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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
|- | ----------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2008

OR



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
|- | -----------------------------------------------------------------------------------------

For the transition period from             
to

Commission file number:





Targanta Therapeutics Corporation

(Exact Name of Registrant as Specified in
Its Charter)









|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 20-3971077                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

222 Third Street, Suite 2300, Cambridge, Massachusetts 02142-1122

(Address of Principal Executive Offices) (Zip Code)

(617) 577-9020

(Registrants Telephone Number, Including Area Code)





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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                           |  |                      |  |                                               |  |                             
|-------------------------- |  | -------------------- |  | --------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer   ̈ |  | Non-accelerated filer  x                      |  | Smaller reporting company   ̈
|                           |  |                      |  | (Do not check if a smaller reporting company) |  |                             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).     ̈  Yes    x  No

As of October 31, 2008, there were 20,988,387 shares of the Registrants common stock outstanding.









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##### Table of Contents

TARGANTA THERAPEUTICS CORPORATION

QUARTERLY REPORT

ON FORM 10-Q

INDEX



|                              |  |                                                                                                                                                                                                             |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                                                                                                             |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                                                                                            
|Item 1.                       |  | Financial Statements (Unaudited)                                                                                                                                                                            |  | 3   
|                              |  | Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007                                                                                                                        |  | 4   
|                              |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007 and the cumulative period from May 20, 1997 (date of inception)
 through September 30, 2008 |  | 5   
|                              |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 and the cumulative period from May 20, 1997 (date of inception) through
 September 30, 2008           |  | 6   
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                                                                                                        |  | 8   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                       |  | 16  
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                                                                  |  | 22  
|Item 4T.                      |  | Controls and Procedures                                                                                                                                                                                     |  | 23  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                                                                                            
|Item 1.                       |  | Legal Proceedings                                                                                                                                                                                           |  | 24  
|Item 1A.                      |  | Risk Factors                                                                                                                                                                                                |  | 24  
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                                 |  | 26  
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                                                                                                             |  | 26  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                                                                                         |  | 26  
|Item 5.                       |  | Other Information                                                                                                                                                                                           |  | 26  
|Item 6.                       |  | Exhibits                                                                                                                                                                                                    |  | 26  
|                              | 
|Signatures                    |  | 27                                                                                                                                                                                                         



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PART I. FINANCIAL INFORMATION

FORWARD-LOOKING STATEMENTS

This Quarterly Report on
Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the
results of Targanta Therapeutics Corporation to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking
statements, including any projections of financing needs, revenue, expenses, earnings or losses from operations, or other financial items; any statements of the plans, strategies and objectives of management for future operations, any statements
concerning product research, development and commercialization plans and timelines; any statements regarding safety and efficacy of product candidates, any statements of expectation or belief; and any statements of assumptions underlying any of the
foregoing. In addition, forward looking statements may contain the words believe, anticipate, expect, estimate, intend, plan, project, will be,
will continue, will result, seek, could, may, might, or any variations of such words or other words with similar meanings.

The risks, uncertainties and assumptions referred to above include risks that are described under the title Risk Factors in Part II,
Item 1A of this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed on March 27, 2008 with the Securities and Exchange Commission (SEC), and our Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2008 filed on May 13, 2008 with the SEC, and that are otherwise described from time to time in our reports filed with the SEC after this report.

The forward-looking statements included in this quarterly report represent our estimates as of the date of this Quarterly Report. We specifically
disclaim any obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the date of this quarterly report.

Item 1. Financial Statements  Unaudited

The financial information set forth below should be read in conjunction with our Managements Discussion and Analysis of Financial Condition
and Results of Operations appearing elsewhere in this Quarterly Report on Form 10-Q.



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##### Table of Contents

Targanta Therapeutics Corporation

(A development-stage company)

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)



|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                 |  | September 30,2008 |          |   | December 31,2007 |  
|Assets                                                                                                                                                                           |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                        |  | $                 | 36,219   |   |                  | $ | 32,955   |  
|Short-term investments                                                                                                                                                           |  |                   | 6,390    |   |                  |   | 56,798   |  
|Restricted cash                                                                                                                                                                  |  |                   | 472      |   |                  |   | 506      |  
|Investment tax credits recoverable                                                                                                                                               |  |                   | 563      |   |                  |   | 757      |  
|Prepaid expenses and other current assets                                                                                                                                        |  |                   | 1,399    |   |                  |   | 1,630    |  
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                                             |  |                   | 45,043   |   |                  |   | 92,646   |  
|Property and equipment, net                                                                                                                                                      |  |                   | 1,429    |   |                  |   | 1,350    |  
|Deferred financing costs                                                                                                                                                         |  |                   | 78       |   |                  |   | 103      |  
|Deposits                                                                                                                                                                         |  |                   | 97       |   |                  |   | 50       |  
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                                                                     |  | $                 | 46,647   |   |                  | $ | 94,149   |  
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Liabilities and Stockholders Equity                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                 |  | $                 | 2,160    |   |                  | $ | 718      |  
|Accrued expenses                                                                                                                                                                 |  |                   | 8,042    |   |                  |   | 5,873    |  
|Income tax payable                                                                                                                                                               |  |                   | 650      |   |                  |   | 2,731    |  
|Current portion of deferred rent                                                                                                                                                 |  |                   | 39       |   |                  |   | 24       |  
|Current portion of long-term debt                                                                                                                                                |  |                   | 6,591    |   |                  |   | 5,480    |  
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                        |  |                   | 17,482   |   |                  |   | 14,826   |  
|Deferred rent                                                                                                                                                                    |  |                   | 66       |   |                  |   | 100      |  
|Other long-term liabilities                                                                                                                                                      |  |                   | 240      |   |                  |   | 63       |  
|Long-term debt                                                                                                                                                                   |  |                   | 9,343    |   |                  |   | 14,287   |  
|Commitments (Note 4)                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                            |  |                   |          |   |                  |   |          |  
|Preferred Stock, par value $0.0001; 5,000,000 shares authorized, no shares issued and outstanding                                                                                |  |                   |         |   |                  |   |         |  
|Common stock, par value $0.0001; 35,000,000 shares authorized, 20,988,387 and 20,969,257 shares issued and outstanding at September 30,
2008 and December 31, 2007, respectively |  |                   | 2        |   |                  |   | 2        |  
|Additional paid-in capital                                                                                                                                                       |  |                   | 192,305  |   |                  |   | 190,137  |  
|Accumulated other comprehensive income                                                                                                                                           |  |                   | 1,527    |   |                  |   | 1,665    |  
|Deficit accumulated during the development stage                                                                                                                                 |  |                   | (174,318 | ) |                  |   | (126,931 | )
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                       |  |                   | 19,516   |   |                  |   | 64,873   |  
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                       |  | $                 | 46,647   |   |                  | $ | 94,149   |  
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  

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



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Targanta Therapeutics Corporation

(A development-stage company)

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(Unaudited)



|                                                                                      |  |                                 |            |   |                                |   |         |                                                                            |  |   |            |   |  |      |           |   |  |   |          |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ------- | -------------------------------------------------------------------------- |  | - | ---------- | - |  | ---- | --------- | - |  | - | -------- | -
|                                                                                      |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |   |         | For the Period from May 20, 1997 (date of inception) through September 30, | 
|                                                                                      |  | 2008                            |            |   | 2007                           |   |         | 2008                                                                       |  |   | 2007       |   |  | 2008 |          
|Operating expenses                                                                    |  |                                 |            |   |                                |   |         |                                                                            |  |   |            |   |  |      |           |   |  |   |          |  
|Research and development (1)                                                          |  | $                               | 7,544      |   |                                | $ | 10,974  |                                                                            |  | $ | 34,682     |   |  | $    | 25,818    |   |  | $ | 100,077  |  
|Acquired in-process research and development                                          |  |                                 |           |   |                                |   | 7,652   |                                                                            |  |   |           |   |  |      | 17,152    |   |  |   | 29,000   |  
|General and administrative (1)                                                        |  |                                 | 4,828      |   |                                |   | 2,452   |                                                                            |  |   | 12,635     |   |  |      | 7,234     |   |  |   | 33,599   |  
|                                                                                      |  |                                 |            |   |                                |   |         |                                                                            |  |   |            |   |  |      |           |   |  |   |          |  
|Total operating expenses                                                              |  |                                 | 12,372     |   |                                |   | 21,078  |                                                                            |  |   | 47,317     |   |  |      | 50,204    |   |  |   | 162,676  |  
|                                                                                      |  |                                 |            |   |                                |   |         |                                                                            |  |   |            |   |  |      |           |   |  |   |          |  
|Other income (expense)                                                                |  |                                 |            |   |                                |   |         |                                                                            |  |   |            |   |  |      |           |   |  |   |          |  
|Interest income                                                                       |  |                                 | 262        |   |                                |   | 541     |                                                                            |  |   | 1,596      |   |  |      | 1,555     |   |  |   | 5,053    |  
|Interest expense                                                                      |  |                                 | (564       | ) |                                |   | (573    | )                                                                          |  |   | (1,809     | ) |  |      | (2,510    | ) |  |   | (20,924  | )
|Foreign exchange loss                                                                 |  |                                 | (34        | ) |                                |   | (795    | )                                                                          |  |   | (48        | ) |  |      | (1,648    | ) |  |   | (1,982   | )
|Gain on disposal of property and equipment                                            |  |                                 |           |   |                                |   |        |                                                                            |  |   |           |   |  |      |          |   |  |   | 47       |  
|                                                                                      |  |                                 |            |   |                                |   |         |                                                                            |  |   |            |   |  |      |           |   |  |   |          |  
|Other income (expense), net                                                           |  |                                 | (336       | ) |                                |   | (827    | )                                                                          |  |   | (261       | ) |  |      | (2,603    | ) |  |   | (17,806  | )
|                                                                                      |  |                                 |            |   |                                |   |         |                                                                            |  |   |            |   |  |      |           |   |  |   |          |  
|Loss before income tax benefit                                                        |  |                                 | (12,708    | ) |                                |   | (21,905 | )                                                                          |  |   | (47,578    | ) |  |      | (52,807   | ) |  |   | (180,482 | )
|Income tax benefit                                                                    |  |                                 | 51         |   |                                |   | 71      |                                                                            |  |   | 191        |   |  |      | 125       |   |  |   | 6,164    |  
|                                                                                      |  |                                 |            |   |                                |   |         |                                                                            |  |   |            |   |  |      |           |   |  |   |          |  
|Net loss                                                                              |  | $                               | (12,657    | ) |                                | $ | (21,834 | )                                                                          |  | $ | (47,387    | ) |  | $    | (52,682   | ) |  | $ | (174,318 | )
|                                                                                      |  |                                 |            |   |                                |   |         |                                                                            |  |   |            |   |  |      |           |   |  |   |          |  
|Net loss per sharebasic and diluted                                                  |  | $                               | (0.60      | ) |                                | $ | (863.62 | )                                                                          |  | $ | (2.26      | ) |  | $    | (2,092.69 | ) |  |   |          |  
|                                                                                      |  |                                 |            |   |                                |   |         |                                                                            |  |   |            |   |  |      |           |   |  |   |          |  
|Weighted average number of common shares used in net loss per sharebasic and diluted |  |                                 | 20,973,107 |   |                                |   | 25,282  |                                                                            |  |   | 20,970,959 |   |  |      | 25,282    |   |  |   |          |  
|(1)    Amounts include stock-based compensation expense, as follows:                  | 
|                                                                                      |  |                                 |            |   |                               
|Research and development                                                              |  | $                               | 364        |   |                                | $ | 190     |                                                                            |  | $ | 933        |   |  | $    | 937       |   |  | $ | 2,825    |  
|General and administrative                                                            |  | $                               | 397        |   |                                | $ | 209     |                                                                            |  | $ | 1,158      |   |  | $    | 812       |   |  | $ | 2,944    |  

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



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Targanta Therapeutics Corporation

(A development-stage company)

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)



|                                                                              |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|----------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | -------------------------------------------------------------------------- | - | ------- | ---- |  | - | -------- | -
|                                                                              |  | Nine Months Ended September 30, |         |   | For the Period from May 20, 1997 (date of inception) through September 30, |  
|                                                                              |  | 2008                            |         |   | 2007                                                                       |   |         | 2008 | 
|Cash flows from operating activities:                                         |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Net loss                                                                      |  | $                               | (47,387 | ) |                                                                            | $ | (52,682 | )    |  | $ | (174,318 | )
|Adjustments to reconcile net loss to net cash used in operating activities:   |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Depreciation and amortization                                                 |  |                                 | 513     |   |                                                                            |   | 396     |      |  |   | 3,418    |  
|Stock-based compensation expense                                              |  |                                 | 2,091   |   |                                                                            |   | 1,749   |      |  |   | 5,769    |  
|Gain on disposal of property and equipment                                    |  |                                 |        |   |                                                                            |   |        |      |  |   | (47      | )
|Amortization of deferred financing costs                                      |  |                                 | 25      |   |                                                                            |   | 339     |      |  |   | 704      |  
|Deferred rent                                                                 |  |                                 | (16     | ) |                                                                            |   | 46      |      |  |   | 64       |  
|Acquired in-process research and development                                  |  |                                 |        |   |                                                                            |   | 15,152  |      |  |   | 26,000   |  
|Non-cash interest expense                                                     |  |                                 | 233     |   |                                                                            |   | 1,858   |      |  |   | 17,560   |  
|Unrealized foreign exchange loss                                              |  |                                 | 5       |   |                                                                            |   | 1,900   |      |  |   | 1,663    |  
|Changes in operating assets and liabilities:                                  |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Investment tax credits recoverable                                            |  |                                 | 163     |   |                                                                            |   | (228    | )    |  |   | 8        |  
|Prepaid expenses and other current assets                                     |  |                                 | 222     |   |                                                                            |   | (182    | )    |  |   | (1,307   | )
|Deposits                                                                      |  |                                 | (48     | ) |                                                                            |   |        |      |  |   | (95      | )
|Accounts payable                                                              |  |                                 | 1,445   |   |                                                                            |   | (354    | )    |  |   | 2,439    |  
|Accrued expenses                                                              |  |                                 | 2,033   |   |                                                                            |   | 4,843   |      |  |   | 5,361    |  
|Income tax payable                                                            |  |                                 | (2,053  | ) |                                                                            |   | 2,336   |      |  |   | 284      |  
|Reimbursement from landlord                                                   |  |                                 |        |   |                                                                            |   | 30      |      |  |   | 30       |  
|Deferred income tax                                                           |  |                                 |        |   |                                                                            |   | (2,212  | )    |  |   | (222     | )
|                                                                              |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Net cash used in operating activities                                         |  |                                 | (42,774 | ) |                                                                            |   | (27,009 | )    |  |   | (112,689 | )
|                                                                              |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Cash flows from investing activities:                                         |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Purchases of property and equipment                                           |  |                                 | (421    | ) |                                                                            |   | (967    | )    |  |   | (3,231   | )
|Proceeds from sale of property and equipment                                  |  |                                 |        |   |                                                                            |   |        |      |  |   | 105      |  
|Increase in restricted cash                                                   |  |                                 |        |   |                                                                            |   |        |      |  |   | (282     | )
|Proceeds from sales and maturities of short-term investments                  |  |                                 | 64,129  |   |                                                                            |   | 2,827   |      |  |   | 83,418   |  
|Purchases of short-term investments                                           |  |                                 | (13,858 | ) |                                                                            |   | (18,360 | )    |  |   | (89,136  | )
|                                                                              |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Net cash provided by (used in) investing activities                           |  |                                 | 49,850  |   |                                                                            |   | (16,500 | )    |  |   | (9,126   | )
|                                                                              |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Cash flows from financing activities:                                         |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Proceeds from bank loan                                                       |  |                                 |        |   |                                                                            |   |        |      |  |   | 327      |  
|Payments on bank loan                                                         |  |                                 |        |   |                                                                            |   |        |      |  |   | (337     | )
|Proceeds from issuance of note payable                                        |  |                                 |        |   |                                                                            |   |        |      |  |   | 6,470    |  
|Payments on note payable                                                      |  |                                 |        |   |                                                                            |   | (9,964  | )    |  |   | (10,044  | )
|Principal payments under capital leases                                       |  |                                 |        |   |                                                                            |   |        |      |  |   | (1,273   | )
|Proceeds from issuance of convertible notes                                   |  |                                 |        |   |                                                                            |   |        |      |  |   | 11,763   |  
|Payments on convertible notes                                                 |  |                                 |        |   |                                                                            |   | (2,177  | )    |  |   | (2,177   | )
|Proceeds from issuance of convertible debentures                              |  |                                 |        |   |                                                                            |   |        |      |  |   | 14,028   |  
|Proceeds from issuance of long-term debt                                      |  |                                 |        |   |                                                                            |   | 20,000  |      |  |   | 20,000   |  
|Payments on long-term debt                                                    |  |                                 | (3,889  | ) |                                                                            |   |        |      |  |   | (3,889   | )
|Proceeds from issuance of preferred stock and warrants, net of issuance costs |  |                                 |        |   |                                                                            |   | 57,825  |      |  |   | 69,154   |  
|Proceeds from issuance of common stock, net of issuance costs                 |  |                                 | 77      |   |                                                                            |   |        |      |  |   | 53,760   |  
|Deferred financing costs                                                      |  |                                 |        |   |                                                                            |   | (1,612  | )    |  |   | (812     | )
|                                                                              |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Net cash (used in) provided by financing activities                           |  |                                 | (3,812  | ) |                                                                            |   | 64,072  |      |  |   | 156,970  |  
|                                                                              |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Net increase in cash and cash equivalents                                     |  |                                 | 3,264   |   |                                                                            |   | 20,563  |      |  |   | 35,155   |  
|Effect of foreign currency on cash and cash equivalents                       |  |                                 |        |   |                                                                            |   |        |      |  |   | 1,064    |  
|                                                                              |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Cash and cash equivalents, beginning of period                                |  |                                 | 32,955  |   |                                                                            |   | 12,104  |      |  |   |         |  
|                                                                              |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  
|Cash and cash equivalents, end of period                                      |  | $                               | 36,219  |   |                                                                            | $ | 32,667  |      |  | $ | 36,219   |  
|                                                                              |  |                                 |         |   |                                                                            |   |         |      |  |   |          |  



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##### Table of Contents

Targanta Therapeutics Corporation

(A development-stage company)

Condensed Consolidated Statements of Cash
Flows  (continued)

(in thousands)

(Unaudited)



|                                                                                                   |  |                                 |       |      |                                                                            |         |      |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | ---- | -------------------------------------------------------------------------- | ------- | ---- |  | - | ------- | -
|                                                                                                   |  | Nine Months Ended September 30, |       |      | For the Period from May 20, 1997 (date of inception) through September 30, |        
|                                                                                                   |  | 2008                            |       | 2007 |                                                                            |         | 2008 | 
|Supplemental disclosure of cash flow information                                                   |  |                                 |       |      |                                                                            |         |      |  |   |         |  
|Cash paid for interest                                                                             |  | $                               | 1,401 |      | $                                                                          | 299     |      |  | $ | 2,450   |  
|Cash paid for income taxes                                                                         |  | $                               | 2,042 |      | $                                                                          |        |      |  | $ | 2,042   |  
|                                                                                                   |  |                                 |      
|Supplemental disclosure of non-cash financing activities                                           |  |                                 |       |      |                                                                            |         |      |  |   |         |  
|Discount to note payable for warrant valuation                                                     |  | $                               |      |      | $                                                                          | (274    | )    |  | $ | 406     |  
|Issuance of InterMune convertible note                                                             |  | $                               |      |      | $                                                                          | 15,152  |      |  | $ | 24,000  |  
|Reduction of InterMune convertible note                                                            |  | $                               |      |      | $                                                                          | (3,000  | )    |  | $ | (3,000  | )
|Discount to convertible notes for warrant valuation and beneficial conversion features             |  | $                               |      |      | $                                                                          | 196     |      |  | $ | 11,715  |  
|Discount to convertible debentures for beneficial conversion features                              |  | $                               |      |      | $                                                                          |        |      |  | $ | 8,724   |  
|Conversion of convertible debt into preferred stock                                                |  | $                               |      |      | $                                                                          | (46,642 | )    |  | $ | (46,642 | )
|Reversal of beneficial conversion features in connection with conversion of convertible debentures |  | $                               |      |      | $                                                                          | (7,026  | )    |  | $ | (7,026  | )
|Discount to long-term debt for warrant valuation                                                   |  | $                               |      |      | $                                                                          | 253     |      |  | $ | 253     |  
|Accretion of redeemable convertible preferred stock to redemption value                            |  | $                               |      |      | $                                                                          | 225     |      |  | $ | 5,327   |  
|Conversion of preferred stock into common stock                                                    |  | $                               |      |      | $                                                                          |        |      |  | $ | 121,534 |  

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



7



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##### Table of Contents

Targanta Therapeutics Corporation

(A development-stage company)

Notes
to Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

1. Basis of Presentation

Targanta Therapeutics Corporation (Parent), a Delaware corporation, was incorporated on December 6, 2005 to become the
parent entity of Targanta Therapeutics Inc. (Targanta Québec) (previously PhageTech Inc.) and Targanta Therapeutics (Ontario) Inc. (Targanta Ontario) as part of a reorganization that was effective December 23,
2005. Targanta Québec, a Canadian company, was incorporated on May 20, 1997 and Targanta Ontario, a Canadian company, was incorporated on December 22, 2005. Targanta Therapeutics Corporation together with its subsidiaries (the
Company) is a biopharmaceutical company focused on developing and commercializing antibacterial drugs to treat serious infections acquired or treated in the hospital or other institutional settings. Oritavancin, the Companys lead
product candidate, is being developed as a once-daily, semi-synthetic lipoglycopeptide intravenous antibiotic and has shown rapid bactericidal activity against all studied clinically relevant serious gram-positive pathogens, including
multi-resistant strains. The Company has commenced its planned principal operations; however, the Company has not generated any revenue from its operations. Accordingly, the Company is considered to be in the development stage as defined in
Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. The Companys activities are carried out at its facilities in Cambridge, Massachusetts; Indianapolis,
Indiana; and Montreal, Québec, Canada.

The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included.
When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements.
Actual results could differ from those estimates. Additionally, operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for any other interim period or for the
year ending December 31, 2008.

The accompanying unaudited condensed consolidated financial statements and notes thereto should be
read in conjunction with the audited consolidated financial statements for the year ended December 31, 2007 included in the Companys Annual Report on Form 10-K.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Parent and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments with original maturities of three months or less at acquisition date to be cash
equivalents. At September 30, 2008, the Company had invested its excess cash in money market accounts, overnight investment accounts, certificates of deposit, commercial paper and debt obligations of government agencies. At December 31,
2007, the Company had invested its excess cash in money market accounts, overnight investment accounts, certificates of deposit and commercial paper. The Company did not hold any investments in mortgage-backed or auction rate securities at
September 30, 2008 or December 31, 2007.



8



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##### Table of Contents

Targanta Therapeutics Corporation

(A development-stage company)

Notes to Condensed Consolidated Financial
Statements  (continued)

(in thousands, except share and per share amounts)

(Unaudited)



Short-term Investments

The Company accounts for its investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115). In accordance with SFAS
No. 115, the Company has classified all of its investments as available-for-sale. The Companys investments are reported at fair value, with any unrealized gains or losses reported as a separate component of stockholders equity as
accumulated other comprehensive income.

Short-term investments included the following at September 30, 2008 and December 31,
2007:



|                                        |  |               |        |                 |   |                  |  |   |           |   |  |   |       
|--------------------------------------- |  | ------------- | ------ | --------------- | - | ---------------- |  | - | --------- | - |  | - | ------
|                                        |  | Amortizedcost |        | Unrealizedgains |   | Unrealizedlosses |  |   | Fairvalue
|September 30, 2008                     |  |               |        |                 |   |                  |  |   |           |   |  |   |       
|Commercial paper                        |  | $             | 5,885  |                 | $ | 8                |  | $ |          |   |  | $ | 5,893 
|Debt obligations of government agencies |  |               | 497    |                 |   |                 |  |   |          |   |  |   | 497   
|                                        |  |               |        |                 |   |                  |  |   |           |   |  |   |       
|                                        |  | $             | 6,382  |                 | $ | 8                |  | $ |          |   |  | $ | 6,390 
|                                        |  |               |        |                 |   |                  |  |   |           |   |  |   |       
|December 31, 2007                      |  |               |        |                 |   |                  |  |   |           |   |  |   |       
|Commercial paper                        |  | $             | 34,080 |                 | $ | 121              |  | $ |          |   |  | $ | 34,201
|Corporate obligations                   |  |               | 4,861  |                 |   |                 |  |   | (6        | ) |  |   | 4,855 
|Asset backed securities                 |  |               | 17,725 |                 |   | 18               |  |   | (1        | ) |  |   | 17,742
|                                        |  |               |        |                 |   |                  |  |   |           |   |  |   |       
|                                        |  | $             | 56,666 |                 | $ | 139              |  | $ | (7        | ) |  | $ | 56,798
|                                        |  |               |        |                 |   |                  |  |   |           |   |  |   |       

All short-term investments have contractual maturities of less than one year.

The aggregate fair value of investments with unrealized losses was $0 and approximately $6,824 at September 30, 2008 and December 31, 2007,
respectively. At September 30, 2008, no investments were in an unrealized loss position. The Company reviews its investments for other-than-temporary impairment whenever the fair value of an investment is less than amortized cost and evidence
indicates that an investments carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment
until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.

The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. Gross realized gains and losses on the sales of investments have not been
material to the Companys consolidated results of operations.

Restricted Cash

The Company maintains restricted cash in the form of a guaranteed investment certificate of approximately $472 (CAN$500) collateralizing an available
credit facility of approximately $472 (CAN$500), comprised of a credit line of approximately $264 (CAN$280) and letters of guarantee maturing in March 2009 amounting to approximately $208 (CAN$220).

Concentration of Credit Risk

The Company maintains
its cash, cash equivalents, short-term investments and restricted cash with several financial institutions and believes that it is subject to minimal credit risk. The Company performs periodic evaluations of the relative credit quality of
investments and the Companys policy is designed to limit exposure to any one institution or type of investment. The primary objective of the Companys investment strategy is the preservation of the principal invested. Investment tax
credits recoverable were due from the Canadian federal and Québec provincial governments. The Company does not maintain foreign exchange contracts or other off-balance sheet financial instruments.



9



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##### Table of Contents

Targanta Therapeutics Corporation

(A development-stage company)

Notes to Condensed Consolidated Financial
Statements  (continued)

(in thousands, except share and per share amounts)

(Unaudited)



Fair Value of Financial Instruments

Cash, cash equivalents, short-term investments, restricted cash, investment tax credits recoverable, accounts payable, accrued expenses and the current
portion of long-term debt are carried at amounts that approximate fair value at September 30, 2008 and December 31, 2007 due to their short-term maturities.

Long-term debt approximates fair value at September 30, 2008, as it bears interest at a rate approximating a market interest rate.

On January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements (SFAS No. 157) for its financial assets and other items that are recognized or
disclosed at fair value on a recurring basis. This statement, among other things, defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February 2008, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position 157-2 (FSP 157-2), which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008 and interim periods within those years. The partial adoption of SFAS No. 157 for financial assets and liabilities
recognized at fair value on a recurring basis, in accordance with FSP 157-2, did not have a material effect on the Companys consolidated financial statements.

SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumption, SFAS No. 157 established a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:



| |  |  | Level 1  Observable inputs such as quoted prices in active markets;
| | - |  | --------------------------------------------------------------------



| |  |  | Level 2  Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

The Companys investment portfolio includes many fixed income securities that do not always trade on a daily basis.
As a result, the pricing services used by the Company applied other available information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. In
addition, model processes were used to assess interest rate impact and develop prepayment scenarios. These models take into consideration relevant credit information, perceived market movements, sector news and economic events. The inputs into these
models may include benchmark yields, reported trades, broker-dealer quotes, issuer spreads and other relevant data.

In accordance with the
disclosure provisions of SFAS No. 157, the Company has classified assets measured at fair value on a recurring basis as follows:



|                              |  |                   |        |                                                             |   |                                            |  |                                        |       |  |   |  
|----------------------------- |  | ----------------- | ------ | ----------------------------------------------------------- | - | ------------------------------------------ |  | -------------------------------------- | ----- |  | - | -
|                              |  |                   |        | Fair Value Measurements at Reporting Date Using            
|Description                   |  | September 30,2008 |        | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Cash equivalents              |  | $                 | 19,309 |                                                             | $ | 19,309                                     |  | $                                      |      |  | $ | 
|Available-for-sale securities |  | $                 | 6,390  |                                                             | $ | 497                                        |  | $                                      | 5,893 |  | $ | 



10



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##### Table of Contents

Targanta Therapeutics Corporation

(A development-stage company)

Notes to Condensed Consolidated Financial
Statements  (continued)

(in thousands, except share and per share amounts)

(Unaudited)



Research and Development Costs

The Company charges research and development costs to operations as incurred in accordance with SFAS No. 2, Accounting for Research and Development Costs and EITF Issue No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. Research and development costs are comprised of costs incurred in performing research and development activities, including salaries,
benefits, facilities, research-related overhead, contracted services, license fees, and other external costs. Acquired in-process research and development having no alternative future use is written off at the time of acquisition. In addition, as
pre-established research and development milestones under the Companys various agreements are achieved, they are charged to acquired in-process research and development expense. Acquired in-process research and development expense for the
three months ended September 30, 2007 includes the fair value of the securities issued to InterMune, Inc. (InterMune) in connection with the Companys achievement of the second milestone under the convertible note the Company
had initially issued to InterMune in December 2005 in connection with the Companys acquisition of rights to oritavancin. Acquired in-process research and development expense for the nine months ended September 30, 2007 includes a $2,000
cash payment and the fair value of the securities issued to InterMune in connection with the Companys achievement of the milestones under the convertible note.

Net Loss per Share

The Company calculates net loss per share in accordance with SFAS No. 128,
Earnings Per Share. Basic and diluted net loss per common share was determined by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The Companys potentially dilutive shares, which
include convertible preferred stock, outstanding stock options exercisable for shares of common stock and warrants exercisable for common and preferred stock, have not been included in the computation of diluted net loss per share for all periods as
the result would be anti-dilutive.



|                                                                                                 |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |           |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | ---------- | - | ------------------------------ | - | ------- | ---- |  | - | ---------- | - |  | - | --------- | -
|                                                                                                 |  | Three Months EndedSeptember 30, |            |   | Nine months EndedSeptember 30, |  
|                                                                                                 |  | 2008                            |            |   | 2007                           |   |         | 2008 |  |   | 2007       |  
|As reported:                                                                                     |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |           |  
|Net loss                                                                                         |  | $                               | (12,657    | ) |                                | $ | (21,834 | )    |  | $ | (47,387    | ) |  | $ | (52,682   | )
|Accretion of Series B Redeemable Convertible Preferred Stock dividends                           |  |                                 |           |   |                                |   |        |      |  |   |           |   |  |   | (225      | )
|                                                                                                 |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |           |  
|Net loss applicable to common stockholders                                                       |  |                                 | (12,657    | ) |                                |   | (21,834 | )    |  |   | (47,387    | ) |  |   | (52,907   | )
|                                                                                                 |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |           |  
|Weighted average number of shares of common stock used in net loss per share  basic and diluted |  |                                 | 20,973,107 |   |                                |   | 25,282  |      |  |   | 20,970,959 |   |  |   | 25,282    |  
|                                                                                                 |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |           |  
|Net loss per share applicable to common stockholders  basic and diluted                         |  | $                               | (0.60      | ) |                                | $ | (863.02 | )    |  | $ | (2.26      | ) |  | $ | (2,092.69 | )
|                                                                                                 |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |           |  

The following potentially dilutive securities have been excluded from the computation of diluted
weighted average shares outstanding during the three and nine months ended September 30, 2008 and 2007.



|                            |  |                                          |  |           
|--------------------------- |  | ---------------------------------------- |  | ----------
|                            |  | Three and Nine Months EndedSeptember 30,
|                            |  | 2008                                     |  | 2007      
|Convertible preferred stock |  |                                         |  | 10,653,260
|Warrants outstanding        |  | 850,287                                  |  | 611,362   
|Options outstanding         |  | 3,815,159                                |  | 2,377,940 



11



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##### Table of Contents

Targanta Therapeutics Corporation

(A development-stage company)

Notes to Condensed Consolidated Financial
Statements  (continued)

(in thousands, except share and per share amounts)

(Unaudited)



Comprehensive Income (Loss)

The Company has applied the provisions of SFAS No. 130, Reporting Comprehensive Income, which requires that all components of comprehensive income (loss) be reported in the period in which they are
recognized. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other than the Companys net loss, the other
element of comprehensive income (loss) impacting the Company is unrealized gains (losses) on marketable securities.



|                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                |  | 2008                            |         |   | 2007                           |   |         | 2008 |  |   | 2007    |  
|As reported:                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss applicable to common stockholders      |  | $                               | (12,657 | ) |                                | $ | (21,834 | )    |  | $ | (47,387 | ) |  | $ | (52,907 | )
|Other comprehensive income (loss):              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Unrealized gain (loss) on marketable securities |  |                                 | (24     | ) |                                |   | 5       |      |  |   | (138    | ) |  |   | 27      |  
|                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive loss                              |  | $                               | (12,681 | ) |                                | $ | (21,829 | )    |  | $ | (47,525 | ) |  | $ | (52,880 | )
|                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

Canadian Part VI.I Tax

The Company has accrued the potential Canadian Part VI.I tax related to the cumulative dividend on its Series B Redeemable Convertible Preferred Stock. The Company applied the provisions of EITF Issue No. 95-9,
Accounting for Tax Effects of Dividends in France in Accordance with FASB Statement No. 109, in accounting for the Canadian Part VI.I tax, which states that unless specific criteria are met, taxes on distributions should be treated as an
income tax expense. The Part VI.I tax liability of approximately $2,731 was presented as a current tax liability in the December 31, 2007 consolidated balance sheet. In February 2008, the Company paid approximately $2,026 of the Part VI.I tax
liability to the Canadian tax authority. The Canadian government voted to approve, but has not given final approval to, a reduction in the Part VI.I tax rate. The February 2008 payment was made at the reduced tax rate. The remaining Part VI.I tax
liability of approximately $636 is presented as a current tax liability in the September 30, 2008 condensed consolidated balance sheet and will be reversed if and when the Canadian government finally approves the Part VI.I tax rate reduction.

Investment Tax Credits

Canadian
federal and Québec and Ontario provincial investment tax credits are accounted for as a reduction of the income tax expense in the period in which the credits are earned and when there is reasonable assurance of their recovery.

Segment and Geographic Information

SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131), established standards for reporting information about operating segments in annual financial statements and requires selected
information about operating segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also established standards for disclosures about products and services and geographic areas. Operating segments are defined
as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The
Company views its operations and manages its business in one operating segment and the Company operates in only two geographic segments, the United States and Canada.



12



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##### Table of Contents

Targanta Therapeutics Corporation

(A development-stage company)

Notes to Condensed Consolidated Financial
Statements  (continued)

(in thousands, except share and per share amounts)

(Unaudited)



The Companys long-lived assets consist of the following:



|         |  |                   |       |                  |   |      
|-------- |  | ----------------- | ----- | ---------------- | - | -----
|         |  | September 30,2008 |       | December 31,2007
|Domestic |  | $                 | 879   |                  | $ | 850  
|Canada   |  |                   | 550   |                  |   | 500  
|         |  |                   |       |                  |   |      
|         |  | $                 | 1,429 |                  | $ | 1,350
|         |  |                   |       |                  |   |      

Recent Accounting Pronouncements

In December 2007, EITF 07-01, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property
(EITF 07-01), was issued. EITF 07-01 prescribes the accounting for collaborations, requiring that, when certain characteristics exist in collaboration relationships, certain transactions between collaborators be recorded within expenses
in the statement of operations on either a gross or net basis. The Company currently has no collaborations that are impacted by EITF 07-01. The Company will evaluate any future collaborations under this guidance, as appropriate.

Reclassifications

Certain reclassifications were
made to prior year balances to conform to the current years presentation.

3. Accrued Expenses

Accrued expenses consist of the following:



|                                               |  |                   |       |                  |   |      
|---------------------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                               |  | September 30,2008 |       | December 31,2007
|Payroll and benefits                           |  | $                 | 1,970 |                  | $ | 1,382
|Professional fees                              |  |                   | 532   |                  |   | 545  
|Clinical expenses                              |  |                   | 1,106 |                  |   | 3,202
|Manufacturing and process development expenses |  |                   | 2,104 |                  |   | 301  
|Other                                          |  |                   | 2,330 |                  |   | 443  
|                                               |  |                   |       |                  |   |      
|                                               |  | $                 | 8,042 |                  | $ | 5,873
|                                               |  |                   |       |                  |   |      

4. Commitments

The Company leases its laboratory and office space under operating lease agreements with various terms and renewal options with lease expirations ranging from 2009 through 2012. In addition to minimum lease
commitments, these lease agreements require the Company to pay its pro rata share of property taxes and building operating expenses.



13



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##### Table of Contents

Targanta Therapeutics Corporation

(A development-stage company)

Notes to Condensed Consolidated Financial
Statements  (continued)

(in thousands, except share and per share amounts)

(Unaudited)



5. Stock-Based Compensation

Stock Option Plans

At September 30, 2008, the Companys 2005 Stock Option Plan (2005
Plan) provided for the grant of options for the purchase of 2,305,675 shares of common stock plus any shares of common stock covered by outstanding options under the Re-Amended and Restated Stock Option Plan of Targanta Québec
(Targanta Québec Plan) that are forfeited and returned for reissuance under the Targanta Québec Plan, such number not to exceed 3,597 shares of common stock. As a result, at September 30, 2008, the maximum aggregate
number of shares of common stock available for issuance under the 2005 Plan was 2,309,272, including 433 shares of common stock which are not available for future grant. The Company is no longer permitted to make grants under the 2005 Plan or the
Targanta Québec Plan but will honor exercises of outstanding options thereunder in accordance with the terms of such options.

At
September 30, 2008, the Companys 2007 Stock Option and Incentive Plan (2007 Plan) provided for the grant of options for the purchase of 2,060,727 shares of common stock. The 2007 Plan permits the Company to make grants of
incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, unrestricted stock awards and cash-based awards. The number of shares available for future grant under the 2007 Plan may
be increased each year by an amount determined by the Companys board of directors not to exceed 3.5% of all shares of the Companys capital stock outstanding on December 31st of each preceding year. Accordingly, on February 6,
2008, the Companys board of directors increased the aggregate number of shares available for grant under the 2007 Plan by 733,921. Generally, shares that are forfeited or canceled from awards under the 2007 Plan also will be available for
future awards. In addition, awards that are returned to the Companys 2005 Plan as a result of their expiration, cancellation, termination or repurchase are automatically made available for issuance under the 2007 Plan.

The Company adopted SFAS No. 123 (revised 2004), Share Based Payment (SFAS No. 123(R)), effective January 1, 2006. In
connection with the adoption of SFAS No. 123(R), the Company reassessed the valuation methodology for stock options and the related input assumptions. The assessment of the valuation methodology resulted in the continued use of the
Black-Scholes model. Since the company completed its initial public offering in October 2007, it did not have relevant historical data as a publicly traded company to evaluate its expected term and volatility. As such, the Company analyzes the
expected term and volatility of several peer companies to support the assumptions it uses in its fair value calculations. The Company averages the volatilities and expected terms of the peer companies with sufficient trading history, similar vesting
terms and similar in-the-money option status to generate the assumptions detailed below.

The following table summarizes the weighted
average assumptions the Company used in its grant date fair value calculations under SFAS No. 123(R):



|                        |  |                                 |   |  |                                |   |  |           |   |  |           |  
|----------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | --------- | - |  | --------- | -
|                        |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                        |  | 2008                            |   |  | 2007                           |   |  | 2008      |   |  | 2007      |  
|Risk-free interest rate |  | 3.37                            | % |  | 4.68                           | % |  | 2.96      | % |  | 4.51      | %
|Expected dividend yield |  | None                            |   |  | None                           |   |  | None      |   |  | None      |  
|Expected option term    |  | 5.1 years                       |   |  | 5.4 years                      |   |  | 5.0 years |   |  | 5.4 years |  
|Volatility              |  | 57.4                            | % |  | 62.2                           | % |  | 51.9      | % |  | 64.0      | %

SFAS No. 123(R) requires the application of an estimated forfeiture rate to current period
expense to recognize compensation expense only for those awards expected to vest. The Company estimates forfeitures based upon comparable companies data and adjusts its estimate of forfeitures if actual forfeitures differ, or are expected to
differ from the Companys estimates. Subsequent changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock-based compensation expense in future
periods.



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##### Table of Contents

Targanta Therapeutics Corporation

(A development-stage company)

Notes to Condensed Consolidated Financial
Statements  (continued)

(in thousands, except share and per share amounts)

(Unaudited)



The weighted average grant date fair value of options granted during the three months ended
September 30, 2008 and 2007 was $3.26 and $2.56, respectively, and the weighted average grant date fair value of options granted during the nine months ended September 30, 2008 and 2007 was $3.83 and $2.33, respectively, based on the
assumptions in the Black-Scholes valuation model discussed above.

As of September 30, 2008, there was $7,072 of unrecognized
stock-based compensation expense. These costs are expected to be recognized over a weighted average period of 2.8 years.

For the three and
nine months ended September 30, 2008 and 2007 and the period from May 20, 1997 (date of inception) to September 30, 2008, the total stock-based compensation expense in connection with stock options issued and outstanding amounted to:



|                         |  |                                 |     |                                |   |                                                                            |  |      |       |      |   |       |  |   |      
|------------------------ |  | ------------------------------- | --- | ------------------------------ | - | -------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                         |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30, |   | For the Period from May 20, 1997 (date of inception) through September 30,
|                         |  | 2008                            |     | 2007                           |   | 2008                                                                       |  | 2007 |       | 2008
|Stock-based compensation |  | $                               | 761 |                                | $ | 399                                                                        |  | $    | 2,091 |      | $ | 1,749 |  | $ | 5,769

A summary of the status of the Companys stock option plans at September 30, 2008 and
changes during the nine months then ended is presented in the table below:



|                                                 |  |                                             |   |  |                                        |      |                                                   |      |                         |   |      
|------------------------------------------------ |  | ------------------------------------------- | - |  | -------------------------------------- | ---- | ------------------------------------------------- | ---- | ----------------------- | - | -----
|                                                 |  | Shares ofCommon StockAttributable toOptions |   |  | WeightedAverageExercisePrice ofOptions |      | WeightedAverageRemainingContractualTerm(in years) |      | AggregateIntrinsicValue
|Outstanding at December 31, 2007                 |  | 2,538,155                                   |   |  | $                                      | 4.44 |                                                   |      |                         |   |      
|Granted                                          |  | 1,443,050                                   |   |  |                                        | 8.04 |                                                   |      |                         |   |      
|Exercised                                        |  | (19,130                                     | ) |  |                                        | 4.04 |                                                   |      |                         |   |      
|Cancelled                                        |  | (146,916                                    | ) |  |                                        | 6.81 |                                                   |      |                         |   |      
|                                                 |  |                                             |   |  |                                        |      |                                                   |      |                         |   |      
|Outstanding at September 30, 2008                |  | 3,815,159                                   |   |  | $                                      | 5.71 |                                                   | 8.89 |                         | $ | 6,143
|                                                 |  |                                             |   |  |                                        |      |                                                   |      |                         |   |      
|Vested or expected to vest at September 30, 2008 |  | 3,696,855                                   |   |  | $                                      | 5.69 |                                                   | 8.88 |                         | $ | 5,996
|                                                 |  |                                             |   |  |                                        |      |                                                   |      |                         |   |      
|Exercisable at September 30, 2008                |  | 1,449,086                                   |   |  | $                                      | 4.81 |                                                   | 8.61 |                         | $ | 3,195
|                                                 |  |                                             |   |  |                                        |      |                                                   |      |                         |   |      



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various factors, including those set forth under the title Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, our
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 and this Quarterly Report. The interim financial statements and this Managements Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2007 and the related Managements Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained
in our Annual Report on Form 10-K filed with the SEC on March 27, 2008. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a
biopharmaceutical company focused on the development and commercialization of innovative antibiotics for serious infections treated or acquired in hospitals and other institutional settings. Our lead product candidate is oritavancin, a novel
intravenous antibiotic, for the treatment of serious gram-positive bacterial infections including complicated skin and skin structure infections (cSSSI) and bacteremia. In February 2008, we submitted a New Drug Application
(NDA) to the U.S. Food and Drug Administration (FDA) seeking to commercialize oritavancin for the treatment of cSSSI, including infections caused by methicillin-resistant Staphylococcus aureus (MRSA). We
are hopeful we will receive U.S. regulatory approval to market oritavancin by the end of 2008. In June 2008, our application for Marketing Authorization Approval (MAA) was accepted for review by the European Medicines Agency
(EMEA). Our MAA seeks approval to commercialize oritavancin for the treatment of complicated skin and soft tissue infections (cSSTI) in Europe. We are hopeful we will receive European Union regulatory approval to market
oritavancin in 2009. We plan on commercializing oritavancin through our own direct sales force in the U.S. and to out-license rights to commercialize oritavancin to third parties in other countries. We are conducting pre-clinical development of an
oral version of oritavancin for the potential treatment of C. difficile. In addition, we have completed our planned pre-clinical development of another antibiotic candidate for the potential treatment of osteomyelitis, and we hope to further its
development following the commercial launch of oritavancin, if approved, in the United States. We continually evaluate opportunities for potential in-licensing of other antibiotics for the treatment of hospital-based infections.

In September 2008, we announced positive, preliminary results from a Phase 2 clinical study of oritavancin entitled, Single or Infrequent Doses for
the Treatment of Complicated Skin and Skin Structure Infections, or SIMPLIFI. This was a three-arm trial that examined the efficacy and safety of a single 1,200 mg dose of oritavancin, compared to an infrequent dosing regimen of 800 mg of
oritavancin on day 1 followed by an optional 400 mg dose of oritavancin on day 5, versus 200 mg of oritavancin given daily for 3-7 days, or the dose used in the larger of our two Phase 3 clinical trials. The results from SIMPLIFI showed comparable
efficacy and safety across all three treatment arms. Based on these study results, we expect to begin a larger confirmatory clinical trial in 2009.

We acquired worldwide rights to oritavancin from InterMune, Inc. (InterMune) in December 2005, and believe that since then we have greatly improved the commercial and economic prospects for the drug by resolving several
important issues with the FDA and by substantially lowering the royalty rate that may be payable to Eli Lilly and Company (Lilly), the original discoverer of oritavancin. Our strategy is to capitalize on the unique attributes of
oritavancin to develop it into a leading therapy worldwide for the treatment of serious gram-positive infections, initially for cSSSI and subsequently for other indications.

We were incorporated as a Delaware corporation on December 6, 2005 and initiated operations through our Québec subsidiary in May 1997 in
Montreal, Québec. To date, we have dedicated substantially all of our activities to the research and development of our drug candidates. Accordingly, we are considered to be in the development stage at September 30, 2008, as defined in
SFAS No. 7, Accounting and Reporting by Development Stage Enterprises. Our fiscal year ends on December 31 and we operate as one reportable segment. Prior to our acquisition of oritavancin in December 2005, we were focused on
early-stage research in the area of antibiotics and the application of our proprietary phage technology.

On October 9, 2007, the SEC
declared our Registration Statement on Form S-1, as amended, for our initial public offering of 5.75 million shares of our common stock (Registration No. 333-142842) effective. We sold the shares of common stock in this initial public
offering at a price of $10.00 per share. We received net proceeds of approximately $51.1 million after deducting underwriting discounts and commissions and offering expenses of approximately $2.3 million.



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##### Table of Contents

We have not generated any revenue to date from product sales and have incurred significant operating
losses since our inception in 1997. We incurred net losses of $63.3 million for the year ended December 31, 2007 and $47.4 million for the nine months ended September 30, 2008. As of September 30, 2008, we had a deficit accumulated
during the development stage of $174.3 million and we expect to incur losses for the foreseeable future.

We expect to incur substantial
expenditures in the foreseeable future for the continued development of our product candidates and, if we obtain regulatory approval, for the commercialization of those products. We expect to continue to incur operating losses for at least the next
several years and we will need additional financing to support our activities. We will seek to fund our operations through public or private equity or debt financings or other sources, such as collaborations and revenue from the sale of oritavancin,
if approved by the FDA. Adequate additional funding may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our
business strategies. If adequate funds are not available to us, we may be required to delay, reduce or eliminate research and development programs, reduce or eliminate commercialization efforts, seek to obtain funds through arrangements with
collaborators or others on terms that may be unfavorable to us or pursue merger or acquisition strategies.

Critical Accounting Policies

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as
critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates  which also would have been reasonable 
could have been used, which would have resulted in different financial results. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2007. There have been no changes to these critical accounting policies since December 31, 2007.

Results of Operations

Three and nine months ended September 30, 2008 compared to three and nine months ended September 30,
2007

Revenue. We recorded no revenue during the three and nine months ended September 30, 2008 or 2007.

Operating Expenses

The following table
summarizes our operating expenses for the three and nine months ended September 30, 2008 and 2007:



|                                                     |  |                                 |       |                              |   |        |                                |      |                              |  |   |        |  |   |        |  |      |   
|---------------------------------------------------- |  | ------------------------------- | ----- | ---------------------------- | - | ------ | ------------------------------ | ---- | ---------------------------- |  | - | ------ |  | - | ------ |  | ---- | --
|                                                     |  | Three Months EndedSeptember 30, |       | PercentageIncrease(Decrease) |   |        | Nine months EndedSeptember 30, |      | PercentageIncrease(Decrease) | 
|                                                     |  | 2008                            |       | 2007                         |   |        | 2008                           |      | 2007                         | 
|                                                     |  | (in thousands)                  |       |                              |   |        | (in thousands)                 |      |                              | 
|Operating expenses                                   |  |                                 |       |                              |   |        |                                |      |                              |  |   |        |  |   |        |  |      |   
|Research and development (1)                         |  | $                               | 7,544 |                              | $ | 10,974 |                                | (31  | )%                           |  | $ | 34,682 |  | $ | 25,818 |  | 34   | % 
|Acquired in-process research and development         |  | $                               |      |                              | $ | 7,652  |                                | (100 | )%                           |  | $ |       |  | $ | 17,152 |  | (100 | )%
|General and administrative (1)                       |  | $                               | 4,828 |                              | $ | 2,452  |                                | 97   | %                            |  | $ | 12,635 |  | $ | 7,234  |  | 75   | % 
|(1)    Includes stock-based compensation expense of: | 
|                                                     |  |                                 |       |                              |   |       
|Research and development                             |  | $                               | 364   |                              | $ | 190    |                                |      |                              |  | $ | 933    |  | $ | 937    |  |      |   
|General and administrative                           |  | $                               | 397   |                              | $ | 209    |                                |      |                              |  | $ | 1,158  |  | $ | 812    |  |      |   



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##### Table of Contents

Research and development expense

Research and development expense for the three months ended September 30, 2008 was $7.5 million, compared to $11.0 million for the three months ended
September 30, 2007. The $3.5 million decrease during the three months ended September 30, 2008 was primarily the result of a $3.5 million decrease in contract research expense, which included a decrease of $2.8 million in pre-clinical and
clinical trials expense primarily resulting from the SIMPLIFI trial approaching completion, as well as a decrease of $0.7 million in third-party product manufacturing, validation and process development expense incurred in preparation for the
commercial launch of oritavancin. Additional factors that contributed to the decrease in research and development expense were a $0.8 million decrease in consultant costs primarily related to the completion of our NDA and MAA filings. These costs
were offset by a $0.5 million increase in salaries and benefits expense, mainly due to an increased number of employees working on the oritavancin program and a $0.2 million increase in stock-based compensation expense due to the incremental expense
related to the options granted in 2008.

Research and development expense for the nine months ended September 30, 2008 was $34.7
million, compared to $25.8 million for the nine months ended September 30, 2007. The $8.9 million increase during the nine months ended September 30, 2008 was primarily the result of a $6.2 million increase in contract research expense,
which included an increase of $4.1 million in pre-clinical and clinical trials expense resulting from clinical trials conducted and in-vitro clinical database work performed for the oritavancin program, as well as an increase of $2.1 million in
third-party product manufacturing, validation and process development expense incurred in preparation for the commercial launch of oritavancin. Additional factors that contributed to the increase in research and development expense were a $1.6
million increase in regulatory filing fees, due to the filing of our NDA with the FDA and our MAA with the EMEA, and a $2.3 million increase in salaries and benefits expense, mainly due to an increased number of employees working on the oritavancin
program. This was partially offset by a decrease of $0.2 million in professional services, primarily due to decreased consulting fees in the three months ended September 30, 2008 related to the completion of our NDA and MAA filings.

Acquired in-process research and development expense

We did not record any acquired in-process research and development expense for the three months ended September 30, 2008, compared to $7.7 million for the three months ended September 30, 2007. The $7.7
million acquired in-process research and development expense incurred during the three months ended September 30, 2007 was due to our achievement of the second milestone under the convertible note we had initially issued to InterMune in
December 2005 in connection with our acquisition of rights to oritavancin. This $7.7 million expense reflects the fair value of the shares of our preferred stock and warrants to purchase shares of our preferred stock that we issued to InterMune upon
our achievement of this milestone.

We did not record any acquired in-process research and development expense for the nine months ended
September 30, 2008, compared to $17.2 million for the nine months ended September 30, 2007. The $17.2 million acquired in-process research and development expense incurred during the nine months ended September 30, 2007 was due to a
$2.0 million cash milestone payment to InterMune and a total of $15.2 million of expense related to our achievement of the first and second milestones under the convertible note we had initially issued to InterMune in December 2005 in connection
with our acquisition of rights to oritavancin. This $15.2 million expense reflects the fair value of the shares of our preferred stock and warrants to purchase shares of our preferred stock that we issued to InterMune upon our achievement of these
milestones.

General and administrative expense

General and administrative expense for the three months ended September 30, 2008 was $4.8 million, compared to $2.5 million for the three months ended September 30, 2007. The $2.3 million increase during the
three months ended September 30, 2008 was primarily the result of a $0.8 million increase in salaries and benefits expense resulting from the hiring of additional administrative staff as we develop our infrastructure to support the commercial
launch of oritavancin and a $0.9 million increase in professional and consulting fees, comprised of a $0.5 million increase in consulting fees primarily related to oritavancin pre-launch expenses, investor relations/public relations and
administrative support expenses, a $0.2 million increase in recruiting expense related to a search for two new board members and a $0.2 million increase in insurance, legal fees and patent expenses. Additional factors contributing to the increase in
general and administrative expense during the three months ended September 30, 2008 were a $0.1 million increase in expense related to meeting the regulatory requirements associated with being a public company and a $0.2 million increase in
stock-based compensation expense due to the incremental expense related to the options granted in 2008.



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General and administrative expense for the nine months ended September 30, 2008 was $12.6 million,
compared to $7.2 million for the nine months ended September 30, 2007. The $5.4 million increase during the nine months ended September 30, 2008 was primarily the result of a $1.9 million increase in salaries and benefits expense resulting
from the hiring of additional administrative staff as we develop our infrastructure to support the commercial launch of oritavancin; and a $2.2 million increase in professional and consulting fees, comprised of a $1.5 million increase in consulting
and recruiting fees primarily related to oritavancin pre-launch expenses, investor relations/public relations and administrative support expenses and a $0.9 million increase in insurance, legal fees and patent expenses. Additional factors
contributing to the increase in general and administrative expense during the nine months ended September 30, 2008 were a $0.3 million increase in expense related to meeting the regulatory requirements associated with being a public company and
$0.3 million increase in stock-based compensation expense due to the incremental expense related to the options granted in 2008.

Interest income

Interest income for the three and nine months ended September 30, 2008 was $0.3 million and $1.6 million, respectively,
compared to $0.6 million and $1.6 million for the three and nine months ended September 30, 2007, respectively. The $0.3 million, or 50%, decrease for the three months ended September 30, 2008 was primarily due to lower market interest
rates on higher average cash, cash equivalents and short-term investments balances. Though the average cash, cash equivalents and short-term investments balances were higher for the nine months ended September 30, 2008 as compared to the nine
months ended September 30, 2007, the decline in interest rates during that period resulted in the interest income for the nine months ended September 30, 2008 to be consistent with that of the comparable 2007 period. Our cash, cash
equivalents and short-term investments balances were higher in 2008 as a result of the $20.0 million of proceeds we received upon our issuance of the term notes to Merrill Lynch Capital and two other lenders in late September 2007 (the MLC
Term Note) and the $51.1 million of net proceeds from our October 2007 initial public offering.

Interest expense

Interest expense for the three months ended September 30, 2008 was $0.6 million compared to $0.6 million for the three months ended
September 30, 2007. In the three months ended September 30, 2008, a $0.8 million decrease in interest expense related to the repayment of the loan to our former lender Investissement Québec (IQ) by our Québec
subsidiary plus a reduction of interest expense in the three months ended September 30, 2007 of $0.3 million related to the change in fair value of the IQ warrant was offset by a $0.5 million increase in interest expense related to the MLC term
note. Interest expense for the nine months ended September 30, 2008 was $1.8 million compared to $2.5 million for the nine months ended September 30, 2007. The decrease of $0.7 million, or 28%, for the nine months ended September 30,
2008 was primarily due to a $2.8 million decrease in interest expense and a $0.3 million decrease in amortization of deferred financing costs resulting from the January 2007 conversion of the outstanding convertible notes and convertible debentures
into shares of our preferred stock and the repayment of the loan to IQ by our Québec subsidiary. This decrease was partially offset by a $1.7 million increase in interest expense related to the MLC Term Note in the nine months ended
September 30, 2008 and a reduction of interest expense in the nine months ended September 30, 2007 of $0.7 million related to the change in the fair value of the IQ warrant.

Foreign Exchange loss

Foreign exchange loss for the three months ended September 30,
2008 was $34,000, compared to a foreign exchange loss of $795,000 in the three months ended September 30, 2007. Foreign exchange loss for the nine months ended September 30, 2008 was $48,000, compared to $1.6 million in the nine months
ended September 30, 2007. The change in the foreign exchange loss of $761,000 or 96%, and $1.6 million, or 97%, in the three and nine months ended September 30, 2008, respectively, was primarily the result of the effect that the stronger
Canadian dollar had on the Canadian dollar liabilities (primarily the loan from IQ) of our Québec subsidiary in 2007. In 2008, the combination of the declining exchange rate for the Canadian dollar and the repayment of the loan to IQ by our
Québec subsidiary in September 2007 resulted in lower foreign exchange losses.

Income tax benefit

Income tax benefit for the three and nine months ended September 30, 2008 was $51,000 and $191,000 respectively, compared to an income tax benefit of
$71,000 and $125,000 for the three and nine months ended September 30, 2007, respectively. The $20,000, or 28%, decrease in income tax benefit for the three months ended September 30, 2008 primarily resulted from the increased U.S. tax
expense in the three months ended September 30, 2008. The $66,000, or 50%, increase in income tax benefit for the nine months ended September 30, 2008 primarily resulted from no longer recording any Canadian Part VI.I income tax expense on
the accumulated dividends related to our Series B Redeemable Convertible Preferred Stock as a result of the January 2007 payment of the accrued dividend (and the associated termination of the cumulative dividend) on those shares.



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Liquidity and Capital Resources

On October 9, 2007, our Registration Statement on Form S-1, as amended, for our initial public offering of 5.75 million shares of our common stock was declared effective by the SEC. On October 15, 2007,
we sold the 5.75 million registered shares at a price of $10.00 per share. We received net proceeds of approximately $51.1 million from the offering after deducting underwriting discounts and commissions and offering expenses of approximately
$2.3 million.

Prior to our October 9, 2007 initial public offering, we financed our operations primarily through the sale of
preferred stock and common stock, debt financings, interest earned on investments and investment tax credits. Prior to our initial public offering, we had received aggregate gross proceeds of $125.8 million from financings, of which $70.4 million
was from the issuance of preferred stock, $2.7 million was from the issuance of common stock and $52.7 million was from debt financings. At September 30, 2008, our cash, cash equivalents, short-term investments and restricted cash included
amounts held in money market accounts, overnight investment accounts, guaranteed investment certificates, certificates of deposit, commercial paper, and debt obligations of government agencies. We invest cash in excess of immediate requirements in
accordance with our investment policy, which is focused primarily on the preservation of capital, fulfillment of liquidity needs, fiduciary control of cash and investments and the maximization of income from our investments without assuming
significant risk. At September 30, 2008, we did not own any mortgage backed securities or auction rate securities.

As of
September 30, 2008, we had cash, cash equivalents and short-term investments of approximately $42.6 million. We intend to use our cash to fund internal and external costs related to regulatory filings in Europe; to fund clinical trials for
oritavancin in cSSSI using a single or infrequent dosing regimen; to continue the clinical development of oritavancin for other indications such as bacteremia; in anticipation of regulatory approval, to fund commercial launch related expenses for
oritavancin including manufacturing, marketing, and sales; to make regularly scheduled payments on our existing debt facilities, namely the MLC Term Note; and to apply the remaining funds for general corporate purposes and the potential acquisition
of, or investment in, technologies, products, or companies that complement our business.

The amounts and timing of our actual expenditures
will depend upon numerous factors, including whether we obtain FDA and foreign regulatory approvals for oritavancin and, if so, the timing of such approval; the success of the commercial launch of oritavancin if approved by the FDA or foreign
regulatory authorities; our cash flows from operations; any potential acquisitions of or investments in technologies, products or companies; and the anticipated growth of our business.

We expect our existing resources to be sufficient to fund our planned operations into the third quarter of 2009.

Cash Flows

The following table summarizes our
net increase in cash and cash equivalents for the nine months ended September 30, 2008 and 2007:



|                                          |  |                                |         |   |      |   |         |  
|----------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                          |  | Nine months EndedSeptember 30, |        
|                                          |  | 2008                           |         |   | 2007 |  
|                                          |  | (in thousands)                 |        
|Net cash provided by (used in):           |  |                                |         |   |      |   |         |  
|Operating activities                      |  | $                              | (42,774 | ) |      | $ | (27,009 | )
|Investing activities                      |  |                                | 49,850  |   |      |   | (16,500 | )
|Financing activities                      |  |                                | (3,812  | ) |      |   | 64,072  |  
|                                          |  |                                |         |   |      |   |         |  
|Net increase in cash and cash equivalents |  | $                              | 3,264   |   |      | $ | 20,563  |  
|                                          |  |                                |         |   |      |   |         |  

Net cash used in operating activities. Net cash used in operating activities was $42.8
million and $27.0 million for the nine months ended September 30, 2008 and 2007, respectively, and primarily reflects our net loss for those periods. The increase in net cash used in the nine months ended September 30, 2008 compared to the
nine months ended September 30, 2007 was due primarily to a $15.1 million decrease in non-cash acquired in-process research and development expense; a $1.6 million decrease in non-cash interest expense; a $0.3 million decrease in amortization
of deferred financing costs expense; a $1.9 million decrease in unrealized foreign exchange loss and a $2.5 million decrease in net changes in working capital items relating to operations; partially offset by a $5.3 million decrease in net loss, a
$0.3 million increase in stock based compensation and a $0.1 million increase in depreciation.



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Net cash provided by (used in) investing activities. Net cash provided by investing activities was
$49.9 million for the nine months ended September 30, 2008 and net cash used in investing activities was $16.5 million in the nine months ended September 30, 2007. Investing activities consist primarily of purchases and sales of short-term
securities and capital purchases. The increase in cash provided by investing activities in the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was primarily due to a $61.7 million increase in the
proceeds from the sales and maturities of short-term investments and a decrease of $4.1 million of cash used to purchase short-term investments.

Net cash (used in) provided by financing activities. Net cash used in financing activities was $3.8 million for the nine months ended September 30, 2008 and net cash provided by financing activities was $64.1 million for the
nine months ended September 30, 2007. The increase in net cash used in the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was primarily due to a decrease in proceeds from the issuance of
preferred stock and warrants of $57.8 million and a decrease in proceeds from the issuance of long term debt of $20.0 million; an increase of payments on long-term debt of $3.9 million; offset by a decrease in payments on convertible notes of $2.2
million and payments on notes payable of $10.0 million.

Contractual obligations

During the fiscal quarter ended September 30, 2008, we did not incur any additional obligations that materially change the disclosure of our
contractual obligations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Off-balance sheet arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow
or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.

Recently issued accounting pronouncements

In December, 2007, EITF 07-01,Accounting for
Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property (EITF 07-01), was issued. EITF 07-01 prescribes the accounting for collaborations, requiring that, when certain characteristics
exist in collaboration relationships, certain transactions between collaborators be recorded within expenses in the income statement on either a gross or net basis. EITF 07-01 is effective for all of our collaborations existing after January 1,
2009. We currently have no collaborations that are impacted by EITF 07-01. We will evaluate any future collaborations under this guidance, as appropriate.



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|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Interest Rate Risk

We are exposed to market risk related to changes in interest rates. As of September 30, 2008, we
had cash, cash equivalents and short-term investments of approximately $42.6 million. In accordance with our investment policy, this amount is invested in a mix of cash and highly liquid short-term investments. The goals of our investment policy are
preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk.

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of interest rates, particularly
because our investments are in short-term marketable securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on
the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.

As of September 30, 2008, our outstanding MLC Term Note has a fixed interest rate and therefore has minimal exposure to changes in interest
rates.

Foreign Currency Risk

Most of our transactions are conducted in U.S. dollars, although we do have some development and clinical trial agreements with vendors located outside the U.S. Transactions under certain of these agreements are conducted in U.S. dollars
while others are transacted in the applicable local currency. The expenses and capital spending of our Canadian subsidiaries are transacted in Canadian dollars and subject to foreign exchange rate risk. Our foreign currency transactions are
translated into U.S. dollars at prevailing rates. Gains or losses resulting from foreign currency transactions are included in current period income or loss as incurred. All material transactions are denominated in U.S. dollars and we have not
entered into any material transactions that are denominated in foreign currencies. As a result, we do not believe that an immediate 10% change in the exchange rate applicable to our international business dealings would have a material impact on our
results of operations or cash flows.

Effects of Inflation

We do not believe that inflation and changing prices over the three and nine months ended September 30, 2008 and 2007 had a significant impact on our
results of operations.



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|Item 4T. | Controls and Procedures
|-------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

As required by Rule 13a15(b) of the Securities and Exchange Act of 1934, as amended (the 1934 Act), our
management, including the principal executive officer and the principal financial officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level in ensuring that
information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file under the 1934 Act is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control

As required by Rule 13a-15(d) of the 1934 Act, our management, including the principal executive officer and the principal financial
officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. Based on that evaluation, the principal executive officer and principal financial officer concluded no such changes during the fiscal quarter covered by this Quarterly Report on Form
10-Q materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

We currently are not a party to
any material legal proceedings.



|Item 1A. | Risk Factors
|-------- | ------------

In addition to the other information
set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks discussed below and under the title Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and our
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008. The three risks discussed below were disclosed in our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2008 and have been updated to provide revised information as of September 30, 2008. The risks described below and in our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 could
materially affect our business, financial condition and/or operating results. These risks are not the only risks facing our Company; additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating results.

We will be completely dependent on third parties to manufacture
oritavancin, and our commercialization of oritavancin, if approved, could be stopped, delayed or made less profitable if those third parties fail to provide us with sufficient quantities of oritavancin or fail to do so at acceptable quality levels
or prices.

We do not have the capability to manufacture the active pharmaceutical ingredient (API) for oritavancin. As a
result, we have entered into a manufacturing and supply agreement with Abbott Laboratories (Abbott) to manufacture and supply us with bulk oritavancin API for clinical and commercial purposes. Abbott is the sole provider of our supply of
oritavancin API. It is possible that if and when we receive regulatory approval to market and sell oritavancin, our current supply of oritavancin API may have exceeded its useful life and no longer be appropriate for commercial sale.

In addition, we do not have the capability to fill, label and package oritavancin finished drug product for distribution to hospitals and other
customers. Consequently, we recently have entered into a manufacturing and service contract with Ben Venue Laboratories, Inc. (BVL) to supply us with drug product in 20 cc nude vials containing 100 milligrams of oritavancin. BVL has
manufactured validation lots of oritavancin drug product and we intend to qualify the facility with the FDA. We previously entered into an agreement with Catalent Pharma Solutions, Inc., located in New Mexico, (formerly known as Cardinal Health PTS,
LLC) (Catalent) to supply us with oritavancin drug product, also packaged 100 milligrams in 20 cc vials. The New Mexico facility has completed the necessary validation program for oritavancin drug product and manufactured half of our
current inventory of oritavancin drug product. In May 2008, Catalent sold the New Mexico facility at which the drug product was formulated to Oso Biopharmaceuticals Manufacturing, LLC (Oso Bio) and, therefore, Catalent no longer is able
to use the New Mexico facility to supply additional quantities of oritavancin drug product to us. We intend to enter into an agreement with Oso Bio to supply us with oritavancin drug product from the New Mexico facility, as nude 20 cc vials
containing 100 milligrams of oritavancin, to ensure that we maintain adequate supplies of drug product if and when we are authorized to make commercial sales of oritavancin. If we receive marketing approval from the FDA, we intend to sell drug
product manufactured by either Catalent, BVL or, subject to entering to a supply agreement with us, Oso Bio.

We have entered into
long-term agreements with each of Abbott and BVL. In the case of the agreement with Abbott, either party to this agreement may terminate the agreement with at least two years advance notice if the terminating party determines in good faith before or
after the first commercial sale made by us that the clinical development and/or commercialization of oritavancin is not technically or commercially feasible or if it is not economically justifiable. After the initial term of this agreement, which
extends until December 31, 2014, the agreement automatically renews for successive two-year terms unless terminated by either party with at least twelve months notice. If we change the specifications for the bulk drug substance Abbott is
to produce, or the FDA or another regulatory body requires us to change the manufacturing specification for the bulk drug substance, and that change would increase Abbotts manufacturing costs, we must reach an agreement with Abbott about how
to allocate the costs associated with the change. If we cannot reach agreement, Abbott may refuse to implement the change, or may terminate the agreement. Further, Abbott may terminate this agreement if the FDA has not approved an NDA for
oritavancin prior to January 1, 2010. Finally, either we or Abbott may terminate this agreement on 60 days written notice in the event of insolvency of or uncured material breach by the other party.

Our agreement with BVL provides for an initial five-year term continuing until August 22, 2013. Either party may terminate this agreement without
cause by providing twenty-four months prior written notice to the other party. Either party may terminate this



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agreement upon written notice to the other party in the event a material breach remains uncured three months after written notice thereof is given to the
other party. In addition, BVL may suspend production under this agreement until any payments that are more than 120 days past due are brought current. Finally, either party may terminate this agreement upon the other partys insolvency. We have
not yet entered into a long-term agreement with Oso Bio, but we intend to do so prior to commercial launch of oritavancin in order to ensure that we maintain adequate supplies of drug product. We cannot guarantee that we will be able to enter into
an agreement with Oso Bio on favorable terms.

If, for any reason, these third parties are unable or unwilling to perform, we may not be
able to terminate our agreements with them, and we may not be able to locate alternative manufacturers or formulators or enter into favorable agreements with them. If any of Abbott, BVL or Oso Bio (assuming we enter into an agreement with Oso Bio)
experiences any significant difficulties in its respective manufacturing processes for oritavancin API or drug product, we could experience significant interruptions in the supply of oritavancin. In 2007, in connection with the production of a
series of three validation lots at Catalent, two of the manufacturing lots failed to meet the required specifications such that they had to be reproduced. Were we to encounter manufacturing issues such as this on a larger scale in the future, our
ability to produce a sufficient supply of oritavancin might be negatively affected. Our inability to coordinate the efforts of our third-party manufacturing partners, or the lack of capacity available at our third-party manufacturing partners, could
impair our ability to supply oritavancin at required levels. Because of the significant regulatory requirements that we would need to satisfy in order to qualify a new bulk active pharmaceutical ingredient or drug product supplier, if we face these
or other difficulties with our current suppliers, we could experience significant interruptions in the supply of oritavancin if we decided to transfer the manufacture of oritavancin to one or more alternative suppliers in an effort to deal with the
difficulties.

We cannot guarantee that Abbott, BVL or Oso Bio (assuming we enter into an agreement with Oso Bio) will be able to reduce
the costs of commercial scale manufacturing of oritavancin over time. If the manufacturing costs of oritavancin remain at current levels, these costs may significantly impact our operating results. In order to reduce costs, we may need to develop
and implement process improvements. However, in order to do so, we will need, from time to time, to notify or make submissions with regulatory authorities, and the improvements may be subject to approval by such regulatory authorities. We cannot be
sure that we will receive these necessary approvals or that these approvals will be granted in a timely fashion. We also cannot guarantee that we will be able to enhance and optimize output in our commercial manufacturing process. If we cannot
enhance and optimize output, we may not be able to reduce our costs over time.

We believe we have sufficient quantities of oritavancin
drug product to satisfy immediate commercial demand, in the event oritavancin is approved for sale by regulatory authorities. We believe we have sufficient quantities of bulk oritavancin API to complete all of the currently planned clinical studies
of oritavancin and to manufacture additional quantities of oritavancin drug product for commercial sale. We plan to have Abbott and BVL or, subject to entering into a supply agreement with us, Oso Bio manufacture additional oritavancin API and drug
product in connection with commercial launch. If the existing quantities of oritavancin drug product are insufficient or Abbott, BVL or Oso Bio are unable to manufacture additional quantities of bulk oritavancin API and drug product in a timely
manner, the commercial introduction of oritavancin, if approved by the FDA, would be adversely affected.

If the FDA does not approve the manufacturing
facilities of Abbott, BVL or Oso Bio, we may be unable to develop or commercialize oritavancin.

We rely on Abbott and BVL to
manufacture bulk oritavancin API and nude vials of drug product, respectively, and currently have no plans to develop our own manufacturing facility. In addition, we expect to add Oso Bio as a second manufacturer of drug product prior to commercial
launch of oritavancin. The facilities used by our contract manufacturers to manufacture oritavancin must be approved by the FDA. We do not control the manufacturing process of oritavancin and are completely dependent on our contract manufacturing
partnerscurrently, Abbott and BVLfor compliance with the FDAs requirements for manufacture of oritavancin. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the
FDAs strict regulatory requirements, they will not be able to secure FDA approval for the manufacturing facilities. If the FDA does not approve these facilities for the manufacture of oritavancin, we may need to find alternative manufacturing
facilities, which would result in significant delays of up to several years in obtaining approval for and manufacturing oritavancin.

In
addition, our contract manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with the current good manufacturing practices (cGMP) regulations, and
similar regulatory requirements. These cGMP regulations cover all aspects of the manufacturing, testing, quality control and record keeping relating to our product candidates. We do not have control over our contract manufacturers compliance
with these regulations and standards. Failure by any of our contract manufacturers to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to grant approval to
market our product candidates, delays, suspensions or withdrawals of approvals, operating restrictions and criminal prosecutions, any of which could significantly and



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adversely affect our business. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality
assurance and qualified personnel. Failure by our contract manufacturers to comply with or maintain any of these standards could adversely affect our ability to have produced, obtain regulatory approval for or market our product candidates.

We may encounter delays in filling customer orders or incur substantial losses if our supply of bulk and finished drug product, which are produced and
packaged for us by third-party manufacturers, is interrupted.

Once Abbott has completed production of oritavancin bulk API at its
facilities in Illinois, the material is shipped to our third party storage facility, Bioconvergence LLC (Bioconvergence) in Indiana. Oritavancin API periodically is shipped from Bioconvergences facility to BVLs facility in
Ohio or, subject to entering into a supply agreement with us, Oso Bios facility in New Mexico for processing into nude vials of drug product. These nude vials are shipped to either Bioconvergence for storage or to Catalents facility in
Pennsylvania to undergo labeling and packaging as finished drug product. These shipments are of significant value and, while in transit, could be lost or damaged. Moreover, at any time after being shipped, the oritavancin API or drug product could
be lost or damaged as it is stored with Bioconvergence, BVL or Oso Bio, or Catalent. Depending on when in this process the API or drug product is lost or damaged, we may have limited recourse for recovery from our manufacturers or insurers. As a
result, our financial performance could be impacted by any such loss of or damage to our oritavancin API or drug product.

We also may
experience interruption or significant delay in the supply of oritavancin API or drug product due to natural disasters, acts of war or terrorism, shipping embargoes, labor unrest or political instability. In any such event, the supply of oritavancin
API and drug product stored with Bioconvergence, BVL or Oso Bio, or Catalent could also be impacted. We may also be subject to financial risk from volatile fuel costs associated with shipping oritavancin API or drug product within the U.S. and, once
we have received necessary foreign approvals, to our international distribution partners for packaging, labeling and distribution.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

Unregistered Sales of Equity Securities

None.

Use of Proceeds

On October 9, 2007, our Registration Statement on Form S-1, as amended (File
No. 333-142842), relating to the initial public offering was declared effective by the SEC. On October 15, 2007, we closed the sale of 5.75 million shares of common stock in the initial public offering for net proceeds to us of
approximately $51.1 million. As of September 30, 2008, $43.1 million of the net proceeds remained available and were primarily invested in highly liquid short-term investments, including money market accounts, overnight investment accounts,
certificates of deposit, commercial paper and debt obligations of various government agencies, pending their use to fund our operations and expansion. There has been no material change in our planned use of proceeds from the initial public offering
from that described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



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

None.



|Item 5. | Other Information
|------- | -----------------

None.



|Item 6. | Exhibits
|------- | --------

The Exhibits listed in the Exhibit Index
immediately preceding the Exhibits are filed as a part of this Quarterly Report on Form 10-Q.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.



|                        |  |                                   |  |                                                                                                              
|----------------------- |  | --------------------------------- |  | -------------------------------------------------------------------------------------------------------------
|                        |  | TARGANTA THERAPEUTICS CORPORATION
|                        |  |                                  
|Date: November 12, 2008 |  | By:                               |  | /s/ Mark W. Leuchtenberger                                                                                   
|                        |  |                                   |  | Mark W. Leuchtenberger                                                                                       
|                        |  |                                   |  | Director, President and Chief Executive Officer                                                              
|                        |  |                                   |  | (Principal Executive Officer)                                                                                
|                        |  |                                  
|Date: November 12, 2008 |  | By:                               |  | /s/ George A. Eldridge                                                                                       
|                        |  |                                   |  | George A. Eldridge                                                                                           
|                        |  |                                   |  | Senior Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Assistant Secretary
|                        |  |                                   |  | (Principal Accounting and Financial Officer)                                                                 



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No: |  | Description                                                                                                                                                                                                                                                                                         
|10.24.2     |  | First Amendment to the Credit and Security Agreement by and among the Registrant, GE Business Financial Services, Inc. (formerly known as Merrill Lynch Business Financial Services Inc.), Oxford
Finance Corporation and Blue Crest Venture Finance Master Fund Limited, dated May 22, 2008.       
|            | 
|10.24.3     |  | Second Amendment to the Credit and Security Agreement by and among the Registrant, GE Business Financial Services, Inc. (formerly known as Merrill Lynch Business Financial Services Inc.), Oxford
Finance Corporation and Blue Crest Venture Finance Master Fund Limited, dated September 29, 2008.
|            | 
|#10.25      |  | Manufacturing and Service Contract dated as of August 22, 2008 between Ben Venue Laboratories, Inc. and the Registrant.                                                                                                                                                                             
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Rules 13a-14 or 15d-14 of the 1934 Act                                                                                                                                                                                                         
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Rules 13a-14 or 15d-14 of the 1934 Act                                                                                                                                                                                                         
|            | 
|32.1        |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the 1934 Act and 18 U.S.C. Section 1350                                                                                                                                                                        
|            | 
|32.2        |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the 1934 Act and 18 U.S.C. Section 1350                                                                                                                                                                        



|# | This exhibit has been filed separately with the Commission pursuant to an application for confidential treatment. The confidential portions of the exhibit have been omitted and have
been marked by an asterisk.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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