##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|  |  |                                                                                              
|- |  | ---------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 or
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.    
| 
|  |  | For the fiscal year ended December 31,
    2003.                                             
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
| 
|  |  | For the transition period
    from           to          .                                   

Commission file number 000-50438

Myogen, Inc.

(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 84-1348020                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

7575 West 103rd Avenue,
Suite 102

Westminster, Colorado 80021


(303) 410-6666


(Address, including zip code, and telephone
number,


including area code, of principal executive
offices)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock $.001 Par Value


(Title of Class)


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

Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of
this chapter) is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes o          No þ

There
was no established public trading market for the
Registrants common stock as of the last business day of
the Registrants most recently completed second fiscal
quarter.

As of February 23, 2004 there were
26,465,885 shares of the Registrants common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Registrants definitive Proxy Statement for the 2004
Annual Meeting of Stockholders are incorporated by reference
into Part III of this report on Form 10-K to the
extent stated therein.



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TABLE OF CONTENTS

|                                                   |  |                                                                                                        |  |      |    | 
|-------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                   |  |                                                                                                        |  | Page
|                                                   |  |                                                                                                        |  |     
|PART I                                            
|Item
    1.                                        |  | Business                                                                                               |  |      | 3  | 
|Item
    2.                                        |  | Properties                                                                                             |  |      | 34 | 
|Item
    3.                                        |  | Legal Proceedings                                                                                      |  |      | 34 | 
|Item
    4.                                        |  | Submission of Matters to a
    Vote of Security Holders                                                |  |      | 34 | 
|PART II                                           
|Item
    5.                                        |  | Market for the
    Registrants Common Equity and Related Stockholder
    Matters                      |  |      | 34 | 
|Item
    6.                                        |  | Selected Financial Data                                                                                |  |      | 36 | 
|Item
    7.                                        |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |      | 37 | 
|Item
    7A.                                       |  | Quantitative and Qualitative
    Disclosures on Market Risk                                            |  |      | 47 | 
|Item
    8.                                        |  | Financial Statements and
    Supplementary Data                                                        |  |      | 48 | 
|Item
    9.                                        |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |      | 48 | 
|Item
    9A.                                       |  | Controls and Procedures                                                                                |  |      | 48 | 
|PART III                                          
|Item
    10.                                       |  | Directors and Executive
    Officers of the Registrant                                                 |  |      | 48 | 
|Item
    11.                                       |  | Executive Compensation                                                                                 |  |      | 49 | 
|Item
    12.                                       |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |      | 49 | 
|Item
    13.                                       |  | Certain Relationships and
    Related Transactions                                                     |  |      | 49 | 
|Item
    14.                                       |  | Principal Accountant Fees
    and Services                                                             |  |      | 49 | 
|PART IV                                           
|Item
    15.                                       |  | Exhibits, Financial
    Statements and Schedules and Reports on Form 8-K                               |  |      | 49 | 
|Indemnification Agreement                         
|First Amendment to Lease Agreement                
|Third Amendment to Property License Agreement     
|Amendment No. 3 to Patent and Technology Agreement
|Amendment No. 1 to Patent and Technology Agreement
|Patent License Agreement                          
|Consent of PricewaterhouseCoopers LLP             
|Certification of Principal Executive Officer      
|Certification of Principal Financial Officer      
|Section 1350 Certification                        





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PART I

Unless the context requires otherwise,
references in this report to Myogen, the
Company, we, us, and
our refer to Myogen, Inc.

This report contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These
forward-looking statements include, but are not limited to,
statements concerning our plans to continue development of our
current product candidates; conduct clinical trials with respect
to our product candidates; seek regulatory approvals; address
certain markets; engage third-party manufacturers to supply our
clinical trial and commercial requirements; hire sales and
marketing personnel; and evaluate additional product candidates
for subsequent clinical and commercial development. In some
cases, these statements may be identified by terminology such as
may, will, should,
expect, plan, anticipate,
believe, estimate, predict,
potential, or continue or the negative
of such terms and other comparable terminology. Although we
believe that the expectations reflected in the forward-looking
statements contained herein are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
These statements involve known and unknown risks and
uncertainties that may cause our or our industrys results,
levels of activity, performance or achievements to be materially
different from those expressed or implied by the forward-looking
statements. Factors that may cause or contribute to such
differences include, among other things, those discussed under
the captions Business, Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Forward-looking
statements not specifically described above also may be found in
these and other sections of this report.






|        |         
|------- | --------
|Item 1. | Business

Overview

We are a biopharmaceutical company focused on the
discovery, development and commercialization of small molecule
therapeutics for the treatment of cardiovascular disorders. We
have three product candidates in late-stage clinical
development: enoximone capsules for the treatment of chronic
heart failure, ambrisentan for the treatment of pulmonary
arterial hypertension and darusentan for the treatment of
resistant hypertension. We are evaluating enoximone capsules in
four Phase III clinical trials. If these trials progress as
planned, we expect three of these trials, including the trials
we believe will be required for regulatory approval, will be
fully enrolled and patients will have completed treatment by the
end of 2004. We completed a Phase II clinical trial of
ambrisentan in September 2003, yielding positive results, and we
initiated two pivotal Phase III clinical trials in January
2004. We intend to begin our Phase IIb clinical evaluation
of darusentan in 2004. All of our product candidates are orally
administered small molecules that we believe offer advantages
over currently available therapies. In addition, we currently
market an intravenous formulation of enoximone,
Perfan I.V., for the treatment of acute decompensated heart
failure in eight countries in Europe.

Through our internal research program and
academic collaborations, we are developing an advanced
understanding of the biological pathways of heart disease and
have discovered several novel molecular targets that we believe
play a key role in heart failure. We believe this understanding
of the biology of cardiovascular disease combined with our
clinical development expertise in cardiovascular therapeutics
provide us with the capability to discover novel therapies, as
well as identify, license or acquire products that address
serious, debilitating cardiovascular disorders that are not
adequately treated with existing therapies.

In October 2003, we entered into a research
collaboration with the Novartis Institutes for BioMedical
Research, Inc. (Novartis) for the discovery and
development of novel drugs for the treatment of cardiovascular
disease. In exchange for a $4.0 million upfront payment, a
deferred payment of an additional $1.0 million after the
first year and obligations to provide research funding to us for
a minimum of three years, Novartis has the exclusive right to
license drug targets and compounds developed through the
collaboration. Upon execution of a license, Novartis is
obligated to fund all further development of the licensed
product candidate, make payments to us upon the achievement of
certain milestones which may total up to $17.1 million for
each product candidate and pay us royalties for sales of any
products that are successfully commercialized. Upon the
completion of Phase II clinical trials of any product
candidate Novartis has

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licensed from us, we have the option to enter
into a co-promotion and profit sharing agreement with them for
that product candidate, subject to our reimbursement of a
portion of the development expenses up to that point, our
agreement to share the future development and marketing expenses
and elimination of the royalty payable to us.


We were incorporated in Colorado in June 1996 and
we reincorporated in Delaware in May 1998. Our website address
is www.myogen.com. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on
Form 8-K, as well as any amendments to those reports, are
available free of charge through our website as soon as
reasonably practicable after we file them with, or furnish them
to, the SEC.

The Cardiovascular Opportunity

The term cardiovascular disease is used to
describe a continuum of clinical conditions resulting primarily
from three underlying chronic diseases: atherosclerosis,
hypertension and diabetes. These underlying diseases cause
permanent damage to the heart, blood vessels and kidneys,
leading to progressively debilitating clinical conditions such
as chronic heart failure, pulmonary arterial hypertension,
systemic hypertension, chronic kidney disease, heart attack and
stroke.

Cardiovascular disease is the leading cause of
death and disability in the United States, accounting for 20% of
all hospitalizations in short-stay, non-Federal hospitals and
over 60% of all deaths. The American Heart Association estimated
that the total direct and indirect costs of cardiovascular
disease in the United States would be $300 billion in 2003,
including $36 billion in drug costs and $105 billion
in hospitalization and nursing home costs. Despite improved
treatments and increased awareness of preventative measures,
62 million people in the United States currently suffer
from cardiovascular disease.

Over the past 25 years, drugs such as
beta-blockers, calcium channel blockers and angiotensin
converting enzyme, or ACE, inhibitors have been used to treat
various cardiovascular diseases. New classes of orally
administered compounds such as endothelin receptor antagonists
have been studied and recently approved for the treatment of
pulmonary arterial hypertension. Intravenous hormones such as
natriuretic peptide have also been introduced as a new treatment
option for acute decompensated heart failure. Several of these
drugs have helped to increase the survival times of patients who
suffer from cardiovascular diseases. However, many current
therapies do not adequately address the underlying molecular
mechanisms of cardiovascular disease. Cardiovascular disease
remains progressive in a large portion of patients, many of whom
continue to deteriorate even when treated with multiple drugs
simultaneously. We believe that recent advances in the
understanding of the molecular biology of cardiovascular
diseases provide an opportunity to improve on existing therapies
and to discover and develop new therapeutics to ameliorate the
symptoms and perhaps to slow or reverse the progression of the
diseases.

Our Strategy

Our goal is to create an integrated
biopharmaceutical company focused on the discovery, development
and commercialization of novel therapeutics that address the
fundamental mechanisms involved in cardiovascular disease, with
an initial focus on chronic heart failure, pulmonary arterial
hypertension and resistant hypertension. The key elements of our
strategy are to:



| |   |                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Complete the clinical development of our
    late-stage cardiovascular therapeutic product
    portfolio.We are currently focused on
    developing and obtaining regulatory approval for three
    late-stage product candidates: enoximone capsules, ambrisentan
    and darusentan.                                                                       
|
| |  | Acquire additional product candidates.We intend to pursue attractive product
    acquisition opportunities. We believe our expertise in
    cardiovascular medicine and understanding of the biological
    pathways associated with cardiovascular disorders makes us an
    attractive partner for companies seeking to out-license product
    candidates.
|
| |  | Discover and develop novel therapeutics for
    the treatment of cardiovascular
    diseases.We will continue to focus
    our target and drug discovery research programs and our
    collaborations on                                                                                                                                                     

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| |   |                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | discovering and developing disease-modifying
    therapeutics for cardiovascular disease. We entered into a
    research collaboration with Novartis to support these programs.                                                                                                                                                                                               
|
| |  | Develop sales and marketing capabilities.We expect to retain significant
    commercial rights to all of our product candidates and plan to
    develop a direct sales force focused on targeted markets. We
    also intend to establish co-promotion arrangements with larger
    pharmaceutical or biotechnology firms, which would allow us to
    address larger markets.
|
| |  | Establish strategic collaborations.We intend to complement our internal
    capabilities by selectively entering into collaborations with
    pharmaceutical and biotechnology companies that improve our
    ability to move new compounds into the clinic and new products
    into the marketplace.                                                                        

Our Product Portfolio

Led by two of our academic founders,
Dr. Michael Bristow and Dr. Eric Olson, our staff and
collaborators have made significant contributions to defining
the molecular bases of cardiovascular disease and improving its
treatment. We believe that our expertise enables us to discover
and develop therapies that address the underlying mechanisms of
cardiovascular disease, evaluate and in-license product
candidates and guide our clinical development efforts. We
currently market one product in Europe for the treatment of
acute decompensated heart failure and are developing three
product candidates for three distinct cardiovascular indications.

(PRODUCT DEVELOPMENT GRAPH)



| |          
| | ---------
| | Enoximone

Enoximone is a small organic molecule that
exhibits highly selective inhibition of type-III
phosphodiesterase, or PDE-III, an enzyme that is present in the
heart and plays an important regulatory role in cardiac
function. PDE-III inhibitors block the action of this enzyme,
increasing the force of contraction of the heart, thereby
increasing cardiac output. Compounds that increase the force of
contraction of the heart, like enoximone, are referred to as
positive inotropes. Enoximone also causes vasodilation, an
increase in the diameter of blood vessels, through its effects
on smooth muscle cells that surround blood vessels, which
results in lower pressure against which the heart must pump.
Positive inotropy and vasodilation can both be therapeutically
useful in the treatment of heart failure. We are currently
working to complete the clinical evaluation of enoximone
capsules. If those clinical trials are successful and the
required regulatory approvals are obtained, enoximone capsules
would be the first PDE-III inhibitor to be commercialized in
oral form for the treatment of chronic heart failure. In
addition, we currently market the intravenous formulation of
enoximone, Perfan I.V., which is indicated for the
treatment of acute decompensated heart failure and was first
approved in Europe in 1989.



| |                        
| | -----------------------
| | Therapeutic Opportunity

Chronic heart failure, also referred to as
congestive heart failure, is a debilitating condition that
occurs as the heart becomes progressively less able to pump an
adequate supply of blood throughout the body. Chronic

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heart failure has many causes. It generally
occurs in patients with a long history of uncontrolled high
blood pressure or in patients that have suffered a heart attack
or some other heart-damaging event. It is estimated that half of
all patients with chronic heart failure die within five years of
diagnosis. Chronic heart failure is one of the largest health
problems in the developed world, with annual direct and indirect
healthcare costs in the United States alone exceeding
$24 billion. In the United States, approximately
five million patients are afflicted with chronic heart
failure, with an additional 550,000 new cases reported each year.


Following diagnosis, patients with chronic heart
failure are typically treated with multiple oral medications,
including ACE inhibitors, beta-blockers, vasodilators, diuretics
and digoxin. ACE inhibitors and beta-blockers suppress the
stress placed on the heart by increased levels of the hormones
angiotensin and norepinephrine and have demonstrated an ability
to increase patient survival time. Vasodilators and diuretics
minimize the work the heart must perform by increasing the
diameter of blood vessels and ridding the body of excess fluid.
Digoxin is a weak positive inotrope used to increase cardiac
output early in the progression of chronic heart failure.

Although medical therapy is improving, heart
failure remains a major debilitating and progressive condition
characterized by high mortality, frequent hospitalization and
deteriorating patient quality of life. The severity of chronic
heart failure is typically classified using a system established
by the New York Heart Association that assesses the
patients degree of functional limitation based primarily
on shortness of breath. This system is divided into four
classes, I through IV, with Class IV being the most severe.
Physicians use this system to track patients disease
progression and responses to therapies.

As patients enter the advanced stages of chronic
heart failure, Classes III and IV, their cardiac function
deteriorates, leading to an accumulation of fluid in the lungs,
referred to as pulmonary congestion. Eventually, pulmonary
congestion and the resulting breathlessness and fatigue reach a
critical point referred to as acute decompensated heart failure.
At this point the patient must be hospitalized and treated with
powerful intravenous diuretics, vasodilators and positive
inotropes such as dobutamine, natriuretic peptide (Natrecor),
milrinone or Perfan I.V., all of which serve to increase the
efficiency of the circulatory system, providing symptomatic
relief. After stabilization and discharge from the hospital,
patients often decompensate again within months and must be
readmitted to the hospital for another round of intravenous
treatment. As their disease progresses, the frequency of
decompensation and hospitalization increases until patients must
be maintained on continuous or intermittent treatment with these
intravenous agents, which is both confining and costly.

We believe that patients with advanced chronic
heart failure can benefit greatly from the chronic use of an
oral inotropic agent that would provide the desired symptomatic
relief to the patients and reduce the frequency of
hospitalizations by delaying additional episodes of acute
decompensated heart failure. An oral product with these
characteristics could also wean patients with severe heart
failure who are currently dependent on intravenous inotropic
therapy from those agents and allow them the opportunity to
leave the hospital and return to a more normal daily life. We
believe that as a result of these significant clinical benefits,
such an agent would decrease the overall costs associated with
the treatment of heart failure. Attempts to date to develop and
commercialize a product with these characteristics have been
unsuccessful, primarily because of drug-related increases in
adverse events, including mortality at high doses.

Based upon our evaluation of extensive clinical
research and an advanced understanding of the molecular basis of
chronic heart failure, we believe that enoximone capsules have
the potential to both alleviate symptoms and reduce
hospitalizations for patients with advanced chronic heart
failure, resulting in a decrease in associated costs.



| |                   
| | ------------------
| | Enoximone Capsules

We are currently conducting four Phase III
trials of low-dose enoximone capsules in patients with advanced
chronic heart failure. If these trials progress as planned, we
expect three of these trials, including the trials we believe
will be required for regulatory approval, will be fully enrolled
and patients will have completed treatment by the end of 2004.
If our clinical program is successful, enoximone capsules will
be the first oral inhibitor of PDE-III to be commercialized for
the treatment of chronic heart failure.

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| |                                  
| | ---------------------------------
| | Overview of Prior Clinical Trials

In the 1980s, Merrell Dow, now part of Aventis,
conducted clinical evaluation of enoximone capsules for the
treatment of chronic heart failure. Enoximone capsules were
evaluated in approximately 5,000 patients with chronic
heart failure in multiple Phase I and Phase II
clinical trials conducted in the United States, Europe and
Japan. The drug was initially tested at doses that we now
consider high, 100 to 300 milligrams administered three
times a day. At these high doses, patients treated with
enoximone capsules demonstrated clinically significant increases
in quality of life scores and maximal exercise capacity.
However, in one Phase II placebo-controlled trial involving
151 patients administered enoximone capsules at doses of
100 milligrams or placebo capsules three times a day, there was
a statistically significant increase in the mortality rate in
the group of patients receiving enoximone capsules compared to
the group receiving placebo capsules: 36% of the patients
treated with enoximone capsules died during the trial versus 23%
of the patients treated with placebo.

Dr. Michael Bristow, our medical founder and
the principal investigator on several previous trials of
enoximone capsules, made an unexpected observation during this
period: enoximone capsules administered at lower doses appeared
to retain efficacy without increasing mortality. Subsequently,
Dr. Bristow demonstrated in a series of Phase II
clinical trials that:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | enoximone capsules administered at doses of 25
    and 50 milligrams three times a day increased maximal exercise
    capacity with no increase in mortality in patients with
    Class II and III chronic heart failure after 12 weeks
    of treatment (two trials involving 219 patients receiving
    placebo, 25 milligrams or 50 milligrams three times a
    day);                                                              
|
| |  | enoximone capsules administered at doses of 25 to
    75 milligrams three times a day extended the survival times
    of patients with Class IV chronic heart failure awaiting a
    heart transplant (186-patient parallel-control, open label
    trial, meaning that both the researcher and patient know the
    patient was receiving the drug); and                                                                              
|
| |  | enoximone capsules administered at doses of 25
    and 50 milligrams three times a day enabled patients with
    Class IV chronic heart failure, and otherwise too weak to
    tolerate beta-blockers, to receive and benefit from beta-blocker
    therapy. These benefits included a significant reduction in the
    severity of their chronic heart failure symptoms and
    hospitalization events (30-patient, open-label trial).

In addition, Dr. Bristow conducted a series
of open-label trials of enoximone capsules involving over
200 patients to gather additional clinical data. Based on
this extensive clinical experience, we sought and successfully
obtained a worldwide license from Aventis (formerly Hoechst
Marion Roussel) to enoximone for the treatment of cardiovascular
diseases and designed a clinical development program to advance
enoximone capsules through the final stages of clinical
development.



| |                                         
| | ----------------------------------------
| | Overview of Current Phase III
    Trials

In June 2000, we initiated our Phase III
program to evaluate the safety and efficacy of enoximone
capsules for the long-term treatment of patients with advanced
chronic heart failure. In these studies, enoximone capsules are
being used in addition to standard therapies, including
diuretics, ACE inhibitors and beta-blockers. Our Phase III
program includes four trials designed to collectively
demonstrate that enoximone capsules at doses of 25 or
50 milligrams administered three times a day are effective
in reducing hospitalizations, improving symptoms of chronic
heart failure, improving quality of life and reducing the need
for intravenous inotropic therapy:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | EMOTE is a randomized, double-blind,
    placebo-controlled Phase III trial of approximately
    200 patients with the most advanced stage of chronic heart
    failure, and who are dependent on intravenous inotrope therapy.
    The trial is designed to evaluate the use of enoximone capsules
    to wean patients off of intravenous inotrope therapy. Patients
    received 26 weeks of treatment. This trial is being
    conducted in the United States. Patient enrollment began in June
    2000 and was completed in July 2003. The last patient completed
    treatment on February 9, 2004. We plan to analyze the data
    from this study in March 2004 and release results shortly
    thereafter. Upon completion of their participation in the trial,

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | patients were given the opportunity to enroll in
    an open-label extension, which is ongoing and may continue until
    enoximone capsules are commercially available or we terminate
    the study.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | ESSENTIAL I is a randomized, double-blind,
    placebo-controlled pivotal Phase III trial of approximately
    900 patients with Class III and IV chronic heart
    failure that are being treated with beta- blockers and other
    therapies according to current guidelines. The trial will track
    the time from randomization to cardiovascular hospitalization or
    death for each patient as the primary endpoint. On average,
    patients will receive treatment for at least 12 months.
    This trial is being conducted in North and South America.
    Patient enrollment began in February 2002, and we expect to
    complete the treatment phase by the end of 2004.                                                                                                                                                                                                                                                                       
|
| |  | ESSENTIAL II is a pivotal Phase III
    trial identical in design and size to ESSENTIAL I. This trial is
    being conducted in Western and Eastern Europe. Patient
    enrollment began in April 2002, and we expect to complete the
    treatment phase by the end of 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | EMPOWER is a randomized, double-blind,
    placebo-controlled Phase III trial of approximately 175
    patients with Class III and IV chronic heart failure.
    Patients will be treated for 26 to 36 weeks with either
    (i) placebo, (ii) extended release metoprolol, a
    frequently prescribed beta-blocker or (iii) extended
    release metoprolol in combination with enoximone capsules. The
    primary objective of this study is to determine whether
    enoximone capsules can increase the tolerability to metoprolol
    in patients previously shown to be intolerant to beta-blocker
    treatment. Patient enrollment began in September 2003. EMPOWER
    is not required for regulatory approval, but might assist us in
    post-approval marketing efforts. The study is enrolling
    substantially slower than anticipated and we intend to re-assess
    the viability of the study at the end of the second quarter of
    2004.

The ESSENTIAL trials will be considered completed
when the accumulated cardiovascular hospitalizations or deaths
for patients reaches a pre-specified number. In September 2003,
we determined that the rate of occurrence to date of
cardiovascular hospitalizations or deaths was lower than
originally predicted. As a result, we decided to enroll an
additional 400 patients, approximately 200 in each trial.
If the ESSENTIAL trials progress as planned, we believe the
accumulated cardiovascular hospitalizations or deaths in the
trials will reach the pre-specified number by the end of 2004.

We believe that if the ESSENTIAL trials are
successful, they will be adequate to support both United States
regulatory approval of enoximone capsules, as well as approvals
in various international markets. Although we do not believe
that EMOTE and EMPOWER will be required for initial regulatory
approval, we believe these studies, if completed and successful,
will assist in regulatory and post-approval marketing efforts.



| |            
| | -----------
| | Perfan I.V.

Perfan I.V. is the intravenous formulation of
enoximone that we market in eight European countries. Clinical
studies supporting the use of Perfan I.V. were completed in
the late 1980s, and the drug was first approved in Europe in
1989. Perfan I.V. is used in a hospital setting to treat
patients with acute decompensated heart failure and to wean
patients from cardiopulmonary bypass following open-heart
surgery. We recorded sales of Perfan I.V. of
$2.8 million in 2003. We believe our European sales
experience helps prepare us for the potential commercial launch
of future products, such as enoximone capsules, ambrisentan and
darusentan.



| |                                                                               
| | ------------------------------------------------------------------------------
| | Selective Oral Endothelin Receptor
    Antagonists: Ambrisentan and Darusentan

Ambrisentan and darusentan are members of a class
of therapeutic agents known as endothelin receptor antagonists,
or ETRAs, that can be orally administered. Endothelin is a small
peptide hormone that is believed to play a critical role in the
control of blood flow and cell growth. Elevated endothelin blood
levels are associated with several cardiovascular disease
conditions, including pulmonary arterial hypertension, chronic
kidney disease, hypertension, chronic heart failure, stroke and
restenosis of arteries after balloon angioplasty or stent
implantation. Therefore, many scientists believe that agents
that block the detrimental effects of endothelin will provide
significant benefits in the treatment of these conditions. There
are two classes of

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endothelin receptors, ETA and
ETB, which play significantly different roles in
regulating blood vessel diameter. The binding of endothelin to
ETA receptors located on smooth muscle cells causes
vasoconstriction, or narrowing of the blood vessels. However,
the binding of endothelin to ETB receptors located on
the vascular endothelium causes vasodilation through the
production of nitric oxide. The activity of the ETB
receptor is thought to be counter-regulatory, protecting against
excessive vasoconstriction.


We believe that a significant opportunity exists
for a new class of selective ETRAs that bind to the
ETA receptor in preference to the ETB
receptor. Selective ETA antagonists are likely to
block the negative effects of endothelin by preventing the
harmful effects of vasoconstriction and cell proliferation,
while preserving the beneficial effects of the ETB
receptor. We believe that the potential clinical benefits of
selective ETA antagonists will position these
compounds as the treatment of choice for certain cardiovascular
diseases.

Ambrisentan and darusentan are ETRAs that are
highly selective for the ETA receptor. The compounds
demonstrate high potency, high bioavailability and half-lives
that we believe may be suitable for once a day dosing. We
believe the selectivity and potency of these ETRAs may offer
significant advantages over non-selective ETRAs, including
enhanced efficacy and a reduction in adverse side effects. We
have initially chosen to evaluate ambrisentan in pulmonary
arterial hypertension and darusentan in resistant hypertension.



| |            
| | -----------
| | Ambrisentan

Ambrisentan is an ETA selective
endothelin receptor antagonist being developed as an oral
therapy for patients with pulmonary arterial hypertension. We
completed a Phase II clinical trial of ambrisentan in
September 2003 and we initiated two pivotal Phase III
clinical trials for this indication in January 2004.



| |                        
| | -----------------------
| | Therapeutic Opportunity

Pulmonary arterial hypertension is a highly
debilitating disease of the lungs characterized by severe
constriction of the blood vessels in the lungs leading to very
high pulmonary arterial pressures. These high pressures make it
difficult for the heart to pump blood through the lungs to be
oxygenated. Pulmonary arterial hypertension can occur with no
known underlying cause, or it can occur secondary to diseases
like scleroderma (an autoimmune disease of the connective
tissues), cirrhosis of the liver, congenital heart defects and
HIV infection. Patients with pulmonary arterial hypertension
suffer from extreme shortness of breath as the heart struggles
to pump against these high pressures causing such patients to
ultimately die of heart failure. Pulmonary arterial hypertension
afflicts approximately 40,000 patients, predominantly
women, in the United States.

Mild to moderate pulmonary arterial hypertension
is currently treated with calcium channel blockers, diuretics
and anticoagulants. As patients advance into more severe stages
of disease, moderate to severe pulmonary arterial hypertension,
therapeutic options become more limited. Prior to 2001, only
continuous intravenous infusion of prostacyclin (Flolan) was
available as a treatment for patients with more advanced stages
of pulmonary arterial hypertension. In mid-2002, Remodulin, a
more stable form of prostacyclin that can be administered via
continuous subcutaneous infusion, was approved by the FDA.

The most significant therapeutic advance for
patients with moderate to severe pulmonary arterial hypertension
took place in December 2001 with the approval of Tracleer, a
twice-a-day oral formulation of bosentan, a non-selective ETRA.
Tracleer was demonstrated in clinical trials to improve exercise
capacity and quality of life. We believe that ambrisentan could
have several additional clinical benefits over existing
therapies, including:



| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | lower incidence of liver toxicity;                                                     
|
| |  | once daily dosing based on its half-life; and                                          
|
| |  | lower incidence of adverse interactions with
    other drugs, including anticoagulants.

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| |                                          
| | -----------------------------------------
| | Overview of Phase II Clinical
    Results

In September 2003, we completed a randomized,
double-blind, multi-center, dose-ranging Phase II study
evaluating the effect of ambrisentan on exercise capacity of
patients with moderate to severe pulmonary arterial
hypertension. Exercise capacity was the primary efficacy
endpoint and was measured as the change from baseline in the
six-minute walk test distance after 12 weeks of treatment.
The secondary endpoints were Borg Dyspnea Index, Patient Global
Assessment, time to clinical worsening and World Health
Organization, or WHO, Functional Class, which are tests used by
physicians to assess the severity of pulmonary arterial
hypertension. Right heart and pulmonary artery hemodynamics
(blood pressures and blood flow in the heart and lungs) were
evaluated in a subset of patients.

A total of 64 patients were randomized to one of
four ambrisentan dose groups (1.0, 2.5, 5.0 or
10.0 milligrams). Doses were administered orally once a day
for 12 weeks. After 12 weeks of treatment, patients
were allowed to enter an optional 12-week open-label extension
period of the study followed by an optional long-term open-label
safety study that is currently ongoing. The results of this
trial demonstrated:



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a statistically significant and clinically
    meaningful increase in the primary efficacy endpoint (six-minute
    walk test) in all four ambrisentan dose groups;
|
| |  | an improvement in all secondary endpoints and
    pulmonary vascular hemodynamics;                                                                                 
|
| |  | ambrisentan was generally safe and well tolerated;                                                                                                                 
|
| |  | among the patients taking anticoagulant therapy,
    there were no apparent harmful interactions with anticoagulants
    requiring dose adjustments; and           
|
| |  | a low incidence of potential liver toxicity as
    assessed by liver function tests.                                                                               

Abnormal elevations of liver function test
(LFT) results, indicative of potential liver toxicity, have
previously been reported as complications in trials of other
endothelin receptor antagonists. LFT abnormalities were defined
in our study as a confirmed serum aminotransferase level greater
than three times the upper limit of the normal range. During the
12-week blinded treatment period of this trial, one patient was
taken off ambrisentan due to an abnormally high LFT result
(eight times the upper limit of the normal range). After halting
treatment, the patients serum aminotransferase level
returned to a normal level without apparent adverse effects on
the patients health. During the second 12-week open-label
extension period, another patient had their dose of ambrisentan
reduced due to a confirmed abnormally high LFT result. Two
additional patients had LFT results that fluctuated above the
normal range during the open-label extension period, and on one
occasion each had an initial LFT result that was marginally
above the threshold of three times the upper limit of the normal
range, but upon repeat testing, the results were below the
threshold. Detailed results of this trial are scheduled to be
presented by the principal investigator, Dr. Lewis Rubin,
at the annual meeting of the American Thoracic Society on
May 23, 2004.



| |                 
| | ----------------
| | Phase III Trials

In January 2004 we initiated two pivotal
Phase III clinical trials, ARIES 1 and ARIES 2,
for ambrisentan in pulmonary arterial hypertension. The ARIES
trials are randomized, double-blind, placebo-controlled trials
of identical design except for the doses of ambrisentan and the
geographic locations of the investigative sites. The study
design anticipates enrolling 186 patients (62 patients
per dose group) in each trial. ARIES 1 will evaluate
ambrisentan doses of 5.0 milligrams and
10.0 milligrams administered orally once per day for
12 weeks to patients in the United States and Canada.
ARIES 2 will evaluate ambrisentan doses of
2.5 milligrams and 5.0 milligrams administered orally
once per day for 12 weeks to patients in Europe and South
America. The primary efficacy endpoint is exercise capacity,
measured as the change from baseline in the six-minute walk test
distance compared to placebo. Secondary endpoints include Borg
Dyspnea Index, WHO Functional Class, a quality of life
assessment and time to clinical worsening. Upon completion of
their participation in the ARIES trials, eligible patients will
be given the opportunity to enroll in an extension study.

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| |           
| | ----------
| | Darusentan

Darusentan is an ETA selective
endothelin receptor antagonist being developed as an oral
therapy for patients with resistant hypertension.



| |                        
| | -----------------------
| | Therapeutic Opportunity

Hypertension affects approximately
50 million individuals in the United States and
approximately one billion worldwide. Despite the availability
and use of several classes of drugs (diuretics, ACE inhibitors,
angiotensin receptor blockers, beta-blockers, calcium channel
blockers) to treat hypertension, a very significant percentage
of these patients do not achieve blood pressures within the
recommended range, a condition described as resistant
hypertension. The higher the blood pressure, the greater
the chance of heart attack and stroke. The relationship between
blood pressure and cardiovascular events is continuous,
consistent and independent of other risk factors.

The relationship between blood pressure and
cardiovascular events is particularly true for patients with
chronic kidney disease. Chronic kidney disease is a progressive
condition that is often associated with diabetes and leads to
end-stage kidney failure. Patients with end-stage kidney failure
experience a high rate of mortality, primarily due to
cardiovascular events such as heart attack and stroke. The
National Kidney Foundation estimates that 20 million people
have chronic kidney disease and an additional 20 million
more are at risk of developing chronic kidney disease and that
hypertension is the second leading cause of the condition in the
United States, accounting for 23% of all cases. The majority of
patients with chronic kidney disease suffer from hypertension
and approximately 75% of all patients are being treated with
anti-hypertensive agents. Unfortunately, the blood pressure of
over 70% of the patients receiving anti-hypertensive therapy
remains uncontrolled. We believe that there is a significant
opportunity for an agent that is capable of improving control of
blood pressure in this patient population, leading to the
potential for enhanced patient outcomes, such as a reduction in
the number of serious cardiac events.



| |                                                
| | -----------------------------------------------
| | Overview of Prior Phase II Clinical
    Results

In 2000, the safety and efficacy of darusentan
were evaluated by Abbott Laboratories in approximately
390 patients with hypertension in a randomized,
double-blind, placebo-controlled, multi-center Phase II
trial. The primary endpoint in the trial was change in resting
diastolic blood pressure. Changes in systolic blood pressure and
pulse rate were secondary endpoints.

The results of this study demonstrated that
darusentan produced statistically significant and clinically
meaningful reductions in diastolic and systolic blood pressures
in a dose-dependent manner. Pulse rate remained unchanged in all
groups. Headache was the most commonly reported adverse event,
with no relevant difference among placebo and active treatment
groups. Flushing and peripheral edema were seen in a
dose-dependent fashion in the active treatment groups only.
There were no treatment-related abnormal elevations in liver
enzymes in the study.



| |                                   
| | ----------------------------------
| | Overview of Planned Clinical Trial

We are finalizing the overall clinical
development plan for evaluating darusentan in patients with
resistant hypertension and we expect to begin a Phase IIb
trial in 2004.



| |                  
| | -----------------
| | Other Indications

Endothelin appears to be involved in the
progression of several other cardiovascular conditions,
including chronic heart failure, acute renal failure, stroke and
restenosis of arteries after balloon angioplasty or stent
implantation. We believe that ETA selective ETRAs,
such as ambrisentan or darusentan, could have therapeutic
potential in some of these indications and we are currently
evaluating whether to pursue any of these additional indications.

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Discovery Research

The goal of our target and drug discovery
research is to discover and develop disease-modifying drugs for
chronic heart failure and related disorders. Our discovery
research involves the integration of three research programs
supported by a proprietary heart tissue bank, and involves
collaborations with the academic laboratories of three prominent
scientists working in heart muscle disease: Dr. Eric Olson
at the University of Texas Southwestern Medical Center (UTSWMC),
Dr. Michael Bristow at the University of Colorado Health
Science Center (UCHSC) and Dr. Leslie Leinwand at the
University of Colorado (UC). Our internal research program,
augmented by the work of our academic collaborators, has led to
the identification of several novel targets for drug discovery,
and we are now screening chemical libraries with high-throughput
assays based on these targets. Several lead chemical structures
have been identified that block abnormal growth of heart muscle
cells, or cardiomyocyte hypertrophy. Further characterization
and evaluation of these compounds is underway. In October 2003,
we established a collaboration agreement with Novartis to
advance this work.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cardiac signaling pathways.Patients with chronic heart failure
    develop an enlargement of the heart called cardiac hypertrophy.
    The causes and effects of cardiac hypertrophy have been
    extensively documented, but the underlying molecular mechanisms
    that link the molecular signals to cell changes, or cardiac
    signaling pathways, remain poorly understood. Understanding
    these signaling pathways is a central theme of
    Dr. Olsons laboratories at UTSWMC and the subject of
    a research program that we sponsor. This work has led to the
    discovery of several key signaling pathways that control cardiac
    hypertrophy.                                                                                                                                                                                                                                   
|
| |  | Fetal gene program.One of the characteristic changes that
    occur in a failing heart is a change in gene expression wherein
    fetal genes that were turned off shortly after birth are
    reactivated in the disease process. Although this response may
    initially be beneficial to a patient with chronic heart failure,
    it becomes harmful as the disease progresses. Our scientists and
    academic collaborators at UCHSC and UC are focused on
    identifying the set of fetal genes that are reactivated in
    chronic heart failure, understanding the consequences of their
    reactivation and discovering the means to control their
    expression. Our work has led to the discovery of what we believe
    to be an important gene reactivation that occurs in the failing
    human heart, which appears to be responsible for weakening the
    contraction of the heart.
|
| |  | Cardiogenomics and cardioproteomics.We have initiated a survey of the
    genes (cardiogenomics) and proteins
    (cardioproteomics) that are expressed in normal and
    diseased human hearts. Knowledge of these differences might
    allow us to identify the complete set of genes that are involved
    in the disease process. Our cardiogenomics efforts have led to
    the identification of more than 200 genes that might be involved
    in the failing heart.                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Heart tissue bank.Through a materials transfer agreement
    with UCHSC, we have access to what we believe is one of the
    largest collections of diseased and non-diseased human heart
    tissue. Dr. Michael Bristow and his team have worked since
    1987 in close collaboration with heart transplant centers to
    collect a growing quantity of high quality, well-characterized
    heart tissue. The heart tissue bank is a valuable resource in
    supporting all aspects of our target discovery program
    including: (i) identifying genes and proteins that are
    differentially expressed in human heart failure,
    (ii) confirming that signaling pathways discovered in
    animal models have relevance to human cardiovascular disease and
    (iii) elucidating the reactivation of fetal genes.                                                                          

We believe our advanced understanding of the
biology of cardiovascular disease combined with our clinical
development expertise in cardiovascular therapeutics allows us
to identify, license or acquire products. The Novartis
collaboration presently covers nearly all of our discovery
research projects. However, as we progress projects that are not
funded by this partner, we intend to enter into collaborations
with other pharmaceutical and biotechnology companies that allow
us to build upon our expertise in cardiovascular disease. We
will seek arrangements that improve our ability to move new
compounds into the clinic and new products into the marketplace.

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Sales and Marketing

Assuming that we receive regulatory approval for
our product candidates, we plan to commercialize them by
building a focused sales and marketing organization complemented
by co-promotion arrangements with pharmaceutical or
biotechnology partners. Our sales and marketing strategy is to:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Build a direct sales force.We believe that a relatively small
    sales force could effectively reach the specialists and medical
    institutions that treat the majority of patients in indications
    such as advanced chronic heart failure and pulmonary arterial
    hypertension. We intend to build this sales force ourselves or
    through a contract sales organization.                                                                                                                                                                                                                                                                                           
|
| |  | Build a marketing organization.We plan to build a marketing and sales
    management organization to develop and implement product plans
    and support our sales force.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Establish co-promotion alliances.We intend to enter into co-promotion
    arrangements with larger pharmaceutical or biotechnology firms
    when necessary to reach larger markets than would be possible
    with our own sales force. For example, our Novartis
    collaboration grants us the option to enter into a co-promotion
    agreement for certain markets upon completion of Phase II
    clinical trials of product candidates they have licensed from
    us. We intend to retain the rights to ambrisentan, but we plan
    to explore co-promotion arrangements for enoximone. We expect to
    seek a co-promotion or co-development partner for darusentan.

We currently market Perfan I.V. through
local distributors in Belgium, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands and the United Kingdom.

Licensing Agreements and
Collaborations

In October 1998, we entered into a license
agreement with Aventis (formerly Hoechst Marion Roussel) under
which we received an exclusive worldwide license to develop and
commercialize enoximone. In consideration for the license, we
paid Aventis initial license fees totaling $5.5 million,
and we are obligated to pay royalties based on net sales of
enoximone for a period of 10 years beginning with the first
commercial sale on a country-by-country basis. If we fail to
commercialize enoximone capsules in certain markets, Aventis may
market the product on its own in the affected countries, paying
us a royalty on its sales. The agreement is of indefinite term,
although Aventis may terminate the agreement if we fail to use
reasonable commercial diligence to develop and commercialize
enoximone capsules. In addition, either party may terminate the
agreement under certain circumstances, including a material
breach of the agreement by the other.

In October 2001, we entered into a license
agreement with Abbott under which we received an exclusive
worldwide license from Abbott to develop and commercialize
ambrisentan. In consideration for the license, we have paid
Abbott initial license fees totaling $5.8 million, have
paid a milestone fee of $1.5 million upon the initiation of
the ARIES trials and have accrued an additional $690,000 related
to an additional feasibility and evaluation study performed on
our behalf. If we successfully develop ambrisentan in pulmonary
arterial hypertension, we will be required to make additional
milestone payments totaling $4.5 million as well as
royalties based on net sales of ambrisentan. If we fail to
commercialize ambrisentan in certain markets, Abbott may market
the product on its own in the affected countries, paying us a
royalty on its sales. We must use reasonable diligence to
develop and commercialize ambrisentan and to meet milestones in
completing certain clinical work. The agreement is of indefinite
term, although either party may terminate the agreement under
certain circumstances, including a material breach of the
agreement by the other. We would be obligated to make additional
milestone payments if we develop ambrisentan in additional
indications. However, in no event would we be obligated to pay
more than $25.5 million in total license and milestone fees.

In June 2003, we entered into a license agreement
with Abbott under which we received an exclusive worldwide
license from Abbott to develop and commercialize darusentan. In
consideration for the license, we paid Abbott initial license
fees of $5.0 million and are obligated to make future
milestone payments totaling $25.0 million if we
successfully commercialize the drug for a single indication.
Additional milestone payments would be due if we commercialize
darusentan for additional indications. However, in no event
would we be obligated to pay more than $50.0 million in
total milestone and license fees. In addition, we will owe
royalties

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based on net sales of darusentan. If we seek a
co-promotion arrangement for darusentan in any country or group
of countries, Abbott has the right of first negotiation. Abbott
also has the option to be our exclusive development and
commercialization partner for darusentan in Japan, upon terms to
be negotiated. If we do not commercialize darusentan in certain
markets, Abbott may market the product on its own in the
affected countries, paying us a royalty on its sales. We must
use reasonable commercial diligence to develop and commercialize
darusentan and to meet milestones in completing certain clinical
work. The term of the agreement is indefinite, however, either
party may terminate the agreement under certain circumstances,
including a material breach of the agreement by the other.


We also hold four other license agreements
relating to intellectual property and patents. In September
1998, we entered into an exclusive license agreement, with the
right to sublicense, with University License Equity Holdings,
Inc., (formerly University Technology Corporation), or ULEHI, an
affiliate of UC, that allows us access to several different
patents relating to the treatment of heart failure. This
exclusive license may be subject to certain rights of the
U.S. Government if any of the licensed subject matter is
developed under a governmental funding agreement. We must use
commercially reasonable efforts to bring one or more products to
market and, in order to retain an exclusive license, must meet
certain milestones, including providing forecast reports and
selling a minimum amount of product. In consideration for the
license, we paid ULEHI an initial fee of $5,900, and we are
obligated to pay future license maintenance fees of
$4,250 per annum, as well as royalties, which are based
upon net sales of the licensed products. As of December 31,
2003, we accrued a $25,000 sublicense fee to ULEHI under this
agreement, which was paid in February 2004. Under this license
agreement, we also have the primary responsibility of applying
for and maintaining any patent or intellectual property rights.
ULEHI may only assume such responsibility in the event that we
decide not to do so. We amended this agreement in November 2003
to modify the royalty structure and to include milestone
payments for any drugs developed from the licensed technology,
up to a maximum of $400,000 in the case of a drug for which an
application for marketing approval is filed. This agreement may
be terminated by either party upon breach of the agreement, or
we may cancel the agreement upon six months notice to ULEHI.

In December 1999, we entered into a Patent and
Technology License Agreement with the University of Texas
System, or the University, which gives us exclusive rights, with
the right to sublicense, to certain patents and technology
relating to cardiac hypertrophy and heart failure. Concurrently,
we entered into a Sponsored Research Agreement with the
University to fund research at UTSWMC. Rights to inventions
arising from the sponsored research are included within the
exclusive license granted by the license agreement. This
exclusive license may be subject to certain rights of the
U.S. Government if any of the licensed subject matter is
developed under a governmental funding agreement. In
consideration for the license, we paid an initial license fee of
$50,000 and are obligated to pay future annual fees of
$50,000 per year beginning the first year following
termination of the Sponsored Research Agreement, a percentage of
sublicense revenue and royalties based upon net sales.
Additionally, we are obligated to make milestone payments for
any drugs developed from the licensed technology, up to a
maximum of $3.2 million in the case of a drug for which a
marketing application is approved. Patent prosecution and
maintenance is carried out by a mutually agreed upon patent
attorney, but we are obligated to reimburse the University for
the associated patent costs. This license agreement will
continue on a country by country basis in many cases until the
last patent expires which currently is on September 26,
2022, based on patents issued to date, but could be extended.
There are also provisions that allow termination of the license
agreement upon breach of the license, upon our insolvency, or
upon written mutual agreement between Myogen and the University.
We must diligently attempt to commercialize a licensed or
identified product or the University has certain rights to
cancel the exclusivity of the license agreement if we fail to
provide written evidence within sixty days of our
commercialization attempts. Similarly, the University can
completely terminate the license agreement in the future if we
fail to provide written evidence of our commercialization
attempts within sixty days. This license agreement is also
subject to the terms of the Sponsored Research Agreement entered
into concurrently with the Patent and Technology License
Agreement, under which we currently pay $250,000 per annum
through March 31, 2007. In 2003, we accrued a $162,500
sublicense fee to the University under this agreement which was
paid in January 2004.

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In January 2000, we entered into a Patent License
Agreement with the University and the University of North Texas
Health Science Center at Fort Worth (UNTHSC) which grants
us exclusive rights, with the right to sublicense, to certain
patents and technology relating to cardiac hypertrophy. This
exclusive license may be subject to certain rights of the U.S.
Government to the extent any of the licensed subject matter is
developed under a governmental funding agreement. In
consideration for the license, we are obligated to pay an annual
license fee of $50,000 per year, a percentage of sublicense
revenue and royalties based upon net sales. Additionally, we are
obligated to make milestone payments for any drugs developed
from the licensed technology, up to a maximum of
$3.2 million in the case of a drug for which a marketing
application is approved. Patent prosecution and maintenance is
carried out by a mutually agreed upon patent attorney, but we
are obligated to pay the associated patent costs. This license
agreement will continue on a country by country basis in many
cases until the last patent expires which currently is on
October 15, 2018, based on patents issued to date, but
could be extended. There are also provisions that allow
termination of the license agreement upon breach of the license,
upon our insolvency, or upon written mutual agreement between
Myogen, the University and UNTHSC. We must actively attempt to
commercialize products or the licensors have certain rights to
cancel the exclusivity of the license agreement if we fail to
provide written evidence of our or our sublicensees
commercialization attempts.

In January 2000, we issued 803,606 shares of
Series B preferred stock in connection with the license
agreements entered into in December 1999 and January 2000 with
the University and UNTHSC.

In January 2002, we entered into a second Patent
and Technology License Agreement, which was amended in February
2004, and related Sponsored Research Agreement with the
University. The license grants us exclusive rights, with the
right to sublicense, to certain patents and technology relating
to cardiac hypertrophy, heart disease, and heart failure,
including inventions that arise during the conduct of the
sponsored research. The patent and technology license is also
subject to certain rights of the U.S. Government if any of
the licensed subject matter is developed under a governmental
funding agreement. In consideration for this license, we paid an
initial license fee totaling $35,000 and have an obligation to
pay milestone payments potentially totaling $400,000, a
percentage of sublicense revenue and royalties based upon a
percentage of net sales. Since the expiration of the Sponsored
Research Agreement, we are obligated to pay annual fees of
$5,000 per year. In addition, we are obligated to reimburse
the University for patent expenses. For most products, this
agreement will terminate upon the expiration of the last patent
to expire, which currently is on February 13, 2021 based on
patents issued to date, but could be extended. There are also
provisions that allow termination upon breach of the license,
upon insolvency of the licensee, or upon written mutual
agreement between Myogen and the University.

We continue to maintain a close working
relationship with three of our academic founders:
Dr. Michael Bristow, our Chief Science and Medical Officer
and head of cardiology at UC, Dr. Leslie Leinwand,
chairperson of molecular, cellular and developmental biology at
UC and Dr. Eric Olson, chairman of molecular biology at
UTSWMC. Dr. Olson serves as an active consultant,
frequently visiting our laboratories and collaborating closely
both in research areas and in our discussions with larger
pharmaceutical firms. In the case of both laboratories, we have
an option allowing us to acquire the rights to future
cardiovascular discoveries. Both universities own shares of our
stock.

In October 2003, we entered into a research
collaboration with Novartis for the discovery and development of
novel drugs for the treatment of cardiovascular disease. In
exchange for signing fees to be paid to us totaling
$5.0 million (a $4.0 million upfront payment and
$1.0 million to be paid after the first year) and an
obligation to provide research funding to us for a minimum of
three years, Novartis has the exclusive right to license drug
targets and compounds developed through the collaboration. Upon
execution of a license for a product candidate, Novartis is
obligated to fund all further development of that product
candidate, make payments to us upon the achievement of certain
milestones which may total up to $17.1 million for each
product candidate and pay us royalties for sales if the product
is successfully commercialized. The agreement provides Novartis
the right to extend the collaboration for an additional period
of up to two years. Thereafter, the collaboration can be
extended by mutual agreement of the parties. Novartis has the
right to terminate the agreement 18 months after the date
of the original agreement, subject to a termination payment. The
agreement can also be terminated upon breach of the license,
insolvency of either party, mutual written

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agreement or our sale to a competitor of
Novartis. The agreement with Novartis provides that upon the
completion of Phase II clinical trials of any product
candidate they have licensed from us, we have an option to enter
into a co-promotion and profit sharing agreement with Novartis
for that product candidate in certain markets, subject to our
reimbursement of development expenses incurred through the
completion of the Phase II trials, our agreement to share
future development and marketing costs and elimination of the
royalty payable to us.


We also intend to selectively enter into
collaborations with other pharmaceutical or biotechnology
companies that allow us to build upon our expertise in heart
disease.

Intellectual Property and Patents

The primary patents covering enoximone expired in
2000 in the United States and 2001 in most of the major markets
in Europe. In the United States, the Hatch-Waxman Act of 1984
provides up to five years of market exclusivity from the date of
marketing approval by the FDA for any new chemical entity. We
believe that enoximone capsules will meet the Acts various
criteria and therefore we expect to receive five years of
marketing exclusivity in the United States, when and if
enoximone capsules are approved. In Europe, similar legislative
enactments provide exclusivity on the data package used by a
drug sponsor to obtain registration for a product with an
expired compound patent. This protection is awarded for six to
10 years, depending on the country and registration
approach taken by the sponsor.

We have licensed from UC a patent with broad
claims for the use of positive inotropes, including enoximone,
to stabilize patients who are otherwise hemodynamically too
unstable to accept beta-blocker therapy without such
stabilization. The European counterpart application is currently
undergoing prosecution.

We plan to commission the development of a
proprietary extended-release oral form of enoximone to reduce
dosing frequency to once per day. We expect that this new
formulation could provide market exclusivity to the extended
release formulation of enoximone capsules beyond the expiration
of legislative protections for immediate release enoximone
capsules.

The primary patents covering ambrisentan and
darusentan expire in 2015 in the United States and most markets
in Europe.

We have exclusive licenses to over 25 patent
applications covering technology for the diagnosis and treatment
of heart failure. Under our licenses, and associated sponsored
research agreements, we have been granted a right of first
refusal to certain future discoveries in the field of heart
disease from UC and UTSWMC. We have either assumed
responsibility for the prosecution of the patent applications or
have significant input thereon.

Competition

The pharmaceutical industry is highly
competitive. We face significant competition from pharmaceutical
companies and biotechnology companies that are researching and
selling products designed to treat cardiovascular disease. Many
of these companies have significantly greater financial,
manufacturing, marketing and product development resources than
we do. Large pharmaceutical companies in particular have
extensive experience in clinical testing and in obtaining
regulatory approvals for drugs. These companies also have
significantly greater research capabilities than we do. Several
pharmaceutical and biotechnology companies have established
themselves in the field of cardiovascular disease. In addition,
many universities and private and public research institutes are
active in cardiovascular research, some in direct competition
with us. We also must compete with these organizations to
recruit scientists and clinical development personnel.
Significant competitors working on treatments for chronic heart
failure, pulmonary arterial hypertension and/or resistant
hypertension are Actelion Ltd., Encysive Pharmaceuticals, Inc.,
GlaxoSmithKline plc, Orion Pharma, Speedel Group, United
Therapeutics Corp., Vasogen Inc., and most other major
pharmaceutical companies.

A number of companies, including Encysive
Pharmaceuticals, Inc., have ETA receptor selective
antagonist compounds in later stage clinical development in
indications competitive with ambrisentan.

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Encysives sitaxsentan is in clinical trials
for the treatment of pulmonary arterial hypertension and could
be approved for marketing before ambrisentan. Several companies
have non-selective endothelin antagonists in development and on
the market. In particular, Actelion Ltd. markets Tracleer
(bosentan), a non-selective endothelin receptor antagonist for
the treatment of pulmonary arterial hypertension. In addition,
Pfizer Inc is conducting trials to expand the label for
sildenafil to include the treatment of pulmonary arterial
hypertension.


Manufacturing

The production of enoximone, ambrisentan, and
darusentan employ small molecule organic chemistry procedures
standard for the pharmaceutical industry. We plan to continue to
outsource manufacturing responsibilities for these and any
additional future products. This manufacturing strategy allows
us to direct our financial and managerial resources to the
development and commercialization of products rather than the
establishment of a manufacturing infrastructure.

Governmental Regulation and Product
Approval

The FDA and comparable regulatory agencies in
state and local jurisdictions and in foreign countries impose
substantial requirements upon the clinical development,
manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate
research and development activities and the testing,
manufacture, quality control, safety, effectiveness, labeling,
storage, record keeping, approval, advertising and promotion of
our products.

The process required by the FDA before product
candidates may be marketed in the United States generally
involves the following:



| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | pre-clinical laboratory and animal tests;                                                                                                 
|
| |  | submission of an investigational new drug
    application, or IND, which must become effective before clinical
    trials may begin;      
|
| |  | adequate and well-controlled human clinical
    trials to establish the safety and efficacy of the proposed drug
    for its intended use;
|
| |  | pre-approval inspection of manufacturing
    facilities and selected clinical investigators; and                                          
|
| |  | FDA approval of a new drug application, or NDA,
    or NDA supplement.                                                                    

The testing and approval process requires
substantial time, effort and financial resources, and we cannot
be certain that any new approvals for our products will be
granted on a timely basis, if at all.

Before the first clinical trial can begin, we
must submit an IND to the FDA. The IND automatically becomes
effective 30 days after receipt by the FDA, unless the FDA,
within the 30-day time period, raises concerns or questions
about the conduct of the clinical trial. In such a case, the
study cannot be initiated until the IND sponsor and the FDA
resolve any outstanding concerns. Our submission of an IND may
not result in FDA authorization to commence a clinical trial. A
separate submission to the existing IND must be made for each
successive clinical trial conducted during product development
but there is no waiting period after the IND is open. An
independent institutional review board for each medical center
proposing to conduct the clinical trial must review and approve
the plan for any clinical trial before it commences at that
center.

For purposes of NDA approval, human clinical
trials are typically conducted in three sequential phases that
may overlap.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase I:The
    drug is initially given to healthy human subjects or patients
    and tested for safety, dosage tolerance, absorption, metabolism,
    distribution and excretion.                                                                                                                                                                                                                                                                     
|
| |  | Phase II:Studies are conducted in a limited
    patient population to identify possible adverse effects and
    safety risks, to determine the efficacy of the product for
    specific targeted diseases and to determine dosage tolerance and
    optimal dosage. Multiple Phase II clinical trials may be
    conducted by the sponsor to obtain information prior to
    beginning larger and more expensive Phase III clinical
    trials. In some

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | cases, a sponsor may decide to run what is
    referred to as a Phase IIb evaluation, which is
    a second, confirmatory Phase II trial that could, if
    positive, serve as a pivotal trial in the approval of a drug.                                                                                                                                                                    
|
| |  | Phase III:When
    Phase II evaluations demonstrate that a dosage range of the
    product is effective and has an acceptable safety profile,
    Phase III trials are undertaken to further evaluate dosage,
    to provide statistically significant evidence of clinical
    efficacy and to further test for safety in an expanded patient
    population at multiple clinical study sites.

Clinical trials are designed and conducted in a
variety of ways. A placebo-controlled trial is one
in which the trial tests the results of a group of patients,
referred to as an arm of the trial, receiving the
drug being tested against those of an arm that receives a
placebo, which is a substance that the researchers know is not
therapeutic in a medical or chemical sense. In a
double-blind study, neither the researcher nor the
patient knows into which arm of the trial the patient has been
placed, or whether the patient is receiving the drug or the
placebo. Randomized means that upon enrollment
patients are placed into one arm or the other at random by
computer. Parallel control trials generally involve
studying a patient population that is not exposed to the study
medication (i.e., is either on placebo or standard treatment
protocols). In such studies experimental subjects and control
subjects are assigned to groups upon admission to the study and
remain in those groups for the duration of the study. An
open label study is one where the researcher and the
patient know that the patient is receiving the drug. A trial is
said to be pivotal if it is designed to meet
statistical criteria with respect to pre-determined
endpoints, or clinical objectives, that the sponsor
believes, based usually on its interactions with the relevant
regulatory authority, will be sufficient for regulatory
approval. In most cases, two pivotal clinical trials
are necessary for approval.

Regulatory authorities or an institutional review
board or the sponsor may suspend a clinical trial at any time on
various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.

The FDA may require, or companies may pursue,
additional clinical trials after a product is approved. These
so-called Phase IV studies may be made a condition to be
satisfied after a drug receives approval. The results of
Phase IV studies can confirm the effectiveness of a product
candidate and can provide important safety information to
augment the FDAs voluntary adverse drug reaction reporting
system.

The results of product development, pre-clinical
studies and clinical trials are submitted to the FDA as part of
an NDA, or as part of an NDA supplement, for approval of a new
indication if the product candidate is already approved for
another indication. The FDA may deny approval of an NDA or NDA
supplement if the applicable regulatory criteria are not
satisfied, or it may require additional clinical data and/or an
additional pivotal Phase III clinical trial. Even if such
data are submitted, the FDA may ultimately decide that the NDA
or NDA supplement does not satisfy the criteria for approval.
Once issued, the FDA may withdraw product approval if ongoing
regulatory standards are not met or if safety problems occur
after the product reaches the market. In addition, the FDA may
require testing and surveillance programs to monitor the effect
of approved products that have been commercialized, and the FDA
has the power to prevent or limit further marketing of a product
based on the results of these post-marketing programs.

Satisfaction of FDA requirements or similar
requirements of state, local and foreign regulatory agencies
typically takes several years and the actual time required may
vary substantially based upon the type, complexity and novelty
of the product or disease. Typically, if a drug product is
intended to treat a chronic disease, as is the case with the
product candidates we are developing, safety and efficacy data
must be gathered over an extended period of time, which can
range from six months to three years or more. Government
regulation may delay or prevent marketing of product candidates
or new drugs for a considerable period of time and impose costly
procedures upon our activities. We cannot be certain that the
FDA or any other regulatory agency will grant approvals for new
indications for our product candidates on a timely basis, if at
all. Success in early stage clinical trials does not ensure
success in later stage clinical trials. Data obtained from
clinical activities is not always conclusive and may be
susceptible to varying interpretations, which could delay, limit
or prevent regulatory approval. Even if a product candidate
receives regulatory approval, the approval may be significantly
limited to specific disease states, patient populations and
dosages. Further, even after regulatory approval is obtained,
later discovery of previously unknown problems with a product
may result in

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restrictions on the product or even complete
withdrawal of the product from the market. Delays in obtaining,
or failures to obtain, additional regulatory approvals for
enoximone or ambrisentan would harm our business. In addition,
we cannot predict what adverse governmental regulations may
arise from future United States or foreign governmental action.


Any products manufactured or distributed by us
pursuant to FDA approvals are subject to continuing regulation
by the FDA, including record-keeping requirements and reporting
of adverse experiences with the drug. Drug manufacturers and
their subcontractors are required to register their
establishments with the FDA and certain state agencies, and are
subject to periodic unannounced inspections by the FDA and
certain state agencies for compliance with current Good
Manufacturing Practices, or cGMP, which impose certain
procedural and documentation requirements upon us and our
third-party manufacturers in order to ensure that the product
meets applicable specifications. We cannot be certain that we or
our present or future suppliers will be able to comply with the
cGMP and other FDA regulatory requirements. If our present or
future suppliers are not able to comply with these requirements,
the FDA may halt our clinical trials, require us to recall a
drug from distribution, or withdraw approval of the NDA for that
drug.

The FDA closely regulates the marketing and
promotion of drugs. A company can make only those claims
relating to safety and efficacy that are approved by the FDA.
Failure to comply with these requirements can result in adverse
publicity, warning letters, corrective advertising and potential
civil and criminal penalties. Physicians may prescribe legally
available drugs for uses that are not described in the
products labeling and that differ from those tested by us
and approved by the FDA. Such off-label uses are common across
medical specialties. Physicians may believe that such off-label
uses are the best treatment for many patients in varied
circumstances. The FDA does not regulate the behavior of
physicians in their choice of treatments. The FDA does, however,
restrict manufacturers communications on the subject of
off-label use.

The FDAs policies may change and additional
government regulations may be enacted which could prevent or
delay regulatory approval of our product candidates or approval
of new diseases for our existing products. We cannot predict the
likelihood, nature or extent of adverse governmental regulation
that might arise from future legislative or administrative
action, either in the United States or abroad.

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RISK FACTORS

Our business faces significant risks. These
risks include those described below and may include additional
risks of which we are not currently aware or which we currently
do not believe are material. If any of the events or
circumstances described in the following risks actually occurs,
our business, financial condition or results of operations could
be materially adversely affected. These risks should be read in
conjunction with the other information set forth in this
report.

Risks Related to Our Business



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | We are at an early stage of development as
    a company and we do not have, and may never have, any products
    that generate significant revenues.

We are at an early stage of development as a
biopharmaceutical company, and we do not have any commercial
products that generate significant revenues. Our existing
product candidates will require extensive additional clinical
evaluation, regulatory review, significant marketing efforts and
substantial investment before they could provide us with any
revenues. Our efforts may not lead to commercially successful
drugs, for a number of reasons, including:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | our product candidates may not prove to be safe
    and effective in clinical trials;                                                        
|
| |  | we may not be able to obtain regulatory approvals
    for our product candidates or approvals may be narrower than we
    seek;              
|
| |  | we may not have adequate financial or other
    resources to complete the development and commercialization of
    our product candidates; or
|
| |  | any products that are approved may not be
    accepted in the marketplace.                                                                   

Other than sales of Perfan I.V. in Europe,
which are only minor, we do not expect to be able to market any
of our product candidates for a number of years. If we are
unable to develop, receive approval for, or successfully
commercialize any of our product candidates, we will be unable
to generate significant revenues. If our development programs
are delayed, we may have to raise additional capital or reduce
or cease our operations.



| |                                                                              
| | -----------------------------------------------------------------------------
| | We have a history of operating losses and
    we may never become profitable.

We have experienced significant operating losses
since our inception in 1996. At December 31, 2003, we had
an accumulated deficit of $118.5 million. For the year
ended December 31, 2003 we had an operating loss of
$43.0 million and for the years ended December 31,
2002 and 2001, we had operating losses of $28.8 million and
$17.8 million, respectively. Revenues from the commercial
sales of our only approved product, Perfan I.V., were
$2.8 million and $2.3 million for the years ended
December 31, 2003 and 2002, respectively, and we will not
achieve profitability from the sales of this product alone. We
also do not expect that research and development revenue, which
was $1.0 million in 2003, will become sufficient for us to
achieve profitability. We have funded our operations principally
from the sale of our equity securities. We expect to continue to
incur substantial additional operating losses for the next
several years as we pursue our clinical trials and research and
development efforts. To become profitable, we, either alone or
with our collaborators, must successfully develop, manufacture
and market our product candidates, or continue to identify,
develop, acquire, manufacture and market other new product
candidates. We may never have any significant revenues or become
profitable.



| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to obtain additional financing,
    we may be unable to complete the development and
    commercialization of our product candidates or continue our
    research and development programs.

Our operations have consumed substantial amounts
of cash since inception. To date, our sources of cash have been
primarily limited to the sale of our equity securities. We
expect to continue to spend substantial amounts on research and
development, including amounts spent on conducting clinical
trials for our product candidates, manufacturing clinical
supplies and expanding our discovery research programs. In 2003,
our

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operations consumed approximately
$2.6 million of cash per month, compared to
$2.2 million of cash per month in 2002. This rate of cash
consumption was reduced by research and development funding by
an average of $0.5 million per month. We expect that our
monthly cash used by operations will continue to increase for
the next several years. We expect that our existing capital
resources will be sufficient to fund our operations for at least
the next 12 months. We will be required to raise additional
capital to complete the development and commercialization of our
current product candidates. If we are unable to raise additional
capital when required or on acceptable terms, we may have to
significantly delay, scale back or discontinue one or more of
our drug development or discovery research programs. We also may
be required to:




| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | seek collaborators for our product candidates at
    an earlier stage than otherwise would be desirable and on terms
    that are less favorable than might otherwise be
    available; and                                                          
|
| |  | relinquish, license or otherwise dispose of
    rights to technologies, product candidates or products that we
    would otherwise seek to develop or commercialize ourselves on
    terms that are less favorable than might otherwise be available.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | We may experience delays in our clinical
    trials that could adversely affect our financial position and
    our commercial prospects.

With the exception of EMOTE, we do not know when
our current clinical trials will be completed, if at all. We
also cannot accurately predict when other planned clinical
trials will begin or be completed. Many factors affect patient
enrollment, including the size of the patient population, the
proximity of patients to clinical sites, the eligibility
criteria for the trial, competing clinical trials and new drugs
approved for the conditions we are investigating. Other
companies are conducting clinical trials and have announced
plans for future trials that are seeking or likely to seek
patients with the same diseases as those we are studying.
Competition for patients in cardiovascular disease trials is
particularly intense because of the limited number of leading
cardiologists and the geographic concentration of major clinical
centers. Our Phase III ARIES trials for ambrisentan include
placebo control groups, which may decrease the pace of
enrollment compared to our Phase II trial. As a result of
all of these factors, our trials may take longer to enroll
patients than we anticipate. Delays in patient enrollment in the
trials may increase our costs and slow down our product
development and approval process. In addition, two of our
current clinical trials for enoximone capsules are designed to
continue until a pre-specified number of events have occurred to
the patients enrolled. Trials such as these are subject to
delays stemming from patient withdrawal and from lower than
expected event rates, in addition to the risk of slower than
anticipated patient enrollment. These trials may also incur
increased costs if enrollment is increased in order to achieve
the desired number of events. Our product development costs will
also increase if we need to perform more or larger clinical
trials than planned. Any delays in completing our clinical
trials will delay our ability to generate revenue from product
sales, and we may have insufficient capital resources to support
our operations. Even if we do have sufficient capital resources,
our ability to become profitable will be delayed.



| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Adverse events in our clinical trials may
    force us to stop development of our product candidates or
    prevent regulatory approval of our product
    candidates.

Our product candidates may produce serious
adverse events. These adverse events could interrupt, delay or
halt clinical trials of our product candidates and could result
in the Food and Drug Administration, or FDA, or other regulatory
authorities denying approval of our product candidates for any
or all targeted indications. An independent data safety
monitoring board, the FDA, other regulatory authorities or we
may suspend or terminate clinical trials at any time. We cannot
assure you that any of our product candidates will be safe for
human use.



| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our applications for regulatory approval
    could be delayed or denied due to problems with studies
    conducted before we in-licensed the product
    candidates.

We are developing product candidates, including
enoximone capsules, ambrisentan and darusentan, that we have
in-licensed from other pharmaceutical companies. Many of the
pre-clinical studies and some of the

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clinical studies on these product candidates were
conducted by other companies before we in-licensed the product
candidates. In some cases, the studies were conducted when
regulatory requirements were different from today. We would
incur unanticipated costs and experience delays if we were
required to repeat some or all of those studies. Even if the
previous studies are acceptable to regulatory authorities, we
may have to spend additional time analyzing and presenting the
results of the studies. Problems with the previous studies could
cause our regulatory applications to be delayed or rejected. For
example, as a result of changing regulatory standards, we may be
required to repeat certain animal toxicology studies for
enoximone prior to the submission of our application for
marketing approval. If we must repeat these studies, we would
experience an increase in our expenditures and the final
regulatory approval of enoximone could be jeopardized or delayed.




| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our product candidates do not meet
    safety or efficacy endpoints in clinical evaluations, they will
    not receive regulatory approval and we will be unable to market
    them.

Other than Perfan I.V., which is approved
for use in several European countries, our current product
candidates, enoximone capsules, ambrisentan and darusentan, are
in clinical development and have not received regulatory
approval from the FDA or any foreign regulatory authority.

The regulatory approval process typically is
extremely expensive, takes many years and the timing of any
approval cannot be accurately predicted. If we fail to obtain
regulatory approval for our current or future product
candidates, we will be unable to market and sell such products
and therefore may never be profitable.

As part of the regulatory approval process, we
must conduct pre-clinical studies and clinical trials for each
product candidate to demonstrate safety and efficacy. The number
of pre-clinical studies and clinical trials that will be
required varies depending on the product candidate, the
indication being evaluated, the trial results and regulations
applicable to any particular product candidate.

The results of pre-clinical studies and initial
clinical trials of our product candidates do not necessarily
predict the results of later-stage clinical trials. Product
candidates in later stages of clinical trials may fail to show
the desired safety and efficacy despite having progressed
through initial clinical trials. We cannot assure you that the
data collected from the pre-clinical studies and clinical trials
of our product candidates will be sufficient to support FDA or
other regulatory approval. In addition, the continuation of a
particular study after review by an independent data safety
monitoring board does not necessarily indicate that our product
candidate will achieve the clinical endpoint.

The FDA and other regulatory agencies can delay,
limit or deny approval for many reasons, including:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | a product candidate may not be safe or effective;                                                           
|
| |  | the manufacturing processes or facilities we have
    selected may not meet the applicable requirements; and
|
| |  | changes in their approval policies or adoption of
    new regulations may require additional work.          

Any delay in, or failure to receive or maintain,
approval for any of our products could prevent us from ever
generating meaningful revenues or achieving profitability.



| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Even if our products meet safety and
    efficacy endpoints in clinical trials, regulatory authorities
    may not approve them, or we may face post-approval problems that
    require withdrawal of our products from the
    market.

Our product candidates may not be approved even
if they achieve their endpoints in clinical trials. Regulatory
agencies, including the FDA, or their advisors may disagree with
our interpretations of data from pre-clinical studies and
clinical trials. Regulatory agencies also may approve a product
candidate for fewer indications than requested or may grant
approval subject to the performance of post-marketing studies
for a product candidate. In addition, regulatory agencies may
not approve the labeling claims that are necessary or desirable
for the successful commercialization of our product candidates.

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Even if we receive regulatory approvals, our
product candidates may later exhibit adverse effects that limit
or prevent their widespread use or that force us to withdraw
those product candidates from the market. In addition, a
marketed product continues to be subject to strict regulation
after approval. Any unforeseen problems with an approved product
or any violation of regulations could result in restrictions on
the product, including its withdrawal from the market. Any delay
in, or failure to receive or maintain regulatory approval for,
any of our products could prevent us from ever generating
meaningful revenues or achieving profitability.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | There can be no assurance that enoximone
    capsules do not increase mortality.

Clinical trials with type-III phosphodiesterase,
or PDE-III, inhibitors, including enoximone capsules, have shown
that at certain doses these compounds can increase the risk of
mortality in specific patient populations. In studies of
enoximone capsules administered at doses of 100 to
300 milligrams three times a day, some patients experienced
abnormal rhythms in the beating of the heart. In one
Phase II placebo-controlled trial involving
151 patients administered placebo capsules or enoximone
capsules at 100 milligrams three times a day, there was a
statistically significant increase in the mortality rate in the
group of patients receiving enoximone capsules compared to the
group of patients receiving placebo capsules: 36% of the
patients treated with enoximone capsules died during the
evaluation period versus 23% of the patients treated with
placebo. We are testing enoximone capsules administered at doses
of 25 and 50 milligrams three times a day. We cannot assure
you that a similar mortality effect will not occur at these
lower doses in our clinical trials or in commercial usage after
approval. If we are unable to clearly demonstrate that mortality
is not increased by enoximone capsules at these lower doses, we
are not likely to receive regulatory approval to market
enoximone capsules.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Endothelin receptor antagonists, including
    ambrisentan and darusentan, have demonstrated toxicity in
    animals.

Prior to regulatory approval for a product
candidate, we are required to conduct studies of our product
candidates on animals to determine if they have the potential to
have toxic effects. The toxicology tests for ambrisentan and
darusentan indicated that they both cause birth defects in
rabbits. Other toxicology tests indicated that ambrisentan and
darusentan caused damage to the testes causing infertility in
rodents and that ambrisentan had the potential to cause damage
to the testes in dogs. We assume that similar toxicities could
occur in humans. As a result, the FDA will only consider
approving ambrisentan and darusentan for the treatment of severe
diseases such as pulmonary arterial hypertension or resistant
hypertension and will prohibit their use in women who may become
pregnant.



| |                                                              
| | -------------------------------------------------------------
| | Market acceptance of our product candidates
    is uncertain.

We cannot assure you that physicians will
prescribe or patients will use enoximone capsules, ambrisentan
or darusentan, if they are approved. Physicians will prescribe
our products only if they determine, based on experience,
clinical data, side effect profiles and other factors, that they
are preferable to other products then in use or beneficial in
combination with other products. Recommendations and
endorsements by influential physicians will be essential for
market acceptance of our products, and we may not be able to
obtain these recommendations and endorsements. Because of prior
reports of increased mortality caused by high dose enoximone
capsules in earlier clinical trials, physicians may be unwilling
to use enoximone capsules in treating their patients. Physicians
may not be willing to use ambrisentan and darusentan because of
demonstrated adverse side effects such as damage to testes in
some animal species. Additionally, market acceptance of
endothelin receptor antagonists will be limited because they are
known to cause birth defects in animals and are believed to do
the same in humans.

Enoximone capsules for the treatment of chronic
heart failure and ambrisentan for the treatment of pulmonary
arterial hypertension both address highly competitive markets
and the availability of other drugs and devices for the same
indications may slow or reduce market acceptance of our
products. Drugs such as beta blockers, angiotensin converting
enzyme inhibitors and diuretics have been on the market for many
years, and physicians have experience with prescribing these
products for the treatment of chronic heart failure. Tracleer, a
non-selective endothelin receptor antagonist, is a drug that has
been approved for pulmonary

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arterial hypertension, the same indication we
intend for ambrisentan, and has been available since December
2001. Adoption of ambrisentan may be slow if physicians continue
to prescribe Tracleer. In addition, sitaxsentan, an
ETA selective endothelin receptor antagonist like
ambrisentan, is in clinical trials for the treatment of
pulmonary arterial hypertension. Sitaxsentan is at a more
advanced stage of development than ambrisentan and could be on
the market before ambrisentan. If sitaxsentan is approved and
achieves market acceptance prior to ambrisentan, the adoption of
ambrisentan may be slowed or reduced.


Many other factors influence the adoption of new
pharmaceuticals, including marketing and distribution
restrictions, adverse publicity, product pricing and
reimbursement by third-party payors. Even if our product
candidates achieve market acceptance, the market may not be
large enough to result in significant revenues. The failure of
our product candidates to achieve market acceptance would
prevent us from ever generating meaningful product revenues.



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | If we become subject to product liability
    claims, the damages may exceed our insurance.

It is impossible to predict from the results of
animal studies the potential adverse effects that a product
candidate may have in humans. We face the risk that the use of
our product candidates in human clinical trials will result in
adverse effects. If we complete clinical testing for our product
candidates and receive regulatory approval to market our
products, we will mark our products with warnings that identify
the known potential adverse effects and the patients who should
not receive our product. We cannot assure that physicians and
patients will comply with these warnings. In addition,
unexpected adverse effects may occur even with use of our
products that have received approval for commercial sale.

In pre-clinical testing, ambrisentan and
darusentan caused birth defects in animals. Based on these
results and similar results with other endothelin receptor
antagonists, we have concluded that ambrisentan and darusentan
could cause birth defects in humans. Neither ambrisentan nor
darusentan should be taken by women who are pregnant, or are
capable of getting pregnant and not practicing adequate forms of
birth control; however, there can be no assurance that
ambrisentan or darusentan will not be taken by these women.
Additionally, there can be no assurance that a patient will not
exceed the recommended dose of our products and suffer adverse
consequences. If a child is born with a birth defect or a
patient suffers harm from exceeding the approved dose on our
products, we may be subject to product liability claims that
exceed any insurance coverage that may be in effect at the time.

We have obtained liability insurance of
$10 million for Perfan I.V. and our product candidates
in clinical trials. We cannot predict all of the possible harms
or side effects that may result and, therefore, the amount of
insurance coverage we currently hold, or that we or our
collaborators may obtain, may not be adequate to protect us from
any liabilities. In addition, if any of our product candidates
are approved for marketing, we may seek additional insurance
coverage. We may be unable to obtain additional coverage or
afford such coverage. We may not have sufficient resources to
pay for any liabilities resulting from a claim beyond the limit
of our insurance coverage. If we cannot protect against
potential liability claims, we or our collaborators may find it
difficult or impossible to commercialize our products. We may
not be able to renew or increase our insurance on reasonable
terms, if at all.



| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to develop adequate sales,
    marketing or distribution capabilities or enter into agreements
    with third parties to perform some of these functions, we will
    not be able to commercialize our products
    effectively.

We have limited experience in sales, marketing
and distribution. To directly market and distribute any
products, we must build a sales and marketing organization with
appropriate technical expertise and distribution capabilities.
We may attempt to build such a sales and marketing organization
on our own or with the assistance of a contract sales
organization. For some market opportunities, we may need to
enter into co-promotion or other licensing arrangements with
larger pharmaceutical or biotechnology firms in order to
increase the commercial success of our products. We may not be
able to establish sales, marketing and distribution capabilities
of our own or enter into such arrangements with third parties in
a timely manner or on acceptable terms. To the extent that we
enter into co-promotion or other licensing arrangements, our
product

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revenues are likely to be lower than if we
directly marketed and sold our products, and some or all of the
revenues we receive will depend upon the efforts of third
parties, and these efforts may not be successful. Additionally,
building marketing and distribution capabilities may be more
expensive than we anticipate, requiring us to divert capital
from other intended purposes or preventing us from building our
marketing and distribution capabilities to the desired levels.




| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | Since we will rely on third-party
    manufacturers, we may be unable to control the availability or
    cost of producing our products.

There can be no assurance that our products, if
approved, can be manufactured in sufficient commercial
quantities, in compliance with regulatory requirements and at an
acceptable cost. Although there are several potential
manufacturers capable of manufacturing our products, we intend
to select and rely initially on one third-party to manufacture
each of our approved products. Establishing a replacement source
for any of our products could require at least 12 months
and significant additional expense. We will need to expand
relationships with manufacturers we have used in the past or
establish new relationships with different third-party
manufacturers for our products. We may not be able to contract
for manufacturing capabilities on acceptable terms, if at all.
Furthermore, third-party manufacturers may encounter
manufacturing or quality control problems or may be unable to
obtain or maintain the necessary governmental licenses and
approvals to manufacture our products. Any such failure could
delay or prevent us from receiving regulatory approvals and
marketing our products. Our dependence on third parties may
reduce our profit margins and delay or limit our ability to
develop and commercialize our products on a timely and
competitive basis.



| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our third-party manufacturers and their
    manufacturing facilities and processes are subject to regulatory
    approval, which may delay or disrupt our development and
    commercialization efforts.

Third-party manufacturers of our products or
product candidates must ensure that all of the processes,
methods and equipment are compliant with the current Good
Manufacturing Practices, or cGMP, and conduct extensive audits
of vendors, contract laboratories and suppliers. The cGMP
requirements govern quality control of the manufacturing process
and documentation policies and procedures. Compliance by
third-party manufacturers with cGMP requires record keeping and
quality control to assure that the product meets applicable
specifications and other requirements. Manufacturing facilities
are subject to inspection by regulatory agencies at any time. If
an inspection by regulatory authorities indicates that there are
deficiencies, third-party manufacturers could be required to
take remedial actions, stop production or close the facility,
which would disrupt the manufacturing processes and limit the
supplies of our products or product candidates. If they fail to
comply with these requirements, we also may be required to
curtail the clinical trials of our product candidates, and may
not be permitted to sell our products or may be limited in the
jurisdictions in which we are permitted to sell them.



| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Due to our reliance on contract research
    organizations or other third parties to conduct clinical trials,
    we are unable to directly control the timing, conduct and
    expense of our clinical trials.

We rely primarily on third parties to conduct our
clinical trials, including the EMOTE, ESSENTIAL and ARIES
trials, as well as the planned clinical trials for darusentan.
As a result, we have had and will continue to have less control
over the conduct of the clinical trials, the timing and
completion of the trials, the required reporting of adverse
events and the management of data developed through the trial
than would be the case if we were relying entirely upon our own
staff. Communicating with outside parties can also be
challenging, potentially leading to mistakes as well as
difficulties in coordinating activities. Outside parties may
have staffing difficulties, may undergo changes in priorities or
may become financially distressed, adversely affecting their
willingness or ability to conduct our trials. We may experience
unexpected cost increases that are beyond our control. Problems
with the timeliness or quality of the work of a contract
research organization may lead us to seek to terminate the
relationship and use an alternative service provider. However,
making this change may be costly and may delay our trials, and
contractual restrictions may make such a change difficult or
impossible. Additionally, it may be impossible to find a
replacement organization that can conduct our trials in an
acceptable manner and at an acceptable cost.

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| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not find development and
    commercialization collaborators for our product candidates, we
    may have to reduce or delay our rate of product development and
    commercialization and increase our expenditures.

Our existing collaborations have been with
academic scientists and institutions for basic scientific
research and we recently entered into a research collaboration
with Novartis relating to targets and compounds identified in
our discovery research program. To date, we have not entered
into any collaboration agreements for the development or
commercialization of our existing product candidates. We plan to
enter into relationships with selected pharmaceutical or
biotechnology companies to help develop and commercialize our
product candidates. We may not be able to negotiate
collaborations with these other companies for the development or
commercialization of our product candidates on acceptable terms.
If we are not able to establish such collaborative arrangements,
we may have to reduce or delay further development of some of
our programs, increase our planned expenditures and undertake
development and commercialization activities at our own expense.

If we enter into development or commercialization
collaborations with pharmaceutical or biotechnology companies,
including a license agreement or a co-promotion and profit
sharing agreement with Novartis, these relationships will also
be subject to a number of risks, including:



| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | collaborators may not pursue further development
    and commercialization of compounds resulting from collaborations
    or may elect not to renew research and development programs;                                                                                               
|
| |  | collaborators may delay clinical trials,
    underfund a clinical trial program, stop a clinical trial or
    abandon a product candidate, repeat or conduct new clinical
    trials or require the development of a new formulation of a
    product candidate for clinical testing;
|
| |  | a collaborator with marketing and distribution
    rights to one or more of our products may not commit enough
    resources to the marketing and distribution of our products,
    limiting our potential revenues from the commercialization of
    these products; and            
|
| |  | disputes may arise delaying or terminating the
    research, development or commercialization of our product
    candidates, or result in significant legal proceedings.                                                                                                             



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Even if we receive regulatory approval for
    our product candidates, we will be subject to ongoing regulatory
    obligations and review.

Following any regulatory approval of our product
candidates, we will be subject to continuing regulatory
obligations such as safety reporting requirements and additional
post-marketing obligations, including regulatory oversight of
the promotion and marketing of our products. In addition, we or
our third-party manufacturers will be required to adhere to
regulations setting forth current good manufacturing practices.
These regulations cover all aspects of the manufacturing,
testing, quality control and record keeping relating to our
product candidates. Furthermore, we or our third-party
manufacturers must pass a pre-approval inspection of
manufacturing facilities by the FDA and foreign authorities
before obtaining marketing approval and will be subject to
periodic inspection by these regulatory authorities. Such
inspections may result in compliance issues that could prevent
or delay marketing approval, or require the expenditure of
financial or other resources to address. If we fail to comply
with applicable regulatory requirements, we may be subject to
fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and
criminal prosecution.



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Our success depends on retention of our
    President and Chief Executive Officer, Chief Science and Medical
    Officer and other key personnel.

We are highly dependent on our President, Chief
Executive Officer and Chairman, J. William
Freytag, Ph.D., Chief Science and Medical Officer, Michael
R. Bristow, M.D., Ph.D. and other members of our
management team. We are named as the beneficiary on term life
insurance policies covering Drs. Freytag and Bristow in the
amount of $2.0 million each. We also depend on academic
collaborators for each of our research and development programs.
The loss of any of our key employees or academic collaborators
could

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delay our discovery research program and the
development and commercialization of our product candidates or
result in termination of them in their entirety.
Drs. Freytag and Bristow, as well as others on our
executive management team, have severance agreements with us,
but the agreements provide for at-will employment
with no specified term. Our future success also will depend in
large part on our continued ability to attract and retain other
highly qualified scientific, technical and management personnel,
as well as personnel with expertise in clinical testing,
governmental regulation and commercialization. We face
competition for personnel from other companies, universities,
public and private research institutions, government entities
and other organizations. If we are unsuccessful in our
recruitment and retention efforts, our business will be harmed.


We also rely on consultants, collaborators and
advisors to assist us in formulating and conducting our
research. All of our consultants, collaborators and advisors are
employed by other employers or are self-employed and may have
commitments to or consulting contracts with other entities that
may limit their ability to contribute to our company.



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | If our discovery research program is not
    successful, we may be unable to develop additional product
    candidates.

We have devoted and expect to continue to devote
significant resources to our discovery research program. For the
years ended December 31, 2003, 2002 and 2001, we spent
$3.3 million, $3.5 million and $2.4 million,
respectively, on our discovery research program. We are
obligated under sponsored research agreements to make annual
payments of $350,000 to the University of Texas Southwestern
Medical Center. However, this program may not succeed in
identifying additional therapeutic targets, product candidates
or products. If we do not develop new products, and if our
existing product candidates do not receive regulatory approval
or achieve commercial success, we would have no other way to
achieve any meaningful revenue. Moreover, if we do not develop
new products, our revenues from any of our product candidates
that are approved will eventually decline as they face
competition when any applicable patents, or periods of market
exclusivity expire. The collaboration agreement we entered into
with Novartis in October 2003 provides Novartis with an
exclusive option to all of our discoveries for a three year
period. Novartis may choose to terminate or not renew the
agreement with us, possibly delaying our development programs
and increasing our operating loss.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Our operations may be impaired unless we
    can successfully manage our growth.

We expect to continue to expand our research and
development, product development, sales and marketing and
administrative operations. Our number of employees and
operational spending have nearly quadrupled since fiscal year
2000. This expansion has placed, and is expected to continue to
place, a significant strain on our management, operational and
financial resources. To manage further growth, we will be
required to improve existing, and implement additional,
operational and financial systems, procedures and controls and
hire, train and manage additional employees. We cannot assure
that (i) our current and planned personnel, systems,
procedures and controls will be adequate to support our
anticipated growth, (ii) management will be able to hire,
train, retain, motivate and manage required personnel or
(iii) management will be able to successfully identify,
manage and exploit existing and potential market opportunities.
Our failure to manage growth effectively could limit our ability
to achieve our research and development and commercialization
goals.



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | If we engage in any acquisition, we will
    incur a variety of costs, and we may never realize the
    anticipated benefits of the acquisition.

Since our inception, we have acquired three
product candidates through in-licensing. One of our strategies
for business expansion is the acquisition of additional products
and product candidates. We may attempt to acquire these product
candidates, or other potentially beneficial technologies,
through in-licensing or the acquisition of businesses, services
or products that we believe are a strategic fit with our
business. Although we currently have no commitments or
agreements with respect to any acquisitions, if we undertake an
acquisition, the process of integrating the acquired business,
technology, service or product may result in

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unforeseen operating difficulties and
expenditures and may divert significant management attention
from our ongoing business operations. Moreover, we may fail to
realize the anticipated benefits of any acquisition for a
variety of reasons, such as an acquired product candidate
proving to not be safe or effective in later clinical trials. We
may fund any future acquisition by issuing equity or debt
securities, which could dilute your ownership percentage.
Acquisition efforts can consume significant management attention
and require substantial expenditures, which could detract from
our other programs. In addition, we may devote resources to
potential acquisitions that are never completed.




| |                                                                              
| | -----------------------------------------------------------------------------
| | Our attempts to increase future sales of
    Perfan I.V. may be unsuccessful.

Our current revenue is derived solely from
European sales of Perfan I.V. and we recorded
$2.8 million in sales of this product in 2003. The revenue
we receive on sales of Perfan I.V. currently exceeds our
costs associated with having it manufactured and sold. The sales
of Perfan I.V. fund our European sales efforts and help
offset some of the costs we incur to develop our product
candidates. We believe that our sales and marketing efforts in
Europe will, at most, lead to only modest increases in
Perfan I.V. sales, and sales may decline over time due to
the expiration of patent protection for Perfan I.V. and
competition from other drugs sold for the same indication as
Perfan I.V., some of which sell for significantly lower
prices. If we do not maintain or increase our sales of
Perfan I.V. in Europe, our operating losses will increase.
We could also be forced to discontinue our European sales
program, depriving us of potential commercialization and sales
experience and contacts which may be important for the
successful commercial launch of any of our product candidates
that receive regulatory approval. We are evaluating the costs
and potential benefits of developing and commercializing
Perfan I.V. in the United States. However, if we undertake
this program, we may not be able to achieve sufficient sales to
justify the time, capital and resources expended.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Our corporate compliance program cannot
    guarantee that we are in compliance with all potentially
    applicable regulations.

The development, manufacturing, pricing, sales,
and reimbursement of our products, together with our general
operations, are subject to extensive regulation by federal,
state and other authorities within the United States and
numerous entities outside of the United States. We are a
relatively small company with 57 employees, 24% of whom
have joined us in the last 12 months. We also have
significantly fewer employees than many other companies that
have the same or fewer product candidates in late stage clinical
development and we rely heavily on third parties to conduct many
important functions. Further, as a publicly traded company we
are subject to significant regulations, some of which have
either only recently been adopted or are currently proposals
subject to change. While we have developed and instituted a
corporate compliance program based on what we believe are the
current best practices, we cannot assure that we are or will be
in compliance with all potentially applicable regulations. If we
fail to comply with any of these regulations we could be subject
to a range of regulatory actions, including suspension or
termination of clinical trials, the failure to approve a product
candidate, restrictions on our products or manufacturing
processes, withdrawal of products from the market, significant
fines, or other sanctions or litigation.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Our operations involve hazardous materials,
    and compliance with environmental laws and regulations is
    expensive.

Our research and development activities involve
the controlled use of hazardous materials, including chemicals
that cause cancer, volatile solvents, radioactive materials
including tritium and phosphorus-32 and biological materials
including human tissue samples that have the potential to
transmit diseases. Our operations also produce hazardous waste
products. We are subject to a variety of federal, state and
local regulations relating to the use, handling and disposal of
these materials. We generally contract with third parties for
the disposal of such substances and store certain low level
radioactive waste at our facility until the materials are no
longer considered radioactive. While we believe that we comply
with current regulatory requirements, we cannot eliminate the
risk of accidental contamination or injury from these materials.
We may be required to incur substantial costs to comply with
current or future environmental and safety regulations. If an
accident or contamination occurred, we would likely incur
significant costs associated with

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civil penalties or criminal fines and in
complying with environmental laws and regulations. Although we
carry a $2.0 million pollution and remediation insurance
policy, we cannot assure that this would be sufficient to cover
our potential liability if we experienced a loss.




| |                                                                         
| | ------------------------------------------------------------------------
| | Currency fluctuations may negatively affect
    our financial condition.

We sell Perfan I.V. in Europe and also
expect to commercialize other products outside the United States
and, as a result, our business is affected by fluctuations in
foreign exchange rates between the U.S. dollar and foreign
currencies. Our reporting currency is the U.S. dollar and,
as a result, financial positions are translated into
U.S. dollars at the applicable foreign exchange rates. Our
revenues are denominated in foreign currencies while the
majority of our expenses are denominated in U.S. dollars.
As exchange rates fluctuate, such fluctuations may adversely
affect our results of operations, financial position and cash
flows. In addition, we conduct clinical trials in many
countries, exposing us to cost increases if the U.S. dollar
declines in value compared to other currencies.

Risks Related to Our Industry



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Our competitors may develop and market
    drugs that are less expensive, more effective or safer than our
    product candidates.

The pharmaceutical market is highly competitive.
Many pharmaceutical and biotechnology companies have developed
or are developing products that will compete with products we
are developing. Several significant competitors are working on,
or already have approval for, drugs for the same indications as
enoximone capsules, ambrisentan and darusentan. It is possible
that our competitors will develop and market products that are
less expensive, more effective or safer than our future products
or that will render our products obsolete. Some of these
products are in late-stage clinical trials. It is also possible
that our competitors will commercialize competing products
before any of our product candidates are approved and marketed.
Actelion Ltd. received FDA approval in December 2001 for
Tracleer, a non-selective endothelin receptor antagonist for the
treatment of pulmonary arterial hypertension. United
Therapeutics Corp. received FDA approval in May 2002 for
Remodulin for the treatment of pulmonary arterial hypertension.
GlaxoSmithKline plc markets Flolan for pulmonary arterial
hypertension. Encysive Pharmaceuticals, Inc. is developing
sitaxsentan, an ETA selective endothelin receptor
antagonist which has demonstrated efficacy in a
Phase IIb/III study and may be approved for pulmonary
arterial hypertension earlier than ambrisentan. A number of
other companies, including Abbott Laboratories, have
ETA selective endothelin receptor antagonists in
late-stage clinical development and could compete with
ambrisentan and darusentan. We expect that competition from
pharmaceutical and biotechnology companies, universities and
public and private research institutions will increase. Many of
these competitors have substantially greater financial,
technical, research and other resources than we do. We may not
have the financial resources, technical and research expertise
or marketing, distribution or support capabilities to compete
successfully.



| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The status of reimbursement from
    third-party payors for newly approved health care drugs is
    uncertain and failure to obtain adequate reimbursement could
    limit our ability to generate revenue.

Our ability to commercialize pharmaceutical
products may depend, in part, on the extent to which
reimbursement for the products will be available from:



| |   |                                                  
| | - | -------------------------------------------------
| |  | government and health administration authorities;
|
| |  | private health insurers;                         
|
| |  | managed care programs; and                       
|
| |  | other third-party payors.                        

Significant uncertainty exists as to the
reimbursement status of newly approved health care products.
Third-party payors, including Medicare, are challenging the
prices charged for medical products and services. Government and
other third-party payors increasingly are attempting to contain
health care costs by limiting

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both coverage and the level of reimbursement for
new drugs and by refusing, in some cases, to provide coverage
for uses of approved products for disease indications for which
the FDA has not granted labeling approval. Third-party insurance
coverage may not be available to patients for our products. If
government and other third-party payors do not provide adequate
coverage and reimbursement levels for our products, their market
acceptance may be reduced.




| |                                                                     
| | --------------------------------------------------------------------
| | Health care reform measures could adversely
    affect our business.

The business and financial condition of
pharmaceutical and biotechnology companies are affected by the
efforts of governmental and third-party payors to contain or
reduce the costs of health care. In the United States and in
foreign jurisdictions there have been, and we expect that there
will continue to be, a number of legislative and regulatory
proposals aimed at changing the health care system. For example,
in some countries other than the United States, pricing of
prescription drugs is subject to government control, and we
expect proposals to implement similar controls in the United
States to continue. Another example of proposed reform that
could affect our business is the discussion of drug
reimportation into the United States. In 2000, Congress directed
the FDA to adopt regulations allowing the reimportation of
approved drugs originally manufactured in the United States back
into the United States from other countries where the drugs were
sold at a lower price. Although the Secretary of Health and
Human Services has refused to implement this directive, in July
2003 the House of Representatives passed a similar bill that
does not require the Secretary of Health and Human Services to
act. The reimportation bills have not yet resulted in any new
laws or regulations; however, these and other initiatives could
decrease the price we or any potential collaborators receive for
our products, adversely affecting our profitability. The
pendency or approval of such proposals could result in a
decrease in our stock price or limit our ability to raise
capital or to obtain strategic partnerships or licenses.



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in or interpretations of accounting
    rules and regulations, such as expensing of stock options, could
    result in unfavorable accounting charges or require us to change
    our compensation policies.

Accounting methods and policies for business and
market practices of biopharmaceutical companies, including
policies regarding expensing stock options, are subject to
further review, interpretation and guidance from relevant
accounting authorities, including the Securities and Exchange
Commission, or SEC. For example, we currently are not required
to record stock-based compensation charges if the
employees stock option exercise price equals or exceeds
the fair value of our common stock at the date of grant.
Although the standards have not been finalized and the timing of
a final statement has not been established, the FASB has
announced their support for recording expense for the fair value
of stock options granted. If we were to change our accounting
policy to record expense for the fair value of stock options
granted and retroactively restate all prior periods presented,
then our operating expenses could increase. We rely heavily on
stock options to compensate existing employees and attract new
employees. If we are required to expense stock options, we may
then choose to reduce our reliance on stock options as a
compensation tool. If we reduce our use of stock options, it may
be more difficult for us to attract and retain qualified
employees. If we did not reduce our reliance on stock options,
our reported losses would increase. Although we believe that our
accounting practices are consistent with current accounting
pronouncements, changes to or interpretations of accounting
methods or policies in the future may require us to reclassify,
restate or otherwise change or revise our financial statements.

Risks Related to Our Intellectual
Property



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Since we will not obtain additional patent
    protection for enoximone capsules, we expect to rely solely on
    the Hatch-Waxman Act and similar foreign statutes to obtain
    market exclusivity.

The primary composition of matter patents
covering enoximone have expired. We therefore have no direct
means to prevent third parties from making, selling, using or
importing enoximone in the United States, Europe or Japan.
Instead, we expect to rely upon the United States Drug Price
Competition and Patent Term Restoration Act of 1984, commonly
known as the Hatch-Waxman Act, and applicable foreign
legislation, to achieve market exclusivity for enoximone
capsules. For new drug applications, or NDAs, for new chemical
entities not previously approved, the Hatch-Waxman Act provides
for marketing exclusivity to the first

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applicant to gain approval for a particular drug
by prohibiting acceptance or approval of an abbreviated new drug
application, or ANDA, from a generic competitor for up to five
years after approval of the original NDA. This exclusivity only
applies to submissions of an ANDA and would not prevent a third
party from conducting pivotal clinical trials and thereafter
filing a complete regulatory submission for enoximone. Our
competitors will be free during any period of statutory
exclusivity to develop the data necessary either to file an ANDA
at the end of the exclusivity period or to conduct studies in
support of a complete NDA filing during the period of market
exclusivity. Japanese law may provide us with marketing
exclusivity in that country for a period up to six years
following Japanese marketing approval. Although statutory market
exclusivity in Europe, the United States and Japan may apply
even when the composition of matter patent has already expired,
it is possible that enoximone will not qualify for such
exclusivity, or alternatively, the terms of the Hatch-Waxman
Act, or similar foreign statutes, could be amended to our
disadvantage. If we do not qualify for marketing exclusivity for
enoximone capsules, the competition we face would increase,
reducing our potential revenues.




| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | We may not be able to extend market
    exclusivity for enoximone capsules by developing an extended
    release formulation.

Our current strategy includes attempting to
obtain an additional period of market exclusivity for enoximone
capsules by developing an extended release formulation before
the marketing exclusivity period for enoximone capsules ends. We
have not yet identified a specific extended release formulation.
If we pursue this development strategy, we expect to file for
and obtain patents covering the specific formulation developed,
as well as its use for the treatment of various diseases. If we
successfully develop an extended release formulation of
enoximone capsules and successfully conduct clinical trials to
demonstrate its safety and efficacy, a separate three years of
marketing exclusivity could be obtained. This would not,
however, prevent a competitor from filing an ANDA for the
immediate release formulation after expiration of the five-year
exclusivity period. There can be no assurance that such an
extended release formulation will be successfully developed in a
timely manner, that adequate patent protection can be obtained
or that any such formulation would provide a commercial
advantage. In addition, many third parties have patents covering
many of the technologies and manufacturing processes needed to
develop and make extended release formulations. There can be no
assurance that we can obtain rights to such patents on
attractive financial terms, if at all.



| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on compounds and technology
    licensed from third parties and termination of any of those
    licenses would result in the loss of significant
    rights.

We have exclusive, worldwide licenses to
enoximone for the treatment of cardiovascular disease,
ambrisentan for all indications, and darusentan for all
indications other than cancer. We also have the worldwide
exclusive rights to certain patents and patent applications
licensed from the University of Colorado and the University of
Texas Southwestern Medical Center and rights to license future
technology and patent applications arising out of research
sponsored at those institutions related to heart failure. Key
financial and other terms for future technology would still need
to be negotiated with the research institutions, and it may not
be possible to obtain any such license on terms that are
satisfactory to us.

Our licenses generally may be terminated by the
licensor if we fail to perform our obligations under the
license, including obligations to develop and commercialize the
compounds and technologies under license. The license agreements
also generally require us to meet specified milestones or show
commercially reasonable diligence in the development and
commercialization of the compounds or technology under the
license. If our agreements are terminated, we would lose the
rights to the product candidates, reducing our potential
revenues.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | If we are unable to protect our proprietary
    technology, we may not be able to compete
    effectively.

Our success depends in part on our ability to
obtain and enforce patent protection for our products, both in
the United States and other countries, to prevent our
competitors from developing, manufacturing and marketing
products based on our technology. The scope and extent of patent
protection for our product candidates is uncertain and
frequently involves complex legal and factual questions. We
cannot predict the breadth of claims that will be allowed and
issued in patents related to biotechnology or pharmaceutical

31



---



##### Table of Contents



applications. Once such patents have issued, we
cannot predict how the claims will be construed or enforced. In
addition, statutory differences between countries may limit the
protection we can obtain on some of our inventions outside of
the United States. For example, methods of treating humans are
not patentable in many countries outside of the United States.


Furthermore, the patents that we have licensed
with respect to enoximone, ambrisentan and darusentan are owned
by third parties. These third parties, with our advice and
input, are responsible for and control the prosecution and
enforcement of these patents. A failure by these third parties
to adequately prosecute and enforce these patents could result
in a decline in the value of the patents and have a material
adverse effect on our business. Since we collaborate with third
parties on some of our technology, there is also the risk that
disputes may arise as to the rights to technology or drugs
developed in collaboration with other parties.

The coverage claimed in a patent application can
be significantly narrowed before a patent is issued, both in the
United States and other countries. We do not know whether any of
our pending or future patent applications will result in the
issuance of patents. To the extent patents have been issued or
will be issued, we do not know whether these patents will be
subject to further proceedings that may limit their scope,
provide significant proprietary protection or competitive
advantage, or cause them to be circumvented or invalidated.
Furthermore, patents already issued to us, or patents that may
issue on our pending applications, may become subject to
dispute, including interference, reissue or reexamination
proceedings in the United States, or opposition proceedings in
foreign countries. Any of these proceedings could result in the
limitation or loss of rights.

We also rely on trade secrets and proprietary
know-how to develop and maintain our competitive position. While
we believe that we have protected our trade secrets, some of our
current or former employees, consultants, scientific advisors or
collaborators may unintentionally or willfully disclose our
confidential information to competitors or use our proprietary
technology for their own benefit. Furthermore, enforcing a claim
alleging the infringement of our trade secrets would be
expensive and difficult to prove, making the outcome uncertain.
Our competitors may also independently develop equivalent
knowledge, methods and know-how or gain access to our
proprietary information through some other means.



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be accused of infringing on the
    proprietary rights of third parties, which could impair our
    ability to successfully commercialize our product
    candidates.

Our success depends in part on operating without
infringing the proprietary rights of third parties. It is
possible that we may infringe on intellectual property rights of
others without being aware of the infringement. If a patent
holder believes that one of our product candidates infringes on
its patent, it may sue us even if we have received patent
protection for our technology. If another party claims we are
infringing its technology, we could face a number of issues,
including the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | defending a lawsuit, which is very expensive and
    time consuming;                                                                                                                                                                                                                                                                                                                            
|
| |  | defending against an interference proceeding in
    the United States Patent and Trademark Office, which also can be
    very expensive and time consuming;                                                                                                                                                                                                                                     
|
| |  | an adverse decision in a lawsuit or in an
    interference proceeding resulting in the loss of some or all of
    our rights to our intellectual property;                                                                                                                                                                                                                                      
|
| |  | paying a large sum for damages if we are found to
    be infringing;                                                                                                                                                                                                                                                                                                                            
|
| |  | being prohibited from making, using, selling or
    offering for sale our product candidates or our products, if
    any, until we obtain a license from the patent holder. Such a
    license may not be granted to us on satisfactory terms, if at
    all, and even if we are granted a license, we may have to pay
    substantial royalties or grant cross-licenses to our
    patents; and
|
| |  | redesigning the manufacturing methods or the use
    claims of our product candidates so that they do not infringe on
    the other partys patent in the event that we are unable to
    obtain a license, which, even if possible, could require
    substantial additional capital, could necessitate additional
    regulatory approval, and could delay commercialization.                 

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##### Table of Contents



Risks Related to Our Stock



| |                                                                 
| | ----------------------------------------------------------------
| | The market price of our common stock may be
    highly volatile.

We cannot assure you that an active trading
market for our common stock will exist at any time. Holders of
our common stock may not be able to sell shares quickly or at
the market price if trading in our common stock is not active.
Since initial trading of our stock began in October 2003 through
February 23, 2004, our average daily trading volume has
been 139,560 shares. Substantially all of the
5.75 million shares sold in our initial public offering,
which includes the underwriters over-allotment shares, are
freely tradable without restrictions or further registration
under the Securities Act of 1933. Of our remaining shares
outstanding, approximately 20.7 million shares will be
eligible for sale in the public market beginning on
April 27, 2004 upon the expiration of the lock-up
agreements with the underwriters. The trading price of our
common stock is likely to be highly volatile and could be
subject to wide fluctuations in price in response to various
factors, many of which are beyond our control, including:



| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated results of our clinical
    trials;                                                                                                                     
|
| |  | actual or anticipated regulatory approvals of our
    products or of competing products;                                                                                      
|
| |  | changes in laws or regulations applicable to our
    products;                                                                                                                
|
| |  | changes in the expected or actual timing of our
    development programs;                                                                                                     
|
| |  | actual or anticipated variations in quarterly
    operating results;                                                                                                          
|
| |  | announcements of technological innovations by us,
    our collaborators or our competitors;                                                                                   
|
| |  | new products or services introduced or announced
    by us or our competitors;                                                                                                
|
| |  | changes in financial estimates or recommendations
    by securities analysts;                                                                                                 
|
| |  | conditions or trends in the biotechnology and
    pharmaceutical industries;                                                                                                  
|
| |  | changes in the market valuations of similar
    companies;                                                                                                                    
|
| |  | announcements by us of significant acquisitions,
    strategic partnerships, joint ventures or capital commitments;                                                           
|
| |  | additions or departures of key personnel;                                                                                                                                     
|
| |  | disputes or other developments relating to
    proprietary rights, including patents, litigation matters and
    our ability to obtain patent protection for our technologies;
|
| |  | the loss of a collaborator, including Novartis;                                                                                                                               
|
| |  | developments concerning our collaborations;                                                                                                                                   
|
| |  | trading volume of our common stock; and                                                                                                                                       
|
| |  | sales of our common stock by us or our
    stockholders.                                                                                                                      

In addition, the stock market in general, the
Nasdaq National Market and the market for technology companies
in particular have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate
to the operating performance of those companies. Further, there
has been particular volatility in the market prices of
securities of biotechnology and life sciences companies. These
broad market and industry factors may seriously harm the market
price of our common stock, regardless of our operating
performance. In the past, following periods of volatility in the
market, securities class-action litigation has often been
instituted against companies. Such litigation, if instituted
against us, could result in substantial costs and diversion of
managements attention and resources.

33



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##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties

We currently lease approximately
28,200 square feet of office and laboratory space in
Westminster, Colorado. The lease expires on February 28,
2007, although we can elect to terminate the lease two years
early, subject to an early termination payment. We have an
option to extend the lease until 2014. We believe that there is
adequate space for lease in our area to support our future
growth requirements.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are not currently a party to any legal
proceedings.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

No matters were submitted to a vote of security
holders, through solicitation of proxies or otherwise, during
the fourth quarter of 2003.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Market Information and Holders

Our common stock is traded on the Nasdaq National
Market under the symbol MYOG. Trading of our common
stock commenced on October 30, 2003, following completion
of our initial public offering. The following table sets forth,
for the periods indicated, the high and low closing sales prices
for our common stock as reported by the Nasdaq National Market:

|                                       |  |      |       |     |  |   |       | 
|-------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Year Ended December 31, 2003           |  | High |       | Low
|                                       |  |      |       |    
|Fourth Quarter (from October 30, 2003) |  | $    | 16.90 |     |  | $ | 11.70 | 

On February 23, 2004, the last reported sale
price of our common stock on the Nasdaq National Market was
$15.53 per share. On February 23, 2004, we had
approximately 112 holders of record of our common stock.

Dividends

We have never paid any cash dividends on our
capital stock and do not intend to pay any such dividends in the
foreseeable future. Our term loan prohibits payment of any
dividends on our common stock.

Equity Compensation Plan Information

The following table shows certain information
concerning our common stock to be issued in connection with our
equity compensation plans as of December 31, 2003:

|                                                                 |  |                         |           |                         |  |                          |      |  |  |  |         | 
|---------------------------------------------------------------- |  | ----------------------- | --------- | ----------------------- |  | ------------------------ | ---- |  |  |  | ------- | 
|                                                                 |  |                         |           |                         |  | Number of Securities    
|                                                                 |  |                         |           |                         |  | Remaining Available     
|                                                                 |  | Number of Securities    |           |                         |  | for Future Issuance     
|                                                                 |  | to be Issued            |           | Weighted-Average        |  | Under Equity            
|                                                                 |  | upon Exercise           |           | Exercise Price          |  | Compensation Plans      
|                                                                 |  | of Outstanding Options, |           | of Outstanding Options, |  | (Excluding Securities   
|                                                                 |  | Warrants and Rights     |           | Warrants and Rights     |  | Reflected in Column (a))
|Plan Category                                                    |  | (a)                     |           | (b)                     |  | (c)                     
|                                                                 |  |                         |           |                         |  |                         
|Equity compensation plans approved by security
    holders(1)(2) |  |                         | 2,729,392 |                         |  | $                        | 2.34 |  |  |  | 851,868 | 
|Equity compensation plans not approved by
    security holders   |  |                         | 0         |                         |  | $                        | 0.00 |  |  |  | 0       | 
|Total                                                            |  |                         | 2,729,392 |                         |  | $                        | 2.34 |  |  |  | 851,868 | 

34



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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of December 31, 2003,
    3,581,260 shares were reserved for issuance under our 2003
    Equity Incentive Plan. On January 1 of each year during the
    term of our 2003 Equity Incentive Plan, beginning on
    January 1, 2004 through and including January 1, 2013,
    the number of shares in the reserve automatically will be
    increased by the lesser of 5% percent of our
    then-outstanding shares on a fully-diluted basis, or
    2,500,000 shares of common stock. Our Board of Directors
    approved a reduction of the share increase to our 2003 Equity
    Incentive Plan effective January 1, 2004 to
    750,000 shares.
|   
|(2) | As of December 31, 2003, 100,000 shares
    were reserved for issuance under our 2003 Employee Stock
    Purchase Plan. On January 1 of each year during the term of
    our 2003 Employee Stock Purchase Plan, beginning on
    January 1, 2004 through and including January 1, 2013,
    the number of shares in the reserve automatically will be
    increased by the lesser of 1.25% percent of our
    then-outstanding shares on a fully-diluted basis, or
    500,000 shares of common stock. On January 1, 2004,
    the share reserve of our 2003 Employee Stock Purchase Plan was
    increased by 150,000 shares.                        

Recent Sales of Unregistered
Securities

During the first two fiscal quarters of 2003, we
issued and sold 4,374 shares of our common stock that were
not registered under the Securities Act of 1933, as amended (the
Securities Act), to our employees and consultants
for cash consideration with an aggregate exercise price of
$5,467.50. During the same period, we granted options to
purchase 156,630 shares of common stock at an exercise
price of $1.25 per share.

During the fourth fiscal quarter of 2003, we
issued and sold 48,457 shares of our common stock that were
not registered under the Securities Act, to our employees and
consultants for cash consideration with an aggregate exercise
price of $56,349.65. During the same period, we granted options
to purchase 24,000 shares of common stock at exercise
prices ranging from $6.88 per share to $16.00 per
share.

No underwriters were involved in the foregoing
stock or option issuances. The issuance of these securities was
exempt from registration under the Securities Act in reliance on
Rule 701 promulgated under the Securities Act as
transactions by an issuer under compensatory benefit plans and
contracts relating to compensation within the parameters
required by Rule 701.

Use of Proceeds from Sales of Registered
Securities

On November 4, 2003, we closed the sale of
5,000,000 shares of our common stock in our initial public
offering (the Offering), and on November 7,
2003, we closed the sale of an additional 750,000 shares of
our common stock pursuant to the exercise by the underwriters of
an over-allotment option. The Registration Statement on
Form S-1 (Reg. No. 333-108301) (the Registration
Statement) we filed to register our common stock in the
Offering was declared effective by the Securities and Exchange
Commission on October 29, 2003. The Offering commenced as
of October 29, 2003 and did not terminate before any
securities were sold. The offering has been completed and all
shares were sold at an initial price per share of $14.00. The
aggregate purchase price of the Offering amount registered was
$80,500,000.

The managing underwriters for the initial public
offering were Credit Suisse First Boston LLC, J.P. Morgan
Securities Inc., CIBC World Markets Corp. and Lazard
Freres & Co. LLC. We incurred expenses in connection
with the Offering of $7.2 million, which consisted of
direct payments of: (i) $1.4 million in legal,
accounting and printing fees; (ii) $5.6 million in
underwriters discounts, fees and commissions; and
(iii) $0.2 million in miscellaneous expenses. No
payments for such expenses were made directly or indirectly to
(i) any of our directors, officers or their associates,
(ii) any person(s) owning 10% or more of any class of our
equity securities or (iii) any of our affiliates.

After deducting expenses of the offering, we
received net offering proceeds of approximately
$73.3 million. As of December 31, 2003, the entire net
proceeds from the offering were invested in short-term financial
instruments.

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##### Table of Contents



None of the net proceeds were directly or
indirectly paid to (i) any of our directors, officers or
their associates, (ii) any person(s) owning 10% or more of
any class of our equity securities or (iii) any of our
affiliates.






|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

The selected consolidated financial data set
forth below should be read in conjunction with our consolidated
financial statements and the related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, included in this
report. The consolidated statement of operations data for the
years ended December 31, 2003, 2002 and 2001 and the
cumulative period from June 10, 1996 (date of Inception)
through December 31, 2003, and the consolidated balance
sheet data as of December 31, 2003 and 2002, are derived
from, and qualified by reference to, our audited consolidated
financial statements included elsewhere in this report. The
consolidated statement of operations data for the years ended
December 31, 2000 and 1999 and the consolidated balance
sheet data as of December 31, 2001, 2000 and 1999, are
derived from our audited consolidated financial statements that
do not appear in this report. The historical results are not
necessarily indicative of the operating results to be expected
in the future.

|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |        | 
|------------------------------------------------------------------------------------- | -------------------------------------- | ----------------------------------------------- | --------- | ------------------- |  | ---- | --------- | ------ |  | ---- | ------- | ----------------- |  | - | ------- | ----- |  | - | ------- | ----- |  | - | -------- | ------ | 
|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         | Cumulative Period
|                                                                                      |                                        |                                                 |           | from June 10, 1996,
|                                                                                      |                                        | Years Ended December 31,                        |           | (Date of Inception)
|                                                                                      |                                        |                                                 |           | Through            
|                                                                                      |                                        | 2003                                            |           | 2002                |  | 2001 |           | 2000   |  | 1999 |         | December 31, 2003
|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                  
|                                                                                      |                                        |                                                
|                                                                                      |                                        | (In thousands, except share and per share data)
|Consolidated Statement of Operations
    Data:                                        |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       
|Revenues:                                                                             |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       
|                                                                                      | Product sales                          |                                                 | $         | 2,846               |  |      | $         | 2,343  |  |      | $       | 1,808             |  |   | $       | 427   |  |   | $       |      |  |   | $        | 7,424  | 
|                                                                                      | Research and development contracts     |                                                 |           | 1,010               |  |      |           |       |  |      |         |                  |  |   |         |      |  |   |         |      |  |   |          | 1,010  | 
|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       
|                                                                                      |                                        |                                                 | 3,856     |                     |  |      | 2,343     |        |  |      | 1,808   |                   |  |   | 427     |       |  |   |        |       |  |   | 8,434    |       
|Costs and expenses:                                                                   |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       
|                                                                                      | Cost of product sold                   |                                                 |           | 885                 |  |      |           | 877    |  |      |         | 756               |  |   |         | 167   |  |   |         |      |  |   |          | 2,687  | 
|                                                                                      | Research and development(1)            |                                                 |           | 37,365              |  |      |           | 24,950 |  |      |         | 15,288            |  |   |         | 7,672 |  |   |         | 2,247 |  |   |          | 88,720 | 
|                                                                                      | Selling, general and administrative(1) |                                                 |           | 4,387               |  |      |           | 4,650  |  |      |         | 3,497             |  |   |         | 2,830 |  |   |         | 1,277 |  |   |          | 17,838 | 
|                                                                                      | Stock-based compensation               |                                                 |           | 4,192               |  |      |           | 681    |  |      |         | 38                |  |   |         | 14    |  |   |         |      |  |   |          | 4,925  | 
|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       
|                                                                                      |                                        |                                                 | 46,829    |                     |  |      | 31,158    |        |  |      | 19,579  |                   |  |   | 10,683  |       |  |   | 3,524   |       |  |   | 114,170  |       
|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       
|Loss from operations                                                                  |                                        |                                                 | (42,973   | )                   |  |      | (28,815   | )      |  |      | (17,771 | )                 |  |   | (10,256 | )     |  |   | (3,524  | )     |  |   | (105,736 | )     
|Interest income (expense), net                                                        |                                        |                                                 | (136      | )                   |  |      | 786       |        |  |      | 659     |                   |  |   | 836     |       |  |   | 203     |       |  |   | 2,400    |       
|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       
|Loss before income taxes                                                              |                                        |                                                 | (43,109   | )                   |  |      | (28,029   | )      |  |      | (17,111 | )                 |  |   | (9,420  | )     |  |   | (3,321  | )     |  |   | (103,336 | )     
|Income taxes                                                                          |                                        |                                                 | 39        |                     |  |      | 18        |        |  |      | 3       |                   |  |   |        |       |  |   |        |       |  |   | 61       |       
|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       
|Net loss                                                                              |                                        |                                                 | (43,148   | )                   |  |      | (28,048   | )      |  |      | (17,114 | )                 |  |   | (9,420  | )     |  |   | (3,321  | )     |  |   | (103,397 | )     
|Accretion of mandatorily redeemable convertible
    preferred stock                   |                                        |                                                 | (13,187   | )                   |  |      | (14,684   | )      |  |      | (607    | )                 |  |   | (3,696  | )     |  |   | (326    | )     |  |   | (32,500  | )     
|Dividend related to beneficial conversion feature
    of preferred stock(2)           |                                        |                                                 | (39,935   | )                   |  |      |          |        |  |      |        |                   |  |   |        |       |  |   |        |       |  |   | (39,935  | )     
|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       
|Net loss attributable to common stockholders                                          |                                        | $                                               | (96,270   | )                   |  | $    | (42,731   | )      |  | $    | (17,721 | )                 |  | $ | (13,116 | )     |  | $ | (3,647  | )     |  | $ | (175,832 | )     
|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       
|Basic and diluted net loss per common share                                           |                                        | $                                               | (17.79    | )                   |  | $    | (42.59    | )      |  | $    | (19.80  | )                 |  | $ | (14.95  | )     |  | $ | (4.17   | )     |  |   |          |       
|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       
|Weighted-average shares used in computing basic
    and diluted net loss per share(3) |                                        |                                                 | 5,411,891 |                     |  |      | 1,003,426 |        |  |      | 894,865 |                   |  |   | 877,400 |       |  |   | 874,449 |       |  |   |          |       
|                                                                                      |                                        |                                                 |           |                     |  |      |           |        |  |      |         |                   |  |   |         |       |  |   |         |       |  |   |          |       

36



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|                                                          |  |                    |          |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|--------------------------------------------------------- |  | ------------------ | -------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------ | -
|                                                          |  |                   
|                                                          |  | As of December 31,
|                                                          |  |                   
|                                                          |  | 2003               |          | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                          |  |                    |          |      |  |      |         |      |  |     
|                                                          |  |                   
|                                                          |  | (In thousands)    
|Consolidated Balance Sheet Data:                          |  |                    |          |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Cash, cash equivalents and short-term investments         |  | $                  | 114,252  |      |  | $    | 33,798  |      |  | $    | 56,504  |   |  | $ | 9,781   |   |  | $ | 18,307 |  
|Working capital                                           |  |                    | 107,630  |      |  |      | 31,751  |      |  |      | 55,814  |   |  |   | 9,646   |   |  |   | 18,105 |  
|Total assets                                              |  |                    | 121,273  |      |  |      | 38,144  |      |  |      | 58,541  |   |  |   | 11,716  |   |  |   | 18,717 |  
|Long-term obligations                                     |  |                    | 5,064    |      |  |      | 3,740   |      |  |      | 33      |   |  |   | 108     |   |  |   |       |  
|Mandatorily redeemable convertible preferred
    stock(2) |  |                    |         |      |  |      | 106,566 |      |  |      | 91,917  |   |  |   | 29,073  |   |  |   | 24,272 |  
|Common stock                                              |  |                    | 26       |      |  |      | 1       |      |  |      | 1       |   |  |   | 1       |   |  |   | 1      |  
|Deficit accumulated during the development stage          |  |                    | (118,477 | )    |  |      | (75,329 | )    |  |      | (35,408 | ) |  |   | (17,784 | ) |  |   | (5,883 | )
|Total stockholders equity/(deficit)                      |  |                    | 103,922  |      |  |      | (76,829 | )    |  |      | (35,569 | ) |  |   | (17,934 | ) |  |   | (5,957 | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the years ended December 31, 2003 and
    2002, research and development and selling, general and
    administrative expenses exclude stock-based compensation of
    $2,373 and $1,819, and $431 and $250, respectively. For the
    cumulative period from June 10, 1996 (Inception) to
    December 31, 2003, research and development and selling,
    general and administrative expenses exclude stock-based
    compensation of $2,856 and $2,070, respectively.                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(2) | In August 2003, we raised $39.9 million
    through the sale of additional shares of Series D
    mandatorily redeemable convertible preferred stock. In November
    2003, we issued approximately 19.4 million shares of common
    stock upon the conversion of all of the outstanding shares of
    Series A, C and D mandatorily redeemable convertible
    preferred stock at the completion of our initial public
    offering. We recorded a non-cash beneficial conversion charge of
    $39.9 million in 2003, which is calculated as the
    difference between the Series D preferred stock offering
    price and the estimated fair value of the Series D
    preferred stock, limited to the amount of the proceeds from the
    sale of the Series D preferred stock.                                                                                                   
|   
|(3) | The weighted average shares used in computing
    basic and diluted net loss per share is calculated based on the
    weighted-average number of common shares outstanding during the
    year and excludes all dilutive potential common stock, including
    options, mandatorily redeemable convertible preferred stock,
    convertible preferred stock, common stock subject to repurchase
    and warrants. In November 2003, we sold 5.75 million shares
    of common stock for net proceeds of $73.3 million in our
    initial public offering. Concurrently, we issued approximately
    19.6 million shares of common stock upon the conversion of
    all of the outstanding shares of Series A, B, C and D
    preferred stock. Accordingly, this resulted in the increase in
    the weighted average common shares outstanding for the year
    ended December 31, 2003.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Overview

We are a biopharmaceutical company focused on the
discovery, development and commercialization of small molecule
therapeutics for the treatment of cardiovascular disorders. We
believe that our advanced understanding of the biology of
cardiovascular disease combined with our clinical development
expertise in cardiovascular therapeutics provide us with the
capability to discover novel therapies, as well as identify,
license or acquire products that address serious, debilitating
cardiovascular disorders that are not adequately treated with
existing therapies.

We have three product candidates in late-stage
clinical development: enoximone capsules for the treatment of
chronic heart failure, ambrisentan for the treatment of
pulmonary arterial hypertension and darusentan for the treatment
of resistant hypertension. We are evaluating enoximone capsules
in four Phase III trials. If these trials progress as
planned, we expect three of these trials, including the trials
we believe will be required for regulatory approval, will be
fully enrolled and patients will have completed

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treatment by the end of 2004. We completed a
Phase II clinical trial of ambrisentan in September 2003
and we initiated pivotal Phase III trials of this product
candidate in January 2004. We intend to begin Phase IIb
clinical evaluation of darusentan in 2004. All of our product
candidates are orally administered small molecules that we
believe offer advantages over currently available therapies. In
addition, we currently market an intravenous formulation of
enoximone, Perfan I.V., for the treatment of acute
decompensated heart failure in eight countries in Europe.


Through our internal research program and
academic collaborations, we are developing an advanced
understanding of the biological pathways of heart disease and
have discovered several novel molecular targets that we believe
play a key role in heart failure.

We are in the development stage and since
inception have devoted substantially all of our efforts to the
discovery, in-licensing and development of drugs to treat
cardiovascular disease. We have incurred losses each year since
our inception and had an accumulated deficit of
$118.5 million as of December 31, 2003. We incurred
operating losses of $43.0 million, $28.8 million and
$17.8 million for the years 2003, 2002 and 2001,
respectively. Our research and development expenses have
historically been much higher than our revenues.

Our current revenue is derived from sales of
Perfan I.V. in eight European countries and research and
development contract revenues from our agreement with Novartis
signed in October 2003. Prior to our licensing the worldwide
rights to enoximone in 1998, Perfan I.V. was marketed in
Europe by Aventis. In 1999, we formed our wholly-owned German
subsidiary, Myogen GmbH, to manage our sales and marketing
activities in Europe. From 2000 through 2002, we entered into
agreements with distributors to distribute Perfan I.V. in
Belgium, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands and the United Kingdom. We recorded our first sales
of Perfan I.V. in 2000. Even if our sales and marketing
efforts lead to modest increases in Perfan I.V. sales in
future periods, we do not expect that such increases will result
in a material reduction in our overall net loss. Our cost of
product sold reflects the cost of Perfan I.V., which we
purchase exclusively from contract manufacturers, and the cost
of royalties payable to Aventis.

Our primary business activities have been focused
on the development of enoximone capsules, ambrisentan and
darusentan. From inception to December 31, 2003, we have
incurred expenses of approximately $50.9 million,
$18.8 million and $5.1 million for the development of
enoximone capsules, ambrisentan and darusentan, respectively.
These expenses represent both clinical development costs and the
costs associated with non-clinical support activities such as
toxicological testing, manufacturing process development and
regulatory consulting services. We also report the costs of
product licenses in this category, including our milestone
obligations associated with the licensing of enoximone,
ambrisentan and darusentan.

While some of our research and development
expenses are the result of the internal costs related directly
to our employees, a majority of the expenses are charged to us
by external service providers, including clinical research
organizations and contract manufacturers. The cost of our
clinical trial programs is the most significant portion of our
development expenses, with the number of patients enrolled in a
trial and the attendant level of contract research organization
and clinical site activity being the principal cost
determinants. We expect that expenses in the research and
development category will increase for the foreseeable future as
we add personnel and expand our clinical trial activities. The
amount of the increase is difficult to predict due to the
uncertainty inherent in the timing of clinical trial
initiations, the rate of patient enrollment and the detailed
design of future trials. In addition, the results from our
trials, as well as the results of trials of similar drugs under
development by others, will influence the number, size and
duration of planned and unplanned trials.

We have a discovery research effort, which is
conducted on our premises by our scientists, through
collaborative agreements with academic laboratories and in
conjunction with Novartis. In October 2003, we entered into a
research collaboration with the Novartis Institutes for
BioMedical Research, Inc. (Novartis) for the
discovery and development of novel drugs for the treatment of
cardiovascular disease. In exchange for license payments and a
commitment to fund our research, Novartis has the exclusive
right to license drug targets and compounds developed through
the collaboration. Upon execution of a license, Novartis is
obligated to fund all further development of the licensed
product candidate, make payments to us upon the achievement of
certain milestones and pay us royalties for sales of any
products that are successfully commercialized. Upon

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the completion of Phase II clinical trials
of any product candidate Novartis has licensed from us, we have
the option to enter into a co-promotion and profit sharing
agreement with them for that product candidate, subject to our
reimbursement of a portion of the development expenses up to
that point, our agreement to share the future development and
marketing expenses and elimination of the royalty payable
to us.


Our selling, general and administrative expense
category consists of our sales, marketing, business development,
finance, accounting and general administration costs. These
costs are primarily comprised of expenses related directly to
our staff, as well as external costs associated with service
providers such as lawyers, accountants and insurers. We
anticipate that selling, general and administrative expenses
will increase for the foreseeable future as we expand our
operating activities and as a result of costs associated with
becoming a publicly traded company.

Our on-going clinical programs studying enoximone
capsules, ambrisentan and darusentan will be lengthy and
expensive. Even if these trials show our product candidates to
be safe and effective in treating their target indications, we
do not expect to be able to record commercial sales of any of
our product candidates for several years. As a result, we expect
to incur significant and growing losses for the foreseeable
future. Although the size and timing of our future operating
losses is subject to significant uncertainty, we expect them to
continue to increase over the next several years as we continue
to fund our development programs and prepare for potential
commercial launch of our product candidates. Our primary source
of working capital has been equity financings.

The pace and outcome of our clinical development
programs and the progress of our discovery program in
discovering new product candidates are difficult to predict. If
we enter into additional third party collaborations or acquire
new product candidates, it may be difficult or impossible for us
to predict the timing or amounts of any related licensing
payments or expenses. As a result, we anticipate that our
quarterly results will fluctuate for the foreseeable future. In
view of this variability and of our limited operating history,
we believe that period-to-period comparisons of our operating
results are not meaningful and you should not rely on them as
indicative of our future performance.

Results of Operations



| |                                                 
| | ------------------------------------------------
| | Years Ended December 31, 2003, 2002
    and 2001



| |         
| | --------
| | Revenues

|          |                                    |                          |       |       |  |      |       |       |  |   |       |       | 
|--------- | ---------------------------------- | ------------------------ | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|          |                                    |                         
|          |                                    | Years Ended December 31,
|          |                                    |                         
|          |                                    | 2003                     |       | 2002  |  | 2001
|          |                                    |                          |       |       |  |     
|          |                                    |                         
|          |                                    | (In thousands)          
|Revenues: |                                    |                          |       |       |  |      |       |       |  |   |       |      
|          | Product sales                      |                          | $     | 2,846 |  |      | $     | 2,343 |  |   | $     | 1,808 | 
|          | Research and development contracts |                          |       | 1,010 |  |      |       |      |  |   |       |      | 
|          |                                    |                          |       |       |  |      |       |       |  |   |       |      
|          |                                    | $                        | 3,856 |       |  | $    | 2,343 |       |  | $ | 1,808 |      
|          |                                    |                          |       |       |  |      |       |       |  |   |       |      



| |              
| | -------------
| | Product Sales

Product sales were derived from sales of
Perfan I.V. in Europe. Approximately $470,000 of the
increase in 2003 as compared to 2002 was due to a favorable
change in the euro exchange rate. The remainder was due to an
increase in sales volume, partially offset by a decrease in the
average selling price. The increase in 2002 as compared to 2001
was primarily due to the initiation of sales in Italy ($191,000
increase) and a full year of sales in France ($144,000 increase)
and the United Kingdom ($142,000 increase). We expect that
Perfan I.V. sales will remain modest in coming years.



| |                                               
| | ----------------------------------------------
| | Research and development contracts
    revenue

Research and development contracts revenues for
the year ended December 31, 2003 were related to the
research agreement with Novartis executed in October 2003;
therefore, there was no corresponding revenue in

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the prior periods. The research and development
revenue consists of license revenue totaling $385,000 and
research support funding of $625,000. The license revenue is
related to the non-refundable upfront payment from Novartis,
which is recognized ratably over the longer of the three-year
contractual term or estimated life of the relationship. The
research support funding is related to the fully burdened cost
of the researchers working on the further development of
specific potential drug targets and is recognized in the period
in which the services are performed.




| |                   
| | ------------------
| | Costs and Expenses

|                    |                                                                                      |                          |        |        |  |      |        |        |  |   |        |        | 
|------------------- | ------------------------------------------------------------------------------------ | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                    |                                                                                      |                         
|                    |                                                                                      | Years Ended December 31,
|                    |                                                                                      |                         
|                    |                                                                                      | 2003                     |        | 2002   |  | 2001
|                    |                                                                                      |                          |        |        |  |     
|                    |                                                                                      |                         
|                    |                                                                                      | (In thousands)          
|Costs and expenses: |                                                                                      |                          |        |        |  |      |        |        |  |   |        |       
|                    | Cost of product sold                                                                 |                          | $      | 885    |  |      | $      | 877    |  |   | $      | 756    | 
|                    | Research and development (excluding stock-based
    compensation)                    |                          |        | 37,365 |  |      |        | 24,950 |  |   |        | 15,287 | 
|                    | Selling, general and administrative (excluding
    stock-based compensation expense) |                          |        | 4,387  |  |      |        | 4,650  |  |   |        | 3,497  | 
|                    | Stock-based compensation                                                             |                          |        | 4,192  |  |      |        | 681    |  |   |        | 38     | 
|                    |                                                                                      |                          |        |        |  |      |        |        |  |   |        |       
|                    |                                                                                      | $                        | 46,829 |        |  | $    | 31,158 |        |  | $ | 19,578 |       
|                    |                                                                                      |                          |        |        |  |      |        |        |  |   |        |       



| |                     
| | --------------------
| | Cost of Product Sold

The cost of product sold for Perfan I.V.
increased slightly in 2003 as compared to 2002 due to currency
fluctuations partially offset by a reduction in material costs
associated with a change in contract manufacturing. The increase
in 2002 as compared to 2001 was due to increased product sales
volume, partially offset by reduced costs due to a change in
contract manufacturers. Due to these factors, the cost of
Perfan I.V. sold as a percentage of product sales was
31.1%, 37.5% and 41.8% for the years ended December 31,
2003, 2002 and 2001, respectively.



| |                         
| | ------------------------
| | Research and Development

Research and development expenses, excluding
stock-based compensation expenses are summarized as follows:

|                               |                    |                          |        |        |  |      |        |        |  |   |        |       | 
|------------------------------ | ------------------ | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ----- | 
|                               |                    |                         
|                               |                    | Years Ended December 31,
|                               |                    |                         
|                               |                    | 2003                     |        | 2002   |  | 2001
|                               |                    |                          |        |        |  |     
|                               |                    |                         
|                               |                    | (In thousands)          
|Development                    |                    |                          |        |        |  |      |        |        |  |   |        |      
|                               | Enoximone capsules |                          | $      | 19,718 |  |      | $      | 14,588 |  |   | $      | 6,864 | 
|                               | Ambrisentan        |                          |        | 7,962  |  |      |        | 4,368  |  |   |        | 1,017 | 
|                               | Darusentan         |                          |        | 149    |  |      |        |       |  |   |        |      | 
|                               |                    |                          |        |        |  |      |        |        |  |   |        |      
|Total development              |                    |                          | 27,829 |        |  |      | 18,956 |        |  |   | 7,881  |      
|License fees                   |                    |                          |        |        |  |      |        |        |  |   |        |      
|                               | Enoximone          |                          |        |       |  |      |        | 1,500  |  |   |        | 1,500 | 
|                               | Ambrisentan        |                          |        | 1,000  |  |      |        | 1,000  |  |   |        | 3,500 | 
|                               | Darusentan         |                          |        | 5,000  |  |      |        |       |  |   |        |      | 
|                               | Other              |                          |        | 188    |  |      |        |       |  |   |        |      | 
|                               |                    |                          |        |        |  |      |        |        |  |   |        |      
|Total license fees             |                    |                          | 6,188  |        |  |      | 2,500  |        |  |   | 5,000  |      
|Discovery research             |                    |                          | 3,348  |        |  |      | 3,494  |        |  |   | 2,406  |      
|                               |                    |                          |        |        |  |      |        |        |  |   |        |      
|Total research and development |                    | $                        | 37,365 |        |  | $    | 24,950 |        |  | $ | 15,287 |      
|                               |                    |                          |        |        |  |      |        |        |  |   |        |      

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The increase in development costs for enoximone
capsules in 2003 as compared to 2002 was primarily due to the
following:



| |   |                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $3.9 million increase in clinical
    investigator site payments and external contract costs
    associated with clinical monitoring and program management
    efforts, as a result of higher patient enrollment and ongoing
    patient progress in the ESSENTIAL trials;
|
| |  | $941,000 increase in the costs associated with
    work on developing the commercial manufacturing process for
    enoximone;                                                                                                                                              
|
| |  | $511,000 increase in the internal costs
    associated with the management of the enoximone trials,
    primarily due to an increase in our staff; and                                                                                                                     
|
| |  | $255,000 increase in costs associated with
    producing clinical trial materials for the ESSENTIAL trial.                                                                                                                                                                 

These increases are partially offset by a
$715,000 decrease in costs associated with the continuing EMOTE
trial, reflecting reduced costs, as this study nears completion.

The increase in development costs for enoximone
capsules in 2002 as compared to 2001 was primarily due to the
initiation and progress of patient enrollment in our ESSENTIAL
trials early in the year.

The increase in development costs for ambrisentan
in 2003 as compared to 2002 was primarily related to:



| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | $1.9 million increase in expenses related to
    non-clinical toxicology studies;                                                    
|
| |  | $1.4 million increase in expenses due to the
    cost of activities in preparation for initiating our two
    Phase III ARIES trials;
|
| |  | $819,000 increase in expenses due to the
    initiation of the extension study for our Phase II PAH
    trial; and                   
|
| |  | $337,000 increase in internal expenses associated
    with the management of the ambrisentan trials.                                 

These increases were partially offset by a
$957,000 decrease in costs from those incurred in 2002, which
were related to the exploration of a potential additional
indication of ambrisentan that we did not pursue.

The increase in ambrisentan development expenses
in 2002 as compared to 2001 was primarily due to:



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | $1.8 million for the Phase II pulmonary
    arterial hypertension clinical trial which began enrollment in
    October 2002;      
|
| |  | $928,000 associated with exploring a potential
    additional indication for ambrisentan which we elected not to
    pursue; and  
|
| |  | $170,000 attributable to the manufacturing,
    regulatory and analytical efforts required to continue to
    develop ambrisentan.

In 2003, the license fees were attributable to
the $5.0 million in-licensing payment for darusentan and
the final $1.0 million cost reimbursement payment for
ambrisentan. The 2002 and 2001 license fees were principally for
enoximone and ambrisentan, with enoximone accounting for
$1.5 million in each of these years.

Although total discovery research expenses were
relatively consistent from 2002 to 2003, in 2003 we recorded an
increase in internal spending of $568,000 to expand our high
through-put screening efforts. This was offset by a decrease of
$310,000 in our support of research programs at academic
laboratories and a decrease of $234,000 in reported costs due to
increased SBIR funding, which was treated as an offset to
expense. The increase in 2002 primarily reflects an increase in
our research and development activity and related staffing.



| |                                        
| | ---------------------------------------
| | Selling, General and
    Administrative

The $263,000 decrease in selling, general and
administrative expense in 2003 as compared to 2002 primarily
relates to a decrease of $230,000 in consulting costs and a
$200,000 decrease in relocation and travel

41



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##### Table of Contents



costs offset by a $150,000 increase in insurance
costs related to becoming a public company. The principal
components of the increase in 2002 as compared to 2001 were
$358,000 for a financing which was not completed, $216,000
primarily for external consultants associated with our business
development activities, $206,000 for increases in staffing and
supporting costs in our European sales subsidiary and general
growth in our administrative activities.




| |                         
| | ------------------------
| | Stock-Based Compensation

Stock-based compensation expenses were
$4.2 million, $681,000 and $38,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. The
increase in each period was due to an increase in the number of
options granted to employees and consultants and an increase in
the fair value of our common stock. The stock-based compensation
expense for each period was allocated between selling, general
and administrative and research and development as follows:

|                                    |  |                         |       |      |  |      |     |  |  |   |    | 
|----------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | --- |  |  | - | -- | 
|                                    |  |                        
|                                    |  | Year Ended December 31,
|                                    |  |                        
|                                    |  | 2003                    |       | 2002 |  | 2001
|                                    |  |                         |       |      |  |     
|                                    |  |                        
|                                    |  | In thousands           
|Research and development            |  | $                       | 2,373 |      |  | $    | 431 |  |  | $ | 38 | 
|Selling, general and administrative |  |                         | 1,819 |      |  |      | 250 |  |  |   |   | 
|                                    |  |                         |       |      |  |      |     |  |  |   |    | 
|                                    |  | $                       | 4,192 |      |  | $    | 681 |  |  | $ | 38 | 
|                                    |  |                         |       |      |  |      |     |  |  |   |    | 



| |                     
| | --------------------
| | Interest Income, Net

Interest income net of interest expense was
($136,000), $786,000 and $659,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. Interest
income was $585,000, $926,000 and $727,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. The
decrease in interest income in 2003 relates to the decreased
cash balance for the first three quarters of 2003 and the
overall decline in interest rates. The increase in interest
income in 2002 reflects the increased invested cash balances
from the sale of our Series D preferred stock in the second
half of 2001. Interest expense was $721,000, $140,000 and
$68,000 for the years ended December 31, 2003, 2002 and
2001, respectively. In 2003, the increase in interest expense is
primarily due to a full year of interest payments on the
$5 million term loan entered into in December 2002. In
2002, the increase in interest expense was the result of
interest due on a milestone payment for the ambrisentan license
agreement.



| |                                                                    
| | -------------------------------------------------------------------
| | Accretion of Mandatorily Redeemable
    Convertible Preferred Stock

Accretion of mandatorily redeemable convertible
preferred stock was $13.2 million, $14.7 million and
$607,000 for the years ended December 31, 2003, 2002 and
2001, respectively. Accretion of the mandatorily redeemable
convertible preferred stock for the years ended
December 31, 2003 and 2002 represented the accretion
associated with the Series A, Series C and
Series D mandatorily redeemable convertible preferred
stock. The $1.5 million decrease in 2003 is due to the
conversion of all mandatorily redeemable convertible preferred
stock upon completion of our initial public offering in November
2003, offset by an increase associated with the issuance of an
additional $39.9 million of Series D mandatorily
redeemable convertible preferred stock in August 2003. In
connection with the issuance of Series D mandatorily
redeemable convertible preferred stock in 2001, the Company
amended and restated its Certificate of Incorporation, which
included a revision to the redemption provisions for the
Series A and Series C mandatorily redeemable
convertible preferred stock then outstanding. The change in the
redemption provisions resulted in a reduced redemption value at
the time of the revision and consequently reduced the accretion
of mandatorily redeemable convertible preferred stock in 2001.

Liquidity and Capital Resources

From our inception on June 10, 1996 to
December 31, 2003, we funded our operations primarily with
$200.7 million (net of issuance costs) from private equity
financings and our initial public offering,

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$5.3 million from term loans,
$7.4 million from sales of Perfan I.V.,
$4.0 million related to a research and development contract
and $2.4 million from net interest income earned on cash
equivalents and short-term investments. Cash, cash equivalents
and short-term investments amounted to $114.3 million at
December 31, 2003. Certain instruments, although possessing
a contractual maturity greater than ten years, are classified as
short-term investments due to their ready marketability. On
August 27, 2003, we raised net proceeds of
$39.9 million through the sale of additional shares of our
Series D preferred stock. On November 7, 2003, we
completed our initial public offering which raised net proceeds
of $73.3 million. These additional funds have been invested
in instruments with maturities of 12 months or less. Our
cash outflows in the next 12 months are expected to consist
primarily of external expenses related to our research and
development programs, as well as payroll costs. We believe our
cash is sufficient to meet these needs. Our cash outflows beyond
one year are also expected to consist primarily of external
expenses related to our research and development programs, as
well as payroll costs. We believe that the proceeds of the
initial public offering, together with the proceeds of the
Novartis collaboration and potential additional collaborations
and future equity offerings, will allow us to fund our future
working capital and capital expenditures for the foreseeable
future.


Our cash, cash equivalents and short-term
investments are held in a variety of interest-bearing
instruments, consisting of U.S. government and agency
securities, high-grade U.S. corporate bonds, municipal
bonds, mortgage-backed securities, commercial paper and money
market accounts. Our Board of Directors has approved our written
investment policy, which limits our investment instruments to
those mentioned above. We review compliance with this policy on
a monthly basis.

At December 31, 2003, we had approximately
$1.3 million in net fixed assets. We expect to purchase
additional equipment and to invest in leasehold improvements in
2004, and we expect our spending on fixed assets to grow in
future years.

Operating activities resulted in net cash
outflows of $31.7 million, $26.5 million and
$16.4 million for the years ended December 31, 2003,
2002 and 2001 respectively. The cumulative net cash outflow from
operating activities from our inception to December 31,
2003 was $88.3 million. The use of cash in all periods was
primarily a result of our losses from operations associated with
our research and development activities.

Investing activities resulted in a net cash
outflow of $43.1 million, a net cash inflow of
$7.0 million and a net cash outflow of $30.8 million
for the years ended December 31, 2003, 2002 and 2001
respectively. The net cash outflow for the year ended
December 31, 2003 resulted primarily from
$114.8 million in purchases of short-term investments
offset by $71.7 million in proceeds related to the maturity
of short-term investments. The net cash inflow for the year
ended December 31, 2002 primarily from $66.5 million
in purchases of short-term investments offset by
$74.8 million in proceeds from the maturity of short-term
investments. The net cash outflow for the year ended
December 31, 2001 resulted primarily from
$41.6 million in the purchase of short-term investments
offset by $11.0 million in proceeds from the maturity of
short-term investments. Cumulative investing activities from
inception to December 31, 2003 resulted in net cash
outflows of $72.1 million, with $2.1 million in net
capital asset expenditures and $323.3 million in purchases
of short-term investments offset by $253.4 million in
proceeds from the maturity of short-term investments.

Financing activities resulted in net cash inflows
of $112.2 million, $5.0 million and
$63.3 million, for the years ended December 31, 2003,
2002 and 2001, respectively. Financing activities for 2003
primarily consisted of the sale of additional shares of our
Series D preferred stock with net proceeds of
$39.9 million and our initial public offering which raised
net proceeds of $73.3 million, offset by approximately
$1.1 million of payments on our term loan. Financing
activities for the year 2002 consisted primarily of borrowing
under our term loan. Financing activities for the year 2001
consisted of the issuance of our Series D preferred stock
for $63.3 million, net of issuance costs. Cumulative
financing activities from our inception to December 31,
2003 resulted in net cash inflows of $204.6 million,
primarily related to the issuance of our Series A, C and D
preferred stock, the sale of shares of our common stock in our
initial public offering and borrowings under our term loans.

We anticipate that our current cash, cash
equivalents and short-term investments will be sufficient to
fund our operations for at least the next 12 months. However,
our forecast of the period of time through which our financial
resources will be adequate to support our operations is a
forward-looking statement that involves

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risks and uncertainties, and actual results could
vary materially. If we are unable to raise additional capital
when required or on acceptable terms, we may have to
significantly delay, scale back or discontinue one or more of
our clinical trials, those aspects of our drug discovery program
not funded by Novartis or other aspects of our operations.


Obligations and Commitments

The following summarizes our significant
contractual obligations, which are comprised of our notes
payable, capital and operating lease obligations as of
December 31, 2003, and the effect these significant
contractual obligations are expected to have on our liquidity
and cash flows in future periods:

|                              |  |              |       |                        |  |             |       |            |  |            |       |  |  |   |    |  |  |   |   | 
|----------------------------- |  | ------------ | ----- | ---------------------- |  | ----------- | ----- | ---------- |  | ---------- | ----- |  |  | - | -- |  |  | - | - | 
|                              |  |              |       |                       
|                              |  |              |       | Payments Due by Period
|                              |  |              |       |                       
|                              |  |              |       | Less Than              |  | One to      |       | Four to    |  | After     
|Contractual Obligations       |  | Total        |       | One Year               |  | Three Years |       | Five Years |  | Five Years
|                              |  |              |       |                        |  |             |       |            |  |           
|                              |  |             
|                              |  | In thousands
|Notes payable(1)              |  | $            | 3,909 |                        |  | $           | 1,777 |            |  | $          | 2,132 |  |  | $ |   |  |  | $ |  | 
|Capital lease obligations(2)  |  |              | 189   |                        |  |             | 54    |            |  |            | 104   |  |  |   | 31 |  |  |   |  | 
|Operating leases(3)           |  |              | 1,127 |                        |  |             | 343   |            |  |            | 724   |  |  |   | 60 |  |  |   |  | 
|                              |  |              |       |                        |  |             |       |            |  |            |       |  |  |   |    |  |  |   |   | 
|Total contractual obligations |  | $            | 5,225 |                        |  | $           | 2,174 |            |  | $          | 2,960 |  |  | $ | 91 |  |  | $ |  | 
|                              |  |              |       |                        |  |             |       |            |  |            |       |  |  |   |    |  |  |   |   | 



---



|    |                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts are equal to the annual maturities of our
    long-term debt outstanding as of December 31, 2003.                                                                 
|   
|(2) | Amounts represent principal payments due under
    various capital lease obligations as of December 31, 2003.
    These arrangements expire in various years through 2008.
|   
|(3) | These commitments are associated with contracts
    that expire in various years through 2007. Payments due reflect
    fixed rent expense.                               

Total lease expense for the years ended
December 31, 2003, 2002 and 2001 was $416,000, $394,000 and
$257,000, respectively. We have future payment commitments for
operating leases of approximately $1.1 million, principally
for our office and laboratory space. In addition, many of our
contracts with clinical research organizations, contract
manufacturers, academic research agreements and others contain
termination provisions that would require us to make final
payments if we were to terminate prematurely. The size of these
payments depends upon the timing and circumstances of the
termination and therefore the extent of the future commitments
cannot be meaningfully quantified.

Net Operating Loss Carryforwards

At December 31, 2003, we had
$82.3 million of net operating loss carryforwards and
approximately $1.4 million in research and development
credits available to offset future regular and alternative
taxable income. These net operating loss carryforwards expire
beginning in 2011 through 2019. The Internal Revenue Code places
certain limitations on the annual amount of net operating loss
carryforwards that can be utilized if certain changes in our
ownership occur.

Critical Accounting Policies

Our consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial consolidated statements requires us to make estimates
and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may

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differ from these estimates under different
assumptions or conditions. Our critical accounting policies that
require the use of estimates and informed management judgments
include:




| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | revenue recognition;                                                                                                 
|
| |  | accounting for research and development expenses;                                                                    
|
| |  | estimating the value of our equity instruments
    for use in deferred stock-based compensation
    calculations; and
|
| |  | accounting for income taxes.                                                                                         



| |                     
| | --------------------
| | Revenue Recognition.

We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 104 Revenue Recognition in
Financial Statements (SAB 104). We consider this
methodology to be the most appropriate for our business model
and current revenue streams.

Product Sales.Sales
are recognized when the following four revenue recognition
criteria are met: (i) persuasive evidence of an arrangement
exists; (ii) product is shipped from the distributor to the
customer; (iii) the selling price is fixed or determinable;
and (iv) collection is reasonably assured. Once the product
is shipped to the customer, the Company does not allow product
returns.

Research and development contracts.We may enter into collaborative
agreements with pharmaceutical companies where the other party
generally receives exclusive marketing and distribution rights
for certain products for set time periods and set geographic
areas. The rights associated with this research and development
is assigned or can be assigned to the collaborator or through a
license at the collaborators option. The terms of the
collaborative agreements can include nonrefundable licensing
fees, funding of research and development efforts, payments
based on achievement of certain milestones, and royalties on
product sales.

Non-refundable license fees received are recorded
as deferred revenue once received or irrevocably committed, and
are recognized ratably over the longer of the development period
to which they relate or contractual term. Where there are two or
more distinct phases embedded into one contract (such as product
development and subsequent commercialization or manufacturing),
the contracts may be considered multiple element arrangements.
When it can be demonstrated that each of these phases are at
fair value, they are treated as separate earnings processes with
upfront fees being recognized over only the initial product
development phase. The relevant time period for the product
development phase is based on management estimates and could
vary depending upon the outcome of clinical trials and the
regulatory approval process. As a result, management continually
reviews the appropriate time period.

Milestones, based on designated achievement
points that are considered at risk and substantive at the
inception of the collaborative contract, are recognized as
earned when the earnings process is complete and the
corresponding payment is reasonably assured. We evaluate whether
milestones are at risk and substantive based on the contingent
nature of the milestone, specifically reviewing factors such as
the technological and commercial risk that needs to be overcome
and the level of investment required. Milestone payments related
to arrangements under which we have continuing performance
obligations are recognized as revenue upon achievement of the
milestone only if all of the following conditions are met: the
milestone payments are non-refundable; achievement of the
milestone was not reasonably assured at the inception of the
arrangement; substantive effort is involved in achieving the
milestone; and the amount of the milestone is reasonable in
relation to the effort expended or the risk associated with the
achievement of the milestone. If any of these conditions are not
met, the milestone payments are deferred and recognized as
revenue over the term of the arrangement as the Company
completes its performance obligations.

Revenues from research funding are recognized
when the services are performed and is typically based on the
fully burdened cost of a researcher working on a collaboration.
Revenue is recognized ratably over the period as services are
performed, with the balance reflected as deferred revenue until
earned.

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Accounting for research and development
expenses.Our research and development
expense category is primarily composed of costs associated with
product development for enoximone capsules, ambrisentan and
darusentan. These expenses represent both clinical development
costs and the costs associated with non-clinical support
activities such as toxicological testing, manufacturing process
development and regulatory consulting services. Clinical
development costs represent internal costs for personnel,
external costs incurred at clinical sites and contractual
payments to third party clinical research organizations to
perform certain clinical trials. We also report the costs of
product licenses in this category, including our ongoing
milestone obligations associated with the licensing of
ambrisentan and darusentan. Our product candidates do not
currently have regulatory approval; accordingly, we expense the
license and milestone fees when we incur the liability. We have
a discovery research effort, which is conducted in part on our
premises by our scientists and in part through collaborative
agreements.

While some of our research and development
expenses are the result of the internal costs related directly
to our employees, a majority of the expenses are charged to us
by external service providers, including clinical research
organizations and contract manufacturers, and by our academic
collaborators. We accrue research and development expenses for
activity occurring during the fiscal period prior to receiving
invoices from clinical sites and third party clinical research
organizations. We accrue external costs for clinical studies
based on the progress of the clinical trials, including patient
enrollment, progress by the enrolled patients through the trial,
and contractual costs with clinical research organizations and
clinical sites. We record internal costs primarily related to
personnel in clinical development and external costs related to
non-clinical studies and basic research when incurred. Amounts
received from other parties to fund our research and development
efforts where the reimbursing party does not obtain any rights
to the research or drug candidates are recognized as a reduction
to research and development expense as the costs are incurred.
Significant judgments and estimates must be made and used in
determining the accrued balance in any accounting period. Actual
costs incurred may or may not match the estimated costs for a
given accounting period.

We expect that expenses in the research and
development category will increase for the foreseeable future as
we add personnel, expand our clinical trial activities and
increase our discovery research capabilities. The amount of the
increase is difficult to predict due to the uncertainty inherent
in the timing of clinical trial initiations, progress in our
discovery research program, the rate of patient enrollment and
the detailed design of future trials. In addition, the results
from each of our trials, as well as the results of trials of
similar drugs under development by others, will influence the
number, size and duration of both planned and unplanned trials.

Valuation of equity instruments.We record compensation expense related
to options issued to consultants and options issued to, or
common stock sold to, employees at less than the fair value. As
a result, we have recorded deferred stock-based compensation
expense that represents, in the case of employees, the
difference between the option exercise price and the fair value
of our common stock. In the case of consultants, deferred
stock-based compensation represents the fair value of the
options granted, computed using the Black-Scholes option-pricing
model. These expenses are based on the fair value of the options
and common stock. Because there has been no public market for
our common stock until recently, we have estimated the fair
value of these equity instruments using various valuation
methods. Subsequent to the commencement of our initial public
offering on October 30, 2003, we estimate the fair value of
these equity instruments using the value for our common stock
that the public market establishes. Deferred stock-based
compensation for employees is recognized over the remaining
vesting period of the related option. Deferred stock-based
compensation related to consultants is recognized over the
vesting period of the related option and the amount recognized
is subject to change based on changes in the fair value of our
common stock. We recognize stock-based compensation using an
accelerated method as described in Financial Accounting
Standards Board Interpretation No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or
Award Plans, an Interpretation of APB Opinions No. 15 and
25 (FIN 28).

Accounting for income taxes.We must make significant management
judgments when determining our provision for income taxes, our
deferred tax assets and liabilities and any valuation allowance
recorded against our net deferred tax assets. At
December 31, 2003, we recorded a full valuation allowance
of $39.5 million against our net deferred tax asset
balance, due to uncertainties related to our deferred tax assets
as a result of

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our history of operating losses. The valuation
allowance is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or we adjust these
estimates in future periods we may need to change the valuation
allowance, which could materially impact our financial position
and results of operations.


Recent Accounting Pronouncements

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities
(FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities, which have certain
characteristics. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an
interest after that date. It applies, in the first fiscal year
beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of
FIN 46 has not had, nor do we believe it will have, a
material impact on our current or prospective consolidated
financial statements.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). This statement establishes standards
for how an issuer classifies and measures in its statement of
financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance
with the standard, certain financial instruments that embody
obligations for the issuer are required to be classified as
liabilities. This Statement is effective for financial
instruments entered into or modified after May 31, 2003,
and otherwise will be effective at the beginning of the first
interim period beginning after June 15, 2003. We do not
expect the provisions of this statement to have a significant
impact on our current or prospective consolidated financial
statements.

In November 2003, the EITF reached a consensus on
Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The
FASB ratified this consensus in November 2003. EITF Issue
No. 03-1 requires certain quantitative and qualitative
disclosures for marketable debt and equity securities classified
as available-for-sale or held-to-maturity that are impaired at
the balance sheet date but for which an other-than-temporary
impairment has not been recognized. The adoption of EITF Issue
No. 03-1 did not have a material impact on our financial
condition or results of operations. As of December 31,
2003, we had no material unrealized losses on our marketable
debt or equity securities.

In December 2003, the SEC issued Staff Accounting
Bulletin No. 104, Revenue Recognition,
(SAB 104) which supercedes SAB 101,
Revenue Recognition in Financial Statements.
SAB 104s primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element
revenue arrangements and to rescind the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions
and Answers (FAQ) issued with SAB 101.
Selected portions of the FAQ have been incorporated into
SAB 104. The adoption of SAB 104 did not have a
material impact on our revenue recognition policies.






|         |                                                            
|-------- | -----------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures on
    Market Risk

We do not use derivative financial instruments in
our investment portfolio and have no foreign exchange contracts.
Our financial instruments consist of cash, cash equivalents,
short-term investments, trade accounts receivable, accounts
payable and long-term obligations. We consider investments that,
when purchased, have a remaining maturity of 90 days or
less to be cash equivalents.

We invest in marketable securities in accordance
with our investment policy. The primary objectives of our
investment policy are to preserve principal, maintain proper
liquidity to meet operating needs and maximize yields. Our
investment policy specifies credit quality standards for our
investments and limits the amount of credit exposure to any
single issue, issuer or type of investment. The maximum
allowable duration of a single issue is 18 months with an
average duration of the issues in the portfolio of nine months.

As of December 31, 2003, we had an
investment portfolio of short-term investments in a variety of
interest-bearing instruments, consisting of U.S. government
and agency securities, high-grade U.S. corporate bonds,
municipal bonds, mortgage-backed securities, commercial paper
and money market accounts of

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$69.9 million excluding those classified as
cash and cash equivalents. Our short-term investments consist
primarily of bank notes, various government obligations and
asset-backed securities. These securities are classified as
available-for-sale and are recorded on the balance sheet at fair
market value with unrealized gains or losses reported as a
separate component of stockholders equity/(deficit).
Unrealized losses are charged against income when a decline in
fair market value is determined to be other than temporary. The
specific identification method is used to determine the cost of
securities sold.


The investment portfolio is subject to interest
rate risk and will fall in value in the event market interest
rates increase. Due to the short duration of our investment
portfolio, we believe an immediate 10% change in interest rates
would not be material to our financial condition or results of
operations.

The euro is the functional currency for Myogen
GmbH. We translate asset and liability accounts to the
U.S. dollar based on the exchange rate as of the balance
sheet date, while the income statement and cash flow statement
amounts are translated to the U.S. dollar at the average
exchange rate for the period. Exchange gains and losses
resulting from such translation are included as a separate
component of stockholders equity/(deficit). Transaction
gains and losses are recognized in income during the period in
which they occur and are included in selling, general and
administrative expenses. In addition, we conduct clinical trials
in many countries, exposing us to cost increases if the
U.S. dollar declines in value compared to other currencies.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The consolidated financial statements required
pursuant to this item are included in Item 15 of this
report and are presented beginning on page F-1.






|        |                                                                                     
|------- | ------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

We carried out an evaluation under the
supervision and with the participation of our management,
including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), of the effectiveness
of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934, as amended (Exchange Act), as of the
end of the period covered by this report. Based on that
evaluation, our CEO and CFO have concluded that our disclosure
controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by us in our
periodic reports under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that
such information is accumulated and communicated to our
management, including our CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure. It should be
noted that the design of any system of controls is based in part
upon certain assumptions about the likelihood of future events,
and can therefore only provide reasonable, not absolute,
assurance that the design will succeed in achieving its stated
goals.

In addition, we reviewed our internal controls,
and there have been no changes in our internal controls over
financial reporting during the quarter ended December 31,
2003 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial
reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this Item concerning
the Companys directors is incorporated by reference to the
information set forth in the sections entitled
Proposal 1  Election of Directors
and Section 16(a) Beneficial Ownership Reporting
Compliance in the Companys definitive Proxy
Statement for the 2004 Annual Meeting of Stockholders to be
filed with the Commission within 120 days after the end of
the Companys fiscal year ended December 31, 2003 (the
Proxy Statement). The information required by this

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Item concerning the executive officers of the
Company is incorporated by reference to the information set
forth in the section of the Proxy Statement entitled
Executive Officers and Key Employees.







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item regarding
executive compensation is incorporated by reference to the
information set forth in the sections of the Proxy Statement
entitled Compensation of Executive Officers,
Compensation of Directors, Employment,
Severance and Change of Control Agreements, and
Compensation Committee Interlocks and Insider
Participation.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this Item regarding
security ownership of certain beneficial owners and management
is incorporated by reference to the information set forth in the
section of the Proxy Statement entitled Security Ownership
of Certain Beneficial Owners and Management.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this Item regarding
certain relationships and related transactions is incorporated
by reference to the information set forth in the section of the
Proxy Statement entitled Certain Transactions.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this Item regarding
principal accountant fees and services and audit committee
pre-approval policy is incorporated by reference to the
information set forth in the sections of the Proxy Statement
entitled Independent Auditors Fees and
Pre-Approval Policies and Procedures.




PART IV






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

(a) The following documents are being filed
as part of this report:



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Consolidated Financial
    Statements. The following consolidated financial statements
    of Myogen, Inc. are filed as part of this report.

|                                                                                                                                                                                                                                        |  |             |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---- | 
|                                                                                                                                                                                                                                        |  | Page Number
|                                                                                                                                                                                                                                        |  | in this    
|                                                                                                                                                                                                                                        |  | Form 10-K  
|                                                                                                                                                                                                                                        |  |            
|Report of Independent Auditors                                                                                                                                                                                                          |  |             | F-2  | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                                                                                                                                        |  |             | F-3  | 
|Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001, and
    cumulatively for the period from June 10, 1996 (date of
    inception) to December 31, 2003                                     |  |             | F-4  | 
|Consolidated Statements of Changes in
    Stockholders Equity/ (Deficit) for the years ended
    December 31, 2003, 2002 and 2001, and cumulatively for the
    period from June 10, 1996 (date of inception) to
    December 31, 2003 |  |             | F-5  | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001, and
    cumulatively for the period from June 10, 1996 (date of
    inception) to December 31, 2003                                     |  |             | F-12 | 
|Notes to Consolidated Financial Statements                                                                                                                                                                                              |  |             | F-13 | 

49



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| |                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) Financial Statement Schedules.
    All financial statement schedules have been omitted because they
    are not applicable or not required or because the information is
    included elsewhere in the Consolidated Financial Statements or
    the Notes thereto.

(b) Reports on Form 8-K:



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | 1. On December 4, 2003, the Company
    filed a current report on Form 8-K entitled Myogen
    Reports Third Quarter 2003 Results.

(c) Exhibits:

|        |           |             |  |                                                                                                                                                                                               
|------- | --------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 3.1*      |             |  | Restated Certificate of Incorporation.                                                                                                                                                        
|        | 3.2*      |             |  | Amended and Restated Bylaws.                                                                                                                                                                  
|        | 4.1*      |             |  | Specimen Stock Certificate.                                                                                                                                                                   
|        | 10.1*(1)  |             |  | 2003 Equity Incentive Plan of the Company, Form
    of Grant Notice and Form of Stock Option Agreement.                                                                                       
|        | 10.2*(1)  |             |  | 2003 Employee Stock Purchase Plan of the Company.                                                                                                                                             
|        | 10.3*     |             |  | Series A Preferred Stock Purchase Agreement,
    dated May 21, 1998 between Myogen and the parties named
    therein.                                                                         
|        | 10.4*     |             |  | Series B Preferred Stock Purchase Agreement,
    dated March 16, 2000 between Myogen and the parties named
    therein.                                                                       
|        | 10.5*     |             |  | Series C Preferred Stock Purchase Agreement,
    dated November 23, 1999, as amended on December 8,
    1999, between Myogen and the parties named therein.                                   
|        | 10.6*     |             |  | Series D Preferred Stock Purchase Agreement,
    dated August 21, 2001, as amended on November 2, 2001
    and December 27, 2001, between Myogen and the parties named
    therein.           
|        | 10.7*     |             |  | Series D Preferred Stock Purchase Agreement,
    dated August 27, 2003, between Myogen and the parties named
    therein.                                                                     
|        | 10.8*     |             |  | Third Amended and Restated Investor Rights
    Agreement, dated August 21, 2001, as amended on
    August 27, 2003, between Myogen and certain of our
    stockholders.                       
|        | 10.9*     |             |  | Third Amended and Restated Stockholders
    Agreement, dated August 21, 2001, as amended on
    December 27, 2001, between Myogen and certain of our
    stockholders.                        
|        | 10.10*(1) |             |  | Form of Employment Agreement entered into between
    Myogen and certain of its executives, including reference
    schedule.                                                                 
|        | 10.11*    |             |  | Form of Indemnification Agreement entered into by
    each of Myogens Executive Officers and Directors.                                                                                      
|        | 10.12*    |             |  | Lease Agreement between the Company and Church
    Ranch Business Center, LLC, dated January 1, 2002.                                                                                         
|        | 10.13*    |             |  | Warrant to purchase shares of Series C
    preferred stock issued to Silicon Valley Bank, dated
    January 26, 2000.                                                                         
|        | 10.14*    |             |  | Venture Loan and Security Agreement by and among
    GATX Ventures, Inc., Silicon Valley Bank and the Company, dated
    December 6, 2002.                                                    
|        | 10.15*    |             |  | Warrant to purchase shares of Series D
    preferred stock issued to GATX Ventures, Inc., dated
    December 6, 2002.                                                                         
|        | 10.16*    |             |  | Warrant to purchase shares of Series D
    preferred stock issued to Silicon Valley Bank, dated
    December 6, 2002.                                                                         
|        | 10.17*=   |             |  | License Agreement between Hoechst Marion Roussel,
    Inc. and the Company, dated October 1, 1998, as amended
    November 23, 1999 and June 2, 2003.                                         
|        | 10.18*=   |             |  | License Agreement between Abbott Deutschland
    Holding GmbH and the Company, dated October 8, 2001.                                                                                         
|        | 10.19*=   |             |  | Intellectual Property License Agreement between
    the University Technology Corporation and the Company, dated
    September 1, 1998, as amended January 26, 2001 and
    November 12, 2002.

50



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##### Table of Contents



|        |         |             |  |                                                                                                                                                                                                           
|------- | ------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 10.20*= |             |  | Materials Transfer Agreement between the Regents
    of the University of Colorado and the Company, dated
    September 4, 1998, as amended January 4, 2001.                                              
|        | 10.21*= |             |  | Patent and Technology License Agreement between
    the Board of Regents of The University Of Texas System and the
    Company, dated December 1, 1999, as amended July 7,
    2000 and December 20, 2001.
|        | 10.22*= |             |  | Exclusive Patent And Technology License Agreement
    between the Board of Regents of The University of Texas System
    and the Company, dated January 1, 2002.                                          
|        | 10.23*= |             |  | License Agreement between Abbott Laboratories and
    the Company, dated June 30, 2003.                                                                                                                   
|        | 10.24*= |             |  | Collaboration and Option Agreement between
    Novartis Institutes for BioMedical Research, Inc. and the
    Company, dated October 8, 2003.                                                              
|        | 10.25*= |             |  | Form of License, Development and
    Commercialization Agreement between Novartis Institutes for
    BioMedical Research, Inc. and the Company.                                                           
|        | 10.26*= |             |  | Materials Transfer Agreement between the Regents
    of the University of Colorado and the Company, dated
    September 12, 2003.                                                                         
|        | 10.27   |             |  | Indemnification Agreement between Kirk K. Calhoun
    and the Company, dated as of January 16, 2004.                                                                                                      
|        | 10.28   |             |  | First Amendment to Lease Agreement between Sevo
    Miller, Inc., as receiver on behalf of Church Ranch Business
    Center, LLC, and the Company, dated December 2, 2003.                                
|        | 10.29  |             |  | Third Amendment to Intellectual Property License
    Agreement between University License Equity Holdings, Inc. and
    the Company, dated November 24, 2003.                                             
|        | 10.30  |             |  | Amendment No. 3 to Patent and Technology
    License Agreement between the Board of Regents of the University
    of Texas System and the Company, dated November 6, 2003.                                
|        | 10.31  |             |  | Amendment No. 1 to Patent and Technology
    License Agreement between the Board of Regents of the University
    of Texas System and the Company, dated as of February 10,
    2004.                     
|        | 10.32  |             |  | Patent License Agreement between the University
    of Texas System, the University of North Texas Health Science
    Center at Fort Worth and the Company, dated January 13,
    2000.                   
|        | 21.1*   |             |  | List of Subsidiaries.                                                                                                                                                                                     
|        | 23.1    |             |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                    
|        | 24.1    |             |  | Powers of Attorney. Reference is made to
    page 52.                                                                                                                                                     
|        | 31.1    |             |  | Certification of principal executive officer
    required by Rule 13a-14(a).                                                                                                                              
|        | 31.2    |             |  | Certification of principal financial officer
    required by Rule 13a-14(a).                                                                                                                              
|        | 32.1    |             |  | Section 1350 Certification.                                                                                                                                                                               



---



|  |                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Incorporated by reference to our Registration
    Statement on Form S-1 (File No. 333-108301) and
    amendments thereto, declared effective October 29, 2003.



|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(1) | Indicates Management Contract or Compensatory
    Plan or Arrangement.                                 
|   
|=   | We have been granted confidential treatment with
    respect to the omitted portions of this agreement.



|  |                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have applied for confidential treatment with
    respect to portions of this agreement. Omitted portions have
    been filed separately with the Securities and Exchange
    Commission.

51



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Date: March 1, 2004

| |             
| | ------------
| | MYOGEN, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/ J. WILLIAM FREYTAG

| |                                          
| | -----------------------------------------
| |                                          
| | J. William Freytag                       
| | President and Chief Executive
    Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
individual whose signature appears below constitutes and
appoints J. William Freytag and Joseph L. Turner, and each of
them, his true and lawful attorneys-in-fact and agents with full
power of substitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments to
this Form 10-K, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this Form 10-K has been
signed by the following persons on behalf of the Registrant on
March 1, 2004, and in the capacities indicated:

|                                         |  |                                                                                                                 |  |               |  | 
|---------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ------------- |  | 
|                                         |  |                                                                                                                 |  |              
|Name                                     |  | Title                                                                                                           |  | Date         
|                                         |  |                                                                                                                 |  |              
|                                        
|/s/ J. WILLIAM FREYTAGJ. William Freytag |  | President, Chief Executive Officer
    and Chairman (Principal
    Executive Officer)                           |  | March 1, 2004
|                                        
|/s/ JOSEPH L. TURNERJoseph L. Turner     |  | Senior Vice President, Finance and Chief
    Financial Officer (Principal Financial and Accounting
    Officer) |  | March 1, 2004
|                                        
|/s/ MICHAEL R. BRISTOWMichael R. Bristow |  | Chief Science and Medical Officer
    and Director                                                              |  | March 1, 2004
|                                        
|/s/ KIRK K. CALHOUNKirk K. Calhoun       |  | Director                                                                                                        |  | March 1, 2004
|                                        
|/s/ JERRY T. JACKSONJerry T. Jackson     |  | Director                                                                                                        |  | March 1, 2004

52



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##### Table of Contents



|                                         |  |          |  |               |  | 
|---------------------------------------- |  | -------- |  | ------------- |  | 
|                                         |  |          |  |              
|Name                                     |  | Title    |  | Date         
|                                         |  |          |  |              
|                                        
|/s/ DANIEL J. MITCHELLDaniel J. Mitchell |  | Director |  | March 1, 2004
|                                        
|/s/ ARNOLD L. ORONSKYArnold L. Oronsky   |  | Director |  | March 1, 2004
|                                        
|/s/ ANDREW N. SCHIFFAndrew N. Schiff     |  | Director |  | March 1, 2004
|                                        
|/s/ SIGRID VAN BLADELSigrid Van Bladel   |  | Director |  | March 1, 2004

53



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##### Table of Contents



MYOGEN, INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                         |  |      |      | 
|------------------------------------------------------------------------ |  | ---- | ---- | 
|                                                                         |  | Page
|                                                                         |  |     
|Report of Independent Auditors                                           |  |      | F-2  | 
|Consolidated Balance Sheets                                              |  |      | F-3  | 
|Consolidated Statements of Operations                                    |  |      | F-4  | 
|Consolidated Statements of Changes in
    Stockholders Equity/(Deficit) |  |      | F-5  | 
|Consolidated Statements of Cash Flows                                    |  |      | F-12 | 
|Notes to Consolidated Financial Statements                               |  |      | F-13 | 

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors

of Myogen, Inc.


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(1) present fairly, in all material respects, the
financial position of Myogen, Inc. and its subsidiary (a
development stage enterprise) at December 31, 2003 and
2002, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2003 and, cumulatively, for the period from
June 10, 1996 (date of inception) to December 31, 2003
in conformity with accounting principles generally accepted in
the United States of America. These consolidated financial
statements are the responsibility of the Companys
management; our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

Denver, Colorado

March 1, 2004


F-2



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##### Table of Contents



MYOGEN, INC.

(A Development Stage Enterprise)


CONSOLIDATED BALANCE SHEETS

|                                                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |            |             |  
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | ------------ | ---------- | ----------- |  | ----------- | ---------- | ----------- | -
|                                                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                 
|                                                                                                           |                                                                                                                                                                                                                                                                                                               | December 31,                                                                                                    
|                                                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                 
|                                                                                                           |                                                                                                                                                                                                                                                                                                               | 2003                                                                                                             |              | 2002      
|                                                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |           
|ASSETS                                                                                                    
|Current assets:                                                                                            |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |           
|                                                                                                           | Cash and cash equivalents                                                                                                                                                                                                                                                                                     |                                                                                                                  | $            | 44,337,721 |             |  | $           | 6,993,146  |            
|                                                                                                           | Short-term investments                                                                                                                                                                                                                                                                                        |                                                                                                                  |              | 69,914,627 |             |  |             | 26,804,619 |            
|                                                                                                           | Accrued interest receivable                                                                                                                                                                                                                                                                                   |                                                                                                                  |              | 607,393    |             |  |             | 178,202    |            
|                                                                                                           | Trade accounts receivable                                                                                                                                                                                                                                                                                     |                                                                                                                  |              | 1,274,861  |             |  |             | 741,852    |            
|                                                                                                           | Research and development contract amounts due
    within one year                                                                                                                                                                                                                                             |                                                                                                                  |              | 1,625,000  |             |  |             | 500,000    |            
|                                                                                                           | Inventories                                                                                                                                                                                                                                                                                                   |                                                                                                                  |              | 724,282    |             |  |             | 860,200    |            
|                                                                                                           | Other current assets                                                                                                                                                                                                                                                                                          |                                                                                                                  |              | 1,434,174  |             |  |             | 340,151    |            
|                                                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |           
|                                                                                                           |                                                                                                                                                                                                                                                                                                               | Total current assets                                                                                             |              |            | 119,918,058 |  |             |            | 36,418,170  |  
|Property and equipment, net                                                                                |                                                                                                                                                                                                                                                                                                               |                                                                                                                  | 1,304,028    |            |             |  | 1,691,931   |           
|Other assets                                                                                               |                                                                                                                                                                                                                                                                                                               |                                                                                                                  | 51,238       |            |             |  | 33,590      |           
|                                                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |           
|                                                                                                           |                                                                                                                                                                                                                                                                                                               | Total assets                                                                                                     |              | $          | 121,273,324 |  |             | $          | 38,143,691  |  
|                                                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |           
|LIABILITIES, MANDATORILY REDEEMABLE
    CONVERTIBLE PREFERRED STOCK AND
    STOCKHOLDERS EQUITY/(DEFICIT)
|Current liabilities:                                                                                       |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |           
|                                                                                                           | Accounts payable                                                                                                                                                                                                                                                                                              |                                                                                                                  | $            | 7,594,935  |             |  | $           | 2,748,647  |            
|                                                                                                           | Accrued liabilities                                                                                                                                                                                                                                                                                           |                                                                                                                  |              | 1,350,114  |             |  |             | 938,102    |            
|                                                                                                           | Current portion of deferred revenue                                                                                                                                                                                                                                                                           |                                                                                                                  |              | 1,666,667  |             |  |             |           |            
|                                                                                                           | Current portion of capital lease obligations                                                                                                                                                                                                                                                                  |                                                                                                                  |              | 37,015     |             |  |             | 25,968     |            
|                                                                                                           | Current portion of notes payable, net of discount                                                                                                                                                                                                                                                             |                                                                                                                  |              | 1,639,246  |             |  |             | 954,004    |            
|                                                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |           
|                                                                                                           |                                                                                                                                                                                                                                                                                                               | Total current liabilities                                                                                        |              |            | 12,287,977  |  |             |            | 4,666,721   |  
|Deferred revenue, net of current portion                                                                   |                                                                                                                                                                                                                                                                                                               |                                                                                                                  | 2,948,029    |            |             |  |            |           
|Capital lease obligations, net of current portion                                                          |                                                                                                                                                                                                                                                                                                               |                                                                                                                  | 121,617      |            |             |  | 106,870     |           
|Notes payable, net of current portion and discount                                                         |                                                                                                                                                                                                                                                                                                               |                                                                                                                  | 1,993,906    |            |             |  | 3,633,152   |           
|Commitments and contingencies (see Note 8
    and Note 13)                                                 |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |           
|Mandatorily redeemable convertible preferred stock                                                         |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |             |            |             |  | 106,565,591 |           
|Stockholders equity/ (deficit):                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |           
|                                                                                                           | Series B convertible preferred stock,
    $0.001 par value, no shares authorized and outstanding as
    of December 31, 2003; 810,000 shares authorized and
    803,606 shares issued and outstanding as of
    December 31, 2002; aggregate liquidation preference of
    $1,104,958 as of December 31, 2002 |                                                                                                                  |              |           |             |  |             | 804        |            
|                                                                                                           | Preferred Stock, $0.001 par value;
    5,000,000 shares authorized at December 31, 2003, no
    shares issued or outstanding                                                                                                                                                                                  |                                                                                                                  |              |           |             |  |             |           |            
|                                                                                                           | Common stock, $0.001 par value; 100,000,000
    and 17,375,000 shares authorized and 26,457,927 and
    1,024,361 shares issued and outstanding as of
    December 31, 2003 and 2002                                                                                                                          |                                                                                                                  |              | 26,458     |             |  |             | 1,025      |            
|Additional paid-in capital                                                                                 |                                                                                                                                                                                                                                                                                                               |                                                                                                                  | 229,080,380  |            |             |  |            |           
|Deferred stock-based compensation                                                                          |                                                                                                                                                                                                                                                                                                               |                                                                                                                  | (6,730,195   | )          |             |  | (1,726,692  | )         
|Other comprehensive income                                                                                 |                                                                                                                                                                                                                                                                                                               |                                                                                                                  | 22,185       |            |             |  | 225,420     |           
|Deficit accumulated during the development stage                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                  | (118,477,033 | )          |             |  | (75,329,200 | )         
|                                                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |           
|                                                                                                           |                                                                                                                                                                                                                                                                                                               | Total stockholders equity/ (deficit)                                                                            |              |            | 103,921,795 |  |             |            | (76,828,643 | )
|                                                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |           
|                                                                                                           |                                                                                                                                                                                                                                                                                                               | Total liabilities, mandatorily redeemable
    convertible preferred stock and stockholders
    equity/(deficit) |              | $          | 121,273,324 |  |             | $          | 38,143,691  |  
|                                                                                                           |                                                                                                                                                                                                                                                                                                               |                                                                                                                  |              |            |             |  |             |           

The accompanying notes are an integral part of
these consolidated financial statements.

F-3



---



##### Table of Contents



MYOGEN, INC.

(A Development Stage Enterprise)


CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |            | 
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ----------- | ---------- |  | ---- | ----------- | ------------------ |  | - | ----------- | ---------- |  | - | ------------ | ---------- | 
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             | Cumulative Period 
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             | From June 10, 1996
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             | (Inception) to    
|                                                                                |                                                                                                                                                   | 2003 |             | 2002       |  | 2001 |             | December 31, 2003 
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             |                   
|Revenues:                                                                       |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |           
|                                                                                | Product sales                                                                                                                                     |      | $           | 2,845,713  |  |      | $           | 2,342,899          |  |   | $           | 1,807,984  |  |   | $            | 7,423,714  | 
|                                                                                | Research and development contracts                                                                                                                |      |             | 1,010,305  |  |      |             |                   |  |   |             |           |  |   |              | 1,010,305  | 
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |           
|                                                                                |                                                                                                                                                   |      | 3,856,018   |            |  |      | 2,342,899   |                    |  |   | 1,807,984   |            |  |   | 8,434,019    |           
|Costs and expenses:                                                             |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |           
|                                                                                | Cost of product sold                                                                                                                              |      |             | 885,145    |  |      |             | 877,434            |  |   |             | 756,304    |  |   |              | 2,686,686  | 
|                                                                                | Research and development (excluding stock-based
    compensation expense of $2,372,888, $430,838, $37,996 and
    $2,855,709, respectively)       |      |             | 37,364,578 |  |      |             | 24,949,510         |  |   |             | 15,287,311 |  |   |              | 88,719,670 | 
|                                                                                | Selling, general and administrative (excluding
    stock-based compensation expense of $1,819,368, $250,405, $0 and
    $2,069,773, respectively) |      |             | 4,386,635  |  |      |             | 4,649,830          |  |   |             | 3,497,016  |  |   |              | 17,838,749 | 
|                                                                                | Stock-based compensation                                                                                                                          |      |             | 4,192,256  |  |      |             | 681,243            |  |   |             | 37,996     |  |   |              | 4,925,482  | 
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |           
|                                                                                |                                                                                                                                                   |      | 46,828,614  |            |  |      | 31,158,017  |                    |  |   | 19,578,627  |            |  |   | 114,170,587  |           
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |           
|Loss from operations                                                            |                                                                                                                                                   |      | (42,972,596 | )          |  |      | (28,815,118 | )                  |  |   | (17,770,643 | )          |  |   | (105,736,568 | )         
|Interest (expense) income, net                                                  |                                                                                                                                                   |      | (135,891    | )          |  |      | 785,843     |                    |  |   | 659,291     |            |  |   | 2,399,995    |           
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |           
|Loss before income taxes                                                        |                                                                                                                                                   |      | (43,108,487 | )          |  |      | (28,029,275 | )                  |  |   | (17,111,352 | )          |  |   | (103,336,573 | )         
|Income taxes                                                                    |                                                                                                                                                   |      | 39,346      |            |  |      | 18,304      |                    |  |   | 3,147       |            |  |   | 60,797       |           
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |           
|Net loss                                                                        |                                                                                                                                                   |      | (43,147,833 | )          |  |      | (28,047,579 | )                  |  |   | (17,114,499 | )          |  |   | (103,397,370 | )         
|Accretion of mandatorily redeemable convertible
    preferred stock             |                                                                                                                                                   |      | (13,187,174 | )          |  |      | (14,683,739 | )                  |  |   | (606,604    | )          |  |   | (32,499,556  | )         
|Deemed dividend related to beneficial conversion
    feature of preferred stock |                                                                                                                                                   |      | (39,935,388 | )          |  |      |            |                    |  |   |            |            |  |   | (39,935,388  | )         
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |           
|Net loss attributable to common stockholders                                    |                                                                                                                                                   | $    | (96,270,395 | )          |  | $    | (42,731,318 | )                  |  | $ | (17,721,103 | )          |  | $ | (175,832,314 | )         
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |           
|Basic and diluted net loss per common share                                     |                                                                                                                                                   | $    | (17.79      | )          |  | $    | (42.59      | )                  |  | $ | (19.80      | )          |  |   |              |           
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |           
|Weighted average common shares outstanding                                      |                                                                                                                                                   |      | 5,411,891   |            |  |      | 1,003,426   |                    |  |   | 894,865     |            |  |   |              |           
|                                                                                |                                                                                                                                                   |      |             |            |  |      |             |                    |  |   |             |            |  |   |              |           

The accompanying notes are an integral part of
these consolidated financial statements.

F-4



---



##### Table of Contents



MYOGEN, INC.

(A Development Stage Enterprise)


CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY/(DEFICIT)

|                                                                    |                            |                      |   |              |  |            |   |             |  |                 |         |               |  |              |     |               |  |       |          |                  |  |   |   |   |  |   |         |   |  |   |   |   |  |   |            |            |   |   |            |            |  
|------------------------------------------------------------------- | -------------------------- | -------------------- | - | ------------ |  | ---------- | - | ----------- |  | --------------- | ------- | ------------- |  | ------------ | --- | ------------- |  | ----- | -------- | ---------------- |  | - | - | - |  | - | ------- | - |  | - | - | - |  | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                                    |                            |                      |   |              |  |            |   |             |  |                 |         |               |  |              |     | Deficit       |  |      
|                                                                    |                            | Series B Convertible |   |              |  |            |   |             |  | Notes           |         | Other         |  | Accumulated  |     |              
|                                                                    |                            | Preferred Stock      |   | Common Stock |  |            |   | Deferred    |  | Receivable      |         | Comprehensive |  | During the   |     | Total        
|                                                                    |                            |                      |   |              |  | Additional |   | Stock-Based |  | from            |         | Income        |  | Development  |     | Stockholders
|                                                                    |                            | Shares               |   | Amount       |  | Shares     |   | Amount      |  | Paid-In Capital |         | Compensation  |  | Stockholders |     | (Loss)        |  | Stage |          | Equity/(Deficit)
|                                                                    |                            |                      |   |              |  |            |   |             |  |                 |         |               |  |              |     |               |  |       |          |                 
|Net loss                                                            |                            |                      |  |              |  | $          |  |             |  |                 |        |               |  | $            |    |               |  | $     |         |                  |  | $ |  |   |  | $ |        |   |  | $ |  |   |  | $ | (71,348    | )          |   | $ | (71,348    | )         
|Balance at December 31, 1996                                        |                            |                      |  |              |  |            |  |             |  |                 |        |               |  |              |    |               |  |       |         |                  |  |   |  |   |  |   |        |   |  |   |  |   |  |   | (71,348    | )          |   |   | (71,348    | )         
|Comprehensive income:                                               |                            |                      |   |              |  |            |   |             |  |                 |         |               |  |              |     |               |  |       |          |                  |  |   |   |   |  |   |         |   |  |   |   |   |  |   |            |            |   |   |            |           
|                                                                    | Net loss                   |                      |   |             |  |            |   |            |  |                 |         |              |  |              |     |              |  |       |          |                 |  |   |   |  |  |   |         |  |  |   |   |  |  |   |            | (285,383   | ) |   |            | (285,383   | )
|                                                                    |                            |                      |   |              |  |            |   |             |  |                 |         |               |  |              |     |               |  |       |          |                  |  |   |   |   |  |   |         |   |  |   |   |   |  |   |            |            |   |   |            |           
|                                                                    | Total comprehensive income |                      |   |              |  |            |   |             |  |                 |         |               |  |              |     |               |  |       |          |                  |  |   |   |   |  |   |         |   |  |   |   |   |  |   |            | (285,383   | ) |   |            | (285,383   | )
|                                                                    |                            |                      |   |              |  |            |   |             |  |                 |         |               |  |              |     |               |  |       |          |                  |  |   |   |   |  |   |         |   |  |   |   |   |  |   |            |            |   |   |            |           
|Balance at December 31, 1997                                        |                            |                      |  |              |  |            |  |             |  |                 |        |               |  |              |    |               |  |       |         |                  |  |   |  |   |  |   |        |   |  |   |  |   |  |   | (356,731   | )          |   |   | (356,731   | )         
|Issuance of common stock for cash and notes
    receivable          |                            |                      |  |              |  |            |  |             |  |                 | 680,000 |               |  |              | 680 |               |  |       | 15,071   |                  |  |   |  |   |  |   | (7,850  | ) |  |   |  |   |  |   |           |            |   |   | 7,901      |           
|Issuance of common stock in exchange for license
    agreements     |                            |                      |  |              |  |            |  |             |  |                 | 46,542  |               |  |              | 47  |               |  |       | 23,224   |                  |  |   |  |   |  |   |        |   |  |   |  |   |  |   |           |            |   |   | 23,271     |           
|Issuance of common stock for notes receivable                       |                            |                      |  |              |  |            |  |             |  |                 | 147,907 |               |  |              | 148 |               |  |       | 73,364   |                  |  |   |  |   |  |   | (73,512 | ) |  |   |  |   |  |   |           |            |   |   |           |           
|Comprehensive income:                                               |                            |                      |   |              |  |            |   |             |  |                 |         |               |  |              |     |               |  |       |          |                  |  |   |   |   |  |   |         |   |  |   |   |   |  |   |            |            |   |   |            |           
|                                                                    | Net loss                   |                      |   |             |  |            |   |            |  |                 |         |              |  |              |     |              |  |       |          |                 |  |   |   |  |  |   |         |  |  |   |   |  |  |   |            | (1,990,914 | ) |   |            | (1,990,914 | )
|                                                                    |                            |                      |   |              |  |            |   |             |  |                 |         |               |  |              |     |               |  |       |          |                  |  |   |   |   |  |   |         |   |  |   |   |   |  |   |            |            |   |   |            |           
|                                                                    | Total comprehensive income |                      |   |              |  |            |   |             |  |                 |         |               |  |              |     |               |  |       |          |                  |  |   |   |   |  |   |         |   |  |   |   |   |  |   |            | (1,990,914 | ) |   |            | (1,990,914 | )
|                                                                    |                            |                      |   |              |  |            |   |             |  |                 |         |               |  |              |     |               |  |       |          |                  |  |   |   |   |  |   |         |   |  |   |   |   |  |   |            |            |   |   |            |           
|Balance at December 31, 1998                                        |                            |                      |  |              |  |            |  |             |  |                 | 874,449 |               |  |              | 875 |               |  |       | 111,659  |                  |  |   |  |   |  |   | (81,362 | ) |  |   |  |   |  |   | (2,347,645 | )          |   |   | (2,316,473 | )         
|Payments on notes receivable from stockholders                      |                            |                      |  |              |  |            |  |             |  |                 |        |               |  |              |    |               |  |       |         |                  |  |   |  |   |  |   | 5,671   |   |  |   |  |   |  |   |           |            |   |   | 5,671      |           
|Receipt of funds for par value of restricted stock                  |                            |                      |  |              |  |            |  |             |  |                 |        |               |  |              |    |               |  |       | 739      |                  |  |   |  |   |  |   |        |   |  |   |  |   |  |   |           |            |   |   | 739        |           
|Other                                                               |                            |                      |  |              |  |            |  |             |  |                 |        |               |  |              |    |               |  |       | (303     | )                |  |   |  |   |  |   | 303     |   |  |   |  |   |  |   |           |            |   |   |           |           
|Accretion of mandatorily redeemable convertible
    preferred stock |                            |                      |  |              |  |            |  |             |  |                 |        |               |  |              |    |               |  |       | (112,095 | )                |  |   |  |   |  |   |        |   |  |   |  |   |  |   | (215,787   | )          |   |   | (327,882   | )         



The accompanying notes are an integral part of
these consolidated financial statements.


F-5



---



##### Table of Contents



|                                                                                              |                            |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |            |                  |  |  |         |   |  |  |         |   |  |  |   |   |  |  |            |            |   |  |            |            |  
|--------------------------------------------------------------------------------------------- | -------------------------- | -------------------- | ------- | ------------ |  | ---------- | --- | ----------- |  | --------------- | ------- | ------------- |  | ------------ | --- | ------------- |  | ----- | ---------- | ---------------- |  |  | ------- | - |  |  | ------- | - |  |  | - | - |  |  | ---------- | ---------- | - |  | ---------- | ---------- | -
|                                                                                              |                            |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     | Deficit       |  |      
|                                                                                              |                            | Series B Convertible |         |              |  |            |     |             |  | Notes           |         | Other         |  | Accumulated  |     |              
|                                                                                              |                            | Preferred Stock      |         | Common Stock |  |            |     | Deferred    |  | Receivable      |         | Comprehensive |  | During the   |     | Total        
|                                                                                              |                            |                      |         |              |  | Additional |     | Stock-Based |  | from            |         | Income        |  | Development  |     | Stockholders
|                                                                                              |                            | Shares               |         | Amount       |  | Shares     |     | Amount      |  | Paid-In Capital |         | Compensation  |  | Stockholders |     | (Loss)        |  | Stage |            | Equity/(Deficit)
|                                                                                              |                            |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |            |                 
|Comprehensive income:                                                                         |                            |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |            |                  |  |  |         |   |  |  |         |   |  |  |   |   |  |  |            |            |   |  |            |           
|                                                                                              | Net loss                   |                      |         |             |  |            |     |            |  |                 |         |              |  |              |     |              |  |       |            |                 |  |  |         |  |  |  |         |  |  |  |   |  |  |  |            | (3,319,539 | ) |  |            | (3,319,539 | )
|                                                                                              |                            |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |            |                  |  |  |         |   |  |  |         |   |  |  |   |   |  |  |            |            |   |  |            |           
|                                                                                              | Total comprehensive income |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |            |                  |  |  |         |   |  |  |         |   |  |  |   |   |  |  |            | (3,319,539 | ) |  |            | (3,319,539 | )
|                                                                                              |                            |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |            |                  |  |  |         |   |  |  |         |   |  |  |   |   |  |  |            |            |   |  |            |           
|Balance at December 31, 1999                                                                  |                            |                      |        |              |  |            |    |             |  |                 | 874,449 |               |  |              | 875 |               |  |       |           |                  |  |  |        |   |  |  | (75,388 | ) |  |  |  |   |  |  | (5,882,971 | )          |   |  | (5,957,484 | )         
|Issuance of Series B convertible preferred
    stock                                          |                            |                      | 803,606 |              |  |            | 804 |             |  |                 |        |               |  |              |    |               |  |       | 1,104,154  |                  |  |  |        |   |  |  |        |   |  |  |  |   |  |  |           |            |   |  | 1,104,958  |           
|Warrants issued in conjunction with note payable                                              |                            |                      |        |              |  |            |    |             |  |                 |        |               |  |              |    |               |  |       | 10,815     |                  |  |  |        |   |  |  |        |   |  |  |  |   |  |  |           |            |   |  | 10,815     |           
|Issuance of common stock in August 2000 at
    $0.50 per share upon the exercise of options   |                            |                      |        |              |  |            |    |             |  |                 | 4,354   |               |  |              | 4   |               |  |       | 2,173      |                  |  |  |        |   |  |  |        |   |  |  |  |   |  |  |           |            |   |  | 2,177      |           
|Issuance of common stock in November 2000 at
    $0.50 per share upon the exercise of options |                            |                      |        |              |  |            |    |             |  |                 | 10,542  |               |  |              | 11  |               |  |       | 5,260      |                  |  |  |        |   |  |  |        |   |  |  |  |   |  |  |           |            |   |  | 5,271      |           
|Issuance of common stock in December 2000 at
    $1.15 per share upon the exercise of options |                            |                      |        |              |  |            |    |             |  |                 | 3,000   |               |  |              | 3   |               |  |       | 3,447      |                  |  |  |        |   |  |  |        |   |  |  |  |   |  |  |           |            |   |  | 3,450      |           
|Issuance of common stock upon the exercise of
    warrants                                    |                            |                      |        |              |  |            |    |             |  |                 | 350     |               |  |              |    |               |  |       | 175        |                  |  |  |        |   |  |  |        |   |  |  |  |   |  |  |           |            |   |  | 175        |           
|Deferred stock-based compensation related to
    options granted to consultants               |                            |                      |        |              |  |            |    |             |  |                 |        |               |  |              |    |               |  |       | 89,576     |                  |  |  | (89,576 | ) |  |  |        |   |  |  |  |   |  |  |           |            |   |  |           |           
|Amortization of deferred stock-based compensation                                             |                            |                      |        |              |  |            |    |             |  |                 |        |               |  |              |    |               |  |       |           |                  |  |  | 13,987  |   |  |  |        |   |  |  |  |   |  |  |           |            |   |  | 13,987     |           
|Accretion of mandatorily redeemable convertible
    preferred stock                           |                            |                      |        |              |  |            |    |             |  |                 |        |               |  |              |    |               |  |       | (1,215,600 | )                |  |  |        |   |  |  |        |   |  |  |  |   |  |  | (2,480,557 | )          |   |  | (3,696,157 | )         



The accompanying notes are an integral part of
these consolidated financial statements.


F-6



---



##### Table of Contents



|                                                                                              |                                         |                                         |         |              |   |            |     |             |   |                 |         |               |   |              |     |               |   |       |         |                  |   |  |         |   |   |  |         |   |   |  |        |        |        |   |             |   |            |   |             |        |           
|--------------------------------------------------------------------------------------------- | --------------------------------------- | --------------------------------------- | ------- | ------------ | - | ---------- | --- | ----------- | - | --------------- | ------- | ------------- | - | ------------ | --- | ------------- | - | ----- | ------- | ---------------- | - |  | ------- | - | - |  | ------- | - | - |  | ------ | ------ | ------ | - | ----------- | - | ---------- | - | ----------- | ------ | ----------
|                                                                                              |                                         |                                         |         |              |   |            |     |             |   |                 |         |               |   |              |     | Deficit       |   |      
|                                                                                              |                                         | Series B Convertible                    |         |              |   |            |     |             |   | Notes           |         | Other         |   | Accumulated  |     |              
|                                                                                              |                                         | Preferred Stock                         |         | Common Stock |   |            |     | Deferred    |   | Receivable      |         | Comprehensive |   | During the   |     | Total        
|                                                                                              |                                         |                                         |         |              |   | Additional |     | Stock-Based |   | from            |         | Income        |   | Development  |     | Stockholders
|                                                                                              |                                         | Shares                                  |         | Amount       |   | Shares     |     | Amount      |   | Paid-In Capital |         | Compensation  |   | Stockholders |     | (Loss)        |   | Stage |         | Equity/(Deficit)
|                                                                                              |                                         |                                         |         |              |   |            |     |             |   |                 |         |               |   |              |     |               |   |       |         |                 
|Comprehensive income:                                                                         |                                         |                                         |         |              |   |            |     |             |   |                 |         |               |   |              |     |               |   |       |         |                  |   |  |         |   |   |  |         |   |   |  |        |        |        |   |             |   |            |   |             |       
|                                                                                              |                                         | Foreign currency translation adjustment |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |         |                  |  |  |         |   |  |  |         |   |  |  |        |        | (1,334 | ) |             |   |           |   |             |        | (1,334    
|                                                                                              |                                         | Net loss                                |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |         |                  |  |  |         |   |  |  |         |   |  |  |        |        |       |   |             |   | (9,420,275 | ) |             |        | (9,420,275
|                                                                                              |                                         |                                         |         |              |   |            |     |             |   |                 |         |               |   |              |     |               |   |       |         |                  |   |  |         |   |   |  |         |   |   |  |        |        |        |   |             |   |            |   |             |       
|                                                                                              |                                         | Total comprehensive income              |         |              |   |            |     |             |   |                 |         |               |   |              |     |               |   |       |         |                  |   |  |         |   |   |  |         |   |   |  |        |        | (1,334 | ) |             |   | (9,420,275 | ) |             |        | (9,421,609
|                                                                                              |                                         |                                         |         |              |   |            |     |             |   |                 |         |               |   |              |     |               |   |       |         |                  |   |  |         |   |   |  |         |   |   |  |        |        |        |   |             |   |            |   |             |       
|Balance at December 31, 2000                                                                  |                                         |                                         | 803,606 |              |   |            | 804 |             |   |                 | 892,695 |               |   |              | 893 |               |   |       |        |                  |   |  | (75,589 | ) |   |  | (75,388 | ) |   |  | (1,334 | )      |        |   | (17,783,803 | ) |            |   | (17,934,417 | )     
|Issuance of common stock in May 2001 at
    $0.86 per share upon the exercise of options      |                                         |                                         |        |              |   |            |    |             |   |                 | 250     |               |   |              |    |               |   |       | 288     |                  |   |  |        |   |   |  |        |   |   |  |       |        |        |   |            |   |            |   | 288         |       
|Issuance of common stock in July 2001 at
    $1.18 per share upon the exercise of options     |                                         |                                         |        |              |   |            |    |             |   |                 | 255     |               |   |              |    |               |   |       | 301     |                  |   |  |        |   |   |  |        |   |   |  |       |        |        |   |            |   |            |   | 301         |       
|Issuance of common stock in August 2001 at
    $0.59 per share upon the exercise of options   |                                         |                                         |        |              |   |            |    |             |   |                 | 375     |               |   |              |    |               |   |       | 223     |                  |   |  |        |   |   |  |        |   |   |  |       |        |        |   |            |   |            |   | 223         |       
|Issuance of common stock in December 2001 at
    $1.20 per share upon the exercise of options |                                         |                                         |        |              |   |            |    |             |   |                 | 16,628  |               |   |              | 17  |               |   |       | 13,800  |                  |   |  |        |   |   |  |        |   |   |  |       |        |        |   |            |   |            |   | 13,817      |       
|Deferred stock-based compensation related to
    options granted to consultants               |                                         |                                         |        |              |   |            |    |             |   |                 |        |               |   |              |    |               |   |       | 82,346  |                  |   |  | (82,346 | ) |   |  |        |   |   |  |       |        |        |   |            |   |            |   |            |       
|Amortization of deferred stock-based compensation                                             |                                         |                                         |        |              |   |            |    |             |   |                 |        |               |   |              |    |               |   |       |        |                  |   |  | 37,996  |   |   |  |        |   |   |  |       |        |        |   |            |   |            |   | 37,996      |       
|Accretion of mandatorily redeemable convertible
    preferred stock                           |                                         |                                         |        |              |   |            |    |             |   |                 |        |               |   |              |    |               |   |       | (96,958 | )                |   |  |        |   |   |  |        |   |   |  |       |        |        |   | (509,646    | ) |            |   | (606,604    | )     
|Comprehensive income:                                                                         |                                         |                                         |         |              |   |            |     |             |   |                 |         |               |   |              |     |               |   |       |         |                  |   |  |         |   |   |  |         |   |   |  |        |        |        |   |             |   |            |   |             |       
|                                                                                              | Foreign currency translation adjustment |                                         |         |             |   |            |     |            |   |                 |         |              |   |              |     |              |   |       |         |                 |   |  |         |  |   |  |         |  |   |  |        | (2,554 | )      |   |             |  |            |   |             | (2,554 | )         



The accompanying notes are an integral part of
these consolidated financial statements.


F-7



---



##### Table of Contents



|                                                                                              |                                                   |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |        |                  |  |  |          |   |  |  |         |   |  |  |        |        |  |  |             |             |   |  |             |             |  
|--------------------------------------------------------------------------------------------- | ------------------------------------------------- | -------------------- | ------- | ------------ |  | ---------- | --- | ----------- |  | --------------- | ------- | ------------- |  | ------------ | --- | ------------- |  | ----- | ------ | ---------------- |  |  | -------- | - |  |  | ------- | - |  |  | ------ | ------ |  |  | ----------- | ----------- | - |  | ----------- | ----------- | -
|                                                                                              |                                                   |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     | Deficit       |  |      
|                                                                                              |                                                   | Series B Convertible |         |              |  |            |     |             |  | Notes           |         | Other         |  | Accumulated  |     |              
|                                                                                              |                                                   | Preferred Stock      |         | Common Stock |  |            |     | Deferred    |  | Receivable      |         | Comprehensive |  | During the   |     | Total        
|                                                                                              |                                                   |                      |         |              |  | Additional |     | Stock-Based |  | from            |         | Income        |  | Development  |     | Stockholders
|                                                                                              |                                                   | Shares               |         | Amount       |  | Shares     |     | Amount      |  | Paid-In Capital |         | Compensation  |  | Stockholders |     | (Loss)        |  | Stage |        | Equity/(Deficit)
|                                                                                              |                                                   |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |        |                 
|                                                                                              | Unrealized gain on investments available for sale |                      |         |             |  |            |     |            |  |                 |         |              |  |              |     |              |  |       |        |                 |  |  |          |  |  |  |         |  |  |  |        | 36,520 |  |  |             |            |   |  |             | 36,520      |  
|                                                                                              | Net loss                                          |                      |         |             |  |            |     |            |  |                 |         |              |  |              |     |              |  |       |        |                 |  |  |          |  |  |  |         |  |  |  |        |       |  |  |             | (17,114,499 | ) |  |             | (17,114,499 | )
|                                                                                              |                                                   |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |        |                  |  |  |          |   |  |  |         |   |  |  |        |        |  |  |             |             |   |  |             |            
|Total comprehensive income                                                                    |                                                   |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |        |                  |  |  |          |   |  |  |         |   |  |  | 33,966 |        |  |  | (17,114,499 | )           |   |  | (17,080,533 | )          
|                                                                                              |                                                   |                      |         |              |  |            |     |             |  |                 |         |               |  |              |     |               |  |       |        |                  |  |  |          |   |  |  |         |   |  |  |        |        |  |  |             |             |   |  |             |            
|Balance at December 31, 2001                                                                  |                                                   |                      | 803,606 |              |  |            | 804 |             |  |                 | 910,203 |               |  |              | 910 |               |  |       |       |                  |  |  | (119,939 | ) |  |  | (75,388 | ) |  |  | 32,632 |        |  |  | (35,407,948 | )           |   |  | (35,568,929 | )          
|Issuance of common stock in January 2002 at
    $0.50 per share upon the exercise of options  |                                                   |                      |        |              |  |            |    |             |  |                 | 6,000   |               |  |              | 6   |               |  |       | 2,994  |                  |  |  |         |   |  |  |        |   |  |  |       |        |  |  |            |             |   |  | 3,000       |            
|Issuance of common stock in February 2002 at
    $1.18 per share upon the exercise of options |                                                   |                      |         |              |  |            |     |             |  |                 | 52,083  |               |  |              | 52  |               |  |       | 61,542 |                  |  |  |         |   |  |  |        |   |  |  |       |        |  |  |            |             |   |  | 61,594      |            
|Issuance of common stock in March 2002 at
    $1.25 per share upon the exercise of options    |                                                   |                      |        |              |  |            |    |             |  |                 | 833     |               |  |              | 1   |               |  |       | 1,040  |                  |  |  |         |   |  |  |        |   |  |  |       |        |  |  |            |             |   |  | 1,041       |            
|Issuance of common stock in April 2002 at
    $1.17 per share upon the exercise of options    |                                                   |                      |        |              |  |            |    |             |  |                 | 11,616  |               |  |              | 12  |               |  |       | 13,576 |                  |  |  |         |   |  |  |        |   |  |  |       |        |  |  |            |             |   |  | 13,588      |            
|Issuance of common stock in May 2002 at
    $1.25 per share upon the exercise of options      |                                                   |                      |        |              |  |            |    |             |  |                 | 1,250   |               |  |              | 1   |               |  |       | 1,561  |                  |  |  |         |   |  |  |        |   |  |  |       |        |  |  |            |             |   |  | 1,562       |            
|Issuance of common stock in June 2002 at
    $1.25 per share upon the exercise of options     |                                                   |                      |        |              |  |            |    |             |  |                 | 2,083   |               |  |              | 2   |               |  |       | 2,602  |                  |  |  |         |   |  |  |        |   |  |  |       |        |  |  |            |             |   |  | 2,604       |            
|Issuance of common stock in October 2002 at
    $2.08 per share upon the exercise of options  |                                                   |                      |        |              |  |            |    |             |  |                 | 1,892   |               |  |              | 2   |               |  |       | 3,936  |                  |  |  |         |   |  |  |        |   |  |  |       |        |  |  |            |             |   |  | 3,938       |            



The accompanying notes are an integral part of
these consolidated financial statements.


F-8



---



##### Table of Contents



|                                                                                              |                                                                 |                      |         |              |  |            |     |             |  |                 |           |               |  |              |       |               |  |       |            |                  |  |  |            |   |  |  |        |   |  |  |         |         |  |  |             |             |   |  |             |             |  
|--------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | -------------------- | ------- | ------------ |  | ---------- | --- | ----------- |  | --------------- | --------- | ------------- |  | ------------ | ----- | ------------- |  | ----- | ---------- | ---------------- |  |  | ---------- | - |  |  | ------ | - |  |  | ------- | ------- |  |  | ----------- | ----------- | - |  | ----------- | ----------- | -
|                                                                                              |                                                                 |                      |         |              |  |            |     |             |  |                 |           |               |  |              |       | Deficit       |  |      
|                                                                                              |                                                                 | Series B Convertible |         |              |  |            |     |             |  | Notes           |           | Other         |  | Accumulated  |       |              
|                                                                                              |                                                                 | Preferred Stock      |         | Common Stock |  |            |     | Deferred    |  | Receivable      |           | Comprehensive |  | During the   |       | Total        
|                                                                                              |                                                                 |                      |         |              |  | Additional |     | Stock-Based |  | from            |           | Income        |  | Development  |       | Stockholders
|                                                                                              |                                                                 | Shares               |         | Amount       |  | Shares     |     | Amount      |  | Paid-In Capital |           | Compensation  |  | Stockholders |       | (Loss)        |  | Stage |            | Equity/(Deficit)
|                                                                                              |                                                                 |                      |         |              |  |            |     |             |  |                 |           |               |  |              |       |               |  |       |            |                 
|Issuance of common stock in December 2002 at
    $1.25 per share upon the exercise of options |                                                                 |                      |        |              |  |            |    |             |  |                 | 3,751     |               |  |              | 4     |               |  |       | 4,685      |                  |  |  |           |   |  |  |       |   |  |  |        |         |  |  |            |             |   |  | 4,689       |            
|Issuance of common stock upon the exercise of
    warrants                                    |                                                                 |                      |        |              |  |            |    |             |  |                 | 34,650    |               |  |              | 35    |               |  |       | 17,290     |                  |  |  |           |   |  |  |       |   |  |  |        |         |  |  |            |             |   |  | 17,325      |            
|Deferred stock-based compensation related to
    options granted to employees and consultants |                                                                 |                      |        |              |  |            |    |             |  |                 |          |               |  |              |      |               |  |       | 2,287,996  |                  |  |  | (2,287,996 | ) |  |  |       |   |  |  |        |         |  |  |            |             |   |  |            |            
|Amortization of deferred stock-based compensation                                             |                                                                 |                      |        |              |  |            |    |             |  |                 |          |               |  |              |      |               |  |       |           |                  |  |  | 681,243    |   |  |  |       |   |  |  |        |         |  |  |            |             |   |  | 681,243     |            
|Warrants issued in conjunction with note payable                                              |                                                                 |                      |        |              |  |            |    |             |  |                 |          |               |  |              |      |               |  |       | 412,844    |                  |  |  |           |   |  |  |       |   |  |  |        |         |  |  |            |             |   |  | 412,844     |            
|Repayment of notes receivable                                                                 |                                                                 |                      |        |              |  |            |    |             |  |                 |          |               |  |              |      |               |  |       |           |                  |  |  |           |   |  |  | 75,388 |   |  |  |        |         |  |  |            |             |   |  | 75,388      |            
|Accretion of mandatorily redeemable convertible
    preferred stock                           |                                                                 |                      |        |              |  |            |    |             |  |                 |          |               |  |              |      |               |  |       | (2,810,066 | )                |  |  |           |   |  |  |       |   |  |  |        |         |  |  | (11,873,673 | )           |   |  | (14,683,739 | )          
|Comprehensive income:                                                                         |                                                                 |                      |         |              |  |            |     |             |  |                 |           |               |  |              |       |               |  |       |            |                  |  |  |            |   |  |  |        |   |  |  |         |         |  |  |             |             |   |  |             |            
|                                                                                              | Foreign currency translation adjustment                         |                      |         |             |  |            |     |            |  |                 |           |              |  |              |       |              |  |       |            |                 |  |  |            |  |  |  |        |  |  |  |         | 137,455 |  |  |             |            |   |  |             | 137,455     |  
|                                                                                              | Change in unrealized gain on investments
    available for sale |                      |         |             |  |            |     |            |  |                 |           |              |  |              |       |              |  |       |            |                 |  |  |            |  |  |  |        |  |  |  |         | 55,333  |  |  |             |            |   |  |             | 55,333      |  
|                                                                                              | Net loss                                                        |                      |         |             |  |            |     |            |  |                 |           |              |  |              |       |              |  |       |            |                 |  |  |            |  |  |  |        |  |  |  |         |        |  |  |             | (28,047,579 | ) |  |             | (28,047,579 | )
|                                                                                              |                                                                 |                      |         |              |  |            |     |             |  |                 |           |               |  |              |       |               |  |       |            |                  |  |  |            |   |  |  |        |   |  |  |         |         |  |  |             |             |   |  |             |            
|Total comprehensive income                                                                    |                                                                 |                      |         |              |  |            |     |             |  |                 |           |               |  |              |       |               |  |       |            |                  |  |  |            |   |  |  |        |   |  |  | 192,788 |         |  |  | (28,047,579 | )           |   |  | (27,854,791 | )          
|                                                                                              |                                                                 |                      |         |              |  |            |     |             |  |                 |           |               |  |              |       |               |  |       |            |                  |  |  |            |   |  |  |        |   |  |  |         |         |  |  |             |             |   |  |             |            
|Balance at December 31, 2002                                                                  |                                                                 |                      | 803,606 |              |  |            | 804 |             |  |                 | 1,024,361 |               |  |              | 1,025 |               |  |       |           |                  |  |  | (1,726,692 | ) |  |  |       |   |  |  | 225,420 |         |  |  | (75,329,200 | )           |   |  | (76,828,643 | )          
|Issuance of common stock in January 2003 at
    $1.25 per share upon exercise of options      |                                                                 |                      |        |              |  |            |    |             |  |                 | 4,375     |               |  |              | 4     |               |  |       | 5,464      |                  |  |  |           |   |  |  |       |   |  |  |        |         |  |  |            |             |   |  | 5,468       |            



The accompanying notes are an integral part of
these consolidated financial statements.


F-9



---



##### Table of Contents



|                                                                                                                                |  |                      |   |              |  |            |   |             |  |                 |           |               |  |              |       |               |  |       |             |                  |  |  |            |   |  |  |   |  |  |  |   |  |  |  |   |  |  |  |             |   | 
|------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | - | ------------ |  | ---------- | - | ----------- |  | --------------- | --------- | ------------- |  | ------------ | ----- | ------------- |  | ----- | ----------- | ---------------- |  |  | ---------- | - |  |  | - |  |  |  | - |  |  |  | - |  |  |  | ----------- | - | 
|                                                                                                                                |  |                      |   |              |  |            |   |             |  |                 |           |               |  |              |       | Deficit       |  |      
|                                                                                                                                |  | Series B Convertible |   |              |  |            |   |             |  | Notes           |           | Other         |  | Accumulated  |       |              
|                                                                                                                                |  | Preferred Stock      |   | Common Stock |  |            |   | Deferred    |  | Receivable      |           | Comprehensive |  | During the   |       | Total        
|                                                                                                                                |  |                      |   |              |  | Additional |   | Stock-Based |  | from            |           | Income        |  | Development  |       | Stockholders
|                                                                                                                                |  | Shares               |   | Amount       |  | Shares     |   | Amount      |  | Paid-In Capital |           | Compensation  |  | Stockholders |       | (Loss)        |  | Stage |             | Equity/(Deficit)
|                                                                                                                                |  |                      |   |              |  |            |   |             |  |                 |           |               |  |              |       |               |  |       |             |                 
|Issuance of common stock in July 2003 at
    $1.05 per share upon exercise of options                                           |  |                      |  |              |  |            |  |             |  |                 | 11,333    |               |  |              | 11    |               |  |       | 11,934      |                  |  |  |           |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 11,945      |  
|Issuance of common stock in August 2003 at
    $1.25 per share upon exercise of options                                         |  |                      |  |              |  |            |  |             |  |                 | 600       |               |  |              | 1     |               |  |       | 749         |                  |  |  |           |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 750         |  
|Issuance of common stock in September 2003 at
    $0.63 per share upon exercise of options                                      |  |                      |  |              |  |            |  |             |  |                 | 14,625    |               |  |              | 15    |               |  |       | 9,267       |                  |  |  |           |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 9,282       |  
|Issuance of common stock in October 2003 at
    $1.16 per share upon exercise of options                                        |  |                      |  |              |  |            |  |             |  |                 | 48,447    |               |  |              | 48    |               |  |       | 55,608      |                  |  |  |           |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 55,656      |  
|Issuance of common stock for cash-initial public
    offering in November 2003, net of offering costs of $7,174,830             |  |                      |  |              |  |            |  |             |  |                 | 5,750,000 |               |  |              | 5,750 |               |  |       | 73,319,420  |                  |  |  |           |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 73,325,170  |  
|Deferred stock-based compensation related to
    options granted to employees and consultants                                   |  |                      |  |              |  |            |  |             |  |                 |          |               |  |              |      |               |  |       | 9,195,759   |                  |  |  | (9,195,759 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |            |  
|Amortization of deferred stock-based compensation                                                                               |  |                      |  |              |  |            |  |             |  |                 |          |               |  |              |      |               |  |       |            |                  |  |  | 4,192,256  |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 4,192,256   |  
|Accretion of mandatorily redeemable convertible
    preferred stock                                                             |  |                      |  |              |  |            |  |             |  |                 |          |               |  |              |      |               |  |       | (13,187,174 | )                |  |  |           |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (13,187,174 | )
|Discount associated with Series D
    mandatorily redeemable convertible preferred stock in August
    2003 at $6.875 per share |  |                      |  |              |  |            |  |             |  |                 |          |               |  |              |      |               |  |       | 39,935,388  |                  |  |  |           |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 39,935,388  |  



The accompanying notes are an integral part of
these consolidated financial statements.


F-10



---



##### Table of Contents



|                                                                                                                                        |                                                                 |                      |          |              |  |            |      |             |  |                 |            |               |  |              |        |               |  |       |             |                  |  |   |            |   |  |   |   |   |  |   |          |          |   |   |              |             |   |   |             |             |  
|--------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | -------------------- | -------- | ------------ |  | ---------- | ---- | ----------- |  | --------------- | ---------- | ------------- |  | ------------ | ------ | ------------- |  | ----- | ----------- | ---------------- |  | - | ---------- | - |  | - | - | - |  | - | -------- | -------- | - | - | ------------ | ----------- | - | - | ----------- | ----------- | -
|                                                                                                                                        |                                                                 |                      |          |              |  |            |      |             |  |                 |            |               |  |              |        | Deficit       |  |      
|                                                                                                                                        |                                                                 | Series B Convertible |          |              |  |            |      |             |  | Notes           |            | Other         |  | Accumulated  |        |              
|                                                                                                                                        |                                                                 | Preferred Stock      |          | Common Stock |  |            |      | Deferred    |  | Receivable      |            | Comprehensive |  | During the   |        | Total        
|                                                                                                                                        |                                                                 |                      |          |              |  | Additional |      | Stock-Based |  | from            |            | Income        |  | Development  |        | Stockholders
|                                                                                                                                        |                                                                 | Shares               |          | Amount       |  | Shares     |      | Amount      |  | Paid-In Capital |            | Compensation  |  | Stockholders |        | (Loss)        |  | Stage |             | Equity/(Deficit)
|                                                                                                                                        |                                                                 |                      |          |              |  |            |      |             |  |                 |            |               |  |              |        |               |  |       |             |                 
|Beneficial conversion feature of Series D
    mandatorily redeemable convertible preferred stock in August
    2003 at $6.875 per share |                                                                 |                      |         |              |  |            |     |             |  |                 |           |               |  |              |       |               |  |       | (39,935,388 | )                |  |   |           |   |  |   |  |   |  |   |         |          |   |   |             |             |   |   | (39,935,388 | )          
|Conversion of Series A mandatorily
    redeemable convertible preferred stock                                                           |                                                                 |                      |         |              |  |            |     |             |  |                 | 1,206,998  |               |  |              | 1,207  |               |  |       | 7,997,573   |                  |  |   |           |   |  |   |  |   |  |   |         |          |   |   |             |             |   |   | 7,998,780   |            
|Conversion of Series B convertible preferred
    stock                                                                                  |                                                                 |                      | (803,606 | )            |  |            | (804 | )           |  |                 | 160,713    |               |  |              | 161    |               |  |       | 643         |                  |  |   |           |   |  |   |  |   |  |   |         |          |   |   |             |             |   |   |            |            
|Conversion of Series C mandatorily
    redeemable convertible preferred stock                                                           |                                                                 |                      |         |              |  |            |     |             |  |                 | 2,618,175  |               |  |              | 2,618  |               |  |       | 23,884,293  |                  |  |   |           |   |  |   |  |   |  |   |         |          |   |   |             |             |   |   | 23,886,911  |            
|Conversion of Series D mandatorily
    redeemable convertible preferred stock                                                           |                                                                 |                      |         |              |  |            |     |             |  |                 | 15,618,300 |               |  |              | 15,618 |               |  |       | 127,786,844 |                  |  |   |           |   |  |   |  |   |  |   |         |          |   |   |             |             |   |   | 127,802,462 |            
|Comprehensive income:                                                                                                                   |                                                                 |                      |          |              |  |            |      |             |  |                 |            |               |  |              |        |               |  |       |             |                  |  |   |            |   |  |   |   |   |  |   |          |          |   |   |              |             |   |   |             |            
|                                                                                                                                        | Foreign currency translation adjustment                         |                      |          |             |  |            |      |            |  |                 |            |              |  |              |        |              |  |       |             |                 |  |   |            |  |  |   |   |  |  |   |          | (105,874 | ) |   |              |            |   |   |             | (105,874    | )
|                                                                                                                                        | Change in unrealized gain on investments
    available for sale |                      |          |             |  |            |      |            |  |                 |            |              |  |              |        |              |  |       |             |                 |  |   |            |  |  |   |   |  |  |   |          | (97,361  | ) |   |              |            |   |   |             | (97,361     | )
|                                                                                                                                        | Net loss                                                        |                      |          |             |  |            |      |            |  |                 |            |              |  |              |        |              |  |       |             |                 |  |   |            |  |  |   |   |  |  |   |          |         |   |   |              | (43,147,833 | ) |   |             | (43,147,833 | )
|                                                                                                                                        |                                                                 |                      |          |              |  |            |      |             |  |                 |            |               |  |              |        |               |  |       |             |                  |  |   |            |   |  |   |   |   |  |   |          |          |   |   |              |             |   |   |             |            
|Total comprehensive income                                                                                                              |                                                                 |                      |          |              |  |            |      |             |  |                 |            |               |  |              |        |               |  |       |             |                  |  |   |            |   |  |   |   |   |  |   | (203,235 | )        |   |   | (43,147,833  | )           |   |   | (43,351,068 | )          
|                                                                                                                                        |                                                                 |                      |          |              |  |            |      |             |  |                 |            |               |  |              |        |               |  |       |             |                  |  |   |            |   |  |   |   |   |  |   |          |          |   |   |              |             |   |   |             |            
|Balance at December 31, 2003                                                                                                            |                                                                 |                      |         |              |  | $          |     |             |  |                 | 26,457,927 |               |  | $            | 26,458 |               |  | $     | 229,080,380 |                  |  | $ | (6,730,195 | ) |  | $ |  |   |  | $ | 22,185   |          |   | $ | (118,477,033 | )           |   | $ | 103,921,795 |            
|                                                                                                                                        |                                                                 |                      |          |              |  |            |      |             |  |                 |            |               |  |              |        |               |  |       |             |                  |  |   |            |   |  |   |   |   |  |   |          |          |   |   |              |             |   |   |             |            



The accompanying notes are an integral part of
these consolidated financial statements.


F-11



---



##### Table of Contents



MYOGEN, INC.

(A Development Stage Enterprise)


CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                                                                                        |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |           |            |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------------- | ------------------------------------------------------- | ---------------- | ---------- | ----------- | ----------- | ----------------- | -------- | ----------- | ----------- | ------- | -------- | ----------- | ------------ | --------- | ---------- | ----------- | -
|                                                                                                                                                                        |                                                   |                                                         |                                                         |                  |            |             |             | Cumulative Period
|                                                                                                                                                                        |                                                   |                                                         |                                                         | From June 10,   
|                                                                                                                                                                        |                                                   | For the Years Ended December 31,                        |                                                         | 1996 (Inception)
|                                                                                                                                                                        |                                                   |                                                         |                                                         | to December 31, 
|                                                                                                                                                                        |                                                   | 2003                                                    |                                                         | 2002             |            | 2001        |             | 2003             
|                                                                                                                                                                        |                                                   |                                                         |                                                         |                  |            |             |             |                  
|Cash Flows From Operating
    Activities:                                                                                                                               |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|Net loss                                                                                                                                                                |                                                   | $                                                       | (43,147,833                                             | )                |            | $           | (28,047,579 | )                 |          | $           | (17,114,499 | )       |          | $           | (103,397,370 | )        
|Adjustments to reconcile net loss to net cash
    used in operating activities:                                                                                         |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|                                                                                                                                                                        | Depreciation and amortization                     |                                                         |                                                         | 413,522          |            |             |             | 302,994           |          |             |             | 138,495 |          |             |              | 1,012,235 |           
|                                                                                                                                                                        | Amortization of deferred stock-based compensation |                                                         |                                                         | 4,192,256        |            |             |             | 681,243           |          |             |             | 37,996  |          |             |              | 4,925,482 |           
|                                                                                                                                                                        | Amortization of debt discount                     |                                                         |                                                         | 137,615          |            |             |             | 4,022             |          |             |             | 3,713   |          |             |              | 148,430   |           
|                                                                                                                                                                        | Amortization of investment (discount)/premium     |                                                         |                                                         | 75,701           |            |             |             | 191,211           |          |             |             | (28,062 | )        |             |              | 238,850   |           
|                                                                                                                                                                        | Stock exchanged for license                       |                                                         |                                                         |                 |            |             |             |                  |          |             |             |        |          |             |              | 1,163,229 |           
|                                                                                                                                                                        | Loss on disposal of property and equipment        |                                                         |                                                         | 11,671           |            |             |             | 22,638            |          |             |             |        |          |             |              | 34,309    |           
|                                                                                                                                                                        | Changes in operating assets and liabilities:      |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |           |           
|                                                                                                                                                                        |                                                   | Trade accounts receivable                               |                                                         |                  | 154,936    |             |             |                   | (280,657 | )           |             |         | (317,617 | )           |              |           | (490,463   | )          
|                                                                                                                                                                        |                                                   | Research and development contract amounts               |                                                         |                  | (625,000   | )           |             |                   |         |             |             |         |         |             |              |           | (625,000   | )          
|                                                                                                                                                                        |                                                   | Inventories                                             |                                                         |                  | 135,918    |             |             |                   | 6,787    |             |             |         | 12,273   |             |              |           | (724,282   | )          
|                                                                                                                                                                        |                                                   | Prepaid expenses, accrued interest and other
    assets |                                                         |                  | (1,295,551 | )           |             |                   | (750,468 | )           |             |         | 272,209  |             |              |           | (2,303,739 | )          
|                                                                                                                                                                        |                                                   | Accounts payable                                        |                                                         |                  | 4,222,118  |             |             |                   | 840,154  |             |             |         | 507,926  |             |              |           | 6,986,013  |            
|                                                                                                                                                                        |                                                   | Deferred revenue                                        |                                                         |                  | 3,614,696  |             |             |                   |         |             |             |         |         |             |              |           | 3,614,696  |            
|                                                                                                                                                                        |                                                   | Accrued liabilities                                     |                                                         |                  | 403,791    |             |             |                   | 570,201  |             |             |         | 77,749   |             |              |           | 1,109,906  |            
|                                                                                                                                                                        |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|                                                                                                                                                                        |                                                   |                                                         | Net cash used in operating activities                   |                  |            | (31,706,160 | )           |                   |          | (26,459,454 | )           |         |          | (16,409,817 | )            |           |            | (88,307,704 | )
|                                                                                                                                                                        |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|Cash Flows From Investing
    Activities:                                                                                                                               |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|Acquisitions of property and equipment                                                                                                                                  |                                                   |                                                         | (275,640                                                | )                |            |             | (1,316,986  | )                 |          |             | (208,107    | )       |          |             | (2,436,556   | )        
|Proceeds from sale of property and equipment                                                                                                                            |                                                   |                                                         | 318,201                                                 |                  |            |             | 14,272      |                   |          |             |            |         |          |             | 332,473      |          
|Purchases of short-term investments                                                                                                                                     |                                                   |                                                         | (114,804,787                                            | )                |            |             | (66,472,688 | )                 |          |             | (41,566,494 | )       |          |             | (323,343,411 | )        
|Proceeds from maturities of short-term investments                                                                                                                      |                                                   |                                                         | 71,653,555                                              |                  |            |             | 74,750,969  |                   |          |             | 11,000,000  |         |          |             | 253,374,600  |          
|                                                                                                                                                                        |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|                                                                                                                                                                        |                                                   |                                                         | Net cash provided by (used in) investing
    activities |                  |            | (43,108,671 | )           |                   |          | 6,975,567   |             |         |          | (30,774,601 | )            |           |            | (72,072,894 | )
|                                                                                                                                                                        |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|Cash Flows From Financing
    Activities:                                                                                                                               |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|Proceeds from related party note                                                                                                                                        |                                                   |                                                         |                                                        |                  |            |             | 75,388      |                   |          |             |            |         |          |             | 370,275      |          
|Repayments of related party note                                                                                                                                        |                                                   |                                                         |                                                        |                  |            |             |            |                   |          |             |            |         |          |             | (289,887     | )        
|Proceeds from notes payable                                                                                                                                             |                                                   |                                                         |                                                        |                  |            |             | 5,000,000   |                   |          |             |            |         |          |             | 5,250,000    |          
|Payments on notes payable                                                                                                                                               |                                                   |                                                         | (1,091,619                                              | )                |            |             | (132,716    | )                 |          |             | (78,679     | )       |          |             | (1,341,619   | )        
|Proceeds from issuance of mandatorily redeemable
    convertible preferred stock, net of issuance costs                                                                 |                                                   |                                                         | 39,935,388                                              |                  |            |             | (35,110     | )                 |          |             | 63,342,365  |         |          |             | 127,151,604  |          
|Proceeds from issuance of common stock, net of
    issuance costs                                                                                                       |                                                   |                                                         | 73,408,271                                              |                  |            |             | 109,341     |                   |          |             | 14,629      |         |          |             | 73,551,213   |          
|Payments on capital leases                                                                                                                                              |                                                   |                                                         | (31,293                                                 | )                |            |             | (25,599     | )                 |          |             |            |         |          |             | (56,892      | )        
|                                                                                                                                                                        |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|                                                                                                                                                                        |                                                   |                                                         | Net cash provided by financing activities               |                  |            | 112,220,747 |             |                   |          | 4,991,304   |             |         |          | 63,278,315  |              |           |            | 204,634,694 |  
|                                                                                                                                                                        |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|Effect of exchange rates on cash                                                                                                                                        |                                                   |                                                         | (61,341                                                 | )                |            |             | 142,444     |                   |          |             | (2,554      | )       |          |             | 83,625       |          
|Net increase (decrease) in cash and cash
    equivalents                                                                                                                |                                                   |                                                         | 37,344,575                                              |                  |            |             | (14,350,139 | )                 |          |             | 16,091,343  |         |          |             | 44,337,721   |          
|Cash and cash equivalents, beginning of period                                                                                                                          |                                                   |                                                         | 6,993,146                                               |                  |            |             | 21,343,285  |                   |          |             | 5,251,942   |         |          |             |             |          
|                                                                                                                                                                        |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|Cash and cash equivalents, end of period                                                                                                                                |                                                   | $                                                       | 44,337,721                                              |                  |            | $           | 6,993,146   |                   |          | $           | 21,343,285  |         |          | $           | 44,337,721   |          
|                                                                                                                                                                        |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|Supplemental Disclosure of Non-Cash Financing
    Activities:                                                                                                           |                                                   |                                                         |                                                         |                  |            |             |             |                   |          |             |             |         |          |             |              |          
|Interest paid                                                                                                                                                           |                                                   | $                                                       | 583,409                                                 |                  |            | $           | 14,089      |                   |          | $           | 39,555      |         |          | $           | 648,791      |          
|Acquisition of property and equipment under
    capital leases                                                                                                          |                                                   |                                                         | 53,532                                                  |                  |            |             | 158,437     |                   |          |             |            |         |          |             | 211,969      |          
|Common stock issued in exchange for notes
    receivable                                                                                                                |                                                   |                                                         |                                                        |                  |            |             |            |                   |          |             |            |         |          |             | 81,362       |          
|Convertible preferred stock issued in exchange
    for license                                                                                                          |                                                   |                                                         |                                                        |                  |            |             |            |                   |          |             |            |         |          |             | 1,163,229    |          
|Mandatorily redeemable convertible preferred
    stock issued in lieu of cash commission on issuance of
    Series D mandatorily redeemable convertible preferred stock |                                                   |                                                         |                                                        |                  |            |             |            |                   |          |             | 928,961     |         |          |             | 928,961      |          
|Conversion of Series B convertible preferred
    stock for common stock upon initial public offering                                                                    |                                                   |                                                         | 804                                                     |                  |            |             |            |                   |          |             |            |         |          |             | 804          |          
|Conversion of mandatorily redeemable preferred
    stock for common stock upon initial public offering                                                                  |                                                   |                                                         | 159,688,153                                             |                  |            |             |            |                   |          |             |            |         |          |             | 159,688,153  |          
|Deferred research and development contract
    revenue due within one year                                                                                              |                                                   |                                                         | 1,000,000                                               |                  |            |             |            |                   |          |             |            |         |          |             | 1,000,000    |          

The accompanying notes are an integral part of
these consolidated financial statements.

F-12



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##### Table of Contents



MYOGEN, INC.

(A Development Stage Enterprise)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                          
|-- | -----------------------------------------
|1. | Formation and Business of the
    Company

Myogen, Inc. and its subsidiary (the
Company) are in the development stage and are
engaged in the discovery, development and sale of therapeutic
drugs for the treatment of cardiovascular conditions. Myogen,
Inc. was incorporated in the State of Colorado on June 10,
1996 (Inception) and on May 15, 1998
reincorporated in the State of Delaware. The Company currently
markets one product in Europe for the treatment of acute
decompensated heart failure, and it has three product candidates
in late-stage clinical development for three cardiovascular
indications. In addition, the Companys research program is
focused on creating disease-modifying drugs for chronic heart
failure and other cardiovascular diseases.

In 1998, the Company obtained a license to
enoximone for the treatment and prevention of certain forms of
heart disease in humans. In 1999, the Company established Myogen
GmbH, a wholly owned subsidiary located in Germany, through
which the intravenous formulation of enoximone,
Perfan I.V., is sold in eight countries in Europe. The
Company has granted certain European distributors exclusive
rights to distribute Perfan I.V. in Belgium, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands and the
United Kingdom. In June 2000, the Company began Phase III
clinical evaluation of the oral formulation of enoximone,
enoximone capsules, with the initiation of EMOTE. In 2002, the
Company initiated two additional enoximone capsule
Phase III trials, and initiated a fourth such trial in the
third quarter of 2003.

In September 2001, the Company in-licensed
ambrisentan, a compound that it may develop for the treatment of
various indications. In 2002, the Company initiated a
Phase II clinical trial of ambrisentan for pulmonary
arterial hypertension. This trial was completed in 2003.

In June 2003, the Company in-licensed darusentan,
a compound that it intends to develop initially for resistant
hypertension.

Prior to commercial sales of a drug, the Company
must complete the clinical trials and receive the necessary
regulatory approvals. Should the Company be unable to obtain
such approvals, there could be a material adverse effect on its
financial position, results of operations and cash flows.

In November 2003, the Company completed an
initial public offering of 5,750,000 shares of its common
stock. The Company received net proceeds of $73.3 million,
net of $7.2 million in expenses and underwriters
discount relating to the issuance and distribution of securities.



|   |          
|-- | ---------
|2. | Liquidity

The Company has incurred significant losses and
negative cash flows from operations in every fiscal period since
Inception. For the years ended December 31, 2003, 2002 and
2001, the Company incurred losses from operations of
$42,972,596, $28,815,118 and $17,770,643, respectively, and
negative cash flows from operations of $31,706,160, $26,459,454
and $16,409,817, respectively. As of December 31, 2003, the
Company had a deficit accumulated during the development stage
of $118,477,033. Management anticipates that operating losses
and negative cash flows from operations will continue for at
least the next several years.

To date, the Company has satisfied its cash
commitments primarily through public and private placements of
equity securities. From Inception to December 31, 2003, the
Company raised $200,702,817 of net cash proceeds from the sale
of equity securities.

Management believes that the cash on hand will be
sufficient to continue operations for at least the next
12 months. Failure to generate sufficient revenues or raise
additional capital could have a material adverse effect on the
Companys ability to achieve its intended business
objectives. Management plans on raising additional financing to
meet future working capital and capital expenditure needs. There
can be no assurance that such additional financing will be
available or, if available, that such financing can be obtained
on terms satisfactory to the Company.

F-13



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                                               
|-- | ----------------------------------------------
|3. | Summary of Significant Accounting
    Policies



| |                      
| | ---------------------
| | Basis of Presentation

The Company has generated limited revenue to date
and its activities have consisted primarily of developing
products, licensing products, raising capital and recruiting
personnel. Accordingly, the Company is considered to be in the
development stage as of December 31, 2003 as defined in
Statement of Financial Accounting Standards (SFAS)
No. 7, Accounting and Reporting by Development Stage
Enterprises.

On October 24, 2003, the Company effected a
one-for-five reverse stock split. All references in the
consolidated financial statements to common shares, common share
prices and per common share amounts have been adjusted
retroactively for all periods presented to reflect this stock
split. The Companys preferred shares, preferred share
prices and per preferred share amounts have not been adjusted
for this stock split. However, as a result of the stock split,
the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred
Stock conversion ratios were adjusted from one-to-one to
five-to-one. On November 4, 2003, all shares of the
Series A, B, C and D preferred stock converted into common
stock, at a rate of one share of common stock for each five
shares of preferred stock.



| |                            
| | ---------------------------
| | Principles of Consolidation

The accompanying consolidated financial
statements include the accounts of Myogen, Inc. and its wholly
owned subsidiary, Myogen GmbH. All significant intercompany
accounts and transactions have been eliminated in consolidation.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amount
of expenses during the reporting period. Actual results could
differ from these estimates.



| |                        
| | -----------------------
| | Risks and Uncertainties

The Companys operations are subject to
certain risks and uncertainties, including those associated with
the history of operating losses and risk of continued losses,
early stage of development, dependence on the outcome of
clinical trials and dependence on regulatory approval to sell
products.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all investments that, when
purchased, have a remaining maturity of 90 days or less, to
be cash equivalents. All cash equivalents are carried at cost,
which approximates fair value.



| |                       
| | ----------------------
| | Short-term Investments

Short-term investments are investments purchased
with maturities of longer than 90 days, but less than one
year, held at a financial institution. Short-term investments
are accounted for in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, and accordingly, those classified as
held-to-maturity are carried at cost plus accrued interest and
total $0 and $313,695 at December 31, 2003 and 2002,
respectively. In addition, those classified as
available-for-sale are carried at fair value and total
$69,914,627 and $26,490,924 at December 31, 2003 and 2002,
respectively. Gains or losses on the sale of investments
classified as available-for-sale are recognized on the specific
identification method.

F-14



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Unrealized gains or losses are treated as a
separate component of stockholders deficit until the
security is sold or until a decline in fair market value is
determined to be other than temporary. As of December 31,
2003 and 2002, the amortized cost basis, aggregate fair value
and gross unrealized holding gains and losses by major security
type of investment classified as available-for-sale and
held-to-maturity are as follows:

|                             |  |            |            |            |  |            |            |            |  |   |        |  |  |   |         |  
|---------------------------- |  | ---------- | ---------- | ---------- |  | ---------- | ---------- | ---------- |  | - | ------ |  |  | - | ------- | -
|                             |  |            |            |            |  | Unrealized |            | Unrealized
|                             |  | Amortized  |            | Aggregate  |  | Holding    |            | Holding   
|Security Type                |  | Cost Basis |            | Fair Value |  | Gains      |            | Losses    
|                             |  |            |            |            |  |            |            |           
|December 31, 2003            |  |            |            |            |  |            |            |            |  |   |        |  |  |   |         |  
|Government securities        |  | $          | 32,509,476 |            |  | $          | 32,519,386 |            |  | $ | 9,910  |  |  | $ |        |  
|Corporate debt securities    |  |            | 24,056,490 |            |  |            | 24,040,418 |            |  |   |       |  |  |   | (16,072 | )
|Commercial paper             |  |            | 9,093,506  |            |  |            | 9,093,736  |            |  |   | 230    |  |  |   |        |  
|Asset-backed securities      |  |            | 4,260,663  |            |  |            | 4,261,087  |            |  |   | 424    |  |  |   |        |  
|                             |  |            |            |            |  |            |            |            |  |   |        |  |  |   |         |  
|Total short-term investments |  | $          | 69,920,135 |            |  | $          | 69,914,627 |            |  | $ | 10,564 |  |  | $ | (16,072 | )
|                             |  |            |            |            |  |            |            |            |  |   |        |  |  |   |         |  
|December 31, 2002            |  |            |            |            |  |            |            |            |  |   |        |  |  |   |         |  
|Commercial paper             |  | $          | 20,453,682 |            |  | $          | 20,527,304 |            |  | $ | 73,622 |  |  | $ |        |  
|Corporate debt securities    |  |            | 6,259,084  |            |  |            | 6,277,315  |            |  |   | 18,231 |  |  |   |        |  
|                             |  |            |            |            |  |            |            |            |  |   |        |  |  |   |         |  
|Total short-term investments |  | $          | 26,712,766 |            |  | $          | 26,804,619 |            |  | $ | 91,853 |  |  | $ |        |  
|                             |  |            |            |            |  |            |            |            |  |   |        |  |  |   |         |  

Certain instruments, although possessing a
contractual maturity greater than ten years, are classified as
short-term investments due to their ready marketability. At
December 31, 2003, the amortized cost basis and aggregate
fair value of these short-term investments was $19,100,000 and
$19,099,721, respectively.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The Companys financial instruments include
cash, cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued liabilities and notes
payable. The carrying amounts of the Companys financial
instruments approximate fair value due to their short
maturities, except for the notes payable where the fair value is
$3,160,567, based on the 9.8% current borrowing rate, as
compared to the carrying amount of $3,633,152 as of
December 31, 2003.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost or
market. Cost is determined on the first-in, first-out basis.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are recorded at cost less
accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the
assets, ranging from three to five years. Leasehold improvements
and assets under capital leases are amortized over the shorter
of the life of the lease or the estimated useful life of the
assets. Repairs and maintenance costs are expensed as incurred.



| |                                      
| | -------------------------------------
| | Long-Lived Assets and
    Impairments

The Company periodically evaluates the
recoverability of its long-lived assets in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144)
and, accordingly, reduces the carrying value whenever events or
changes in business conditions indicate the carrying amount of
the assets may not be fully recoverable. SFAS 144 requires
recognition of impairment of

F-15



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

long-lived assets in the event the net book value
of such assets exceeds the fair value less costs to sell such
assets.



| |                    
| | -------------------
| | Revenue Recognition

Myogen recognizes revenue in accordance with SEC
Staff Accounting Bulletin No. 104 Revenue Recognition
in Financial Statements (SAB 104). The Company
considers this methodology to be the most appropriate for its
business model and current revenue streams.



| |              
| | -------------
| | Product Sales

Sales are recognized when the following four
revenue recognition criteria are met: (i) persuasive
evidence of an arrangement exists; (ii) product is shipped
from the distributor to the customer; (iii) the selling
price is fixed or determinable; and (iv) collection is
reasonably assured. Once the product is shipped to the customer,
the Company does not allow product returns.



| |                                   
| | ----------------------------------
| | Research and development contracts

Myogen may enter into collaborative agreements
with pharmaceutical companies where the other party receives
exclusive marketing and distribution rights for certain products
for set time periods and set geographic areas. The rights
associated with this research and development are assigned or
can be assigned to the collaborator through a license at the
collaborators option. The terms of the collaborative
agreements can include nonrefundable funding of research and
development efforts, licensing fees, payments based on
achievement of certain milestones, and royalties on product
sales.

Non-refundable license fees received are recorded
as deferred revenue once received or irrevocably committed, and
are recognized ratably over the longer of the development period
to which they relate or contractual term. Where there are two or
more distinct phases embedded into one contract (such as product
development and subsequent commercialization or manufacturing),
the contracts may be considered multiple element arrangements.
When it can be demonstrated that each of these phases are at
fair value, they are treated as separate earnings processes with
upfront fees being recognized over only the initial product
development phase. The relevant time period for the product
development phase is based on management estimates and could
vary depending upon the outcome of clinical trials and the
regulatory approval process. As a result, management continually
reviews the appropriate time period.

Milestones, based on designated achievement
points that are considered at risk and substantive at the
inception of the collaborative contract, are recognized as
earned when the earnings process is complete and the
corresponding payment is reasonably assured. The Company
evaluates whether milestones are at risk and substantive based
on the contingent nature of the milestone, specifically
reviewing factors such as the technological and commercial risk
that needs to be overcome and the level of investment required.
Milestone payments related to arrangements under which the
Company has continuing performance obligations are recognized as
revenue upon achievement of the milestone only if all of the
following conditions are met: the milestone payments are
non-refundable; achievement of the milestone was not reasonably
assured at the inception of the arrangement; substantive effort
is involved in achieving the milestone; and the amount of the
milestone is reasonable in relation to the effort expended or
the risk associated with the achievement of the milestone. If
any of these conditions are not met, the milestone payments are
deferred and recognized as revenue over the term of the
arrangement as the Company completes its performance obligations.

Revenues from research funding are recognized
when the services are performed in order to match revenues to
expenses incurred and are typically based on the fully burdened
cost of a researcher working on a

F-16



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

collaboration. Revenue is recognized ratably over
the period as services are performed, with the balance reflected
as deferred revenue until earned.



| |                         
| | ------------------------
| | Research and Development

The Companys research and development
expense is primarily composed of costs associated with discovery
research and product development. The latter expense represents
both clinical trial costs and the costs associated with
non-clinical support activities such as toxicological testing,
manufacturing process development and regulatory affairs. The
Companys research and development expenses include
internal employee costs and research and development expenses
associated with external service providers, including clinical
research organizations and contract manufacturers, and by the
Companys academic collaborators. The Company also reports
the cost of product licenses in this category, including its
milestone obligations. Research and development expenditures are
charged to operations as incurred. Amounts received from other
parties to fund our research and development efforts where the
reimbursing party does not obtain any rights to the research or
drug candidates are recognized as a reduction to research and
development expense as the costs are incurred.



| |                          
| | -------------------------
| | Net Loss Per Common Share

Net loss per common share is calculated in
accordance with SFAS No. 128, Earnings Per
Share (SFAS 128) and SEC Staff Accounting
Bulletin No. 98 (SAB 98). Under the
provisions of SFAS 128 and SAB 98, basic net loss per
common share is computed by dividing the net loss available for
common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted
net loss per common share is computed giving effect to all
dilutive potential common stock, including options, mandatorily
redeemable convertible preferred stock, convertible preferred
stock, common stock subject to repurchase and warrants. Diluted
net loss per common share for all periods presented is the same
as basic net loss per share because the potential common shares
were anti-dilutive. Anti-dilutive common shares not included in
net loss attributable to common stockholders are summarized, on
a weighted average basis, as follows:

|                                                   |  |              |            |      |  |      |            |  |  |  |           | 
|-------------------------------------------------- |  | ------------ | ---------- | ---- |  | ---- | ---------- |  |  |  | --------- | 
|                                                   |  |             
|                                                   |  | December 31,
|                                                   |  |             
|                                                   |  | 2003         |            | 2002 |  | 2001
|                                                   |  |              |            |      |  |     
|Common stock subject to repurchase                 |  |              |           |      |  |      | 15,738     |  |  |  | 47,215    | 
|Common stock options                               |  |              | 2,263,623  |      |  |      | 1,179,768  |  |  |  | 50,185    | 
|Warrants                                           |  |              | 33,544     |      |  |      | 11,820     |  |  |  | 36,468    | 
|Convertible preferred stock                        |  |              | 132,980    |      |  |      | 160,721    |  |  |  | 160,721   | 
|Mandatorily redeemable convertible preferred stock |  |              | 12,293,728 |      |  |      | 13,625,321 |  |  |  | 6,721,025 | 
|                                                   |  |              |            |      |  |      |            |  |  |  |           | 
|Total                                              |  |              | 14,723,875 |      |  |      | 14,993,368 |  |  |  | 7,015,614 | 
|                                                   |  |              |            |      |  |      |            |  |  |  |           | 



| |                                                                               
| | ------------------------------------------------------------------------------
| | Stock-Based Compensation and Unaudited Pro
    Forma Net Loss per Common Share

The Company measures compensation expense to
employees using the intrinsic value method as prescribed by
Accounting Principles Board Opinion (APB)
No. 25, Accounting For Stock Issued to Employees
(APB 25), and provides pro forma disclosures of
net loss as if the fair value based method was applied as
prescribed by SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123).
Accordingly, as allowable under SFAS 123, the Company does
not recognize compensation expense for options granted to
employees when the exercise price equals or exceeds the fair
value of common stock as of the grant date. Stock-based awards
to consultants are accounted for under the provisions of
SFAS 123 and

F-17



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Emerging Issues Task Force (EITF)
Issue 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services.

Had employee compensation cost for the
Companys stock-based compensation plan been determined
based on the fair value at the grant dates for awards using the
Black-Scholes model prescribed by SFAS 123, the
Companys pro forma net loss and pro forma net loss per
share would be as follows:

|                                                                                                          |  |                          |             |      |  |      |             |   |  |   |             |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                                                                          |  |                         
|                                                                                                          |  | Years Ended December 31,
|                                                                                                          |  |                         
|                                                                                                          |  | 2003                     |             | 2002 |  | 2001
|                                                                                                          |  |                          |             |      |  |     
|Net loss attributable to common stockholders, as
    reported                                             |  | $                        | (96,270,395 | )    |  | $    | (42,731,318 | ) |  | $ | (17,721,103 | )
|Deduct: total stock-based employee compensation
    expense determined under fair value based method      |  |                          | (3,508,779  | )    |  |      | (476,234    | ) |  |   | (87,584     | )
|Add: total stock-based employee compensation
    expense recognized under the intrinsic rate based method |  |                          | 3,412,815   |      |  |      | 392,119     |   |  |   |            |  
|                                                                                                          |  |                          |             |      |  |      |             |   |  |   |             |  
|Pro forma net loss                                                                                        |  | $                        | (96,366,359 | )    |  | $    | (42,815,433 | ) |  | $ | (17,808,687 | )
|                                                                                                          |  |                          |             |      |  |      |             |   |  |   |             |  
|Pro forma basic and diluted net loss per share                                                            |  | $                        | (17.81      | )    |  | $    | (42.67      | ) |  | $ | (19.90      | )
|                                                                                                          |  |                          |             |      |  |      |             |   |  |   |             |  
|Basic and diluted net loss per share, as reported                                                         |  | $                        | (17.79      | )    |  | $    | (42.59      | ) |  | $ | (19.80      | )
|                                                                                                          |  |                          |             |      |  |      |             |   |  |   |             |  

For options granted prior to the commencement of
public trading of the Companys common stock, the fair
value was determined at the date of grant using the
Black-Scholes model with the following weighted average
assumptions: no dividend yield, risk-free interest rates ranging
from 2.3% to 6.8%, volatility factor of 0% and an expected life
of five years. Risk-free interest rates were determined using
government securities with original maturities similar to the
respective expected option life at date of grant. The estimated
fair value for these options was calculated using the minimum
value method and may not be indicative of the future pro forma
effects of option grants on reported net income (loss) for
future years since this model does not take into consideration
volatility and the commencement of public trading in the
Companys common stock on October 30, 2003. The
Black-Scholes model was utilized to calculate the value of the
options issued after October 30, 2003, using the following
assumptions: no dividend yield, risk-free interest rates ranging
from 3.0% to 3.1%, volatility factor of 100% and an expected
life of five years.



| |             
| | ------------
| | Income Taxes

Income taxes are accounted for under the asset
and liability method whereby deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis
using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be ultimately realized.



| |                             
| | ----------------------------
| | Foreign Currency Translation

The euro is the functional currency for the
Companys foreign subsidiary. The Company translates asset
and liability accounts to the U.S. dollar based on the
exchange rate as of the balance sheet date, while income
statement and cash flow statement amounts are translated to the
U.S. dollar at the average exchange rate for the period.
Exchange gains or losses resulting from such translation are
included as a separate component of stockholders deficit.
Transaction gains and losses are recognized in income during the
period in which they occur. During the years ended
December 31, 2003, 2002 and 2001, the Company recognized
net transaction

F-18



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

gains of $431,637, $122,179 and $6,928,
respectively, which are included in selling, general and
administrative expense.



| |                      
| | ---------------------
| | Concentration of Risk

The Companys cash, cash equivalents and
short-term investments as of December 31, 2003 and 2002 are
maintained in three financial institutions in amounts that
typically exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
exposed to significant credit risk in this area. It is the
Companys practice to place its cash equivalents and
short-term investments in high quality securities in accordance
with a written policy approved by the Companys Board of
Directors.

All product sales recorded as of
December 31, 2003, 2002 and 2001 relate to product sales to
independent distributors in Europe of Perfan I.V., the
intravenous form of enoximone. As of December 31, 2003,
customer concentrations in excess of 10% of trade accounts
receivable and product sales were as follows:

|         |  |            |      |               |  |      |      |      |  |      |      |   |  |  |      |   |  |  |      |  
|-------- |  | ---------- | ---- | ------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | - |  |  | ---- | -
|         |  |            |      |               |  |      |      |     
|         |  | Trade      |      |               |  |      |      |     
|         |  | Accounts   |      |              
|         |  | Receivable |      | Product Sales
|         |  |            |      |              
|Customer |  | 2003       |      | 2002          |  | 2003 |      | 2002 |  | 2001
|         |  |            |      |               |  |      |      |      |  |     
|A        |  |            | 26.3 | %             |  |      | 32.7 | %    |  |      | 28.0 | % |  |  | 27.8 | % |  |  | 38.4 | %
|B        |  |            | 5.5  |               |  |      | 11.0 |      |  |      | 25.3 |   |  |  | 29.5 |   |  |  | 33.2 |  
|C        |  |            | 19.9 |               |  |      | 14.9 |      |  |      | 19.0 |   |  |  | 21.9 |   |  |  | 20.5 |  
|D        |  |            | 9.3  |               |  |      | 12.2 |      |  |      | 12.0 |   |  |  | 11.4 |   |  |  | 6.8  |  
|E        |  |            | 37.9 |               |  |      | 25.0 |      |  |      | 14.2 |   |  |  | 8.1  |   |  |  |     |  
|         |  |            |      |               |  |      |      |      |  |      |      |   |  |  |      |   |  |  |      |  
|Total    |  |            | 98.9 | %             |  |      | 95.8 | %    |  |      | 98.5 | % |  |  | 98.7 | % |  |  | 98.9 | %
|         |  |            |      |               |  |      |      |      |  |      |      |   |  |  |      |   |  |  |      |  

The Company relies on single-source manufacturers
for each of its product candidates. Establishing a replacement
source for any of its product candidates could require at least
12 months and significant additional expense.

All of our research and development contract
revenues and amounts due are from a single collaborator in 2003.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities
(FIN 46). FIN 46 addresses consolidation
by business enterprises of variable interest entities that have
certain characteristics. FIN 46 applies immediately to
variable interest entities created after January 31, 2003,
and to variable interest entities in which an enterprise obtains
an interest after that date. It applies, in the first fiscal
year beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of
FIN 46 has not had, nor does the Company believe it will
have, a material impact on its current or prospective financial
statements.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). This statement
establishes standards for how an issuer classifies and measures
in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity.
In accordance with the standard, certain financial instruments
that embody obligations for the issuer are required to be
classified as liabilities. SFAS 150 shall be effective for
financial instruments entered into or modified after
May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after
June 15, 2003. The FASB issued FASB Staff Position
(FSP) 150-3 on November 7, 2003 to defer the
effective date for applying the provisions of
SFAS No. 150

F-19



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

for certain mandatorily redeemable
non-controlling interests. The Company does not expect the
provisions of this statement to have a significant impact on its
current or prospective financial statements.

In November 2003, the EITF reached a consensus on
Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The
FASB ratified this consensus in November 2003. EITF Issue
No. 03-1 requires certain quantitative and qualitative
disclosures for marketable debt and equity securities classified
as available-for-sale or held-to-maturity that are impaired at
the balance sheet date but for which an other-than-temporary
impairment has not been recognized. The adoption of EITF Issue
No. 03-1 did not have a material impact on the
Companys financial condition or results of operations. As
of December 31, 2003, the Company had no material
unrealized losses on its marketable debt or equity securities.

In December 2003, the SEC issued Staff Accounting
Bulletin No. 104, Revenue Recognition,
(SAB 104) which supercedes SAB 101,
Revenue Recognition in Financial Statements.
SAB 104s primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element
revenue arrangements and to rescind the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions
and Answers (FAQ) issued with SAB 101.
Selected portions of the FAQ have been incorporated into
SAB 104. The adoption of SAB 104 did not have a
material impact on the Companys revenue recognition
policies.



| |                  
| | -----------------
| | Reclassifications

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



|   |            
|-- | -----------
|4. | Inventories

Inventories are summarized as follows:

|                  |  |              |         |      |  |   |         | 
|----------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                  |  |             
|                  |  | December 31,
|                  |  |             
|                  |  | 2003         |         | 2002
|                  |  |              |         |     
|Finished products |  | $            | 207,262 |      |  | $ | 266,068 | 
|Raw materials     |  |              | 517,020 |      |  |   | 594,132 | 
|                  |  |              |         |      |  |   |         | 
|                  |  | $            | 724,282 |      |  | $ | 860,200 | 
|                  |  |              |         |      |  |   |         | 



|   |                       
|-- | ----------------------
|5. | Property and Equipment

Property and equipment are summarized as follows:

|                                |  |              |           |      |  |   |           |  
|------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | -
|                                |  |             
|                                |  | December 31,
|                                |  |             
|                                |  | 2003         |           | 2002
|                                |  |              |           |     
|Laboratory equipment and other  |  | $            | 1,111,136 |      |  | $ | 1,353,601 |  
|Furniture and fixtures          |  |              | 300,180   |      |  |   | 249,988   |  
|Computer equipment and software |  |              | 423,199   |      |  |   | 380,214   |  
|Leasehold improvements          |  |              | 235,365   |      |  |   | 218,365   |  
|Manufacturing equipment         |  |              | 48,000    |      |  |   |          |  
|Capital projects in progress    |  |              | 60,213    |      |  |   | 2,324     |  
|                                |  |              |           |      |  |   |           |  
|                                |  |              | 2,178,093 |      |  |   | 2,204,492 |  
|Less accumulated depreciation   |  |              | (874,065  | )    |  |   | (512,561  | )
|                                |  |              |           |      |  |   |           |  
|                                |  | $            | 1,304,028 |      |  | $ | 1,691,931 |  
|                                |  |              |           |      |  |   |           |  

F-20



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Property and equipment recorded under capital
leases totaled $211,969 and $158,437 as of December 31,
2003 and 2002, respectively, and is included in computer
equipment and software. In addition, amortization expense
related to assets under capital lease was $46,716, $19,337, and
$0 for the years ended December 31, 2003, 2002, and 2001
respectively and $66,053 for the period from Inception to
December 31, 2003; the Company had no significant assets
under capital lease during 2001.



|   |                                             
|-- | --------------------------------------------
|6. | Accounts Payable and Accrued
    Liabilities

Accounts payable are comprised of the following:

|                                    |  |              |           |      |  |   |           | 
|----------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                    |  |             
|                                    |  | December 31,
|                                    |  |             
|                                    |  | 2003         |           | 2002
|                                    |  |              |           |     
|Trade                               |  | $            | 679,827   |      |  | $ | 265,614   | 
|Research and development activities |  |              | 6,510,549 |      |  |   | 2,419,673 | 
|Related parties (Note 14)           |  |              | 404,559   |      |  |   | 63,360    | 
|                                    |  |              |           |      |  |   |           | 
|                                    |  | $            | 7,594,935 |      |  | $ | 2,748,647 | 
|                                    |  |              |           |      |  |   |           | 

Accrued liabilities are comprised of the
following:

|                                                                |  |              |           |      |  |   |         | 
|--------------------------------------------------------------- |  | ------------ | --------- | ---- |  | - | ------- | 
|                                                                |  |             
|                                                                |  | December 31,
|                                                                |  |             
|                                                                |  | 2003         |           | 2002
|                                                                |  |              |           |     
|Accrued payroll                                                 |  | $            | 388,641   |      |  | $ | 197,962 | 
|Accrued taxes                                                   |  |              | 119,537   |      |  |   | 99,025  | 
|Accrued royalties                                               |  |              | 55,050    |      |  |   | 48,778  | 
|Advances for reimbursable research and
    development expenses |  |              | 644,940   |      |  |   | 500,000 | 
|Other                                                           |  |              | 141,946   |      |  |   | 92,337  | 
|                                                                |  |              |           |      |  |   |         | 
|                                                                |  | $            | 1,350,114 |      |  | $ | 938,102 | 
|                                                                |  |              |           |      |  |   |         | 



|   |           
|-- | ----------
|7. | Borrowings

In December 2002, the Company entered into a term
loan with certain financial institutions and borrowed $5,000,000
with a 36-month repayment term, subject to customary covenants.
The loan accrues interest at 9.82% per annum. The first
three monthly repayments were comprised of interest only; the
remaining thirty-three payments are comprised of both principal
and interest. Concurrent with this loan agreement, warrants were
granted to the financial institutions (Note 10).
Substantially all the assets of the Company are pledged as
collateral for the loan.

On January 26, 2000, the Company entered
into a term loan with a bank (the Bank). Subject to
the terms of the agreement, on June 30, 2000, the Company
borrowed $250,000 with a 36-month repayment term. The loan
accumulated interest at the annual rate associated with the
U.S. Treasury note yield to maturity on a 36-month note, as
of the funding date, plus a loan margin of 300 basis
points. Concurrent with this loan agreement, a warrant to
purchase 9,090 shares of the Companys Series C
Preferred Stock at an exercise price of $1.375 was granted to
the Bank (Note 10). In December 2002, the loan was repaid
in full.

F-21



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Maturities of the notes payable as of
December 31, 2003 are as follows:

|                                                          |                                       |   |           |            |  
|--------------------------------------------------------- | ------------------------------------- | - | --------- | ---------- | -
|2004                                                      |                                       | $ | 1,776,861 |           
|2005                                                      |                                       |   | 1,959,420 |           
|2006                                                      |                                       |   | 172,100   |           
|Thereafter                                                |                                       |   |          |           
|                                                          |                                       |   |           |           
|Principal portion of future notes payable
    obligations |                                       |   | 3,908,381 |           
|                                                          | Less unamortized discount             |   |           | (275,229   | )
|                                                          | Less current portion of notes payable |   |           | (1,639,246 | )
|                                                          |                                       |   |           |           
|Notes payable, net of current portion and discount        |                                       | $ | 1,993,906 |           
|                                                          |                                       |   |           |           



|   |                              
|-- | -----------------------------
|8. | Commitments and Contingencies

The Company leases office and research and
development facilities under agreements that expire in 2005 and
2007. In December 2003, the lease was amended to add an
additional 6,200 square feet of laboratory space to be
occupied April 1, 2004. Total rent expense in 2003, 2002
and 2001 was $416,128, $393,908 and $257,028, respectively.

During 2002, the Company entered into several
capital leases in order to finance certain equipment
acquisitions. As of December 31, 2003, the aggregate future
minimum lease obligations for capital leases and non-cancelable
operating leases with initial or remaining terms in excess of
one year are as follows for each of the years ending
December 31:

|                                                |                                   |                |         |                  |   |   |           |  | 
|----------------------------------------------- | --------------------------------- | -------------- | ------- | ---------------- | - | - | --------- |  | 
|                                                |                                   | Capital Leases |         | Operating Leases
|                                                |                                   |                |         |                 
|2004                                            |                                   | $              | 54,303  |                  |   | $ | 342,981   | 
|2005                                            |                                   |                | 54,303  |                  |   |   | 362,729   | 
|2006                                            |                                   |                | 49,274  |                  |   |   | 361,272   | 
|2007                                            |                                   |                | 21,146  |                  |   |   | 60,212    | 
|2008                                            |                                   |                | 10,228  |                  |   |   |          | 
|                                                |                                   |                |         |                  |   |   |           | 
|Total future minimum lease payments             |                                   |                | 189,254 |                  |   | $ | 1,127,194 | 
|                                                |                                   |                |         |                  |   |   |           | 
|                                                | Less amount representing interest |                |         | (30,622          | ) |   |           |  | 
|                                                |                                   |                |         |                  |   |   |           | 
|Present value of future minimum lease payments  |                                   |                | 158,632 |                  |   |   |           | 
|                                                | Less current portion              |                |         | (37,015          | ) |   |           |  | 
|                                                |                                   |                |         |                  |   |   |           | 
|Capital lease obligations, less current portion |                                   | $              | 121,617 |                  |   |   |           | 
|                                                |                                   |                |         |                  |   |   |           | 

From time to time, the Company becomes involved
in legal proceedings arising in the ordinary course of business.
The Company was not involved in any material legal proceedings
as of December 31, 2003.

In the ordinary course of its business, the
Company makes certain indemnities, commitments and guarantees
under which it may be required to make payments in relation to
certain transactions. These include indemnities of clinical
investigators, consultants and contract research organizations
involved in the development of the Companys clinical stage
products, indemnities of distributors of its marketed product,
indemnities to its lenders and indemnities to directors and
officers of the Company to the maximum extent permitted under
the laws of the State of Delaware. The duration of these
indemnities, commitments and guarantees varies, and in certain
cases, is indefinite. The majority of these indemnities,
commitments and guarantees do not provide for any limitation of
the maximum potential future payments the Company could be
obligated to

F-22



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

make. The Company has not recorded any liability
for these indemnities, commitments and guarantees in the
accompanying consolidated balance sheets. However, the Company
accrues for losses for any known contingent liability, including
those that may arise from indemnification provisions, when
future payment is probable and in accordance with
SFAS No. 5, Accounting for Contingencies. No
such losses have been recorded to date.



|   |                
|-- | ---------------
|9. | Preferred Stock



| |                             
| | ----------------------------
| | Undesignated Preferred Stock

As of December 31, 2003 the Company had
5,000,000 authorized but unissued shares of undesignated
preferred stock.



| |                                                       
| | ------------------------------------------------------
| | Mandatorily Redeemable Convertible
    Preferred Stock

Mandatorily redeemable convertible preferred
stock is summarized as follows:

|                                                                                                                                                                                                                                                                              |  |              |   |      |  |   |             | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | - | ---- |  | - | ----------- | 
|                                                                                                                                                                                                                                                                              |  |             
|                                                                                                                                                                                                                                                                              |  | December 31,
|                                                                                                                                                                                                                                                                              |  |             
|                                                                                                                                                                                                                                                                              |  | 2003         |   | 2002
|                                                                                                                                                                                                                                                                              |  |              |   |     
|Series A Preferred Stock, at redemption
    value, $0.001 par value, 0 and 6,035,000 shares
    authorized; 0 and 6,035,000 shares issued and outstanding
    as of December 31, 2003 and 2002; aggregate liquidation
    preference of $6,035,000 as of December 31, 2002    |  | $            |  |      |  | $ | 7,246,186   | 
|Series C Preferred Stock, at redemption
    value, $0.001 par value, 0 and 13,100,000 shares
    authorized; 0 and 13,090,910 shares issued and outstanding
    as of December 31, 2003 and 2002; aggregate liquidation
    preference of $18,000,000 as of December 31, 2002 |  |              |  |      |  |   | 21,644,880  | 
|Series D Preferred Stock, at redemption
    value, $0.001 par value, 0 and 49,425,000 shares
    authorized; 0 and 49,000,696 shares issued and outstanding
    as of December 31, 2003 and 2002; aggregate liquidation
    preference of $67,375,957 as of December 31, 2002 |  |              |  |      |  |   | 77,674,525  | 
|                                                                                                                                                                                                                                                                              |  |              |   |      |  |   |             | 
|Total mandatorily redeemable convertible
    preferred stock                                                                                                                                                                                                                  |  | $            |  |      |  | $ | 106,565,591 | 
|                                                                                                                                                                                                                                                                              |  |              |   |      |  |   |             | 



| |         
| | --------
| | Series A

During 1998, the Company issued
6,000,000 shares of Series A Preferred Stock at
$1.00 per share in a private placement to accredited
investors for proceeds of $5,967,394, net of $32,606 in issuance
costs. In addition, the Company issued 35,000 shares of
Series A Preferred Stock in exchange for services and
accounted for these shares based upon the estimated value of the
shares at the issuance date.

Upon the initial closing of our initial public
offering on November 4, 2003, these 6,035,000 shares
of Series A Preferred Stock were automatically converted
into 1,206,998 shares of common stock.



| |         
| | --------
| | Series C

During 1999, the Company issued
13,090,910 shares of Series C Preferred Stock at
$1.375 per share in a private placement to accredited
investors for proceeds of $17,941,567, net of $58,434 in
issuance costs.

F-23



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Upon the initial closing of our initial public
offering on November 4, 2003, these 13,090,910 shares
of Series C Preferred Stock were automatically converted
into 2,618,175 shares of common stock.



| |         
| | --------
| | Series D

During 2001, the Company issued
49,000,696 shares of Series D Preferred Stock at
$1.375 per share in a private placement to accredited
investors for proceeds of $63,307,255, net of $4,068,702 in
issuance costs.

On August 27, 2003, the Company issued
29,090,908 shares of Series D Preferred Stock at
$1.375 per share and received proceeds of $39,935,388, net
of issuance costs of $64,611. In the third quarter of 2003, the
Company recorded a beneficial conversion charge, which was
calculated as the difference between the offering price and the
fair value of the underlying common stock, and limited to the
amount of proceeds allocated to the Series D Preferred
Stock in accordance with EITF No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios. The Company
extended the date for when the Company may be required to redeem
the Senior Preferred Stock from August 21, 2007 to
August 26, 2009.

Upon the initial closing of our initial public
offering on November 4, 2003, these 78,091,604 shares
of Series D Preferred Stock were automatically converted
into 15,618,300 shares of common stock.

Prior to the conversion of such shares of
preferred stock upon the effectiveness of the initial public
offering, the holders of the Senior Preferred Stock (which
comprises the Series A, C and D preferred stock) had the
following rights and preferences:



| |              
| | -------------
| | Voting Rights

The holders of the Senior Preferred Stock, voting
equally with the shares of common stock, were entitled to vote
upon any matter submitted to the stockholders; however, for as
long as at least 1,500,000 shares of Senior Preferred Stock
remained outstanding, the holders of at least 65% of the
outstanding Senior Preferred Stock, voting together as a single
class on an as-converted to common stock basis, were necessary
for effecting or validating certain transactions or events,
including changes to the capital structure of the Company. In
addition, certain transactions or events required a majority
vote of each class of Senior Preferred Stock.



| |          
| | ---------
| | Dividends

The holders of Senior Preferred Stock were
entitled to receive non-cumulative cash dividends at a rate of
8% of the respective original issue price per annum, prior and
in preference to any dividend on Series B Preferred Stock
and common stock. Dividends were payable only when, as and if
declared by the Board of Directors. No dividends were declared
prior to conversion.



| |            
| | -----------
| | Liquidation

In the event of any liquidation, dissolution or
winding up of the Company, the holders of Senior Preferred Stock
were entitled to receive in exchange for and in redemption of
each share of Senior Preferred Stock, prior and in preference to
Series B Preferred Stock and common stock, an amount equal
to the applicable original issue price for such shares, plus all
declared and unpaid dividends on such shares. After payment of
the full liquidation preference to the Senior Preferred Stock,
any remaining assets were to be distributed ratably to the
holders of all preferred stock, on an as-converted to common
stock basis, and common stock until the holders of all preferred
stock have received an aggregate amount per share equal to three
times the applicable original issue price; thereafter, the
holders of common stock, after conversion, were to receive all
of the remaining assets in proportion to their applicable share.

F-24



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |           
| | ----------
| | Conversion

The Senior Preferred Stock was convertible, at
the option of the holder, at any time after the date of
issuance, into fully-paid non-assessable shares of common stock
as determined by dividing the respective original issue price by
the conversion price in effect on the date of the certificate
surrendered for conversion. The conversion price was the
respective original issue price as adjusted for certain dilutive
issuances, splits, reorganizations, combinations and other
factors. Upon the effective date of the common stock split, the
conversion ratio was five preferred shares for each common share.

Automatic conversion was to occur immediately
upon the earlier of (i) the closing of a firmly
underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, at a
per share price of at least 1.5 times the original issue price,
as adjusted, of Series D Preferred Stock and cash proceeds
to the Company of at least $25,000,000 or (ii) upon the
date of affirmative consent from at least 65% of the outstanding
shares of all preferred stock, voting together as a single
class. These shares automatically converted on November 4,
2003, the date of the initial closing of our initial public
offering.



| |           
| | ----------
| | Redemption

The holders of at least 65% of the then
outstanding shares of Senior Preferred Stock, voting together as
a single class, were entitled to require the Company to redeem
the Senior Preferred Stock in three equal annual installments
beginning on August 26, 2009, provided the Company received
a written notice of such election at least 60 days prior to
such date. The Company was obligated to redeem the Senior
Preferred Stock for an amount per share equal to the applicable
conversion price, plus interest calculated at 15% per annum
beginning from the Series D Preferred Stock original issue
date (August 21, 2001) on each outstanding share of Senior
Preferred Stock based on the applicable conversion price, plus
any declared and unpaid dividends on the Senior Preferred Stock.
In August 2001, the Company amended and restated its Certificate
of Incorporation in conjunction with the initial issuance of its
Series D preferred stock. Prior to August 2001, holders of
at least 65% of the then outstanding shares of Senior Preferred
Stock could require the Company to redeem the Senior Preferred
Stock beginning in November 2005 for an amount per share equal
to the applicable conversion price, plus interest calculated at
15% per annum beginning from the original issue date of the
Series C Preferred Stock (November 1999).

The holders of the Senior Preferred Stock were
subject to automatic redemption in the event of any
consolidation or merger of the Company, or sale of all or
substantially all of the Companys assets in which the
stockholders of the Company immediately prior to the transaction
hold less than fifty percent of the outstanding securities of
the surviving entity.

The redemption values of the Senior Preferred
Stock outstanding as of December 31, 2001 and 2002 were
derived by accreting 15% interest from August 21, 2001 on
such stock, plus the accretion of the respective issuance costs.
As of December 31, 2002, the redemption values of
Series A Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock were $7,246,186, $21,644,880 and
$77,674,525, respectively.



| |                            
| | ---------------------------
| | Convertible Preferred Stock



| |         
| | --------
| | Series B

During 2000, the Company issued
803,606 shares of Series B Preferred Stock and
warrants to purchase 35,000 shares of common stock (see
Note 10) to the University of Texas System and
affiliated individuals, at a deemed value of $1.375 per
share, in a private placement for a license with a total
assigned value of $1,104,958.

F-25



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Upon the initial closing of the Companys
initial public offering on November 4, 2003, these
803,606 shares of Series B Preferred Stock were
automatically converted into 160,713 shares of common stock.

The holders of the Series B Preferred Stock
had the following rights and preferences:



| |              
| | -------------
| | Voting Rights

The holders of the Series B Preferred Stock,
voting equally with the shares of common stock, were entitled to
vote upon any matter submitted to the stockholders. Certain
transactions or events required the majority vote of the
Series B Preferred Stock.



| |          
| | ---------
| | Dividends

The holders of the Series B Preferred Stock
were entitled to receive non-cumulative cash dividends at a rate
of 8% of the original issue price per annum, prior and in
preference to any dividend on common stock. No dividend was to
have been paid on the Series B Preferred Stock unless an
applicable dividend shall have been paid on the Senior Preferred
Stock. Dividends were payable only when, as and if declared by
the Board of Directors. No dividends were declared prior to the
conversion.



| |            
| | -----------
| | Liquidation

In the event of any liquidation, dissolution or
winding up of the Company, after payment of the full liquidation
preference to the Senior Preferred Stock, any remaining assets
were to be distributed ratably to the holders of all preferred
stock, on an as-converted to common stock basis, and common
stock until the holders of all preferred stock had received an
aggregate amount per share equal to three times the applicable
original issue price; thereafter, the holders of common stock,
after conversion, were to receive all of the remaining assets in
proportion to their applicable share.



| |           
| | ----------
| | Conversion

The Series B Preferred Stock was
convertible, at the option of the holder, at any time after the
date of issuance, into fully-paid non-assessable shares of
common stock as determined by dividing the original issue price
by the conversion price in effect on the date of the certificate
surrendered for conversion. The conversion price was the
original issue price as adjusted for certain dilutive issuances,
splits, reorganizations, combinations, and certain other
factors. Upon the effective date of the common stock split, the
conversion ratio was five preferred shares for each common share.

Automatic conversion was to occur immediately
upon the earlier of (i) the closing of a firmly
underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, at a
per share price of at least 1.5 times the original issue price,
as adjusted, of Series D Preferred Stock and cash proceeds
to the Company of at least $25,000,000 or (ii) upon the
date of affirmative consent from at least 65% of the outstanding
shares of all preferred stock, voting together as a single
class. These shares automatically converted on November 4,
2003, the date of the initial closing of our initial public
offering.



| |           
| | ----------
| | Redemption

The holders of the Series B Preferred Stock
were subject to automatic redemption in the event of any
consolidation or merger of the Company, or sale of all or
substantially all of the Companys assets in which the
stockholders of the Company immediately prior to the transaction
hold less than fifty percent of the outstanding securities of
the surviving entity.

F-26



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On October 24, 2003, the Company effected a
one-for-five reverse stock split. All references in the
consolidated financial statements to common shares, common share
prices and per common share amounts have been adjusted
retroactively for all periods presented to reflect this stock
split. The Companys actual preferred shares, preferred
share prices and per preferred share amounts have not been
adjusted for this stock split. However, as a result of the stock
split, the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock conversion ratios have been adjusted from
one-to-one to five-to-one.



|    |                               
|--- | ------------------------------
|10. | Stockholders Equity/(Deficit)



| |             
| | ------------
| | Common Stock

In 1998, the Company issued 147,907 shares
of restricted common stock to two officers of the Company in
exchange for $73,512 in notes receivable (the
Notes). The shares of restricted stock were subject
to vesting and, in 2002, all shares became fully vested and the
Notes were collected in full.

On August 27, 2003, the Company increased
the authorized number of shares of common stock from
17,375,000 shares to 24,221,913 shares.

On October 24, 2003, the Company effected a
one-for-five reverse stock split. All references in the
consolidated financial statements to common shares, common share
prices and per common share amounts have been adjusted
retroactively for all periods presented to reflect this stock
split. The Companys actual preferred shares, preferred
share prices and per preferred share amounts have not been
adjusted for this stock split. However, as a result of the stock
split, the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock conversion ratios have been adjusted from
one-to-one to five-to-one.

On November 4, 2003, the Company completed
an initial public offering of 5,000,000 shares of its
common stock. On November 7, 2003, the public offering
underwriters completed the exercise of their
over-allotment option for an additional 750,000 shares.
Concurrent with the closing of the initial public offering, all
of the 98,021,120 shares of convertible preferred stock
outstanding automatically converted into common stock at a
five-to-one ratio, resulting in the issuance of
19,604,186 shares of common stock and the Company increased
the authorized number of shares of common stock to
100,000,000 shares and decreased the authorized number of
undesignated preferred shares to 5,000,000 shares. The
Company received net proceeds of $73,325,170 from its initial
public offering, net of $7,174,830 in expenses and
underwriters discount relating to the issuance and
distribution of the securities.



| |         
| | --------
| | Warrants

In December 2002, the Company issued warrants to
purchase 327,273 shares of Series D Preferred Stock
with an exercise price of $1.375 per share to certain
financial institutions in connection with a term loan. Upon the
conversion of the Preferred Stock into common stock in November
2003, these warrants became exercisable for 65,453 shares
of common stock with an exercise price of $6.875 per share.
The Company allocated the proceeds between the warrants and the
term loan in accordance with the provisions of APB No. 14,
Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants (APB 14). Upon date of
grant, the warrants were ascribed a relative fair value of
$412,844 using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%; estimated
volatility of 100%; risk-free interest rate of 2.8% and a
contractual life of ten years. This amount was recorded as a
debt discount and is amortized over the three-year term of the
loan. The life of the warrants is equal to ten years from the
date of grant. As of December 31, 2003, the warrants
remained outstanding.

F-27



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In 2000, the Company issued warrants to purchase
35,000 shares of common stock to certain stockholders in
connection with the issuance shares of Series B Preferred
Stock. As of December 31, 2002, all such warrants were
exercised.

In 2000, the Company issued a warrant to purchase
9,090 shares of Series C Preferred Stock with an
exercise price of $1.375 per share to a financial
institution in connection with a term loan. Upon the conversion
of the Preferred Stock into common stock in November 2003, this
warrant became exercisable for 1,818 shares of common stock
with an exercise price of $6.875 per share. The Company
allocated the proceeds between the warrant and the term loan in
accordance with the provisions of APB 14. Upon date of
grant, the warrant was ascribed a relative fair value of $10,815
using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; estimated volatility of 100%;
risk-free interest rate of 6.6% and a contractual life of ten
years. As of December 31, 2003, the warrant remained
outstanding.

The Company has reserved 67,271 shares of
common stock to meet its warrant obligations.



|    |                                    
|--- | -----------------------------------
|11. | Stock Options and Employee Benefits

In July 1998, the Board of Directors approved the
Companys 1998 Equity Incentive Plan, under which the
Company may grant options, stock bonuses, stock appreciation
rights and rights to purchase stock to officers, employees,
consultants and directors. In September 2003, the Board of
Directors approved the amendment and restatement of the 1998
Equity Incentive Plan as the 2003 Equity Incentive Plan (as
amended and restated, the Plan), which became
effective upon the initial closing of the initial public
offering on November 4, 2003. The options are intended to
qualify as incentive stock options under
Section 422 of the Internal Revenue Code, unless
specifically designated as non-qualifying stock options or
unless exceeding the applicable statutory limit.

At December 31, 2003, the Company had
reserved an aggregate of 3,581,260 shares of common stock
for issuance under the Plan and 851,868 options were available
for grant. Options granted may be exercised for a period of not
more than ten years from the date of grant or any shorter period
as determined by the Board of Directors. Options vest as
determined by the Board of Directors, generally over a four-year
period, subject to acceleration upon the occurrence of certain
events. The option price of any incentive stock option shall
equal or exceed the fair value per share on the date of grant as
determined by the Companys Board of Directors prior to the
initial public offering or market closing price after the
initial public offering, or 110% of the fair value per share in
the case of a 10% or greater stockholder.

F-28



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Activity of the Plan is summarized in the
following table:

|                                 |                        |                                            |           |                  |   |             |      |                  |  |  |         |  |  |   |      |  | 
|-------------------------------- | ---------------------- | ------------------------------------------ | --------- | ---------------- | - | ----------- | ---- | ---------------- |  |  | ------- |  |  | - | ---- |  | 
|                                 |                        |                                           
|                                 |                        | Incentive and Non-Qualifying Stock Options
|                                 |                        |                                           
|                                 |                        | Number of                                  |           | Weighted Average |   | Options     |      | Weighted Average
|                                 |                        | Shares                                     |           | Exercise Price   |   | Exercisable |      | Exercise Price  
|                                 |                        |                                            |           |                  |   |             |      |                 
|Outstanding at December 31, 1997 |                        |                                            |          |                  |   | $           |     |                  |  |  |        |  |  |   |     | 
|                                 | Granted (at market)    |                                            |           | 61,500           |   |             | $    | 0.50             |  |  |         |  |  |   |      |  | 
|                                 | Exercised              |                                            |           |                 |   |             | $    |                 |  |  |         |  |  |   |      |  | 
|                                 | Canceled               |                                            |           | (3,000           | ) |             | $    | 0.50             |  |  |         |  |  |   |      |  | 
|                                 |                        |                                            |           |                  |   |             |      |                  |  |  |         |  |  |   |      | 
|Outstanding at December 31, 1998 |                        |                                            | 58,500    |                  |   | $           | 0.50 |                  |  |  |        |  |  |   |     | 
|                                 | Granted (at market)    |                                            |           | 29,500           |   |             | $    | 0.81             |  |  |         |  |  |   |      |  | 
|                                 | Exercised              |                                            |           |                 |   |             | $    |                 |  |  |         |  |  |   |      |  | 
|                                 | Canceled               |                                            |           | (600             | ) |             | $    | 0.50             |  |  |         |  |  |   |      |  | 
|                                 |                        |                                            |           |                  |   |             |      |                  |  |  |         |  |  |   |      | 
|Outstanding at December 31, 1999 |                        |                                            | 87,400    |                  |   | $           | 0.61 |                  |  |  | 14,325  |  |  | $ | 0.50 | 
|                                 | Granted (at market)    |                                            |           | 240,300          |   |             | $    | 1.15             |  |  |         |  |  |   |      |  | 
|                                 | Exercised              |                                            |           | (17,896          | ) |             | $    | 0.60             |  |  |         |  |  |   |      |  | 
|                                 | Canceled               |                                            |           | (1,000           | ) |             | $    | 1.15             |  |  |         |  |  |   |      |  | 
|                                 |                        |                                            |           |                  |   |             |      |                  |  |  |         |  |  |   |      | 
|Outstanding at December 31, 2000 |                        |                                            | 308,804   |                  |   | $           | 1.03 |                  |  |  | 25,568  |  |  | $ | 0.68 | 
|                                 | Granted (at market)    |                                            |           | 1,123,800        |   |             | $    | 1.25             |  |  |         |  |  |   |      |  | 
|                                 | Granted (above market) |                                            |           | 38,240           |   |             | $    | 2.50             |  |  |         |  |  |   |      |  | 
|                                 | Exercised              |                                            |           | (17,508          | ) |             | $    | 0.85             |  |  |         |  |  |   |      |  | 
|                                 | Canceled               |                                            |           | (10,962          | ) |             | $    | 1.15             |  |  |         |  |  |   |      |  | 
|                                 |                        |                                            |           |                  |   |             |      |                  |  |  |         |  |  |   |      | 
|Outstanding at December 31, 2001 |                        |                                            | 1,442,374 |                  |   | $           | 1.25 |                  |  |  | 146,226 |  |  | $ | 1.13 | 
|                                 | Granted (below market) |                                            |           | 474,280          |   |             | $    | 1.25             |  |  |         |  |  |   |      |  | 
|                                 | Granted (at market)    |                                            |           | 180,724          |   |             | $    | 1.25             |  |  |         |  |  |   |      |  | 
|                                 | Exercised              |                                            |           | (79,508          | ) |             | $    | 1.20             |  |  |         |  |  |   |      |  | 
|                                 | Canceled               |                                            |           | (84,829          | ) |             | $    | 1.25             |  |  |         |  |  |   |      |  | 
|                                 |                        |                                            |           |                  |   |             |      |                  |  |  |         |  |  |   |      | 
|Outstanding at December 31, 2002 |                        |                                            | 1,933,041 |                  |   | $           | 1.25 |                  |  |  | 459,109 |  |  | $ | 1.22 | 
|                                 | Granted (below market) |                                            |           | 850,427          |   |             | $    | 4.35             |  |  |         |  |  |   |      |  | 
|                                 | Granted (at market)    |                                            |           | 26,500           |   |             | $    | 13.61            |  |  |         |  |  |   |      |  | 
|                                 | Exercised              |                                            |           | (79,380          | ) |             | $    | 1.06             |  |  |         |  |  |   |      |  | 
|                                 | Canceled               |                                            |           | (1,196           | ) |             | $    | 1.24             |  |  |         |  |  |   |      |  | 
|                                 |                        |                                            |           |                  |   |             |      |                  |  |  |         |  |  |   |      | 
|Outstanding at December 31, 2003 |                        |                                            | 2,729,392 |                  |   | $           | 2.34 |                  |  |  | 986,041 |  |  | $ | 1.43 | 
|                                 |                        |                                            |           |                  |   |             |      |                  |  |  |         |  |  |   |      | 

F-29



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The total options outstanding and exercisable
under the Plan as of December 31, 2003 are as follows:

|                |  |                     |           |             |  |          |      |                     |  |          |       |  |  |  |         |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ----------- |  | -------- | ---- | ------------------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                |  |                     |           |             |  |         
|                |  | Options Outstanding |           |             |  |         
|                |  |                     |           |            
|                |  |                     |           | Weighted    |  |          |      | Options Exercisable
|                |  |                     |           | Average     |  |          |      |                    
|                |  |                     |           | Remaining   |  | Weighted |      |                     |  | Weighted
|                |  |                     |           | Contractual |  | Average  |      |                     |  | Average 
|                |  | Number of           |           | Life        |  | Exercise |      | Number of           |  | Exercise
|Exercise Prices |  | Shares              |           | (Years)     |  | Price    |      | Shares              |  | Price   
|                |  |                     |           |             |  |          |      |                     |  |         
|$0.50           |  |                     | 21,001    |             |  |          | 4.87 |                     |  | $        | 0.50  |  |  |  | 21,001  |  |  | $ | 0.50  | 
|$1.15           |  |                     | 133,593   |             |  |          | 6.26 |                     |  | $        | 1.15  |  |  |  | 120,121 |  |  | $ | 1.15  | 
|$1.25           |  |                     | 1,816,632 |             |  |          | 8.12 |                     |  | $        | 1.25  |  |  |  | 801,893 |  |  | $ | 1.25  | 
|$2.50           |  |                     | 72,169    |             |  |          | 8.23 |                     |  | $        | 2.50  |  |  |  | 28,714  |  |  | $ | 2.50  | 
|$5.00           |  |                     | 614,997   |             |  |          | 9.65 |                     |  | $        | 5.00  |  |  |  |        |  |  | $ | 5.00  | 
|$6.88-$7.50     |  |                     | 46,000    |             |  |          | 8.18 |                     |  | $        | 7.45  |  |  |  | 4,312   |  |  | $ | 7.50  | 
|$13.57-$16.00   |  |                     | 25,000    |             |  |          | 9.90 |                     |  | $        | 14.35 |  |  |  | 10,000  |  |  | $ | 15.51 | 
|                |  |                     |           |             |  |          |      |                     |  |          |       |  |  |  |         |  |  |   |       | 
|                |  |                     | 2,729,392 |             |  |          | 8.37 |                     |  | $        | 2.34  |  |  |  | 986,041 |  |  | $ | 1.43  | 
|                |  |                     |           |             |  |          |      |                     |  |          |       |  |  |  |         |  |  |   |       | 

The per share weighted average grant date fair
value of options granted at market value under the Plan during
2003, 2002 and 2001 was $11.68, $0.89 and $0.22, respectively.
The per share weighted average grant date fair value of options
granted below market value under the Plan during 2003 and 2002
was $11.21 and $4.32, respectively.



| |                         
| | ------------------------
| | Stock-Based Compensation

In connection with certain option grants to
employees, the Company recognized $8,317,386, $1,841,472 and $0
of deferred stock-based compensation for the years ended
December 31, 2003, 2002 and 2001, respectively, for the
excess of the fair value of the Companys common stock over
the exercise price of the option at the date of grant. Of these
amounts, the Company recognized stock-based compensation expense
of $3,412,815, $392,119 and $0 for the years ended
December 31, 2003, 2002 and 2001, respectively. Stock-based
employee compensation expense is recognized over the option
vesting period using the multiple option method as prescribed by
FASB Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans, an Interpretation of APB Opinions No. 15 and 25
(FIN 28).

During the years ended December 31, 2003,
2002 and 2001, the Company granted 47,000, 34,425 and
73,000 options, respectively, to consultants. The Company
recorded deferred stock-based compensation of $878,373, $446,524
and $82,346 related to such grants in 2003, 2002 and 2001,
respectively, of which $779,441, $289,124 and $37,996 was
recognized in operations in 2003, 2002 and 2001, respectively.
The fair values of these options are calculated at each
reporting date using the Black-Scholes option-pricing model. As
a result, the stock-based compensation expense will fluctuate as
the fair value of the Companys common stock fluctuates.
The Company believes that the fair values of the options are
more reliably measurable than the fair value of the services
received. The following weighted average assumptions were used
in the Black-Scholes option-pricing model:

|                         |  |      |            |      |  |      |      |   |  |  |      |  
|------------------------ |  | ---- | ---------- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                         |  | 2003 |            | 2002 |  | 2001
|                         |  |      |            |      |  |     
|Risk-free interest rate  |  |      | 2.74- 3.36 | %    |  |      | 3.06 | % |  |  | 5.85 | %
|Expected life (in years) |  |      | 10         |      |  |      | 10   |   |  |  | 10   |  
|Expected volatility      |  |      | 100        | %    |  |      | 100  | % |  |  | 100  | %
|Expected dividend yield  |  |      | 0          | %    |  |      | 0    | % |  |  | 0    | %

F-30



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |            
| | -----------
| | 401(k) Plan

The Companys employee savings and
retirement plan is qualified under Sections 401(a) and
401(k) of the Internal Revenue Code of 1986, as amended.
Eligible employees may elect to defer their current compensation
up to the statutorily prescribed annual limits and have the
amount of such reduction contributed to the 401(k) Plan. As of
December 31, 2003, the Company had not made any matching or
additional contributions to the 401(k) Plan on behalf of its
employees.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

The Company adopted an employee stock purchase
plan in 2003, in which substantially all of its employees are
eligible to participate. The Board of Directors has the
authority to set the terms of an offering and may specify
offering periods of up to 27 months. The plan allows
participants to purchase Myogen common stock through payroll
deductions at a price 15% less than the lower of the closing
price for the beginning of the offering period or the purchase
date. As of December 31, 2003, the plan allowed for the
issuance of 100,000 shares of common stock to eligible
employees. If an offering is approved, participants may
contribute up to 15% of their annual compensation to the plan,
subject to certain limitations. During 2003, no shares were
issued pursuant to this plan, and no offering was approved as of
December 31, 2003.



|    |             
|--- | ------------
|12. | Income Taxes

The components of loss before income taxes
consisted of the following for the years ended:

|                         |  |              |             |      |  |      |             |   |  |   |             |  
|------------------------ |  | ------------ | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                         |  |             
|                         |  | December 31,
|                         |  |             
|                         |  | 2003         |             | 2002 |  | 2001
|                         |  |              |             |      |  |     
|Domestic                 |  | $            | (43,201,630 | )    |  | $    | (28,084,751 | ) |  | $ | (17,189,218 | )
|Foreign                  |  |              | 93,143      |      |  |      | 55,476      |   |  |   | 77,866      |  
|                         |  |              |             |      |  |      |             |   |  |   |             |  
|Loss before income taxes |  | $            | (43,108,487 | )    |  | $    | (28,029,275 | ) |  | $ | (17,111,352 | )
|                         |  |              |             |      |  |      |             |   |  |   |             |  

The current provision for income taxes for the
years ended December 31, 2003, 2002 and 2001 consisted of
foreign expense of $39,346, $18,304 and $3,147, respectively.

F-31



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The income tax effects of temporary differences
that give rise to significant portions of the Companys net
deferred tax assets are as follows:

|                                                        |                                  |                                |             |            |            |   |             |            |            |  
|------------------------------------------------------- | -------------------------------- | ------------------------------ | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | -
|                                                        |                                  |                               
|                                                        |                                  | December 31,                  
|                                                        |                                  |                               
|                                                        |                                  | 2003                           |             | 2002      
|                                                        |                                  |                                |             |           
|Deferred tax assets:                                    |                                  |                                |             |            |            |   |             |           
|                                                        | Net operating loss carryforwards |                                | $           | 31,485,487 |            |   | $           | 18,795,933 |           
|                                                        | Amortization of intangibles      |                                |             | 4,894,938  |            |   |             | 3,981,158  |           
|                                                        | Research and development credits |                                |             | 1,423,790  |            |   |             | 200,000    |           
|                                                        | Deferred revenue                 |                                |             | 1,283,655  |            |   |             |           |           
|                                                        | Other                            |                                |             | 491,055    |            |   |             | 35,812     |           
|                                                        |                                  |                                |             |            |            |   |             |           
|                                                        |                                  | Total deferred tax assets      |             |            | 39,578,925 |   |             |            | 23,012,903 |  
|Deferred tax liabilities:                               |                                  |                                |             |            |            |   |             |           
|                                                        | Depreciable assets               |                                |             | (88,216    | )          |   |             | (36,340    | )         
|                                                        |                                  |                                |             |            |            |   |             |           
|                                                        |                                  | Total deferred tax liabilities |             |            | (88,216    | ) |             |            | (36,340    | )
|                                                        |                                  |                                |             |            |            |   |             |           
|Net deferred tax assets, before valuation
    allowance |                                  |                                | 39,490,709  |            |            |   | 22,976,563  |           
|Valuation allowance                                     |                                  |                                | (39,490,709 | )          |            |   | (22,976,563 | )         
|                                                        |                                  |                                |             |            |            |   |             |           
|Net deferred tax assets                                 |                                  | $                              |            |            |            | $ |            |           
|                                                        |                                  |                                |             |            |            |   |             |           

The Companys ability to realize the benefit
of its deferred tax assets will depend on the generation of
future taxable income through profitable operations. Due to the
uncertainty of achieving profitable operations, the Company has
recorded a full valuation allowance against its deferred tax
assets.

The provision for income taxes differs from the
amount computed by applying the federal income tax rate of 35%
for 2003, 2002 and 2001 to the loss before income taxes as
follows for the years ended:

|                                                       |  |              |             |      |  |      |            |   |  |   |            |  
|------------------------------------------------------ |  | ------------ | ----------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                       |  |             
|                                                       |  | December 31,
|                                                       |  |             
|                                                       |  | 2003         |             | 2002 |  | 2001
|                                                       |  |              |             |      |  |     
|U.S. federal income tax benefit at statutory
    rates |  | $            | (15,087,971 | )    |  | $    | (9,810,246 | ) |  | $ | (5,988,973 | )
|Permanent differences                                  |  |              | 1,063,470   |      |  |      | 123,481    |   |  |   | 9,848      |  
|Research and development credits                       |  |              | (1,223,790  | )    |  |      | (200,000   | ) |  |   |           |  
|Change in income tax rate                              |  |              |            |      |  |      |           |   |  |   | (150,022   | )
|Foreign income taxes greater than 35%                  |  |              | 6,748       |      |  |      | (1,110     | ) |  |   | (10,906    | )
|State income tax benefit, net of federal benefit       |  |              | (1,233,257  | )    |  |      | (891,375   | ) |  |   | (549,016   | )
|Change in valuation allowance                          |  |              | 16,514,146  |      |  |      | 10,797,554 |   |  |   | 6,692,216  |  
|                                                       |  |              |             |      |  |      |            |   |  |   |            |  
|                                                       |  | $            | 39,346      |      |  | $    | 18,304     |   |  | $ | 3,147      |  
|                                                       |  |              |             |      |  |      |            |   |  |   |            |  

As of December 31, 2003, the Company had
$82.3 million of net operating loss carryforwards and
$1.4 million of research and development credits available
to offset future regular and alternative taxable income. These
net operating loss carryforwards and research development
credits will expire beginning in 2011 and 2019, respectively.
The Internal Revenue Code places certain limitations on the
annual amount of net operating loss carryforwards which can be
utilized if certain changes in the Companys ownership
occur. Changes in the Companys ownership may limit the use
of such carryforward benefits.

F-32



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##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                
|--- | -------------------------------
|13. | Royalty and License Commitments

From time to time, the Company enters into
royalty and license agreements (the Agreements) with
universities, companies, research groups and others, resulting
in certain commitments. The Company may terminate such
Agreements at any time, generally with 30 days to 6 months
written notice. The Company has expensed $7,442,000, $3,621,000
and $5,489,000 related to the Agreements for the years ended
December 31, 2003, 2002 and 2001, respectively.

The Agreements are summarized as follows:

In September 1998, the Company entered into a
license agreement with University License Equity Holdings, Inc.,
(formerly University Technology Corporation),
(ULEHI) under which ULEHI granted to the Company an
exclusive, worldwide license to practice, develop and use
certain of ULEHIs technology and licensed patent rights to
develop and market licensed products. In exchange for the
license agreement, the Company made a small upfront payment and
issued 46,542 shares of its common stock valued at
$0.50 per share. Under the license agreement, the Company
will be required to pay an annual license maintenance fee and
quarterly royalty payments based on a percentage of net
quarterly product sales. The terms of the agreement also require
the Company to pay for all costs related to obtaining and
maintaining patents on the technology. As of December 31,
2003, no royalty payments have been made and no royalty payments
are due. The Company incurred a $25,000 sublicense fee to ULEHI
under this agreement, which is accrued at December 31,
2003. This agreement was amended in November 2003 to modify the
royalty structure and to include milestone payments for any
drugs developed from the licensed technology, up to a maximum of
$400,000 in the case of a drug for which an application for
marketing approval is filed.

In October 1998, the Company entered into a
license agreement with Hoechst Marion Roussel, Inc., now
Aventis, to obtain an exclusive worldwide license for the right
to develop and commercialize enoximone. On November 23,
1999, the Company and Aventis amended the licensing agreement,
reducing annual payments required under the agreement. As of
December 31, 2003, the Company has made $5.5 million
in license payments under this agreement. No additional
milestone payments are due under this agreement. The Company
pays Aventis royalties based on sales.

In December 1999, the Company entered into a
license agreement with the Board of Regents of the University of
Texas System (UTS) to obtain certain patent and
technology rights. Under the agreement, the Company is required
to make payments totaling $3.2 million on achieving certain
milestone objectives beginning with the initiation of
Phase I clinical trials and through the approval of a new
drug application for a licensed or identified product. In
addition, the Company will be required to pay an annual license
fee of $50,000 on each anniversary of the effective date,
beginning on the termination of the University of Texas
Southwestern Medical Center (UTSWMC) Sponsored
Research Agreement, as defined below. This license agreement is
also subject to the terms of the Sponsored Research Agreement
entered into concurrently with the Patent and Technology License
Agreement, under which the Company currently pays $250,000 per
annum through March 31, 2007. As of December 31, 2003,
the Company had accrued $162,500 in accounts payable to a
related party under this agreement for a sublicense fee.

In January 2000, the Company entered into a
Patent License Agreement with the University and the University
of North Texas Health Science Center at Fort Worth
(UNTHSC) which grants the Company exclusive rights, with
the right to sublicense, to certain patents and technology
relating to cardiac hypertrophy. This exclusive license may be
subject to certain rights of the U.S. Government to the extent
any of the licensed subject matter is developed under a
governmental funding agreement. In consideration for the
license, the Company is obligated to pay an annual license fee
of $50,000 per year, a percentage of sublicense revenue and
royalties based upon net sales. Additionally, the Company is
obligated to make milestone payments for

F-33



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

any drugs developed from the licensed technology,
up to a maximum of $3.2 million in the case of a drug for
which a marketing application is approved.

In January 2000, the Company issued 803,606
shares of Series B Preferred Stock in connection with the
license agreements entered into in December 1999 and January
2000 with the University and UNTHSC.

Concurrent with the UTS licensing agreement, the
Company entered into a Sponsored Research Agreement with UTSWMC
for a term of three years. As consideration for the research
performed by UTSWMC, the Company is required to pay the related
expenses, plus other indirect costs of such research. In 2002,
total payments made under the agreement and expensed to research
and development were $360,000, of which $62,500 was included in
accounts payable to a related party at December 31, 2002.
This agreement will terminate on March 31, 2007, unless
terminated earlier under the terms of the agreement.

In October 2001, the Company entered into an
agreement with Abbott Laboratories for the exclusive license to
develop and commercialize ambrisentan, an endothelin receptor
antagonist compound. Under the agreement, the Company is
required to make payments on attainment of certain milestone
objectives. In addition, the Company was required to reimburse
Abbott for costs related to the development expenditures already
incurred by them as of the effective date of the agreement. The
Company has made license and cost-reimbursement payments
totaling $5.8 million in the past and an additional
cost-reimbursement payment for additional feasibility and
evaluation studies performed on the Companys behalf of
$690,225 is accrued at December 31, 2003. Milestone
payments totaling $6.0 million will be made in the future
if the agreement remains in effect through the successful
commercialization of ambrisentan in pulmonary arterial
hypertension.

In June 2003, the Company entered into a license
agreement with Abbott under which the Company received an
exclusive worldwide license from Abbott to develop and
commercialize darusentan. In consideration for the license, the
Company paid Abbott initial license fees of $5.0 million
and are obligated to make future milestone payments totaling
$25.0 million if the Company successfully commercializes
the drug for a single indication. Additional milestone payments
would be due if the Company commercializes darusentan for
additional indications. However, in no event would the Company
be obligated to pay more than $50.0 million in total
milestone and license fees. In addition, the Company will owe
royalties based on net sales of darusentan. If the Company seeks
a co-promotion arrangement for darusentan in any country or
group of countries, Abbott has the right of first negotiation.
Abbott also has the option to be the exclusive development and
commercialization partner for darusentan in Japan, upon terms to
be negotiated. If the Company does not commercialize darusentan
in certain markets, Abbott may market the product on its own in
the affected countries, paying the Company a royalty on its
sales. The Company must use reasonable commercial diligence to
develop and commercialize darusentan and to meet milestones in
completing certain clinical work. The term of the agreement is
indefinite, however, either party may terminate the agreement
under certain circumstances, including a material breach of the
agreement by the other.

In February 2002, the Company entered into a
Sponsored Research Agreement with the Board of Regents of the
University of Wisconsin System (UWS), effective
October 2001. Under the terms of the agreement, the Company is
required to reimburse UWS for all direct and indirect costs of
such research up to a maximum amount. Total payments made under
the agreement in 2003 and 2002 were $210,657 and $337,050,
respectively. This agreement will terminate on March 31,
2005, unless terminated earlier by its terms. The Company has an
obligation to pay a total of an additional $294,920 in 2004 and
2005.

During 2002, the Company entered into a
collaborative research agreement with an unrelated third party
associated with the Companys EMPOWER study. Under this
agreement, the Company is entitled to certain milestone payments
in conjunction with the Phase III study. As of
December 31, 2003, the Company accrued $644,940 under this
agreement which is reflected as a reduction in research and
development expense as costs

F-34



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

are incurred. In 2003, $355,060 of research and
development expenses were reduced under this agreement as the
unrelated third party does not obtain any rights to the research
or drug candidates.

On October 8, 2003, the Company entered into
a research collaboration with the Novartis Institutes for
BioMedical Research, Inc. (Novartis) for the
discovery and development of novel drugs for the treatment of
cardiovascular disease. In exchange for a $4.0 million
upfront payment, a deferred payment of an additional
$1.0 million after the first year and an obligation to
provide research funding to the Company for a minimum of three
years, Novartis has the exclusive right to license drug targets
and product candidates developed through the collaboration. Upon
execution of a license, Novartis is obligated to fund all
further development of the licensed product candidate, make
payments to the Company upon the achievement of certain
milestones and pay the Company royalties for sales of any
products that are successfully commercialized. Upon the
completion of Phase II clinical trials of any product
candidate Novartis has licensed from the Company, the Company
has the option to enter into a co-promotion and profit sharing
agreement with them for that product candidate, subject to
reimbursement by the Company of a portion of Novartis
development expenses up to that point, the Companys
agreement to share the future development and marketing expenses
for the relevant product candidate and elimination of the
royalty payable to the Company.



|    |                           
|--- | --------------------------
|14. | Related Party Transactions

In October 1998, the Company issued restricted
common stock in exchange for notes receivable from two officers
which were fully collected in 2002.

During 1998, the Company entered into consulting
agreements with three stockholders of the Company. The
agreements are renewable annually upon mutual consent. One
agreement expired in 1999 and was not renewed. Another agreement
terminated in 2003. For the years ended December 31, 2003,
2002 and 2001, the Company incurred consulting fees of $29,831,
$33,996 and $33,996 related to these agreements, respectively.
In addition, the Company granted to these two stockholders
options to purchase a total of 24,000 shares of the
Companys common stock at $0.50 per share. For
consulting services provided during 2001, certain of such
stockholders also received options to purchase
24,000 shares of the Companys common stock at an
exercise price of $0.50, vesting over four years. The options
were valued on their respective grant dates using the
Black-Scholes option-pricing model resulting in an insignificant
stock-based compensation charge over the vesting period. During
2003, a new consulting agreement was entered into with one of
these stockholders, with a three-year term. The consulting fees
will be $24,000 per year and it granted 12,000 options to
purchase the Companys common stock at an exercise price of
$7.50, vesting over three years. These options were valued on
the grant date using the Black-Scholes option-pricing model
which resulted in a total value of $133,000, of which $36,000
was recognized as stock-based compensation expense during 2003.

During 1999, the Company entered into separate
consulting agreements with two stockholders of the Company. The
agreements extend for three years and are renewable annually
thereafter upon mutual consent. For the years ended
December 31, 2003, 2002 and 2001, the Company incurred
consulting fees of $71,250, $86,500 and $74,000, respectively,
related to these agreements. One agreement expired in 2002 and
was not renewed. The remaining agreement was amended in 2003 to
extend the expiration date of the agreement to December 31,
2007 and grant an additional 30,000 options. For consulting
services provided prior to 2001, the stockholders also received
options to purchase 62,000 shares of the Companys
common stock at a weighted average exercise price of $1.10,
vesting over four years. The options were valued on their
respective grant dates using the Black-Scholes option-pricing
model. The options have a total value of approximately $603,000
of which approximately $349,000, $244,000 and $10,000 was
recognized as stock-based compensation expense during the years
ended December 31, 2003, 2002 and 2001, respectively. The
additional 30,000 options granted in 2003 have an exercise price
of $7.50, vesting over two years. The options were valued on the
grant

F-35



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

date using the Black-Scholes option-pricing model
which resulted in a total value of $392,000, of which $141,000
was recognized as stock-based compensation expense during 2003.

Dr. Michael Bristow, the Chief Science and
Medical Officer and a Director of the Company, has served as a
director of Clinical Cardiovascular Research, LLC for each of
the last three years. On December 4, 1998, the Company
entered into a Clinical Research Services Master Agreement with
Clinical Cardiovascular Research, LLC, as amended, pursuant to
which it paid $1,473,977 in 2003, $2,141,461 in 2002 and
$2,315,098 in 2001. Such payments are recorded as research and
development expense.

The Company has made annual contributions of
$268,650, $300,000 and $200,000 for fiscal years ended
December 31, 2003, 2002 and 2001, respectively, and a
sponsored research payment of $26,200 in the fiscal year ended
December 31, 2001 to the University of Colorado to support
academic research in heart failure, including research performed
by Dr. Michael Bristow. Such contributions and payments
were recorded as research and development expense.



|    |                  
|--- | -----------------
|15. | Business Segments

The Company operates in the United States and in
certain countries throughout Europe under one operating segment.
All product sales from Inception to December 31, 2003 have
occurred in Europe through the Companys subsidiary.

|       |                |                          |           |         |  |      |           |         |  |   |           |         | 
|------ | -------------- | ------------------------ | --------- | ------- |  | ---- | --------- | ------- |  | - | --------- | ------- | 
|       |                |                         
|       |                | Years Ended December 31,
|       |                |                         
|       |                | 2003                     |           | 2002    |  | 2001
|       |                |                          |           |         |  |     
|Sales: |                |                          |           |         |  |      |           |         |  |   |           |        
|       | Germany        |                          | $         | 720,251 |  |      | $         | 691,683 |  |   | $         | 599,813 | 
|       | Netherlands    |                          |           | 796,414 |  |      |           | 650,524 |  |   |           | 693,758 | 
|       | United Kingdom |                          |           | 541,963 |  |      |           | 512,303 |  |   |           | 370,392 | 
|       | Italy          |                          |           | 405,341 |  |      |           | 190,511 |  |   |           |        | 
|       | France         |                          |           | 342,192 |  |      |           | 267,274 |  |   |           | 123,364 | 
|       | Other          |                          |           | 39,552  |  |      |           | 30,604  |  |   |           | 20,657  | 
|       |                |                          |           |         |  |      |           |         |  |   |           |        
|       |                | $                        | 2,845,713 |         |  | $    | 2,342,899 |         |  | $ | 1,807,984 |        
|       |                |                          |           |         |  |      |           |         |  |   |           |        

|                   |               |              |           |           |  |   |           |           | 
|------------------ | ------------- | ------------ | --------- | --------- |  | - | --------- | --------- | 
|                   |               |             
|                   |               | December 31,
|                   |               |             
|                   |               | 2003         |           | 2002     
|                   |               |              |           |          
|Long-lived assets: |               |              |           |           |  |   |           |          
|                   | United States |              | $         | 1,234,685 |  |   | $         | 1,627,684 | 
|                   | Europe        |              |           | 69,343    |  |   |           | 64,247    | 
|                   |               |              |           |           |  |   |           |          
|                   |               | $            | 1,304,028 |           |  | $ | 1,691,931 |          
|                   |               |              |           |           |  |   |           |          



|    |                 
|--- | ----------------
|16. | Subsequent Event

In February 2004, the Company made a
$1.5 million milestone payment to Abbott as a result of the
initiation of its Phase III ARIES trials for ambrisentan.

F-36



---



##### Table of Contents



MYOGEN, INC.


(A Development Stage Enterprise)


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|17. | Quarterly Financial Results (Unaudited) (in
    thousands, except per share data)

|                                            |                                      |           |         |          |  |               |         |              |  |   |         |       |  |   |         |        | 
|------------------------------------------- | ------------------------------------ | --------- | ------- | -------- |  | ------------- | ------- | ------------ |  | - | ------- | ----- |  | - | ------- | ------ | 
|2003                                        |                                      | March 31, |         | June 30, |  | September 30, |         | December 31,
|                                            |                                      |           |         |          |  |               |         |             
|Revenue:                                    |                                      |           |         |          |  |               |         |              |  |   |         |       |  |   |         |       
|                                            | Product sales                        |           | $       | 657      |  |               | $       | 708          |  |   | $       | 707   |  |   | $       | 774    | 
|                                            | Research and development contracts   |           |         |         |  |               |         |             |  |   |         |      |  |   |         | 1,010  | 
|Costs and expenses:                         |                                      |           |         |          |  |               |         |              |  |   |         |       |  |   |         |       
|                                            | Cost of product sold                 |           |         | 207      |  |               |         | 227          |  |   |         | 220   |  |   |         | 231    | 
|                                            | Research and development*            |           |         | 6,351    |  |               |         | 11,219       |  |   |         | 7,052 |  |   |         | 12,743 | 
|                                            | Selling, general and administrative* |           |         | 932      |  |               |         | 970          |  |   |         | 663   |  |   |         | 1,822  | 
|                                            | Stock-based compensation             |           |         | 772      |  |               |         | 493          |  |   |         | 841   |  |   |         | 2,086  | 
|Net loss                                    |                                      |           | (7,580  | )        |  |               | (12,244 | )            |  |   | (8,130  | )     |  |   | (15,194 | )     
|Accretion of dividends                      |                                      |           | (3,670  | )        |  |               | (3,670  | )            |  |   | (4,244  | )     |  |   | (1,603  | )     
|Deemed dividend                             |                                      |           |        |          |  |               |        |              |  |   | (39,935 | )     |  |   |        |       
|Net loss attributable to common stock       |                                      | $         | (11,250 | )        |  | $             | (15,915 | )            |  | $ | (52,309 | )     |  | $ | (16,796 | )     
|Basic and diluted earnings per common share |                                      | $         | (10.95  | )        |  | $             | (15.47  | )            |  | $ | (50.29  | )     |  | $ | (0.91   | )     

|                                            |                                      |           |        |          |  |               |        |              |  |   |         |       |  |   |         |       | 
|------------------------------------------- | ------------------------------------ | --------- | ------ | -------- |  | ------------- | ------ | ------------ |  | - | ------- | ----- |  | - | ------- | ----- | 
|2002                                        |                                      | March 31, |        | June 30, |  | September 30, |        | December 31,
|                                            |                                      |           |        |          |  |               |        |             
|Revenue:                                    |                                      |           |        |          |  |               |        |              |  |   |         |       |  |   |         |      
|                                            | Product sales                        |           | $      | 473      |  |               | $      | 549          |  |   | $       | 635   |  |   | $       | 686   | 
|                                            | Research and development contracts   |           |        |         |  |               |        |             |  |   |         |      |  |   |         |      | 
|Costs and expenses:                         |                                      |           |        |          |  |               |        |              |  |   |         |       |  |   |         |      
|                                            | Cost of product sold                 |           |        | 175      |  |               |        | 261          |  |   |         | 225   |  |   |         | 216   | 
|                                            | Research and development*            |           |        | 4,338    |  |               |        | 4,940        |  |   |         | 8,421 |  |   |         | 7,251 | 
|                                            | Selling, general and administrative* |           |        | 1,214    |  |               |        | 1,033        |  |   |         | 1,460 |  |   |         | 943   | 
|                                            | Stock-based compensation             |           |        |         |  |               |        | 23           |  |   |         | 291   |  |   |         | 367   | 
|Net loss                                    |                                      |           | (5,026 | )        |  |               | (5,446 | )            |  |   | (9,518  | )     |  |   | (8,058  | )    
|Accretion of dividends                      |                                      |           | (3,671 | )        |  |               | (3,671 | )            |  |   | (3,671  | )     |  |   | (3,671  | )    
|Deemed dividend                             |                                      |           |       |          |  |               |       |              |  |   |        |       |  |   |        |      
|Net loss attributable to common stock       |                                      | $         | (8,697 | )        |  | $             | (9,117 | )            |  | $ | (13,189 | )     |  | $ | (11,728 | )    
|Basic and diluted earnings per common share |                                      | $         | (9.06  | )        |  | $             | (8.98  | )            |  | $ | (12.95  | )     |  | $ | (11.48  | )    






|  |                                            
|- | -------------------------------------------
|* | Excludes Stock-based compensation expenses.

In the fourth quarter of 2003, the Company signed
a research and development contract which provided upfront
payments, license revenues and research funding for a minimum of
three years. The research and development contract revenues that
were recognized in the fourth quarter of 2003 relate to this
agreement and consist of license revenue and research funding.
Research and development expenses increased $5.7 million in
the fourth quarter 2003 compared to the third quarter 2003 due
to the initiation of the Phase III ARIES trials for
ambrisentan and costs related to increased duration and
enrollment in the other clinical trials. In addition, the fourth
quarter 2003 stock-based compensation expense increased
$1.2 million compared to the third quarter of 2003. This
was primarily a result of a full quarter of amortization related
to employee stock option grants that occurred in late August
2003 and an increase in expense related to options granted to
non-employees as a result of an increase in the Companys
market price for its common stock.

F-37



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##### Table of Contents



INDEX TO EXHIBITS

|        |    |             |  |                                                                                                                                                                                                           
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1*         |  | Restated Certificate of Incorporation.                                                                                                                                                                    
|        | 3  | .2*         |  | Amended and Restated Bylaws.                                                                                                                                                                              
|        | 4  | .1*         |  | Specimen Stock Certificate.                                                                                                                                                                               
|        | 10 | .1*(1)      |  | 2003 Equity Incentive Plan of the Company, Form
    of Grant Notice and Form of Stock Option Agreement.                                                                                                   
|        | 10 | .2*(1)      |  | 2003 Employee Stock Purchase Plan of the Company.                                                                                                                                                         
|        | 10 | .3*         |  | Series A Preferred Stock Purchase Agreement,
    dated May 21, 1998 between Myogen and the parties named
    therein.                                                                                     
|        | 10 | .4*         |  | Series B Preferred Stock Purchase Agreement,
    dated March 16, 2000 between Myogen and the parties named
    therein.                                                                                   
|        | 10 | .5*         |  | Series C Preferred Stock Purchase Agreement,
    dated November 23, 1999, as amended on December 8,
    1999, between Myogen and the parties named therein.                                               
|        | 10 | .6*         |  | Series D Preferred Stock Purchase Agreement,
    dated August 21, 2001, as amended on November 2, 2001
    and December 27, 2001, between Myogen and the parties named
    therein.                       
|        | 10 | .7*         |  | Series D Preferred Stock Purchase Agreement,
    dated August 27, 2003, between Myogen and the parties named
    therein.                                                                                 
|        | 10 | .8*         |  | Third Amended and Restated Investor Rights
    Agreement, dated August 21, 2001, as amended on
    August 27, 2003, between Myogen and certain of our
    stockholders.                                   
|        | 10 | .9*         |  | Third Amended and Restated Stockholders
    Agreement, dated August 21, 2001, as amended on
    December 27, 2001, between Myogen and certain of our
    stockholders.                                    
|        | 10 | .10*(1)     |  | Form of Employment Agreement entered into between
    Myogen and certain of its executives, including reference
    schedule.                                                                             
|        | 10 | .11*        |  | Form of Indemnification Agreement entered into by
    each of Myogens Executive Officers and Directors.                                                                                                  
|        | 10 | .12*        |  | Lease Agreement between the Company and Church
    Ranch Business Center, LLC, dated January 1, 2002.                                                                                                     
|        | 10 | .13*        |  | Warrant to purchase shares of Series C
    preferred stock issued to Silicon Valley Bank, dated
    January 26, 2000.                                                                                     
|        | 10 | .14*        |  | Venture Loan and Security Agreement by and among
    GATX Ventures, Inc., Silicon Valley Bank and the Company, dated
    December 6, 2002.                                                                
|        | 10 | .15*        |  | Warrant to purchase shares of Series D
    preferred stock issued to GATX Ventures, Inc., dated
    December 6, 2002.                                                                                     
|        | 10 | .16*        |  | Warrant to purchase shares of Series D
    preferred stock issued to Silicon Valley Bank, dated
    December 6, 2002.                                                                                     
|        | 10 | .17*=       |  | License Agreement between Hoechst Marion Roussel,
    Inc. and the Company, dated October 1, 1998, as amended
    November 23, 1999 and June 2, 2003.                                                     
|        | 10 | .18*=       |  | License Agreement between Abbott Deutschland
    Holding GmbH and the Company, dated October 8, 2001.                                                                                                     
|        | 10 | .19*=       |  | Intellectual Property License Agreement between
    the University Technology Corporation and the Company, dated
    September 1, 1998, as amended January 26, 2001 and
    November 12, 2002.            
|        | 10 | .20*=       |  | Materials Transfer Agreement between the Regents
    of the University of Colorado and the Company, dated
    September 4, 1998, as amended January 4, 2001.                                              
|        | 10 | .21*=       |  | Patent and Technology License Agreement between
    the Board of Regents of The University Of Texas System and the
    Company, dated December 1, 1999, as amended July 7,
    2000 and December 20, 2001.
|        | 10 | .22*=       |  | Exclusive Patent And Technology License Agreement
    between the Board of Regents of The University of Texas System
    and the Company, dated January 1, 2002.                                          
|        | 10 | .23*=       |  | License Agreement between Abbott Laboratories and
    the Company, dated June 30, 2003.                                                                                                                   



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                        
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .24*=       |  | Collaboration and Option Agreement between
    Novartis Institutes for BioMedical Research, Inc. and the
    Company, dated October 8, 2003.                                           
|        | 10 | .25*=       |  | Form of License, Development and
    Commercialization Agreement between Novartis Institutes for
    BioMedical Research, Inc. and the Company.                                        
|        | 10 | .26*=       |  | Materials Transfer Agreement between the Regents
    of the University of Colorado and the Company, dated
    September 12, 2003.                                                      
|        | 10 | .27         |  | Indemnification Agreement between Kirk K. Calhoun
    and the Company, dated as of January 16, 2004.                                                                                   
|        | 10 | .28         |  | First Amendment to Lease Agreement between Sevo
    Miller, Inc., as receiver on behalf of Church Ranch Business
    Center, LLC, and the Company, dated December 2, 2003.             
|        | 10 | .29        |  | Third Amendment to Intellectual Property License
    Agreement between University License Equity Holdings, Inc. and
    the Company, dated November 24, 2003.                          
|        | 10 | .30        |  | Amendment No. 3 to Patent and Technology
    License Agreement between the Board of Regents of the University
    of Texas System and the Company, dated November 6, 2003.             
|        | 10 | .31        |  | Amendment No. 1 to Patent and Technology
    License Agreement between the Board of Regents of the University
    of Texas System and the Company, dated as of February 10,
    2004.  
|        | 10 | .32        |  | Patent License Agreement between the University
    of Texas System, the University of North Texas Health Science
    Center at Fort Worth and the Company, dated January 13,
    2000.
|        | 21 | .1*         |  | List of Subsidiaries.                                                                                                                                                                  
|        | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                 
|        | 24 | .1          |  | Powers of Attorney. Reference is made to
    page 52.                                                                                                                                  
|        | 31 | .1          |  | Certification of principal executive officer
    required by Rule 13a-14(a).                                                                                                           
|        | 31 | .2          |  | Certification of principal financial officer
    required by Rule 13a-14(a).                                                                                                           
|        | 32 | .1          |  | Section 1350 Certification.                                                                                                                                                            



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|  |                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Incorporated by reference to our Registration
    Statement on Form S-1 (File No. 333-108301) and
    amendments thereto, declared effective October 29, 2003.



|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(1) | Indicates Management Contract or Compensatory
    Plan or Arrangement.                                 
|   
|=   | We have been granted confidential treatment with
    respect to the omitted portions of this agreement.



|  |                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have applied for confidential treatment with
    respect to portions of this agreement. Omitted portions have
    been filed separately with the Securities and Exchange
    Commission.