**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

----

FORM 10-K/A

**(AmendmentNo. 1)**

**FORANNUAL AND TRANSITION REPORTS PURSUANT TOSECTIONS 13 OR 15(d) OF THE SECURITIES ECHANGE ACT OF 1934**
| **(Mark One)**                                       | ** ** | ** **                                                                                                       |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|
| x                                                    | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |
| **For the fiscal year ended December 31, 2004** |
| **Or**                                               |
|  ̈                                               | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15() OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission file number 0-27436**

----

TITAN PHARMACEUTICALS, INC.

(Exact name of registrantas specified in its charter)
| **Delaware**(State or other jurisdiction of  incorporation or organization)                                            | ** ** | **94-3171940**(I.R.S. Employer identification number) |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|
| **400 Oyster Point Blvd., Suite 505,  South San Francisco, California**  (Address of principal executive offices) | ** ** | **94080**(Zip code)                                   |

 

**Registrant’s telephone number, including area code:**(650) 244-4990

** **

Securities registeredpursuant to Section 12(b) of the Act:
| **Title of each class**        | ** ** | **Name of  each exchange on which registered** |
|--------------------------------|------------|------------------------------------------------|
| Common  Stock, $.001 par value |       | The  American Stock Exchange                   |

 

**Securities registered pursuant to Section 12(g) ofthe Act:**

**None**

----

Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to the filing requirementsfor the past 90 days. Yes x  No  ̈

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§ 229.405 of this chapter) is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  ̈

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

The aggregate market valueof the 32,119,236 shares of voting and non-voting common equity held bynon-affiliates of the registrant based on the closing price on June 30,2004 was $86.4 million.

Asof March 1, 2005, 32,343,921 shares of common stock, $.001 par value, ofthe registrant were issued and outstanding.

----

**EXPLANATORY NOTE**

We are filing this AnnualReport on Form 10-K/A for the fiscal year ended December 31, 2004 to amendfootnote 1 to the financial statements to reflect the consummation of themerger of ProNeura, Inc. (formerly a majority-owned and consolidated subsidiaryof ours) with and into Titan Pharmaceuticals, Inc. on November 23, 2004 and toinclude Exhibit 21 setting forth our subsidiaries as of December 31, 2004. Exceptas specifically referenced herein, this Annual Report on Form 10-K/A does not reflectany event occurring subsequent to March 15, 2005, the filing date of the originalreport.

**PART I**

Statements in this Form 10-K that are notdescriptions of historical facts are forward-looking statements that aresubject to risks and uncertainties. Actual results could differ materially fromthose currently anticipated due to a number of factors, including those setforth under “Risk Factors” including, but not limited to, the results ofresearch and development efforts, the results of pre-clinical and clinicaltesting, the effect of regulation by the United States Food and DrugAdministration (FDA) and other agencies, the impact of competitive products,product development, commercialization and technological difficulties, theresults of financing efforts, the effect of our accounting policies, and otherrisks detailed in our Securities and Exchange Commission filings.

Probuphine®,Spheramine® and CCMTM are trademarks of Titan Pharmaceuticals, Inc.This Form 10-K also includes other trade names and trademarks ofcompanies other than Titan Pharmaceuticals, Inc.

**Item 1. Business**

**(a)   General Development of Business**

We are abiopharmaceutical company developing proprietary therapeutics for the treatmentof central nervous system (CNS) disorders, cardiovascular disease and cancer.Our product development programs focus primarily on large pharmaceuticalmarkets with significant unmet medical needs and commercial potential. We arefocused principally on clinical development of the following products:

·       Iloperidone:for the treatment of schizophrenia and related psychotic disorders (partneredwith Vanda Pharmaceuticals, Inc.)

·       Probuphine:  for the treatment of opiate addiction

·       Spheramine:for the treatment of advanced Parkinson’s disease (partnered with Schering AG)

·       DITPA:  for the treatment of congestive heart failure

·       Galliummaltolate: for the treatment of bone related diseases and certain cancers.

We are directly developing our product candidates andalso utilizing strategic partnerships. These collaborations help fund productdevelopment and enable us to retain significant economic interest in ourproducts. In June 2004, we announced that Vanda Pharmaceuticals, Inc.(Vanda) had acquired from Novartis Pharma AG (Novartis) the worldwide rights todevelop and commercialize iloperidone, our proprietary antipsychotic agent inPhase III clinical development for the treatment of schizophrenia and relatedpsychotic disorders. Vanda will now pursue advancement of the iloperidone PhaseIII development program. All of our rights and economic interests iniloperidone, including royalties on sales of iloperidone, remain essentiallyunchanged under the agreement. Spheramine development is primarily funded byour corporate partner for Spheramine, Schering AG, Germany (Schering). We areno longer directly pursuing development of the monoclonal antibodies—CeaVac,TriAb, and TriGem—for the 

1

----

treatment of variouscancers, and further development of Pivanex for treatment of lung cancer was alsodiscontinued.

We were incorporated inDelaware in February 1992 and have been funded through various sources,including an initial public offering in January 1996 and privateplacements of securities, as well as proceeds from warrant and optionexercises, corporate licensing and collaborative agreements, and government-sponsoredresearch grants.

**(b)   FinancialInformation About Industry Segments**

We operate in only onebusiness segment, the development of pharmaceutical products.

**(c)   Narrative Description of Business**

**Product Development Programs**

Thefollowing table provides summary status of our products in development:
| **Product**       | ** ** | ** **                               | ** ** | **Potential Indication(s)** | ** ** | **Phase of  Development**        | ** ** | **Marketing Rights** |
|-------------------|------------|------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------|
| Iloperidone       |       | Schizophrenia, psychosis                 |       | Phase III                   |       | Vanda Pharmaceuticals, Inc. |
| Probuphine        |       | Opiate addiction                         |       | Phase I/II                  |       | Titan                            |
| Spheramine        |       | Parkinson’s disease                 |       | Phase IIb                   |       | Schering AG                      |
| DITPA             |       | Congestive heart failure                 |       | Phase II                    |       | Titan                            |
| Gallium maltolate |       | Bone related disease and certain cancers |       | Phase I/II                  |       | Titan                            |

 

Our products are atvarious stages of development and may not be successfully developed orcommercialized. We do not currently have any products being commercially sold. Ourproposed products will require significant further capital expenditures,development, testing, and regulatory clearances prior to commercialization. Wemay experience unanticipated problems relating to product development and cannotpredict whether we will successfully develop and commercialize any products. Fora full discussion of risks and uncertainties of our product development, see “RiskFactors—Our products are at various stages of development and may not besuccessfully developed or commercialized.”

***Iloperidone***

Iloperidone is our novel, proprietary product indevelopment for the treatment of schizophrenia and related psychotic disorders.Iloperidone has been evaluated in an extensive Phase III program comprisingover 3,500 patients at more than 200 sites in 24 countries, administered andfunded by Novartis Pharma AG. In three completed efficacy studies, iloperidonestatistically significantly reduced the symptoms of schizophrenia compared toplacebo. Iloperidone has also been investigated in three 12-month safetystudies, which confirm safety and tolerability. Additionally, Novartis hascompleted a study in elderly patients with good results. Although iloperidonewas considered safe in the above efficacy studies, it has shown a dosedependent increase in the QTc interval.

The results of a study evaluating the potential effectof iloperidone on the EKG profile (QTc interval prolongation) of patientsreceiving the drug were announced in July 2002. The study indicated thatthere was a dose dependent increase in QTc interval and results for iloperidonewere roughly comparable to that for ziprasidone, one of the currently marketedagents in the study. The FDA has concurred with this assessment and hasindicated that one additional successful pivotal Phase III study is necessaryto complete the efficacy data package prior to NDA submission. The QTc profilemay potentially limit the opportunity of iloperidone as first line therapy forschizophrenia.

2

----

In June 2004, weannounced that Vanda Pharmaceuticals, Inc. acquired from Novartis PharmaAG the worldwide rights to develop and commercialize iloperidone. Vanda wasfounded by Dr. Argeris N. Karabelas, former CEO of NovartisPharmaceuticals, and Dr. Mihael Polymeropoulos, former Vice President ofPharmacogenetics at Novartis Pharmaceuticals. Under its agreement withNovartis, Vanda will now pursue advancement of the iloperidone Phase IIIdevelopment program. All of our rights and economic interests in iloperidone,including royalties on sales of iloperidone, remain essentially unchanged underthe agreement.

***Probuphine***

We are developing Probuphine for the treatment ofopiate addiction. Probuphine is the first product to utilize our novel,proprietary ProNeura long-term drug delivery technology (See “ProNeuraContinuous Drug Delivery Technology” below). Probuphine is designed to providetherapeutic levels of buprenorphine, an approved agent for the treatment ofopiate addiction.

In June 2002, we presented data at theInternational Conference on Pain and Chemical Dependency in New Yorkdemonstrating that Probuphine continuously delivered buprenorphine for one yearin preclinical studies.  In June 2004,we announced final results from a pilot clinical study that evaluated thesafety, pharmacokinetics and preliminary efficacy of Probuphine in opiate-dependentpatients. The results were presented at the Annual Meeting of The InternationalSociety of Addiction Medicine in Helsinki, and demonstrated that all 12patients switched from daily sublingual buprenorphine therapy to Probuphine,had maintenance of therapeutic benefit for a period of six months following asingle treatment of Probuphine. Treatment with Probuphine was also safe andwell tolerated in this pilot study, with no significant adverse events.

We are currently in theprocess of discussing clinical development strategy with regulatory authoritiesin various countries that may lead to marketing authorization for Probuphine. Weare also currently scaling up manufacturing process development for Probuphinein support of planned Phase III clinical development activities and commercialsupply. We expect to initiate pivotal clinical testing of Probuphine in thetreatment of opiate addiction in the third quarter of 2005. We also plan toinitiate pilot clinical testing of Probuphine in chronic pain in 2005.

***Spheramine***

Spheramine is a cell-based therapeutic being developedfor potential treatment of advanced Parkinson’s disease. It utilizes ourproprietary cell-coated microcarrier (CCM) technology, which enables thedevelopment of cell-based therapies for minimally-invasive, site-specificdelivery to the central nervous system of therapeutic factors precisely where theyare needed.

Spheramine consists of microcarriers coated with humanretinal pigment epithelial cells that directly enhance brain levels ofdopamine, a neurotransmitter deficient in certain brain regions in Parkinson’sdisease, leading to movement disorders. Preclinical studies have demonstratedthe preliminary efficacy and safety of Spheramine, including blinded studies ina primate model of Parkinson’s disease. Positron emission tomography (PET)imaging studies in primates have confirmed the presence of increased dopaminesignals in regions treated with Spheramine. A pilot clinical study ofSpheramine performed by Titan in six patients with advanced Parkinson’s diseasedemonstrated substantial improvement (average 48%) in motor function in sixpatients at one-year post treatment with no significant adverse events. Theseresults were first reported at the American Academy of Neurology (AAN) annualmeeting in 2002. At the AAN annual meeting in 2003, two-year results from thisstudy were presented that demonstrated an average 41% improvement in thosepatients’ motor function two years post treatment with no significant adverseevents.

3

----

In December 2002, we announced the initiation ofa multicenter, randomized, blinded, controlled study of Spheramine in Parkinson’sdisease. This Phase IIb clinical study will enroll 68 patients with advancedParkinson’s disease (Hoehn and Yahr Stages III and IV) to further evaluatethe efficacy, safety, and tolerability of Spheramine. Following the secondsafety review by the Independent Data Monitoring Committee (IDMC) in the thirdquarter 2004, and after treatment of 36 patients in the Phase IIb clinicalstudy of Spheramine, the IDMC recommended continuation of enrollment in thethird and final cohort of 32 patients in this study. We are now enrolling thethird and final cohort of 32 patients in this Phase IIb clinical study. Weestimate that this Phase IIb clinical study will be completed by the secondhalf of 2006. The Company was advised by the U.S. Food and Drug Administration(FDA)  that additional informationregarding study inclusion/exclusion criteria, criteria for patient selection,and related monitoring procedures should be updated and submitted to FDA priorto further patient treatment in this study. Patient enrollment continues andthe Company anticipates that further patient treatment should occur onschedule, subsequent to submission to, and approval by FDA of the additionalrequested documentation. Schering, our corporate partner for worldwidedevelopment and commercialization of Spheramine, is funding the clinicaldevelopment program for Spheramine. Under this agreement, Schering receivedexclusive, worldwide development, manufacturing and commercialization rights,and, in addition to the clinical and manufacturing development funding andmilestone payments, Schering will pay us a royalty on future product sales.

In July 2004, weannounced that the FDA had granted us a Fast Track designation for Spheraminefor the treatment of advanced Parkinson’s disease. The Fast Track Program isdesigned by the FDA to facilitate the development and expedite the review ofdrug candidates that demonstrate the potential to treat serious orlife-threatening diseases and address unmet medical needs.

***DITPA***

Our novel, proprietary product in development for thetreatment of congestive heart failure (CHF) is 3,5-diiodothyropropionicacid, or DITPA, an orally active analogue of thyroid hormone. DITPA representsa potential new class of agents for CHF, based upon the central role of thyroidhormone in regulating cardiovascular function. DITPA has demonstrated inpreclinical and clinical studies to date the ability to significantly improvecardiac function without significantly increasing heart rate. Specifically, inpreclinical studies, when DITPA was administered alone or in combination withcaptopril in animal models of heart failure, cardiac output was improved andleft ventricular end diastolic pressure was decreased, without significantlyincreasing heart rate. In addition, DITPA improved the time for ventricularrelaxation, indicating a potential beneficial effect on diastolic function. Inclinical studies DITPA has demonstrated similar potentially beneficial effectsin preliminary human testing. A double blind, placebo controlled Phase II studyin 19 patients with moderately severe (NYHA Class II-III) heart failuredemonstrated a significant improvement in cardiac index, a significant decreasein systemic vascular resistance, and no significant increase in heart rate.These study results also supported a beneficial effect of DITPA on diastolicfunction. In addition, results from this study as well as previous preclinicaltesting suggest that DITPA is potentially compatible with other currenttreatments such as Angiotensin-Converting Enzyme (ACE) inhibitors.

We plan to initially develop DITPA as a potentialtreatment for congestive heart failure (CHF) associated with low serum thyroidhormone (T3). Congestive heartfailure is a syndrome of progressive decrease in cardiac function and inabilityof the heart to pump sufficient blood for proper function of the lungs,kidneys, and other vital organs and tissues. Symptoms include decreasingactivity capacity, shortness of breath, and peripheral and pulmonary edema.There are a total of approximately nine million people in the U.S. andEurope with CHF. In the U.S., approximately 25% of patients have moderate orsevere symptoms (New York Hospital Association Class III or IV), and CHFis the most common hospital discharge diagnosis in the U.S. for patients over65. Currently, only approximately 50% of patients 

4

----

diagnosed with CHF survivefor five years, and only 50% of patients with class IV CHF survive oneyear. New treatments for CHF are greatly needed to improve symptoms, enhancecardiac function, and avoid dangerous and progressive complications ofcongestive heart failure.

Researchers have demonstrated that approximately 30%of patients with advanced (NYHA Class III and IV) congestive heart failurehave abnormally low levels of T3,the active form of thyroid hormone needed by heart cells, and that low levelsof T3 are a strong independent predictor ofincreased mortality in CHF patients.

The important role of thyroid hormone in maintainingheart and blood vessel function, and the association of low T3 and increasedmortality in CHF suggest a potential role for DITPA as a thyroid hormonereplacement therapy in CHF. Currently available thyroid hormone medications aregenerally not suitable for chronic use in CHF, because they are primarily T4 preparations, orhave too short a half-life, and have the potential to increase heart rate,which is an unwanted side effect in CHF patients.

In December 2004, we initiated a placebocontrolled Phase IIb clinical study with DITPA in Class III and Class IVCHF patients with low T3 levels.  This study will evaluate 150 patients withNYHA Class III-IV CHF and low serum T3 levels. Patients will receiveeither of two doses of DITPA or placebo for six months. The study will beperformed at 35 centers in the U.S. The study will evaluate clinical andlaboratory parameters related to severity of CHF, including change in globalclinical status, echocardiographic parameters, BNP levels, exercise testing andquality of life measurements in addition to safety.

In addition to evaluation of DITPA in CHF patientswith low T3 levels, we believe that scientific evidence concerning thyroidhormone and cardiovascular function suggest potential utility of DITPA in thesetting of diastolic dysfunction, left ventricular dysfunction post myocardialinfarction, cardiopulmonary bypass surgery and hyperlipidemia.

DITPA is also currentlybeing evaluated in a second randomized, double blind, placebo controlled PhaseII study in 150 patients with NYHA Class II-IV CHF, sponsored by theDepartment of Veterans Affairs Cooperative Studies Program and funded by a $3.8million grant.

***Gallium Maltolate***

Gallium maltolate is our novel oral agent for thepotential treatment of bone disease and cancer. Gallium is a semi-metallicelement with two distinct potential mechanisms of action, one with potentialfor the treatment of bone disease and the other for the potential treatment ofcertain cancers. Gallium acts upon bone by enhancing the formation ofosteoblasts and inhibiting osteoclasts, thereby increasing bone deposition andreducing bone turnover. Additionally, gallium also inhibits ribonucleotidereductase, a key enzyme essential for DNA replication in cancer cells.

In preclinical studies in animal models of rheumatoidarthritis conducted by the Company, oral dosing of gallium maltolate reducedthe severity of disease related end points in a dose-dependent manner. Based onthese results, we believe gallium maltolate may have potential in the treatmentof rheumatoid arthritis.

Prior independent studies using intravenouslyadministered gallium nitrate have demonstrated preliminary evidence of clinicalactivity in several cancers, including multiple myeloma, lymphoma, bladdercancer and prostate cancer. An intravenous formulation of gallium nitrate,received FDA approval in 1991 for the treatment of hypercalcemia of malignancy.Evidence suggests that gallium may concentrate at sites of malignancy and thenact at these sites to inhibit abnormal cell proliferation.

In the first quarter of2005, a dose ranging clinical study of gallium maltolate in patients with multiplemyeloma, metastatic prostate cancer, metastatic bladder cancer and refractorylymphoma was completed. Significant blood levels of gallium were achieved, anda maximum tolerated dose level was not reached in 

5

----

thisstudy. We are currently completing development of a new formulation of galliummaltolate with increased bioavailability, and subsequent clinical trials willuse this new formulation of gallium maltolate.

***Pivanex***

Pivanex is a novel small molecule that acts by inhibitingkey enzymes called histone deacetylases, which are responsible for changing theexpression of cancer-related genes. By altering gene expression, Pivanexslows cancer cell growth and helps in the destruction of cancer cells.

Based on data generated from an open label Phase IIstudy of Pivanex in refractory non-small cell lung cancer we initiated in January 2003a dose escalation study to assess the safety of Pivanex combined with docetaxelas a second line treatment of NSCLC. The objective of this pilot study was toestablish a safe and effective dose to be used in a subsequent Phase IIbclinical trial. In August 2003, we announced positive results from thispilot study demonstrating that Pivanex and docetaxel can be administered safelyto non-small cell lung cancer patients. The regimen tested utilized thepreviously tested single-agent dose of Pivanex and the currently approveddose of docetaxel. The results were presented in August 2003 at the 10thWorld Conference on Lung Cancer in Vancouver.

In June 2003, weinitiated a multicenter, randomized, controlled Phase IIb clinical trial withPivanex in the treatment of advanced non-small cell lung cancer. The study wasdesigned to evaluate the safety and efficacy of Pivanex plus docetaxel, versusdocetaxel alone. In June 2004, we announced that an interim safetyanalysis by an independent data monitoring committee (IDMC) had identifiedsignificant safety issues in the combination treatment of Pivanex withdocetaxel. This randomized study evaluating treatment with Pivanex anddocetaxel versus docetaxel alone had already completed its enrollment target of225 patients by that time. As a result of the IDMC finding and upon theirrecommendation, we discontinued treatment with Pivanex for the remainingpatients on the study. Data collection for this study is now complete, andpreliminary analysis indicates no significant difference in survival in the twotreatment arms. Final study analysis is expected to be complete in the secondquarter of 2005. Following these results, we have refocused priorities andPivanex studies in chronic lymphocytic leukemia and melanoma are beingdiscontinued.

***ProNeura Continuous Drug Delivery Technology***

Our ProNeura continuous drug delivery system consistsof a small, solid rod made from a mixture of ethylene-vinyl acetate (EVA) and adrug substance. The resulting product is a solid matrix that is placedsubcutaneously, normally in the upper arm in a simple 15-minute officeprocedure, and is removed in a similar manner at the end of the treatmentperiod.  The drug substance is releasedslowly, at continuous levels, through the process of diffusion. This results in a constant rate of release similarto intravenous administration. We believe that such long-term, linear releasecharacteristics are desirable by avoiding peak and trough level dosing thatposes problems for many CNS and other therapeutic agents.

We are developing our ProNeura sustained drug deliverytechnology for potential applications in the treatment of a number ofdisorders, including opiate addiction, chronic pain, Parkinson’s disease,alcoholism, schizophrenia, and others, in which conventional treatment islimited by variability in blood drug levels and poor patient compliance. ProNeuratechnology was developed to address the need for a simple, practical method toachieve continuous long-term drug delivery, and potentially can providecontrolled drug release on an outpatient basis over extended periods up to 6 -12 months.

In November 2003, we announced positivepreclinical results demonstrating that continuous drug delivery using ourProNeura sustained drug delivery technology reduced the risk of motor symptomsin a validated primate model of Parkinson’s disease. In this study, researchersat Titan and the National Institutes of Health (NIH) compared constantadministration of a dopaminergic agent using our technology, to once dailyadministration, for a period of six months. The drug chosen was apomorphine, a 

6

----

dopamine agonist that hasshown efficacy in Parkinson’s disease. The study results were first presentedat the 2003 American Academy of Neurology Meeting in Honolulu.

In addition to Probuphine, which is our first productin clinical testing to utilize our proprietary ProNeura long term drug deliverytechnology, we have also demonstrated preliminary proof of principle ofProNeura technology with a number of other drugs in preclinical testing,including drugs for the treatment of Parkinson’s disease, psychiatric disordersand alcohol addiction.

The status of additionaldevelopment programs is as follows:

***Immunotherapeutics***

There are twoclinical trials in progress that utilize combinations of our cancerimmunotherapy products, CeaVac and TriAb, and are funded by the National CancerInstitute, specifically:

·       APhase II study conducted by the Radiation Therapy Oncology Group utilizing acombination of CeaVac and TriAb in patients with limited stage non-small celllung cancer,

·       APhase II study conducted by the Cancer and Leukemia Group B utilizing acombination of CeaVac and TriAb in patients with resected Dukes D colorectalcancer.

At this time, we are notdevoting any additional internal resources to the monoclonal antibodies CeaVac,TriAb, and TriGem. Treatment in these studies has been completed and follow-upof patients continues.

**SponsoredResearch and License Agreements**

We are a party to severalagreements with research institutions, companies, universities and otherentities for the performance of research and development activities and for theacquisition of licenses relating to such activities.

***Iloperidone***

In January 1997, we acquired an exclusiveworldwide license under U.S. and foreign patents and patent applicationsrelating to the use of iloperidone for the treatment of psychiatric andpsychotic disorders and analgesia from Aventis SA (formerly Hoechst MarionRoussel, Inc.). The Aventis agreement provides for the payment ofroyalties on future net sales and requires us to satisfy certain other termsand conditions in order to retain our rights, all of which have been met todate.

In November 1997, we granted a worldwidesublicense, except Japan, to Novartis under which Novartis will continue, atits expense, all further development of iloperidone. In April 2001, thatsublicense was extended to include Japan. Novartis will make our milestonepayments to Aventis during the life of the Novartis agreement, and will alsopay to Aventis and Titan a royalty on future net sales of the product. Theresults of a QTc study evaluating the EKG profile of patients taking iloperidoneannounced in July 2002 found that iloperidone has a similar profile toziprasidone (Geodon), an approved product. These results have significantlydelayed the regulatory filings for this product.

In June 2004, weannounced that Vanda Pharmaceuticals, Inc. acquired from Novartis PharmaAG the worldwide rights to develop and commercialize iloperidone, ourproprietary antipsychotic agent in Phase III clinical development for thetreatment of schizophrenia and related psychotic disorders. Under its agreementwith Novartis, Vanda will pursue advancement of the iloperidone Phase IIIdevelopment program. All of our rights and economic interests in iloperidone,including royalties on sales of iloperidone, remain essentially unchanged underthe agreement.

7

----

***ProNeura Long-term Drug Delivery System***

In October 1995, weacquired from the Massachusetts Institute of Technology (MIT) an exclusiveworldwide license to certain U.S. and foreign patents relating to the long-termdrug delivery system. The exclusive nature of the MIT license is subject tocertain conditions regarding timely performance of product developmentactivities. We must also satisfy certain other usual terms and conditions setforth in the MIT license in order to retain our license rights, includingpayments of royalties based on sale of products and processes incorporating thelicensed technology, as well as a percentage of income derived from sublicensesof the licensed technology.

***Spheramine and Other Cell Therapy Products***

In November 1992, we acquired an exclusive,worldwide license under certain U.S. and foreign patent applications relatingto the CCM technology pursuant to a research and license agreement with NewYork University (NYU). The NYU agreement provides for the payment of royaltiesbased on future net sales of products and processes incorporating the licensedtechnology, as well as a percentage of any income we receive from anysublicense thereof. We are also obligated to reimburse NYU for all costs andexpenses incurred by NYU in filing, prosecuting and maintaining the licensedpatents and patent applications. We must satisfy certain other terms andconditions of the NYU agreement in order to retain our license rights. Theseinclude, but are not limited to, the use of best efforts to bring licensedproducts to market as soon as commercially practicable and to diligentlycommercialize such products thereafter.

In January 2000, weentered into a sublicense agreement with Schering granting Schering exclusiveworldwide commercialization rights to Spheramine. Under the agreement, we willcollaborate with Schering on manufacturing and clinical development of celltherapy for the treatment of Parkinson’s disease. We will receive funding fordevelopment activities, as well as potential reimbursement of certain priorresearch and development expenses. Schering will fully fund, and manage incollaboration with us, all future pilot and pivotal clinical studies, andmanufacturing and development activities. Schering will pay us a royalty on netsales of Spheramine. Schering may terminate this sublicense for any reason byproviding us 90 days notice in advance.

***DITPA***

In October 2003,through the acquisition of Developmental Therapeutics, Inc. (DTI), weacquired an exclusive worldwide license to an issued U.S. patent and pendinginternational patent applications covering DITPA. Under this license agreement,we made an initial stock payment of 1,187,500 shares of our common stock and acash payment of $171,250 to The University of Arizona, the licensor of the technology,and will also make an additional payment of 712,500 shares of our common stockupon the achievement of positive pivotal study results or certain othersubstantial milestones within five years. A cash payment of $102,750 or,alternatively, an additional payment of 37,500 shares of our common stock, willalso be made to the licensor of the technology upon achievement of such studyresults or such other substantial milestones within five years. Also under thisagreement, we are required to make royalty payments to the licensor based onnet sales of products and processes incorporating the licensed technology,subject to minimum annual amounts commencing in the first year following thecommercial sale of the product, as well as a percentage of any income derivedfrom any sublicense of the licensed technology. In addition, we are required tomake milestone payments to the licensor upon the achievement of certainclinical or regulatory milestones.

***Gallium Complexes***

In August 2000, through the acquisition of GeoMed, Inc.,we acquired an exclusive worldwide license to make, use and sell productsdeveloped under the patent rights to the compositions and application of 

8

----

gallium complexes. Underthis license agreement, we are required to make an annual license payment to Dr. LawrenceBernstein, technology inventor, of $50,000, as well as royalty payments basedon future net sales of products and processes incorporating the licensedtechnology. We must also pay all costs and expenses incurred in patentprosecution and maintenance.

In February 2004, weexecuted an agreement giving us an exclusive worldwide license to patent rightsheld by The Ohio State University covering the methods of treating arthritisusing gallium compounds. Under this agreement, we are required to pay a licenseissuance fee and certain minimum annual royalty payments. In addition, we arerequired to pay royalties based on net sales of products and processesincorporating the licensed technology.

***Pivanex***

We have acquired, fromBar-Ilan Research and Development Co. Ltd., in Israel, an exclusive,worldwide license to an issued United States patent and certain foreignpatents, and patent applications covering novel analogues of butyric acid ownedby Bar-Ilan University and Kupat Hulim Health Insurance Institution. TheBar-Ilan agreement provides for the payment by us to Bar-Ilan of royaltiesbased on net sales of products and processes incorporating the licensedtechnology, subject to minimum annual amounts commencing in 1995, as well as apercentage of any income derived from any sublicense of the licensedtechnology. We must also pay all costs and expenses incurred in patentprosecution and maintenance and use reasonable best efforts to bring anyproducts developed under the Bar-Ilan agreement to market. Our minimum annualroyalty payment to Bar-Ilan is $60,000.

***Immunotherapeutics***

In May 1996, we acquired an exclusive, worldwidelicense under certain United States and foreign patent and patent applicationspursuant to a license agreement with the University of Kentucky ResearchFoundation. These patent and patent applications relate to the anti-idiotypicantibodies known as 3H1, 1A7 and 11D10 and their fragments, derivatives oranalogues. The Kentucky agreement required us to fund research at the Universityof Kentucky at amounts agreed to on an annual basis for the five-year periodending November 14, 2001. The Kentucky agreement provides for the paymentof certain license fees as well as royalties based on future net sales oflicensed products by Titan or any sublicensees. We must also pay all costs andexpenses incurred in obtaining and maintaining patents, and diligently pursue avigorous development program for the products in order to maintain our licenserights under the Kentucky agreement.

In November 1998, weentered into an agreement with the Wistar Institute of Anatomy and Biology, anot-for-profit organization in Philadelphia, Pennsylvania, for a non-exclusivelicense under certain patents for the use of anti-idiotypic antibodies for thetreatment of tumors. The Wistar agreement provides for the payment of certainlicense fees as well as royalties based on future net sales of licensedproducts. Our minimum annual royalty payment to Wistar is $30,000.

**Patents and Proprietary Rights**

We have obtained rights tocertain patents and patent applications relating to our proposed products andmay, in the future, seek rights from third parties to additional patents andpatent applications. We also rely on trade secrets and proprietary know-how,which we seek to protect, in part, by confidentiality agreements withemployees, consultants, advisors, and others. For risks we face with respect topatents and proprietary rights, see “Risk Factors—We may be unable to protectour patents and proprietary rights.”

9

----

***Iloperidone***

We hold a license fromAventis under one issued U.S. patent and certain foreign patents relating toiloperidone and its methods of use. Our license is exclusive for use in thetreatment of psychiatric disorders, psychotic disorders and analgesia. Unlessits term is extended, the U.S. patent that covers certain aspects of ouriloperidone product and its use will expire in 2011. Prosecution of variousdivisional and continuation applications and their foreign counterpartscontinues satisfactorily, although it is uncertain whether additional patentswill be granted.

***ProNeura Long-term Drug Delivery System***

We are the exclusivelicensee under the MIT license to three U.S. patents, expiring in 2007, 2009and 2014, and certain European patents relating to a long-term drug deliverysystem, expiring in 2008 and 2010. Additional patent applications have beenfiled which incorporate the use of specific compounds with the ProNeuratechnology.

***Spheramine and Other Cell Therapy Products***

We are the exclusive licensee under a licenseagreement with NYU of certain U.S. and foreign patents and patent applicationsrelating to our CCM technology. The U.S. Patent and Trademark Office has issuedfour U.S. patents on the core subject matter underlying the NYU license and anadditional two patents relating to uses in delivery of gene therapy to thecentral nervous system. Prosecution of various foreign counterparts continuessatisfactorily, although it is uncertain whether additional patents will begranted. Patents have issued that cover certain aspects of our Spheramineproduct and its use, including four U.S. patents that will expire in 2010,2014, 2015, and 2017, one European patent, which has been unbundled as 15European national patents, all of which will expire in 2011, and one Australianand one Canadian patent, both of which will expire in 2011. Patents have issuedrelating to aspects of our gene transfer technology, including two U.S. patentsthat will expire in 2016, two Australian patents that will expire in 2017, oneSouth African patent that will expire in 2017, one Taiwanese patent that willexpire in 2017, and one Philippine patent that will expire in 2019. These datesdo not include possible term extensions.

We are the owners ofcertain U.S. and foreign patents and patent applications relating to our CCMtechnology. Prosecution of patent applications relating to these technologiescontinues satisfactorily, as does prosecution of their foreign counterparts,although it is uncertain whether additional patents will be granted. Threeforeign patents have issued that cover certain aspects of the use of ourSpheramine product and other CCM technology, including one Australian and oneNew Zealand patent, both of which will expire in 2018, one New Zealand patentthat will expire in 2020, and one South African patent that will expire in2020. These dates do not include possible term extensions.

***DITPA***

Through our wholly-ownedsubsidiary, Developmental Therapeutics, Inc., we hold an exclusive licensefrom the University of Arizona to two U.S. patents, both expiring in 2021, onepending U.S. patent, and related foreign patent applications relating to theuse of 3,5-diiodothyroproprionic acid (DITPA) for the treatment of heartfailure and elevated cholesterol.

***Gallium Complexes***

We are the exclusivelicensee under the license agreement with Dr. Lawrence Bernstein of certain U.S.and foreign patents and patent applications relating to the galliumcomplexes.  10 U.S. patents and severalforeign patents have issued that cover pharmaceutical compositions and methodsof use for gallium complexes. Prosecution of other U.S. and foreign patent applications relating tothis technology continues satisfactorily, although it is uncertain whetheradditional patents will be granted. Patents in this family will 

10

----

begin toexpire in 2009.  However, this date doesnot include any possible patent term extensions, typically 3 to 5 years, orrestorations available under 35 U.S.C.§ 154 et seq.  We have also filed additional patentapplications covering the use of gallium complexes in treating infection byintracellular prokaryotes and DNA viruses, treating inflammatory arthritis, andtreating and preventing adverse liver conditions.

***Pivanex***

We are the exclusivelicensee under the Bar-Ilan agreement of an issued U.S. patent, expiring in2010 unless extended, patents in major European countries and Japan expiring in2008 unless extended, a Canadian patent expiring in 2011, a Hong Kong patentexpiring in 2008, and an Israeli patent expiring in 2007, all relating toPivanex and/or formulations and uses of Pivanex. We also have a Patent CooperationTreaty (PCT) patent application designating multiple countries abroad,including a designation in the U.S., for certain aspects of Pivanex.

***Immunotherapeutics***

We are the exclusivelicensee under a license agreement with the University of Kentucky ResearchFoundation of certain U.S. and foreign patents and patent applications relatedto the anti-idiotype antibodies known as 3H1, 1A7 and 11D10 and theirfragments, derivatives or analogues. U.S. and foreign patents have been issuedthat relate to aspects of these technologies. Prosecution of patentapplications relating to these technologies continues satisfactorily, althoughit is uncertain whether additional patents will be granted. Patents that covercertain aspects of CeaVac (antibody 3H1) include two U.S. patents that willexpire in 2014 and 2017, two European patents, one of which has been unbundledas 16 European national patents and the other of which has been unbundled as 17European national patents, all of which will expire in 2015, and threeAustralian patents, two of which will expire in 2015 and one of which willexpire in 2017. Patents that cover certain aspects of TriGem (antibody 1A7)include five U.S. patents, four of which will expire in 2015 and one of whichwill expire in 2018, and two Australian patents which will expire in 2016 and2018, respectively. Patents that cover certain aspects of TriAb (antibody11D10) include one U.S. patent which will expire in 2018 and two Australianpatents which will expire in 2016 and 2018, respectively. These dates do notinclude possible term extensions.

**Competition**

The pharmaceutical andbiotechnology industries are characterized by rapidly evolving technology andintense competition. Many companies of all sizes, including majorpharmaceutical companies and specialized biotechnology companies, are engagedin the development and commercialization of therapeutic agents designed for thetreatment of the same diseases and disorders that we target. Many of ourcompetitors have substantially greater financial and other resources, largerresearch and development staffs and more experience in the regulatory approvalprocess. Moreover, potential competitors have or may have patents or otherrights that conflict with patents covering our technologies.

***Iloperidone***

With respect toiloperidone, several products categorized as atypical antipsychotics arealready on the market. These products include Risperdal sold by JanssenPharmaceuticals, Zyprexa sold by Eli Lilly, Clozaril sold by Novartis, Seroquelsold by AstraZeneca, Geodon sold by Pfizer, and Abilify sold by Bristol-MyersSquibb. Competition among these companies is already intense and iloperidonewill face significant competition. The success of iloperidone will depend onhow it can be differentiated from products already on the market on the basisof efficacy, side-effect profile, cost, availability of formulations and doserequirements, among other things.

11

----

***Probuphine***

With regard to Probuphine,we are aware that Reckitt & Benckaiser, Inc. received FDA approvalin 2002 for a sublingual buprenorphine product (combined with naloxone) for thetreatment of opiate dependence. This product, to be administered daily, mightcompete with our six-month implantable product for drug abuse. Other forms ofbuprenorphine are also in development by other companies, includingintramuscular injections and intranasally delivered buprenorphine, which alsomight compete with our product for drug abuse.

***Spheramine***

With regard to Spheramine,we are aware of several new treatments for Parkinson’s disease that are inpre-clinical and clinical development. In addition, several public and privatecompanies, including StemCells, Inc., are actively pursuing alternativecell transplant technologies. Deep brain stimulation, also known as subthalamicstimulation is also a competing therapy for patients with advanced Parkinson’sdisease. The FDA has approved a stimulator device (Activa) manufactured byMedtronic, Inc., which is marketed in the U.S. We believe Spheramine mayhave potential competitive advantages to this therapy.

***DITPA***

We are aware of severalother companies which are currently marketing drugs such as beta blockers, aceinhibitors and inotropes, which may be used for the treatment of heart failure.These companies include Abbott, AstraZeneca, Aventis, Johnson &Johnson, Pfizer and Sanofi-Synthelabo. In addition, companies such asBristol-Myers Squibb, Merck and OSI Pharmaceuticals are developing newdrugs which may be used to treat heart failure. Although DITPA represents apotential new class of agents for the treatment of CHF, these products maycompete with DITPA.

***Gallium Complexes***

We are aware thatintravenously administered gallium nitrate is approved to treat hypercalcemiarelated to malignancy and may have potential for treatment of certain cancers.Other intravenous products, including the bisphosphonates, are available or arein development in the U.S. or Europe to treat osteoporosis, Paget’s disease,primary hyperparathyroidism, hypercalcemia of malignancy and metastatic bonedisease. Our product, gallium maltolate, is an orally administered drug and mayhave potential advantages in the treatment of cancer as well as bone-relateddiseases. Genta has previously stated that it is developing oral galliumcompounds to treat bone-losing conditions.

See “Risk Factors—We face intense competition.”

**Manufacturing**

We utilize contractmanufacturing organizations to manufacture our products for pre-clinicalstudies and clinical trials. While we have not introduced any products on thecommercial market to date, at such time as we are ready to do so we will needto allocate additional resources to the manufacture of these products. We donot have the facilities to manufacture these products in-house nor do we intendto establish our own manufacturing operation at this time. We currently plan topursue collaborative arrangements regarding the manufacture of any productsthat we may successfully develop.

**Government Regulation**

In order to obtain FDA approval of a new drug, acompany generally must submit proof of purity, potency, safety and efficacy,among other regulatory standards. In most cases, such proof entails extensiveclinical and pre-clinical laboratory tests.

12

----

The procedure for obtaining FDA approval to market anew drug involves several steps. Initially, the manufacturer must conductpre-clinical animal testing to demonstrate that the product does not pose anunreasonable risk to human subjects in clinical studies. Upon completion ofsuch animal testing, an Investigational New Drug application, or IND, must befiled with the FDA before clinical studies may begin. An IND applicationconsists of, among other things, information about the proposed clinicaltrials. Among the conditions for clinical studies and IND approval is therequirement that the prospective manufacturer’s quality control andmanufacturing procedures conform to current Good Manufacturing Practices(cGMP), which must be followed at all times. Once the IND is approved (or ifFDA does not respond within 30 days), the clinical trials may begin.

Human clinical trials on drugs are typically conductedin three sequential phases, although the phases may overlap. Phase I trialstypically consist of testing the product in a small number of healthyvolunteers or patients, primarily for safety in one or more doses. During PhaseII, in addition to safety, dose selection and efficacy of the product isevaluated in up to several hundred patients and sometimes more. Phase IIItrials typically involve additional testing for safety and confirmation ofefficacy in an expanded patient population at multiple test sites. The FDA mayorder the temporary or permanent discontinuation of a clinical trial at anytime.

The results of the pre-clinical and clinical testingon new drugs, if successful, are submitted to the FDA in the form of a New DrugApplication, or NDA. The NDA approval process requires substantial time andeffort and there can be no assurance that any approval will be granted on atimely basis, if at all. The FDA may refuse to approve an NDA if applicableregulatory requirements are not satisfied. Product approvals, if granted, maybe withdrawn if compliance with regulatory standards is not maintained orproblems occur following initial marketing.

The FDA may also require post-marketing testing andsurveillance of approved products, or place other conditions on theirapprovals. These requirements could cause it to be more difficult or expensiveto sell the products, and could therefore restrict the commercial applicationsof such products. Product approvals may be withdrawn if compliance withregulatory standards is not maintained or if problems occur following initialmarketing. With respect to patented products or technologies, delays imposed bythe governmental approval process may materially reduce the period during whichwe will have the exclusive right to exploit such technologies.

We believe we are incompliance with all material applicable regulatory requirements. However, see “RiskFactors—We must comply with extensive government regulations” for additionalrisks we face regarding regulatory requirements and compliance.

**Foreign Regulatory Issues**

Sales of pharmaceuticalproducts outside the United States are subject to foreign regulatoryrequirements that vary widely from country to country. Whether or not FDAapproval has been obtained, approval of a product by a comparable regulatoryauthority of a foreign country must generally be obtained prior to thecommencement of marketing in that country. Although the time required to obtainsuch approval may be longer or shorter than that required for FDA approval, therequirements for FDA approval are among the most detailed in the world and FDAapproval generally takes longer than foreign regulatory approvals.

**Employees**

At December 31, 2004we had 71 full-time employees. None of our employees are represented by a laborunion. We have not experienced any work stoppages and consider ourrelations with our employees to be good. See “Risk Factors—We may not be ableto retain our key management and scientific personnel.”

13

----

**Available Information**

We electronically file our annual reports on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-Kwith the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934. Any materials we file withthe SEC are accessible to the public at the SEC’s Public Reference Room at450 Fifth Street, NW, Washington, DC 20549. You may obtain information on theoperation of the SEC’s Public Reference Room by calling the SEC at(800) SEC-0330. The public may also utilize the SEC’s Internetwebsite, which contains reports, proxy and information statements, and otherinformation regarding issuers that file electronically with the SEC. Theaddress of the SEC website is http://www.sec.gov.

You may obtain free copies of our annual reports on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-Kand amendments to those reports on our website at http://www.titanpharm.com, orby contacting our corporate office by calling (650) 244-4990, or bysending an e-mail message to info@titanpharm.com.

14

----

**RISKFACTORS**

Our business is subject tonumerous risks.

**Wehave a history of operating losses and may never be profitable.**

From our inception throughDecember 31, 2004, we had an accumulated deficit of approximately$185.7 million. We will continue to incur losses for the foreseeablefuture as a result of the various costs associated with our research,development, financial, administrative, regulatory and management activities.We may never achieve or sustain profitability.

**Ourproducts are at various stages of development and may not be successfullydeveloped or commercialized.**

We do not currentlyhave any products being sold on the commercial market. Our proposed productsare at various stages of development, but all will require significant furthercapital expenditures, development, testing, and regulatory clearances prior tocommercialization. Of the large number of drugs in development, only a smallpercentage successfully complete the FDA regulatory approval process and arecommercialized. We are subject to the risk that some or all of our proposedproducts:

·       willbe found to be ineffective or unsafe;

·       willnot receive necessary regulatory clearances;

·       willbe unable to get to market in a timely manner;

·       willnot be capable of being produced in commercial quantities at reasonable costs;

·       willnot be successfully marketed; or

·       willnot be widely accepted by the physician community.

To date, we have experienced setbacks in some of ourproduct development efforts. The results of a study evaluating the EKG profileof patients taking iloperidone, for example, found that iloperidone appeared toprolong the cardiac QTc interval, potentially a cause for concern. Whileiloperidone was shown to have a similar QTc profile to ziprasidone (Geodon), aproduct already approved by the FDA, these results significantly delayed theregulatory filings for that product and we cannot predict when, if ever, thedevelopment program for iloperidone will advance. Furthermore, we previouslyannounced study results with CeaVac that did not meet their primary endpoint,and, as a result, we have determined to discontinue our internal activities inthe development of the monoclonal antibodies CeaVac, TriAb, and TriGem.

In June 2004, we announced that an interim safetyanalysis by an independent data monitoring committee (IDMC) had identifiedsignificant safety issues in the combination treatment of Pivanex withdocetaxel. The randomized study evaluating treatment with Pivanex and docetaxelversus docetaxel alone had already completed its enrollment target of 225patients at the time of such interim safety analysis. As a result of the IDMCfindings and upon its recommendation, we discontinued the combination treatmentof Pivanex and Docetaxel for the remaining patients on the study. Furtherdevelopment of Pivanex for treatment of lung cancer was also discontinued.

Our Spheramine product is based upon new technologywhich may be risky and fail to show efficacy. We are not aware of any othercell therapy products for CNS disorders that have been approved by the FDA orany similar foreign government entity and cannot assure you that we will beable to obtain the required regulatory approvals for any products based uponsuch technology.

15

----

We may continue toexperience unanticipated problems relating to product development, testing,regulatory compliance, manufacturing, marketing and competition, and our costsand expenses could exceed current estimates. We cannot predict whether we willsuccessfully develop and commercialize any products.

**We mustcomply with extensive government regulations.**

Our research,development, preclinical and clinical trial activities and the manufacture andmarketing of any products that we may successfully develop are subject to anextensive regulatory approval process by the FDA and other regulatory agenciesin the U.S. and other countries. The process of obtaining required regulatoryapprovals for drugs, including conducting preclinical and clinical testing todetermine safety and efficacy, is lengthy, expensive and uncertain. Even aftersuch time and expenditures, we may not obtain necessary regulatory approvalsfor clinical testing or for the manufacturing or marketing of any products. Wehave limited experience in obtaining FDA approval. Regulatory approval may entaillimitations on the indicated usage of a drug, which may reduce the drug’smarket potential. Even if regulatory clearance is obtained, post-marketevaluation of the products, if required, could result in restrictions on aproduct’s marketing or withdrawal of the product from the market, as well aspossible civil and criminal sanctions. Our regulatory submissions may bedelayed or we may cancel plans to make submissions for proposed products for anumber of reasons, including:

·       unanticipatedpreclinical testing or clinical trial reports;

·       changesin regulations or the adoption of new regulations;

·       unanticipatedenforcement of existing regulations;

·       unexpectedtechnological developments; and

·       developmentsby our competitors.

Consequently, we cannot assure you that we will makeour submissions promptly, or at all, or that our submissions will receiveapproval from the FDA. If our corporate partners and we are unable to obtainregulatory approval for our products, our business will be seriously harmed.

In addition, we and our collaborative partners may besubject to regulation under state and federal laws, including requirementsregarding occupational safety, laboratory practices, environmental protectionand hazardous substance control, and may be subject to other local, state,federal and foreign regulation. We cannot predict the impact of such regulationon us, although it could seriously harm our business.

**Weface risks associated with third parties conducting preclinical studies andclinical trials of our products as well as our dependence on third parties tomanufacture any products that we may successfully develop.**

We depend on third-partylaboratories and medical institutions to conduct preclinical studies andclinical trials for our products and other third-party organizations toperform data collection and analysis, all of which must maintain both goodlaboratory and good clinical practices. We will also depend upon third partymanufacturers for the production of any products we may successfully develop tocomply with current Good Manufacturing Practices of the FDA, which aresimilarly outside our direct control. Our business could be materiallyadversely affected should third party laboratories and medical institutionsconducting studies of our products fail to maintain both good laboratory andclinical practices. Similarly, we could be materially adversely affected if themanufacturers of any products we develop in the future fail to comply with GoodManufacturing Practices of the FDA.

16

----

**Weface many uncertainties relating to our human clinical trial strategy andresults.**

In order to obtainthe regulatory approvals that we need to commercialize any of our productcandidates, we must demonstrate that each product candidate is safe andeffective for use in humans for each target indication. The results ofpreclinical and Phase I and Phase II clinical studies are not necessarilyindicative of whether a product will demonstrate safety and efficacy in largepatient populations. Two of our product candidates have reached Phase III humanclinical trials, however results from the studies have not supported aregulatory filing. Several other product candidates are currently advancinginto Phase II human clinical trials. We may not be able to demonstrate that anyof our product candidates will be safe or effective in advanced trials thatinvolve larger numbers of patients. Clinical trials are subject to oversight byinstitutional review boards and the FDA and:

·       mustbe conducted in conformance with the FDA’s good laboratory practiceregulations;

·       mustmeet requirements for institutional review board oversight;

·       mustmeet requirements for informed consent;

·       mustmeet requirements for good clinical practices;

·       aresubject to continuing FDA oversight; and

·       mayrequire large numbers of test subjects.

As described above in “Our products are at various stages of development and may not besuccessfully developed or commercialized,” our product developmentprograms have in the past been and may in the future be curtailed, redirectedor eliminated at any time for some or all of the following reasons:

·       unanticipated,adverse or ambiguous results;

·       undesirableside effects which delay or extend the trials;

·       ourinability to locate, recruit and qualify a sufficient number of patients forour trials;

·       regulatorydelays or other regulatory actions;

·       difficultiesin manufacturing sufficient quantities of the particular product candidate orany other components needed for our preclinical testing or clinical trials;

·       changein the focus of our development efforts; and

·       reevaluationof our clinical development strategy.

Accordingly, our clinicaltrials may not proceed as anticipated or otherwise adequately support ourapplications for regulatory approval.

**Weface risks associated with clinical trial liability claims in the event thatthe use or misuse of our product candidates results in personal injury ordeath.**

We face an inherent riskof clinical trial liability claims in the event that the use or misuse of ourproduct candidates results in personal injury or death. Our clinical liabilityinsurance coverage may not be sufficient to cover claims that may be madeagainst us. Any claims against us, regardless of their merit, could severelyharm our financial condition, strain our management and other resources oradversely impact or destroy the prospects for commercialization of the productwhich is the subject of any such claim.

17

----

**Wemay be unable to protect our patents and proprietary rights.**

Our future successwill depend to a significant extent on our ability to:

·       obtainand keep patent protection for our products and technologies on aninternational basis;

·       enforceour patents to prevent others from using our inventions;

·       maintainand prevent others from using our trade secrets; and

·       operateand commercialize products without infringing on the patents or proprietaryrights of others.

We cannot assure you that our patent rights willafford any competitive advantages, and these rights may be challenged orcircumvented by third parties. Further, patents may not be issued on any of ourpending patent applications in the U.S. or abroad. Because of the extensivetime required for development, testing and regulatory review of a potentialproduct, it is possible that before a potential product can be commercialized,any related patent may expire or remain in existence for only a short periodfollowing commercialization, reducing or eliminating any advantage of thepatent. If we sue others for infringing our patents, a court may determine thatsuch patents are invalid or unenforceable. Even if the validity of our patentrights is upheld by a court, a court may not prevent the alleged infringementof our patent rights on the grounds that such activity is not covered by ourpatent claims.

In addition, thirdparties may sue us for infringing their patents. In the event of a successfulclaim of infringement against us, we may be required to:

·       paysubstantial damages;

·       stopusing our technologies and methods;

·       stopcertain research and development efforts;

·       developnon-infringing products or methods; and

·       obtainone or more licenses from third parties.

If required, we cannot assure you that we will be ableto obtain such licenses on acceptable terms, or at all. If we are sued forinfringement, we could encounter substantial delays in development, manufactureand commercialization of our product candidates. Any litigation, whether toenforce our patent rights or to defend against allegations that we infringethird party rights, will be costly, time consuming, and may distract managementfrom other important tasks.

As is commonplace in the biotechnology andpharmaceutical industry, we employ individuals who were previously employed atother biotechnology or pharmaceutical companies, including our competitors orpotential competitors. To the extent our employees are involved in researchareas which are similar to those areas in which they were involved at theirformer employers, we may be subject to claims that such employees and/or wehave inadvertently or otherwise used or disclosed the alleged trade secrets orother proprietary information of the former employers. Litigation may benecessary to defend against such claims, which could result in substantialcosts and be a distraction to management and which may have a material adverseeffect on us, even if we are successful in defending such claims.

We also rely in ourbusiness on trade secrets, know-how and other proprietary information. We seekto protect this information, in part, through the use of confidentialityagreements with employees, consultants, advisors and others. Nonetheless, wecannot assure you that those agreements will provide adequate protection forour trade secrets, know-how or other proprietary information and prevent theirunauthorized use or disclosure. To the extent that consultants, key employeesor other third parties apply technological information independently developedby them or by others to our proposed products, 

18

----

disputesmay arise as to the proprietary rights to such information, which may not beresolved in our favor. Most of our consultants are employed by, or haveconsulting agreements with, third parties and any inventions discovered by suchindividuals generally will not become our property. There is a risk that otherparties may breach confidentiality agreements or that our trade secrets maybecome known or independently discovered by competitors, which could adverselyaffect us.

**We face intense competition.**

Competition in thepharmaceutical and biotechnology industries is intense. We face, and willcontinue to face, competition from numerous companies that currently market, orare developing, products for the treatment of the diseases and disorders wehave targeted. Many of these entities have significantly greater research anddevelopment capabilities, experience in obtaining regulatory approvals andmanufacturing, marketing, financial and managerial resources than we have. Wealso compete with universities and other research institutions in the developmentof products, technologies and processes, as well as the recruitment of highlyqualified personnel. Our competitors may succeed in developing technologies orproducts that are more effective than the ones we have under development orthat render our proposed products or technologies noncompetitive or obsolete.In addition, our competitors may achieve product commercialization or patentprotection earlier than we will.

**Weare dependent upon our key collaborative relationships and license andsponsored research agreements.**

As a company with limited resources, we relysignificantly on the resources of third parties to conduct research anddevelopment and complete the regulatory approval process on our behalf. Forexample, our ability to ultimately derive revenues from iloperidone is almostentirely dependent upon Novartis and Vanda Pharmaceuticals conducting the PhaseIII trials and completing the regulatory approval process and implementing themarketing program necessary to commercialize iloperidone if the product isapproved by the FDA. We are similarly dependent upon Schering, our collaboratorfor the development and commercialization of Spheramine. Beyond our contractualrights, we cannot control the amount or timing of resources that any existingor future corporate partner devotes to product development andcommercialization efforts for our product candidates. In addition, we alsoreceive substantial government funding for our cancer immunotherapeuticprograms. We cannot assure you that we will continue to receive suchgovernmental funding. If such funds are no longer available, some of ourcurrent and future development efforts may be delayed or terminated. We dependon our ability to maintain existing collaborative relationships, to develop newcollaborative relationships with third parties and to acquire or in-licenseadditional products and technologies for the development of new productcandidates. We cannot assure you that we will be able to maintain or developnew collaborative relationships, or that any such third-party products ortechnology will be available on acceptable terms, if at all.

Conflicts with ourcollaborators and strategic partners could have an adverse impact on ourrelationships with them and impair our ability to enter into future collaborations,either of which could seriously harm our business. Our collaborators have, andmay, to the extent permitted by our agreements, develop competing products,preclude us from entering into collaborations with their competitors orterminate their agreements with us prematurely. Moreover, disagreements couldarise with our collaborators or strategic partners over rights to ourintellectual property and our rights to share in any of the future revenuesfrom products or technologies resulting from use of our technologies, or ouractivities in separate fields may conflict with other business plans of ourcollaborators.

**Wemust meet payment and other obligations under our license and sponsoredresearch agreements.**

Our license agreementsrelating to the in-licensing of technology generally require the payment ofup-front license fees and royalties based on sales with minimum annualroyalties, the use of due diligence in 

19

----

developingand bringing products to market, the achievement of funding milestones and, insome cases, the grant of stock to the licensor. Our sponsored researchagreements generally require periodic payments on an annual or quarterly basis.Our failure to meet financial or other obligations under license or sponsoredresearch agreements in a timely manner could result in the loss of our rightsto proprietary technology or our right to have the applicable university orinstitution conduct research and development efforts.

**Wemay be dependent upon third parties to manufacture and market any products wesuccessfully develop.**

We currently do not havethe resources or capacity to commercially manufacture or directly market any ofour proposed products. Collaborative arrangements may be pursued regarding themanufacture and marketing of any products that may be successfully developed.We may be unable to enter into additional collaborative arrangements tomanufacture or market any proposed products or, in lieu thereof, establish ourown manufacturing operations or sales force.

**Healthcarereform and restrictions on reimbursements may limit our financial returns.**

Our ability or the ability of our collaborators tocommercialize drug products, if any, may depend in part on the extent to whichgovernment health administration authorities, private health insurers and otherorganizations will reimburse consumers for the cost of these products. Thesethird parties are increasingly challenging both the need for and the price ofnew drug products. Significant uncertainty exists as to the reimbursementstatus of newly approved therapeutics. Adequate third party reimbursement maynot be available for our own or our collaborator’s drug products to enable usor them to maintain price levels sufficient to realize an appropriate return ontheir and our investments in research and product development.

**Wemay encounter difficulties managing our growth, which could adversely affectour results of operations.**

Our success will depend onour ability to expand and manage our growth. We may not be able to manage ourgrowth, to meet the staffing requirements of additional collaborativerelationships or successfully assimilate and train new employees. If wecontinue to grow, our existing management skills and systems may not beadequate and we may not be able to manage any additional growth effectively. Ifwe fail to achieve any of these goals, there could be a material adverse effecton our business, financial condition or results of operations.

**Wemay not be able to retain our key management and scientific personnel.**

As a company with alimited number of personnel, we are highly dependent on the services of Dr. LouisR. Bucalo, our Chairman, President and Chief Executive Officer, as well as theother principal members of our management and scientific staff. The loss of oneor more of such individuals could substantially impair ongoing research anddevelopment programs and could hinder our ability to obtain corporate partners.Our success depends in large part upon our ability to attract and retain highlyqualified personnel. We compete in our hiring efforts with other pharmaceuticaland biotechnology companies, as well as universities and nonprofit researchorganizations, and we may have to pay higher salaries to attract and retainpersonnel.

**We will need additional financing.**

At December 31, 2004,we had approximately $36.3 million of cash, cash equivalents, andmarketable securities that we believe will enable us to fund our operationsthrough 2005. We will need to seek additional financing to continue our productdevelopment activities, and will be required to obtain substantial funding tocommercialize any products other than iloperidone or Spheramine that we may 

20

----

successfullydevelop. We do not have any funding commitments or arrangements. If we areunable to generate adequate revenues, enter into a corporate collaboration,complete a debt or equity offering, or otherwise obtain sufficient financingwhen and if needed, we may be required to reduce, defer or discontinue one ormore of our product development programs.

**Futuresales of our common stock in the public market could adversely impact our stockprice.**

Future sales of our commonstock by existing stockholders pursuant to Rule 144 under the SecuritiesAct, pursuant to an effective registration statement or otherwise, could havean adverse effect on the price of our common stock.

**Ourstock price has been and will likely continue to be volatile.**

Our stock price hasexperienced substantial fluctuations and could continue to fluctuatesignificantly due to a number of factors, including:

·       variationsin our anticipated or actual operating results;

·       salesof substantial amounts of our common stock;

·       announcementsabout us or about our competitors, including introductions of new products;

·       litigationand other developments relating to our patents or other proprietary rights orthose of our competitors;

·       conditionsin the pharmaceutical or biotechnology industries;

·       governmentalregulation and legislation; and

·       changein securities analysts’ estimates of our performance, or our failure to meetanalysts’ expectations.

Many of these factors are beyond our control.

In addition, the stockmarkets in general, and the American Stock Exchange and the market forpharmaceutical and biotechnological companies in particular, have experienced extremeprice and volume fluctuations recently. These fluctuations often have beenunrelated or disproportionate to the operating performance of these companies.These broad market and industry factors may adversely affect the market priceof our common stock, regardless of our actual operating performance.

**Item 2. Properties**

We have a five-yearoperating lease, expiring in June 2010, for approximately 22,595 squarefeet of office space in South San Francisco, California. We also have afive-year lease, expiring in January 2007, for approximately 4,200 squarefeet of office and laboratory space in Somerville, New Jersey.

**Item 3.  LegalProceedings**

Not applicable

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

Not applicable

21

----

**PART II**

**Item5. Market for Registrant’s Common Equity and Related Stockholder Matters.**

**(a)   Price Range of Securities**

Ourcommon stock trades on the American Stock Exchange under the symbol TTP. Thetable below sets forth the high and low sales prices of our common stock asreported by the American Stock Exchange for the periods indicated.
| ** **                            | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------|------------|----------|------------|---------|------------|
| Fiscal Year Ended  December 31, 2004: |       |     |       |    |       |
| First Quarter                         |       | $        | 5.89       |    | $          | 2.80 |   |
| Second Quarter                        |       | $        | 5.15       |    | $          | 2.43 |   |
| Third Quarter                         |       | $        | 2.84       |    | $          | 1.80 |   |
| Fourth Quarter                        |       | $        | 3.39       |    | $          | 1.94 |   |
| Fiscal Year Ended  December 31, 2003: |       |     |       |    |       |
| First Quarter                         |       | $        | 1.81       |    | $          | 1.36 |   |
| Second Quarter                        |       | $        | 3.09       |    | $          | 1.44 |   |
| Third Quarter                         |       | $        | 2.80       |    | $          | 1.91 |   |
| Fourth Quarter                        |       | $        | 4.00       |    | $          | 2.42 |   |

 

**(b)   ApproximateNumber of Equity Security Holders**

Thenumber of record holders of our common stock as of March 1, 2005 wasapproximately 155. Based on the last ADP search, we believe there are in excessof 10,000 beneficial holders of our common stock.

**(c)**   Dividends

We have never paid a cashdividend on our common stock and anticipate that for the foreseeable future anyearnings will be retained for use in our business and, accordingly, do notanticipate the payment of cash dividends.

22

----

**Item 6. Selected Financial Data**

Theselected financial data presented below summarizes certain financial data whichhas been derived from and should be read in conjunction with our consolidatedfinancial statements and footnotes thereto included in the section beginning onpage F-1. See also “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.”
| ** **                                       | ** ** | **Year Ended December 31,**                         | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement of Operations Data:**                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total revenue(1)                                 |       | $                                                                  | 31         |   | $ | 89 |   | $ | 2,892 |   | $ | 4,572 |   | $ | 1,880 |   |
| Operating expenses:                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Research and development                         |       | 20,415                                                             |       | 22,258 |   | 29,819 |   | 23,339 |   | 16,744 |   |
| Acquired/in-process research and  development(2) |       | 759                                                                |       | 3,896 |   | — |   | — |   | 4,969 |   |
| General and administrative                       |       | 5,237                                                              |       | 5,109 |   | 5,076 |   | 5,383 |   | 4,070 |   |
| Other income, net                                |       | 376                                                                |       | 1,285 |   | 3,821 |   | 6,686 |   | 5,115 |   |
| Net loss                                         |       | $                                                                  | (26,004    | ) | $ | (29,889 | ) | $ | (28,182 | ) | $ | (17,464 | ) | $ | (18,788 | ) |
| Basic and diluted  net loss per share            |       | $                                                                  | (0.83      | ) | $ | (1.07 | ) | $ | (1.02 | ) | $ | (0.63 | ) | $ | (0.73 | ) |
| Shares used in  computing:                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per share             |       | 31,381                                                             |       | 27,907 |   | 27,642 |   | 27,595 |   | 25,591 |   |

----

(1)          Revenues for 2001include $2.5 million license fee payment from Novartis for the developmentand commercialization of iloperidone in Japan. Revenues for 2002 include a$2.0 million milestone payment from Schering.

(2)          Acquiredresearch and development reflects the acquisition of the minority shares ofProneura in 2004, the acquisition of DTI in 2003 and in-process research anddevelopment reflects the acquisition of GeoMed in 2000.
| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                         | ** ** | **(in thousands)**               | ** ** |
| **Balance Sheet Data:**                            |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents, and marketable securities |       | $                                     | 36,322     |   | $ | 46,555 |   | $ | 73,450 |   | $ | 105,051 |   | $ | 117,523 |   |
| Working capital                                    |       | 33,760                                |       | 44,578 |   | 70,702 |   | 100,193 |   | 115,386 |   |
| Total assets                                       |       | 38,626                                |       | 49,008 |   | 75,926 |   | 107,132 |   | 118,442 |   |
| Total stockholders’  equity                   |       | 33,713                                |       | 44,426 |   | 70,740 |   | 100,127 |   | 114,738 |   |
|                                                    |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

23

----

**Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

The following discussionshould be read in conjunction with the Consolidated Financial Statements andNotes thereto beginning on page F-1 in this report.

The following discussioncontains certain forward-looking statements, within the meaning of the “safeharbor” provisions of the Private Securities Reform Act of 1995, the attainmentof which involves various risks and uncertainties. Forward-lookingstatements may be identified by the use of forward-looking terminologysuch as “may,” “will,” “expect,” “believe,” “estimate,” “plan,” “anticipate,” “continue,”or similar terms, variations of those terms or the negative of those terms. Ouractual results may differ materially from those described in these forward-lookingstatements due to, among other factors, the results of ongoing research anddevelopment activities and pre-clinical testing, the results of clinical trialsand the availability of additional financing through corporate partneringarrangements or otherwise.

Probuphine®,Spheramine® and CCMTM are trademarks of Titan Pharmaceuticals, Inc.This Form 10-K also includes trade names and trademarks of companies otherthan Titan Pharmaceuticals, Inc.

**Overview**

We area biopharmaceutical company developing proprietary therapeutics for thetreatment of central nervous system (CNS) disorders, cardiovascular disease andcancer. Our product development programs focus on large pharmaceutical marketswith significant unmet medical needs and commercial potential. We are focusedprimarily on clinical development of the following products:

·       Iloperidone:   forthe treatment of schizophrenia and related psychotic disorders (partnered withVanda Pharmaceuticals, Inc.)

·       Probuphine:   forthe treatment of opiate addiction

·       Spheramine:   forthe treatment of advanced Parkinson’s disease (partnered with Schering AG)

·       DITPA:   forthe treatment of congestive heart failure

·       Galliummaltolate:   for the treatment of bone related diseases and certaincancers.

We are directly developingour product candidates and also utilizing strategic partnerships. Thesecollaborations help fund product development and enable us to retainsignificant economic interest in our products. In June 2004, we announcedthat Vanda Pharmaceuticals, Inc. had acquired from Novartis Pharma AG theworldwide rights to develop and commercialize iloperidone, our proprietaryantipsychotic agent in Phase III clinical development for the treatment ofschizophrenia and related psychotic disorders. Vanda will now pursueadvancement of the iloperidone Phase III development program. All of our rightsand economic interests in iloperidone, including royalties on sales ofiloperidone, remain essentially unchanged under the agreement. Spheraminedevelopment is primarily funded by our corporate partner for Spheramine,Schering AG, Germany (Schering). We are no longer directly pursuing developmentof the monoclonal antibodies—CeaVac, TriAb, and TriGem—for the treatment ofvarious cancers, and further development of Pivanex for treatment of lungcancer was also discontinued.

Thefollowing table provides summary status of our products in development:
| **Product**       | ** ** | ** **                               | ** ** | ** ** | **Potential Indication(s)** | ** **                        | ** ** | **Phase of  Development** | ** ** | ** ** | **Marketing Rights** | ** ** |
|-------------------|------------|------------------------------------------|------------|------------|-----------------------------|-----------------------------------|------------|---------------------------|------------|------------|----------------------|------------|
| Iloperidone       |       | Schizophrenia, psychosis                 |       | Phase III  |                        | Vanda  Pharmaceuticals, Inc. |
| Probuphine        |       | Opiate addiction                         |       | Phase I/II |                        | Titan                             |
| Spheramine        |       | Parkinson’s disease                 |       | Phase IIb  |                        | Schering AG                       |
| DITPA             |       | Congestive heart failure                 |       | Phase II   |                        | Titan                             |
| Gallium maltolate |       | Bone related disease and certain cancers |       | Phase I/II |                        | Titan                             |

 

24

----

For additional information on our product developmentprograms, see Item 1(c) “Narrative Description of Business” section.

Our products are atvarious stages of development and may not be successfully developed orcommercialized. We do not currently have any products being sold on thecommercial market and we do not expect to generate any revenue from productsales or royalties in the foreseeable future. Our proposed products willrequire significant further capital expenditures, development, testing, andregulatory clearances prior to commercialization. We may experienceunanticipated problems relating to product development and cannot predictwhether we will successfully develop and commercialize any products. Anestimation of product completion dates and completion costs can vary significantlyfor each product and are difficult to predict. Various statutes and regulationsalso influence our product development progress and the success of obtainingapproval is highly uncertain. We will also continue to identify newtechnologies and/or product candidates for possible in-licensing oracquisition. Accordingly, we expect to incur operating losses for theforeseeable future. We cannot assure you that we will ever achieve profitableoperations. For a full discussion of risks and uncertainties in our productdevelopment, see “Risk Factors—Our products are at various stages ofdevelopment and may not be successfully developed or commercialized.”

**CriticalAccounting Policies and the Use of Estimates**

The preparation ofour financial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in our financial statements andaccompanying notes. Actual results could differ materially from thoseestimates. We believe the following accounting policies and estimates for theyear ended December 31, 2004, to be critical:

·       We have elected to continueto follow Accounting Principles Board Opinion No. 25 (or APB 25), *“Accounting for Stock Issued to Employees,”*to account for employee stock options because the alternative fair value methodof accounting prescribed by Statement of Financial Accounting Standards No. 123(or SFAS 123), *“Accounting for Stock-BasedCompensation,”* requires the use of option valuation models that werenot developed for use in valuing employee stock options. Under APB 25, nocompensation expense is recognized when the exercise price of our employeestock options equals the market price of the underlying stock on the date of grant.Had we elected to follow SFAS 123 and to apply the fair value method tostock-based employee compensation, we would have recorded an additional$1.1 million in net loss, or an additional $0.03 of net loss per share forthe year ended December 31, 2004.

**Results of Operations**

***Comparison of Years Ended December 31, 2004 and2003***

Revenues in 2004 were $31,000 compared to $89,000 for2003, a decrease of $58,000. Our revenues during 2004 and 2003 were derivedfrom fees received under various licensing agreements.

Research and development expenses for 2004 were$20.4 million compared to $22.3 million for 2003, a decrease of$1.9 million. The decrease in research and development was primarilyassociated with the pending completion of a Phase II clinical study and thereduction of internal resources to our immunotherapy products in 2004. Of our2004 research and development expenses, approximately 44%, or$9.0 million, were attributable to external R&D expenses. ExternalR&D expenses include direct expenses such as clinical research organizationcharges, investigator and review board fees, patient expense reimbursements,pre-clinical activities and contract manufacturing expenses. In 2004,approximately $3.9 million of external R&D expenses were related toPivanex, $1.4 million to Probuphine, $1.3 million to galliummaltolate, $1.2 million to DITPA, $0.2 million to Spheramine, and theremainder to other projects. 

25

----

Remaining R&D expenseswere attributable to internal operating costs, which include clinical researchand development personnel salaries and employment related expenses, clinicaltrials related travel expenses, and allocation of facility and corporate costs.In 2004, we recorded a $759,000 acquired research and development expense inconnection with the acquisition of minority shares of ProNeura, Inc. Theentire purchase price of the shares was charged to acquired research anddevelopment on the acquisition date in accordance with generally acceptedaccounting principles. As a result of the risks and uncertainties inherentlyassociated with pharmaceutical research and development activities describedelsewhere in this report, we are unable to estimate the specific timing andfuture costs of our clinical development programs or the timing of materialcash inflows, if any, from our product candidates.

General and administrative expenses for 2004 were$5.2 million compared to $5.1 million for 2003.

Other income, net, for 2004 was $376,000 compared to$1.3 million for 2003, a decrease of $900,000. The decrease, primarily ininterest income, was a result of declining interest rates and our smalleraverage cash and marketable securities position.

As a result of theforegoing, we had a net loss of $26.0 million in 2004 compared to a netloss of $29.9 million in 2003.

***Comparison of Years Ended December 31, 2003 and2002***

Revenues in 2003 were $0.1 million compared to$2.9 million for 2002, a decrease of $2.8 million. Our 2002 revenueincluded a one-time $2 million milestone payment from Schering AGfollowing successful completion of our Phase I/II clinical study of Spheraminein the treatment of Parkinson’s disease and Schering’s decision to initiaterandomized clinical testing of Spheramine for the treatment of patients withadvanced Parkinson’s disease (see Note 7 to the Consolidated FinancialStatements beginning on page F-1 in this report). In addition, our 2002revenue also included SBIR grant revenues from the National Institutes ofHealth in support of the development of Spheramine. We had no comparablemilestone or grant revenue in 2003.

Research and development expenses for 2003 were$22.3 million compared to $29.8 million for 2002, a decrease of$7.5 million. The decrease in research and development was primarilyassociated with the completion of a randomized, placebo-controlled PhaseIII clinical study in 2002. Of our 2003 research and development expenses,approximately 52%, or $11.7 million, were attributable to external R&Dexpenses. External R&D expenses include direct expenses such as clinicalresearch organization charges, investigator and review board fees, patientexpense reimbursements, pre-clinical activities and contractmanufacturing expenses. In 2003, approximately $5.2 million of externalR&D expenses were related to Pivanex, $1.2 million to Probuphine,$1.3 million to gallium maltolate, $0.6 million to Spheramine, andthe remainder to other projects. Remaining R&D expenses were attributableto internal operating costs, which include clinical research and developmentpersonnel salaries and employment related expenses, clinical trials relatedtravel expenses, and allocation of facility and corporate costs. In 2003, werecorded a $3.9 million acquired research and development expense inconnection with the acquisition of DITPA, a novel product for the potentialtreatment of congestive heart failure. The entire purchase price was charged toacquired research and development on the acquisition date in accordance withgenerally accepted accounting principles. See Note 8 to the ConsolidatedFinancial Statements beginning on page F-1 in this report.

General and administrative expenses for 2003 were$5.1 million compared to $5.1 million for 2002.

Other income, net, for 2003 was $1.3 millioncompared to $3.8 million for 2002, a decrease of $2.5 million. Thedecrease, primarily in interest income, was a result of declining interestrates and our smaller average cash and marketable securities position.

26

----

As a result of theforegoing, we had a net loss of $29.9 million in 2003 compared to a netloss of $28.2 million in 2002.

**Liquidity andCapital Resources**
| ** **                                        | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| **As of December 31:**                       |       |                    |       |     |       |     |       |
| Cash, cash  equivalents and marketable securities |       | $                       | 36,322     |     | $          | 46,555   |       | $ | 73,450 |   |
| Working capital                                   |       | $                       | 33,760     |     | $          | 44,578   |       | $ | 70,702 |   |
| Current ratio                                     |       | 10:1                    |       | 14:1     |       | 19:1     |       |
| **Year Ended December 31:**                  |       |                    |       |     |       |     |       |
| Cash (used in)  provided by operating activities  |       | $                       | (23,912    | )        | $          | (26,438  | )          | $ | (29,291 | ) |
| Cash (used in)  provided by investing activities  |       | $                       | 7,977      |     | $          | 26,002   |       | $ | 30,678 |   |
| Cash (used in) provided  by financing activities  |       | $                       | 14,566     |     | $          | 113      |       | $ | (4 | ) |

 

We have funded our operations since inceptionprimarily through sales of our securities, as well as proceeds from warrant andoption exercises, corporate licensing and collaborative agreements, andgovernment sponsored research grants.

In October 2003, we acquired DITPA through theacquisition of Developmental Therapeutics, Inc. in a stock transaction for1,187,500 shares of our common stock valued at approximately $3.6 millionusing the average market price of our common stock over the five-day tradingperiod, including and prior to the date of the merger. In addition, up to atotal of 750,000 shares of our common stock will be issued only upon theachievement of positive pivotal study results or certain other substantial milestoneswithin five years.

Uses of cash in operating activities were primarily tofund product development programs and administrative expenses. We have enteredinto various agreements with research institutions, universities, and otherentities for the performance of research and development activities and for theacquisition of licenses related to those activities. Certain of the licensesrequire us to pay royalties on future product sales, if any. In addition, inorder to maintain license and other rights while products are underdevelopment, we must comply with customary licensee obligations, including thepayment of patent related costs, annual minimum license fees, and meetingproject-funding milestones.

Thefollowing table sets forth the aggregate contractual cash obligations as of December 31,2004 (in thousands):
| ** **                                        | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations**                  | ** ** | ** **                                | ** ** | **Total** | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **5 years+** | ** ** |
| Operating leases                                  |       | $                                         | 3,676      |   | $ | 893 |   | $ | 1,331 |   | $ | 1,157 |   |   | 295 |   |   |
| Sponsored  research & license agreements |       | $                                         | 2,408      |   | $ | 753 |   | $ | 653 |   | $ | 668 |   |   | $ | 334 |   |   |
| Total contractual cash  obligations               |       | $                                         | 6,086      |   | $ | 1,646 |   | $ | 1,985 |   | $ | 1,826 |   |   | $ | 629 |   |   |
|                                                   |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We expect to continue toincur substantial additional operating losses from costs related tocontinuation and expansion of product and technology development, clinicaltrials, and administrative activities. We believe that we currently havesufficient working capital to sustain our planned operations through 2005. In February 2004we filed a shelf registration statement with the Securities and ExchangeCommission to sell up to $50 million of common or preferred stock. Underthis registration statement, shares may be sold periodically to provideadditional funds for our operations. In March 2004, we completed a sale of3,075,000 shares of our common stock offered under the registration statementat a price of $5.00 per share, for gross proceeds of approximately $15.4million. Net proceeds were 

27

----

approximately$14.4 million. For a full discussion of risks and uncertainties regarding ourneed for additional financing, see “Risk Factors—We will need additionalfinancing.”

**Off-Balance Sheet Arrangements**

We have never entered intoany off-balance sheet financing arrangements and  we have never established any special purposeentities. We have not guaranteed any debt or commitments of other entities orentered into any options on non-financial assets.

**Item7A. Quantitative and Qualitative Disclosures About Market Risk.**

Our portfolio of marketable securities exposes us tointerest rate risk. We adhere to an investment policy that requires us to limitamounts invested in securities based on maturity, type of instrument,investment grade and issuer. We satisfy liquidity requirements by investingexcess cash in securities with different maturities to match projected cashneeds and limit concentration of credit risk by diversifying our investmentsamong a variety of high credit-quality issuers. A hypothetical 100 basispoint decrease in interest rates would result in an approximate $200,000decrease in cash flow over the subsequent year. We do not use derivativefinancial instruments in our investment portfolio.

Thefollowing table summarizes principal amounts and related weighted-averageinterest rates by year of maturity on our interest-bearing investmentportfolio at December 31, 2004 (in thousands, except interest rate):
| ** **                                                          | ** ** | **Face Value** | ** ** |
|---------------------------------------------------------------------|------------|---------------------|------------|
| **Cash equivalents and marketable securities:** | ** ** | ** **          | ** ** | **2005** | ** ** | **2006** | ** ** | **Total** | ** ** | **Estimated  Fair value** | ** ** |
| Variable rate  securities                                           |       | $                   | 5,005      |   | — |   | $ | 5,005 |   | $ | 5,005 |   |
| Average interest  rate                                              |       | 1.38                | %          | — |   | 1.38 | % |   |   |
| Fixed rate  securities                                              |       | $                   | 26,885     |   | $ | 3,990 |   | $ | 30,875 |   | $ | 30,859 |   |
| Average interest rate                                               |       | 1.40                | %          | 2.85 | % | 1.59 | % |   |   |
|                                                                     |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item8. Consolidated Financial Statements and Supplementary Data.**

The response to this itemis included in a separate section of this Report. See “Index to ConsolidatedFinancial Statements” on Page F-1.

**Item9. Changes and Disagreements with Accountants on Accounting and FinancialDisclosure.**

None

**Item 9A. Controls and Procedures.**

(a)   *Evaluation of Disclosure Controls and Procedures*:  Ourprincipal executive and financial officers reviewed and evaluated ourdisclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e))as of the end of the period covered by this Form 10-K. Based on thatevaluation, our principal executive and financial officers concluded that ourdisclosure controls and procedures are effective in timely providing them withmaterial information relating to the company, as required to be disclosed inthe reports we file under the Exchange Act.

(b)   *Management’s Annual Report on Internal Control OverFinancial Reporting*:  Our management is responsible forestablishing and maintaining adequate internal control over our financialreporting. Management assessed the effectiveness of our internal control overfinancial reporting as of December 31, 2004. In making this assessment,management used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission in *InternalControl—Integrated Framework*. Based on the 

28

----

assessment using thosecriteria, management concluded that, as of December 31, 2004, our internalcontrol over financial reporting was effective.

Our independentregistered public accountants, OdenbergUllakko Muranishi & Co., LLP, audited the consolidatedfinancial statements included in this Annual Report on Form 10-K andhave issued an audit report on management’s assessment of our internal controlover financial reporting as well as on the effectiveness of our internalcontrol over financial reporting. Each of the report on the audit of internalcontrol over financial reporting and the report on the audit of the consolidatedfinancial statements appear elsewhere in this Annual Report on Form 10-K.

(c)   *Changes in Internal ControlOver Financial Reporting*:  There were no significantchanges in our internal control over financial reporting during our mostrecently completed fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

**Item 9B. Other Information.**

**None**

29

----

**PART III**

**Item10. Directors and Executive Officers of Registrant.**

Thefollowing table sets forth the names, ages and positions of our executiveofficers and directors.
| **Name**                               | ** ** | ** ** | ** ** | **Age**                                                          | ** ** | **Position** |
|----------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|--------------|
| Louis R. Bucalo, M.D.(1)               |       | 46         |       | Chairman, President and  Chief Executive Officer                 |
| Sunil Bhonsle                          |       | 55         |       | Executive Vice  President, Chief Operating Officer, and Director |
| Richard C. Allen, Ph.D.                |       | 62         |       | Executive Vice  President, Cell Therapy                          |
| Robert E. Farrell                      |       | 55         |       | Executive Vice President  and Chief Financial Officer            |
| Ernst-Günter  Afting, M.D., Ph.D. |       | 62         |       | Director                                                         |
| Victor Bauer, Ph.D.                    |       | 69         |       | Director                                                         |
| Eurelio M.  Cavalier(1)(3)(4)          |       | 72         |       | Director                                                         |
| Hubert Huckel,  M.D.(1)(2)(3)          |       | 73         |       | Director                                                         |
| M. David MacFarlane,  Ph.D.(2)(4)      |       | 64         |       | Director                                                         |
| Ley S. Smith(1)(2)(4)                  |       | 70         |       | Director                                                         |
| Konrad M. Weis, Ph.D.(1)(3)            |       | 76         |       | Director                                                         |

----

(1)          Member of ExecutiveCommittee

(2)          Member of AuditCommittee

(3)          Member of CompensationCommittee

(4)          Member of NominatingCommittee

**Louis R. Bucalo, M.D.**is the founder of Titan and has served as our President and Chief ExecutiveOfficer since January 1993. Dr. Bucalo has served as a director ofTitan since March 1993 and was elected Chairman of the Board of Directorsin January 2000. From July 1990 to April 1992, Dr. Bucalo wasAssociate Director of Clinical Research at Genentech, Inc., abiotechnology company. Dr. Bucalo holds an M.D. from Stanford Universityand a B.A. in biochemistry from Harvard University.

**Sunil Bhonsle**hasserved as our Executive Vice President and Chief Operating Officer since September 1995,and has served as a director of Titan since February 2004. Mr. Bhonsleserved in various positions, including Vice President and General Manager-PlasmaSupply and Manager-Inventory and Technical Planning, at Bayer Corporationfrom July 1975 until April 1995. Mr. Bhonsle holds an M.B.A.from the University of California at Berkeley and a B.Tech. in chemicalengineering from the Indian Institute of Technology.

**Richard C. Allen, Ph.D.,**has served as our Executive Vice President, Cell Therapy, since August 1995.From January 1995 until it was merged into Titan in March 1999, healso served as President and Chief Executive Officer of Theracell, Inc.From June 1991 until December 1994, Dr. Allen was Vice Presidentand General Manager of the Neuroscience Strategic Business Unit of Hoechst-RousselPharmaceuticals, Inc. Dr. Allen holds a Ph.D. in medicinal chemistryand a B.S. in pharmacy from the Medical College of Virginia.

**Robert E. Farrell**has served as our Executive Vice President and Chief Financial Officer since September 1996.Mr. Farrell was employed by Fresenius USA, Inc. from 1991 until August 1996where he served in various capacities, including Vice President Administration,Chief Financial Officer and General Counsel. His last position was CorporateGroup Vice President. Mr. Farrell holds a B.A. from the University ofNotre Dame and a J.D. from Hastings College of Law, University of California.

30

----

**Ernst-Günter Afting, M.D.,Ph.D.,**has served on our Board of Directors since May 1996.He has served as the President of the GSF-National Center for Environment andHealth, a government research center in Germany, since 1995. From 1984 until1995, Dr. Afting was employed in various capacities by the Hoechst Group,serving as Divisional Head of the Pharmaceuticals Division of the Hoechst Groupfrom 1991 to 1993 and as President and Chief Executive Officer of Roussel Uclaf(a majority stockholder of Hoechst AG) in Paris from 1993 until 1995. Hecurrently serves on the Board of Directors of Sequenom, Inc.

**Victor J.Bauer, Ph.D.,** has served on our Board of Directors sinceNovember 1997. Dr. Bauer serves as the Executive Vice President of ConcordiaPharmaceuticals, Inc., a biopharmaceutical company he co-founded in January2004. From February 1997 through March 2003, Dr. Bauer was employed by Titan,most recently as our Executive Director of Corporate Development. From April1996 until its merger into Titan, Dr. Bauer also served as a director andChairman of Theracell. From December 1992 until February 1997, Dr. Bauer was aself-employed consultant to companies in the pharmaceutical and biotechnologyindustries. Prior to that time, Dr. Bauer was with Hoechst-Roussel PharmaceuticalsInc., where he served as President from 1988 through 1992.

**Eurelio M. Cavalier**has served on our Board of Directors since September 1998. He was employedin various capacities by Eli Lilly & Co. from 1958 until hisretirement in 1994, serving as Vice President Sales from 1976 to 1982 and GroupVice President U.S. Pharmaceutical Business Unit from 1982 to 1993. Mr. Cavaliercurrently serves on the Board of Directors of ProSolv, Inc.

**Hubert E. Huckel, M.D.**, has served on our Board of Directorssince October 1995. Dr. Huckel serves as the Executive Chairman of the Board ofConcordia Pharmaceuticals, Inc., a biopharmaceutical company he co-founded in January 2004. He served in various positions with TheHoechst Group from 1964 until his retirement in December 1992. At the time ofhis retirement, Dr. Huckel was Chairman of the Board of Hoechst-RousselPharmaceuticals, Inc., Chairman and President of Hoechst-Roussel Agri-VetCompany and a member of the Executive Committee of Hoechst CelaneseCorporation. He currently serves on the Board of Directors of Thermogenesis,Corp. and Amarin Pharmaceuticals, plc and is a member of their compensationcommittees.

**M. David MacFarlane, Ph.D.,**has served on the Board of Directors since May 2002. From 1989 until hisretirement in August 1999, Dr. MacFarlane served as Vice Presidentand Responsible Head of Regulatory Affairs of Genentech, Inc. Prior tojoining Genentech, Inc., he served in various positions with Glaxo Inc.,last as Vice President of Regulatory Affairs.

**Ley S. Smith** hasserved on our Board of Directors since July 2000. He served in variouspositions with The Upjohn Company and Pharmacia & Upjohn from 1958until his retirement in November 1997. From 1991 to 1993 he served as ViceChairman of the Board of The Upjohn Company, and from 1993 to 1995 he wasPresident and Chief Operating Officer of The Upjohn Company. At the time of hisretirement, Mr. Smith was Executive Vice President of Pharmacia &Upjohn, and President of Pharmacia & Upjohn’s U.S. Pharma ProductCenter. He currently serves on the Board of Directors of Protana, Inc.

**Konrad M. Weis, Ph.D.,**has served on our Board of Directors since March 1993. He is the formerPresident, Chief Executive Officer and Honorary Chairman of Bayer Corporation. Dr. Weisserves as a director of PNC Equity Management Company, Michael BakerCorporation, Visible Genetics, Inc. and Demegen, Inc.

Directors serve until thenext annual meeting or until their successors are elected and qualified.Officers serve at the discretion of the Board of Directors, subject to rights,if any, under contracts of employment. See “Item 11. ExecutiveCompensation—Employment Agreements.”

31

----

**Code of Ethics**

We have adopted a Code ofBusiness Conduct and Ethics (the “Code”) that applies to our directors,officers and employees, including our Chief Executive Officer and ChiefFinancial Officer (our principal executive officer and principal financial andaccounting officer, respectively). The Code was filed as Exhibit 14 to ourannual report on Form 10-K for the year ended December 31, 2003 andhas been incorporated by reference into this annual report. A written copy ofthe Code will be provided upon request at no charge by writing to our ChiefFinancial Officer, Titan Pharmaceuticals, Inc., 400 Oyster PointBoulevard, Suite 505, South San Francisco, California 94080.

**BoardCommittees and Designated Directors**

The Board of Directors has an Executive Committee, aCompensation Committee, an Audit Committee, and a Nominating Committee.

*Executive Committee.  *TheExecutive Committee exercises all the power and authority of the Board ofDirectors in the management of Titan between Board meetings, to the extentpermitted by law.

*Compensation Committee.  *TheCompensation Committee makes recommendations to the Board of Directorsconcerning salaries and incentive compensation for our officers, including ourChief Executive Officer, and employees and administers our stock option plans.The Compensation Committee consists of three directors, each of whom meets theindependence requirements and standards currently established by the AmericanStock Exchange.

*Nominating Committee.  *TheNominating Committee operates under a written charter. The Nominating Committeeconsists of three directors, each of whom meets the independence requirementsand standards currently established by the American Stock Exchange. The purposeof the Nominating Committee is to assist the Board of Directors in identifyingqualified individuals to become board members, in determining the compositionof the Board of Directors and in monitoring a process to assess Boardeffectiveness.

*AuditCommittee.  *The Audit Committee operates under a writtencharter. The Audit Committee consists of three directors, each of whom meetsthe independence requirements and standards currently established by theAmerican Stock Exchange and the SEC. In addition, the Board of Directors hasdetermined that Mr. Ley Smith is an “audit committee financial expert” and“independent” as defined under the relevant rules of the SEC and theAmerican Stock Exchange. The Audit Committee assists the Board of Directors infulfilling its oversight of the quality and integrity of Titan’s financialstatements and Titan’s compliance with legal and regulatory requirements. TheAudit Committee is responsible for retaining (subject to stockholderratification) and, as necessary, terminating, the independent auditors,annually reviews the qualifications, performance and independence of theindependent auditors and the audit plan, fees and audit results, andpre-approves audit and non-audit services to be performed by the auditors andrelated fees. The Audit Committee also oversees the performance of Titan’sinternal audit and compliance functions.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) of the Securities Exchange Actof 1934, as amended (the “Exchange Act”), requires our executive officers,directors and persons who beneficially own more than 10% of a registered classof our equity securities to file with the Securities and Exchange Commissioninitial reports of ownership and reports of changes in ownership of our commonstock and other equity securities. Such executive officers, directors, andgreater than 10% beneficial owners are required by SEC regulation to furnish uswith copies of all Section 16(a) forms filed by such reportingpersons.

32

----

There was a failure totimely file Form 4s to report the February 9, 2004 grants of stockoptions to officers of the Company. Based solely on our review of such formsfurnished to us and written representations from certain reporting persons, webelieve that all other filing requirements applicable to our executiveofficers, directors and greater than 10% beneficial owners were complied withduring 2004.

**Item 11. Executive Compensation.**

The following summarycompensation table sets forth, for each of the last three fiscal years, theaggregate compensation awarded to, earned by, or paid to the Chief ExecutiveOfficer and to the three other executive officers at December 31, 2004whose annual compensation exceeded $100,000 for the fiscal year ended December 31,2004 (collectively, the “named executive officers”):

**Summary Compensation Table**
| ** **                                            | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Other**                          | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------------------------|------------|------------------------------------|------------|
| **Name and Principal Position**        | ** ** | ** ** | ** ** | **Year**                     | ** ** | **  Salary  ** | ** ** | ** Bonus ** | ** ** | **Compensation** | ** ** |
| Louis R. Bucalo, M.D.                                 |       | 2004       |       | $                            | 357,042    |                               |       | — |   |   |   | — |   |   |
| President and Chief Executive Officer                 |       | 2003       |       | $348,038                     |       |                               | —     |   |   |   | — |   |   |
|                                                  |       | 2002       |       | $339,896                     |       |                               | —     |   |   |   | — |   |   |
| Sunil Bhonsle                                         |       | 2004       |       | $                            | 272,125    |                               |       | — |   |   |   | — |   |   |
| Executive Vice President and Chief Operating Officer  |       | 2003       |       | $265,276                     |       |                               | —     |   |   |   | — |   |   |
|                                                  |       | 2002       |       | $259,167                     |       |                               | —     |   |   |   | — |   |   |
| Richard C. Allen,  Ph.D.                              |       | 2004       |       | $                            | 238,200    |                               |       | — |   |   |   | — |   |   |
| Executive Vice President, Cell Therapy                |       | 2003       |       | $232,230                     |       |                               | —     |   |   |   | — |   |   |
|                                                  |       | 2002       |       | $226,821                     |       |                               | —     |   |   |   | — |   |   |
| Robert E. Farrell, J.D.                               |       | 2004       |       | $                            | 227,217    |                               |       | — |   |   |   | — |   |   |
| Executive Vice  President and Chief Financial Officer |       | 2003       |       | $221,447                     |       |                               | —     |   |   |   | — |   |   |
|                                                  |       | 2002       |       | $216,254                     |       |                               | —     |   |   |   | $59,766 | (1) |   |
|                                                       |            |            |            |                              |            |                                    |            |  |  |  |  |  |  |  |  |  |

----

(1)          Theamount disclosed for Mr. Farrell represents an accrued vacation paymentmade in 2002.

**Option Grants in Last Fiscal Year**

Thefollowing table contains information concerning the stock option grants made tothe named executive officers during the fiscal year ended December 31,2004. No stock appreciation rights were granted to these individuals duringsuch year.
| ** **        | ** ** | **Number of Securities  Underlying Options** | ** ** | **% of Total  Options Granted  to Employees** | ** ** | **Exercise or Base Price  ($/Sh)(1)** | ** ** | **Expiration**            | ** ** | **Potential Realizable  Value at Assumed  Annual  Rate of Stock Price  Appreciation For  Option Terms** | ** ** |
|-------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Name**          | ** ** | ** **                                                  | ** ** | **Granted**                                                       | ** ** | **In Fiscal Year**                         | ** ** | **Individual Grant** | ** ** | **Date**                                                                                                                                        | ** ** | **5%** | ** ** | **10%** | ** ** |
| Louis R. Bucalo   |       |                                                        | 75,000     |                                                              |       |                                                 | 6.73       | %                         |       |                                                                                                                                            | $          | 3.69 |   |   | 02/09/2014 |   | $ | 174,047 |   | $ | 441,068 |   |
| Louis R. Bucalo   |       |                                                        | 20,000     |                                                              |       |                                                 | 1.79       | %                         |       |                                                                                                                                            | $          | 2.37 |   |   | 09/01/2014 |   | $ | 32,416 |   | $ | 79,693 |   |
| Sunil Bhonsle     |       |                                                        | 60,000     |                                                              |       |                                                 | 5.38       | %                         |       |                                                                                                                                            | $          | 3.69 |   |   | 02/09/2014 |   | $ | 139,237 |   | $ | 352,855 |   |
| Richard C. Allen  |       |                                                        | 30,000     |                                                              |       |                                                 | 2.69       | %                         |       |                                                                                                                                            | $          | 3.69 |   |   | 02/09/2014 |   | $ | 69,619 |   | $ | 176,427 |   |
| Robert E. Farrell |       |                                                        | 35,000     |                                                              |       |                                                 | 3.14       | %                         |       |                                                                                                                                            | $          | 3.69 |   |   | 02/09/2014 |   | $ | 81,222 |   | $ | 205,832 |   |
|                   |            |                                                             |            |                                                                   |            |                                                      |            |                           |            |                                                                                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Theexercise price may be paid in cash, in shares of common stock valued at thefair market value on the exercise date or through a cashless exercise procedureinvolving a same-day sale of the purchase shares.

33

----

**Aggregate Option Exercises in Last Fiscal Year andFiscal Year-End Option Values**

Thefollowing table sets forth information concerning option exercises and optionholdings for the fiscal year ended December 31, 2004 with respect to thenamed executive officers. No stock appreciation rights were exercised duringsuch year or were outstanding at the end of that year.
| ** **        | ** ** | **Shares  Acquired on** | ** ** | **Value**    | ** ** | **Number of Securities  Underlying  Unexercised Options at  FY-End** | ** ** | **Value of Unexercised  in-the-Money  Options at FY-End(1)** | ** ** |
|-------------------|------------|------------------------------|------------|--------------|------------|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Name**          | ** ** | ** **                   | ** ** | **Exercise** | ** ** | **Realized**                                                                             | ** ** | **Exercisable**                                                                  | ** ** | **Unexercisable** | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Louis R. Bucalo   |       |                         | 81,755     |         |       | $                                                                                        | 253,441    |                                                                             | 1,552,356  |   |   | 109,063 |   |   | $ | 230,149 |   |   | $ | 41,779 |   |   |
| Sunil Bhonsle     |       |                         | —     |         |       | —                                                                                   |       | 681,655                                                                          |       |   | 66,250 |   |   | $ | 75,250 |   |   | $ | 10,750 |   |   |
| Richard C. Allen  |       |                         | —     |         |       | —                                                                                   |       | 565,309                                                                          |       |   | 34,375 |   |   | $ | 241,396 |   |   | $ | 7,525 |   |   |
| Robert E. Farrell |       |                         | —     |         |       | —                                                                                   |       | 277,677                                                                          |       |   | 39,375 |   |   | $ | 155,799 |   |   | $ | 7,525 |   |   |
|                   |            |                              |            |              |            |                                                                                          |            |                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Basedon the fair market value of our common stock at year-end, $3.22 per share, lessthe exercise price payable for such shares.

**Director Compensation**

Non-employee directors are entitled to receive a feefor each meeting attended and all directors are entitled to receive stockoptions pursuant to our stockholder-approved stock option plans,including an initial grant of 10,000 options upon becoming a director, abiennial grant of 15,000 options thereafter, and an annual grant of 5,000options for each committee on which they serve. During 2004, each director wasgranted an annual option to purchase 5,000 shares of our common stock at anexercise price of $2.37, which was equal to the fair market value of our commonstock at date of grant, with respect to each committee of the Board on whicheach director served. In addition to having their out-of-pocket expensesreimbursed, non-employee directors received $2,500 for each Board of Directorsmeeting attended in 2004. Directors are not precluded from serving us in any othercapacity and receiving compensation therefore. Commencing in 2005, non-employeedirectors are entitled to receive an annual retainer fee of $5,000 in additionto the fee received for each meeting attended. The biennial grant of options todirectors pursuant to our stockholder-approved stock option plans will beincreased from 15,000 options to 20,000 options.

We are a party to aconsulting agreement with Dr. Ernst-Günter Afting pursuant to whichhe receives fees of $7,000 annually.

**CompensationCommittee Interlocks and Insider Participation**

Members of our Compensation Committee of the Board ofDirectors were Dr. Eurelio M. Cavalier, Dr. Hubert E. Huckel and Dr. KonradM. Weis. No member of our Compensation Committee was, or has been, an officeror employee of Titan or any of our subsidiaries.

No member of theCompensation Committee has a relationship that would constitute an interlockingrelationship with Executive Officers or Directors of the Company or anotherentity.

**Employment Agreements**

We are a party to an employment agreement with Dr. Bucalowhich, as amended in February 2005, expires in February 2008 andprovides for a base annual salary of $210,000, subject to annual increases of5% and bonuses of up to 25% at the discretion of the Board of Directors. In theevent of the termination of the agreement by us without just cause or by Dr. Bucalofor just cause, we are obligated to make severance payments equal to his baseannual salary for the greater of the balance of the term of the agreement ortwo years, subject to offset for earnings after the first 18 months.

34

----

Employment agreements witheach of Dr. Allen, Mr. Bhonsle and Mr. Farrell provide for abase annual salary of $185,000 subject to automatic annual increases based onincreases in the consumer price index, and bonuses of up to 20% at thediscretion of the Board of Directors. In the event the employee’s employment isterminated other than for “good cause” (as defined in each employmentagreement), we are obligated to make severance payments equal to the baseannual salary for six months. All of the agreements contain confidentialityprovisions.

**Item12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.**

Thefollowing table sets forth, as of March 1, 2005, certain informationconcerning the beneficial ownership of our common stock by (i) eachstockholder known by us to own beneficially five percent or more of ouroutstanding common stock; (ii) each director; (iii) each executiveofficer; and (iv) all of our executive officers and directors as a group,and their percentage ownership and voting power.
| **Name and Address of Beneficial Owner(1)**                                 | ** ** | ** ** | ** ** | **Shares  Beneficially  Owned(2)** | ** ** | **Percent of Shares  Beneficially Owned** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------------------|------------|----------------------------------------------------------|------------|
| Louis R. Bucalo,  M.D.                                                                               |       | 2,076,008  | (3)        |                               | 6.4        | %                                                        |       |
| Ernst-Günter  Afting, M.D., Ph.D.                                                               |       | 66,437     | (4)        |                               | *          |                                                     |       |
| Richard C. Allen,  Ph.D.                                                                             |       | 604,449    | (5)        |                               | 1.9        | %                                                        |       |
| Victor J. Bauer,  Ph.D.                                                                              |       | 256,581    | (6)        |                               | *          |                                                     |       |
| Sunil Bhonsle                                                                                        |       | 928,299    | (7)        |                               | 2.9        | %                                                        |       |
| Eurelio M.  Cavalier                                                                                 |       | 130,935    | (8)        |                               | *          |                                                     |       |
| Robert E. Farrell                                                                                    |       | 364,832    | (9)        |                               | 1.1        | %                                                        |       |
| Hubert Huckel,  M.D.                                                                                 |       | 163,435    | (10)       |                               | *          |                                                     |       |
| M. David  MacFarlane, Ph.D.                                                                          |       | 38,019     | (11)       |                               | *          |                                                     |       |
| Ley S. Smith                                                                                         |       | 108,435    | (12)       |                               | *          |                                                     |       |
| Konrad M. Weis,  Ph.D.                                                                               |       | 159,343    | (13)       |                               | *          |                                                     |       |
| Kevin Douglas and  The Douglas Family Trust  1101 Fifth Avenue, Suite 360  San Rafael, CA 94901 |       | 1,674,100  | (14)       |                               | 5.2        | %                                                        |       |
| All executive officers  and directors as a group (11) persons                                        |       | 4,896,773  |       |                               | 15.1       | %                                                        |       |

----

*                    Less than onepercent.

  (1)    Unlessotherwise indicated, the address of such individual is c/o Titan Pharmaceuticals, Inc.,400 Oyster Point Boulevard, Suite 505, South San Francisco,California 94080.

  (2)    Incomputing the number of shares beneficially owned by a person and thepercentage ownership of a person, shares of our common stock subject to optionsheld by that person that are currently exercisable or exercisable within60 days of March 1, 2005 are deemed outstanding. Such shares,however, are not deemed outstanding for purposes of computing the percentageownership of each other person. Except as indicated in the footnotes to thistable and pursuant to applicable community property laws, the persons named inthe table have sole voting and investment power with respect to all shares ofcommon stock.

  (3)    Includes1,641,522 shares issuable upon exercise of outstanding options.

  (4)    Includes66,437 shares issuable upon exercise of outstanding options.

  (5)    Includes574,067 shares issuable upon exercise of outstanding options.

  (6)    Includes247,937 shares issuable upon exercise of outstanding options.

35

----

  (7)    Includes747,905 shares issuable upon exercise of outstanding options.

  (8)    Includes100,935 shares issuable upon exercise of outstanding options.

  (9)    Includes317,052 shares issuable upon exercise of outstanding options.

(10)   Includes (i) 123,935shares issuable upon exercise of outstanding options, and (ii) 3,000shares held by Dr. Huckel’s wife.

(11)   Includes 28,019 shares issuableupon exercise of outstanding options.

(12)   Includes 98,435 shares issuableupon exercise of outstanding options.

(13)   Includes 123,769 sharesissuable upon exercise of outstanding options.

(14)   Derivedfrom a Schedule 13G/A filed by Kevin Douglas and The Douglas Family Truston February 14, 2005.

**Equity Compensation Plan Information**

Thefollowing table sets forth aggregate information regarding our equitycompensation plans in effect as of December 31, 2004:
| **Plan category**                                            | ** ** | ** ** | ** ** | **Number of securities to  be issued upon exercise  of outstanding options  (a)** | ** ** | **Weighted-  average  exercise  price of  outstanding  options  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (c)** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders           |       |       | 4,090,831  |                                                                                                                      |       |                                                                       | $          | 9.18                                                                                                                                             |       |   |   | 1,399,146 |   |   |
| Equity  compensation plans not approved by security holders(1)(2) |       |       | 2,354,555  |                                                                                                                      |       |                                                                       | $          | 7.01                                                                                                                                             |       |   |   | 65,091 |   |   |
| Total                                                             |       |       | 6,445,386  |                                                                                                                      |       |                                                                       | $          | 8.39                                                                                                                                             |       |   |   | 1,464,237 |   |   |

----

(1)          In August 2002, weamended our 2001 Employee Non-Qualified Stock Option Plan. Pursuant to thisamendment, a total of 1,750,000 shares of common stock were reserved andauthorized for issuance for option grants to employees and consultants who arenot officers or directors of Titan.

(2)          InNovember 1999 and in connection with the redemption of warrants, wegranted 813,000 non-qualified stock options outside of our stock option plansto our executive officers, at an exercise price of $12.69, vesting equally over36 months from the date of grant.

**Item13. Certain Relationships and Related Transactions.**

Not applicable

36

----

**Item14. Principal Accountant Fees and Services.**

Aggregatefees billed by Ernst & Young LLP and Odenberg, Ullakko, Muranishi &Co LLP during the fiscal year ended December 31, 2004 and aggregate feesbilled by Ernst & Young LLP during the fiscal year ended December 31,2003 were as follows:
| ** **          | ** ** | **2004** | ** **  | **2003**   | ** ** |
|---------------------|------------|----------|-------------|------------|------------|
| Audit Fees          |       | $        | 213,200     |       | $          | 175,500 |   |
| Audit-Related  Fees |       | 33,000   |        | 9,900      |       |
| Tax Fees            |       | 30,000   |        | 63,900     |       |
| All Other Fees      |       | —   |        | —     |       |
| **Total**           | ** ** | **$**    | **276,200** | ** ** | **$**      | **249,300** | ** ** |

 

Ernst & Young LLP served as our principalaccountant for the fiscal year ended December 31, 2003 and until November 8,2004, the effective date of their resignation. The amounts related to fiscalyear 2004 include audit fees of $43,200 and audit related fees of $33,000billed by Ernst & Young LLP for services provided as our principleaccountants up to November 8, 2004. Odenberg, Ullakko, Muranishi &Co LLP were engaged as our principal accountant effective November 9,2004, the filing date of our Form 10-Q for the quarter ended September 30,2004.

**AuditFees**—This category includes aggregate fees billed byour independent auditors for the audit of Titan’s annual financial statements,audit of management’s assessment and effectiveness of internal controls overfinancial reporting, review of financial statements included in our quarterlyreports on Form 10-Q and services that are normally provided by theauditor in connection with statutory and regulatory filings for those fiscalyears.

**Audit-RelatedFees**—This category consists of services by ourindependent auditors that, including accounting consultations on transactionrelated matters, are reasonably related to the performance of the audit orreview of Titan’s financial statements and are not reported above under AuditFees.

**TaxFees**—This category consists of professional servicesrendered for tax compliance and preparation of Titan’s corporate tax returnsand other tax advice.

**AllOther Fees**—During the years ended December 31,2004 and 2003, Ernst & Young LLP and Odenberg, Ullakko, Muranishi &Co LLP did not incur any fees for other professional services.

The Audit Committeereviewed and approved all audit and non-audit services provided by Ernst &Young LLP and Odenberg, Ullakko, Muranishi & Co LLP and concluded thatthese services were compatible with maintaining its independence. The AuditCommittee approved the provision of all non-audit services by Ernst &Young LLP and Odenberg, Ullakko, Muranishi & Co LLP.

***Pre-Approval Policies and Procedures***

In accordance with the SEC’s new auditor independencerules, which became effective on May 6, 2003, the Audit Committee hasestablished the following policies and procedures by which it approves inadvance any audit or permissible non-audit services to be provided to Titan byits independent auditor.

Prior to the engagement of the independent auditor forany fiscal year’s audit, management submits to the Audit Committee for approvallists of recurring audit, audit-related, tax and other services expectedto be provided by the auditor during that fiscal year. The Audit Committeeadopts pre-approval schedules describing the recurring services that it haspre-approved, and is informed on a timely basis, and in any event by the nextscheduled meeting, of any such services rendered by the independent auditor andthe related fees.

37

----

The fees for any services listed in a pre-approvalschedule are budgeted, and the Audit Committee requires the independent auditorand management to report actual fees versus the budget periodically throughoutthe year. The Audit Committee will require additional pre-approval ifcircumstances arise where it becomes necessary to engage the independentauditor for additional services above the amount of fees originallypre-approved. Any audit or non-audit service not listed in a pre-approvalschedule must be separately pre-approved by the Audit Committee on acase-by-case basis.

Every request to adopt or amend a pre-approvalschedule or to provide services that are not listed in a pre-approval schedulemust include a statement by the independent auditors as to whether, in their view,the request is consistent with the SEC’s rules on auditor independence.

The Audit Committeewill not grant approval for:

·       anyservices prohibited by applicable law or by any rule or regulation of theSEC or other regulatory body applicable to Titan;

·       provisionby the independent auditor to Titan of strategic consulting services of thetype typically provided by management consulting firms; or

·       theretention of the independent auditor in connection with a transaction initiallyrecommended by the independent auditor, the tax treatment of which may not beclear under the Internal Revenue Code and related regulations and which it isreasonable to conclude will be subject to audit procedures during an audit ofTitan’s financial statements.

Tax services proposed to be provided by the auditor toany director, officer or employee of Titan who is in an accounting role orfinancial reporting oversight role must be approved by the Audit Committee on acase-by-case basis where such services are to be paid for by Titan, and theAudit Committee will be informed of any services to be provided to suchindividuals that are not to be paid for by Titan.

In determiningwhether to grant pre-approval of any non-audit services in the “all other”category, the Audit Committee will consider all relevant facts andcircumstances, including the following four basic guidelines**:**

·       whetherthe service creates a mutual or conflicting interest between the auditor andthe Company;

·       whetherthe service places the auditor in the position of auditing his or her own work;

·       whetherthe service results in the auditor acting as management or an employee of theCompany; and

·       whetherthe service places the auditor in a position of being an advocate for theCompany.

38

----

**PART IV**

**Item 15.Exhibits, Financial Statements Schedules and Reports on Form 8-K**

**(a)   1.**        FinancialStatements

An index to Consolidated Financial Statements appearson page F-1.

**2.    Schedules**

All financial statement schedules are omitted becausethey are not applicable, not required under the instructions or all theinformation required is set forth in the financial statements or notes thereto.

**(b)**          Exhibits
| 3.1         | — | Restated Certificate of Incorporation of the Registrant(1)                                                                                                                                |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2         | — | Form of Amendment to Restated Certificate of Incorporation of the  Registrant(1)                                                                                                     |
| 3.3         | — | By-laws of the Registrant(1)                                                                                                                                                              |
| 4.7         | — | Certificate of Designation of Series C Preferred Stock(6)                                                                                                                            |
| 10.1*       | — | 1993 Stock Option Plan(1)                                                                                                                                                                 |
| 10.2*       | — | 1995 Stock Option Plan, as amended(2)                                                                                                                                                     |
| 10.3*       | — | Employment Agreement between the Registrant and Louis Bucalo dated February 1,  1993, amended as of February 3, 1994(1).                                                        |
| 10.4*       | — | Employment Agreement between Registrant and Richard Allen dated July 28,  1995(1)                                                                                                    |
| 10.5*       | — | Employment Agreement between Registrant and Sunil Bhonsle, dated August 6,  1995(1)                                                                                                  |
| 10.6        | — | Form of Indemnification Agreement(1)                                                                                                                                                 |
| †10.9  | — | MDR Exclusive License Agreement between Ingenex, Inc. (formerly  Pharm-Gen Systems Ltd.) and the Board of Trustees of the University of  Illinois dated May 6, 1992(1)          |
| †10.11 | — | License Agreement between Theracell, Inc. and New York University  dated November 20, 1992, as amended as of February 23, 1993 and as  of February 25, 1995(1)        |
| †10.12 | — | License Agreement between the Registrant and the Massachusetts  Institute of Technology dated September 28, 1995(1)                                                                  |
| †10.14 | — | Exclusive License Agreement between Ingenex, Inc. and the Board  of Trustees of the University of Illinois, dated July 1, 1994(1)                                               |
| †10.15 | — | Exclusive License Agreement between Ingenex, Inc. and the Board  of Trustees of the University of Illinois, dated July 1, 1994(1)                                               |
| †10.16 | — | License Agreement between Ingenex, Inc. and the Massachusetts  Institute of Technology, dated September 11,1992(1)                                                              |
| †10.17 | — | License Agreement between Ingenex, Inc. and Baylor College of  Medicine, dated October 21, 1992(1)                                                                              |
| 10.18       | — | Lease for Registrant’s facilities, amended as of October 1, 2004.(13)                                                                                                           |
| †10.20 | — | License Agreement between Trilex Pharmaceuticals, Inc. (formerly  Ascalon Pharmaceuticals, Inc.) and the University of Kentucky Research  Foundation dated May 30, 1996(3) |

39

----

 
| †10.22 | — | License Agreement between the Registrant and Aventis SA (formerly  Hoechst Marion Roussel, Inc.) effective as of December 31, 1996(4)                                                                                         |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23*      | — | Employment Agreement between Registrant and Robert E. Farrell dated August 9,  1996(4)                                                                                                                                             |
| †10.27 | — | License Agreement between the Registrant and Bar-Ilan Research  and Development Company Limited effective November 25, 1997(5)                                                                                                     |
| 10.28       | — | License Agreement between the Registrant and Ansan Pharmaceuticals, Inc.  dated November 24, 1997(5)                                                                                                                          |
| †10.30 | — | Sublicense Agreement between the Registrant and Novartis Pharma AG  dated November 20, 1997(5)                                                                                                                                     |
| 10.31*      | — | 1998 Stock Option Plan, as amended.(7)                                                                                                                                                                                                  |
| †10.32 | — | License Agreement between the Registrant and Schering AG dated January 25,  2000. (8)                                                                                                                                              |
| 10.34       | — | Agreement and Plan of Merger by and among the Registrant, GeoMed  Merger Sub Corp., GeoMed, Inc. and Dr. Lawrence Bernstein, Dr. Neil  Gesundheit, Leland Wilson and Dr. Virgil Place dated July 11,  2000.(9) |
| 10.35*      | — | 2001 Non-Qualified Employee Stock Option Plan.(10)                                                                                                                                                                                      |
| 10.37*      | — | 2002 Stock Option Plan.(11)                                                                                                                                                                                                             |
| 10.38       | — | Merger Agreement between the Registrant and Developmental Therapeutics, Inc.  dated October 15, 2003.(13)                                                                                                                     |
| 10.39       | — | Addendums to License Agreement between the Registrant and Schering AG  dated January 25, 2000.(13)                                                                                                                                 |
| 10.40*      | — | Amendment to Employment Agreement between the Registrant and Louis  Bucalo dated February 7, 2005.(13)                                                                                                                             |
| 14          | — | Code of Business Conduct and Ethics. (12)                                                                                                                                                                                               |
| 21          | — | List of Subsidiaries                                                                                                                                                                                                                    |
| 23.1        | — | Consent of Odenberg Ullakko Muranishi & Co. LLP, Independent Registered Public Accounting Firm.                                                                                                                                |
| 23.2        | — | Consent of Ernst & Young LLP, Independent Registered Public  Accounting Firm.                                                                                                                                                  |
| 31.1        | — | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as amended.                                                                                 |
| 31.2        | — | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as amended.                                                                                 |
| 32          | — | Certification of Chief Executive Office and Chief Financial Officer  pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 .                                                           |

----

†                    Confidentialtreatment has been granted with respect to portions of this exhibit.

*       Representsa management contract or compensatory plan.

(1)          Incorporated byreference from the Registrant’s Registration Statement on Form SB-2(File No. 33-99386).

40

----

(2)          Incorporated byreference from the Registrant’s Definitive Proxy Statement filed on September 3,1996.

(3)          Incorporated byreference from the Registrant’s Registration Statement on Form SB-2(File No. 333-13469) filed on October 4, 1996, amended on November 25,1996.

(4)          Incorporated byreference from the Registrant’s Annual Report on Form 10-KSB for theyear ended December 31, 1996.

(5)          Incorporated byreference from the Registrant’s Registration Statement on Form S-3(File No. 333-42367) filed on December 16, 1997.

(6)          Incorporated byreference from the Registrant’s Annual Report on Form 10-K for theyear ended December 31, 1997.

(7)          Incorporated byreference from the Registrant’s Definitive Proxy Statement filed on July 28,2000.

(8)          Incorporated byreference from the Registrant’s Annual Report on Form 10-K for theyear ended December 31, 1999.

(9)          Incorporated byreference from the Registrant’s Quarterly Report on Form 10-Q forthe period ended September 30, 2000.

(10)   Incorporated by reference fromthe Registrant’s Annual Report on Form 10-K for the year ended December 31,2001.

(11)   Incorporated by reference fromthe Registrant’s Annual Report on Form 10-K for the year ended December 31,2002.

(12)   Incorporated by reference fromthe Registrant’s Annual Report on Form 10-K for the year ended December 31,2003.

(13) Incorporated by reference from the Registrant’sAnnual Report on Form 10-K for the year ended December 31, 2004.

41

----

 

**TITAN PHARMACEUTICALS, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                               | ** ** | **Page** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Reports  of Odenberg, Ullakko, Muranishi & Co., LLP, Independent Registered  Public  Accounting Firm |       | F-2      |       |
| Report of  Ernst & Young LLP, Independent Registered Public Accounting Firm                          |       | F-5      |       |
| Consolidated Balance Sheets                                                                                   |       | F-6      |       |
| Consolidated  Statement of Operations                                                                         |       | F-7      |       |
| Consolidated  Statement of Stockholders’ Equity                                                          |       | F-8      |       |
| Consolidated  Statement of Cash Flows                                                                         |       | F-9      |       |
| Notes to  Consolidated Financial Statements                                                                   |       | F-10     |       |

 

F-1

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

***To the Board ofDirectors and Stockholders ofTitan Pharmaceuticals, Inc.***

We have audited management’s assessment, included inthe accompanying Management Report on Internal Controls Over Financial Reportingincluded in Item 9A that Titan Pharmaceuticals, Inc. and its subsidiaries(the “Company”) maintained effective internal control over financial reportingas of December 31, 2004, based on criteria established in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (theCOSO criteria). The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company;and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of the inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of the effectiveness to future periods aresubject to the risk that the controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2004, is fairly stated, in all material respects, based on the COSO criteria.Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2004, based on the COSO criteria.

F-2

----

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheet of Titan Pharmaceuticals, Inc.and its subsidiaries as of December 31, 2004, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for the yearthen ended and our report dated February 15, 2005 expressed an unqualifiedopinion thereon.

/s/ Odenberg UllakkoMuranishi & Co. LLP

San Francisco, CaliforniaFebruary 15, 2005

F-3

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**To the Board of Directors andStockholders of**Titan Pharmaceuticals, Inc.

We have audited the accompanying consolidated balancesheet of Titan Pharmaceuticals, Inc. and its subsidiaries as of December 31,2004, and the related consolidated statements of operations, stockholders’equity, and cash flows for the year then ended. These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsaudited by us present fairly, in all material respects, the financial positionof Titan Pharmaceuticals, Inc. and its subsidiaries at December 31,2004, and the results of their operations and their cash flows for the yearthen ended, in conformity with accounting principles generally accepted in theUnited States of America.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Titan Pharmaceuticals, Inc.’sinternal control over financial reporting as of December 31, 2004, basedon criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 15,2005 expressed an unqualified opinion thereon.

/s/ Odenberg Ullakko Muranishi &Co. LLP

San Francisco, California

February 15, 2005

F-4

----

**REPORTOF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and StockholdersTitan Pharmaceuticals, Inc. 

We have audited the accompanying consolidated balancesheet of Titan Pharmaceuticals, Inc. as of December 31, 2003, and therelated consolidated statements of operations, stockholders' equity, and cashflows for each of the two years in the period ended December 31, 2003.These financial statements are the responsibility of the Company's management.Our responsibility is to express an opinion on these financial statements basedon our audits. 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  We were not engaged toperform an audit of the Company’s internal control over financialreporting.  Our audit included considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly we express no such opinion.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion. 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of TitanPharmaceuticals, Inc. at December 31, 2003, and the consolidatedresults of its operations and its cash flows for each of the two years in theperiod ended December 31, 2003, in conformity with U.S. generally acceptedaccounting principles. 
|   |  |
|--------|--|

 

Palo Alto, CaliforniaFebruary 20, 2004

F-5

----

**TITAN PHARMACEUTICALS, INC.CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                                             | ** ** | **December 31,**                        | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **2004**                                     | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                                             | ** ** | **(in thousands of dollars)** | ** ** |
| **Assets**                                                                                                                                                                                             |       |
| Current assets:                                                                                                                                                                                        |       |                                         |       |   |   |
| Cash and cash equivalents                                                                                                                                                                              |       | $                                            | 5,463      |   | $ | 6,832 |   |
| Marketable securities                                                                                                                                                                                  |       | 30,859                                       |       | 39,723 |   |
| Related party receivables                                                                                                                                                                              |       | 18                                           |       | 123 |   |
| Prepaid expenses, other receivables and current  assets                                                                                                                                                |       | 1,092                                        |       | 1,241 |   |
| Total current assets                                                                                                                                                                                   |       | 37,432                                       |       | 47,919 |   |
| Property and  equipment, net                                                                                                                                                                           |       | 1,044                                        |       | 789 |   |
| Investment in  other companies                                                                                                                                                                         |       | 150                                          |       | 300 |   |
|                                                                                                                                                                                                   |       | $                                            | 38,626     |   | $ | 49,008 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                          | ** ** |
| Current liabilities:                                                                                                                                                                                   |       |                                         |       |   |   |
| Accounts payable                                                                                                                                                                                       |       | $                                            | 689        |   | $ | 1,505 |   |
| Accrued clinical trials expenses                                                                                                                                                                       |       | 1,445                                        |       | 634 |   |
| Other accrued liabilities                                                                                                                                                                              |       | 1,538                                        |       | 1,202 |   |
| Total current liabilities                                                                                                                                                                              |       | 3,672                                        |       | 3,341 |   |
| Commitments                                                                                                                                                                                            |       |                                         |       |   |   |
| Minority  interest—Series B preferred stock of Ingenex, Inc.                                                                                                                            |       | 1,241                                        |       | 1,241 |   |
| Stockholders’ Equity                                                                                                                                                                              |       |                                         |       |   |   |
| Preferred stock,  $0.001 par value per share; 5,000,000 shares authorized, issuable in series:                                                                                                         |       |                                         |       |   |   |
| Convertible Series C, 222,400 shares  designated, 222,400 shares issued and outstanding, with an aggregate  liquidation value of $2,000 at December 31, 2004 and 2003                        |       | —                                       |       | — |   |
| Common stock, at amounts paid in, $0.001 par value  per share; 50,000,000 shares authorized, 32,307,638 and 28,903,043 shares  issued and outstanding at December 31, 2004 and 2003, respectively |       | 210,264                                      |       | 195,331 |   |
| Additional paid-in capital                                                                                                                                                                             |       | 9,327                                        |       | 9,047 |   |
| Deferred compensation                                                                                                                                                                                  |       | (82                                          | )          | (211 | ) |
| Accumulated deficit                                                                                                                                                                                    |       | (185,745                                     | )          | (159,741 | ) |
| Accumulated other comprehensive income                                                                                                                                                                 |       | (51                                          | )          | — |   |
| Total stockholders’ equity                                                                                                                                                                        |       | 33,713                                       |       | 44,426 |   |
|                                                                                                                                                                                                   |       | $                                            | 38,626     |   | $ | 49,008 |   |

 

See accompanying notes.

F-6

----

**TITAN PHARMACEUTICALS, INC.CONSOLIDATED STATEMENT OFOPERATIONS**

 
| ** **                                                                      | ** ** | **Year ended December 31,**                       | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                                                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                      | ** ** | **(in thousands, except per share  amount)** | ** ** |
| Revenue:                                                                        |       |                                                             |       |   |   |   |   |
| Contract revenue                                                                |       | $                                                                | —     |   | $ | 28 |   | $ | 2,696 |   |
| License revenue                                                                 |       | 31                                                               |       | 61 |   | — |   |
| Grant revenue                                                                   |       | —                                                           |       | — |   | 196 |   |
| Total revenue                                                                   |       | 31                                                               |       | 89 |   | 2,892 |   |
| Operating  expenses:                                                            |       |                                                             |       |   |   |   |   |
| Research and development                                                        |       | 20,415                                                           |       | 22,258 |   | 29,819 |   |
| Acquired research and development                                               |       | 759                                                              |       | 3,896 |   | — |   |
| General and administrative                                                      |       | 5,237                                                            |       | 5,109 |   | 5,076 |   |
| Total operating expenses                                                        |       | 26,411                                                           |       | 31,263 |   | 34,895 |   |
| Loss from operations                                                            |       | (26,380                                                          | )          | (31,174 | ) | (32,003 | ) |
| Other income (expense):                                                         |       |                                                             |       |   |   |   |   |
| Interest income                                                                 |       | 673                                                              |       | 1,278 |   | 4,221 |   |
| Other income (expense)                                                          |       | (297                                                             | )          | 7 |   | (400 | ) |
| Other income, net                                                               |       | 376                                                              |       | 1,285 |   | 3,821 |   |
| Net loss                                                                        |       | $                                                                | (26,004    | ) | $ | (29,889 | ) | $ | (28,182 | ) |
| Basic and diluted  net loss per share                                           |       | $                                                                | (0.83      | ) | $ | (1.07 | ) | $ | (1.02 | ) |
| Weighted average shares  used in computing basic and diluted net loss per share |       | 31,381                                                           |       | 27,907 |   | 27,642 |   |

 

See accompanying notes.

F-7

----

**TITANPHARMACEUTICALS, INC**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

**(inthousands)**
| ** **                                                                            | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Deferred** | ** ** | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Stockholders’** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|-----------------|------------|---------------------------------------|------------|-------------------------------|------------|
| ** **                                                                            | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**              | ** ** | **Amount**   | ** ** | **Capital**     | ** ** | **Compensation**                      | ** ** | **Deficit**                   | ** ** | **Income** | ** ** | **Equity** | ** ** |
| **Balances  at December 31, 2001**                                               | ** ** |                     | **222**    | ** **            |       |                    | **$**      | **—**   | ** ** |            | **27,642** | ** **                            | **$**      | **191,684**                   | ** ** |   | **$** | **9,017** | ** ** |   |   | **$** | **(795** | **)** |   |   | **$** | **(101,670** | **)** |   |   | **$** | **1,891** | ** ** |   |   | **$** | **100,127** | ** ** |   |
| Comprehensive loss:                                                                   |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net loss                                                                              |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | (28,182 | ) |   |   | ** ** | ** ** |   |   | (28,182 | ) |   |
| Unrealized loss on  marketable securities                                             |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | (1,519 | ) |   |   | (1,519 | ) |   |
| Comprehensive loss                                                                    |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | (29,701 | ) |   |
| Issuance of common  stock upon exercise of options, net of issuance costs of $6       |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       | —          |       | (4                                    | )          |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | (4 | ) |   |
| Compensation  related to stock options                                                |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | 144        | ** ** |   |   | (141 | ) |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | 3 | ** ** |   |
| Amortization of  deferred compensation                                                |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | 315 | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | 315 | ** ** |   |
| **Balances  at December 31, 2002**                                               | ** ** |                     | **222**    | ** **            |       |                    | **$**      | **—**   | ** ** |            | **27,642** | ** **                            | **$**      | **191,680**                   | ** ** |   | **$** | **9,161** | ** ** |   |   | **$** | **(621** | **)** |   |   | **$** | **(129,852** | **)** |   |   | **$** | **372** | ** ** |   |   | **$** | **70,740** | ** ** |   |
| Comprehensive loss:                                                                   |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net loss                                                                              |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | (29,889 | ) |   |   | ** ** | ** ** |   |   | (29,889 | ) |   |
| Unrealized loss on  marketable securities                                             |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | (372 | ) |   |   | (372 | ) |   |
| Comprehensive loss                                                                    |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | (30,261 | ) |   |
| Issuance of common  stock to acquire technologies, net of issuance costs of $22  |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       | 1,188           |       | 3,538                                 |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | 3,538 | ** ** |   |
| Issuance of common  stock upon exercise of options                                    |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       | 73              |       | 113                                   |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | 113 | ** ** |   |
| Compensation  related to stock options                                                |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | (114       | ) |   |   | 114 | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | — | ** ** |   |
| Amortization of  deferred compensation                                                |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | 296 | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | 296 |   |   |
| **Balances  at December 31, 2003**                                               | ** ** |                     | **222**    | ** **            |       |                    | **$**      | **—**   | ** ** |            | **28,903** | ** **                            | **$**      | **195,331**                   | ** ** |   | **$** | **9,047** | ** ** |   |   | **$** | **(211** | **)** |   |   | **$** | **(159,741** | **)** |   |   | **$** | **—** | ** ** |   |   | **$** | **44,426** | ** ** |   |
| Comprehensive loss:                                                                   |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net loss                                                                              |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | (26,004 | ) |   |   | ** ** | ** ** |   |   | (26,004 | ) |   |
| Unrealized loss on  marketable securities                                             |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | (51 | ) |   |   | (51 | ) |   |
| Comprehensive loss                                                                    |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | (26,055 | ) |   |
| Issuance of common  stock, net of issuance costs of $1,020                            |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       | 3,075           |       | 14,355                                |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | 14,355 | ** ** |   |
| Issuance of common  stock upon exercise of options                                    |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       | 180             |       | 211                                   |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | 211 | ** ** |   |
| Issuance of common  stock upon tender of Proneura, Inc. shares                   |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       | 150             |       | 367                                   |       |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | 367 | ** ** |   |
| Compensation  related to stock options                                                |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | 280        |   |   |   | (154 | ) |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | 126 | ** ** |   |
| Amortization of  deferred compensation                                                |       |                     | ** ** | ** **            |       |                    | ** ** | ** **   |       |            |       |                                  |       |                          | ** ** | ** ** |   |   | 283 | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | 283 | ** ** |   |
| **Balances  at December 31, 2004**                                               | ** ** |                     | **222**    | ** **            |       |                    | **$**      | **—**   | ** ** |            | **32,308** | ** **                            | **$**      | **210,264**                   | ** ** |   | **$** | **9,327** | ** ** |   |   | **$** | **(82** | **)** |   |   | **$** | **(185,745** | **)** |   |   | **$** | **(51** | **)** |   |   | **$** | **33,713** | ** ** |   |

 

F-8

See accompanying notes.

 

----

**TITAN PHARMACEUTICALS, INC.CONSOLIDATED STATEMENT OFCASH FLOWS**
| ** **                                                                                 | ** ** | **Years ended December 31,**  | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                 | ** ** | **(in thousands of dollars)** | ** ** |
| **Cash flows from operating  activities:**                                                 |       |                                         |       |   |   |   |   |
| Net loss                                                                                   |       | $                                            | (26,004    | ) | $ | (29,889 | ) | $ | (28,182 | ) |
| Adjustments to reconcile  net loss to net cash provided by (used in) operating activities: |       |                                         |       |   |   |   |   |
| Depreciation and amortization                                                              |       | 466                                          |       | 439 |   | 374 |   |
| (Gain) loss on investment activities                                                       |       | 261                                          |       | (51 | ) | 309 |   |
| Gain on disposition of property and equipment                                              |       | 4                                            |       | — |   | — |   |
| Acquired research and development                                                          |       | 759                                          |       | 3,873 |   | — |   |
| Non-cash compensation related to stock options                                             |       | 409                                          |       | 296 |   | 318 |   |
| Changes in operating  assets and liabilities:                                              |       |                                         |       |   |   |   |   |
| Prepaid expenses, receivables and other current  assets                                    |       | 254                                          |       | (166 | ) | (291 | ) |
| Accounts payable                                                                           |       | (816                                         | )          | (675 | ) | 1,007 |   |
| Accrued clinical trials and other liabilities                                              |       | 755                                          |       | (265 | ) | (826 | ) |
| Deferred contract revenue                                                                  |       | —                                       |       | — |   | (2,000 | ) |
| Net cash used in  operating activities                                                     |       | (23,912                                      | )          | (26,438 | ) | (29,291 | ) |
| **Cash flows from investing  activities:**                                                 |       |                                         |       |   |   |   |   |
| Purchases of property and equipment, net                                                   |       | (725                                         | )          | (248 | ) | (778 | ) |
| Investment in other companies                                                              |       | —                                       |       | 91 |   | — |   |
| Purchases of marketable securities                                                         |       | (12,098                                      | )          | (47,660 | ) | (25,114 | ) |
| Proceeds from maturities of marketable securities                                          |       | 20,800                                       |       | 64,819 |   | 43,718 |   |
| Proceeds from sales of marketable securities                                               |       | —                                       |       | 9,000 |   | 12,852 |   |
| Net cash provided  by investing activities                                                 |       | 7,977                                        |       | 26,002 |   | 30,678 |   |
| **Cash flows from financing  activities:**                                                 |       |                                         |       |   |   |   |   |
| Issuance of common stock, net                                                              |       | 14,566                                       |       | 113 |   | (4 | ) |
| Net cash (used  in) provided by financing activities                                       |       | 14,566                                       |       | 113 |   | (4 | ) |
| **Net  increase (decrease) in cash and cash equivalents**                                  |       | (1,369                                       | )          | (323 | ) | 1,383 |   |
| Cash and cash  equivalents at beginning of year                                            |       | 6,832                                        |       | 7,155 |   | 5,772 |   |
| **Cash  and cash equivalents at end of year**                                              |       | 5,463                                        |       | 6,832 |   | 7,155 |   |
| Marketable  securities at end of year                                                      |       | 30,859                                       |       | 39,723 |   | 66,295 |   |
| **Cash,  cash equivalents and marketable securities at end of year**                       |       | $                                            | 36,322     |   | $ | 46,555 |   | $ | 73,450 |   |
| *Schedule  of non-cash transaction:*                                                       |       |                                         |       |   |   |   |   |
| Issuance of  common stock to acquire technologies, net                                     |       | $                                            | 367        |   | $ | 3,538 |   | $ | — |   |

 

See accompanying notes.

F-9

----

**TITAN PHARMACEUTICALS, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**1.Organization and Summary of Significant Accounting Policies**

***The Company and its Subsidiaries***

We are a biopharmaceuticalcompany developing proprietary therapeutics for the treatment of centralnervous system (CNS) disorders, cardiovascular disease and cancer. Our productdevelopment programs focus on large pharmaceutical markets with significantunmet medical needs and commercial potential. We are directly developing ourproduct candidates and also utilizing strategic partnerships, including acollaboration with Schering AG, Germany (Schering). These collaborations helpfund product development and enable us to retain significant economic interestin our products. Some of our preclinical product development work is conductedthrough our consolidated subsidiary Ingenex, Inc. At December 31,2004, we owned 81% of Ingenex, assuming the conversion of all preferred stockto common stock. In the fourth quarter of 2004, we completed the merger ofProNeura, Inc., our 89% owned subsidiary, into Titan. In the fourth quarter of2003, we acquired 3,5-diiodothyropropionic acid (DITPA), a novel productin clinical testing, for the treatment of congestive heart failure (CHF)through the acquisition of Developmental Therapeutics, Inc. (DTI), aprivate company established to develop DITPA. We operate in one businesssegment, the development of pharmaceutical products.

***Basis of Presentation and Consolidation***

The accompanying consolidatedfinancial statements include the accounts of Titan and our wholly and majorityowned subsidiaries. All significant intercompany balances and transactions areeliminated.

***Reclassifications***

Certain prior yearbalances have been reclassified to conform to the current year presentation.These reclassifications have no impact on the results of operations.

***Use of Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

***Stock Option Plans***

We have elected tocontinue to follow Accounting Principles Board Opinion No. 25 (or APB 25),*“Accounting for Stock Issued to Employees,”*rather than the alternative method of accounting prescribed by Statement ofFinancial Accounting Standards No. 123 (or SFAS 123), *“Accounting for Stock-Based Compensation.”*Under APB 25, no compensation expense is recognized when the exercise price ofour 

F-10

----

employee stock options equals the market price of theunderlying stock on the date of grant. The following table illustrates theeffect on our net loss and net loss per share if we had applied the provisionsof SFAS 123 to estimate and recognize compensation expense for our stock-basedemployee compensation.
| ** **                                                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net loss, as  reported                                                                                             |       | $                                          | (26,004    | ) | $ | (29,889 | ) | $ | (28,182 | ) |
| Add: Stock-based  employee compensation expense included in reported net loss                                      |       | 268                                        |       | 296 |   | 318 |   |
| Deduct: Stock-based  employee compensation expense determined under fair value method for all  stock option grants |       | (1,390                                     | )          | (2,319 | ) | (8,489 | ) |
| Pro forma net  loss                                                                                                |       | $                                          | (27,126    | ) | $ | (31,912 | ) | $ | (36,353 | ) |
| Basic and diluted  net loss per share, as reported                                                                 |       | $                                          | (0.83      | ) | $ | (1.07 | ) | $ | (1.02 | ) |
| Pro forma basic and  diluted net loss per share                                                                    |       | $                                          | (0.86      | ) | $ | (1.14 | ) | $ | (1.32 | ) |

 

***Cash, Cash Equivalents and Marketable Securities***

Our cash and investment policy emphasizes liquidityand preservation of principal over other portfolio considerations. We selectinvestments that maximize interest income to the extent possible given thesetwo constraints. We satisfy liquidity requirements by investing excess cash insecurities with different maturities to match projected cash needs and limitconcentration of credit risk by diversifying our investments among a variety ofhigh credit-quality issuers and limit the amount of credit exposure toany one issuer. The estimated fair values have been determined using availablemarket information. We do not use derivative financial instruments in ourinvestment portfolio.

All investments withoriginal maturities of three months or less are considered to be cash equivalents.Our marketable securities, consisting primarily of high-grade debt securitiesincluding money market funds, U.S. government and corporate notes and bonds,and commercial paper, are classified as available-for-sale at time of purchaseand carried at fair value. If the fair value of a security is below itsamortized cost for six consecutive months or if its decline is due to asignificant adverse event, the impairment is considered to beother-than-temporary. Other-than-temporary declines in fair value of ourmarketable securities are charged against interest income. We recognizedexpenses of approximately $102,000 in 2004, $40,000 in 2003, and $9,000 in 2002as a result of charges related to other-than-temporary declines in the fairvalues of certain of our marketable securities. Amortization of premiums anddiscounts, and realized gains and losses are included in interest income.Unrealized gains and losses are included as accumulated other comprehensiveincome, a separate component of stockholders’ equity. The cost of securitiessold is based on use of the specific identification method.

***Property and Equipment***

Property and equipment arerecorded at cost and depreciated using the straight-line method over theestimated useful lives of the assets ranging from three to five years.Leasehold improvements are amortized over the shorter of the lease term or theestimated useful life of the assets.

***Investment in Other Companies***

We have invested in equity instruments of privatelyheld companies for business and strategic purposes. These investments areclassified as long-term assets and are accounted for under the cost method aswe do not have the ability to exercise significant influence over theiroperations. We monitor our investments for impairment and record reductions incarrying value when events or changes in circumstances indicate that thecarrying value may not be recoverable. Determination of impairment is based ona number of factors, including an assessment of the strength of investee’smanagement, the length 

F-11

----

of time and extent towhich the fair value has been less than our cost basis, the financial conditionand near-term prospects of the investee, fundamental changes to the businessprospects of the investee, share prices of subsequent offerings, and our intentand ability to hold the investment for a period of time sufficient to allow forany anticipated recovery in our carrying value.

In July 2001, we madea $300,000 equity investment in Altagen Biosciences Inc. (formerly CSSAcquisition Corporation) for 300 shares of Series D Preferred stock,representing 2.5% of total equity in the company. In December 2001, wemade a $300,000 equity investment in Molecular Medicine BioServices, Inc.for 714,286 shares of Series A Preferred stock, and at December 31,2004, these shares represent 4.6% of total equity in the company. In June 2002,we recorded a $300,000 reduction in the carrying value of our investment inAltagen, and in July 2003, we returned the 300 shares of Series DPreferred stock to Altagen in settlement of outstanding liabilities andrecorded a gain on investment of approximately $90,000. In September 2004,we recorded a $150,000 reduction in the carrying value of our investment inMolecular Medicine BioServices, Inc., and included the loss in otherincome (expense).

***Revenue Recognition***

We generate revenue principally from collaborativeresearch and development arrangements, technology licenses, and governmentgrants. Revenue arrangements with multiple components are divided into separateunits of accounting if certain criteria are met, including whether thedelivered component has stand-alone value to the customer, and whetherthere is objective and reliable evidence of the fair value of the undelivereditems. Consideration received is allocated among the separate units ofaccounting based on their respective fair values, and the applicable revenuerecognition criteria are then applied to each of the units.

Revenue isrecognized when the four basic criteria of revenue recognition are met: (1) acontractual agreement exists; (2) transfer of technology has beencompleted or services have been rendered; (3) the fee is fixed ordeterminable; and (4) collectibility is reasonably assured. For eachsource of revenue, we comply with the above revenue recognition criteria in thefollowing manner:

·        Collaborativearrangements typically consist of non-refundable and/or exclusive technologyaccess fees, cost reimbursements for specific research and developmentspending, and various milestone and future product royalty payments. If thedelivered technology does not have stand-alone value or if we do not haveobjective or reliable evidence of the fair value of the undelivered component,the amount of revenue allocable to the delivered technology is deferred. Non-refundableupfront fees with stand-alone value that are not dependent on futureperformance under these agreements are recognized as revenue when received, andare deferred if we have continuing performance obligations and have no evidenceof fair value of those obligations. Cost reimbursements for research anddevelopment spending are recognized when the related costs are incurred andwhen reimbursements are received. Payments received related to substantive,performance-based “at-risk” milestones are recognized as revenue uponachievement of the clinical success or regulatory event specified in theunderlying contracts, which represent the culmination of the earnings process.Amounts received in advance are recorded as deferred revenue until the technologyis transferred, costs are incurred, or milestone is reached.

·        Technologylicense agreements typically consist of non-refundable upfront license fees,annual minimum access fees or royalty payments. Non-refundable upfrontlicense fees and annual minimum payments received with separable stand-alonevalues are recognized when the technology is transferred or accessed, providedthat the technology transferred or accessed is not dependent on the outcome ofour continuing research and development efforts.

F-12

----

·        Government grants, whichsupport our research efforts in specific projects, generally provide forreimbursement of approved costs as defined in the notices of grants. Grantrevenue is recognized when associated project costs are incurred.

***Research and Development Costs***

Research and developmentexpenses include internal and external costs. Internal costs include salariesand employment related expenses, facility costs, administrative expenses andallocations of corporate costs. External expenses consist of costs associatedwith outsourced clinical research organization activities, sponsored researchstudies, product registration, patent application and prosecution, andinvestigator sponsored trials. In accordance with SFAS No. 2, *“Accounting for Research and Development Costs*,*”* all such costs are charged to expense asincurred.

***Net Loss Per Share***

We calculate basic netloss per share using the weighted average common shares outstanding for theperiod. Diluted net income per share would include the impact of other dilutiveequity instruments, primarily our preferred stock, options and warrants. Forthe years ended December 31, 2004, 2003, and 2002, outstanding preferredstock, options and warrants totaled 6.7 million, 6.1 million, and6.4 million shares, respectively. We reported net losses for all yearspresented and, therefore, preferred stock, options and warrants were excludedfrom the calculation of diluted net loss per share as they were anti-dilutive.

***Comprehensive Income***

Comprehensive income iscomprised of net loss and other comprehensive income. The only component ofother comprehensive income is unrealized gains and losses on our marketablesecurities. Comprehensive loss for the years ended December 31, 2004,2003, and 2002 was $26.1 million, $30.3 million, and$29.7 million, respectively. Comprehensive loss has been disclosed in theStatement of Stockholders’ Equity for all periods presented.

***Recent Accounting Pronouncements***

In December 2004, theFinancial Accounting Standards Board (FASB) issued their final standard onaccounting for share-based payments in FASB Standard No. 123R (revised2004), *Share-Based Payment* (FAS 123R).  This statement replaces FASB Statement 123, *Accounting for Stock-Based Compensation*, and supersedesAccounting Principles Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees*. The statement is effective for allinterim and annual periods beginning after June 15, 2005 and requirescompanies to measure and recognize compensation expense for all stock-basedpayments at fair value. Stock-based payments include stock option grants underCompany stock plans. The adoption of FAS 123R could materially impact ourresults of operations.

F-13

----

**2.Cash, Cash Equivalents and Marketable Securities**

Thefollowing is a summary of our cash, cash equivalents and marketable securitiesat December 31, 2004 and 2003 (in thousands):
| ** **                                              | ** ** | **2004**   | ** ** | **2003**            | ** ** |
|---------------------------------------------------------|------------|------------|------------|---------------------|------------|
| **Classified as:**                                 | ** ** | ** ** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  (Loss)** | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  (Loss)** | ** ** | **Fair  Value** | ** ** |
| Cash                                                    |       |       | $          | 458                 |       |   |   | $ | — |   |   |   | $ | — |   |   | $ | 458 |   |   | $ | 253 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 253 |   |
| Cash equivalents:                                       |       |       |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market funds                                      |       |       | 5,005      |                |       |   | — |   |   |   | — |   |   | 5,005 |   |   | 5,082 |   |   |   | — |   |   |   | — |   |   | 5,082 |   |
| Commercial paper                                        |       |       | —     |                |       |   | — |   |   |   | — |   |   | — |   |   | 1,497 |   |   |   | — |   |   |   | — |   |   | 1,497 |   |
| Total cash  equivalents                                 |       |       | 5,005      |                |       |   | — |   |   |   | — |   |   | 5,005 |   |   | 6,579 |   |   |   | — |   |   |   | — |   |   | 6,579 |   |
| Marketable  securities:                                 |       |       |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities of the  U.S. government and its  agencies    |       |       | 29,910     |                |       |   | 3 |   |   |   | (54 | ) |   | 29,859 |   |   | 33,178 |   |   |   | 47 |   |   |   | (17 | ) |   | 33,208 |   |
| Corporate notes  and bonds                              |       |       | —     |                |       |   | — |   |   |   | — |   |   | — |   |   | 4,246 |   |   |   | 9 |   |   |   | (38 | ) |   | 4,217 |   |
| Commercial paper                                        |       |       | 1,000      |                |       |   | — |   |   |   | — |   |   | 1,000 |   |   | 2,299 |   |   |   | — |   |   |   | (1 | ) |   | 2,298 |   |
| Total marketable  securities                            |       |       | 30,910     |                |       |   | — |   |   |   | — |   |   | 30,859 |   |   | 39,723 |   |   |   | 56 |   |   |   | (56 | ) |   | 39,723 |   |
| Total cash, cash  equivalents and marketable securities |       |       | $          | 36,373              |       |   |   | $ | 3 |   |   |   | $ | (54 | ) |   | $ | 36,322 |   |   | $ | 46,555 |   |   |   | $ | 56 |   |   |   | $ | (56 | ) |   | $ | 46,555 |   |
| **Securities  available-for-sale:**                     |       |       |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Maturing within 1  year                                 |       |       | $          | 31,909              |       |   |   |   |   |   |   |   |   |   | $ | 31,869 |   |   | $ | 30,353 |   |   |   |   |   |   |   |   |   |   | $ | 30,353 |   |
| Maturing between 1  to 2  years                         |       |       | $          | 4,000               |       |   |   |   |   |   |   |   |   |   | $ | 3,995 |   |   | $ | 15,949 |   |   |   |   |   |   |   |   |   |   | $ | 15,949 |   |
|                                                         |            |            |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

There were no material gross realized gains or losseson sales of marketable securities for the year ended December 31, 2004. Forthe year ended December 31, 2003, there were no gross realized gains and$17,000 of gross realized losses. For the year ended December 31, 2002,there were $119,000 of gross realized gains and $3,000 of gross realizedlosses.

The aggregate amount of unrealized losses and therelated fair value of investments with unrealized losses at December 31,2004 were approximately $54,000 and $23.1 million, respectively. Theunrealized losses were caused by fluctuation in market interest rates and arenot considered other-than-temporary until a continuous decline has occurred.

We recorded chargestotaling $51,000 related to other than temporary impairments of debt and equitysecurities for the year ended December 31, 2004.

**3. Property and Equipment**

Propertyand equipment consisted of the following at December 31 (in thousands):
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Furniture and  office equipment                 |       | $        | 540        |     | $          | 530 |   |
| Leasehold  improvements                         |       | 413      |       | 368      |       |
| Laboratory  equipment                           |       | 935      |       | 428      |       |
| Computer  equipment                             |       | 871      |       | 810      |       |
|                                            |       | 2,759    |       | 2,136    |       |
| Less accumulated  depreciation and amortization |       | (1,715   | )          | (1,347   | )          |
| Property and equipment,  net                    |       | $        | 1,044      |     | $          | 789 |   |

 

Depreciation andamortization expense was $466,000, $436,000, and $374,000 for the years ended December 31,2004, 2003, and 2002, respectively.

F-14

----

**4. Research and License Agreements**

We have entered into various agreements with researchinstitutions, universities, clinical research organizations and other entitiesfor the performance of research and development activities and for theacquisition of licenses related to those activities. Expenses under theseagreements totaled $3.5 million, $2.6 million, and $1.3 million inthe years ended December 31, 2004, 2003, and 2002, respectively.

At December 31,2004, the annual aggregate commitments we have under these agreements, includingminimum license payments, are as follows (in thousands):
| 2005   |   | $   | 753    |   |
|--------|--------|-----|--------|--------|
| 2006   |   | 324 |   |
| 2007   |   | 329 |   |
| 2008   |   | 334 |   |
| 2009   |   | 334 |   |
|   |   | $   | 2,074  |   |

 

After 2009, we must makeannual payments aggregating $334,000 per year to maintain certain licenses.Certain licenses provide for the payment of royalties by us on future productsales, if any. In addition, in order to maintain these licenses and otherrights during product development, we must comply with various conditionsincluding the payment of patent related costs and obtaining additional equityinvestments.

**5. Agreement with Aventis SA**

In 1997, we entered intoan exclusive license agreement with Aventis SA (formerly Hoechst Marion Roussel, Inc.).The agreement gave us a worldwide license to the patent rights and know-howrelated to the antipsychotic agent iloperidone, including the ability todevelop, use, sublicense, manufacture and sell products and processes claimedin the patent rights. We are required to make additional benchmark payments asspecific milestones are met. Upon commercialization of the product, the licenseagreement provides that we will pay royalties based on net sales.

**6.Iloperidone Sublicense to Novartis Pharma AG**

We entered into an agreement with Novartis Pharma AG(Novartis) in 1997 pursuant to which we granted Novartis a sublicense for theworldwide (with the exception of Japan) development, manufacturing andmarketing of iloperidone. In April 2001, we entered into an amendment tothe agreement for the development and commercialization of iloperidone inJapan. Under the amendment, in exchange for rights to iloperidone in Japan, wereceived a $2.5 million license fee in May 2001. Novartis will makeour milestone payments to Aventis during the life of the Novartis agreement,and will also pay to Aventis and us a royalty on future net sales of theproduct, providing us with a net royalty of 8% on the first $200 millionof sales annually and 10% on all sales above $200 million on an annualbasis. Novartis has assumed the responsibility for all clinical development,registration, manufacturing and marketing of iloperidone, and we have noremaining obligations under the terms of this agreement, except for maintainingcertain usual and customary requirements, such as confidentiality covenants.

In June 2004, weannounced that Vanda Pharmaceuticals, Inc. (Vanda) had acquired fromNovartis the worldwide rights to develop and commercialize iloperidone, ourproprietary antipsychotic agent in Phase III clinical development for thetreatment of schizophrenia and related psychotic disorders. Under its agreementwith Novartis, Vanda will pursue advancement of the iloperidone Phase IIIdevelopment program. All of our rights and economic interests in iloperidone,including royalties on sales of iloperidone, remain essentially unchanged underthe agreement.

F-15

----

**7.Licensing and Collaborative Agreement with Schering AG**

In January 2000, weentered into a licensing and collaborative agreement with Schering, under whichwe will collaborate with Schering on manufacturing and clinical development ofour cell therapy product, Spheramine®, for the treatment ofParkinson’s disease. Under the agreement, we will perform clinical developmentactivities for which we will receive funding. As of December 31, 2004, wehave recognized $2.8 million under this agreement. In February 2002,we announced that we received a $2.0 million milestone payment fromSchering. The milestone payment followed Schering’s decision in the firstquarter 2002 to initiate larger, randomized clinical testing of Spheramine forthe treatment of patients with advanced Parkinson’s disease following thesuccessful completion of our Phase I/II clinical study of Spheramine. As aresult, we recognized $2.0 million in contract revenue in the firstquarter of 2002. Schering will fully fund, and manage in collaboration with us,all future pilot and pivotal clinical studies, and manufacturing anddevelopment activities. We are entitled to receive up to an aggregate of$8 million over the life of the Schering agreement upon the achievement ofspecific milestones.

**8. DITPAAcquisition**

On October 16, 2003,we announced the acquisition of a novel product in clinical testing for thetreatment of congestive heart failure (CHF). The product in development,3,5-diiodothyropropionic acid (DITPA), is an orally active analogue of thyroidhormone that has demonstrated in preclinical and clinical studies to date theability to improve cardiac function, with no significant adverse effects. Weacquired DITPA through the acquisition of Developmental Therapeutics, Inc.(DTI), a private company established to develop DITPA, and the exclusivelicensee of recently issued U.S. patent and pending U.S. and internationalpatent applications covering DITPA. We acquired DTI in a stock transaction for1,187,500 shares of our common stock valued at approximately $3.6 millionusing the average market price of our common stock over the five-day tradingperiod, including and prior to the date of the merger in accordance withgenerally accepted accounting principles. We also made a cash payment of$171,250 to the licensor of the technology. In the fourth quarter of 2003, thetotal acquisition cost of $3.9 million was reported as acquired researchand development in the statement of operations. An additional payment of712,500 shares of our common stock will be made only upon the achievement ofpositive pivotal study results or certain other substantial milestones withinfive years. In addition, a cash payment of $102,750 or, alternatively, anadditional payment of 37,500 shares of our common stock, will be made to thelicensor of the technology upon achievement of such study results or such othersubstantial milestones within five years.

**9.Commitments and Contingencies**

***Lease Commitments***

Welease facilities under operating leases that expire at various dates through June 2010.We also lease certain office equipment under operating and capital leases thatexpire at various dates through July 2008. Rental expense was $832,000,$825,000, and $765,000 for years ended December 31, 2004, 2003, and 2002,respectively.

Thefollowing is a schedule of future minimum lease payments at December 31,2004 (in thousands):
| 2005       |   | $   | 893    |   |
|------------|--------|-----|--------|--------|
| 2006       |   | 764 |   |
| 2007       |   | 567 |   |
| 2008       |   | 573 |   |
| 2009       |   | 584 |   |
| Thereafter |   | 295 |   |
|       |   | $   | 3,676  |   |

 

F-16

----

***Legal Proceedings***

On November 4,2003, a purported class action suit entitled *PatrickMagee v. Titan Pharmaceuticals, Inc., et al* was filed in theUnited States District Court for the Northern District of California on behalfof purchasers of Titan’s common stock during the period between December 1,1999 and July 22, 2002. Subsequently, several similar actions were filedin the same court. The complaints alleged that Titan and certain of itsexecutive officers violated Sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934 by issuing false and misleading statements that failed todisclose certain key information regarding iloperidone. The complaints soughtunspecified damages.

On November 6,2003, a stockholder purporting to act on our behalf filed a derivative actionin the California Superior Court for the County of San Mateo against Titan’sexecutive officers and directors and certain former directors seekingunspecified damages, injunctive relief and restitution. Titan was also named asa nominal defendant. The derivative action is based on the same factualallegations as the purported class actions and alleges state law claims forbreach of fiduciary duty, abuse of control, gross mismanagement, waste ofcorporate assets and unjust enrichment.

On February 2,2004, we announced that all of the class action and derivative lawsuits filedagainst the Company had been dismissed without prejudice. In every case, theplaintiffs agreed to voluntarily dismiss the lawsuits after discussion of thefacts with Titan’s counsel, without any further legal action necessary byTitan. Titan, its affiliates, and insurers made no payment in connection withdismissal of the lawsuits, and have no obligation to make any paymentswhatsoever to any plaintiffs or their counsel in connection with thedismissals. Furthermore, Titan has no other obligations in connection with thedismissals.

**10. Guarantees and Indemnifications**

As permitted under Delaware law and in accordance withour Bylaws, we indemnify our officers and directors for certain events oroccurrences while the officer or director is or was serving at the Company’srequest in such capacity. The term of the indemnification period is for theofficer’s or director’s lifetime. The maximum amount of potential future indemnificationis unlimited; however, we have a director and officer insurance policy thatlimits our exposure and may enable us to recover a portion of any futureamounts paid. We believe the fair value of these indemnification agreements isminimal. Accordingly, we have not recorded any liabilities for these agreementsas of December 31, 2004.

In the normal course ofbusiness, we have commitments to make certain milestone payments to variousclinical research organizations in connection with our clinical trialactivities. Payments are contingent upon the achievement of specific milestonesor events as defined in the agreements, and we have made appropriate accrualsin our consolidated financial statements for those milestones that wereachieved as of December 31, 2004. We also provide indemnifications ofvarying scope to our clinical research organizations and investigators againstclaims made by third parties arising from the use of our products and processesin clinical trials. Historically, costs related to these indemnificationprovisions were immaterial. We also maintain various liability insurancepolicies that limit our exposure. We are unable to estimate the maximumpotential impact of these indemnification provisions on our future results ofoperations.

**11. Stockholders’ Equity**

***Preferred Stock***

In connection with themerger of our Trilex Pharmaceuticals, Inc. subsidiary (Trilex) in 1997, weissued 222,400 shares of Series C convertible preferred stock (the Series CPreferred) to certain members of the Trilex management team and to certainconsultants of Trilex. The Series C Preferred automatically converts toour common stock, on a one-to-one basis, only if certain development milestonesare achieved within a certain timeframe. Upon achievement of the milestones, wewould be required to value the 

F-17

----

technologyusing the then fair market value of our common stock issuable upon conversion.Certain milestones were not achieved by October 6, 2004. Therefore, wehave the right to redeem all, but not less than all, of the outstanding sharesof Series C Preferred Stock at a redemption price equal to the aggregatepar value of the shares plus accrued and unpaid dividends, if any. Holders of Series CPreferred are not entitled to vote but are entitled to receive dividends, when,as and if declared by the Board of Directors ratably with any declaration orpayment of any dividend on our common stock or other junior securities. The Series CPreferred has a liquidation preference equal to $0.01 per share. No value wasassigned to the Series C Preferred in the accompanying financialstatements. There were no accrued and unpaid dividends outstanding as of December 31,2004.

***Common Stock***

In October 2004, we issued 149,599 shares of ourcommon stock in exchange for 101,700 shares of ProNeura, Inc. (ProNeura)common stock under a share exchange agreement with two of the three minorityshareholders of ProNeura. Our common stock was valued at $367,000 using theaverage market price of our common stock over a five day trading period,including two days prior to and subsequent to the date of issuance.

In February 2004, we filed a shelf registrationstatement with the Securities and Exchange Commission to sell up to $50 millionof common or preferred stock. Under this registration statement, shares may besold periodically to provide additional funds for our operations. In March 2004,we completed a sale of 3,075,000 shares of our common stock offered under theregistration statement at a price of $5.00 per share, for gross proceeds of approximately$15.4 million. Net proceeds were approximately $14.4 million.

In October 2003, weacquired DITPA through the acquisition of Developmental Therapeutics, Inc.(DTI) in a stock transaction for 1,187,500 shares of our common stock valued atapproximately $3.6 million using the average market price of our commonstock over the five-day trading period, including and prior to the date of themerger. In addition, up to a total of 750,000 shares of common stock will beissued only upon the achievement of positive pivotal study results or certainother substantial milestones within five years.

***Shares Reserved for Future Issuance***

As of December 31,2004, shares of common stock reserved by us for future issuance consisted ofthe following (shares in thousands):
| Stock options                 |   | 7,910 |   |
|-------------------------------|--------|-------|--------|
| Preferred stock               |   | 222   |   |
| DTI merger  contingent shares |   | 750   |   |
|                          |   | 8,882 |   |

 

**12. Stock Option Plans**

In July 2002, we adopted the 2002 Stock OptionPlan (2002 Plan). The 2002 Plan assumed the options which remain available forgrant under our option plans previously approved by stockholders. Under the2002 Plan and predecessor plans, a total of 6.4 million shares of ourcommon stock were authorized for issuance to employees, officers, directors,consultants, and advisers. Options granted under the 2002 Plan and predecessorplans may either be incentive stock options within the meaning of Section 422of the Internal Revenue Code and/or options that do not qualify as incentivestock options; however, only employees are eligible to receive incentive stockoptions. Options granted under the option plans generally expire no later thanten years from the date of grant, except when the grantee is a 10% shareholder,in 

F-18

----

which case the maximumterm is five years from the date of grant. Options generally vest at the rateof one fourth after one year from the date of grant and the remainder ratablyover the subsequent three years, although options with different vesting termsare granted from time-to-time. Generally, the exercise price of any optionsgranted under the 2002 Plan must be at least 100% of the fair market value ofour common stock on the date of grant, except when the grantee is a 10%shareholder, in which case the exercise price shall be at least 110% of thefair market value of our common stock on the date of grant.

In July 2002, our Board of Directors elected tocontinue the option grant practice under our amended 1998 Option Plan, whichprovided for the automatic grant of non-qualified stock options (Directors’Options) to our directors who are not 10% stockholders (Eligible Directors).Each Eligible Director will be granted an option to purchase 10,000 shares ofcommon stock on the date that such person is first elected or appointed adirector. Commencing on the day immediately following the later of (i) the2000 annual stockholders meeting, or (ii) the first annual meeting ofstockholders after their election to the Board, each Eligible Director willreceive an automatic biennial (i.e. every two years) grant of an option topurchase 15,000 shares of common stock as long as such director is a member ofthe Board of Directors. In addition, each Eligible Director will receive anautomatic annual grant of an option to purchase 5,000 shares of common stockfor each committee of the Board on which they serve. The exercise price of theDirector’s Options shall be equal to the fair market value of our common stockon the date of grant.

In August 2001, we adopted the 2001 EmployeeNon-Qualified Stock Option Plan (2001 NQ Plan) pursuant to which 1,750,000shares of common stock were authorized for issuance for option grants toemployees and consultants who are not officers or directors of Titan. Optionsgranted under the option plans generally expire no later than ten years fromthe date of grant. Option vesting schedule and exercise price are determined attime of grant by the Board of Directors. Historically, the exercise prices ofoptions granted under the 2001 NQ Plan were 100% of the fair market value ofour common stock on the date of grant.

Activityunder our stock option plans, as well as non-plan activity are summarized below(shares in thousands):
| ** **                         | ** ** | **Shares Available  For Grant** | ** ** | **Number of  Options  Outstanding** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------|------------|
| Balance at  December 31, 2001 |       |                                      | 1,291      |                                     |       |                                           | 4,128      |   |   |   | $ | 13.20 |   |   |
| Increase in shares reserved        |       |                                      | 2,750      |                                     |       |                                           | —     |   |   |   | — |   |   |
| Options granted                    |       |                                      | (2,200     | )                                        |       |                                           | 2,200      |   |   |   | $ | 4.44 |   |   |
| Options exercised                  |       |                                      | —     |                                     |       |                                           | —     |   |   |   | — |   |   |
| Options cancelled                  |       |                                      | 132        |                                     |       |                                           | (138       | ) |   |   | $ | 15.31 |   |   |
| Balance at  December 31, 2002 |       |                                      | 1,973      |                                     |       |                                           | 6,190      |   |   |   | $ | 10.05 |   |   |
| Options granted                    |       |                                      | (699       | )                                        |       |                                           | 699        |   |   |   | $ | 1.83 |   |   |
| Options exercised                  |       |                                      | —     |                                     |       |                                           | (73        | ) |   |   | $ | 1.57 |   |   |
| Options cancelled                  |       |                                      | 864        |                                     |       |                                           | (864       | ) |   |   | $ | 8.67 |   |   |
| Balance at  December 31, 2003 |       |                                      | 2,138      |                                     |       |                                           | 5,952      |   |   |   | $ | 9.39 |   |   |
| Options granted                    |       |                                      | (1,407     | )                                        |       |                                           | 1,407      |   |   |   | $ | 2.90 |   |   |
| Options exercised                  |       |                                      | —     |                                     |       |                                           | (180       | ) |   |   | $ | 1.17 |   |   |
| Options cancelled                  |       |                                      | 734        |                                     |       |                                           | (734       | ) |   |   | $ | 7.81 |   |   |
| Balance at  December 31, 2004 |       |                                      | 1,465      |                                     |       |                                           | 6,445      |   |   |   | $ | 8.39 |   |   |

 

Our option plans allow for stock options issued as theresult of a merger or consolidation of another entity, including theacquisition of minority interest of our subsidiaries, to be added to themaximum number of shares provided for in the plan (Substitute Options).Consequently, Substitute Options are not 

F-19

----

returned to the sharesreserved under the plan when cancelled. During 2004, 2003 and 2002, the numberof Substitute Options cancelled was immaterial.

Optionsfor 5.0 million and 3.9 million shares were exercisable at December 31,2004 and 2003, respectively. The options outstanding at December 31, 2004have been segregated into three ranges for additional disclosure as follows(option shares in thousands):
| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                        | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $0.08 - $3.38                               |       |                         | 2,157      |                                                |       |   | 7.92 |   |   |   | $ | 2.13 |   |   |   | 1,085 |   |   |   | $ | 1.83 |   |   |
| $3.43 - $8.77                               |       |                         | 2,344      |                                                |       |   | 5.35 |   |   |   | $ | 6.32 |   |   |   | 2,010 |   |   |   | $ | 6.66 |   |   |
| $9.06 - $46.50                              |       |                         | 1,944      |                                                |       |   | 5.61 |   |   |   | $ | 17.82 |   |   |   | 1,944 |   |   |   | $ | 17.82 |   |   |
| $0.08 - $46.50                              |       |                         | 6,445      |                                                |       |   | 6.29 |   |   |   | $ | 8.39 |   |   |   | 5,039 |   |   |   | $ | 9.92 |   |   |

 

In addition, Ingenex has a stock option plan underwhich options to purchase common stock of Ingenex have been and may be granted.No options have been granted under such plan since 1997.

We have elected to continue to follow APB 25 inaccounting for our stock options. Under APB 25, no compensation expense isrecognized when the exercise price of our stock options equals the market priceof the underlying stock on the date of grant.

Pro forma net loss and net loss per share informationrequired by SFAS 123 as amended by SFAS 148 has been determined as ifwe had accounted for our employee stock options under the fair value method ofSFAS 123. The fair value for these options was estimated at the date of grantusing a Black-Scholes option pricing model with the following assumptionsfor 2004, 2003, and 2002: weighted-average volatility factor of 0.70,0.70, and 0.79, respectively; no expected dividend payments; weighted-averagerisk-free interest rates in effect of 3.0%, 2.2%, and 2.4%, respectively; and aweighted-average expected life of 3.97, 3.01, and 3.54 years,respectively. For purposes of disclosure, the estimated fair value of optionsis amortized to expense over the options’ vesting period.

The Black-Scholes option valuation model wasdeveloped for use in estimating the fair value of traded options that have novesting restrictions and are fully transferable. In addition, option valuationmodels require the input of highly subjective assumptions including theexpected stock price volatility. Because our employee stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of our employeestock options.

Based upon the abovemethodology, the weighted-average fair value of options granted duringthe years ended December 31, 2004, 2003, and 2002 was $1.65, $0.89, and$2.32, respectively. A tabular presentation of pro forma net loss and net lossper share information for all reporting periods is presented in Note 1.

**13. Minority Interest**

The $1.2 million received by Ingenex upon theissuance of its Series B convertible preferred stock has been classifiedas minority interest in the consolidated balance sheet. As a result of the Series Bpreferred stockholders’ liquidation preference, the balance has not beenreduced by any portion of the losses of Ingenex.

Amounts invested byoutside investors in the common stock of the consolidated subsidiaries havebeen apportioned between minority interest and additional paid-in capital inthe consolidated balance 

F-20

----

sheets.Losses applicable to the minority interest holdings of the subsidiaries’ commonstock have been reduced to zero.

**14. Related Party Transactions**

We make loans to ouremployees from time to time in order to attract and retain the best availabletalent and to encourage the highest level of performance. At December 31,2004 and 2003, such receivables were $18,000 and $123,000, respectively.

**15. Income Taxes**

As of December 31, 2004, we had net operatingloss carryforwards for federal income tax purposes of approximately $184.2 millionthat expire at various dates through 2024, and federal research and developmenttax credits of approximately $5.3 million that expire at various datesthrough 2024. We also had net operating loss carryforwards for state income taxpurposes of approximately $58.9  million that expire at various datesthrough 2014, and state research and development tax credits of approximately $4.0 millionwhich do not expire.

Utilization of our net operating loss may be subjectto substantial annual limitation due to ownership change limitations providedby the Internal Revenue Code and similar state provisions. Such an annuallimitation could result in the expiration of the net operating losscarryforwards before utilization.

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of ourdeferred tax assets are as follows (in thousands):
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Deferred tax assets:             |       |                  |       |   |   |
| Net operating loss carryforwards |       | $                     | 66,070     |   | $ | 59,000 |   |
| Research credit carryforwards    |       | 9,344                 |       | 6,400 |   |
| Other, net                       |       | 1,732                 |       | 4,200 |   |
| Total deferred  tax assets       |       | 77,146                |       | 69,600 |   |
| Deferred tax  liabilities:       |       |                  |       |   |   |
| Unrealized gain on investments   |       | —                |       | (50 | ) |
| Valuation  allowance             |       | (77,146               | )          | (69,550 | ) |
| Net deferred tax assets          |       | $                     | —     |   | $ | — |   |

 

Realization of deferredtax assets is dependent upon future earnings, if any, the timing and amount ofwhich are uncertain. Accordingly, the net deferred tax assets have been fullyoffset by a valuation allowance. The valuation allowance increased by $7.6 million,$17.6 million, and $11.1 million during 2004, 2003, and 2002,respectively. The valuation allowance at December 31, 2004 includes $4.0 millionrelated to deferred tax assets arising from tax benefits associated with stockoption plans. This benefit, when realized, will be recorded as an increase tostockholders’ equity.

F-21

----

**16.Quarterly Financial Data (Unaudited)**
| ** **                            | ** ** | **First  Quarter**                                                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth   uarter** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                            | ** ** | **(in thousands, except per share amount)** | ** ** |
| **2004**                              |       |                                                                 |       |                |       |               |       |                     |       |
| Total revenue                         |       | $                                                                    | 1          |                | —     |               | —     |                     | $          | 30 |   |
| Net loss                              |       | $                                                                    | (6,381     | )                   | $          | (5,555             | )          | $                        | (6,270     | ) | $ | (7,798 | ) |
| Basic and diluted  net loss per share |       | $                                                                    | (0.22      | )                   | $          | (0.17              | )          | $                        | (0.20      | ) | $ | (0.24 | ) |
| **2003**                              |       |                                                                 |       |                |       |               |       |                     |       |
| Total revenue                         |       | $                                                                    | 26         |                | $          | 2                  |       | —                   |       | $ | 61 |   |
| Net loss                              |       | $                                                                    | (6,530     | )                   | $          | (6,681             | )          | $                        | (6,169     | ) | $ | (10,509 | ) |
| Basic and diluted net  loss per share |       | $                                                                    | (0.24      | )                   | $          | (0.24              | )          | $                        | (0.22      | ) | $ | (0.37 | ) |

 

F-22

----

**SIGNATURES**

Pursuantto the requirements of Section 13 of the Securities and Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|                      |   | TITAN PHARMACEUTICALS, INC. |
|----------------------|--------|-----------------------------|
| Date: April 15, 2005 |   | By:                         |   | /s/  LOUIS R. BUCALO |
| * *             |   |                        |   | Louis R. Bucalo,  M.D.,*Chairman, President and Chief Executive Officer* |

 

----