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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 1934For the fiscal year ended
    December 31, 2005oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File Number
    000-51745
      SGX Pharmaceuticals,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

06-1523147(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)  10505 Roselle Street
 San Diego, CA 92121
 (Address of principal executive
    offices, including zip code)
  (858) 558-4850
 (Registrants telephone number, including area code)
      Securities registered pursuant to Section 12(b) of the
    Act:
 None
  Securities registered pursuant to Section 12(g) of the
    Act:
 Common Stock, $0.001 par value per share
 (Title of class)
      o þ
  o þ
  o þ
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



SGX
    PHARMACEUTICALS, INC.
   ANNUAL REPORT ON
    FORM 10-K
    FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
   TABLE OF CONTENTS
  PART I


2Item 1.

Business


2Item 1A.

Risk Factors


23Item 1B.

Unresolved Staff
    Comments


45Item 2.

Properties


45Item 3.

Legal
    Proceedings


45Item 4.

Submission of
    Matters to a Vote of Security Holders


45 PART II


46Item 5.

Market for the
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


46Item 6.

Selected Financial
    Data


47Item 7.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


50Item 7A.

Quantitative and
    Qualitative Disclosures About Market Risk


60Item 8.

Financial
    Statements and Supplementary Data


62Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


90Item 9A.

Controls and
    Procedures


90Item 9B.

Other
    Information


90 PART III


90Item 10.

Directors and
    Executive Officers of the Registrant


90Item 11.

Executive
    Compensation


94Item 12.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


107Item 13.

Certain
    Relationships and Related Transactions


110Item 14.

Principal
    Accounting Fees and Services


115 PART IV


115Item 15.

Exhibits and
    Financial Statement Schedules


115SIGNATURES


119EXHIBIT 4.9EXHIBIT 10.41EXHIBIT 10.42EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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Cautionary
    Note Regarding Forward-Looking Statements
  Form 10-K Form 10-K Form 10-K.
 1




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PART I  Item 1.
    Business  Overview
  head-to-head
  ® in vivo
 2




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Program/Indication

Status

Marketing RightsTroxatyl



SGX (Worldwide) Third-line AML

Pivotal Phase II/III trial
    ongoing (data expected second half of 2006) Second-line AML

Phase I Ara-C combination
    trial (initiate second quarter of 2006)Phase III Ara-C combination
    trial (initiate first half of 2007) MDS

Phase I/II trial (initiate
    second half of 2006) Solid tumors

Phase I/II trial (initiate
    first half of 2007)BCR-ABL



Novartis (Worldwide)SGX (U.S. and Canada 
    Commercialization rights) Gleevec-resistant
    CML

Preclinical development (IND
    expected in first half of 2007)MET



SGX (Worldwide) Solid tumors

Lead optimizationK-RAS



SGX (Worldwide) Solid tumors

Lead discovery   Troxatyl
  ®
    
    activity against tumors that are resistant to multiple cancer
    drugs, including Ara-C, anthracyclines, another class of drugs
    commonly used in the treatment of AML, and Gemzar, which is
    often used for the treatment of certain solid tumors;
    entrance into cells by slow, passive diffusion, which is a
    different route than many other cancer drugs and may provide the
    basis for improved safety and activity profiles;
    a more manageable and transient side effect profile, including
    absence of significant central nervous system and liver toxicity
    in patients, as compared to Ara-C; and
    synergy in combination with Ara-C, Gemzar and Gleevec.     3




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Acute
    Myelogenous Leukemia
     4




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##### Table of Contents



®
  Phase I/II Clinical Trial by Continuous IV
    Infusion.
    
    at optimal dosing in this trial, the dose by continuous IV
    infusion of Troxatyl (12 mg/m(2)/day for five consecutive
    days, or a total dose of 60 mg/m(2)) is 50% higher than
    that obtained via consecutive daily IV dosing in a previous
    trial conducted by Shire (8 mg/m(2)/day for five
    consecutive days, or a total dose of 40 mg/m(2)); and
    all nine patients who responded to Troxatyl achieved sustained
    levels of Troxatyl in the blood of approximately 80 ng/mL or
    higher and received dosing for greater than three days.     5




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Dosed > 3 Days andAll Patients


Dosed > 3 Days


Phase II/III
    EligiblePatients


48



41



15Complete Response


5
(10%)


5
(12%)


2
(13%)Complete Response with Partial
    Platelet Recovery


4
(8%)


4
(10%)


2
(13%)Overall Response


9
(19%)


9
(22%)


4
(27%)Severe or Life-Threatening Toxicity


10
(21%)


9
(22%)


5
(33%)   Cancer
  Current Phase II/III Clinical
    Trial. End-of-Phase II
  Cancer
   6




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Market Expansion Trials for AML.
  Myelodysplastic
    Syndromes
    ® ®
    ® ®
 7




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Solid
    Tumors
    Pancreatic Cancer.
    in vivo
  Renal Cell Carcinoma.
   8




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Development Plan.
  Research
    Programs
    BCR-ABL
    Kinase Inhibitor Program
    (BMS-354825),
   9




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MET
    Solid Tumor Program
  in vivo
  FAST  Our
    Drug Discovery Platform
      
    a high-throughput capability to generate many different crystals
    of a target protein in parallel;
    the evaluation of our library of fragments and direct
    visualization of bound fragments utilizing X-ray
    crystallography; and
    the use of novel computational design methods and iterative
    synthetic chemistry to optimize these fragments into drug-like
    lead compounds.    X-ray
   10




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Collaborations,
    Commercial Agreements and Grants
    Collaborations
    and Grants:
  Party

Scope

Start Date

Payments to SGXNovartis Institutes for Biomedical
    Research, Inc.

Drug discovery, development and
    commercialization

Mar. 2006

Upfront payment, research funding,
    milestones and royaltiesCystic Fibrosis Foundation
    Therapeutics, Inc.

Drug discovery

Jul. 2005

Upfront payment; technology access
    fees; research funding; milestones; royaltiesNational Institutes of Health

Protein Structure Initiative

Jul. 2005

Research funding   Commercial
    Agreements:
  Party

Scope

Start Date

Payments to SGXAmgen, Inc.

Structural data on Amgen targets
    and compounds

Feb. 2005

Annual paymentsEli Lilly & Company

Structural data on Eli Lilly
    targets and compounds

Apr. 2003

Upfront payment; research funding;
    technology access feesEli Lilly & Company

Structural data on Eli Lilly
    targets and compounds

Dec. 2003

Upfront payment; fundingExelixis Inc.

Structural data on Exelixis
    targets and compounds

Aug. 2005

Upfront payment; fundingMillennium Pharmaceuticals,
    Inc.

Structural data on Millennium
    targets and compounds

Oct. 2004

Upfront payment; fundingF. Hoffmann-La Roche
    Ltd.

Structural data on Roche targets
    and compounds

Dec. 2005

Upfront payment; fundingBiogen Idec Inc.

Structural data on Biogen Idec
    targets and compounds

Dec. 2005

Upfront payment; funding   License
    and Collaboration Agreement.
  Novartis
    Institutes for Biomedical Research, Inc.
   11




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Cystic
    Fibrosis Foundation Therapeutics, Inc.
   12




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country-by-country product-by-product
  F.
    Hoffmann-La Roche Ltd.
    country-by-country product-by-collaboration
  NIH
    Cooperative Agreement Award
    Serono
    International S.A.
    country-by-country
  Eli
    Lilly & Company
  target-to-structure
 13




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OSI
    Pharmaceuticals, Inc.
      Beamline
    Services
     14




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Shire
    country-by-country country-by-country product-by-product 10-year
  Our
    Strategy
    
    Obtain regulatory approval of Troxatyl for
    AML.  We are currently focusing much of our
    resources on Troxatyl. Because there is no approved therapy and
    no standard of care for the third-line treatment of AML, we are
    initially targeting FDA approval of Troxatyl for this indication
    through an accelerated approval process and fast track
    designation. We believe that Troxatyl could be approved in 2007
    on the basis of a pivotal Phase II/III clinical trial that
    we initiated in July 2005, with targeted enrollment of
    211 patients. In 2006, we also intend to begin clinical
    trials evaluating Troxatyl for use in combination therapy in the
    second-line treatment of AML.
    Develop Troxatyl for other cancer
    indications.  We have considerable clinical data
    which shows that Troxatyl is active against numerous cancer
    indications. We will continue to explore potential opportunities
    to further expand the market for Troxatyl in MDS and in solid
    tumors.
    Develop and expand our cancer pipeline.  We
    consider drug development for the cancer markets attractive
    because relatively small clinical trials of short duration can
    provide meaningful data on patient outcomes. We have initially
    targeted blood cancer indications because we believe they
    typically involve clear, objective response measurements that
    can be assessed and confirmed within 90 days of treatment.
    We will seek to advance our BCR-ABL program in collaboration
    with Novartis to develop and commercialize BCR-ABL inhibitors
    for the treatment of CML. We will also seek to further enhance
    our pipeline by advancing our MET, and K-RAS programs into the
    clinic, and by applying FAST to high-value cancer targets with
    the objective of discovering a series of additional clinical
    candidates. 15




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
    Continue to access capabilities and generate revenue through
    strategic partnering.  Revenue generation from
    strategic partnering will continue to be important to us in the
    near term by providing funds for reinvestment in internal drug
    discovery and development. Our business development activities
    will involve both strategic partnering of certain of our
    oncology programs and additional revenue generation through
    application of our FAST technology platform. Oncology
    partnerships will be sought with organizations that provide
    complementary capabilities to allow rapid progression of our
    product candidates to the market. We will remain open to
    opportunities to apply FAST to targets outside the oncology
    area, particularly where there are attractive financial or
    strategic opportunities.
    Develop sales and marketing
    capabilities.  There are approximately 3,000
    hematologist/oncologists and approximately 5,000 oncologists
    practicing in the United States. Of these physicians, a small
    number of opinion leaders significantly influence the types of
    drugs prescribed by this group. We believe that we can
    effectively reach hematology and oncology markets in the United
    States with a relatively small sales organization focused on
    these and other targeted opinion leaders and physicians. We will
    seek marketing partners for indications and in territories, such
    as outside North America, which may require more extensive sales
    and marketing capabilities. We believe our drug discovery
    programs will provide us with product candidates in oncology
    which will serve as the basis for future sales and marketing.
    Expand our portfolio of product candidates through
    acquisitions and in-licensing.  We may further
    augment our internal discovery efforts through strategic
    acquisitions and by in-licensing novel therapeutics. We believe
    this approach, combined with internal drug discovery and
    development, will enable us to accelerate the expansion of our
    portfolio of product candidates.  Manufacturing
    and Supply
      Intellectual
    Property
  Troxatyl
  Overview.
 16




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Troxatyl Patent Portfolio.
      Data Exclusivity.
  Other
    Intellectual Property
      Patent
    Term Extension/Restoration
    Third
    Party Intellectual Property
    and/or
 17




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
    infringement and other intellectual property claims which, with
    or without merit, may be expensive and time-consuming to
    litigate and may divert our managements attention from our
    core business;
    substantial damages for infringement, including treble damages
    and attorneys fees, which we may have to pay if a court
    decides that the product or proprietary technology at issue
    infringes on or violates the third partys rights;
    a court prohibiting us from selling or licensing the product or
    using the proprietary technology unless the third party licenses
    its technology to us, which it is not required to do;
    if a license is available from the third party, we may have to
    pay substantial royalties, fees
    and/or grant
    cross licenses to our technology; and
    redesigning our products or processes so they do not infringe,
    which may not be possible or may require substantial funds and
    time.    Sales and
    Marketing
      Competition
   18




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tm ® tm tm ® tm ® ®
      Government
    Regulation and Product Approvals
       19




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20




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Sub-part E, Sub-part H
     21




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
    the disease affects no more than 50 in 100,000 persons in the
    E.U. or the drug is intended for a life-threatening, seriously
    debilitating, or serious and chronic condition;
    without incentive it is unlikely that the drug would generate
    sufficient return to justify the necessary investment; and
    no satisfactory method of treatment for the condition exists or,
    if it does, the new drug will provide a significant benefit to
    those affected by the condition.        Employees
   22




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Item 1A.
    Risk
    Factors  You should carefully consider the following information about
    these risks, together with the other information appearing
    elsewhere in this report. If any of the following risks actually
    occur, our business, financial condition, results of operations
    and future growth prospects would likely be materially and
    adversely affected. In these circumstances, the market price of
    our common stock could decline, and you may lose all or part of
    your investment in our common stock.
  Risks
    Relating to Our Business
  We are
    dependent on the success of our product candidate, Troxatyl, and
    we cannot give any assurance that it will receive regulatory
    approval or be successfully commercialized.
    The
    clinical trial protocol and design for our ongoing pivotal
    Phase II/III clinical trial of Troxatyl for the third-line
    treatment of AML may not be sufficient to allow us to submit an
    NDA for Troxatyl or demonstrate efficacy at the level required
    by the FDA for product approval.
  End-of-Phase II
   23




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End-of-Phase II
  While
    we may seek to take advantage of various regulatory mechanisms
    intended to accelerate drug development and approval for
    Troxatyl for the third-line treatment for AML, we may not be
    able to submit an NDA for Troxatyl until the third quarter of
    2009, at the earliest.
      Because
    the results of preclinical studies and early clinical trials are
    not necessarily predictive of future results, Troxatyl, BCR-ABL
    product candidates that may be selected under our license and
    collaboration agreement with Novartis or any other product
    candidate we advance into clinical trials may not have favorable
    results in later clinical trials, if any, or receive regulatory
    approval.
   24




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Troxatyl,
    BCR-ABL product candidates that may be selected under our
    license and collaboration agreement with Novartis or any other
    product candidate we advance into clinical trials may cause
    undesirable side effects that could delay or prevent its
    regulatory approval or commercialization.
      
    regulatory authorities may withdraw their approval of the
    product;
    we may be required to change the way the product is
    administered, conduct additional clinical trials or change the
    labeling of the product; or
    our reputation may suffer.   25




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Delays
    in the commencement or completion of clinical testing could
    result in increased costs to us and delay our ability to
    generate significant revenues.
    
    obtaining regulatory approval to commence a clinical trial;
    reaching agreement on acceptable terms with prospective contract
    research organizations and trial sites;
    manufacturing sufficient quantities of a product candidate;
    obtaining institutional review board approval to conduct a
    clinical trial at a prospective site; and
    identifying, recruiting and enrolling patients to participate in
    a clinical trial.    
    failure to conduct the clinical trial in accordance with
    regulatory requirements or our clinical protocols;
    inspection of the clinical trial operations or trial site by the
    FDA or other regulatory authorities resulting in the imposition
    of a clinical hold;
    unforeseen safety issues; or
    lack of adequate funding to continue the clinical trial.    We
    rely on third parties to conduct our clinical trials, including
    our ongoing pivotal Phase II/III clinical trial for
    Troxatyl. If these third parties do not successfully carry out
    their contractual duties or meet expected deadlines, we may not
    be able to obtain regulatory approval for or commercialize our
    product candidates.
  follow-up
 26




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Troxatyl,
    BCR-ABL product candidates that may be selected under our
    license and collaboration agreement with Novartis and any other
    product candidates we advance into clinical trials are subject
    to extensive regulation, which can be costly and time consuming,
    cause unanticipated delays or prevent the receipt of the
    required approvals to commercialize our product
    candidates.
    
    a product candidate may not be safe and effective;
    regulatory agencies may not find the data from preclinical
    testing and clinical trials to be sufficient;
    regulatory agencies may not approve of our third party
    manufacturers processes or facilities; or
    regulatory agencies may change their approval policies or adopt
    new regulations.    Even
    if Troxatyl, BCR-ABL product candidates that may be selected
    under our license and collaboration agreement with Novartis or
    any other product candidate we advance into clinical trials
    receives regulatory approval, our product candidates may still
    face future development and regulatory
    difficulties.
   27




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
    issue warning letters;
    impose civil or criminal penalties;
    withdraw regulatory approval;
    suspend any ongoing clinical trials;
    refuse to approve pending applications or supplements to
    approved applications filed by us or our collaborators;
    impose restrictions on operations, including costly new
    manufacturing requirements; or
    seize or detain products or require a product recall.  follow-up
    Because
    we exclusively licensed our product candidate, Troxatyl, from
    Shire and our rights are subject to certain licenses to Shire
    from third parties, any dispute with Shire or between Shire and
    any of these third parties may adversely affect our ability to
    develop and commercialize Troxatyl.
    Our
    drug discovery approach and technologies are unproven and may
    not allow us to establish or maintain a clinical development
    pipeline or successful collaborations or result in the discovery
    or development of commercially viable products.
   28




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If we
    fail to establish new collaborations and other commercial
    agreements, we may have to reduce or limit our internal drug
    discovery and development efforts.
    We are
    dependent on our collaborations, and events involving these
    collaborations or any future collaborations could prevent us
    from developing or commercializing product
    candidates.
     29




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®
    
    we do not achieve our objectives under our collaboration
    agreements;
    we or our collaborators are unable to obtain patent protection
    for the product candidates or proprietary technologies we
    discover in our collaborations;
    we are unable to manage multiple simultaneous product discovery
    and development collaborations;
    our potential collaborators are less willing to expend their
    resources on our programs due to their focus on other programs
    or as a result of general market conditions;
    our collaborators become competitors of ours or enter into
    agreements with our competitors;
    we or our collaborators encounter regulatory hurdles that
    prevent commercialization of our product candidates; or
    we develop products and processes or enter into additional
    collaborations that conflict with the business objectives of our
    other collaborators.    Conflicts
    may arise between us and our collaborators that could delay or
    prevent the development or commercialization of our product
    candidates.
    
    disagreements regarding the payment of research funding,
    milestone payments, royalties or other payments we believe are
    due to us under our collaboration agreements or from us under
    our licensing agreements;
    uncertainty regarding ownership of intellectual property rights
    arising from our collaborative activities, which could prevent
    us from entering into additional collaborations; 30




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
    actions taken by a collaborator inside or outside a
    collaboration which could negatively impact our rights under or
    benefits from such collaboration;
    unwillingness on the part of a collaborator to keep us informed
    regarding the progress of its development and commercialization
    activities or to permit public disclosure of the results of
    those activities; or
    slowing or cessation of a collaborators development or
    commercialization efforts with respect to our product candidates.  We
    currently depend on one collaboration partner, Novartis, for a
    portion of our revenues and for the future commercialization of
    one of our significant research programs. If our license and
    collaboration agreement with Novartis terminates, our business
    and, in particular, our BCR-ABL program, will be seriously
    harmed.
    Our
    drug discovery efforts are dependent on continued access to and
    use of our beamline facility, which is subject to various
    governmental regulations and policies and a user agreement with
    the University of Chicago and the U.S. Department of
    Energy. If we are unable to continue the use of our beamline
    facility, we may be required to delay, reduce the scope of or
    abandon some of our drug discovery efforts, and may fail to
    perform under our collaborations, commercial agreements and
    grants, which would result in a material reduction in our
    current primary source of revenue.
   31




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If our
    competitors develop drug discovery technologies that are more
    advanced than ours, our ability to generate revenue from
    collaborations, commercial arrangements or grants may be reduced
    or eliminated.
    If our
    competitors develop treatments for AML, CML or any other
    therapeutic area that are approved more quickly, marketed more
    effectively or demonstrated to be more effective than our
    current or future product candidates, our ability to generate
    product revenue will be reduced or eliminated.
    ® tm ® tm tm ® tm ® ®
       32




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We
    have limited experience in identifying, acquiring or
    in-licensing, and integrating third parties products,
    businesses and technologies into our current infrastructure. If
    we determine that future acquisition or in-licensing
    opportunities are desirable and do not successfully execute on
    and integrate such targets, we may incur costs and disruptions
    to our business.
    
    exposure to unknown liabilities;
    disruption of our business and diversion of our
    managements time and attention to the development of
    acquired products or technologies;
    incurrence of substantial debt or dilutive issuances of
    securities to pay for acquisitions;
    higher than expected acquisition and integration costs;
    increased amortization expenses;
    difficulties in and costs of combining the operations and
    personnel of any acquired businesses with our operations and
    personnel;
    impairment of relationships with key suppliers or customers of
    any acquired businesses due to changes in management and
    ownership; and
    inability to retain key employees of any acquired businesses.    We do
    not have internal manufacturing capabilities, and if we fail to
    develop and maintain supply relationships with collaborators or
    other third party manufacturers, we may be unable to develop or
    commercialize our products.
     33




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If we
    are unable to establish sales and marketing capabilities or
    enter into agreements with third parties to market and sell any
    products we may develop, we may not be able to generate product
    revenue.
    The
    commercial success of Troxatyl or any other product that we may
    develop depends upon market acceptance among physicians,
    patients, health care payors and the medical
    community.
    
    our ability to provide acceptable evidence of safety and
    efficacy;
    relative convenience and ease of administration;
    the prevalence and severity of any adverse side effects; 34




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
    availability of alternative treatments;
    pricing and cost effectiveness;
    effectiveness of our or our collaborators sales and
    marketing strategies; and
    our ability to obtain sufficient third party coverage or
    reimbursement.    We are
    subject to uncertainty relating to health care reform measures
    and reimbursement policies which, if not favorable to our
    product candidates, could hinder or prevent our product
    candidates commercial success.
    
    our ability to set a price we believe is fair for our products;
    our ability to generate revenues and achieve profitability;
    the future revenues and profitability of our potential
    customers, suppliers and collaborators; and
    the availability of capital.      We
    will need to increase the size of our organization, and we may
    experience difficulties in managing growth.
   35




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
    manage our clinical trials effectively;
    manage our internal research and development efforts effectively
    while carrying out our contractual obligations to collaborators
    and other third-parties;
    continue to improve our operational, financial and management
    controls, reporting systems and procedures;
    set up marketing, sales, distribution and other commercial
    operations infrastructure; and
    attract and retain sufficient numbers of talented employees.    If we
    fail to attract and keep key management and scientific
    personnel, we may be unable to successfully develop or
    commercialize our product candidates.
        Risks
    Relating to our Finances and Capital Requirements
  We
    expect our net operating losses to continue for at least several
    years, and we are unable to predict the extent of future losses
    or when we will become profitable, if ever.
   36




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We
    currently lack a significant continuing revenue source and may
    not become profitable.
      
    obtaining new collaborations and commercial agreements;
    performing under current and future collaborations, commercial
    agreements and grants, including achieving milestones;
    successful completion of clinical trials for Troxatyl and any
    other product candidate we advance into clinical trials;
    achievement of regulatory approval for Troxatyl and any other
    product candidate we advance into clinical trials; and
    successful sales, manufacturing, distribution and marketing of
    our future products, if any.    We
    will need substantial additional funding and may be unable to
    raise capital when needed, which would force us to delay, reduce
    or eliminate our research and development programs or
    commercialization efforts.
    
    terms and timing of any collaborative, licensing and other
    arrangements that we may establish;
    rate of progress and cost of our clinical trials and other
    research and development activities;
    scope, prioritization and number of clinical development and
    research programs we pursue;
    costs and timing of regulatory approval;
    costs of establishing or contracting for sales and marketing
    capabilities;
    costs of manufacturing;
    extent to which we acquire or in-license new products,
    technologies or businesses; 37




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
    effect of competing technological and market
    developments; and
    costs of filing, prosecuting, defending and enforcing any patent
    claims and other intellectual property rights.    Raising
    additional funds by issuing securities or through licensing
    arrangements may cause dilution to existing stockholders,
    restrict our operations or require us to relinquish proprietary
    rights.
    Our
    quarterly operating results may fluctuate
    significantly.
    
    our addition or termination of research programs or funding
    support;
    variations in the level of expenses related to our product
    candidates or research programs;
    our execution of collaborative, licensing or other arrangements,
    and the timing of payments we may make or receive under these
    arrangements;
    any intellectual property infringement lawsuit in which we may
    become involved; and
    changes in accounting principles.    We may
    incur substantial liabilities from any product liability claims
    if our insurance coverage for those claims is
    inadequate.
    
    decreased demand for our product candidates;
    injury to our reputation;
    withdrawal of clinical trial participants;
    costs of related litigation;
    substantial monetary awards to patients or other claimants; 38




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##### Table of Contents




    loss of revenues; and
    the inability to commercialize our product candidates.    We use
    biological and hazardous materials, and any claims relating to
    improper handling, storage or disposal of these materials could
    be time consuming or costly.
      Risks
    Relating to our Intellectual Property
  Our
    success depends upon our ability to protect our intellectual
    property and our proprietary technologies.
        
    we might not have been the first to file patent applications for
    these inventions;
    we might not have been the first to make the inventions covered
    by each of our pending patent applications and issued patents;
    others may independently develop similar or alternative
    technologies or duplicate any of our technologies; 39




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##### Table of Contents




    the patents of others may have an adverse effect on our business;
    it is possible that none of our pending patent applications will
    result in issued patents;
    our issued patents may not encompass commercially viable
    products, may not provide us with any competitive advantages, or
    may be challenged by third parties;
    our issued patents may not be valid or enforceable; or
    we may not develop additional proprietary technologies that are
    patentable.    The
    intellectual property protection for Troxatyl is dependent
    primarily on third parties and our long term protection is
    primarily focused on methods of manufacturing and use and
    formulations.
        If we
    are sued for infringing intellectual property rights of third
    parties, it will be costly and time consuming, and an
    unfavorable outcome in that litigation would have a material
    adverse effect on our business.
   40




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##### Table of Contents




    infringement and other intellectual property claims which, with
    or without merit, may be expensive and time-consuming to
    litigate and may divert our managements attention from our
    core business;
    substantial damages for infringement, including treble damages
    and attorneys fees, which we may have to pay if a court
    decides that the product or proprietary technology at issue
    infringes on or violates the third partys rights;
    a court prohibiting us from selling or licensing the product or
    using the proprietary technology unless the third party licenses
    its technology to us, which it is not required to do;
    if a license is available from the third party, we may have to
    pay substantial royalties, fees
    and/or grant
    cross licenses to our technology; and
    redesigning our products or processes so they do not infringe,
    which may not be possible or may require substantial funds and
    time.      We may
    not be able to obtain patent term extension/restoration or other
    exclusivity for our products which may subject us to increased
    competition and reduce or eliminate our opportunity to generate
    product revenue.
   41




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##### Table of Contents



Risks
    Relating to the Securities Markets and Ownership of our Common
    Stock
  Market
    volatility may affect our stock price.
    
    changes in the development status of or clinical trial results
    for our product candidates, including the results for our
    ongoing pivotal Phase II/III trial of Troxatyl;
    announcements of new products or technologies, commercial
    relationships or collaboration arrangements or other events by
    us or our competitors;
    events affecting our collaborations, commercial agreements and
    grants;
    variations in our quarterly operating results;
    changes in securities analysts estimates of our financial
    performance;
    regulatory developments in the United States and foreign
    countries;
    fluctuations in stock market prices and trading volumes of
    similar companies;
    sales of large blocks of our common stock, including sales by
    our executive officers, directors and significant stockholders;
    additions or departures of key personnel;
    discussion of us or our stock price by the financial and
    scientific press and in online investor communities; and
    changes in accounting principles generally accepted in the
    United States.    Our
    management has broad discretion over the use of proceeds from
    our recent initial public offering of our common stock and may
    allocate the net proceeds in ways that our stockholders may not
    approve.
    
    the clinical development of Troxatyl;
    further development of our research programs and initial
    clinical development stemming from these programs;
    working capital and general corporate purposes; and
    potential acquisition and in-licensing activities.   42




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##### Table of Contents



Anti-takeover
    provisions in our charter documents and under Delaware law could
    make an acquisition of us, which may be beneficial to our
    stockholders, more difficult and may prevent attempts by our
    stockholders to replace or remove our current
    management.
    We may
    incur increased costs as a result of changes in laws and
    regulations relating to corporate governance
    matters.
  Sarbanes-Oxley
  If our
    executive officers, directors and largest stockholders choose to
    act together, they may be able to control our operations and act
    in a manner that advances their best interests and not
    necessarily those of other stockholders.
   43




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Approximately
    72%, of our total outstanding shares are restricted from
    immediate resale but may be sold into the market in the near
    future. This could cause the market price of our common stock to
    decline significantly.
    Number of Shares

Type of Securities8,151,342

Common stock

Date of Availability for Resale
    into Public Market 180 days after January 31, 2006 due
    to lock-up
    agreements the holders of these shares have with the
    underwriters or with us. However, the underwriters can waive
    these restrictions under the
    lock-up
    agreements with the underwriters and allow those stockholders to
    sell their shares at any time.1,000,000

Common stock (resulting form
    conversion of $6.0 million convertible note)

Freely tradable pursuant to
    Rule 144 under the Securities Act of 1933, as amended,
    subject to the
    180-day
    lock-up
    referenced above.1,051,827

Common stock

From time to time after expiration
    of the
    180-day
    lock-up upon
    completion of their respective one-year holding periods, or
    earlier if the holders exercise any available registration
    rights.637,755

Common stock (purchased by
    Novartis Pharma AG)

From time to time after expiration
    of the
    180-day
    lock-up upon
    completion of its one-year holding period, or earlier if
    Novartis exercises any available registration rights.1,615,355

Options outstanding under our
    equity incentive plans

Upon the exercise of the options
    in the future, if ever, with all shares subject to a
    180-day
    lock-up.195,629

Warrants exercisable for common
    stock

Upon the exercise of the warrants
    in the future, if ever, with all shares subject to a
    180-day
    lock-up.     Plan

Number of Shares of Common Stock
    Reserved for Issuance2005 equity incentive plan

750,000 shares plus the
    number of shares remaining available for future issuance under
    our 2000 equity incentive plan that are not covered by
    outstanding options as of the effective date of this offering or
    that would otherwise have reverted to the share reserve under
    the 2000 plan.2005 non-employee directors
    stock option plan

75,000.2005 employee stock purchase plan

375,000.     
    The share reserve for our 2005 equity incentive plan is subject
    to an automatic annual share increase in an amount up to and
    including the lesser of 3.5% of the total number of shares of
    our common stock outstanding 44




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##### Table of Contents




    The share reserve for our 2005 non-employee directors
    stock option plan is subject to an automatic annual share
    increase in an amount up to and including the aggregate number
    of shares subject to options granted to our non-employee
    directors during the fiscal year immediately preceding the
    increase in the share reserve (or a smaller number of shares as
    may be determined by our board of directors).
    The share reserve for our 2005 employee stock purchase plan is
    subject to an automatic annual share increase in an amount up to
    and including the lesser of 1.0% of the total number of shares
    of our common stock outstanding at the end of the fiscal year
    immediately preceding the increase in the share reserve or
    150,000 shares (or a smaller number of shares as may be
    determined by our board of directors).      Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders                1-for-2
 45




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##### Table of Contents



1-for-2
  Non-Employee 1-for-2
  1-for-2
   PART II  Item 5.
    Market
    for the Registrants Common Equity, Related Stockholder
    Matters and Issuer Purchases of Equity Securities  Common
    Stock Market Price
      Dividends
    Use of
    Proceeds from the Sale of Registered Securities
  Form S-1 No. 333-128059)
  Recent
    Sales of Unregistered Securities
  0.126453-for-1
 46




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##### Table of Contents



1-for-2 1-for-2 1-for-2
  
    In April 2005, in connection with our Series B preferred
    stock financing and recapitalization, we (i) issued and
    sold an aggregate of 1,592,354 shares of Series B
    preferred stock in a private placement to 53 accredited
    investors for aggregate consideration of approximately
    $7.5 million, (ii) issued an aggregate of
    13,600,000 shares of Series A preferred stock to 51
    accredited investors upon the exchange of an aggregate of
    427,435 shares of our previously outstanding
    Series A-1
    preferred stock, 3,034,095 shares of our previously
    outstanding
    series A-2
    preferred stock, 641,615 shares of our previously
    outstanding
    Series B-1
    preferred stock, 604,213 shares of our previously
    outstanding
    Series C-1
    preferred stock, and 92,637 shares of our previously
    outstanding
    Series D-1
    preferred stock and (iii) committed to issue an additional
    1,592,354 shares of Series B preferred stock to the
    accredited investors who irrevocably committed to purchase these
    shares in April 2005. We issued 1,583,627 of these additional
    shares of Series B preferred stock in December 2005
    pursuant to these irrevocable commitments from April 2005. Upon
    completion of our initial public offering, these shares of
    Series A preferred stock and Series B preferred stock
    converted into an aggregate of 8,346,316 shares of common
    stock.
    In July 2005, we issued two warrants to purchase up to an
    aggregate of 115,000 shares of common stock having an
    exercise price of $1.00 per share to two accredited
    investors as consideration for past services to us. The warrants
    include net exercise provisions and each have a five year term.
    In September 2005, in connection with a line of credit and
    equipment financing agreement, we issued two warrants to two
    lenders to purchase an aggregate of 40,763 shares of our
    Series B preferred stock, at an initial exercise price of
    $4.71 per share. These warrants are exercisable through
    September 2015. These warrants became exercisable for
    20,381 shares of our common stock, at an exercise price of
    $9.42 per share, upon completion of our initial public offering.
    In December 2005, in connection with this line of credit and
    equipment financing agreement, we issued two additional warrants
    to the lenders to purchase an aggregate of 49,607 shares of
    our Series B preferred stock, at an initial exercise price
    of $4.71 per share. These warrants are exercisable through
    December 2015. These warrants became exercisable for
    24,803 shares of our common stock, at an exercise price of
    $9.42 per share, upon completion of our initial public offering.      and/or
  Item 6.
    Selected
    Financial Data   47




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##### Table of Contents



Form 10-K.
    Years Ended
    December 31,2005


2004


2003


2002


2001(In thousands, except per share
    data)Statement of Operations
    Data:Revenue:Grants

$
1,949


$
6,380


$
3,344


$
350


$
Grants  subcontractor
    reimbursements


5,083



4,976



4,599







Collaborations and commercial
    agreements


14,604



15,941



10,135



2,986



1,338Total revenue


21,636



27,297



18,078



3,336



1,338Expenses:Research and development


37,881



31,444



28,587



25,573



17,831General and administrative


11,820



6,719



7,353



10,122



7,682In-process technology






4,000











1,500Total operating expenses


49,701



42,163



35,940



35,695



27,013Loss from operations


(28,065
)


(14,866
)


(17,862
)


(32,359
)


(25,675
)Interest income


284



175



320



622



2,729Interest expense


(422
)


(669
)


(1,219
)


(932
)


(302
)Interest expense associated with
    debenture


(1,188
)


(3,392
)










Net loss


(29,391
)


(18,752
)


(18,761
)


(32,669
)


(23,248
)Accretion to redemption value of
    redeemable convertible preferred stock


(472
)


(329
)


(329
)


(329
)


(329
)Net loss attributable to common
    stockholders

$
(29,863
)

$
(19,081
)

$
(19,090
)

$
(32,998
)

$
(23,577
)Basic and diluted net loss
    attributable to common stockholders per share:

$
(48.32
)

$
(39.84
)

$
(44.92
)

$
(78.94
)

$
(86.05
)Shares used to compute basic and
    diluted net loss attributable to common stockholders per share:


618



479



425



418



274   48




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##### Table of Contents



As of
    December 31,2005


2004


2003


2002


2001(In thousands)Balance Sheet Data:Cash, cash equivalents and
    short-term investments

$
17,718


$
11,512


$
13,635


$
24,255


$
50,615Working capital (deficit)


618



(8,634
)


1,042



15,656



38,548Total assets


33,251



28,332



35,943



47,721



72,095Long-term debt obligations
    (including current portion)


15,733



23,420



13,487



15,789



7,707Redeemable preferred stock


46,837



74,850



88,306



87,977



87,648Accumulated deficit


(135,628
)


(105,765
)


(86,684
)


(67,594
)


(34,596
)Total stockholders deficit


(41,677
)


(78,782
)


(78,044
)


(60,237
)


(30,882
)  49




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following discussion and analysis should be read in
    conjunction with our consolidated financial statements and
    related notes included elsewhere in this report. This discussion
    and other parts of this report may contain forward-looking
    statements based upon current expectations that involve risks
    and uncertainties. Our actual results and the timing of selected
    events could differ materially from those anticipated in these
    forward-looking statements as a result of several factors,
    including those set forth under Risk Factors in
    Item 1A of Part I of this report and elsewhere in this
    report.
  Overview
      
    continue the clinical trials and prepare for the
    commercialization of our product candidate, Troxatyl;
    develop and expand our oncology pipeline; and
    acquire or in-license oncology products or discovery
    technologies that are complementary to our own.    Financial
    Operations Overview
  Collaboration,
    Commercial Agreement and Grant Revenue
    Research
    and Development Expense
   50




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51




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General
    and Administrative Expense
      Interest
    Income
    Interest
    Expense
    Critical
    Accounting Policies and Estimates
    Revenue
    Recognition
  Revenue Recognition Issue 00-21, Revenue Arrangements with Multiple Deliverables EITF 00-21.
     52




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EITF 00-21.
    out-of-pocket Reporting Revenue Gross
    as a Principal Versus Net as an Agent Issue 01-14, Income Statement Characterization of Reimbursements Received
    for
    Out-of-Pocket Expenses Incurred.
    Stock-Based
    Compensation Expense
  Accounting for Stock-Based Compensation No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring or in Conjunction with Selling
    Goods and Services
     53




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Deferred
    Tax Asset Valuation Allowance
    Results
    of Operations
  Year
    Ended December 31, 2005 Compared to 2004
  Collaboration, Commercial Agreement and Grant
    Revenue.
  Research and Development Expense.
  General and Administrative.
  Amortization of Stock-Based Compensation.
 54




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##### Table of Contents



Interest Income.
  Interest Expense.
  Interest Expense Associated with Bridge
    Notes.
    Year
    Ended December 31, 2004 Compared to 2003
  Collaboration, Commercial Agreement and Grant
    Revenue.
  Research and Development Expense.
  General and Administrative.
  In-process Technology.
  Interest Income.
  Interest Expense.
 55




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Interest
    Expense Associated with Bridge Notes
      Liquidity
    and Capital Resources
  Sources
    of Liquidity
      Series A-2
   56




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##### Table of Contents



Cash
    Flows
          Funding
    Requirements
    
    terms and timing of any collaborative, licensing and other
    arrangements that we may establish;
    rate of progress and cost of our clinical trials and other
    research and development activities;
    scope, prioritization and number of clinical development and
    research programs we pursue;
    costs and timing of regulatory approval; 57




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##### Table of Contents




    costs of establishing or contracting for sales and marketing
    capabilities;
    costs of manufacturing;
    extent to which we acquire or in-license new products,
    technologies or businesses;
    effect of competing technological and market
    developments; and
    costs of filing, prosecuting, defending and enforcing any patent
    claims and other intellectual property rights.      Off-Balance
    Sheet Arrangements
    Contractual
    Obligations
    Payments Due by PeriodLess Than


1 to


4 to


More ThanContractual
    Obligations

Total


1 Year


3 Years


5 Years


5 Years(In thousands)Long-term debt obligations(1)


10,212



3,466



6,746







Operating lease obligations


4,131



1,939



2,173



19



License obligations(2)


















Total

$
14,343


$
5,405


$
8,919


$
19


$
     (1)
    
    Long term debt obligations do not include a convertible note
    payable of $6.0 million, which can only be settled through
    the issuance of shares of our common stock upon an initial
    public offering or the sale of our business. 58




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##### Table of Contents



(2)
    
    License obligations do not include contingent payments of up to
    $17.0 million payable to Shire upon the completion of
    milestones related to the successful development and approval of
    Troxatyl for the treatment of AML, $11.0 million of which
    is payable upon the satisfaction of specified milestone events
    leading up to and including the filing of an NDA. License
    obligations also do not include royalties, including minimum
    royalty payments of approximately $10.0 million over a
    four-year period following product launch, or other milestone
    payments that may be payable in the future to Shire upon the
    occurrence of other development and regulatory events for solid
    tumor and other indications. Because we have not yet completed
    clinical development or obtained regulatory approval of Troxatyl
    for any indication, we are currently unable to estimate the
    amount or timing of any of these other potential payments.      Related
    Party Transactions
    Income
    Taxes
        Recently
    Issued Accounting Pronouncements
  Inventory Costs,
    an amendment of ARB No. 43, Chapter 4. Inventory Pricing,
  Share-Based Payment Accounting for Stock-Based
    Compensation.
 59




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##### Table of Contents



Accounting for Stock Issued to Employees, Statement of Cash
    Flows.
      Exchanges of Nonmonetary Assets  An
    Amendment of APB Opinion No. 29, Accounting for Nonmonetary
    Transactions, Accounting for Nonmonetary Transactions,
  Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk   60




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61




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##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  Index to
    Financial Statements
  Report of
    Independent Registered Public Accounting Firm


63Consolidated
    Balance Sheets as of December 31, 2005 and
    December 31, 2004


64Consolidated
    Statements of Operations for the years ended December 31,
    2005, 2004 and 2003


65Consolidated
    Statements of Stockholders Deficit for the years ended
    December 31, 2005, 2004 and 2003


66Consolidated
    Statements of Cash Flows for the years ended December 31,
    2005, 2004 and 2003


67Notes to
    Consolidated Financial Statements


68  62




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REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                     63




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##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Consolidated Balance Sheets
  December 31,2005


2004(In thousands, except par value
    and share data)AssetsCurrent assets:Cash and cash equivalents

$
17,718


$
11,512Accounts receivable


863



919Prepaid expenses


1,279



1,048Other current assets


101



181Total current assets


19,961



13,660Property and equipment, net


7,168



9,663Goodwill and intangible assets, net


3,439



3,615Other assets


2,683



1,394Total assets

$
33,251


$
28,332Liabilities and
    stockholders deficitCurrent liabilities:Accounts payable

$
2,935


$
652Accrued liabilities


4,329



2,731Accrued liability for the
    acquisition of Troxatyl






1,000Other current liabilities


128



135Current portion of line of credit


9,733



2,958Bridge notes payable






13,154Deferred revenue


2,218



1,664Total current liabilities


19,343



22,294Deferred rent


169



266Line of credit, net of current
    portion






1,308Deferred revenue, long-term


2,579



2,396Note payable, net of current
    portion


6,000



6,000Commitments and contingencies
    (Note 4)Redeemable convertible preferred
    stock, par value $.001; Authorized
    shares  19,000,000 and 34,391,054 at
    December 31, 2005 and 2004, respectively; issued and
    outstanding shares 16,692,654 and 1,765,900 at December 31,
    2005 and 2004, respectively; aggregate liquidation preference
    and redemption amount  $48,190 and $75,690 at
    December 31, 2005 and 2004, respectively


46,837



74,850Stockholders deficit:Common stock, par value $.001;
    Authorized shares  50,000,000 and 35,000,000 at
    December 31, 2005 and 2004, respectively; issued and
    outstanding shares  854,160 and 500,436 at
    December 31, 2005 and 2004, respectively


1



1Notes receivable from stockholders


(59
)


(138
)Additional paid-in capital


99,110



27,120Deferred compensation


(5,101
)


Accumulated deficit


(135,628
)


(105,765
)Total stockholders deficit


(41,677
)


(78,782
)Total liabilities and
    stockholders deficit

$
33,251


$
28,332    64




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##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Consolidated Statements of Operations
  Years Ended
    December 31,2005


2004


2003(In thousands, except per share
    data)Revenue:Grants

$
1,949


$
6,380


$
3,344Grants  subcontractor
    reimbursements


5,083



4,976



4,599Collaborations and commercial
    agreements


14,604



15,941



10,135Total revenue


21,636



27,297



18,078Expenses:Research and development


37,881



31,444



28,587General and administrative


11,820



6,719



7,353In-process technology






4,000



Total operating expenses


49,701



42,163



35,940Loss from operations


(28,065
)


(14,866
)


(17,862
)Interest income


284



175



320Interest expense


(422
)


(669
)


(1,219
)Interest expense associated with
    bridge notes


(1,188
)


(3,392
)


Net loss


(29,391
)


(18,752
)


(18,761
)Accretion to redemption value of
    redeemable convertible preferred stock


(472
)


(329
)


(329
)Net loss attributable to common
    stockholders

$
(29,863
)

$
(19,081
)

$
(19,090
)Basic and diluted net loss per
    share attributable to common stockholders:

$
(48.32
)

$
(39.84
)

$
(44.92
)Shares used to compute basic and
    diluted net loss per share attributable to common stockholders:


618



479



425    65




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##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Consolidated Statements of Stockholders
    Deficit
    Years Ended December 31, 2003, 2004 and 2005
  NotesReceivable


Additional








TotalCommon Stock


from


Paid-In


Deferred


Accumulated


StockholdersShares


Amount


Stockholders


Capital


Compensation


Deficit


Deficit(In thousands, except share
    data)Balance at December 31, 2002


430,297


$
1


$
(1,989
)

$
10,994


$
(1,649
)

$
(67,594
)

$
(60,237
)Issuance of warrant to lender














15











15Issuance of common stock upon
    exercise of stock options


307











5











5Repurchase of unvested restricted
    stock


(7,077
)






91



(86
)










5Issuance of common stock to former
    employee


3,629























Repayment of notes receivable from
    stockholders










25















25Accrued interest on notes
    receivable from stockholders










(124
)














(124
)Deferred compensation for issuance
    of equity instruments














57



(57
)






Stock-based compensation, including
    amortization of deferred compensation














123



1,116







1,239Write-off of issuance costs
    incurred in equity financing














118











118Deemed dividend and accretion to
    redemption value of redeemable convertible preferred stock






















(329
)


(329
)Net loss and comprehensive loss






















(18,761
)


(18,761
)Balance at December 31, 2003


427,156


$
1


$
(1,997
)

$
11,226


$
(590
)

$
(86,684
)

$
(78,044
)Issuance of common stock upon
    exercise of stock options


11,196











62











62Repurchase of unvested restricted
    stock


(744
)










(10
)










(10
)Repurchase of common stock in
    exchange for settlement of notes and accrued interest from
    stockholders


(131,224
)






1,764



(1,764
)










Forgiveness of a portion of
    principal on notes and accrued interest on note settlement










131



651











782Repayment of notes receivable from
    stockholders










42















42Accrued interest on notes
    receivable from stockholders










(78
)














(78
)Deferred compensation for issuance
    of equity instruments














6



(6
)






Amortization of stock-based
    compensation














(147
)


596







449Issuance costs incurred in equity
    financing














(166
)










(166
)Conversion of redeemable preferred
    stock into common stock for non-participation in the bridge
    financing


194,052











13,785











13,785Issuance of warrants to bridge note
    lenders














3,477











3,477Deemed dividend and accretion to
    redemption value of redeemable convertible preferred stock






















(329
)


(329
)Net loss and comprehensive loss






















(18,752
)


(18,752
)Balance at December 31, 2004


500,436


$
1


$
(138
)

$
27,120


$



$
(105,765
)

$
(78,782
)Issuance of common stock upon
    exercise of stock options


213,417











222











222Conversion of preferred stock into
    common stock for non-participation in the Series B financing


70,392











1,410











1,410Repayment of notes receivable from
    stockholders










81















81Accrued interest on notes
    receivable from stockholders










(3
)














(3
)Deferred compensation for issuance
    of equity instruments














12,944



(12,944
)






Amortization of stock-based
    compensation


















10,233







10,233Repurchase of unvested restricted
    stock


(85
)






1



(4
)










(3
)Issuance of restricted stock


70,000











654



(654
)






Issuance of equity instruments to
    former employees and consultants














1,736



(1,736
)






Issuance of warrants to lenders














498











498Deemed dividend and accretion to
    redemption value of redeemable convertible preferred stock






















(472
)


(472
)Reduction of redemption value on
    redeemable preferred stock














54,530











54,530Net loss and comprehensive loss






















(29,391
)


(29,391
)Balance at December 31, 2005


854,160


$
1


$
(59
)

$
99,110


$
(5,101
)

$
(135,628
)

$
(41,677
)    66




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Consolidated Statements of Cash Flows
  Years Ended
    December 31,2005


2004


2003(In thousands)Operating activities:Net loss

$
(29,391
)

$
(18,752
)

$
(18,761
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation and amortization


3,976



5,002



5,110Imputed interest expense on
    convertible debenture






18



239Stock-based compensation


10,233



449



1,239Amortization of discount on
    warrants


72



64



84Amortization of discount on
    warrants associated with bridge notes


727



2,753



Deferred rent


(97
)


(27
)


169Accrual of interest on notes
    receivable from stockholders






(78
)


(124
)Accrual of interest on bridge
    notes payable


411



467



Forgiveness of principal and
    accrued interest on note settlement






782



Changes in operating assets and
    liabilities:


Prepaid expenses and other current
    assets


(95
)


1,102



(2,185
)Accounts payable and accrued
    liabilities


2,874



(680
)


1,968Deferred revenue


737



(2,643
)


5,865Other assets


(1,289
)


559



84Net cash used in operating
    activities


(11,842
)


(10,984
)


(6,312
)Investing activities:Purchases of property and
    equipment, net


(1,303
)


(1,175
)


(1,313
)Net cash used in investing
    activities


(1,303
)


(1,175
)


(1,313
)Financing activities:Proceeds from lines of credit and
    notes payable


8,868



643



1,302Principal payments on lines of
    credit and notes payable


(2,974
)


(3,946
)


(3,912
)Proceeds from repayment of notes
    receivable from stockholders


79



42



25Issuance of common stock for cash,
    net of repurchases


219



52



10Issuance of preferred stock, net


13,159



(166
)


118Issuance of bridge notes






13,411



Net cash provided by (used in)
    financing activities


19,351



10,036



(2,457
)Net increase (decrease) in cash
    and cash equivalents


6,206



(2,123
)


(10,082
)Cash and cash equivalents at
    beginning of year


11,512



13,635



23,717Cash and cash equivalents at end
    of year

$
17,718


$
11,512


$
13,635Supplemental schedule of cash flow
    information:Cash paid for interest

$
363


$
587


$
890Supplemental schedule of non-cash
    investing and financing activities:Issuance of warrant related to
    line of credit

$
498


$



$
15Deferred compensation

$
15,334


$



$
57Conversion of bridge notes and
    redeemable convertible preferred stock to equity

$
54,530



13,785



Conversion of bridge notes to
    preferred stock

$
14,291







    67




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes
    to Consolidated Financial Statements
 (in thousands, except share and per share data)
  1.
    Organization
    and Summary of Significant Accounting Policies  Organization
    and Business
    Principles
    of Consolidation
    Use of
    Estimates
    Stock
    Split
  .126453-for-1
  1-for-2 1-for-2
  Reclassification
    Cash
    and Cash Equivalents
    Fair
    Value of Financial Statements
   68




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Accounts
    Receivable
      December 31,2005

2004

2003Customer A

38%

34%

28%Customer B

33%

42%

44%Customer C

12%

7%

10%   Property
    and Equipment
    Long-Lived
    Assets
  Accounting for the
    Impairment or Disposal of Long-Lived Assets
  Deferred
    Rent
    Redeemable
    Convertible Preferred Stock
   69




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Stock-Based
    Compensation
  Accounting for Stock
    Issued to Employees
  Accounting for Stock-Based Compensation
    (SFAS No. 123) Accounting for Equity
    Instruments That are Issued to Other Than Employees for
    Acquiring, or in Conjunction with Selling Goods and
    Services
      Accounting for
    Stock Appreciation Rights and Other Variable Stock Option or
    Award Plans.
 70




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
     For the Years Ending
    December 31,2006


3,5262007


1,3512008


2002009


24$
5,101     December 31,2005


2004


2003Net loss attributable to common
    stockholders, as reported

$
(29,863
)

$
(19,081
)

$
(19,090
)Add: Stock-based employee
    compensation expense included in net loss attributable to common
    stockholders


8,785



121



334Deduct: Stock-based employee
    compensation determined under the fair value method


(6,859
)


(262
)


(475
)Pro forma net loss attributable to
    common stockholders

$
(27,937
)

$
(19,222
)

$
(19,231
)Basic and diluted net loss
    attributable to common stockholders per share, as reported

$
(48.32
)

$
(39.84
)

$
(44.92
)Pro forma basic and diluted net
    loss attributable to common stockholders per share

$
(45.21
)

$
(40.13
)

$
(45.25
)     2005

2004

2003Risk-free interest rate

3%

3%

3%Expected volatility

63%

63%

63%Expected lives

4 years

4 years

4 yearsExpected dividend





     Revenue
    Recognition
   71




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Revenue Recognition Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21).
     EITF 00-21.
    out-of-pocket Reporting Revenue Gross
    as a Principal Versus Net as an Agent Issue 01-14, Income Statement Characterization of Reimbursements Received
    for
    Out-of-Pocket
    Expenses Incurred (EITF 01-14).
    Research
    and Development
    Income
    Taxes
  Accounting for Income Taxes.
 72




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Net
    Loss Per Share Attributable to Common Stockholders
  Earnings Per Share
  Years Ended
    December 31,2005


2004


2003Redeemable convertible preferred
    stock


5,686,849



993,761



1,077,002Notes payable


1,000,000



1,000,000



666,667Outstanding common stock options


636,927



183,881



139,442Outstanding warrants


70,645



10,479



10,276Total


7,394,421



2,188,121



1,893,387       2005Net Loss Attributable to Common
    Stock


(29,863
)Weighted Average Common Shares
    Outstanding


618Weighted Average Conversion of
    Preferred to Common


5,687Weighted Average Conversion of
    Notes Payable to Common


1,000Proforma weighted average common
    shares outstanding


7,305Net loss per common share, as
    reported

$
(48.32
)Proforma net loss per common share

$
(4.09
)   Comprehensive
    Income (Loss)
  Reporting Comprehensive Income
 73




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Segment
    Reporting
  Disclosure
    About Segments of an Enterprise and Related Information
  Recently
    Issued Accounting Standards
  Inventory Costs, an amendment of ARB No. 43,
    Chapter 4. Inventory Pricing,
  Share-Based Payment Accounting for Stock-Based
    Compensation. Accounting for Stock Issued to
    Employees, Statement of Cash Flows.
     74




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Exchanges of Nonmonetary Assets  An
    Amendment of APB Opinion No. 29, Accounting for Nonmonetary
    Transactions. Accounting for Nonmonetary
    Transactions,
  Accounting Changes and Error Corrections, Accounting
    Changes Reporting
    Accounting Changes in Interim Financial Statements.
  2.
    Balance
    Sheet Details  Property
    and Equipment
    Estimated

December 31,Life in Years

2005


2004Lab equipment

5-7

$
12,573


$
11,851Computers and equipment

3-5


7,676



7,629Leasehold improvements

4-15


4,935



4,795Furniture

10


411



411Construction in progress

NA


756



76626,351



25,452Accumulated depreciation and
    amortization




(19,183
)


(15,789
)$
7,168


$
9,663    75




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      Goodwill
    and Intangible Assets
    December 31, 2005GrossEstimated

Carrying


AccumulatedLife in Years

Amount


AmortizationGoodwill

Indefinite

$
3,914


$
(522
)Licenses

3  5


977



(930
)Total intangible assets



$
4,891


$
(1,452
)   December 31, 2004GrossEstimated

Carrying


AccumulatedLife in Years

Amount


AmortizationGoodwill

Indefinite

$
3,914


$
(522
)Licenses

3  5


977



(754
)Total intangible assets



$
4,891


$
(1,276
)       2006


382007


9$
47   3.
    Lines of
    Credit     76




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
         No. 95-22, Balance Sheet Classifications of Borrowings Outstanding
    under Revolving Credit Agreements that include both a Subjective
    Acceleration Clause and a Lock-Box Arrangement Bulletin No. 79-3, Subjective Acceleration Clauses in Long-Term Debt
    Agreements
    2006

$
3,4662007


3,2012008


3,2882009


257Total

$
10,212    77




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   4.
    Commitments
    and Collaborative Research and Development Agreements        2006

$
1,9392007


1,4172008


7332009


232010


19Total minimum lease payments

$
4,131     Bridge
    Financing
    Series A-2
  Series A-1, one-for-one Series A-1,
   78




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    No. 98-5, Accounting for Convertible Securities with Beneficial
    Conversion Features No. 00-27, Application of Issue
    No. 98-5
    to Certain Convertible Instruments
  Note Payable
      Sponsored
    Research and Drug Discovery Collaboration Agreements with Cystic
    Fibrosis Foundation Therapeutics, Inc.
    Collaboration
    and License Agreement with Eli Lilly and Company
     79




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      In-Licensing
    of
    Troxatyltm
    5.
    Redeemable
    Convertible Preferred Stock  Redeemable
    Convertible Preferred Stock
    Aggregate LiquidationShares Issued and


Preference andOutstanding


Redemption ValueSeries A


541,594


$
7,709Series B


809,299



32,000Series C


673,419



45,000Series D


129,692



5,4052,154,004


$
90,114     Series A


114,159Series B


167,684Series C


69,206Series D


37,055Total


388,104  80




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Series A-1, one-for-one
  Aggregate LiquidationShares Issued and


Preference andOutstanding


Redemption ValueSeries A-1


427,435


$
6,084Series B-1


641,615



25,370Series C-1


604,213



40,375Series D-1


92,637



3,8611,765,900


$
75,690   Series A-1, one-for-one 2 3 Series A-1,
  Series A-1,
  Series A-1,
  Series A-2 Series A-1, Series A-1, Series A-2 Series A-1,
 81




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Aggregate LiquidationShares Issued and


Preference andOutstanding


Redemption ValueSeries A (New)


13,525,400


$
33,272Series B (New)


3,167,254



14,91816,692,654


$
48,190   2 3
  6.
    Stockholders
    Deficit  Common
    Stock
    .126453-for-1 1-for-2 1-for-2 1-for-2
  Stock
    Options
   82




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Weighted-AverageShares


Exercise PriceOutstanding at December 31,
    2002


129,094


$
12.80Granted


46,958


$
10.12Exercised


(307
)

$
13.44Cancelled


(11,644
)

$
13.44Outstanding at December 31,
    2003


164,101


$
11.98Granted


39,905


$
4.80Exercised


(11,196
)

$
5.59Cancelled


(28,335
)

$
12.04Outstanding at December 31,
    2004


164,475


$
10.67Granted


1,396,627


$
1.00Exercised


(213,417
)

$
1.04Cancelled


(200,999
)

$
2.41Outstanding at December 31,
    2005


1,146,686


$
2.13       Options Outstanding


Options ExercisableWeighted








WeightedRange of

Number


Average


Weighted


Number


AverageExercise

of


Remaining


Average


of


ExercisePrice

Shares


Life in Years


Exercise Price


Shares


Price$1.00


1,010,211



9.39


$
1.00



247,095


$
1.00$1.58


7,020



5.34


$
1.58



6,682


$
1.58$3.96


33,252



8.05


$
3.96



32,094


$
3.96$13.44


96,203



6.44


$
13.44



81,549


$
13.44$1.00-$13.44


1,146,686



9.08


$
2.13



367,420


$
4.16       2005
    Equity Incentive Plan
   83




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    2005
    Non-Employee Directors Stock Option Plan
    2005
    Employee Stock Purchase Plan
      Notes Receivable
     84




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Warrants
  Series A-1
    Series C-1
  Series C-1
   85




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Shares Reserved
    for Future Issuance
    December 31,


December 31,2005


2004Conversion of convertible
    preferred stock


8,346,316



882,950Conversion of convertible
    promissory note


1,000,000



1,000,0002000 Equity Incentive Plan


1,394,614



666,210Warrants


195,629



6,72810,936,559



2,555,888     7.
    Income
    Taxes    December 31,2005


2004Deferred tax assets:Net operating loss carryforwards

$
38,538


$
29,954Research and development credits


5,990



4,783Capitalized research and
    development


1,555



1,742License






1,630Accrued vacation


224



258Deferred revenue


1,954



1,655Other


141



236Depreciation and amortization


1,030



434Total deferred tax assets


49,432



40,692Valuation allowance for deferred
    tax assets


(49,432
)


(40,692
)Net deferred tax assets

$



$
      86




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    8.
    Employee
    Benefit Plan    9.
    Reductions
    In Force        10.
    Quarterly
    Financial Data (unaudited)    2005First


Second


Third


Fourth


TotalRevenues

$
4,010


$
5,847


$
4,893


$
6,886


$
21,636Net loss


(5,806
)


(7,166
)


(10,552
)


(5,867
)


(29,391
)Accretion of redeemable
    convertible preferred stock issuance costs


(82
)


(82
)


(55
)


(253
)


(472
)Net loss applicable to common
    stockholders

$
(5,888
)

$
(7,248
)

$
(10,607
)

$
(6,120
)

$
(29,863
)Net loss per share

$
(11.61
)

$
(12.96
)

$
(17.38
)

$
(7.30
)

$
(47.56
)Accretion of redeemable
    convertible preferred stock issuance costs


(0.16
)


(0.15
)


(0.09
)


(0.31
)


(0.76
)Net loss per share applicable to
    common stockholders

$
(11.77
)

$
(13.11
)

$
(17.47
)

$
(7.61
)

$
(48.32
)   87




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  2004First


Second


Third


Fourth


TotalRevenues

$
4,619


$
7,239


$
6,573


$
8,866


$
27,297Net loss


(4,934
)


(2,138
)


(8,416
)


(3,264
)


(18,752
)Accretion of redeemable
    convertible preferred stock issuance costs


(82
)


(82
)


(83
)


(82
)


(329
)Net loss applicable to common
    stockholders

$
(5,016
)

$
(2,220
)

$
(8,499
)

$
(3,346
)

$
(19,081
)Net loss per share

$
(11.45
)

$
(4.89
)

$
(15.76
)

$
(6.44
)

$
(39.15
)Accretion of redeemable
    convertible preferred stock issuance costs


(0.19
)


(0.19
)


(0.16
)


(0.16
)


(0.69
)Net loss per share applicable to
    common stockholders

$
(11.64
)

$
(5.08
)

$
(15.92
)

$
(6.60
)

$
(39.84
)     11.
    Subsequent
    Events  Reverse
    Stock Split
  1-for-2 1-for-2
  Initial
    Public Offering
  Form S-1 number 333-128059)
  Termination
    Agreement
   88




---



##### Table of Contents



SGX
    Pharmaceuticals, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    License
    and Collaboration Agreement
     89




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures        Item 9B.
    Other
    Information   PART III  Item 10.
    Directors
    and Executive Officers of the Registrant  Executive
    Officers, Directors and Key Employees
    Name

Age

PositionExecutive Officers and
    DirectorsMichael Grey

53

President, Chief Executive Officer
    and DirectorStephen K. Burley, M.D.,
    D.Phil

48

Chief Scientific Officer and
    Senior Vice President, ResearchW. Todd Myers, C.P.A.

38

Chief Financial OfficerAnnette North, Esq.

40

Vice President, Legal Affairs and
    Corporate SecretarySiegfried Reich, Ph.D.(4)

46

Vice President, Drug DiscoveryChristopher S. Henney, Ph.D.,
    D.Sc.(1)(2)

65

Director and ChairmanLouis C. Bock(3)

40

DirectorKarin Eastham, C.P.A.(1)(3)

56

DirectorJean-François
    Formela, M.D. (2)(3)

49

DirectorVijay Lathi(1)

33

DirectorStelios Papadopoulos, Ph.D.(2)

57

DirectorKey EmployeesSean McCarthy, D.Phil

38

Vice President, Business
    Development  90




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##### Table of Contents



(1)
    
    Member of the audit committee.(2)
    
    Member of the corporate governance and nominating committee.(3)
    
    Member of the compensation committee.(4)
    
    Dr. Reich joined us in mid-January 2006 as our Vice
    President of Drug Discovery.  Executive
    Officers and Directors
  Michael Grey,
  Stephen K. Burley, M.D., D.Phil.,
  W. Todd Myers, C.P.A.,
  Annette North, Esq.,
 91




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##### Table of Contents



Siegfried Reich, Ph.D. ®
  Christopher S. Henney, Ph.D., D.Sc.,
  Louis C. Bock
  Karin Eastham, C.P.A., not-for-profit
  Jean-François Formela, M.D., A, Schering-Ploughs
 92




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##### Table of Contents



Vijay Lathi
  Stelios Papadopoulos, Ph.D.,
  Key
    Employees
  Sean McCarthy, D.Phil,
    Audit
    Committee
    Section 16(a)
    Beneficial Ownership Reporting Compliance
     93




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##### Table of Contents



Code of
    Ethics
    Item 11.
    Executive
    Compensation  Compensation
    Committee Interlocks and Insider Participation
    Director
    Compensation
       94




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##### Table of Contents




    $60,000 for the Chairman of our board of directors and $25,000
    for other non-employee members of our board;
    $15,000 for the Chair of the audit committee and $7,500 for the
    other audit committee members;
    $5,000 each for the Chair of the compensation committee and the
    nominating committee; and
    $2,500 for the other compensation committee and nominating
    committee members.     95




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##### Table of Contents



Executive
    Compensation
    Summary
    Compensation Table(1)
  Long-TermCompensationSecuritiesAnnual Compensation


Underlying


All OtherName and Principal
    Position(s)

Year


Salary


Bonus(2)


Options


CompensationMichael Grey


2005


$
349,344







363,863



President, Chief Executive
    Officer


2004


$
332,308


$
37,700



2,383
(3)

$
81,893
(4)and Member of the Board of
    DirectorsStephen K. Burley


2005


$
324,000


$
100,000



175,000



Chief Scientific Officer
    and


2004


$
311,539


$
31,688



2,003
(3)


Senior Vice President,
    ResearchAnnette North


2005


$
202,500







50,000



Vice President, Legal
    Affairs


2004


$
194,470


$
11,780



744
(3)

$
3,836
(4)and Corporate
    SecretaryW. Todd Myers


2005


$
8,654











Chief Financial
    Officer(5)


2004















Herbert Mutter


2005


$
106,434







12,500


$
45,926
(7)Former Chief Financial
    Officer(6)


2004


$
232,201


$
18,168



1,148
(3)

$
9,050
(4)     (1)
    
    In accordance with the rules of the SEC, the compensation
    described in this table does not include medical, group life
    insurance or other benefits which are generally available to all
    of our salaried employees and certain perquisites and other
    personal benefits received by a named executive officer which do
    not exceed the lesser of $50,000 or 10% of that named executive
    officers salary and bonus disclosed in this table.(2)
    
    Bonuses paid in 2004 were earned by the respective named
    executive officer in 2003. Amounts reflect the cash portion of
    the bonuses awarded to the named executive officers in 2004. In
    2004, the named executive officers were also granted fully
    vested stock options at an exercise price of $3.96 per
    share. The stock options were fully vested as of the date of
    grant. See note (3) below. In March 2006, cash bonuses were
    awarded to Mr. Grey in the amount of $140,003, to
    Dr. Burley in the amount of $105,456, to Ms. North in
    the amount of $60,840 and to Mr. Myers in the amount of
    $56,250 in part based on performance in 2005. These amounts are
    not reflected in the Summary Compensation Table. See Cash
    Bonuses Awarded in 2006 included below under Item 11
    of Part III of this report.(3)
    
    Amounts reflect stock options granted in 2004 for performance in
    2003. The stock options were fully vested as of the date of
    grant.(4)
    
    Represents forgiveness of indebtedness income as discussed under
    the heading Note Settlement Agreements below.(5)
    
    Mr. Myers joined us as our Chief Financial Officer in
    December 2005.(6)
    
    Mr. Mutter resigned as our Chief Financial Officer in May
    2005.(7)
    
    Represents $32,926 for unused vacation and $13,000 for
    consulting services paid in September 2005.  Stock
    Option Grants in Last Fiscal Year
   96




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
    the rate of progress and cost of our clinical trials and other
    research and development activities;
    the terms of our collaborative, licensing and other arrangements;
    the fact that our options involved illiquid securities in a
    non-public company;
    prices of preferred stock issued by us to outside investors in
    arms-length transactions;
    the senior rights, preferences and privileges of our preferred
    stock over our common stock; and
    the likelihood that our common stock would become liquid through
    an initial public offering, an acquisition of us or another
    event.    Individual Grants(1)% of TotalOptionsNumber of


Granted to








Potential Realizable Value atSecurities


Employees in








Assumed Annual Rates ofUnderlying


the Year Ended








Stock Price Appreciation forOptions


December 31,


Exercise or Base


Expiration


Option Term(2)Name

Granted


2005(1)


Price ($/Sh)


Date


5%


10%Michael Grey


363,863



26.1
%


1.00



5/12/2015


$
3,068,539


$
4,920,149Stephen K. Burley


175,000



12.5
%


1.00



5/12/2015


$
1,475,815


$
2,366,347Annette North


50,000



3.6
%


1.00



5/12/2015


$
421,661


$
676,099W. Todd Myers(3)






















Herbert Mutter(4)


12,500



0.9
%


1.00



5/12/2015


$
105,415


$
169,025     (1)
    
    Based on 1,396,627 stock options granted to employees during the
    fiscal year ended December 31, 2005 under our 2000 equity
    incentive plan, including grants to executive officers.(2)
    
    Potential realizable values are computed by (a) multiplying
    the number of shares of common stock subject to a given option
    by the initial public offering price of $6.00 per share,
    (b) assuming that the aggregate stock value derived from
    that calculation compounds at the annual 5% or 10% rate shown in
    the table for the entire term of the option and
    (c) subtracting from that result the aggregate option
    exercise price. The 5% and 10% assumed annual rates of stock
    price appreciation are mandated by the rules of the SEC and do
    not represent our estimate or projection of future common stock
    prices.(3)
    
    Mr. Myers joined us as our Chief Financial Officer in
    December 2005.(4)
    
    Mr. Mutter resigned from his position as our Chief
    Financial Officer in May 2005. 97




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Aggregated
    Option Exercises in Last Fiscal Year and Fiscal Year-End Option
    Values
    Number of Securities


Value of Unexercised
    In-the-Shares





Underlying Unexercised


Money Options at FiscalAcquired on





Options at Fiscal
    Year-End


Year-End(1)Name

Exercise


Value Realized


Exercisable


Unexercisable


Exercisable


UnexercisableMichael Grey


100,000


$
500,000



49,573



221,731


$
225,006


$
1,099,170Stephen K. Burley


50,000


$
250,000



58,066



106,943


$
127,730


$
528,650Annette North










24,227



30,625


$
100,473


$
151,045W. Todd Myers

















$



$
Herbert Mutter


12,500


$
62,500










$



$
     (1)
    
    The value of an unexercised
    in-the-money
    option as of December 31, 2005 and the value realized are
    each equal to the excess of the initial public offering price of
    $6.00 per share over the exercise price for the option,
    multiplied by the number of shares subject to the option,
    without taking into account any taxes that may be payable in
    connection with the transaction.  Employment,
    Termination of Employment and
    Change-in-Control
    Arrangements
  Employment
    Agreements
      out-of-pocket
   98




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out-of-pocket
         99




---



##### Table of Contents



Twenty-five
        Stock
    Option and Restricted Stock Unit Agreements
   100




---



##### Table of Contents



Cash
    Bonuses Awarded in 2006
    Note Settlement
    Agreements
   101




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##### Table of Contents



Confidential
    Information and Inventions Agreement
    Employee
    Benefit Plans
  2005
    Equity Incentive Plan
    
    ISOs, which may be granted solely to our employees, including
    officers; and
    NSOs, stock purchase awards, stock bonus awards, stock unit
    awards, stock appreciation rights and other stock awards, which
    may be granted to our directors, consultants or employees,
    including officers.  Share Reserve.
  Administration.
 102




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##### Table of Contents



Stock Options.
  Limitations.
  
    the option exercise price must be at least 110% of the fair
    market value of the stock subject to the option on the date of
    grant; and
    the term of any ISO award must not exceed five years from the
    date of grant.    Stock Purchase Awards.
  Stock Bonus Awards.
 103




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##### Table of Contents



Stock Unit Awards.
  Stock Appreciation Rights.
  Other Stock Awards.
  Changes to Capital Structure.
  Corporate Transactions.
  Plan Amendments.
  2005
    Non-Employee Directors Stock Option Plan
   104




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##### Table of Contents



Share Reserve.
  Administration.
  Stock Options.
  Form S-8
  Automatic
    Grants.
  
    Initial Grant.  Any person who becomes a
    non-employee director after the completion of our initial public
    offering will automatically receive an initial grant of an
    option to purchase 12,500 shares of our common stock upon
    his or her election. These options will vest in equal monthly
    installments over three years.
    Annual Grant.  In addition, any person who is a
    non-employee director on the date of each annual meeting of our
    stockholders automatically will be granted, on the annual
    meeting date, beginning with our 2007 annual meeting, an option
    to purchase 5,000 shares of our common stock, or the annual
    grant. However, the size of an annual grant made to a
    non-employee director who is elected after the completion of
    this offering and who has served for less than 12 months at
    the time of the annual meeting will be reduced by 25% for each
    full quarter prior to the date of grant during which such person
    did not serve as a non-employee director. These options will
    vest in equal monthly installments over 12 months.  Changes to Capital Structure.
  Corporate Transactions.
 105




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##### Table of Contents



Plan Amendments.
  2005
    Employee Stock Purchase Plan
    Share Reserve.
  Administration.
  Offering.
      Limitations.
  Corporate Transactions.
 106




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##### Table of Contents



Plan Amendments.
  401(k)
    Plan
    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    
    each person, or group of affiliated persons, known by us to
    beneficially own more than 5% of our common stock;
    each of our directors;
    each of our named executive officers; and
    all of our directors and executive officers as a group.     107




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Number of


Percentage ofShares


SharesBeneficially


BeneficiallyOwned


OwnedBAVP, L.P.(1)


2,547,441



16.97950 Tower Lane, Suite 700 
    Foster City, CA 94404Atlas Venture Fund IV, L.P. and
    its affiliates(2)


2,485,762



16.56890 Winter Street,
    Suite 320
    Waltham, MA 02451Sprout Capital VIII, L.P. and its
    affiliates(3)


1,406,967



9.3711 Madison Avenue
    New York, NY 10010Millennium Pharmaceuticals


1,000,000



6.6640 Landsdowne Street
    Cambridge, MA 02139Index Ventures Associates I
    Limited and its affiliates(4)


839,818



5.59No. 1 Seaton Place, St.
    Helier
    Jersey, Channel Islands JE48YJMichael Grey(5)


369,934



2.42Stephen K. Burley(6)


220,055



1.45W. Todd Myers(7)






*Annette North(8)


54,640



*Siegfried Reich(9)






*Herbert Mutter(10)


5,000



*Louis C. Bock(1)


2,547,441



16.97Jean-François Formela(2)


2,485,762



16.56Karin Eastham(11)


12,500



*Christopher Henney(12)


110,215



*Vijay Lathi(3)(13)


1,407,661



9.38Stelios Papadopoulos(14)


216,438



1.44All directors and executive
    officers as a group (11 persons)(15)


7,424,646



47.86     *
    
    Represents beneficial ownership of less than 1%.(1)
    
    The voting and disposition of the shares held by BAVP, L.P. is
    determined by the sole managing member of BA Venture
    Partners VI, LLC, the ultimate general partner of BAVP,
    L.P.  Louis C. Bock is one of four managing members of
    BA Venture Partners VI, LLC and, as such, may be
    deemed to share voting and investment power with respect to the
    2,546,747 shares of common stock beneficially owned by
    BA Venture Partners IV, Inc. Mr. Bock disclaims
    beneficial ownership of these shares, except to the extent of
    his proportionate pecuniary interest therein. Mr. Bock
    disclaims beneficial ownership of the securities beneficially
    owned by BA Venture Partners VI, LLC, and has advised
    us that the beneficial ownership of these securities should not
    be attributed to him. Mr. Bock also holds a stock option to
    purchase up to 12,500 shares of our Common Stock,
    694 shares of which he has the right to acquire from us
    within 60 days of March 27, 2006 and are included
    above. Pursuant to the policies of BAVP, L.P. and its
    affiliates, Mr. Bock is deemed to hold this stock option
    for the benefit of BAVP, L.P. and must exercise the stock option
    solely for the benefit of BAVP, L.P.; therefore, BAVP, L.P. may
    be deemed to be the indirect owner of such stock option.(2)
    
    Includes 27,734 shares (the Atlas III
    Shares) held by Atlas Venture Fund III, L.P.
    (Atlas III), 602 shares (the
    AVE III Shares) held by Atlas Venture
    Entrepreneurs Fund III, L.P.
    (AVE III), 1,880,457 shares (the
    Atlas IV Shares) held by Atlas Venture
    Fund IV, L.P. (Atlas IV), 545,934 shares
    (the Atlas IV-A Shares) 108




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##### Table of Contents



held by Atlas Venture Parallel
    Fund IV-A,
    C.V. (Atlas IV-A) and 30,341 shares (the
    AVE IV Shares, and together with the Atlas III
    Shares, the AVE III Shares, the Atlas IV Shares and
    the Atlas IV-A Shares, the Shares) held by Atlas
    Venture Entrepreneurs Fund IV, L.P. (AVE
    IV, and together with Atlas III, AVE III,
    Atlas IV and Atlas IV-A, the Funds). As general
    partner of certain of the Funds, and by virtue of the
    Funds relationship as affiliated limited partnerships,
    each of Atlas Venture Associates III, L.P.
    (AVA III LP) and Atlas Venture Associates IV,
    L.P. (AVA IV LP) may also be deemed to beneficially
    own the Shares. As the general partner of AVA III LP and
    AVA IV LP, respectively, Atlas Venture Associates III, Inc.
    (AVA III Inc.) and Atlas Venture Associates IV,
    Inc. (AVA IV Inc.) may also be deemed to
    beneficially own the Shares. AVA III LP, AVA IV LP,
    AVA III Inc. and AVA IV Inc. disclaim beneficial ownership
    of the Shares except to the extent of their pecuniary interest
    therein. In their capacities as directors of AVA III Inc. and
    AVA IV Inc. each of Messrs. Axel Bichara, Jean-Francois
    Formela and Christopher Spray may be deemed to beneficially own
    the Shares. Each of Messrs. Bichara, Formela and Spray
    disclaim beneficial ownership of the Shares except to the extent
    of his pecuniary interest therein. Dr. Formela also holds a
    stock option to purchase up to 12,500 shares of our common
    stock, 694 shares of which he has the right to acquire from
    us within 60 days of March 27, 2006 and are included
    above. The proceeds of the sale of any such shares belong to
    Atlas Venture Advisors, Inc. and, therefore, Dr. Formela
    disclaims beneficial ownership of these shares, except to the
    extent of his proportionate pecuniary interest therein.(3)
    
    Includes 1,245,812 shares held by Sprout Capital VIII,
    L.P., 74,744 shares held by Sprout Venture Capital, L.P.,
    26,988 shares held by Sprout Plan Investors, L.P.,
    55,342 shares held by DLJ ESC II, L.P. and
    4,081 shares held by DLJ Capital Corporation. Vijay K.
    Lathi is a member of our board of directors and is a Managing
    Director of New Leaf Venture Partners, L.L.C., or NLV. NLV has
    entered into an agreement with DLJ Capital Corporation, or
    DLJCC, whereby NLV provides sub-management services for the
    Sprout investment portfolio. DLJCC is the managing general
    partner of Sprout Capital VIII, L.P., the general partner of
    Sprout Venture Capital, L.P., which is affiliated with DLJ LBO
    Plans Management Corporation, the general partner of DLJ
    ESC II, L.P., and of DLJ LBO Plans Management
    Corporation II, which is the general partner of Sprout Plan
    Investors, L.P., Mr. Lathi disclaims beneficial ownership
    of these shares except to the extent of his pecuniary interest
    in these entities.(4)
    
    Includes 461,235 shares held by Index Ventures I (Jersey)
    L.P., 292,866 shares held by Index Ventures I (Delaware)
    L.P., 15,942 shares held by Index Ventures I Parallel
    Entrepreneur Fund (Jersey) L.P., 64,315 shares held by
    Index Ventures I GmbH & Co. KG and 5,460 shares
    held by Index Venture Management SA on behalf of Index Employee
    Investment Plan.(5)
    
    Includes 269,934 shares that Mr. Grey has the right to
    acquire from us within 60 days of March 27, 2006
    pursuant to the exercise of stock options, 181,932 of which are
    unvested as of 60 days after March 27, 2006 but may be
    early exercised by Mr. Grey, subject to repurchase by us.(6)
    
    Includes 164,324 shares that Dr. Burley has the right
    to acquire from us within 60 days of March 27, 2006
    pursuant to the exercise of stock options, 87,500 of which are
    unvested as of 60 days after March 27, 2006 but may be
    early exercised by Dr. Burley, subject to repurchase by us.(7)
    
    Mr. Myers joined as our Chief Financial Officer in December
    2005.(8)
    
    Represents 54,640 shares that Ms. North has the right
    to acquire from us within 60 days of March 27, 2006
    pursuant to the exercise of stock options, 25,000 of which are
    unvested as of 60 days after March 27, 2006 but may be
    early exercised by Ms. North, subject to repurchase by us.(9)
    
    Dr. Reich joined as our Vice President of Drug Discovery in
    mid-January 2006.(10)
    
    Mr. Mutter resigned as our Chief Financial Officer in May
    2005.(11)
    
    Includes 9,723 shares that are subject to repurchase by us
    within 60 days of March 27, 2006 under certain
    circumstances.(12)
    
    Includes 26,250 shares that are subject to repurchase by us
    within 60 days of March 27, 2006 under certain
    circumstances and 13,050 shares held by
    Dr. Henneys two adult children who do not reside with
    him, over which Dr. Henney has no beneficial ownership or
    control.(13)
    
    Includes 694 shares that Mr. Lathi has the right to
    acquire from us within 60 days of March 27, 2006. 109




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##### Table of Contents



(14)
    
    Includes 10,017 shares that Dr. Papadopoulos has the
    right to acquire from us within 60 days of March 27,
    2006 pursuant to the exercise of stock options. Also includes
    170,491 shares held by SGC Partners I L.L.C.
    Dr. Papadopoulos is a Vice Chairman of SG Cowen &
    Co., LLC. SG Cowen & Co., LLC is the managing member of
    SG Capital Partners L.L.C. which is the general partner of SG
    Merchant Banking Fund L.P. which is the sole member of SGC
    Partners I LLC. Because of the relationship, SGC Partners I LLC
    may be deemed to be an affiliate of SG Cowen & Co.,
    LLC. Dr. Papadopoulos disclaims beneficial ownership of
    these shares except to the extent of his pecuniary interest
    therein, if any.(15)
    
    Includes the shares referred to in footnotes (1), (2), (3), (5),
    (6), (8), (11), (12), (13) and (14) above.  Securities
    Authorized for Issuance under Equity Compensation
    Plans
    Equity
    Compensation Plan Information
  Number of Securities
    RemainingNumber of Securities to be





Available for Future IssuanceIssued Upon Exercise of


Weighted-Average Exercise


Under Equity CompensationOutstanding Options,


Price of Outstanding Options,


Plans (Excluding SecuritiesWarrants and Rights


Warrants and Rights


Reflected in Column(a))Plan Category

(a)


(b)


(c)Equity compensation plans approved
    by security holders


1,146,686


$
2.13



247,928Equity compensation plans not
    approved by security holders










Total


1,146,686







247,928   Item 13.
    Certain
    Relationships and Related Transactions  change-in-control 0.126453-for-1 1-for-2 1-for-2 1-for-2
  Stock
    Issuances
  Initial
    Issuances of Preferred Stock
    
    541,594 shares of our previously outstanding
    Series A preferred stock at a price of $14.23 per
    share of preferred stock between June and October 1999 for
    aggregate gross proceeds of approximately $7.7 million; 110




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##### Table of Contents




    809,299 shares of our previously outstanding Series B
    preferred stock at a price of $39.54 per share of preferred
    stock in March 2000 for aggregate gross proceeds of
    approximately $32.0 million;
    673,419 shares of our previously outstanding Series C
    preferred stock at a price of $66.82 per share of preferred
    stock in September 2000 for aggregate gross proceeds of
    approximately $45.0 million; and
    129,692 shares of our previously outstanding Series D
    preferred stock valued at $41.68 per share of preferred
    stock in connection with the acquisition of Prospect Genomics in
    May 2001.    Series DSeries A


Series B


Series C


PreferredPreferred Stock


Preferred Stock


Preferred Stock


StockInvestor

Purchased(1)


Purchased(1)


Purchased(1)


Purchased(1)Atlas Venture Fund IV, LP and
    affiliates


219,536



153,378



59,859



Prospect Venture Partners, LP


199,046



54,796



32,131



Sprout Capital VIII, LP and
    affiliates






227,615



47,475



Index Ventures I, LP and
    affiliates






50,581



51,544



BAVP, LP










178,455



Stelios Papadopoulos(2)






2,529



25,164



Christopher Henney(3)










7,482



Stephen K. Burley














9,263     (1)
    
    These share numbers reflect the
    0.126453-for-1
    reverse stock split effected in April 2005 even though these
    shares had been exchanged for shares of
    Series A-1,
    Series B-1
    and
    Series C-1
    preferred stock or converted to common stock and were no longer
    outstanding prior to the reverse stock split. As a result of the
    1-for-2
    reverse stock split effected in January 2006, each share of
    preferred stock outstanding upon the completion of our initial
    public offering was converted into one-half of a share of our
    common stock. The shares of preferred stock were not outstanding
    at the time of the
    1-for-2
    reverse stock split but, if outstanding, each share would have
    been convertible into one-half of a share of our common stock.(2)
    
    Includes 19,454 shares of our previous Series C
    preferred stock previously held of record by SGC Partners I LLC.
    SG Cowen & Co., LLC is the managing member of SG
    Capital Partners L.L.C. which is the general partner of SG
    Merchant Banking Fund L.P. which is the sole member of SGC
    Partners I LLC. Because of the relationship, SGC Partners I LLC
    may be deemed to be an affiliate of SG Cowen & Co.,
    LLC. Dr. Papadopoulos disclaims beneficial ownership of
    these shares except to the extent of his pecuniary interest
    therein, if any.(3)
    
    Includes shares held by Dr. Henneys two adult
    children who do not reside with him, over which Dr. Henney
    has no beneficial ownership or control.    Secured
    Bridge Financing and Recapitalization
     111




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##### Table of Contents



Series A-1, Series B-1, Series C-1 Series D-1 Series A-2
    Series A-2 Series A-1, Series B-1 Series C-1
  Shares of SeriesA-2 PreferredPrincipal Issued


Shares Issued Upon
    Exchange(1)Principal


Accrued


Upon Debt


Series


Series


SeriesInvestor

Loan Amount


Interest


Conversion(1)


A-1(2)


B-1(3)


C-1(4)Atlas Venture Fund IV, LP and
    affiliates

$
3,031,743


$
198,747



685,879



219,536



153,378



59,859Prospect Venture Partners, LP

$
1,500,000


$
98,333



339,349



199,046



54,796



32,131Sprout Capital VIII, LP and
    affiliates

$
1,915,674


$
125,583



433,388







227,615



47,475Index Ventures I, LP and
    affiliates

$
1,500,000


$
98,333



339,478







101,162



60,999BAVP, LP

$
3,000,000


$
196,666



678,698











178,455Stelios Papadopoulos(5)

$
307,378


$
20,150



69,539







2,529



25,164Christopher Henney(6)

$
52,106


$
3,415



11,788











7,482     (1)
    
    As a result of the
    1-for-2
    reverse stock split effected in January 2006, each share of
    outstanding preferred stock was then convertible into one-half
    of a share of our common stock. These shares of preferred stock
    are no longer outstanding but, if outstanding, each share would
    have been convertible into one-half of a share of our common
    stock.(2)
    
    Shares of
    Series A-1
    preferred stock issued upon exchange of shares of Series A
    preferred stock.(3)
    
    Shares of
    Series B-1
    preferred stock issued upon exchange of shares of Series B
    preferred stock.(4)
    
    Shares of
    Series C-1
    preferred stock issued upon exchange of shares of Series C
    preferred stock.(5)
    
    Includes $250,000 principal amount, $16,389 of accrued interest,
    56,558 shares of
    Series A-2
    preferred stock issued upon conversion of the outstanding note
    to SGC Partners I LLC and 19,454 shares of
    Series C-1
    preferred stock previously held of record by SGC Partners I LLC.
    Dr. Papadopoulos is a Vice Chairman of SG Cowen & Co.,
    LLC. SG Cowen & Co., LLC is the managing member of SG
    Capital Partners L.L.C. which is the general partner of SG
    Merchant Banking Fund L.P. which is the sole member of SGC
    Partners I LLC. Because of the relationship, SGC Partners I LLC
    may be deemed to be an affiliate of SG Cowen & Co.,
    LLC. Dr. Papadopoulos disclaims beneficial ownership of
    these shares except to the extent of his pecuniary interest
    therein, if any.(6)
    
    Includes shares held by Dr. Henneys two adult
    children who do not reside with him, over which Dr. Henney
    has no beneficial ownership or control. 112




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##### Table of Contents



Series B
    Financing and Recapitalization
  1-for-2 1-for-2 Series A-1, Series A-2, Series B-1, Series C-1 Series D-1 Series A-1, Series A-2, Series B-1, Series C-1 Series D-1
  0.126453-for-1
    Shares of CommonStock Issuable UponConversion ofSeries A Preferred





Series A andStock Received


Series B Preferred


Series B PreferredInvestor

in Exchange


Stock Purchased


StockAtlas Venture Fund IV, LP and
    affiliates


3,352,837



783,968



2,068,402Prospect Venture Partners, LP


1,141,795



267,148



704,471Sprout Capital VIII, LP and
    affiliates


2,118,568



495,368



1,306,967Index Ventures I, LP and
    affiliates


1,361,164



318,474



839,818BAVP, LP


3,317,734



775,760



2,046,747Stelios Papadopoulos(1)


334,596



78,246



206,421Christopher Henney(2)


52,884



12,374



32,628     (1)
    
    Includes 276,362 shares of Series A preferred stock
    and 64,620 shares of Series B preferred stock,
    together convertible into an aggregate of 170,491 shares of
    our common stock upon completion of this offering, held of
    record by SGC Partners I L.L.C. Dr. Papadopoulos is a Vice
    Chairman of SG Cowen & Co., LLC. SG Cowen &
    Co., LLC is the managing member of SG Capital Partners L.L.C.
    which is the general partner of SG Merchant Banking
    Fund L.P. which is the sole member of SGC Partners I LLC.
    Because of the relationship, SGC Partners I LLC may be deemed to
    be an affiliate of SG Cowen & Co., LLC.
    Dr. Papadopoulos disclaims beneficial ownership of these
    shares except to the extent of his pecuniary interest therein,
    if any.(2)
    
    Includes 13,050 shares held by Dr. Henneys two
    adult children who do not reside with him, over which
    Dr. Henney has no beneficial ownership or control. 113




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##### Table of Contents



Director

Principal StockholderDr. Jean-Francois Formela

Atlas Venture Fund IV, LP and
    affiliatesLouis C. Bock

BAVP, LPVijay Lathi

Sprout Capital VIII, LP and
    affiliates     Amended
    and Restated Investor Rights Agreement
  Form S-3 Form S-3
  Separation
    Agreement
    Indemnity
    Agreements
    Convertible
    Promissory Note
    Participation
    in Initial Public Offering
   114




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##### Table of Contents



Item 14.
    Principal
    Accounting Fees and Services   Fiscal Year Ended2005


2004(In thousands)Audit Fees

$
859


$
51Audit-related Fees






Tax Fees


12



9All Other Fees






Total Fees

$
871


$
60       Pre-Approval
    Policies and Procedures.
  Pre-approval case-by-case
   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Financial Statements
  Form 10-K,
  Financial Statement Schedules
    Exhibits
  ExhibitNumber

Description of
    Document3
.1(1)

Form of Registrants Amended
    and Restated Certificate of Incorporation.3
.2(1)

Form of Registrants Amended
    and Restated Bylaws.4
.1(4)

Form of Common Stock Certificate
    of Registrant.4
.2(1)

Form of Warrant to Purchase Common
    Stock issued by Registrant in July 2005 to Timothy Harris and
    Linda Grais.4
.3(4)

Form of Warrants issued by
    Registrant in July 2002 to GATX Ventures, Inc.4
.4(3)

Amended and Restated Warrant
    issued by Registrant in January 2005 to Oxford Finance
    Corporation. 115




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##### Table of Contents



ExhibitNumber

Description of
    Document4
.5(4)

Warrant issued by Registrant in
    July 2002 to Silicon Valley Bank.4
.6(1)

Amended and Restated Convertible
    Promissory Note dated December 16, 2004 between Registrant
    and Millennium Pharmaceuticals, Inc.4
.7(1)

Amended and Restated Investor
    Rights Agreement dated April 21, 2005 between Registrant
    and certain of its stockholders.4
.8(2)

Form of Warrant issued by
    Registrant in September and December 2005 to Oxford Finance
    Corporation and Silicon Valley Bank. Reference is made to
    Exhibit 10.34.4
.9

First and Second Amendments to
    Amended and Restated Investor Rights Agreement, dated
    October 31, 2005 and March 27, 2006, respectively,
    each between Registrant and certain of its stockholders.10
.1+(1)

Form of Indemnity Agreement by and
    between Registrant and its directors and executive officers.10
.2+(4)

2000 Equity Incentive Plan and
    Form of Option Agreement and Form of Stock Option Grant Notice
    thereunder.10
.3+(4)

2005 Equity Incentive Plan and
    Form of Stock Option Agreement and Form of Stock Option Grant
    Notice thereunder.10
.4+(4)

2005 Employee Stock Purchase Plan
    and Form of Offering Document thereunder.10
.5+(4)

2005 Non-Employee Directors
    Stock Option Plan and Form of Stock Option Agreement and Form of
    Stock Option Grant Notice thereunder.10
.6+(1)

Amended and Restated Executive
    Employment Agreement dated January 1, 2005 between
    Registrant and Michael Grey.10
.7+(1)

Executive Employment Agreement
    dated January 1, 2002 between Registrant and Stephen
    Burley, M.D., D.Phil. and related relocation loan agreement
    dated July 29, 2002.10
.8+(1)

Separation Letter Agreement dated
    November 12, 2004 between Registrant and Tim
    Harris, Ph.D.10
.9+(1)

Offer Letter Agreement dated
    June 3, 2005 between Registrant and James A. Rotherham.10
.10+(1)

Separation Agreement dated
    June 14, 2005 between Registrant and Neill Giese.10
.11+(1)

Chairmanship Letter Agreement
    dated January 16, 2004 between Registrant and Christopher
    Henney, Ph.D., DSc.10
.12+(1)

Non-Employee Director Compensation
    Letter Agreement dated April 13, 2001 between Registrant
    and Stelios Papadopoulos, Ph.D., as amended.10
.13(1)

Lease Agreement dated
    September 20, 1999 between Registrant and ARE-10505 Roselle
    Street, LLC, as amended.10
.14(1)

Lease Agreement dated May 18,
    2000 between Registrant and ARE-3770 Tansy Street, LLC.10
.15(1)

Lease Agreement dated June 1,
    2001 between Registrant and BRS Torrey I, LLC.10
.16*(4)

Patent and Know How License dated
    July 23, 2004 between Registrant, Shire Biochem Inc.,
    Tanaud Ireland Inc. and Tanaud International B.V., as amended,
    and related novation agreements.10
.17*(3)

Collaboration and License
    Agreement dated April 14, 2003 between Registrant and Eli
    Lilly and Company.10
.18*(3)

Amendment to Agreement dated
    July 1, 2003 between Registrant and Eli Lilly and Company.10
.19*(1)

Amendment to Agreement dated
    January 30, 2004 between Registrant and Eli Lilly and
    Company.10
.20*(3)

Amendment to Agreement dated
    November 11, 2004 between Registrant and Eli Lilly and
    Company.10
.21*(1)

Amendment to Agreement dated
    March 31, 2005 between Registrant and Eli Lilly and Company.10
.22*(3)

Collaboration Agreement dated
    August 20, 2004 between Registrant, F.
    Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc.10
.23*(3)

Collaboration Agreement dated
    August 1, 2003 between Registrant and OSI Pharmaceuticals,
    Inc.10
.24(1)

Amendment to Agreement dated
    January 11, 2004 between Registrant and OSI
    Pharmaceuticals, Inc.10
.25*(3)

Amendment to Agreement dated
    February 1, 2005 between Registrant and OSI
    Pharmaceuticals, Inc.10
.26*(3)

Collaboration Agreement dated
    March 18, 2004 between Registrant and Serono International
    SA.10
.27*(3)

Collaboration Agreement dated
    December 1, 2003 between Registrant and UroGene, S.A.
    (which was acquired by Pierre Fabre Medicament in July 2005). 116




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##### Table of Contents



ExhibitNumber

Description of
    Document10
.28*(1)

Amendment to Agreement dated
    December 16, 2004 between Registrant and UroGene, S.A.
    (predecessor-in-interest
    to Pierre Fabre Medicament) and related assignment agreements.10
.29*(4)

Drug Discovery Agreement dated
    July 1, 2005 between Registrant and Cystic Fibrosis
    Foundation Therapeutics, Inc.10
.30(1)

Memorandum of Understanding dated
    July 26, 2000 between the Advanced Photon Source and the
    Structural GenomiX Collaborative Access Team and related
    Collaborative Access Team User Agreement dated May 15, 2001
    between Registrant, The University of Chicago and United States
    Department of Energy.10
.31(1)

Master Loan and Security Agreement
    No. 2081008 dated August 28, 2002 between Registrant
    and Oxford Finance Corporation, as amended.10
.32(2)

First Amendment to Lease Agreement
    dated August 30, 2005 between Registrant and ARE-3770 Tansy
    Street, LLC.10
.33(2)

Third Amendment to Lease Agreement
    dated August 30, 2005 between Registrant and ARE-10505
    Roselle Street, LLC.10
.34(2)

Loan and Security Agreement dated
    September 16, 2005 among Registrant, Oxford Finance
    Corporation and Silicon Valley Bank.10
.35*(3)

Amendment to Agreement effective
    as of October 1, 2005 between Registrant, F.
    Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc.10
.36*(3)

Amendment to Agreement dated
    October 28, 2005 between Registrant and Serono
    International SA.10
.37+(4)

Offer Letter Agreement dated
    November 16, 2005 between Registrant and William Todd Myers.10
.38+(4)

Offer Letter Agreement dated
    December 13, 2005 between Registrant and Siegfried
    Reich, Ph.D.10
.39+(4)

Separation Agreement dated
    November 18, 2005 between Registrant and James Rotherham.10
.40**(5)

Termination Agreement effective
    February 15, 2006 between Registrant and Pierre Fabre
    Medicament S.A.10
.41+

Form of Restricted Stock Unit
    Grant Notice and Restricted Stock Unit Agreement for Executive
    Officers under the Registrants 2005 Equity Incentive Plan.10
.42

Stock Purchase Agreement dated
    March 27, 2006, between Registrant and Novartis Pharma AG.23
.1

Consent of Independent Registered
    Public Accounting Firm.24
.1

Power of Attorney. Reference is
    made to the signature page of this report.31
.1

Certification of principal
    executive officer required by
    Rule 13a-14(a)
    or
    Rule 15d-14(a).31
.2

Certification of principal
    financial officer required by
    Rule 13a-14(a)
    or
    Rule 15d-14(a).32


Certification by the Chief
    Executive Officer and the Chief Financial Officer of the
    Registrant, as required by
    Rule 13a-14(b)
    or 15d-14(b)
    and Section 1350 of Chapter 63 of Title 18 of the
    United States Code (18 U.S.C. 1350).     +
    
    Indicates management contract or compensatory plan.*
    
    Confidential treatment has been granted with respect to certain
    portions of this exhibit. Omitted portions have been filed
    separately with the Securities and Exchange Commission.**
    
    Confidential treatment has been requested with respect to
    certain portions of this exhibit. Omitted portions have been
    filed separately with the Securities and Exchange Commission.(1)
    
    Filed with the Registrants Registration Statement on
    Form S-1
    on September 2, 2005 and incorporated herein by reference.(2)
    
    Filed with Amendment No. 1 to the Registrants
    Registration Statement on
    Form S-1
    on October 14, 2005 and incorporated herein by reference.(3)
    
    Filed with Amendment No. 3 to the Registrants
    Registration Statement on
    Form S-1
    on November 14, 2005 and incorporated herein by reference.(4)
    
    Filed with Amendment No. 4 to the Registrants
    Registration Statement on
    Form S-1
    on January 4, 2006 and incorporated herein by reference. 117




---



##### Table of Contents



(5)
    
    Filed with the Registrants Current Report on
    Form 8-K
    on March 13, 2006 and incorporated herein by reference.  Exhibits
    Financial Statement Schedules
   118




---



##### Table of Contents



SIGNATURES      By:
    /s/  Michael
    Grey    President and Chief Executive Officer
    POWER OF
    ATTORNEY
  attorney-in-fact, Form 10-K, attorneys-in-fact attorneys-in-fact
    Signature

Title

Date/s/  Michael
    GreyMichael
    Grey

President, Chief Executive Officer
    and Member of the Board of Directors (Principal Executive
    Officer)

March 31, 2006/s/  Todd
    MyersTodd
    Myers, C.P.A.

Chief Financial Officer(Principal Financial and
    Accounting Officer)

March 31, 2006/s/  Christopher
    S. HenneyChristopher
    S. Henney, Ph.D., D.Sc.

Chairman of the Board of Directors

March 31, 2006/s/  Louis
    C. BockLouis
    C. Bock

Member of the Board of Directors

March 31, 2006/s/  Karin
    EasthamKarin
    Eastham, C.P.A.

Member of the Board of Directors

March 31, 2006 119




---



##### Table of Contents



Signature

Title

Date/s/  Jean-Francois
    FormelaJean-Francois
    Formela, M.D.

Member of the Board of Directors

March 31, 2006/s/  Vijay
    K. LathiVijay
    K. Lathi

Member of the Board of Directors

March 31, 2006/s/  Stelios
    PapadopoulosStelios
    Papadopoulos, Ph.D.

Member of the Board of Directors

March 31, 2006  120




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNumber

Description of
    Document3
.1(1)

Form of Registrants Amended
    and Restated Certificate of Incorporation.3
.2(1)

Form of Registrants Amended
    and Restated Bylaws.4
.1(4)

Form of Common Stock Certificate
    of Registrant.4
.2(1)

Form of Warrant to Purchase Common
    Stock issued by Registrant in July 2005 to Timothy Harris and
    Linda Grais.4
.3(4)

Form of Warrants issued by
    Registrant in July 2002 to GATX Ventures, Inc.4
.4(3)

Amended and Restated Warrant
    issued by Registrant in January 2005 to Oxford Finance
    Corporation.4
.5(4)

Warrant issued by Registrant in
    July 2002 to Silicon Valley Bank.4
.6(1)

Amended and Restated Convertible
    Promissory Note dated December 16, 2004 between Registrant
    and Millennium Pharmaceuticals, Inc.4
.7(1)

Amended and Restated Investor
    Rights Agreement dated April 21, 2005 between Registrant
    and certain of its stockholders.4
.8(2)

Form of Warrant issued by
    Registrant in September and December 2005 to Oxford Finance
    Corporation and Silicon Valley Bank. Reference is made to
    Exhibit 10.34.4
.9

First and Second Amendments to
    Amended and Restated Investor Rights Agreement, dated
    October 31, 2005 and March 27, 2006, respectively,
    each between Registrant and certain of its stockholders.10
.1+(1)

Form of Indemnity Agreement by and
    between Registrant and its directors and executive officers.10
.2+(4)

2000 Equity Incentive Plan and
    Form of Option Agreement and Form of Stock Option Grant Notice
    thereunder.10
.3+(4)

2005 Equity Incentive Plan and
    Form of Stock Option Agreement and Form of Stock Option Grant
    Notice thereunder.10
.4+(4)

2005 Employee Stock Purchase Plan
    and Form of Offering Document thereunder.10
.5+(4)

2005 Non-Employee Directors
    Stock Option Plan and Form of Stock Option Agreement and Form of
    Stock Option Grant Notice thereunder.10
.6+(1)

Amended and Restated Executive
    Employment Agreement dated January 1, 2005 between
    Registrant and Michael Grey.10
.7+(1)

Executive Employment Agreement
    dated January 1, 2002 between Registrant and Stephen
    Burley, M.D., D.Phil. and related relocation loan agreement
    dated July 29, 2002.10
.8+(1)

Separation Letter Agreement dated
    November 12, 2004 between Registrant and Tim
    Harris, Ph.D.10
.9+(1)

Offer Letter Agreement dated
    June 3, 2005 between Registrant and James A. Rotherham.10
.10+(1)

Separation Agreement dated
    June 14, 2005 between Registrant and Neill Giese.10
.11+(1)

Chairmanship Letter Agreement
    dated January 16, 2004 between Registrant and Christopher
    Henney, Ph.D., DSc.10
.12+(1)

Non-Employee Director Compensation
    Letter Agreement dated April 13, 2001 between Registrant
    and Stelios Papadopoulos, Ph.D., as amended.10
.13(1)

Lease Agreement dated
    September 20, 1999 between Registrant and ARE-10505 Roselle
    Street, LLC, as amended.10
.14(1)

Lease Agreement dated May 18,
    2000 between Registrant and ARE-3770 Tansy Street, LLC.10
.15(1)

Lease Agreement dated June 1,
    2001 between Registrant and BRS Torrey I, LLC.10
.16*(4)

Patent and Know How License dated
    July 23, 2004 between Registrant, Shire Biochem Inc.,
    Tanaud Ireland Inc. and Tanaud International B.V., as amended,
    and related novation agreements.10
.17*(3)

Collaboration and License
    Agreement dated April 14, 2003 between Registrant and Eli
    Lilly and Company.10
.18*(3)

Amendment to Agreement dated
    July 1, 2003 between Registrant and Eli Lilly and Company.10
.19*(1)

Amendment to Agreement dated
    January 30, 2004 between Registrant and Eli Lilly and
    Company.10
.20*(3)

Amendment to Agreement dated
    November 11, 2004 between Registrant and Eli Lilly and
    Company.




---



##### Table of Contents



ExhibitNumber

Description of
    Document10
.21*(1)

Amendment to Agreement dated
    March 31, 2005 between Registrant and Eli Lilly and Company.10
.22*(3)

Collaboration Agreement dated
    August 20, 2004 between Registrant, F.
    Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc.10
.23*(3)

Collaboration Agreement dated
    August 1, 2003 between Registrant and OSI Pharmaceuticals,
    Inc.10
.24(1)

Amendment to Agreement dated
    January 11, 2004 between Registrant and OSI
    Pharmaceuticals, Inc.10
.25*(3)

Amendment to Agreement dated
    February 1, 2005 between Registrant and OSI
    Pharmaceuticals, Inc.10
.26*(3)

Collaboration Agreement dated
    March 18, 2004 between Registrant and Serono International
    SA.10
.27*(3)

Collaboration Agreement dated
    December 1, 2003 between Registrant and UroGene, S.A.
    (which was acquired by Pierre Fabre Medicament in July 2005).10
.28*(1)

Amendment to Agreement dated
    December 16, 2004 between Registrant and UroGene, S.A.
    (predecessor-in-interest
    to Pierre Fabre Medicament) and related assignment agreements.10
.29*(4)

Drug Discovery Agreement dated
    July 1, 2005 between Registrant and Cystic Fibrosis
    Foundation Therapeutics, Inc.10
.30(1)

Memorandum of Understanding dated
    July 26, 2000 between the Advanced Photon Source and the
    Structural GenomiX Collaborative Access Team and related
    Collaborative Access Team User Agreement dated May 15, 2001
    between Registrant, The University of Chicago and United States
    Department of Energy.10
.31(1)

Master Loan and Security Agreement
    No. 2081008 dated August 28, 2002 between Registrant
    and Oxford Finance Corporation, as amended.10
.32(2)

First Amendment to Lease Agreement
    dated August 30, 2005 between Registrant and ARE-3770 Tansy
    Street, LLC.10
.33(2)

Third Amendment to Lease Agreement
    dated August 30, 2005 between Registrant and ARE-10505
    Roselle Street, LLC.10
.34(2)

Loan and Security Agreement dated
    September 16, 2005 among Registrant, Oxford Finance
    Corporation and Silicon Valley Bank.10
.35*(3)

Amendment to Agreement effective
    as of October 1, 2005 between Registrant, F.
    Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc.10
.36*(3)

Amendment to Agreement dated
    October 28, 2005 between Registrant and Serono
    International SA.10
.37+(4)

Offer Letter Agreement dated
    November 16, 2005 between Registrant and William Todd Myers.10
.38+(4)

Offer Letter Agreement dated
    December 13, 2005 between Registrant and Siegfried
    Reich, Ph.D.10
.39+(4)

Separation Agreement dated
    November 18, 2005 between Registrant and James Rotherham.10
.40**(5)

Termination Agreement effective
    February 15, 2006 between Registrant and Pierre Fabre
    Medicament S.A.10
.41+

Form of Restricted Stock Unit
    Grant Notice and Restricted Stock Unit Agreement for Executive
    Officers under the Registrants 2005 Equity Incentive Plan.10
.42

Stock Purchase Agreement dated
    March 27, 2006, between Registrant and Novartis Pharma AG.23
.1

Consent of Independent Registered
    Public Accounting Firm.24
.1

Power of Attorney. Reference is
    made to the signature page of this report.31
.1

Certification of principal
    executive officer required by
    Rule 13a-14(a)
    or
    Rule 15d-14(a).31
.2

Certification of principal
    financial officer required by
    Rule 13a-14(a)
    or
    Rule 15d-14(a).32


Certification by the Chief
    Executive Officer and the Chief Financial Officer of the
    Registrant, as required by
    Rule 13a-14(b)
    or 15d-14(b)
    and Section 1350 of Chapter 63 of Title 18 of the
    United States Code (18 U.S.C. 1350).     +
    
    Indicates management contract or compensatory plan.*
    
    Confidential treatment has been granted with respect to certain
    portions of this exhibit. Omitted portions have been filed
    separately with the Securities and Exchange Commission.**
    
    Confidential treatment has been requested with respect to
    certain portions of this exhibit. Omitted portions have been
    filed separately with the Securities and Exchange Commission.




---



##### Table of Contents



(1)
    
    Filed with the Registrants Registration Statement on
    Form S-1
    on September 2, 2005 and incorporated herein by reference.(2)
    
    Filed with Amendment No. 1 to the Registrants
    Registration Statement on
    Form S-1
    on October 14, 2005 and incorporated herein by reference.(3)
    
    Filed with Amendment No. 3 to the Registrants
    Registration Statement on
    Form S-1
    on November 14, 2005 and incorporated herein by reference.(4)
    
    Filed with Amendment No. 4 to the Registrants
    Registration Statement on
    Form S-1
    on January 4, 2006 and incorporated herein by reference.(5)
    
    Filed with the Registrants Current Report on
    Form 8-K
    on March 13, 2006 and incorporated herein by reference.