**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

----

**FORM 10-K**

**FOR ANNUAL AND TRANSITIONREPORTSPURSUANT TO SECTIONS 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**(Mark One)**

**x**                                 ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended December 31, 2006**

**OR**

**o**                                   TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from**               to                   .

**CommissionFile Number 000-50405**

**ACUSPHERE, INC.**

(Exact name of registrant as specified in its charter)

| **Delaware**                              |   | **04-3208947**                     |
|-------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of          |   | (IRS Employer  Identification No.) |
| incorporation or  organization)           |   |                               |
| **500 Arsenal Street**                    |   | ** **                         |
| **Watertown,  Massachusetts**             |   | **02472**                          |
| (Address of  principal executive offices) |   | (Zip Code)                         |

 

Registrant’s telephone number, including areacode: **(617) 648-8800**

Securities registeredpursuant to Section 12(b) of the Act:

| **Title of each class**           | ** ** | **Name of  each exchange on which registered** |
|-----------------------------------|------------|------------------------------------------------|
| **Common  Stock, $.01 Par Value** |       | **The  NASDAQ Stock Market LLC**               |

 

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

**None**

----

Indicate by check markwhether the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o No x

Indicate by check markwhether the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 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 suchreports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes x No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated filer o | Accelerated  filer x | Non-accelerated  filer o |
|--------------------------------|---------------------------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b 2 of theExchange Act). Yes o No x

The aggregate market valueof Common Stock as of the last business day of the registrant’s most recentlycompleted second fiscal quarter (based on the last reported sale price on TheNASDAQ Global Market as of such date) held by non-affiliates of the registrantas of such date was approximately $97.9 million. As of March 2, 2007 therewere 38,101,913 shares of the registrant’s Common Stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Part IIIof this report incorporates information by reference from the Company’sdefinitive proxy statement, which proxy statement is due to be filed with theSecurities and Exchange Commission not later than 120 days after December 31,2006.

 

----

**INTRODUCTORY NOTE**

This report,including the documents incorporated by reference in this report, includesforward-looking statements. We have based these forward-looking statements onour current expectations and projections about future events. Forward-lookingstatements involve risks and uncertainties. We make such forward-lookingstatements pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. In this Annual Report on Form 10-K,words such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “projects,” “predicts,” “intends,” “potential,” andsimilar expressions (as well as other words or expressions referencing futureevents, conditions or circumstances) are intended to identify forward-lookingstatements. Forward-looking statements in these documents include, but are notlimited to, those relating to:

·       thetiming of our clinical trials and regulatory milestones for ImagifyTM(perflubutane polymermicrospheres for delivery in an injectable suspension, formerly known as AI-700), including:

·        the public announcement ofclinical data, in particular for our RAMP-2 clinical trial,

·        thequalification of our Tewksbury, Massachusetts manufacturing facility, includingour completion of aseptic validation and our completion of qualification forthis facility,

·        thesubmission of a New Drug Application, or NDA, with the U.S. Food &Drug Administration, or FDA, for Imagify,

·        thecompletion of our ACCESS (Acquiring Consensus for Contrast EchocardiographySystem Settings) trial and

·        thecompletion of our PACE (Prognostic Assessment of Contrast Echocardiography)trial for Imagify;

·       ourestimates regarding our capital requirements and our needs for additionalfinancing;

·       ourplans to develop and market new product candidates and the timing of thesedevelopment programs; including the timing of our anticipated commencement of anew Hydrophobic Drug Delivery SystemTM (“HDDS”) development program;

·       ourclinical development of product candidates, clinical trials and our ability toobtain and maintain regulatory approval for our product candidates;

·       ourestimates of expenses and future revenues and profitability;

·       ourestimates of the size of the potential markets for our product candidates;

·       ourselection and licensing of product candidates;

·       ourability to attract collaborators with acceptable development, regulatory andcommercialization expertise;

·       thebenefits to be derived from corporate collaborations, license agreements andother collaborative efforts, including those relating to the development andcommercialization of our product candidates;

·       sourcesof revenues and anticipated revenues, including contributions from corporatecollaborations, license agreements and other collaborative efforts for thedevelopment and commercialization of products;

·       ourability to create an effective direct sales and marketing infrastructure forproducts we elect to market and sell directly;

2

----

·       therate and degree of market acceptance of our product candidates;

·       thetiming and amount of reimbursement for our product candidates;

·       thesuccess of other competing therapies that may become available; and

·       themanufacturing capacity for our product candidates, including our plans toqualify a commercial manufacturing facility for Imagify.

Our actual results and the timing of certain eventsmay differ materially from the results discussed, projected, anticipated orindicated in any forward-looking statements. Any forward-looking statementshould be considered in light of factors discussed in Item 1A. under “CertainFactors Which May Affect Future Results” and elsewhere in this AnnualReport on Form 10-K. We caution readers not to place undue relianceon any such forward-looking statements, which speak only as of the date theyare made. We disclaim any obligation, except as specifically required by lawand the rules of the Securities and Exchange Commission, to publiclyupdate or revise any such statements to reflect any change in companyexpectations or in events, conditions or circumstances on which any suchstatements may be based, or that may affect the likelihood that actual resultswill differ from those set forth in the forward-looking statements.

3

----

**TABLEOF CONTENTS**

| **PART I**   |   |                                                                                                               |   |   |   |
|-------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Item 1.           |   | Business                                                                                                           |   | 5      |   |
| Item  1A.         |   | Risk  Factors                                                                                                      |   | 29     |   |
| Item 1B           |   | Unresolved Staff Comments.                                                                                         |   | 48     |   |
| Item 2.           |   | Properties                                                                                                         |   | 48     |   |
| Item  3.          |   | Legal  Proceedings                                                                                                 |   | 49     |   |
| Item 4.           |   | Submission of Matters to a Vote of Security Holders                                                                |   | 49     |   |
| **PART II**  |   |                                                                                                               |   |   |   |
| Item 5.           |   | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   | 49     |   |
| Item  6.          |   | Selected  Financial Data                                                                                           |   | 52     |   |
| Item 7.           |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |   | 52     |   |
| Item 7A.     |   | Quantitative and Qualitative Disclosures about Market  Risk                                                        |   | 74     |   |
| Item 8.           |   | Financial Statements and Supplementary Data                                                                        |   | 74     |   |
| Item 9.           |   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |   | 75     |   |
| Item 9A.          |   | Controls and Procedures                                                                                            |   | 75     |   |
| Item  9B.         |   | Other  Information                                                                                                 |   | 78     |   |
| **PART III** |   |                                                                                                               |   |   |   |
| Item 10.          |   | Directors and Executive Officers of the Registrant                                                                 |   | 79     |   |
| Item 11.          |   | Executive Compensation                                                                                             |   | 79     |   |
| Item 12.          |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |   | 79     |   |
| Item 13.          |   | Certain Relationships and Related Transactions, and  Director Independence                                         |   | 79     |   |
| Item 14.          |   | Principal Accountant Fees and Services                                                                             |   | 79     |   |
| **PART IV**  |   |                                                                                                               |   |   |   |
| Item 15.          |   | Exhibits and Financial Statement Schedules                                                                         |   | 80     |   |

 

| **SIGNATURES** |   | 87 |   |
|----------------|--------|----|--------|

 

| EXHIBIT 14.01 |   | Code of  Business Conduct and Ethics             |   |   |   |
|---------------|--------|--------------------------------------------------|--------|--------|--------|
| EXHIBIT 21.01 |   | List of  Subsidiaries                            |   |   |   |
| EXHIBIT 23.01 |   | Consent of  Deloitte & Touche LLP       |   |   |   |
| EXHIBIT 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification |   |   |   |
| EXHIBIT 31.2  |   | Rule 13a-14(a)/15d-14(a) Certification |   |   |   |
| EXHIBIT 32.1  |   | Section 1350  Certifications                |   |   |   |

 

4

----

**PART I**

**ITEM 1. BUSINESS**

**Overview**

We are a specialty pharmaceutical company thatdevelops new drugs and improved formulations of existing drugs using ourproprietary porous microparticle technology. We are focused on developingproprietary drugs that can offer significant benefits over existing drugs,including improved safety and efficacy, increased patient compliance, greaterease of use, expanded indications or reduced cost. Our lead product candidate ImagifyTM (perflubutane polymer microspheresfor delivery in an injectable suspension, formerly known as AI-700) isa cardiovascular drug in Phase 3 clinical development for the detection ofcoronary artery disease, the leading cause of death in the United States. Wealso have demonstrated that our technology has the potential to improve theformulation of hydrophobic drugs and asthma drugs.

Our proprietarytechnology enables us to control the size and porosity of particles, includingnanoparticles and microparticles, in a versatile manner, so that we cancustomize the particles to address the delivery needs of a variety of drugs. Wehave initially applied this technology in our research and development effortsin the following areas:

·       *Imagify, Intravenous Deliveryof Gas for Ultrasound Contrast.  *We specifically designedImagify to assess myocardial perfusion, or blood flow in the heart muscle, asensitive marker for coronary artery disease, or CAD. Imagify is acardiovascular drug that enables cardiac stress ultrasound to obtaininformation on myocardial perfusion, or blood flow in the heart muscle.Currently, there is no drug approved by the U.S. Food and Drug Administration,or FDA, to assess myocardial perfusion using ultrasound. Imagify is in Phase 3clinical development.

·       *Hydrophobic Drug Delivery System**TM, HDDS.  *Hydrophobicdrugs, which are drugs that do not dissolve well in water, are often difficultto formulate, especially for intravenous delivery. We have demonstrated thatour HDDS technology improves the dissolution rate of a variety of hydrophobic drugs.We have completed a Phase 1 clinical trial for AI-850, which is a productcandidate that, utilizing our HDDS technology, is designed to improve thedissolution rate of a leading cancer drug.

·       *Pulmonary Drug Delivery System**TM, PDDS.  *Most asthma drugs deliveredvia inhalation are immediate release formulations that must be inhaled multipletimes per day, reducing patient compliance. We have demonstrated that our PDDStechnology has the potential to provide sustained release drug administrationin the lung and can be targeted to deliver the drug to the upper or lowerregion of the lungs. We have completed a Phase 1 study for AI-128 that,utilizing our PDDS technology, demonstrated sustained release of anFDA-approved asthma drug.

**Our PorousMicroparticle Technology**

Microparticles are useful in the delivery of a widerange of drugs. The suitability of microparticles for use in drug deliverydepends on a variety of characteristics, including size and porosity. Ourtechnology enables us to control the size and porosity of microparticles andnanoparticles in a versatile manner so that we can customize the particles toaddress the delivery needs of a variety of drugs. We are focused on creatingporous particles that are smaller than red blood cells. Microparticles, or thedrugs embedded within these microparticles, when measured at less than onemicron in size, are referred to as nanoparticles. These microparticles andnanoparticles can be used to deliver gases or to deliver drugs to patientsthrough various routes of delivery. Small microparticles are important fordelivering drugs intravenously so that they can pass safely through the body’ssmallest blood vessels, for increasing the surface area of a drug so that itwill dissolve more rapidly, and for delivering drugs via inhalation. Porosityis important for a variety of applications, including entrapping gases inmicroparticles, controlling the release rate of the drug from a microparticle,and targeting inhaled drugs to specific regions of the lung. 

5

----

We have developedproprietary spray drying equipment and pore forming processes that enable us toproduce these porous microparticles in a versatile manner.

Using ourproprietary technology:

·       Wehave produced small, porous microparticles containing gas, which are analogousin structure to honeycombs. Using these microparticles, we are developingImagify, a cardiovascular drug for detection of coronary artery disease throughthe assessment of myocardial perfusion.

·       Wehave produced small microparticles with tiny pores throughout, which areanalogous in structure to sponges. Using these microparticles, we aredeveloping our HDDS technology, which may enable improved dissolution ofhydrophobic drugs in water.

·       We have produced smallmicroparticles with large pores throughout, which are analogous in structure towhiffle balls. These microparticles are developed using our PDDS technology,which may enable improved delivery of drugs via the pulmonary route.

**Our Strategy**

In the last thirty years, a large worldwide market hasemerged based on technologies that improve the delivery of established drugs innovel, cost-effective ways by providing significant benefits, such as improvedsafety and efficacy, increased patient compliance, greater ease of use,expanded indications or reduced cost. Drug delivery technologies can improvethe commercial prospects for existing drugs by introducing new formulationsthat offer new delivery methods that may be patented and thereby protected.Traditionally, drug delivery companies have earned royalties by applying theirdelivery technologies to create new formulations of existing drugs owned byothers. Recently, some companies have begun developing new drugs by using theirproprietary drug delivery technologies in combination with off-patent drugs.These companies are often referred to as specialty pharmaceutical companies.

Our goal is to become a leading specialtypharmaceutical company that develops and commercializes new drugs and improvedformulations of existing drugs using our porous microparticle technology. Ourstrategy to accomplish that goal includes the following:

*AdvanceDevelopment of Our Lead Product Candidate, Imagify.**  *We have completed patientenrollment in our Phase 3 clinical trial program for our lead productcandidate, Imagify, a cardiovascular drug for the detection of coronary arterydisease. Data from this program is intended to be used to seek approval forImagify in the United States, Europe and other markets. We expect to announcedata from our RAMP-2 clinical trial in the second quarter of 2007.

*Focuson Proprietary Product Opportunities.**  *We intend to focus on proprietaryproduct opportunities, where we own broad patent rights to the products. Due toour ownership interest in these product candidates and technology, we believewe would be able to negotiate corporate collaborations from a stronger positionthan service-oriented companies that develop drug delivery technologies forpatented drugs owned by pharmaceutical or biotechnology companies. We mayretain the sales and marketing rights to our proprietary products in specialtymarkets that we can readily address. For instance, our lead product candidate,Imagify, will initially be used by a subset of cardiologists, calledechocardiologists, who are generally hospital-based. We believeechocardiologists can be reached by a relatively small sales force ofapproximately 60 to 100 people in theUnited States. Therefore, we believe Imagify may be an attractive candidate forus to market and sell directly in the United States. In Europe, we intend tomarket Imagify through Nycomed Danmark ApS (Nycomed) a company with which weentered into a strategic collaboration in 2004. We intend to pursue otherstrategic partnering opportunities to market and sell Imagify outside of theUnited States and Europe. We may also in-license products or technologies whichwe believe are complementary or synergistic with our internally-developedproduct candidates or technologies.

6

----

*ApplyOur Proprietary Technology for New Drug Delivery Systems.**  *We believe that our porousmicroparticle technology can be applied to a wide variety of marketed as wellas development stage drugs, including patented and off-patent drugs. Manypatented drugs owned by large pharmaceutical companies are hydrophobic or deliveredby inhalation. These drugs could benefit from our HDDS or PDDS technologies. Weplan to develop drugs with this technology on our own or in collaboration withothers and to seek collaborations with companies that have patented drugs thatcould benefit from the most compelling capabilities of our technologies. Byfocusing on drugs where the advantages of our technologies are most compelling,we believe we will be in an attractive position when negotiating the terms ofthese collaborations.

*Focus on Large MarketsWhere Our Product Candidates Can Address Significant Unmet Clinical Needs.**  *We are focused on developingproprietary drugs for large markets within cardiology, oncology and asthmawhere we believe our porous microparticle technology can provide compellingclinical advantages over current approaches. For example, we believe our leadproduct candidate, Imagify, will provide a convenient and cost effectivealternative for the detection of coronary artery disease with respect to thisinitially targeted indication. We believe the potential market opportunity forImagify is over $2.0 billion in theUnited States and even larger worldwide.

**Product DevelopmentPrograms**

Our proprietary porousmicroparticle technology has been used to create product candidates that mayaddress large unmet clinical needs within cardiology, oncology and asthma.

***Imagify, Intravenous Delivery of Gas for UltrasoundContrast***

*BroadApplications for Ultrasound Contrast.**  *We have developed an intravenousdelivery system for gas that has the potential to expand the usefulness ofultrasound in the detection of coronary artery disease. Ultrasound is one ofthe least expensive and most frequently used imaging techniques that permitphysicians to view the inside of the body. However, ultrasound is the onlyfrequently used imaging technique without a commercially significant contrastagent. As a result, the clarity of ultrasound is often inadequate for adefinitive assessment of some medical conditions. A contrast agent that couldprovide more detail and clarity and thereby improve the diagnostic imageproduced could expand the usefulness of ultrasound. Gases are attractivecontrast agents for ultrasound because they reflect ultrasound waves moreefficiently than blood or body tissues, enabling their detection by theultrasound machine. Gas injected intravenously can potentially act as a tracerof abnormal blood flow, which is associated with many life-threatening diseasessuch as coronary artery disease. However, gas rapidly dissolves in bloodthereby losing its effectiveness. As a result, microparticles that can entrapthe gas and be administered intravenously are necessary in order to develop anultrasound contrast agent with broad applications.

*CoronaryArtery Disease Market.**  *Accordingto the American Heart Association, or AHA, approximately 16.0 million people in the United Statessuffer from coronary artery disease, the leading cause of death in the UnitedStates. Coronary artery disease is characterized by the accumulation of plaque,which narrows coronary arteries and reduces blood flow in the heart muscle. TheAHA projects that in 2006, over$150 billion will be spent on direct medical expenses for coronary arterydisease in the United States. Early detection of coronary artery disease canreduce treatment costs, increase patient survival and improve quality of life.

The definitive method for the detection of coronaryartery disease is coronary angiography, an expensive and invasive procedureimpractical for use as a routine screening tool. Two of the most common methodsfor coronary artery disease screening are nuclear stress imaging and cardiacstress ultrasound. We estimate that approximately 10.4 millionof these screening procedures were performed collectively in the United Statesin 2006. We believe that a contrast agentthat enables the assessment of blood flow in the 

7

----

heart muscle, ormyocardial perfusion, with ultrasound could replace many of these screeningprocedures. We believe that an ultrasound contrast agent capable of myocardialperfusion assessment could be priced at $200or higher per procedure, including both rest and stress evaluations. Assumingall of these procedures were performed using ultrasound with an effectivecontrast agent at this price, we estimate the potential U.S. ultrasoundcontrast market for the cardiac indication of Imagify to be over $2.0 billion.

*CurrentPractice for Coronary Artery Disease Screening.**  *Nuclear stress tests assessmyocardial perfusion, or blood flow in the heart muscle. Nuclear stress testsinvolve the intravenous injection of a radioactive compound, followed by scansof the heart using a special camera while the patient is at rest and understressed conditions. These tests may take up to five hours to complete, theresults are not available immediately as post-processing is required, do notprovide real-time results, cost approximately $800per procedure, and due to significant capital equipment costs and complexregulatory requirements associated with the use of radioactive materials, are notavailable in many hospital or physician office settings. We estimate thatapproximately 7.6 million nuclear stress tests were conducted in theUnited States in 2006.

The current cardiac ultrasound performed using stressassesses the motion of the heart wall. Advanced coronary artery diseasetypically results in abnormal blood flow in the heart muscle, which in turncauses abnormal wall motion that can be detected by the ultrasound machine usedin cardiac ultrasound. Although myocardial perfusion information from nuclearstress tests provides the most direct information about blood flow in the heartmuscle, cardiac stress ultrasound provides dynamic, real-time information aboutregional heart function. This additional information, along with the greater availabilityof ultrasound over nuclear equipment, results in the use of cardiac stressultrasound as a screening method in many hospital and physician officesettings. Cardiac ultrasound involves the use of high-frequency sound wavesthat are bounced off of the heart wall while the patient is at rest and understressed conditions. We estimate that approximately 2.8 million cardiac stress ultrasound procedures wereconducted in the United States in 2006. However, cardiac stress ultrasound isoften inadequate for a definitive assessment of coronary artery disease. Forinstance, the motion of the heart wall can be difficult to see under certainconditions, particularly in obese patients. In addition, the detection ofdefects in myocardial perfusion using cardiac stress ultrasound is not possiblewithout use of a contrast agent.

There is no ultrasound contrast agent approved by theFDA for use in cardiac ultrasound for myocardial perfusion imaging. Ultrasoundcontrast agents have been approved by the FDA for use in cardiac ultrasoundwithout stress for left ventricular opacification, or LVO, and endocardialborder delineation, or EBD, in patients with suboptimal images. LVO is imageenhancement of blood volume in the left ventricular chamber of the heart. EBDis image enhancement of the borders of the ventricular chambers.

*OurSolution, Imagify, a Synthetic Polymer Microparticle.**  *Using our porous microparticletechnology, we specifically designed Imagify for myocardial perfusionassessment. Currently in Phase 3 clinical trials, Imagify is a cardiovasculardrug that is being developed to enable cardiac stress ultrasound to provideinformation on myocardial perfusion in addition to wall motion. Based on theresults of our Phase 2 clinical trials, we believe that Imagify-enhancedcardiac stress ultrasound has the potential to provide information comparableto the nuclear stress tests, while retaining the inherent advantages ofultrasound.

We believe we haveovercome many of the limitations of other ultrasound contrast agents bydeveloping an intravenous gas delivery system made from a synthetic polymer.All of the ultrasound contrast agents currently approved by FDA for LVO and EBDin patients with suboptimal images deliver gas intravenously in fragile systemsmade from natural materials. When exposed to the power of the ultrasound beamduring the imaging procedure, these natural materials are so fragile they oftenrupture and release the gas into the blood, where it dissolves, thereafterrendering these contrast agents ineffective. Moreover, some ultrasound contrastagents encapsulate nitrogen, which dissolves quickly in water. Such contrastagents have a very short duration of enhancement because the nitrogen isquickly pushed out of 

8

----

themicrobubble and displaced with water. Ultrasound contrast agents made fromnatural materials or containing nitrogen have only been approved by FDA for LVOand EBD in patients with suboptimal images and we believe they are difficult touse in myocardial perfusion imaging, which is more technically demanding.Unlike the natural materials used in FDA-approved ultrasound contrast agents,the synthetic polymers used in Imagify do not break during the imagingprocedure. In addition, perfluorocarbon gases are less soluble in water andtherefore have the propensity to stay inside the microparticle. As a result, wecan deliver a higher concentration of gas to the myocardium over a longerperiod of time, thereby enabling Imagify to target the broader application ofmyocardial perfusion assessment. Imagify is a dry powder consisting of small,porous microspheres filled with a perfluorocarbon gas. These microspheres aremade of a synthetic biodegradable polymer, called poly (D, L-lactideco-glycolide), or PLGA, that has been used in other drug delivery systemsapproved by FDA. The composition and structure of the microspheres, which alsocontain a phospholipid, and the properties of the perfluorocarbon gas slow therate at which the gas dissolves and prevents the microspheres from beingquickly broken down inside the body. These microspheres are suspended insterile water and injected into the body by intravenous injection. Imagify wasdesigned to be used with commercially available ultrasound equipment andestablished imaging techniques.

*Potential Benefitsof Imagify-Enhanced Cardiac Stress Ultrasound vs. Nuclear Stress Tests*

Imagify-enhancedcardiac stress ultrasound has the potential to significantly reduce the time,cost and resources needed in the assessment of myocardial perfusion.

*·**      *Less Expensive.*  *We estimate that the cost ofperforming an ultrasound imaging procedure using our Imagify contrast agentwill be approximately $400 per procedure, representing costs of $200 for thecontrast agent and $200 for administering the procedure. Nuclear stress teststypically cost approximately $800 per procedure. Nuclear stress tests arerelatively more expensive because the equipment is large and costly and patientthroughput is low. Ultrasound equipment is much smaller and generally half thecost of nuclear equipment used for the detection of coronary artery disease.

·       *Less Time Consuming.  *Nuclear stresstests may take up to five hours, while cardiac stress ultrasound procedurestypically take less than one hour.

·       *Greater Availability.  *Due to thetechnical complexity, high cost and the regulatory requirements associated withthe use of radioactive materials, nuclear stress tests are not available in allhospitals, cardiology practices and emergency departments. In the UnitedStates, ultrasound equipment is widely available in all of these settings.

·       *More Information.  *Imagify-enhancedcardiac stress ultrasound has the potential to provide information on bothmyocardial perfusion and wall motion, whereas nuclear stress tests typicallyprovide good information on myocardial perfusion, but little information onwall motion. Imagify-enhanced cardiac stress ultrasound has the potential toprovide this information immediately whereas images from nuclear stress testsrequire post-processing and analysis.

·       *No Radioactivity.  *Imagify is madefrom a synthetic polymer that does not require special licensing, has thepotential of at least a two-year shelf life, and is convenient to use andstore. Nuclear stress tests use radioactive materials that create additionalcosts due to preparation, storage and disposal requirements.

·       *Expanded Opportunity for Cardiologists.  *We believethat many cardiologists will prefer Imagify-enhanced cardiac stress ultrasoundover nuclear stress tests because it may allow them to remain in closer contactwith their patients. To assess myocardial perfusion with nuclear stress tests,many patients are referred by cardiologists to the radiology department, whichis usually a different profit and care center within the hospital.

9

----

*Potential Benefitsof Imagify-Enhanced Cardiac Stress Ultrasound vs. Cardiac Stress Ultrasoundwithout Contrast*

Imagify-enhancedcardiac stress ultrasound has the potential to provide broader information forheart evaluation.

·       *More Information.  *Imagify-enhancedcardiac stress ultrasound has the potential to provide information on bothmyocardial perfusion and wall motion, whereas cardiac stress ultrasound withoutcontrast provides information only on wall motion.

·       *Potential for Increased Sensitivity with Perfusion.  *Cardiologistsseek to identify coronary artery disease early in the disease progression inorder to minimize the risk of heart attack. In early coronary artery disease,the coronary artery is only partially blocked, so there may be little or nowall motion abnormality, but there could be a perfusion abnormality. Thepotential for increased sensitivity has contributed to the popularity ofnuclear stress tests. We estimate that in 2006, approximately 7.6 millionnuclear stress tests were performed compared to 2.8 million stress cardiacultrasounds. We believe that an ultrasound contrast agent capable of myocardialperfusion imaging would enable cardiac stress ultrasound to compete moreeffectively with nuclear stress testing.

*ClinicalResults.**  *Priorto commencing our Phase 3 clinical program, we enrolled over 200 human subjectsin our Phase 1 and Phase 2 clinical trials for Imagify. Our Phase 1 clinicaltrials evaluated the safety and feasibility of myocardial perfusion imagingwith Imagify. Our Phase 2 clinical trials evaluated the preliminary safety andefficacy of Imagify-enhanced cardiac ultrasound imaging. In our Phase 2clinical trials, efficacy was measured by comparing the results obtained frommyocardial perfusion assessment using Imagify-enhanced cardiac ultrasound withthose obtained using nuclear stress tests. Our Phase 1 and Phase 2 clinicaltrials were conducted in the U.S. under an Investigational New DrugApplication, or IND. The results of our Phase 2 trials are summarized below. Wehave filed these results and our protocols for our Phase 3 trials with the FDA.We completed the pilot phase of our Phase 3 clinical program in 2005. We areintentionally blinded to efficacy data from our ongoing Phase 3 pivotal trial.

*The “20”Trial.**  *Ourobjectives in our first Phase 2 clinical trial, the “20” trial, were toevaluate the safety of Imagify in subjects with known coronary artery diseaseas well as in healthy subjects and to determine the optimal imaging proceduresfor myocardial perfusion assessment using Imagify-enhanced cardiac ultrasound.The study included 53 subjects, was conducted by echocardiologists and utilizeda variety of commercially available equipment platforms. Subjects enrolled inthe “20” trial received a single injection of Imagify at a variety of doses andwere imaged under resting conditions only. The primary efficacy endpoint wasagreement between Imagify-enhanced cardiac ultrasound and nuclear stress tests.Agreement was defined as the percentage of subjects who received the samediagnosis using Imagify-enhanced cardiac ultrasound as with nuclear stress. Atthe optimal imaging conditions identified during the trial, we met the primaryendpoint of this trial.

*The “21”Trial.**  *Ourobjectives in our second Phase 2 clinical trial, the “21” trial, were toevaluate the safety and diagnostic efficacy of Imagify in patients withsuspected or confirmed coronary artery disease as well as in healthy subjects.The study included 122 subjects, was conducted by echocardiologists and utilizeda variety of commercially available ultrasound equipment platforms and imagingtechniques. A variety of doses of Imagify were evaluated in the trial. Patientsenrolled in the “21” trial received two injections of Imagify, one underresting conditions and the other under stressed conditions. All patientsreceived a nuclear stress test and either an Imagify-enhanced cardiac stressultrasound or a cardiac stress ultrasound without contrast. The primaryefficacy analysis was based on the ability of independent echocardiologists,blinded to all other information, to detect myocardial defects when comparingcardiac ultrasound images to nuclear stress. In the “21” trial we met theprimary efficacy endpoints, which were sensitivity, or the ability todetect the presence of disease, and specificity, or the ability to determinethe absence of disease.

10

----

*Efficacy Data.**  *Comparison of Imagify-enhancedcardiac stress ultrasound and nuclear stress for subjects in our Phase 2 trialsindicated the following:

·       *Imagify-enhanced cardiac stress  ultrasound versus cardiac stress  ultrasound without contrast.  *Cardiacstress ultrasound with both low and high doses of Imagify resulted in a greaterthan 30% increase in sensitivity compared to cardiac stress ultrasound withoutcontrast, and demonstrated a higher level of agreement with nuclear stresstests versus cardiac stress ultrasound without contrast.

·       *Imagify-enhanced cardiac stress  ultrasound versus the nuclear stress test.  *Cardiacstress ultrasound with both low and high doses of Imagify agreed with nuclearstress tests in more than three-quarters of all patients.

·       *Imagify-enhanced cardiac stress ultrasound versuscoronary angiography.  *Nuclear imaging does not always resultin a correct diagnosis of coronary artery disease. The generally agreed goldstandard for the diagnosis of coronary artery disease is coronary angiography.In a retrospective exploratory analysis of those patients that underwentcoronary angiography, Imagify-enhanced cardiac stress ultrasound had the samesensitivity as nuclear stress tests when compared to coronary angiography.

*ThePhase 3 Program: Detection of Coronary Artery Disease in Patients BeingEvaluated for Ischemic Heart Disease.**  *Our Phase 3 program for Imagifycommenced in 2003 under a U.S. Investigational New Drug application and incompliance with applicable European regulatory requirements. The Phase 3clinical plan provides for a two-part program consisting of a pilot phase, orthe pilot study, under which investigators and blinded readers were qualifiedand trained, and two independent multi-center pivotal trials. These two pivotaltrials, previously referred to as the “32” and “33” trials, have been re-namedRAMP-1 and RAMP-2, respectively. “RAMP” stands for **R**eal-time**A**ssessment of**M**yocardial**P**erfusion with echocardiography. Clinicalinvestigators were qualified in the pilot phase on a rolling basis. The pilotphase was completed in 2005, after which more than 20 clinical investigatorswere qualified to enroll patients in the pivotal studies. Clinicalinvestigators in the Phase 3 pivotal studies are located at clinical sites inNorth America, Europe and Australia. Data from the Phase 3 pivotal studies areintended for submission to U.S., European, and potentially other regulatoryauthorities.

*ThePivotal Trials.**  *ThePhase 3 pivotal studies are designed to demonstrate that Imagify-enhancedcardiac stress ultrasound is non-inferior, or equivalent, to nuclear stresstesting. Clinical sites that participated in these studies were primarily inthe U.S. and Europe. All patients enrolled in these studies received anImagify-enhanced cardiac stress ultrasound. Most of these patients alsoreceived a nuclear stress test. The Imagify-enhanced cardiac stress ultrasoundimages and the nuclear stress images resulting from these studies are forwardedby the clinical sites to an independent clinical research organization whereall information about the patients, other than what is shown by the imagesthemselves, is removed. Because all such patient information is removed from theimages, evaluators of the images are referred to as “blinded readers”. Imagesproduced by Imagify-enhanced cardiac stress ultrasound are evaluated byechocardiologists, who we refer to as “ultrasound blinded readers”. Imagesproduced by nuclear stress tests are evaluated by nuclear cardiologists, who werefer to as “nuclear blinded readers”.

A truth standard defines which patients have diseaseand which patients are normal, and serves as the basis for quantifying theperformance of the ultrasound blinded readers and the performance of thenuclear blinded readers. Non-inferiority is determined by comparing theperformance of the ultrasound blinded read relative to the nuclear blindedread.

Non-inferiority of Imagify-enhanced cardiac stressultrasound relative to nuclear stress tests is evaluated in three ways, whichare the primary endpoints of the pivotal trials. First, non-inferiority is evaluated in all patients. We define “accuracy” as a measure of thepercentage of patients in which the test is correct relative to the truthstandard. Next, non-inferiority isevaluated in two different subsets of patients, those with disease and thosewithout disease. We define “sensitivity” as a measure of the 

11

----

effectivenessof the test in assessing the presence of disease in the patients who have beenshown by the truth standard as having coronary artery disease and “specificity” as a measure of theeffectiveness of the test in assessing the absence of disease in the patientswho have been shown by the truth standard to be free of coronary arterydisease.

The criteria for success for each primary endpoint isfor two of the three ultrasound blinded readers to be non-inferior to thenuclear blinded reader. In the RAMP-1 study there was one nuclear blindedreader. In the RAMP-2 study there are three nuclear blinded readers.

During the pivotal trials, we intentionally have noaccess to efficacy data. We do not publicly disclose results from a pivotaltrial until after the trial is closed, quality control checks are completed,the database is locked, the data are revealed to us and we have had anopportunity to review and understand the data, including data regardingclinical outcomes and safety results. A total of 777 patients with known orsuspected coronary artery disease have been enrolled in the Phase 3 pivotaltrials.

*RAMP-1Trial.**  *320patients were enrolled in the RAMP-1 clinical trial. Patients eligiblefor this trial had, in accordance with current clinical practice, been referredfor a nuclear stress test. All RAMP-1 patients received anImagify-enhanced cardiac stress ultrasound as well as a nuclear stress test.The truth standard in this trial was angiography, clinical outcome or clinicaloutcome with the unblinded evaluation of the nuclear stress test. The truthstandard was angiography in 42% of patients.

In June 2006 we announced preliminary results ofthe RAMP-1 study. The accuracy and specificity results exceeded thecriteria for success.  Three of threeecho blinded readers had statistically non-inferior accuracy to the nuclearblinded reader, whose accuracy was 70% (all p value <0.005).  Two of three ultrasound blinded readers hadstatistically superior specificity to the nuclear blinded reader, whosespecificity was 63% (p value for both with respect to non-inferiority<0.001). The sensitivity results missed the criteria for success of thetrial with one of three ultrasound blinded readers having statisticalnon-inferior sensitivity (p=0.002) to the nuclear blinded reader’s sensitivityof 78%. Based upon our review of the safety data from this trial, we believeImagify was well tolerated. Greater than 99% of the images acquired frompatients enrolled in the trial were evaluable.

*RAMP-2Trial.**  *InJune 2006 we completed the enrollment of 457 patients in this trial.Patients eligible for this trial had been referred for a coronary angiogram.All patients enrolled in this clinical trial received an Imagify-enhancedcardiac stress ultrasound. Approximately 420 patients also received a nuclearstress test for purposes of evaluation against the primary endpoints of thisstudy. The truth standard for all patients in this study is coronaryangiography. As dictated by the trial design, all patients in this trial wereevaluated for up to 30 days following the Imagify-enhanced cardiac stress ultrasoundstudy. Once all images have been read, and all patient data from the follow-upperiod and angiography data are collected, an independent third-party clinicalresearch organization, on our behalf, will conduct quality control checks.These checks, which can take up to 90 days, are designed to ensure that all ofthe required information has been fully gathered and filed before locking thedatabase. At that time, the data may be unblinded and made available to us foranalysis.

In October 2006, we completed an initiativedesigned to train all of the ultrasound blinded readers in the RAMP-2trial to increase their sensitivity while maintaining high accuracy. Wecontinue to train the ultrasound blinded readers in an effort to assure thatgains in sensitivity do not lower specificity below targeted levels. Based uponour findings from this training, we intend to have each of the RAMP-2ultrasound blinded readers evaluate all images for the primary efficacyanalysis of the RAMP-2 trial. We and the blinded readers remain blindedto all of the RAMP-2 efficacy data until all the blinded reads arecompleted and the trial results are available. Although this training and eachof the other differences referred to above are intended to increase thelikelihood of success for the RAMP-2 trial, we cannot assure you that theRAMP-2 results will meet or exceed the clinical endpoints. We currentlyexpect that the results from RAMP-2 will be publicly available in thesecond quarter of 2007, and that the NDA 

12

----

submission will occur inthe fourth quarter of 2007. No additional patients are expected to be enrolledin the RAMP-2 study.

*TrialDesign and Purpose.**  *Webelieve that Imagify-enhanced cardiac stress ultrasound has the potential tosignificantly reduce the time, cost and resources needed in the assessment ofmyocardial perfusion, compared to nuclear stress testing. Myocardial perfusionis blood flow to the heart muscle, a sensitive marker for coronary arterydisease. There is no ultrasound contrast agent approved by FDA for use incardiac stress ultrasound or myocardial perfusion imaging. Based upon theendpoints described above, our RAMP-1 and RAMP-2 trials aredesigned to demonstrate non-inferiority of Imagify-enhanced cardiac stressultrasound relative to nuclear stress testing. In April 2005, based inpart upon feedback from FDA, we revised the statistical analysis plan on whichwe base our patient enrollment estimates for the Imagify Phase 3 clinicaltrials. Since that time we have continued discussions with FDA regarding trialdesign and our statistical analysis plan. As a result of our ongoingdiscussions with FDA, we may make further revisions. These discussions couldlead to delays in the public announcement of the results from our RAMP-2clinical trial and affect whether Imagify is approved for the indication thatwe are seeking, the timing of such approval or whether Imagify is approved atall.

The discussion of the timing of the RAMP-2blinded reads, RAMP-2 data release and NDA submission for Imagify reflectour current assumptions, based on our knowledge and experience and the guidanceof our advisors. We cannot assure you that these timelines will be met, nor canwe assure you that our estimates and assumptions will not change based uponongoing regulatory feedback or that, when RAMP-2 results are unblinded tous, that such results will successfully achieve results that meet or exceed theclinical endpoints or that FDA will accept and approve our NDA once submitted.

*SafetyData.**  *Duringour Imagify clinical studies we have intentionally sought to identify andevaluate all AEs. Any change in how the patient feels after injection ofImagify is considered an AE, which are recorded in these studies whether or notattributable to Imagify. The adverse experiences observed in our trials havebeen typically mild in intensity and of short duration. The vast majority ofpeople exposed to Imagify are cardiac patients who are undergoing a stressstudy and have a pre-study history of chest pain. Cardiac stress ultrasound proceduresrequire stressing the heart through exercise or pharmacologically inducedstress. For purposes of control and consistency of data between studies,pharmacologically induced stress was used with all patients enrolled in thepivotal study.

Many of the types of AEs observed in our clinicalstudies have been consistent with the types associated with the pharmacologicalstressor. While certain of these AEs appear to be attributable to causes otherthan Imagify and some to Imagify, the attribution of many of these events isnot definitive. We enrolled 393 subjections in the Phase 1, Phase 2 and pilotstudies. In these studies, the most prevalent adverse events, or AEs, wereheadache, facial flushing and nausea. In these studies, one of the observed AEswas characterized as a serious adverse event, or SAE, which definition includesany AE that results in patient remaining in the hospital overnight forobservation. There was no residual effect from this event. We enrolled 320patients in the RAMP-1 clinical trial. Patients eligible for this trialhad, in accordance with current clinical practice, been referred for a nuclearstress test. The majority of AE’s reported in RAMP-1 were mild inintensity, transient, and resolved without residual effects. The most commonAEs reported were headache, chest pain, nausea, flushing and dizziness and themajority of these AEs occurred following the administration of the dipyridamolepharmacologic stress agent prior to stress imaging. SAEs and dosediscontinuation was experienced in four and five of 320 patients, respectively.All SAEs were non-life threatening, transient, and resolved without residualeffects.

The safety of our clinical studies is monitored by anindependent third party advisor and all AEs are reported to investigators,institutional review boards and regulatory agencies on a periodic basis. Weintend to continue to study the safety profile of Imagify. While we do notcomment on data from ongoing clinical trials, based upon observations to date,we believe that Imagify is generally well tolerated. 

13

----

However, there can be noassurance that we will not experience other AEs in our clinical trials or thatregulatory authorities will conclude that Imagify is safe for approval andbroader use.

*AdditionalClinical Trials to Strengthen Imagify’s Market Position.**  *As a part of our ongoing clinical program forImagify, we will continue investigating the performance of Imagify in a rangeof circumstances that may be encountered beyond of the scope of the RAMP-1and RAMP-2 studies. One such trial, named ACCESS (Acquiring Consensus forContrast Echocardiography System Settings), is designed to determine theappropriate equipment settings for Imagify on a variety of ultrasound hardwareplatforms. In March 2007, we completed ACCESS trial enrollment at 39patients. Additionally, with RAMP-1 and RAMP-2 focused on thediagnostic value of Imagify, which is the ability to detect the presence orabsence of disease at a fixed point in time, we also anticipate evaluating theprognostic value of Imagify, which is the ability to predict futurecardiovascular events, or outcomes through a trial called PACE (PrognosticAssessment of Contrast Echocardiography). No new administration of Imagify willbe required for PACE, as we will conduct follow-up analysis on patients fromthe RAMP-1 and RAMP-2 trials and expect results from this trial in2008.

*Future Indications.**  *Since Imagify circulates in theblood and acts as a tracer of blood flow, we believe it has the potential toassist in the assessment of a wide variety of diseases in addition to coronaryartery disease. Abnormal blood flow is associated with a variety of lifethreatening diseases including various forms of cancer, renal artery stenosisand deep vein thrombosis. These diseases often cannot be adequately assessedwith ultrasound imaging without contrast, and as a result radiologistscurrently detect these diseases with more expensive imaging techniques, such ascomputerized tomography, angiography, nuclear medicine and venography.Ultrasound imaging using Imagify may offer a cost-effective alternative tothese expensive techniques.

***Our Hydrophobic Drug Delivery System, or HDDSTM***

*BroadApplications for the Delivery of Hydrophobic Drugs.**  *We have developed a proprietaryformulation technology called HDDS that converts drugs that do not dissolvewell in water, or hydrophobic drugs, into microparticles or nanoparticles ofthe drugs embedded in small microparticles, such that the drugs can rapidlydissolve in water. Formulation of hydrophobic drugs is often challenging. Sincethe human body is primarily composed of water, hydrophobic drugs do notdissolve well in the body, which can limit the effectiveness of these drugs.Many promising drugs never make it to market because they are difficult todissolve. Drug programs are often abandoned after significant investmentbecause suitable formulations for these insoluble drugs are elusive. Manyhydrophobic drugs that do make it to market have less than ideal formulations.Developing intravenous formulations of hydrophobic drugs is particularlychallenging. Intravenous formulations of drugs can open new markets for drugs likeantibiotics that could often be initially prescribed in a hospital setting. Inaddition, intravenous formulations can expand the market for the oral dosageformulation because physicians typically prefer to discharge patients on theoral formulation of the intravenous formulation administered to the patient inthe hospital.

*Marketfor Hydrophobic Drug Delivery.**  *We believe that FDA-approvedhydrophobic pharmaceuticals generated $100 billion in revenues in 2005 andthat other potential drugs have not achieved FDA approval due to issuesassociated with effectively dissolving these drug candidates.

*CurrentPractice.**  *Manyhydrophobic drugs are comprised of particles that are relatively large andtherefore have a limited surface area available for interaction with water.These hydrophobic drugs are often formulated in less than ideal ways in orderto make them dissolve. It is possible to increase the dissolution rate of somehydrophobic drugs by increasing their aggregate surface area. To accomplishthis, many pharmaceutical companies use a process called micronization, whichentails grinding hydrophobic drugs into smaller microparticles. However, thedrug particles produced by micronization are often still not small enough toadequately improve dissolution, or to be administered intravenously.Alternatively, oils 

14

----

like Cremophor® are usedto dissolve the drugs. However, these oils are often not well tolerated and canrequire prolonged infusion rather than rapid injections to minimize potentialside effects. In addition, some hydrophobic drugs can be formulated into softgelatin capsules, but these are only suitable for oral administration andencapsulate only a small volume of drug, requiring the administration of manycapsules. Sometimes development of these drugs must be terminated because nosuitable formulation can be found.

*OurSolution: Rapidly Dissolving Sponge-Like Particles.**  *We have demonstrated that our HDDStechnology improves the dissolution rate of a variety of hydrophobic drugs.HDDS has achieved up to 30-fold increases in the dissolution rate of avariety of hydrophobic drugs. HDDS has produced drug formulations that arewell-tolerated in pre-clinical studies and we believe would be suitable for allroutes of administration, without resorting to the use of unsafe or unprovenadditives to formulate the drug.

*HDDSProof of Concept.**  *Wehave demonstrated in multiple laboratory tests, and in one Phase 1 human safetystudy, that our HDDS technology has the potential to improve the dissolutionrate of a variety of hydrophobic drugs, including anti-inflammatories, taxanes,calcium channel blockers and anti-fungals. Such initial testing resulted inpatent coverage with respect to over 150 potential reformulations ofhydrophobic drugs in a variety of therapeutic areas.

Our Phase 1 human safety study utilizing our HDDStechnology was conducted with AI-850, one of our initial HDDS-basedproduct candidates. AI-850 is a readily dissolving formulation of thehydrophobic drug, paclitaxel, the active ingredient in the cancer drug, Taxol®.To dissolve paclitaxel, Taxol contains Cremophor, which is believed to causesevere hypersensitivity reactions, including an extreme allergic reactioncalled anaphylaxis. Therefore, Taxol is typically administered usingpre-medications and by long infusions to patients with cancer. By puttingpaclitaxel into our sponge-like microparticles, we have created a paclitaxelformulation that is free of Cremophor. Our Phase 1 human safety study of AI-850was completed during 2004. The primary goal of the Phase 1 study was to providehuman proof-of-concept that our HDDS technology is capable of intravenouslydelivering hydrophobic drugs without the need for co-solvents that areinconvenient to administer and are associated with undesirable side effects.The primary objective of this trial was to determine the maximum tolerateddose, or MTD, of AI-850. In the dose escalation study, 22 patients withsolid tumors (taxane naïve patients and patients who previously had receivedtaxane therapy) were treated with AI-850 without standard taxanepre-medications in doses up to 250 mg/m2. Infusions of AI-850 were delivered in less than 30minutes at all doses, which is significantly shorter that the three-hourinfusion typically required by Taxol. The MTD of AI-850 for patients withextensive prior taxane therapy was 205 mg/m2, which is higher than the Taxol dose of 175 mg/m2 typically used to treat taxanenaïve patients with metastatic breast cancer. It is our current plan to seekstrategic collaborators for AI-850 before commencing additional clinicaltesting of this product candidate.

*HDDS Development Statusand Potential Product Candidates.**  *Inrecent years, although our efforts to develop HDDS product candidates have beenlimited by our prioritization of Imagify Phase 3 clinical trials, we havecontinued development. During this time, we have conducted discussions withpotential partners regarding product candidates and have performed feasibilitystudies. We will continue to seek opportunities to work with other companies onimproving their patented hydrophobic drugs and product candidates and we willevaluate the feasibility of developing, on our own or in collaboration withothers, improved formulations of off-patent hydrophobic drugs. We anticipategreater emphasis on HDDS product development in 2007 than 2006.

***Our Pulmonary Drug Delivery System, or PDDSTM***

*BroadApplications for Sustained Release in the Lung.**  *A sustained release delivery systemfor drugs delivered locally to the lung would be desirable for the treatment ofrespiratory disease. Relative to systemic drug delivery by the oral orinjectable routes, local delivery of respiratory drugs by the pulmonary 

15

----

route allows smaller dosesof the drug and minimizes systemic toxicity because the drug can be delivereddirectly to the site of the disease. Moreover, sustained release of respiratorydrugs may offer significant clinical benefit to millions of respiratorypatients, including a growing percentage of pediatric patients, by allowingthem to take treatments for such diseases as asthma less frequently, and toreceive more prolonged and steadier relief. We believe sustained delivery ofdrugs to the lung also offers the potential for improved safety, by moderatingthe drug peaks and troughs of immediate release drugs, which can cause addedtoxicity or reduced efficacy. Our initial development efforts have focused ondeveloping sustained release formulations of asthma drugs.

*Marketfor Pulmonary Drug Delivery.*   The worldwideasthma therapeutics market is estimated at over $12.0 billion in 2005. Webelieve the delivery of long-acting drugs to the lungs represents a significantmedical opportunity.

*CurrentPractice.**  *Currentpulmonary delivery systems are not ideal, delivering inaccurate doses,requiring frequent dosing and losing significant amounts of drug in thedelivery process. Most asthma drugs delivered by inhalation are immediaterelease formulations that must be inhaled multiple times per day, which discouragespatient compliance. When patients forget to take their medicine during the day,they may experience complications which may result in increased emergency roomvisits and hospitalizations. In a recent study, two thirds of all asthmapatients did not take their medications as directed. In addition, immediaterelease formulations often deliver drug levels that peak and trough, causingundesirable toxicity or inadequate efficacy.

*OurSolution: Slowly Dissolving Microparticles.**  *By controlling particle size,particle porosity and thus density, and particle composition, and therefore theaerodynamic properties of a particle, our PDDS technology controls where drugparticles go in the lung and how quickly they release their drug. This tightcontrol of release rate, and targeting within the lungs, may enable our PDDStechnology to address many of the hurdles of sustained release pulmonarydelivery.

*PDDSProof of Concept.**  *Wehave demonstrated using several molecules in multiple laboratory tests, andusing one molecule in a European Phase 1 clinical trial, that our PDDStechnology has the potential to improve the delivery of asthma drugs.

Our European Phase 1 clinical trial utilizing our PDDStechnology was conducted with AI-128, our initial PDDS-based productcandidate. AI-128 is a sustained release, dry powder formulation of awidely used asthma drug. We believe that AI-128 is the first humandemonstration of sustained release drug administration in the lung. Withonce-a-day dosing, we believe AI-128 would be more convenient for thepatient, reducing non-compliance related complications and costs. Bycontrolling the release rate of the drug to the lung, AI-128 offers thepotential for improved safety. Slowing drug release in the lung offers thepotential for a lower peak concentration of drug in the systemic circulation. OurEuropean Phase 1 clinical trial with AI-128 was conducted in accordancewith applicable local regulatory requirements. In this trial, we demonstratedthat approximately 80% of inhaled AI-128 was delivered to the intendedtarget, the upper lung. The microparticles remained in the lung for up to24 hours, the period of time that we believe is required for once-dailydosing, and that the drug was released from the microparticles in the lung overa 12 to 24-hour period.

*PDDS Development Statusand Potential Product Candidates.**  *Inrecent years, our efforts to develop PDDS product candidates have been limitedby our prioritization of Imagify Phase 3 clinical trials. We believe our PDDStechnology may enable improved formulations of other locally acting asthmadrugs as well as allow drugs that must be delivered into the bloodstream forsystemic therapy to be administered by inhalation through the lung. We havedemonstrated in pre-clinical studies that we can create sustained release,dry-powder reformulations of drugs currently used to treat respiratory disease.We believe that one or more of such reformulations could have many of thebenefits AI-128 potentially offers. Moreover, many large molecule drugs,such as proteins, cannot be delivered orally because they are destroyed by 

16

----

enzymes in thegastrointestinal system. As a result, they often must be injected subcutaneouslyor intramuscularly several times per week in order to get an adequate amount ofthe drug into the body’s general circulation. Since the lung does not containthese destructive enzymes, systemic delivery of these drugs via the pulmonaryroute could be more convenient and require less dosing. We plan to seek bothproprietary and collaborative opportunities for these drug formulations.

**Research andDevelopment**

Over the past three fiscalyears, we have made material expenditures on research and development. In thefiscal years ended December 31, 2004, 2005, and 2006, research anddevelopment expenses were approximately $26.0 million, $42.2 millionand $52.4 million, respectively.

**Our ProprietaryMicroparticle Technology**

Microparticles are usefulin the delivery of a wide range of drugs. Suitability of microparticles for usein pharmaceuticals depends on a variety of factors, including size andporosity. Smaller microparticles have a broader range of utility, such asintravenous and pulmonary delivery applications. Depending on the targeted siteand desired route of delivery, drug delivery technologies utilizemicroparticles of various sizes. Our porous microparticle technology enables usto produce very small microparticles that are smaller than a red blood cell andwith a wide range of porosities.

***Microparticle Size***

Large microparticles are microparticles over 100microns in size. Large microparticles are used to deliver drugs throughrelatively large orifices, like the mouth (oral delivery). Large microparticleshave been used in the delivery of both immediate and controlled release oraldrug formulations. However, these particles cannot be delivered by injection,because they are too large to fit through a needle. In addition, they areunsuitable for delivery via the pulmonary route, because larger particles tendto get caught in the back of the throat when inhaled. For these reasons, theuse of large microparticles is generally limited to oral administration.

Medium microparticles are microparticles between 10and 100 microns in size. These particles are small enough to fit through aneedle, and therefore are suitable for injection subcutaneously, which is underthe skin, or intramuscularly, which is into the muscle. These microparticleshave been used primarily to deliver drugs, which cannot be delivered orallybecause they are destroyed in the gastrointestinal system. However, mediummicroparticles cannot be injected intravenously because they are too large tofit through the body’s smallest blood vessels, or capillaries, and like largemicroparticles, are unsuitable for delivery via the pulmonary route.

Small microparticles aremicroparticles smaller than 10 microns, which is approximately the size of ahuman red blood cell. Small microparticles include nanoparticles, which areparticles smaller than 1 micron. Small microparticles are small enough to passthrough the capillaries for intravenous delivery; are small enough to bereadily inhaled for pulmonary delivery; and have more total surface area per unitof weight relative to larger microparticles, making them a particularlyefficient method for delivering hydrophobic drugs. Intravenous delivery isdesirable in a hospital setting to ensure that the drug is fully bioavailable,or that the entire drug dose is absorbed by the body. Intravenous delivery isalso used for drugs that must be injected but with a dose too high forintramuscular or subcutaneous delivery. Drugs are also administeredintravenously, or directly into the blood, to act as tracers of blood flow,since abnormal blood flow is associated with many life threatening diseases.Therefore, small particles have many potential applications, including use asultrasound contrast agents, as delivery systems for hydrophobic drugs, and asdelivery vehicles for asthma drugs.

17

----

***Microparticle Porosity***

The ability to vary theporosity of microparticles on a consistent basis can be critical to thesuccessful use of microparticles in pharmaceutical products. For instance, inultrasound contrast imaging, we believe it is advantageous to usemicroparticles that are highly porous on the inside but with limited porosityin the shell. Porosity on the inside of microparticles enables them to containmore of the active ingredient, which is gas, than particles that are dense.Limiting porosity in the shell prevents gas leakage and enables the retentionof the gas inside the particle. Furthermore, pores can facilitate absorption ofwater into a microparticle, which is useful in getting hydrophobic drugs todissolve more quickly, and useful for controlling the release of a drug from asustained release system. Finally, in drug delivery to the lung, it isadvantageous to use microparticles of various porosities, which controlsdensity, because the size and density of the microparticles dictates where inthe lung they will be delivered.

***Microparticle Production Using Spray Drying***

We believe the use of small, porous microparticles hasnot reached its full potential in the delivery of drugs. We believe thatcurrent manufacturing processes for creating small microparticles have lowyields, have not been adapted for use with encapsulating materials likesynthetic polymers, have low encapsulation efficiency and are difficult tocombine with other technologies, such as coating technologies. We believe thatthe use of porosity to improve drug formulations has been underutilized becausean efficient process for creating porous microparticles at commercial scale didnot exist. Our porous microparticle technology was designed to address thelimitations of existing manufacturing processes.

Spray drying is aproduction technique widely used in the pharmaceutical industry because it is asingle-step, continuous process. However, standard spray drying:

·       *Produces solid microparticles* rather thanthe porous microparticles, which are required for ultrasound contrast imagingand may be beneficial for hydrophobic and pulmonary drug delivery.

·       *Does not completely remove* moisture fromthe microparticles, contributing to low yields and making standard spray dryinguneconomic for the production of drugs made from expensive raw materials.

·       *Results in relatively high levels of residualsolvents*, which can be problematic for the stability and safety ofthe drug.

·       *Often operates at high temperatures*, makingit difficult to use with drugs that are unstable at higher temperatures.

·       *Is not well-suited to sterile, or aseptic, processing*,which is required for most intravenously administered drugs and is beneficialfor pulmonary-delivered drugs.

Our proprietary porousmicroparticle technology platform consists of two key components—amulti-chamber spray dryer and pore-forming agents.

***Our Patented Spray Dryers***

We believe we haveovercome the limitations of standard spray drying in producing smallmicroparticles and nanoparticles through patented equipment innovations that:

·       *Remove nearly all residual solvents such as moisture*from the microparticles because our patented spray dryer increases the lengthof time the microparticles are dried.

·       *Can be operated at low or high temperatures*,due to increasing the drying time used for microparticles produced at lowertemperatures, and reducing the drying time for microparticles produced athigher temperatures.

18

----

·       *Are well suited to aseptic processing* byusing steam sterilization techniques and a positive pressure system, therebyminimizing the contaminants pulled into the spray dryer from the surroundingenvironment.

We have improved the drying capability of standardspray dryers by adding additional drying chambers through which themicroparticles travel. The additional drying chamber consists of a large,narrow coil through which the particles can be dried at multiple temperaturesand at high linear gas velocities. As a result, our spray dryers allow highthroughput drying, higher yield and lower residual solvent than conventionalspray dryers do. The additional drying chamber allows the microparticles toremain in the drying phase for a longer period of time, thereby increasing theamount of moisture and residual solvents that are removed during the dryingphase. This innovation, which is the subject of six of our issued patents,improves yield by reducing the amount of microparticles that cling to thesurfaces of the spray dryer due to inefficient drying. Accordingly, we believethat this technology is appropriate for the encapsulation of drugs usingexpensive raw materials. This innovation enables us to increase the drying timeand lower the drying temperature for drugs. Accordingly, we believe thistechnology is appropriate for the encapsulation of drugs, like proteins, whichare unstable at higher temperatures.

In order to produce microparticles and nanoparticlesto be used in drugs delivered intravenously, the particles must be producedaseptically. We have improved standard spray dryers by making them suitable foraseptic processing. Our spray dryers operate under positive pressure,minimizing the risk of pulling contaminants into the process from thesurrounding environment. In addition, our spray dryers are composed ofstainless steel and Teflon components to mitigate against shedding into theproduct during processing, and can be sterilized using steam sterilizationtechniques.

We have made theseimprovements to standard spray drying processes and equipment without alteringthe fundamental advantages of standard spray drying. Like standard spraydryers, our spray dryers enable a single-step, continuous process that isefficient in encapsulating up to 100% of the active ingredient, and can be usedwith either synthetic or natural materials.

***Our Patented Pore-Forming Agents***

We have developed apatented process technology for creating porous microparticles. To create poresin our microparticles we add pore-forming agents to the solution before we putit through the spray dryer. These pore-forming agents create bubbles, similarto the bubbles in carbonated beverages. These bubbles are formed while thesolution is being converted into a microparticle in the spray dryer. Thebubbles create pores in the microparticle and the pore-forming agents areremoved during the drying process. We can vary the number and size of the poresby varying the amount of pore-forming agents we add to the process. In this waywe can design microparticles that are porous or sponge-like.

**Reimbursement**

We intend to focus on obtaining coverage andreimbursement from Medicare, Medicaid and private insurers for our productcandidates. Although there can be no assurance that we will be successful inobtaining third-party reimbursement, we believe we will be successful inobtaining this reimbursement for our lead product candidate, Imagify.

Effective January 2001, the Centers for Medicareand Medicaid Services, formerly known as the Health Care FinancingAdministration, implemented a reimbursement code that provides reimbursementfor the use of injectable contrast material in echocardiography in a physician’soffice and hospital outpatient setting. Currently, the reimbursed rate for eachof the three ultrasound contrast agents FDA-approved for use in LVO and EBD inpatients with suboptimal images is over $100 per vial. Although privateinsurers make their own decisions on reimbursement, they typically follow thelead of the Centers for Medicare and Medicaid Services, which managereimbursement for Medicare and Medicaid.

19

----

We plan to apply for a newreimbursement code at a higher rate. We believe ultrasound imaging usingImagify for myocardial perfusion assessment, which involves dosing of patientsfor a resting ultrasound study followed by a second dose for a cardiacultrasound stress study, will provide at least the same clinical information asnuclear stress tests (which also requires dosing for a rest study followed bydosing for a stress study), but at much lower total study cost, due in part tohigher capital equipment costs, longer procedure times and radioactive materialhandling issues associated with nuclear stress tests. Given these expected costadvantages, we believe that Imagify will ultimately obtain adequatereimbursement in this era of managed care, where the federal government andprivate insurers are striving to lower the total cost of deliveringstate-of-the-art healthcare. Further, in the treatment of hospital inpatients,who are usually subject to a fixed total reimbursement based solely on theirdiagnosis and not on the test used, we expect that hospital staffs will beencouraged to use the much lower cost Imagify-enhanced cardiac stressultrasound, if and when it is approved by FDA, rather than the more expensivenuclear stress test. Our efforts to obtain a higher reimbursement rate canbegin prior to our product’s approval and will probably require about two yearsfor completion. The current reimbursement codes cover hospital outpatient andphysician offices, which are the locations where almost all cardiac ultrasoundsare performed. In the period immediately following the potential launch of ourproduct, we believe that the current reimbursement rates for ultrasoundcontrast agents should enable us to sell our product at attractive margins.

**Manufacturing**

Prior to filing an NDA for Imagify, we mustdemonstrate that we can successfully and repeatedly manufacture Imagify incompliance with current good manufacturing practices, or cGMPs, enforced by theFDA and overseas regulatory agencies in the manufacturing facility that weintend to use to produce Imagify at commercial launch.

In July 2004, we entered into a lease agreementfor 58,000 square feet of commercial manufacturing space in Tewksbury,Massachusetts. In late 2005, we substantially completed the build-out of thisfacility and commenced start-up activities relating to the manufacturingequipment installed at the site. In early 2006 we completed commissioning ofthe manufacturing equipment and utilities within the facility, in mid-2006we produced full commercial scale development batches of Imagify in thisfacility and in late 2006 we substantially completed all InstallationQualification, or IQ, and Operational Qualification, or OQ, requirementsrelating to the equipment and utilities initially needed for this facility. Remainingsteps to qualification of the manufacturing facility include; asepticvalidation, process qualification and completion of product stability testing.All such qualification activities need to be completed under cGMPs. Data fromthe production of Imagify under cGMPs is intended to be part of our NDAsubmission of Imagify. Based upon our current plans, we expect to complete thisqualification phase in time to support a NDA submission in the fourth quarterof 2007.

Although the manufacturing facility is built-out andequipped and IQ’s and OQ’s are substantially complete, considerable work andtesting remain to be completed before this facility is qualified. We cannotassure you that we will not encounter complications in the qualification ofoperations in this facility, which complications could add additional costs ordelay our submission of a NDA for Imagify.

We believe that ourexisting facilities, subject to the successful qualification of the commercialmanufacturing facility in Tewksbury, Massachusetts, are adequate to meet ourcurrent and initial commercial requirements and that suitable additional spacewill be available as needed. In support of our efforts to qualify ourcommercial manufacturing facility for Imagify, in February 2006, we andNycomed agreed to amend the 2004 strategic collaboration agreement resulting incommitment by Nycomed to accelerate $1.8 million in payments to us in order tofund certain activities associated with the qualification of our manufacturingfacility. During 2006 we received the full $1.8 million in payments fromNycomed.

20

----

**Patents andProprietary Rights**

Our success depends in part on our ability to obtainpatents, to protect trade secrets, to operate without infringing theproprietary rights of others and to prevent others from infringing ourproprietary rights. Our policy is to seek to protect our proprietary positionby, among other methods, filing U.S. and foreign patent applications related toour proprietary technology, inventions and improvements that are important tothe development of our business.

Ourpatents include internally developed patents as well as patents acquired fromthird parties. As of March 2007, we owned 31 issued U.S. patents, oneallowed U.S. patent and 20 U.S. patent applications. We charge allpatent-related expenses to operations as incurred. Six of our issued U.S.patents are directed to aspects of the spray drying method for manufacturingmicroparticles. Four issued U.S. patents and eight U.S. patent applications arerelated to various aspects of our porous microparticle delivery technology. Fiveissued U.S. patents relate to aspects delivery of hydrophobic drugs, includingAI-850. We also own a number of pending international and foreign patentapplications corresponding to these U.S. patents and applications.

| **U.S. Patent   Number** | ** ** | **Issue Date** | ** ** | **Expiration Date** | ** ** | **Subject (Title)**                                                                                                                       |
|--------------------------|------------|----------------|------------|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| 5,425,366                |       | 20Jun95        |       | 20Jun12             |       | Ultrasonic Contrast   Agents, Process for Their Preparation and Their Use as a Diagnostic and   Therapeutic Agent                         |
| 5,611,344                |       | 18Mar97        |       | 05Mar16             |       | Microencapsulated   Flurorinated Gases for Use As Imaging Agents                                                                          |
| 5,837,221                |       | 17Nov98        |       | 29Jul16             |       | Polymer-Lipid   Microencapsulated Gases for Use as Imaging Agents                                                                         |
| 5,853,698                |       | 29Dec98        |       | 05Mar16             |       | Method for Making Porous   Microparticles by Spray Drying                                                                                 |
| 6,045,777                |       | 04Apr00        |       | 30Jun17             |       | Method for Enhancing The   Echogenicity And Decreasing The Attenuation pf Microencapsulated Gases                                         |
| 6,068,857                |       | 30May00        |       | 25Aug14             |       | New Microparticles   Containing Active Ingredients, Agents Containing These Microparticles, Their   Use for Ultrasound-Controlled Release |
| 6,071,496                |       | 06Jun00        |       | 06Jun17             |       | Ultrasonic Contrast   Agents, Process for Their Preparation and Their Use as a Diagnostic and   Therapeutic Agent                         |
| 6,132,699                |       | 17Oct00        |       | 05Mar16             |       | Ultrasound Contract Agents   Produced By Spray Drying                                                                                     |
| 6,177,062                |       | 23Jan01        |       | 06Jun17             |       | Ultrasonic Contrast   Agents, Process for Their Preparation and Their Use as a Diagnostic and   Therapeutic Agent                         |
| 6,223,455                |       | 01May01        |       | 03May19             |       | Spray Drying Apparatus And   Methods of Use                                                                                               |
| 6,284,280                |       | 04Sep01        |       | 25Aug14             |       | New Microparticles   Containing Active Ingredients, Agents Containing These Microparticles, Their   Use for Ultrasound-Controlled Release |
| 6,306,366                |       | 22Oct01        |       | 10Feb15             |       | Microparticles That   Contain Gas, Media That Contain The Latter, Their Use in Ultrasound   Diagnosis, As Well As Process For The Product |
| 6,308,434                |       | 30Oct01        |       | 03May19             |       | Spray Drying Apparatus And   Methods of Use                                                                                               |
| 6,383,470                |       | 07May02        |       | 12Nov13             |       | Microparticle Preparations   Made of Biodegradable Copolymers                                                                             |
| 6,395,300                |       | 28May02        |       | 04Nov19             |       | Porous Drug Matrices And   Methods For Manufacture Thereof                                                                                |
| 6,423,345                |       | 23Jul02        |       | 22Feb19             |       | Matrices Formed of Polymer   And Hydrophobic Compounds For Use In Drug Delivery                                                           |
| 6,560,897                |       | 13May03        |       | 26Jun19             |       | Spray Drying Apparatus And   Methods of Use                                                                                               |
| 6,589,557                |       | 08Jul03        |       | 04Nov19             |       | Porous Celecoxib Matrices   And Methods Of Manufacture Thereof                                                                            |
| 6,610,317                |       | 26Aug03        |       | 25May20             |       | Porous Paclitaxel Matrices   And Methods Of Manufacture Thereof                                                                           |
| 6,645,528                |       | 11Nov03        |       | 25Nov19             |       | Porous Drug Matrices And   Methods For Manufacture Thereof                                                                                |
| 6,652,782                |       | 25Nov03        |       | 23May20             |       | Multi-Stage Method For   Producing Gas-Filled Microcapsules                                                                               |
| 6,689,390                |       | 10Feb04        |       | 22Feb19             |       | Matrices Formed of Polymer   And Hydrophobic Compounds For Use in Drug Delivery                                                           |
| 6,730,322                |       | 04May04        |       | 22Feb19             |       | Matrices Formed of Polymer   And Hydrophobic Compounds For Use in Drug Delivery                                                           |
| 6,800,297                |       | 05Oct04        |       | 04Nov19             |       | Porous Cox-2   Inhibitor Matrices and Methods of Manufacture Thereof                                                                      |
| 6,872,180                |       | 29Mar05        |       | 28Mar23             |       | Device and Process for   Quantifying Bodies by Means of Ultrasound                                                                        |
| 6,918,991                |       | 19Jul05        |       | 19Dec22             |       | Methods and Apparatus for   Making Particles Using Spray Dryer and In-Line Jet Mill                                                       |

21

----

 

| **U.S. Patent   Number** | ** ** | **Issue Date** | ** ** | **Expiration Date** | ** ** | **Subject (Title)**                                                                 |
|--------------------------|------------|----------------|------------|---------------------|------------|-------------------------------------------------------------------------------------|
| 6,921,458                |       | 26Jul05        |       | 19Dec22             |       | Methods and Apparatus for   Making Particles Using Spray Dryer and In-Line Jet Mill |
| 6,932,983                |       | 23Aug05        |       | 09Jul21             |       | Porous Drug Matrices And   Methods For Manufacture Thereof                          |
| 6,962,006                |       | 08Nov05        |       | 29Apr23             |       | Methods and Apparatus for   Making Particles Using Spray Dryer and In-Line Jet Mill |
| 7,052,719                |       | 30May06        |       | 03Oct21             |       | Matrices Formed of Polymer   And Hydrophobic Compounds For Use in Drug Delivery     |
| 7,160,557                |       | 09Jan07        |       | 22Feb19             |       | Matrices Formed of Polymer   And Hydrophobic Compounds For Use in Drug Delivery     |

 

In June 2006, pursuant to a non-exclusive licenseagreement with GE Healthcare, or GE, a division of General Electric Company, welicensed GE’s ultrasound contrast agent patents and patent applications, aswell as any patents that GE acquires in the field of ultrasound contrast agentswithin 12 months of the agreement. In consideration of the non-exclusivelicense of these patents, we agreed to pay GE $10.0 million prior to commercialapproval of Imagify, of which $5.0 million was paid in June 2006 and $5.0million is due in June 2007. In addition, we agreed to pay GE $5.0 millionupon the commercial approval (defined as the first to occur of the approval ofa New Drug Application in the United States or the approval of a MarketingAuthorization Application in Europe) of Imagify and $5.0 million upon the oneyear anniversary of such commercial approval.

Also in June 2006, pursuant to a non-exclusivelicense agreement with Bracco International BV, or Bracco, we licensed Bracco’sultrasound-related patents and patent applications in the field of ultrasounddiagnostic imaging. In consideration of the non-exclusive license of thesepatents, we agreed to pay Bracco up toa total of Euros 3.0 million (approximately $4.0 million), ofwhich Euros 0.5 million (approximately $0.6 million) was paid inJune 2006. An additional Euros 2.5 million (approximately $3.3 million)is payable upon our achievement of certain defined regulatory milestones. Wealso agreed to pay a royalty on future Imagify revenue, up to a maximum royaltyamount of Euros 10.0 million (approximately $13.2 million), less aportion of the above-referenced milestone payments.

In May 2005, pursuant to a Patent TransferAgreement with Schering, we acquired from Schering rights, title and interestin nine patent families, including U.S. and international ultrasound relatedpatents, and licenses to two other patent families. In consideration of thetransfer and assignment of these patents, we agreed to pay Schering a total of$7.0 million of which $1.0 million was paid in May 2005, $3.0 million waspaid in May 2006, and $3.0 million is due in May 2007.

Our planned and potential products should be protectedfrom unauthorized use by third parties to the extent that they are covered byvalid and enforceable patents or are effectively maintained as trade secrets.Patents owned by or licensed to us may not afford protection againstcompetition, and our pending patent applications now or hereafter filed by orlicensed to us may not result in patents being issued. In addition, the laws ofsome foreign countries may not protect our intellectual property rights to thesame extent as the laws of the United States.

The patent positions of companies like ours involvecomplex legal and factual questions and, therefore, their enforceability cannotbe predicted with certainty. Our patent applications may not issue as patents.Our issued patents and those that may issue in the future, or those licensed tous, may be challenged, invalidated or circumvented, and the rights grantedthereunder may not provide us proprietary protection or competitive advantagesagainst competitors with similar technology. Furthermore, our competitors mayindependently develop similar technologies or duplicate any technologydeveloped by us. Because of the extensive time required for development,testing and regulatory review of a potential product, it is possible that,before any of our products can be commercialized, any related patent may expireor remain in force for only a short period following commercialization. Patentexpiration could 

22

----

adversely affect ourability to protect future product development and, consequently, our operatingresults and financial position.

Because patent applications in the United States andmany foreign jurisdictions are typically held in secret and not published untileighteen months after filing, we cannot be certain that we were the first tofile for protection of the inventions set forth in these patent applications.Because publications of discoveries in the scientific literature often lagbehind actual discoveries, we cannot be certain that we were the first to makethe inventions claimed in each of our issued or pending patent applications.

Our planned or potential products may be covered bythird-party patents or other intellectual property rights, in which case we mayneed to obtain a license or sublicense to these rights to continue developingor marketing these products. Although from time to time we receivecorrespondence from and have discussions with third-parties concerning thepatent position of such third-parties, as of the date of this report we havenot received correspondence from any third-party alleging infringement. Anyrequired licenses or sublicenses may not be available to us on acceptableterms, if at all. If we do not obtain any required licenses or sublicense, wecould encounter delays in product introductions while we attempt to designaround these patents, or could find that the development, manufacture or saleof products requiring these licenses is foreclosed.

We know of U.S. and foreign patents issued to thirdparties that relate to aspects of our product candidates. There may also bepatent applications filed by these or other parties in the United States andvarious foreign jurisdictions that relate to some aspects of our productcandidates, which, if issued, could subject us to infringement actions. Inparticular, we are aware of U.S. and foreign patents owned by third parties,including potential competitors that arguably cover aspects of our Imagifycontrast agent. Based on advice from our patent counsel, we believe that theseclaims are not infringed and/or invalid. Absent a license or other businessarrangement, there is a significant possibility that one or more of these thirdparties will use litigation to assert their patents in the United States orEurope.

The owners or licensees of these and other patents mayfile one or more infringement actions against us. Any such infringement ormisappropriation action could cause us to incur substantial costs defending thelawsuit and could distract our management from our business, even if theallegations of infringement or misappropriation are unwarranted. The defense ofmultiple claims could have a disproportionately greater impact. In addition,either in response to or in anticipation of any such infringement ormisappropriation claim, we may enter into commercial agreements with the ownersor licensees of these rights. The terms of these commercial agreements mayinclude substantial payments, including substantial royalty payments onrevenues received by us in connection with the commercialization of ourproducts. These payments could increase our operating losses and reduce ourresources available for development activities. Furthermore, a party makingthis type of claim could secure a judgment that requires us to pay substantialdamages, which would increase our operating losses and reduce our resourcesavailable for development activities. A judgment could also include aninjunction or other court order that could prevent us from making, using,selling, offering for sale or importing our products or prevent our customersfrom using our products.

Litigation may be necessary to defend against orassert claims of infringement, to enforce patents issued to us, to protecttrade secrets or know-how owned by us, or to determine the scope and validityof the proprietary rights of others. In addition, interference proceedings declaredby the U.S. Patent and Trademark Office may be necessary to determine thepriority of inventions with respect to our patent applications. Litigation orinterference proceedings could result in substantial costs to and diversion ofeffort by us, and could have a material adverse effect on our business,financial condition and results of operations. These efforts by us may not besuccessful.

We may rely, in somecircumstances, on trade secrets to protect our technology. However, tradesecrets are difficult to protect. We seek to protect our proprietary technologyand processes, in part, by 

23

----

confidentialityagreements with our employees and contractors. There can be no assurance thatthese agreements will not be breached, that we will have adequate remedies forany breach, or that our trade secrets will not otherwise become known or beindependently discovered by competitors. To the extent that our employees,consultants or contractors use intellectual property owned by others in theirwork for us, disputes may also arise as to the rights in related or resultingknow-how and inventions.

**GovernmentRegulation**

***U.S. Regulatory Approval***

FDA and comparable regulatory agencies in state andlocal jurisdictions and in foreign countries regulate and impose substantialrequirements upon the research, development, pre-clinical and clinical testing,manufacture, distribution, record keeping, reporting, storage, approval,advertising, promotion, sale and export of pharmaceutical products. We believethat our products will be regulated as drugs by FDA.

The processrequired by FDA under the new drug provisions of the Federal Food, Drug andCosmetic Act before our products may be marketed in the United States generallyinvolves the following:

·       pre-clinicallaboratory and animal tests performed under FDA’s Good Laboratory Practicesregulation;

·       developmentof manufacturing processes which conform to FDA-mandated cGMPs;

·       submissionand acceptance of an Investigational New Drug application, or IND, which mustbecome effective before clinical trials may begin in the United States;

·       adequateand well-controlled human clinical trials to establish the safety and efficacyof the product candidate in our intended use; and

·       FDAreview and approval of an NDA, prior to any commercial sale or shipment of aproduct.

The testing and approval process requires substantialtime, effort, and financial resources and we cannot be certain that anyapproval will be granted on a timely basis, if at all.

Pre-clinical tests include laboratory evaluation ofthe product candidate, its chemistry, formulation and stability, as well asanimal studies to assess the potential safety and efficacy of the productcandidate. The results of the pre-clinical tests, together with manufacturinginformation and analytical data, are then submitted to FDA as part of an IND,which must become effective before we may begin human clinical trials.Pre-clinical tests and studies can take several years to complete, and there isno guarantee that an IND based on those tests and studies will become effectiveto permit clinical testing to begin. An IND becomes effective 30 daysafter receipt by FDA, unless FDA, within the 30-day time period, raisesconcerns or questions about the conduct of the trials as outlined in the INDand imposes a clinical hold. In this case, the IND sponsor and FDA must resolveany outstanding concerns before clinical trials can begin. Prior to initiationof clinical studies, an independent Institutional Review Board at each medicalsite proposing to conduct the clinical trials must review and approve eachstudy protocol. Similar requirements exist in other countries where we maychoose to perform clinical trials.

Human clinicaltrials are typically conducted in three sequential phases that may overlap:

·       Phase1:   The drug is initially introduced into healthy human subjects orpatients and tested for safety and dosage tolerance. Absorption, metabolism,distribution and excretion studies are generally performed at this stage.

·       Phase2:   The drug is studied in exploratory therapeutic trials in a limitednumber of subjects with the disease or medical condition for which the new drugis intended to be used in order to identify 

24

----

possible adverse effectsand safety risks, to determine the preliminary or potential efficacy of theproduct for specific targeted diseases or medical condition and to determinedosage tolerance and the optimal effective dose.

·       Phase3:   When Phase 2 evaluations demonstrate that a specific dosage range ofthe drug is likely to be effective and has an acceptable safety profile, Phase3 trials are undertaken to demonstrate clinical efficacy and to further testfor safety in an expanded patient population, often at geographically dispersedclinical study sites.

We cannot be certain that we will successfullycomplete Phase 1, Phase 2 or Phase 3 testing of our product candidates withinany specific time period, if at all. Furthermore, FDA, the Institutional ReviewBoard or the sponsor may suspend or terminate clinical trials at any time onvarious grounds, including a finding that the subjects or patients are beingexposed to an unacceptable health risk.

A description of the manufacturing process and qualitycontrol methods, including data to support the successful qualifiedmanufacturing of product within the designated manufacturing facility, as wellas results of pre-clinical studies, toxicology studies and clinical trials,among other things, are submitted to FDA as part of an NDA for approval priorto the marketing and commercial shipment of the product. FDA may deny a newdrug application if all applicable regulatory criteria are not satisfied or mayrequire additional data including clinical, toxicology or manufacturing data.Even after a new drug application is issued, FDA may withdraw product approvalif compliance with regulatory standards is not maintained or if safety problemsoccur after the product reaches the market. In addition, FDA requiressurveillance programs to monitor the consistency of manufacturing and thesafety of approved products that have been commercialized. The agency has thepower to require changes in labeling or to prevent further marketing of aproduct based on new data that may arise after commercialization. Similarrequirements exist in other countries where we may choose to seek marketingapproval.

Satisfaction of FDA requirements or similarrequirements of state, local and foreign regulatory agencies typically takesseveral years and the actual time required may vary substantially, based uponthe type, complexity and novelty of the pharmaceutical product. Governmentregulation may delay or prevent marketing of potential products altogether orfor a considerable period of time and imposes costly and time-consumingrequirements. We cannot be certain that FDA or any other regulatory agency willagree with our judgment and interpretations or will grant approval for any ofour products under development on a timely basis, if at all. Success inpre-clinical or early stage clinical trials does not assure success in laterstage clinical trials. Data obtained from pre-clinical and clinical activitiesis not always conclusive and may be susceptible to varying interpretations thatcould delay, limit or prevent regulatory approval. Even if a product receivesregulatory approval, the approval is typically limited to specific clinicalindications. Further, even after regulatory approval is obtained, laterdiscovery of previously unknown problems with a product may result inrestrictions on the product or even complete withdrawal of the product from themarket. Delays in obtaining, or failures to obtain regulatory approvals wouldhave a material adverse effect on our business. Marketing our products abroadwill require similar regulatory approvals and is subject to similar risks. Inaddition, we cannot predict what adverse governmental regulations may arisefrom future U.S. or foreign governmental action.

Any products manufactured or distributed by uspursuant to FDA clearances or approvals are subject to continuing regulation bythe FDA, including record-keeping requirements and reporting of adverseexperiences. Drug manufacturers and their subcontractors are required toregister their establishments with FDA and state agencies, and are subject toperiodic unannounced inspections by FDA and state agencies for compliance withcGMPs, which impose procedural and documentation requirements upon us and ourthird party manufacturers. We cannot be certain that we, or our present orfuture suppliers, will be able to comply with the cGMP regulations and otherFDA regulatory requirements. Failure to comply with these requirements canresult in, among other things, total or partial suspension of production,failure of 

25

----

the government to grantapproval for marketing, and withdrawal, suspension, or revocation of marketingapprovals.

Once FDA approves a product, a manufacturer mustprovide certain updated safety and efficacy information. Product changes, aswell as certain changes in a manufacturing process or facility or otherpost-approval changes may necessitate additional FDA review and approval.

FDA regulates drug labeling and promotion activities.FDA has actively enforced regulations prohibiting the marketing of products forunapproved uses. Violations of the Federal Food, Drug, and Cosmetic Act orregulatory requirements may result in agency enforcement action, includingvoluntary or mandatory recall, suspension or revocation of product approval,product seizure, fines, injunctions or civil or criminal penalties. Our productdevelopment and testing activities are also subject to a variety of state lawsand regulations. Any applicable state or local regulations may hinder ourability to manufacture or test our products in those states or localities. Weare also subject to numerous federal, state and local laws relating to suchmatters as safe working conditions, manufacturing practices, environmentalprotection, fire hazard control, and disposal of hazardous or potentiallyhazardous substances. We may incur significant costs to comply with such lawsand regulations now or in the future.

FDA’s policies may change and additional governmentregulations may be enacted which could prevent or delay regulatory approval ofour potential products. Moreover, increased attention to the containment ofhealth care costs in the United States and in foreign markets could result innew government regulations that could have a material adverse effect on ourbusiness. We cannot predict the likelihood, nature or extent of adversegovernmental regulation that might arise from future legislative oradministrative action, either in the United States or abroad.

We have had ongoingdiscussions with FDA concerning the statistical analysis plan used inconnection with our Phase 3 clinical trials of Imagify. In April 2005,based in part upon feedback from FDA, we revised the statistical analysis planon which we base our patient enrollment estimates for the Imagify Phase 3 clinicaltrials. Since that time we have continued discussions with FDA. Continueddiscussions with FDA could lead to other changes relating to our statisticalanalysis plans. How, when or if the matters being discussed are resolved mayaffect whether Imagify is approved for the indication that we are seeking, thetiming of such approval or whether Imagify is approved at all. Such timingcould also lead to delays in the timing of the unblinding of the data from ourPhase 3 clinical trials, and therefore public announcement of results fromthose trials.

***Foreign Regulatory Approval***

Outside the United States, our ability to market ourproducts will also be contingent upon receiving marketing and pricingauthorizations from the appropriate regulatory authorities. The foreignregulatory approval process includes all the risks associated with FDA approvaldescribed above. The requirements governing conduct of clinical trials andmarketing authorization vary widely from country to country.

Under European Union regulatory systems, marketingauthorizations may be submitted either under a centralized or decentralizedprocedure. The centralized procedure provides for the grant of a singlemarketing authorization that is valid for all European Union member states. Thedecentralized procedure provides for mutual recognition of national approvaldecisions. Under this procedure, the holder of a national marketingauthorization may submit an application to the remaining member states. Within90 days of receiving the applications and assessment report, each memberstate must decide whether to recognize approval.

We, or a partner to whomwe have assigned the right, will choose the appropriate route of Europeanregulatory filing. In 2004, we entered into a strategic partnership with Nycomedunder which they are primarily responsible for regulatory strategy and approvalin Europe for our lead product candidate, 

26

----

Imagify.However, the chosen regulatory strategy for our product candidates may notsecure regulatory approvals or approvals of the chosen product indications.These approvals, if obtained, may take longer than anticipated. We cannotassure you that any of our product candidates will prove to be safe oreffective, will receive regulatory approvals, or will be successfully commercialized.

**Competition**

The pharmaceutical and biotechnology industries inwhich we operate are characterized by rapidly advancing technologies, intensecompetition and an emphasis on proprietary products. Our competitors includelarge pharmaceutical and biotechnology companies, specialty pharmaceutical andgeneric drug companies, academic institutions, government agencies and researchinstitutions. All of these competitors currently engage in, have engaged in ormay engage in the future in the development, manufacturing, marketing andcommercialization of new pharmaceuticals and pharmaceuticals, some of which maycompete with our present or future product candidates.

We expect that our product candidates, if approved formarketing, will compete with existing drugs, therapies, drug delivery systemsand technological approaches, as well as new drugs, therapies, drug deliverysystems or technological approaches that may be developed or commercialized inthe future. Any of these drugs, therapies, systems or approaches may receivegovernment approval or gain market acceptance more rapidly than our productcandidates, may offer therapeutic or cost advantages over our productcandidates or may cure our targeted diseases or their underlying causescompletely. As a result, our product candidates may become noncompetitive orobsolete.

Imagify, our cardiovascular drug for the assessment ofmyocardial perfusion, if approved for marketing and sale, will face intensecompetition. We believe that Imagify-enhanced cardiac stress ultrasound can bea cost-effective and convenient substitute for nuclear stress tests, thecurrent standard of care in myocardial perfusion assessment. In addition, webelieve Imagify will add useful myocardial perfusion information that currentcardiac stress ultrasound tests cannot provide without a contrast agent.Imagify is designed for use with widely available ultrasound equipment andtechniques currently used for wall motion studies using cardiac ultrasound. Weexpect to face intense competition from companies that market products relatedto these existing imaging techniques, as well as other companies that aredeveloping ultrasound contrast agents for use in cardiac ultrasound.

Nuclear stress testing is an established technique forassessing myocardial perfusion. Radioactive contrast agents that are approvedby the FDA for use in nuclear stress tests include Cardiolite®, which ismarketed by Bristol-Myers Squibb Company; Myoview®, which is marketed by GEHealthcare; and thallium, which is marketed by GE Healthcare, Bristol-MyersSquibb and Tyco International. Cardiac ultrasound without contrast is anestablished technique for detecting abnormal wall motion, which somecardiologists may find satisfactory for the detection of coronary arterydisease. However, cardiac ultrasound without contrast is incapable of assessingmyocardial perfusion. We believe that Imagify-enhanced cardiac stressultrasound will enable cardiac ultrasound to provide information on myocardialperfusion in addition to wall motion.

No ultrasound contrast agent has been approved by FDAfor use in myocardial perfusion imaging using cardiac ultrasound. However, weare aware of other companies that are or may be developing ultrasound contrastagents for use in cardiac ultrasound. CardioSphereTM, which is being developedby Point Biomedical Corporation, is an ultrasound contrast agent for theassessment of myocardial perfusion. In 2006, it was reported that PointBiomedical Corporation, in order to potential gain regulatory approval forCardioSphere, must design and commence new Phase 3 clinical trials. Inaddition, some companies have ultrasound contrast agents that are FDA approvedfor LVO and EBD in patients with suboptimal images or are in development. Inthe future, these companies may seek to broaden their indications to includemyocardial perfusion assessment. These FDA-approved agents include Optison®,which is 

27

----

marketed by GE Healthcareand Definity®, which is marketed by Bristol-Myers Squibb. SonoVue® is anultrasound contrast agent marketed in Europe by Bracco for LVO and EBD and forradiology applications.

Numerous companies are seeking to improve theformulation of drugs, including efforts to improve the dissolution ofhydrophobic drugs which efforts could compete with our HDDS technology. Forexample, AI-850, our reformulation of paclitaxel, if approved formarketing and sale, will also face intense competition. We are aware ofcompanies, such as American Pharmaceutical Partners, NeoPharm and SonusPharmaceuticals that are applying significant resources and expertise todeveloping reformulations of paclitaxel for intravenous delivery that willcompete with our current product candidate. In early 2005, AmericanPharmaceutical Partners received FDA approval for and is marketing their product,Abraxane. None of these other reformulations has received approval from FDA.Other companies, such as Cell Therapeutics, are developing new chemicalentities that involve paclitaxel conjugated, or chemically bound, to anotherchemical. None of these new chemical entities have received final approval fromFDA. In addition, a number of companies have developed technology fordelivering hydrophobic drugs. Cardinal Health, CyDex and Elan have createdformulations of hydrophobic drugs that have been approved by FDA.

Efforts by companies to improve the formulation drugscould result in competition for our PDDS technology. As a result, AI-128,our initial sustained release formulation of an asthma drug or other productcandidates utilizing our PDDS technology, if approved for marketing and sale,will also face intense competition. Companies such as Alkermes possesstechnology that may be suitable for sustained release pulmonary drug deliveryand may have competitive programs that have not been publicly announced or maydecide to begin such programs in the future. We are not aware of any othercompany currently in human clinical development of a sustained release versionof the asthma drug that is currently the subject of our research anddevelopment efforts. In addition, many asthma drugs are marketed by largepharmaceutical companies with much greater resources than us. These companiesmay be developing sustained release versions of their asthma drugs that wouldcompete with our sustained release product candidate.

Many of our competitors inthese markets have greater development, financial, manufacturing, marketing,and sales experience and resources than we do and we cannot be certain thatthey will not succeed in developing products or technologies which will renderour technologies and products obsolete or noncompetitive. We cannot assure youthat our products will compete successfully with these newly emergingtechnologies. In addition, many of those competitors have significantly greaterexperience than we do in their respective fields. Many of these competitors mayhave greater name recognition than we do, and may offer discounts as acompetitive tactic.

**Employees**

As of March 2, 2007,we had 116 full-time employees, including 93 in research and development and 23in general and administrative. Fourteen of our employees have M.D.s and/orPh.D.s. From time to time, we also employ independent contractors to supportour engineering and administrative organizations. None of our employees arerepresented by a collective bargaining unit and we have never experienced awork stoppage. We consider our relations with our employees to be good.

**Organization andTrademarks**

We were organized as a Delaware corporation on July 12,1993.

We have trademarks in the United States and othercountries, including “Acusphere”, “Imagify”, “HDDS” and “PDDS” and our logo.

28

----

This Annual Report onForm 10-K also contains the trademarks and trade names of otherentities that are the property of their respective owners.

**FinancialInformation**

The financial informationrequired under this Item 1 is incorporated herein by reference to Item 8 ofthis Annual Report on Form 10-K.

**AvailableInformation**

Our website is availableat *www.acusphere.com*. We make available ourAnnual Reports on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K, reports filed pursuant to Section 16and amendments to those reports on our website as soon as reasonablypracticable after such materials are electronically filed or furnished to theSecurities and Exchange Commission. Information posted on our website is notincorporated by reference in this Annual Report on Form 10-K

**ITEM 1A. RISKFACTORS**

**Certain FactorsWhich May Affect Future Results**

*Our operating results and financial condition havevaried in the past and may in the future vary significantly depending on anumber of factors. Except for the historical information in this report, thematters contained in this report include forward-looking statements thatinvolve risks and uncertainties. The following factors, among others, couldcause actual results to differ materially from those contained inforward-looking statements made in this report and presented elsewhere bymanagement from time to time. Such factors, among others, may have a materialadverse effect upon our business, results of operations and financialcondition.*

**Risks Related toOur Company**

***We have not generated any product revenue to date,have a history of operating losses and our capital resources are limited.***

We are focused on product development and we have notgenerated any revenue from commercial sales of our products to date. We haveincurred losses each year of our operations. In 2006, we had a net lossavailable to holders of common stock of $63.5 million.At December 31, 2006 we had an accumulated deficit of $281.1 million.We expect our research and development, general and administrative and salesand marketing expenses will increase over the next several years.

We expect to continue to incur losses and capitalexpenditures for the foreseeable future. We also anticipate cash outflow fromdebt repayment and payment of other obligations, including dividends payable onour outstanding shares of 6.5% convertible exchangeable preferred stock. Webelieve, based on our operating plans, that our existing resources are adequateto fund our planned operations through 2007, or beyond twelve months if weelect to reduce our rate of spending. Based on our plans, we will requiresignificant additional capital to fund our operations, including developingproducts, conducting clinical trials, achieving regulatory approvals, qualifyingcommercial manufacturing space and, subject to regulatory approval,commercially launching Imagify, or other product candidates under developmentor future product candidates. We may raise this additional capital throughpublic or private sales of equity, or from borrowings, or from strategicpartners.

As a result of our limitedcapital resources, we may elect to delay the funding of certain developmentactivities, including those leading to the submission of our NDA for Imagify,which would result in a delay in the commercialization of Imagify. Any suchdelay in the submission of an NDA or commercialization of Imagify would have amaterial adverse impact on our business and would likely have a materialadverse effect on the market price of our common stock. To address our capitalneeds, we may elect to raise funds 

29

----

throughpublic or private sales of equity or from borrowings or from strategicpartners. Additional equity financing, if available, may be dilutive to ourstockholders; debt financing, if available, may involve significant cashpayment obligations and covenants that restrict our ability to operate ourbusiness; and strategic partnerships, if available, may result in royalties orother terms which reduce our economic potential from products underdevelopment. In addition, third parties may attempt to acquire us at valuationsour board of directors or stockholders may not find attractive. If our capitalresources are not sufficient to fund our planned operations for a twelve monthperiod at the time the audit for our 2007 financial results is complete, ourauditor may include in its audit report, to be included in our annual report onForm 10-K, an explanatory paragraph regarding substantial doubtrelating to our ability to continue as a going concern. Any such qualificationof the report of our auditors may have a material adverse effect on our abilityto raise capital and may have a material adverse effect on the market price ofour common stock.

***We need to allocate significant amounts of our availablecapital resources to make payments on our outstanding indebtedness andequipment lease obligations, our patent transfer agreement with ScheringAktiengesellschaft, our patent license agreement with GE and as dividends onour 6.5% convertible exchangeable preferred stock, which in turn could reduceour financial flexibility and ability to fund other activities.***

As of March 2,2007, we had approximately $21.8 million in aggregate principal indebtednessoutstanding related to capital lease obligations, notes payable, and otherlong-term obligations.****As ofMarch 2, 2007, we had outstanding 730,000 shares of our 6.5% convertibleexchangeable preferred stock, which shares accrue cumulative cash dividends atthe annual rate of $3.25 per share, payable quarterly on the first day ofMarch, June, September, and December. These payments will:

·       reducethe availability of our capital to fund our clinical trials for Imagify, thequalification of our commercial manufacturing space in Tewksbury, Massachusettsand for working capital and other general corporate purposes and may requireus, in order to meet these obligations, to delay or reduce expenditures orforego business opportunities; and

·       potentiallyimpair our ability to obtain additional financing.

To address our capitalneeds, we may elect to raise funds through public or private sales of equity orfrom borrowings or from strategic partners. Additional equity financing, ifavailable, may be dilutive to our stockholders; debt financing, if available,may involve significant cash payment obligations and covenants that restrictour ability to operate as a business; and strategic partnerships, if available,may result in royalties or other terms which reduce our economic potential fromproducts under development.

***Failure to obtain regulatory approvals for our productcandidates under development, in particular our lead product candidate Imagify,would have a material adverse effect on our business.***

We must receive regulatory approval of each of ourproduct candidates before we can commercialize or sell that product candidate.The pre-clinical laboratory testing, formulation development, manufacturing andclinical trials of any product candidates we develop independently or incollaboration with third parties, as well as the distribution and marketing ofthese product candidates, are regulated by numerous federal, state and localgovernmental authorities in the United States, principally FDA, and by similaragencies in other countries. The development and regulatory approval processtakes many years, requires the expenditure of substantial resources, isuncertain and subject to delays, and could thus delay our receipt of revenues,if any, from any of our product candidates.

We cannot assure you that our clinical trials willdemonstrate the safety and efficacy of any of our product candidates or willresult in marketable products or that the indication for use of Imagify will beas broad as we are seeking or that we will not need additional clinical trials.No product can receive FDA approval unless human clinical trials show bothsafety and efficacy for each target indication in accordance 

30

----

with FDA standards. Anumber of companies in the pharmaceutical and biotechnology industries havesuffered significant setbacks in late stage clinical trials even afterachieving promising results in early stage development. In our Phase 3 clinicaltrials for Imagify, we are seeking to demonstrate non-inferiority compared tonuclear stress tests. In such non-inferiority trials we are also required toshow that the comparator treatment has been performed at an acceptable level.The clinical effectiveness of nuclear stress tests may have improved since thetime of our Phase 2 clinical trials. We therefore cannot assure you that theresults from our Phase 2 clinical trials for Imagify will be predictive ofresults obtained in our Phase 3 clinical trials.

The data obtained from pre-clinical and clinicalactivities are subject to varying interpretations that could delay, limit orprevent regulatory agency approval. We cannot assure you that our Phase 3 planfor Imagify will successfully address the requirements of FDA or that theresults of the Phase 3 program will establish the safety and efficacy ofImagify sufficiently for us to obtain regulatory approval. In addition, inconjunction with approving products, it is common for regulatory agencies toimpose limits on how such products can be used and marketed. We anticipate thatif and when Imagify and other product candidates are approved that the initialuse and marketing of these products may be limited at least until such time aswe conduct additional clinical studies or information otherwise becomesavailable to address the underlying reasons for such limits.

We may encounter delays or rejections based on changesin regulatory agency policies or personnel during the period in which wedevelop a drug or the period required for review of any application forregulatory agency approval of a particular compound. In 2004, changes went intoeffect in the regulation of clinical trials in Europe and are currently beingimplemented by the individual member states of the European Union. Ourcontinuing efforts to comply with these changes could lead to delays orrejections of our clinical trials. We also may encounter delays in the event weare unable to produce clinical trial material in sufficient quantities and ofsufficient quality to meet the schedule for our planned clinical trials. Inaddition, we rely on a number of third parties, such as clinical researchorganizations, to help support the clinical trials by performing independentclinical monitoring, data acquisition and data evaluations. Any failure on thepart of these third parties could delay the regulatory approval process.

Failure to obtainregulatory approval or any delay or setback in obtaining regulatory agencyapprovals could:

·       adverselyaffect our ability to market any drugs we develop independently or withcollaborative partners;

·       imposeadditional costs and diminish any competitive advantages that we may attain; or

·       adverselyaffect our ability to generate royalties.

In particular, failure toobtain approval or failure to achieve the clinical endpoints in our RAMP-2trial could result in substantial delays in obtaining approval for our leadproduct candidate, Imagify, would delay our receipt of product revenues andwould have a material adverse affect our business, financial condition andresults of operations. Our stock price would also be materially adverselyaffected.

***We did not achieve one of the primary clinicalendpoints in our RAMP-1 trial and we cannot assure you that our RAMP-2trial results will achieve all, or any, of it primary clinical endpoints.***

We cannot assure you thatour training efforts following RAMP-1 will enable the ultrasound blindedreaders to achieve the sensitivity endpoint in RAMP-2 or that efforts toincrease sensitivity will not result in failure of ultrasound blinded readersto achieve the specificity or accuracy endpoints. In addition, while it ispossible that Imagify could receive regulatory approval without achieving allof the primary clinical endpoints for our Phase 3 clinical trials, we canprovide no assurance that such approval will be achieved without significantdelays, the need for additional clinical trials, without narrowing thepotential indication 

31

----

for useof Imagify or that it will be approved at all. Failure to obtain approval orfailure to achieve the clinical endpoints in our RAMP-2 trial couldresult in substantial delays in obtaining approval for our lead productcandidate, Imagify, would delay our receipt of product revenues and would havea material adverse affect our business, financial condition and results ofoperations. Our stock price would also be materially adversely affected.

***Adverse events are likely to be encountered in ourclinical trials and these events could delay, limit or prevent regulatoryapproval.***

Many of the patients in our Imagify clinical trialshave coronary artery disease. As part of our Imagify clinical trials, patientsare exposed to potential safety risks associated with a stress test, includingrisks associated with a pharmacological stressor, and Imagify. Given the natureof the Imagify clinical trials, including the cumulative administration ofImagify to larger numbers of at-risk patients and administering Imagify topatients with coexisting disease, adverse events are expected to be encounteredduring the clinical trials. Adverse events are also likely to be encountered inclinical trials for our other products, which clinical trials may also includeat-risk patients. When significant adverse events are detected and these eventsare attributable to our products, such events could delay, limit or preventregulatory agency approval.

***Our collaborative partners may not obtain regulatoryapprovals in other countries, which may have an adverse effect on our business..***

We cannot be certain thatwe or our partners will obtain any regulatory approvals in other countries andthe failure to obtain these approvals would have a material adverse affect onour business, financial condition and results of operations. In order to marketour products outside of the United States, we and our current, and potentialfuture, collaborative partners must establish and comply with numerous andvarying regulatory requirements of other countries regarding safety andefficacy. The approval procedures vary among countries and can involveadditional product testing and additional administrative review periods. Thetime required to obtain approval in other countries might differ from thatrequired to obtain FDA approval. The regulatory approval process in othercountries may include all of the risks associated with obtaining FDA approvaldetailed above. Approval by FDA does not ensure approval by the regulatoryauthorities of other countries. In addition, many countries outside the UnitedStates require a separate review process prior to marketing to determinewhether their national health insurance schemes will pay for newly approvedproducts, as well as the price which may be charged for a product.

***We may need to enroll more patients in future clinicaltrials, and any such additional enrollment would require additionalexpenditures, which may be material, and would likely result in a delay of oursubmitting an NDA with the FDA for Imagify.***

Estimations of the numberof patients needed to enroll in RAMP-2 in order to achieve statisticalsignificance were based on a variety of factors, including our understandingand analysis of previous trial data for Imagify, our ongoing discussions withFDA and our own knowledge and past experience in these and similar matters.These estimates are subject to risks and uncertainties, and there can be noassurance that our estimates will prove to be correct, or if additionalclinical trials will be required to statistically demonstrate the safety andefficacy of Imagify. Continued discussions with FDA could lead to otherchanges, including changes relating to our Phase 3 program and statisticalanalysis plans. How, when, or if the matters being discussed are resolved mayaffect whether Imagify is approved for the indication that we are seeking, thetiming of such approval, or whether Imagify is approved at all. Thesediscussions could also lead to delays in the timing of the unblinding of thedata from our RAMP-2 clinical trial and therefore, the publicannouncement of results from that trial. We may also encounter delays if thereading of images by the “blinded readers” in our RAMP-2 trial is notpromptly completed, which delay could be caused by a variety of factorsincluding time availability of the blinded readers. Any such delays will likely

32

----

resultin increased costs, which may be material and would likely have a harmfuleffect on our financial position and results of operations. The market price ofour common stock may also be materially adversely affected in response to anysuch delays.

***If we cannot raiseadditional capital on acceptable terms, we may be unable to complete plannedclinical trials, obtain regulatory approvals or commercialize our productcandidates.***

Wewill require substantial future capital in order to continue to conduct theresearch and development, clinical and regulatory activities necessary to bringour product candidates to market and to establish commercial manufacturing,marketing and sales capabilities. Our future capital requirements will dependon many factors, including the:

·       progressof pre-clinical development and laboratory testing and clinical trials;

·       timingof construction and size to which we expand our manufacturing capabilities;

·       timeand costs involved in obtaining regulatory approvals;

·       numberof product candidates we pursue;

·       costsinvolved in filing and prosecuting patent applications and enforcing ordefending patent claims; and

·       establishmentof selected strategic alliances and activities required for productcommercialization.

We may seek additionalfunding through strategic collaborations or through private or public sales ofour securities or by licensing all or a portion of our technology. This fundingmay significantly dilute existing stockholders or may limit our rights to ourtechnology.

Wecannot assure you that we can obtain additional funding on reasonable terms, orat all. If we raise additional funds by issuing equity securities, our stockprice may decline, our existing stockholders may experience significantdilution, and the newly issued securities may have rights superior to those ofour common stock. If we raise additional funds by issuing debt, we may besubject to limitations on our operations and such debt may have rights seniorto the debentures, if issued. If we cannot obtain adequate funds, we may:

·       terminateor delay clinical trials for one or more of our product candidates;

·       delayour establishment of sales, marketing and/or manufacturing capabilities;

·       curtailsignificant product development programs that are designed to identify newproduct candidates;

·       relinquishrights to our technologies or product candidates;

·       terminateor delay qualification of our commercial manufacturing facility and/or

·       terminate or delaydevelopment of one or more of our product candidates, including Imagify, anddiscontinue operations of all or a portion of our operations.

***Our products, ifapproved, may fail to achieve market acceptance.***

There can be no assurancethat any products we successfully develop, if approved for marketing, willachieve market acceptance or generate significant revenues. Each of our productcandidates is intended to replace or alter existing therapies or procedures,and hospitals, physicians or patients may conclude that these products are lesssafe or effective or otherwise less attractive than these existing therapies orprocedures. For example, our lead product candidate, Imagify, is acardiovascular drug for use in ultrasound imaging procedures which will competewith existing nuclear imaging and cardiac ultrasound. 

33

----

Hospitals,physicians or patients may prefer these existing procedures to Imagify-enhancedcardiac stress ultrasound imaging. If our products do not receive marketacceptance for any reason, it would adversely affect our business, financialcondition and results of operations. In such event, we may elect to conductadditional clinical trials designed to demonstrate the effectiveness of Imagifyin circumstances not studied in our Phase 3 clinical trials. Any such studieswill likely be expensive and time consuming. Further, our competitors maydevelop new technologies or products that are more effective or less costly, orthat seem more cost-effective, than our products. We can give no assurance thathospitals, physicians, patients or the medical community in general will acceptand use any products that we may develop.

***We have nevermanufactured any of our product candidates in commercial quantities, and if wefail to develop an effective manufacturing capability for our products,including our lead product candidate Imagify, we may be unable to commercializethese products.***

Wehave no experience in manufacturing our products for commercial use and limitedexperience in designing equipment for the manufacture of our products. We areworking to start-up and qualify operations at a commercial manufacturingfacility in Tewksbury, Massachusetts and to demonstrate that we can produceImagify at a commercial manufacturing scale prior to our filing of a NDA forImagify and, subject to required regulatory approvals, we intend to manufactureImagify in this facility for commercial use. We can not assure you that we willbe able to obtain the necessary regulatory approvals for such commercialmanufacture, at all or in a timely or economical manner. Our intention tomanufacture Imagify or other products exposes us to the following risks, any ofwhich could delay or prevent the approval of our products by FDA orcorresponding state and foreign agencies, or the commercialization of ourproducts, or result in higher costs or inability to meet demand for Imagifyleading to potential revenue loss, and any of which would have a materialadverse impact on our business, financial condition and results of operations.

·       Manufacturersare obliged to manufacture in highly controlled environments and to operate inaccordance with FDA and international mandated current good manufacturingpractices, or cGMPs. For our clinical trials we have relied on contractmanufacturers for such facilities and cGMP compliance. Creation andqualification of a commercial manufacturing environment requires significantexpertise and capital resources, including the development of advancedmanufacturing techniques and process controls and is subject to local and stateplanning approvals. Manufacturers of pharmaceutical products often encounterdifficulties in constructing and qualifying new manufacturing facilities and inproduction, especially in scaling-up initial production. A failure to establishand follow cGMPs and to document adherence to such practices may lead tosignificant delays in the availability of material for our NDA filing or commercialproduction for Imagify and may delay or prevent filing or approval of marketingapplications for our products or the ability to continue to manufacture theproducts. Certain of these delays would further require us to continue tooperate this facility and incur related costs.

·       Manufactureof our product candidates, in preparation for filing a NDA and for commercialproduction, will each initially require and rely on a single commercialmanufacturing site, directly or through a contract manufacturer, without thebackup of a second site that is qualified for commercial manufacture of theproduct. Qualification of another manufacturing site can be expensive and timeconsuming. Prior to using product from a new manufacturing site, we mustdemonstrate to FDA and corresponding state and foreign agencies that thespecifications for the product are consistent with the specifications for theproduct as it was manufactured at a prior qualified site or we must clinicallyor otherwise demonstrate that the safety and efficacy of the product producedin the new manufacturing site is consistent with the product as it wasmanufactured at the prior site. Demonstrating such consistency may bedifficult, expensive or time consuming. In addition, before we would be able toproduce product for commercial use at a new 

34

----

facility, it willhave to undergo a pre-approval inspection by FDA and corresponding state andforeign agencies. Once approved, drug manufacturers are subject to ongoingperiodic unannounced inspection by FDA and corresponding state and foreignagencies to ensure strict compliance with cGMPs, other government regulationsand corresponding foreign standards. Failure to maintain compliance with cGMPor with safety or environmental regulations could result in penalties, productrecalls or restrictions on the use of the manufacturing site.

We have a singlemanufacturing facility. This facility and the manufacturing equipment we use toproduce Imagify would be difficult to replace and could require substantiallead-time to repair or replace in the event of a regulatory, manufacturing,catastrophic event or similar problem. In such event, we would be forced torely on third-party manufacturers and there would likely be substantial delaybefore we would be able to restart production. Although we possess insurancefor damage to our property and the disruption of our business from casualties,such insurance may not be sufficient to cover all of our potential losses,including potential damage to our reputation, and may not continue to beavailable to us on acceptable terms, or at all. In addition, future growth mayoutpace our manufacturing capacity, in which event we would need to locate,obtain and build-out additional space. New or alternative facilities may not beavailable to us on acceptable terms. Even if we are able to identify such newor alternative facilities, we may incur additional costs and we may experiencea disruption in the supply of our products until those facilities areavailable.

***Failure tomanufacture our products in commercial quantities could damage our Europeanpartnership***

Under the terms of ourcollaboration agreement with Nycomed, we are responsible for the commercialmanufacture of Imagify for marketing and sale by Nycomed in Europe. Failure tomanufacture Imagify in a timely manner or on an economic basis, or insufficient quantities, could jeopardize our relationship with Nycomed. We donot currently have a European sales force, nor do we have experience withregard to the commercialization, marketing, sale or distribution ofpharmaceutical products in Europe, and we rely entirely on Nycomed for thisexpertise. Any termination of our relationship with Nycomed would have amaterial adverse impact on our business, financial condition and results of operations.

***We may not be able to manufacture our products incommercial quantities, which would prevent us from marketing our products.***

To date our productcandidates have been manufactured in small quantities for pre-clinical andclinical trials. If any of these product candidates are approved by FDA orforeign regulatory authorities for commercial sale, we will need to manufacturethem in larger quantities. For Imagify, it is our intention to seek regulatoryapproval after we have demonstrated that we can manufacture Imagify at a largerbatch scale than is being used for clinical trial materials. Manufacturersoften encounter difficulties in achieving volume production, quality controland quality assurance. Accordingly, we might not be able to manufacturesufficient quantities of drugs to meet our clinical schedules or tocommercialize our products. We cannot assure you that we will be able tosuccessfully increase the manufacturing capacity or manufacture at a largerbatch scale, whether on our own or in collaboration with third partymanufacturers, for any of our product candidates in a timely or economicmanner, or at all. Significant scale-up of manufacturing may require certainadditional validation studies, which FDA must review and approve. If we areunable to successfully increase the manufacturing capacity for a productcandidate, the regulatory approval or commercial launch of that productcandidate may be delayed or there may be a shortage in supply of that productcandidate. Our product candidates require precise, high-quality manufacturing.Our failure to achieve and maintain these high manufacturing standards,including controlling the incidence of manufacturing errors and maintainingreliable product packaging for diverse environmental conditions, could resultin patient injury or death, product recalls or withdrawals, delays or 

35

----

failuresin product testing or delivery, cost overruns or other problems that couldseriously hurt our business.

Our commercialmanufacturing facility in Tewksbury, Massachusetts is designed to meet ourestimated initial commercial demand for Imagify. The facility is beinginitially equipped to run one production line. In order to support greaterproduction capacity, this production line is designed to support a larger lyophilizer(pharmaceutical freeze dryer which can be operated under sterile conditions) inaddition to the one that has been initially installed. Purchasing, installingand qualifying manufacturing equipment, such as a lyophilizer, typicallyrequires significant lead times and temporary discontinuation of production.Also in the future we may need to add additional production lines at theTewksbury, Massachusetts site or elsewhere to meet potential commercial demandfor Imagify. We have made no commitment to such additions at this time. Thecost of such additions can be significant. There can be no assurance that ourcapacity estimates will be achieved. Any such additions would increase ouroperating spending, increase our capital requirements and reduce our resourcesavailable for development activities.

***We have removed ourImagify manufacturing equipment from the facilities of our third party contractmanufacturer and currently have no facility within which to manufacture Imagifyuntil the new commercial manufacturing facility is qualified or until otherarrangements are made.***

We have removed ourImagify manufacturing equipment from the facilities of a third-party contractmanufacturer. Currently, we have no facility within which to manufactureImagify until the new commercial manufacturing facility is qualified or untilother arrangements are made. We have a limited inventory of Imagify on-hand andthe shelf life of this existing supply is anticipated to expire during 2007. Ifwe lack sufficient inventory of Imagify clinical trial material to performclinical trials or are unable to manufacture sufficient inventory on a timelybasis, our program could be adversely impacted or delayed. These delays couldhave a material adverse effect on our business, financial condition and resultsof operations.

***If third-partymanufacturers of our products candidates fail to devote sufficient time andresources to our concerns, or if their performance is substandard, our clinicaltrials may be delayed and our costs may rise.***

We mayrely substantially on third-party contract manufacturers to supply, store anddistribute our product candidates for our clinical trials and other developmentneeds. Our reliance on these third-party manufacturers will expose us to thefollowing risks, any of which could delay or prevent the completion of ourclinical trials, the approval of our products by FDA, or the commercializationof our products, result in higher costs, or deprive us of additional productcandidates, and any of such effects would have a material adverse impact on ourbusiness, financial condition and results of operations.

·       Contractmanufacturers often encounter difficulties in achieving volume production,quality control and quality assurance, as well as shortages of qualified personnel.Accordingly, a manufacturer might not be able to manufacture sufficientquantities of drugs to meet our clinical schedules.

·       Contractmanufacturers are obliged to operate in accordance with FDA-mandated currentgood manufacturing practices, or cGMPs. A failure of these contractmanufacturers to establish and follow cGMPs and to document their adherence tosuch practices may lead to significant delays in the availability of materialfor clinical study and may delay or prevent filing or approval of marketingapplications for our products.

·       Forproduction of clinical trial material for each of our current productcandidates we will initially rely on a single manufacturer. Changing these orfuture manufacturers may be difficult and the number of potential manufacturersis limited. Changing manufacturers may require re-validation of themanufacturing processes and procedures in accordance with FDA-mandated cGMPs.Such re-

36

----

validation may becostly and time-consuming. It may be difficult or impossible for us to findreplacement manufacturers on acceptable terms quickly, or at all.

·       Ourcontract manufacturers may not perform as agreed or may not remain in thecontract manufacturing business for the time required to produce, store anddistribute our products successfully. Our manufacturing levels, while importantto us, can represent relatively small fractions of the overall business of mostqualified contract manufacturers. As a result, the contract manufacturers maynot provide us with the attention that we need or may be unwilling to adapt tonecessary changes in our manufacturing requirements.

Drug manufacturers aresubject to ongoing periodic unannounced inspection by FDA and correspondingstate and foreign agencies to ensure strict compliance with cGMPs, othergovernment regulations and corresponding foreign standards. While we areobligated to audit the performance of third party contractors, we do not havecontrol over our third-party manufacturers’ compliance with these regulationsand standards. Failure by our third-party manufacturers or us to comply withapplicable regulations could result in sanctions being imposed on us, includingfines, injunctions, civil penalties, failure of the government to grant marketapproval of drugs, delays, suspension or withdrawal of approvals, seizures orrecalls of product, operating restrictions and criminal prosecutions, any ofwhich could significantly and adversely affect our business.

***Materials necessaryto manufacture our products may not be available, which may delay ourdevelopment and commercialization activities.***

Only a few facilitiesmanufacture some of the raw materials necessary to manufacture our products. Ifwe need to purchase a raw material that is in limited supply for our clinicaltrials, or for commercial distribution if we obtain marketing approval of aproduct candidate, we cannot assure you that one or more suppliers would beable to sell us that raw material at the time we need it and on commerciallyreasonable terms. If we change suppliers for any of these materials or any ofour suppliers experiences a shutdown or disruption in the facilities used toproduce these materials, due to technical, regulatory or other problems, itcould harm our ability to manufacture our products or receive regulatoryapproval.

***We have noexperience selling, marketing or distributing our products and no internalcapability to do so.***

If we receive regulatoryapproval to commence commercial sale of any product, we will face competitionwith respect to commercial sales, marketing and distribution. These are areasin which we have no experience. To market any of our products directly, we mustdevelop a direct marketing and sales force with technical expertise andsupporting distribution capability. Alternatively, we may engage apharmaceutical or other healthcare company with an existing distribution systemand direct sales force to assist us. There can be no assurance that we willsuccessfully establish sales and distribution capabilities either on our own orin collaboration with third parties or gain market acceptance for our products.To the extent we have or will enter co-promotion or other licensingarrangements, any revenues we receive will depend on the efforts of thirdparties and there can be no assurance that our efforts will succeed.

***Claims by otherparties that we infringe or have misappropriated their proprietary technologymay result in liability for damages, royalties, or other payments, or stop ourdevelopment and commercialization efforts.***

Competitors and otherthird parties may initiate patent litigation against us in the United States orin foreign countries based on existing patents or patents that may be grantedin the future. Many of our competitors have obtained patents covering productsand processes generally related to our products and processes, and they mayassert these patents against us. Moreover, there can be no assurance that thesecompetitors have not sought or will not seek additional patents that may coveraspects of our technology. As a result, there is a greater likelihood of apatent dispute than would be expected if our competitors were pursuingunrelated technologies.

37

----

While we conduct patentsearches to determine whether the technologies used in our products infringepatents held by third parties, numerous patent applications are currentlypending and may be filed in the future for technologies generally related toour technologies, including many patent applications that remain confidentialafter filing. Due to these factors and the inherent uncertainty in conductingpatent searches, there can be no guarantee that we will not violate third-partypatent rights that we have not yet identified.

We know of U.S. andforeign patents issued to third parties that relate to aspects of our product candidates.There may also be patent applications filed by these or other parties in theUnited States and various foreign jurisdictions that relate to some aspects ofour product candidates, which, if issued, could subject us to infringementactions. In particular, we are aware of U.S. and foreign patents owned by thirdparties, including potential competitors, which arguably cover aspects of ourImagify contrast agent. We and several of these parties have been activelyengaged in opposing the grant of European patents with claims that arguablycover aspects of our Imagify product. Parties may contest patents in Europeprior to contesting the counterpart patents in the United States because ofprocedural differences between European and U.S. patent laws as well aseconomic considerations.

The owners or licensees ofthese and other patents may file one or more infringement actions against us.In addition, a competitor may claim misappropriation of a trade secret by anemployee hired from that competitor. Any such infringement or misappropriationaction could cause us to incur substantial costs defending the lawsuit andcould distract our management from our business, even if the allegations ofinfringement or misappropriation are unwarranted. A need to defend multipleactions or claims could have a disproportionately greater impact. In addition,either in response to or in anticipation of any such infringement ormisappropriation claim, we may enter into commercial agreements with the ownersor licensees of these rights. The terms of these commercial agreements mayinclude substantial payments, including substantial royalty payments onrevenues received by us in connection with the commercialization of ourproducts. Payments under such agreements could increase our operating lossesand reduce our resources available for development activities. Furthermore, aparty making this type of claim could secure a judgment that requires us to paysubstantial damages, which would increase our operating losses and reduce ourresources available for development activities. A judgment could also includean injunction or other court order that could prevent us from making, using,selling, offering for sale or importing our products or prevent our customersfrom using our products. If a court determined or if we independently concludedthat any of our products or manufacturing processes violated third-partyproprietary rights, our clinical trials could be delayed and there can be noassurance that we would be able to reengineer the product or processes to avoidthose rights, or to obtain a license under those rights on commerciallyreasonable terms, if at all.

***If we are unable toprotect our intellectual property rights, our competitors may develop andmarket products with similar features that may reduce demand for our products,and we may be prevented from establishing collaborative relationships onfavorable terms.***

Thefollowing factors are important to our success:

·       receivingpatent protection for our product candidates;

·       maintainingour trade secrets;

·       notinfringing on the proprietary rights of others; and

·       preventingothers from infringing our proprietary rights.

We will be able to protectour proprietary rights from unauthorized use by third parties only to theextent that our proprietary rights are covered by valid and enforceable patentsor are effectively maintained as trade secrets.

38

----

We try to protect ourproprietary position by filing U.S. and foreign patent applications related toour proprietary technology, inventions and improvements that are important tothe development of our business. Because the patent position of pharmaceuticalcompanies involves complex legal and factual questions, the issuance, scope andenforceability of patents cannot be predicted with certainty. Patents, ifissued, may be challenged, invalidated or circumvented. Thus, any patents thatwe own or license from others may not provide any protection againstcompetitors. Our pending patent applications, those we may file in the future,or those we may license from third parties, may not result in patents beingissued. If issued, they may not provide us with proprietary protection orcompetitive advantages against competitors with similar technology.Furthermore, others may independently develop similar technologies or duplicateany technology that we have developed. The laws of many foreign countries donot protect our intellectual property rights to the same extent as do the lawsof the United States.

We also rely on tradesecrets, know-how and technology, which are not protected by patents, tomaintain our competitive position. We try to protect this information byentering into confidentiality agreements with parties that have access to it,such as our corporate partners, collaborators, employees and consultants. Anyof these parties may breach the agreements and disclose our confidentialinformation or our competitors might learn of the information in some otherway. If any trade secret, know-how or other technology not protected by apatent were to be disclosed to or independently developed by a competitor, ourbusiness and financial condition could be materially adversely affected.

***We may becomeinvolved in lawsuits and administrative proceedings to protect, defend orenforce our patents that would be expensive and time consuming.***

In order to protect orenforce our patent rights, we may initiate patent litigation against thirdparties in the United States or in foreign countries. In addition, we have beenand continue to be subject to certain opposition proceedings conducted inpatent and trademark offices challenging the validity of our patents and maybecome involved in future opposition proceedings. The defense of intellectualproperty rights, including patent rights through lawsuits, interference oropposition proceedings, and other legal and administrative proceedings can becostly and can divert our technical and management personnel from their normalresponsibilities. Such costs increase our operating losses and reduce ourresources available for development activities. An adverse determination of anylitigation or defense proceedings could put one or more of our patents at riskof being invalidated or interpreted narrowly and could put our patentapplications at risk of not issuing.

Furthermore, because ofthe substantial amount of discovery required in connection with intellectualproperty litigation, there is a risk that some of our confidential informationcould be compromised by disclosure during this type of litigation. For example,during the course of this kind of litigation and despite protective ordersentered by the court, confidential information may be inadvertently disclosedin the form of documents or testimony in connection with discovery requests,depositions or trial testimony. This disclosure could materially adverselyaffect our business and financial results.

***If we are unable toretain key personnel and hire additional qualified scientific, manufacturing,sales and marketing, and other personnel, we may not be able to successfullyachieve our goals.***

We depend on the principalmembers of our scientific and management staff. The loss of these principalmembers’ services might significantly delay or prevent the achievement ofresearch, development or business objectives and could materially adverselyaffect our business, financial condition and results of operations. We do notmaintain key person life insurance on any of these principal members. We haveentered into executive employment agreements with key members of the managementteam that provide for compensation and other benefits in the event thesepersons are terminated other than for cause, including in connection with a “changeof control” of Acusphere.

39

----

Our success depends, inlarge part, on our ability to attract and retain qualified scientific andmanagement personnel such as these individuals. We face intense competition forsuch personnel and consultants. We cannot assure you that we will attract andretain qualified management and scientific personnel in the future.

Further, we expect thatour potential expansion into areas and activities requiring additionalexpertise, such as further clinical trials, governmental approvals, commercialmanufacturing and marketing, will place additional requirements on ourmanagement, operational and financial resources. We expect these demands willrequire an increase in management and scientific personnel and the developmentof additional expertise by existing management personnel. The failure toattract and retain such personnel or to develop such expertise could materiallyadversely affect prospects for our success.

***We will establishcollaborative relationships, and those relationships may expose us to a numberof risks.***

Wewill rely on a number of significant collaborative relationships withpharmaceutical or other healthcare companies for our manufacturing, researchfunding, clinical development and/or sales and marketing performance. Relianceon collaborative relationships poses a number of risks, including thefollowing:

·       wecannot effectively control whether our corporate partners will devotesufficient resources to our programs or product candidates;

·       disputesmay arise in the future with respect to the ownership of rights to technologydeveloped with collaborators;

·       disagreementswith collaborators could delay or terminate the research and development,regulatory approval or commercialization of product candidates, or result inlitigation or arbitration;

·       corporatepartners may have considerable discretion in electing whether to pursue thedevelopment of any additional product candidates and may pursue technologies orproducts either on their own or in collaboration with our competitors; and

·       collaboratorswith marketing rights may choose to devote fewer resources to the marketing ofour product candidates than they do to product candidates of their owndevelopment.

In July 2004, weentered into a collaboration, license and supply agreement with Nycomed inwhich we granted Nycomed rights to develop and market Imagify in Europe. Therecan be no assurance that the regulatory goals, sales targets and otherobjectives of this agreement will be achieved. Failure to achieve these goals,targets and objectives would result in our inability to receive license,milestone, royalty and other payments under this agreement, which would have amaterial adverse impact on our business, financial condition and results ofoperations including, under certain conditions, reduction of royalty rates,delays in regulatory approvals and product sales, penalties and termination ofthe agreement. Under certain provisions of this collaboration agreement, if wefail in any material respect to use all commercially reasonable efforts tocarry out referenced obligations under the agreement, we would be obligated topay Nycomed liquidated damages of up to $12 million. Although we plan tocarry out all of these obligations, which we believe are in our control, therecan be no assurance that termination of this agreement will not occur or thatsuch termination would not result in us incurring liquidated damages of up to$12 million.

Given these risks, ourcurrent and future collaborative efforts may not be successful. Failure ofthese efforts could delay our product development or impair commercializationof our products, and could have a material adverse effect on our business,financial condition and results of operations.

40

----

***Competition in the pharmaceutical industry is intense,and if we fail to compete effectively our financial results will suffer.***

We engage in a business characterized by extensiveresearch efforts, rapid developments and intense competition. We cannot assureyou that our products will compete successfully or that research anddevelopment by others will not render our products obsolete or uneconomical.Our failure to compete effectively would materially adversely affect ourbusiness, financial condition and results of operations. We expect thatsuccessful competition will depend, among other things, on product efficacy,safety, reliability, availability, timing and scope of regulatory approval andprice. Specifically, we expect important factors will include the relativespeed with which we can develop products, complete the clinical, developmentand laboratory testing and regulatory approval processes and supply commercialquantities of the product to the market.

We expectcompetition to increase as technological advances are made and commercialapplications broaden. In commercializing our initial product candidates and anyadditional products we develop using our HDDS and PDDS technologies, we willface substantial competition from large pharmaceutical, biotechnology and othercompanies, universities and research institutions.

·       Imagify,our cardiovascular drug and lead product candidate, if approved for marketingand sale, will compete with nuclear stress tests, the current standard of carein myocardial perfusion imaging. Nuclear contrast agents that are approved foruse in myocardial perfusion imaging include products marketed by GE Healthcareand Bristol-Myers Squibb. In 2005, the reimbursement rate of a nuclear stresstest was approximately $800 per procedure. In addition, GE Healthcare andBristol-Myers Squibb have developed and marketed ultrasound contrast agentsthat have been used for Left Ventricular Opacification, or LVO, and EndocardialBorder Delineation, or EBD, in patients with suboptimal images. No ultrasoundcontrast agent has been approved by FDA for use in myocardial perfusion imagingusing cardiac ultrasound. However, we are aware of other companies that are ormay be developing ultrasound contrast agents for use in cardiac ultrasound.CardioSphere, which is being developed by Point Biomedical Corporation, is anultrasound contrast agent for the assessment of myocardial perfusion. In 2006,it was reported that Point Biomedical Corporation, in order to potential gainregulatory approval for CardioSphere, must design and commence new Phase 3clinical trials. In addition, some companies have ultrasound contrast agentsthat are FDA approved for LVO and EBD in patients with suboptimal images or arein development. In the future, these companies may seek to broaden theirindications to include myocardial perfusion assessment. These FDA-approvedagents include Optison, which is marketed by GE Healthcare and Definity, whichis marketed by Bristol-Myers Squibb. SonoVue is an ultrasound contrast agentmarketed in Europe by Bracco for LVO and EBD and for radiology applications.

·       AI-850,our reformulation of paclitaxel, if approved for marketing and sale, will alsoface intense competition. We are aware of companies, such as AmericanPharmaceutical Partners, NeoPharm and Sonus Pharmaceuticals that are applyingsignificant resources and expertise to developing reformulations of paclitaxelfor intravenous delivery. In early 2005, American Pharmaceutical Partnersreceived FDA approval for and is marketing their product. None of these otherreformulations has received approval from FDA. Other companies, such as CellTherapeutics, are developing new chemical entities that involve paclitaxelconjugated, or chemically bound, to another chemical. None of these new chemicalentities have received final approval from FDA. In addition, a number ofcompanies have developed technology for delivering hydrophobic drugs. CardinalHealth, CyDex and Elan have created formulations of hydrophobic drugs that havebeen approved by FDA.

41

----

·       AI-128,our initial sustained release formulation of an asthma drug, if approved formarketing and sale, will also face intense competition. Companies such asAlkermes possess technology that may be suitable for sustained releasepulmonary drug delivery and may have competitive programs that have not beenpublicly announced or may decide to begin such programs in the future. We arenot aware of any other company currently in human clinical development of asustained release version of the asthma drug that is currently the subject ofour research and development efforts. In addition, many asthma drugs aremarketed by large pharmaceutical companies with much greater resources than us.These companies may be developing sustained release versions of their asthmadrugs that would compete with our sustained release product candidate.

Relative to us, most of our competitors havesubstantially greater capital resources, research and development staffs,facilities and experience in conducting clinical trials and obtainingregulatory approvals, as well as in manufacturing and marketing pharmaceuticalproducts. Many of our competitors may achieve product commercialization orpatent protection earlier than we will. Furthermore, we believe that some ofour competitors have used, and may continue to use, litigation to gain acompetitive advantage. Finally, our competitors may use different technologiesor approaches to the development of products similar to the products we areseeking to develop.

***We expect to develop international operations thatwill expose us to additional business risks.***

We expect, whetherdirectly or through collaborative relationships, to develop operations outsidethe United States in order to market and distribute our products. Regardless ofthe extent to which we seek to develop these operations ourselves or incollaboration with others, we cannot be sure that our international effortswill be successful. Any expansion into international markets will requireadditional resources and management attention and will subject us to newbusiness risks. These risks could lower the prices at which we can sell ourproducts or otherwise have an adverse effect on our operating results. Amongthe risks we believe are most likely to affect any international operationsare:

·       differentregulatory requirements for approval of our product candidates;

·       dependenceon local distributors;

·       longerpayment cycles and problems in collecting accounts receivable;

·       adversechanges in trade and tax regulations;

·       theabsence or significant lack of legal protection for intellectual propertyrights;

·       politicaland economic instability; and

·       currency risks.

**Risks Related toOur Industry**

***Even if we obtain marketing approval, our productswill be subject to ongoing regulatory review.***

If regulatory approval of a product is granted, suchapproval may be subject to limitations on the indicated uses for which theproduct may be marketed or contain requirements for costly, post-marketingfollow-up studies. As to products for which marketing approval is obtained, themanufacturer of the product and the manufacturing facilities will be subject tocontinual review and periodic inspections by FDA and other regulatoryauthorities. In addition, the labeling, packaging, adverse event reporting,storage, advertising, promotion and record keeping related to the product willremain subject to extensive regulatory requirements. The subsequent discoveryof previously unknown problems with the product, manufacturer or facility mayresult in restrictions on the product or the manufacturer, including withdrawalof the product from the market. We may be slow to adapt, or we may never adapt,to changes in existing requirements or adoption of new requirements orpolicies.

42

----

If we fail to comply withapplicable regulatory requirements, we may be subject to fines, suspension orwithdrawal of regulatory approvals, product recalls, seizure of products,operating restrictions and criminal prosecution.

***Market acceptance of our products will be limited ifusers of our products are unable to obtain adequate reimbursement fromthird-party payors.***

Government health administration authorities, privatehealth insurers and other organizations generally provide reimbursement forproducts like our product candidates, and our commercial success will depend inpart on these third-party payors agreeing to reimburse patients for the costsof our products. Even if we succeed in bringing any of our proposed products tomarket, we cannot assure you that third-party payors, in the United States,Europe and other markets that we may pursue, will consider our productscost-effective or provide reimbursement in whole or in part for their use oragree to the proposed price.

Significant uncertainty exists as to the reimbursementstatus of newly approved health care products. Each of our product candidatesis intended to replace or alter existing therapies or procedures. Thesethird-party payors may conclude that our products are less safe, effective orcost-effective than these existing therapies or procedures. Therefore,third-party payors may not approve our products for reimbursement.

If third-party payors do not approve our products forreimbursement or fail to reimburse them adequately, sales will suffer as somephysicians or their patients will opt for a competing product that is approvedfor reimbursement or is adequately reimbursed. Even if third-party payors makereimbursement available, these payors’ reimbursement policies may adverselyaffect the ability of us and our potential collaborators to sell our productson a profitable basis.

Moreover, the trend toward managed healthcare in theUnited States, the growth of organizations such as health maintenanceorganizations, and legislative proposals to reform healthcare and governmentinsurance programs could significantly influence the purchase of healthcareservices and products, resulting in lower prices and reduced demand for ourproducts which could adversely affect our business, financial condition andresults of operations.

In addition, legislationand regulations affecting the pricing of pharmaceuticals may change in waysadverse to us before or after FDA or other regulatory agencies approve any ofour proposed products for marketing. While we cannot predict the likelihood of anyof these legislative or regulatory proposals, if any government or regulatoryagencies adopt these proposals they could materially adversely affect ourbusiness, financial condition and results of operations.

***We may be required to defend lawsuits or pay damagesin connection with the alleged or actual harm caused by our products or productcandidates.***

We face an inherentbusiness risk of exposure to product liability claims in the event that the useof our products is alleged to have resulted in harm to others. This risk existsin clinical trials as well as in commercial distribution. In addition, thepharmaceutical and biotechnology industries in general have been subject tosignificant medical malpractice litigation. We may incur significant liability ifproduct liability or malpractice lawsuits against us are successful.Furthermore, product liability claims, regardless of their merits, could becostly and divert our management’s attention from other business concerns, oradversely affect our reputation and the demand for our products. Although wemaintain product liability insurance, we cannot be certain that this coveragewill be adequate or that it will continue to be available to us on acceptableterms.

43

----

***Rapid technological change could make our productsobsolete.***

Pharmaceuticaltechnologies have undergone rapid and significant change. We expect thatpharmaceutical technologies will continue to develop rapidly. Our future willdepend in large part on our ability to maintain a competitive position with respectto these technologies. Any compounds, products or processes that we develop maybecome obsolete before we recover any expenses incurred in connection withtheir development. Rapid technological change could make our products obsolete,which could materially adversely affect our business, financial condition andresults of operations.

***Our products involve the use of hazardous materials,and as a result we are exposed to potential liability claims and to costsassociated with complying with laws regulating hazardous waste.***

Our research and development activities involve theuse of hazardous materials, including chemicals and biological materials. Webelieve that our procedures for handling hazardous materials comply withfederal and state regulations. However, there can be no assurance thataccidental injury or contamination from these materials will not occur. In theevent of an accident, we could be held liable for any damages, which couldexceed our available financial resources. This liability could materiallyadversely affect our business, financial condition and results of operations.

We are subject to federal,state and local laws and regulations governing the use, manufacture, storage,handling and disposal of hazardous materials and waste products, and we spentapproximately $34,000 during the twelve months ended December 31, 2006 todispose of these hazardous materials and waste products. We may be required toincur significant costs to comply with environmental laws and regulations inthe future that could materially adversely affect our business, financialcondition and results of operations.

**Risks Related toOur Common Stock**

***We expect that our stock price will fluctuatesignificantly.***

We completed ourinitial public offering in October 2003. Prior to this offering, you couldnot buy or sell our common stock publicly. After this offering, the averagedaily trading volume for our common stock has been relatively low. An activepublic market for our common stock may not continue to develop or be sustained.The stock market, particularly in recent years, has experienced significantvolatility particularly with respect to pharmaceutical and biotechnologystocks. The volatility of pharmaceutical and biotechnology stocks often doesnot relate to the operating performance of the companies represented by thestock. Factors that could cause this volatility in the market price of ourcommon stock include:

·       announcementsof the introduction of new products by us or our competitors;

·       announcementsof clinical trial results;

·       marketconditions in the pharmaceutical and biotechnology sectors;

·       rumorsrelating to us or our competitors;

·       litigationor public concern about the safety of our potential products;

·       ourquarterly operating results;

·       deviationsin our operating results from the estimates of securities analysts;

·       salesby us of additional shares of our common or preferred stock; and

·       FDAor international regulatory actions.

44

----

The market price of ourcommon stock may also fluctuate in response to the exercise by us of rightsunder the terms of our 6.5% convertible exchangeable preferred stock. Forexample, we may elect to automatically convert the preferred stock if ourcommon stock price has exceeded 150% of the conversion price of the preferredstock for at least 20 trading days during a 30-day trading period endingwithin five trading days prior to the notice of automatic conversion. There isa risk of fluctuation in the price of our common stock between the time when wemay first elect to automatically convert the preferred stock and the automaticconversion date. These fluctuations may adversely affect the value of ourcommon stock.

***If sharesunder our universal shelf registration statement are issued, then the price ofour securities may be negatively affected.***

We have on file with the SEC a universal shelf registrationstatement on Form S-3 (Registration No. 333-134263) and auniversal shelf registration statement on Form S-3 (Registration No. 333-123854),which provide for the offer, from time to time, of common stock, preferredstock, debt securities and warrants up to an aggregate remaining availabilityof approximately $33.1 million and $27.3million, respectively, net of financing amounts previously executed under theseregistration statements and amounts reserved for up to $30.0 million inpotential financing under the equity line of credit arrangement we entered intoin August 2006 with Azimuth Opportunity, Ltd. The SEC declared the shelfregistration statements effective on June 1, 2006 and April 15, 2005,respectively. Subject to market conditions and our capital needs, and so longas we are then eligible to use the registration statements under SEC rules, wemay again seek to use any remaining availability under the shelf registrationstatements by making an offering of securities covered for sale under theregistration statements. In addition, we may amend our shelf registrationstatements or file a new shelf registration statement to increase our potentialaccess to capital. The addition of these securities into the market may bedilutive to existing stockholders and have an adverse effect on the price ofour securities.

***If we sell shares of our common***stock under our equity lineof credit arrangement , then the price of our securities may be negativelyaffected.

In August 2006, weentered into what is sometimes termed an equity line of credit arrangement withAzimuth Opportunity Ltd. The arrangement provides that, upon the terms andsubject to the conditions set forth therein, Azimuth is committed to purchaseup to $30.0 million of our common stock, or up to approximately 7.6 millionshares of common stock, whichever occurs first, over the 18-month term ofthe agreement. From time to time during the term of the agreement, and at oursole discretion, we may present Azimuth with draw down notices requiringAzimuth to purchase our common stock. The per share purchase price for theseshares will equal the daily volume weighted average price of the common stockon each date during the draw down period on which shares are purchased, less adiscount ranging from 3.875% to 5.875%, based on the volume weighted averageprice of the common stock. As a result, our existing common stockholders willexperience immediate dilution upon the purchase of any shares of our commonstock by Azimuth under this agreement. The sale of shares under this equity line will bedilutive to existing stockholders and may have an adverse effect on the priceof our securities.

***Our significant equity holders may have conflicts of interestswith us or you in the future.***

As of March 2, 2007,and based on information provided to us by such entities: the Endowment CapitalGroup LLC and its affiliates beneficially own approximately 9% of ouroutstanding common stock; Bank of America Corporation and its affiliatesbeneficially own approximately 8% of our outstanding common stock; QuakerCapital Management Corporation and its affiliates beneficially ownapproximately 7% of our outstanding common stock; Deutche Bank AG and itsaffiliates beneficially own approximately 6% of our outstanding common stock;and the Baupost Group LLC beneficially owns approximately 5% of our outstandingcommon stock. Collectively these investors will control approximately 35% ofour 

45

----

outstandingcommon stock. These investors, particularly if they were to act together as aconcentrated group, could exert influence over the election of our directors,direct our policies and operations, including future issuances of common stockor other securities, the payments of dividends, if any, on our common stock,the incurrence of debt by us, amendments to our Amended and RestatedCertificate of Incorporation and Amended and Restated Bylaws and entering intoof extraordinary transactions, and their interests, as a concentrated group,may not in all cases be aligned with your interests. This concentration ofownership among a small number of investors may make it more difficult forother stockholders to influence matters requiring stockholder approval and mayhave the effect of delaying, preventing or deterring a change in control of ourcompany, thereby possibly depriving our stockholders of an opportunity toreceive a premium for their common stock as part of any sale or acquisition.

***Our common stock is junior to our preferred stock withrespect to the right to receive payments in the event of a dissolution,liquidation or winding up of Acusphere.***

In February 2005, weissued and sold 900,000 shares of our 6.5% convertible exchangeable preferredstock. As of March 2, 2007, 730,000 of these shares of preferred stock areoutstanding. The preferred stock is senior to the common stock as toliquidation. In the event of our voluntary or involuntary dissolution,liquidation or winding up of Acusphere, holders of our preferred stock will receivea liquidation preference in an amount equal to $50 per share, plus all accruedand unpaid dividends through the distribution date. Only after holders of thepreferred stock have received their liquidation preference and any accrued andunpaid dividends will we distribute assets, if any are remaining, to our commonstock holders.

***Acusphere could be the subject of securities class action litigation due to future stockprice volatility.***

In the past, when themarket price of a stock has been volatile, holders of that stock have ofteninstituted securities class action litigation against the company that issuedthe stock. The market price of our common stock has been historically volatileand may remain volatile. Such volatility in our stock price could result inshareholder litigation against us. If any of our stockholders brought a lawsuitagainst us, we could incur substantial costs defending the lawsuit. The lawsuitcould also divert the time and attention of our management.

***Future sales of common stock by our existingstockholders may cause our stock price to fall.***

The market price of ourcommon stock could decline as a result of sales by our existing stockholders ofshares of common stock in the market, or the perception that these sales couldoccur. These sales might also make it more difficult for us to sell equitysecurities at a time and price that we deem appropriate. As of March 2,2007, we have approximately 38,101,913 shares of common stock outstanding and730,000 shares of convertible preferred stock outstanding that are convertibleinto approximately 5.3 million shares of our common stock, plus up to amaximum of approximately 0.9 million additional shares of our common stockissuable at our option in satisfaction of the maximum dividend make-wholepayment on these shares of preferred stock. All of the shares of common stockissuable upon conversion of our preferred stock will be freely tradable withoutrestriction under the federal securities laws unless purchased by ouraffiliates.

***The terms of our outstanding shares of preferred stockmay restrict our ability to raise additional capital or hamper or prevent anacquisition of us.***

In February 2005, we issued and sold 900,000shares of our 6.5% convertible exchangeable preferred stock. As of March 2,2007, 730,000 of these shares of preferred stock are outstanding. In the eventof our voluntary or involuntary dissolution, liquidation or winding up ofAcusphere, holders of our preferred stock will receive a liquidation preferencein an amount equal to $50 per share, plus all accrued and unpaid dividendsthrough the distribution date. Only after holders of the preferred stock havereceived their liquidation preference and any accrued and unpaid dividends willwe distribute assets, if any are remaining, 

46

----

to our common stockholders. Without the vote or consent of the holders of at least a majority ofthe shares of preferred stock, we can not authorize or sell any equity securitythat ranks senior to the preferred stock as to dividends or distributions ofassets upon liquidation, dissolution or winding up of Acusphere. As a result ofthis liquidation preference, it may be difficult for us to raise additionalcapital through the sale of common stock or junior preferred stock onacceptable terms, or at all.

In addition, without thevote or consent of the holders of at least a majority of the shares ofpreferred stock we may not effect a consolidation or merger with another entityunless the preferred stock that remains outstanding and its rights, privilegesand preferences are unaffected or are converted into or exchanged for preferredstock of the surviving entity having rights, preferences and limitationssubstantially similar, but no less favorable, to the convertible preferredstock. This provision could hamper a third party’s acquisition of us ordiscourage a third party from attempting to acquire control of us via a merger.

***Under some circumstances, the holders of ouroutstanding shares of preferred stock may be entitled to elect some of thedirectors of Acusphere.***

In February 2005 weissued and sold 900,000 shares of our 6.5% convertible exchangeable preferredstock. As of March 2, 2007, 730,000 of these shares of preferred stock areoutstanding. Cumulative dividends accrue on our preferred stock at an annualrate of $3.25 per share, payable quarterly on the first day of March, June, September andDecember, commencing June 1, 2005. Any dividends must be declared by ourboard of directors and must come from funds that are legally available fordividend payments. If we have not paid dividends on the preferred stock in anaggregate amount equal to at least six quarterly dividends whether or notconsecutive, we must increase the size of our board of directors by twoadditional directors. After this time, and for so long as these dividendsremain due and unpaid, holders of the preferred stock, voting separately as aclass with holders of preferred stock ranking on the same basis as to dividendshaving like voting rights, will be entitled to elect two additional directorsat any meeting of stockholders at which directors are to be elected. Thesedirectors will be appointed to classes on the board as determined by our boardof directors. These voting rights will terminate when we have declared andeither paid or set aside for payment all accrued and unpaid dividends. Theterms of office of all directors so elected will terminate immediately upon thetermination of these voting rights.

***Provisions of Delaware law or our charter documentscould delay or prevent an acquisition of us, even if the acquisition would bebeneficial to our stockholders, and could make it more difficult for you tochange management.***

Provisions of Delaware law or our charter or by-lawscould hamper a third party’s acquisition of us, or discourage a third partyfrom attempting to acquire control of us. Stockholders who wish to participatein these transactions may not have the opportunity to do so. These provisionscould also limit the price that investors might be willing to pay in the futurefor shares of our common stock. Further, these provisions make it moredifficult for stockholders to change the composition of our board of directorsin any one year.

These provisionsinclude:

·       aprovision allowing us to issue preferred stock with rights senior to those ofthe common stock without any further vote or action by the holders of thecommon stock;

·       theexistence of a staggered board of directors in which there are three classes ofdirectors serving staggered three-year terms, thus expanding the time requiredto change the composition of a majority of directors and potentiallydiscouraging someone from making an acquisition proposal for us;

·       theby-laws’ requirement that stockholders provide advance notice when nominatingour directors;

47

----

·       theinability of stockholders to convene a stockholders’ meeting without thechairperson of the board, the chief executive officer, the president or amajority of the board of directors first calling the meeting; and

·       the application of Delawarelaw prohibiting us from entering into a business combination with thebeneficial owner of 15% or more of our outstanding voting stock for a period ofthree years after the 15% or greater owner first reached that level of stockownership, unless we meet specified criteria.

***We have never paid dividends on our common stock, andwe do not anticipate paying any cash dividends on our common stock in theforeseeable future.***

We have paid no cashdividends on our common stock to date and, other than cash dividends paid onour preferred stock, we currently intend to retain our future earnings, if any,to fund the development and growth of our businesses. In addition, the terms ofany future debt or credit facility may preclude us from paying these dividends.As a result, capital appreciation, if any, of our common stock will be yoursole source of gain for the foreseeable future.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None.

**ITEM 2.**                PROPERTIES

Our primary offices and laboratory facilities arelocated in one 47,500 square foot facility located in Watertown, Massachusetts.We lease the space in this facility under a tenyear, six month operating lease that expires in June 2012. Weanticipate that we may need additional office space prior to the launch ofImagify primarily to support planned increases in sales and marketingpersonnel.

In July 2004, we entered into a lease agreementfor 58,000 square feet of commercial manufacturing space in Tewksbury,Massachusetts. This lease has a five year, nine month term with options toextend the lease for up to two additional five-year terms at predeterminedrental rates. We intend to demonstrate that we can produce Imagify at acommercial manufacturing scale prior to our filing of an NDA for Imagify and,subject to required regulatory approvals, we intend to manufacture Imagify inthis facility for commercial use.  Inlate 2005 we substantially completed the build-out of this facility andcommenced startup activities relating to the manufacturing equipment installedat the site. In early 2006 we completed commissioning of the manufacturingequipment and utilities within the facility, in mid-2006 we produced fullcommercial scale development batches of Imagify in this facility and in late2006 we substantially completed all installation qualification,or IQ, andoperational qualification, or OQ, requirements relating to the equipment andutilities initially needed for this facility Remaining steps  the qualification of the manufacturingfacility include; process qualification; aseptic validation,  and completion of product stability testing.All such qualification activities need to be completed under cGMPs. Data fromthe production of Imagify under cGMPs is intended to be part of our NDAsubmission of Imagify. Based upon our current plans, we expect to complete thisqualification phase in time to support a NDA submission in the fourth quarterof 2007.

Although the manufacturing facility is built-out andequipped and IQ’s and OQ’s are substantially complete, considerable work andtesting remain to be completed before this facility is qualified. We cannotassure you that we will not encounter complications in the qualification ofoperations in this facility, which complications could add additional costs ordelay our submission of a NDA for Imagify.

48

----

We believe that our existing facilities, subject tothe successful qualification of the commercial manufacturing facility inTewksbury, Massachusetts, are adequate to meet our current and initialcommercial requirements and that suitable additional space will be available asneeded.

**ITEM 3.**                LEGALPROCEEDINGS

From time to time, we maybe subject to other legal proceedings and claims in the ordinary course ofbusiness. We are not currently aware of any such proceedings or claims that webelieve will have, individually or in the aggregate, a material adverse effecton our business, results of operations or financial condition.

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

No matters were submittedto a vote of our security holders, through the solicitation of proxies orotherwise, during the last quarter of the year ended December 31, 2006.

**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

**Price Range ofCommon Stock**

Ourcommon stock is currently traded on The NASDAQ Global Market under the symbol “ACUS.”The following table sets forth the high and low closing prices for our CommonStock as reported on The NASDAQ Global Market for the periods indicated, asadjusted to the nearest cent.

| ** **                                 | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------|------------|----------|------------|---------|------------|
| **Year Ending December 31,  2007:**   |       |     |       |    |       |
| First quarter (through March 2, 2007) |       | $        | 2.93       |    | $          | 2.44 |   |
| **Year Ended December 31,  2006:**    |       |     |       |    |       |
| Fourth quarter                             |       | $        | 3.78       |    | $          | 2.35 |   |
| Third quarter                              |       | $        | 4.21       |    | $          | 2.40 |   |
| Second quarter                             |       | $        | 7.20       |    | $          | 2.99 |   |
| First quarter                              |       | $        | 6.69       |    | $          | 5.42 |   |
| **Year Ended December 31,  2005:**    |       |     |       |    |       |
| Fourth quarter                             |       | $        | 5.57       |    | $          | 4.82 |   |
| Third quarter                              |       | $        | 6.20       |    | $          | 4.95 |   |
| Second quarter                             |       | $        | 5.55       |    | $          | 4.05 |   |
| First quarter                              |       | $        | 6.30       |    | $          | 5.12 |   |

 

On March 2, 2007, thelast reported sale price of our common stock on The NASDAQ Global Market was$2.73 per share. As of March 2, 2007, there were approximately133 holders of record of our common stock, excluding multiple beneficialholders at depositories, banks and brokers included as a single holder in thesingle “street” name of each respective depository, bank or broker.

**Dividend Policy**

We have never declared or paid a cash dividend on ourcommon stock, and we currently do not anticipate paying any cash dividends onour common stock in the foreseeable future.

In February 2005 we issued and sold 900,000shares of our 6.5% convertible exchangeable preferred stock. Cumulativedividends accrue on our preferred stock at an annual rate of $3.25 per share,payable quarterly on the first day of March, June, September and December.Any dividends must be declared by 

49

----

our board of directors andmust come from funds that are legally available for dividend payments. In 2006and 2005, we paid $2.4 million and $2.2 million, respectively, in cashdividends on the then outstanding shares of our preferred stock.

As of March 2, 2007, there were 730,000 shares ofour preferred stock outstanding. In February 2007, our board of directorsdeclared a quarterly dividend in the amount of $0.8125 per share of preferredstock, or $593,000 in aggregate, which was paid on March 1, 2007, to theholders of record as of the close of business on February 15, 2007.

Delaware law limits our ability to pay cash dividendson the preferred stock. Under Delaware law, cash dividends may only be paidfrom “surplus” or, if there is no “surplus,” from our net profits for thecurrent or preceding fiscal year. Delaware law defines “surplus” as the amountby which the total assets of a corporation, after subtracting its totalliabilities, exceed the corporation’s capital, as determined by its board ofdirectors. Although we currently intend to pay cash dividends on our preferredstock, our ability to pay these dividends will depend upon our financialresults, liquidity and financial condition. Unless we have paid or set asidecumulative dividends in full on our preferred stock for all past dividendperiods and sufficient funds shall have been set apart for the payment of thedividend for the current period with respect to our preferred stock, we may notdeclare or pay or set aside cash dividends on our common stock and we may notredeem, purchase or otherwise acquire any of our common stock except underlimited circumstances.

Except for dividendspayable on our preferred stock, we currently intend to retain all of our futureearnings, if any, to finance operations. Any future determination relating toour dividend policy will be made at the discretion of our board of directorsand will depend on a number of factors, including future earnings, capitalrequirements, financial conditions, future prospects, contractual restrictionsand other factors that our board of directors may deem relevant.

**Equity CompensationPlan Information**

See Part III, Item 12for information regarding securities authorized for issuance under our equitycompensation plans; such information is incorporated herein by reference to ourdefinitive proxy statement pursuant to Regulation 14A, which proxystatement will be filed with the Securities and Exchange Commission not laterthan 120 days after the close of our fiscal year ended December 31,2006.

50

----

**Stock PerformanceGraph**

*The following performancegraph and related information shall not be deemed “soliciting material” or tobe “filed” with the Securities and Exchange Commission, nor shall suchinformation be incorporated by reference into any future filing under theSecurities Act of 1933 or Securities Exchange Act of 1934, each as amended,except to the extent that we specifically incorporate it by reference into suchfiling.*

The stock performancegraph set forth below compares percentage change in the cumulative totalstockholder return on our Common Stock during the period from October 8,2003 through December 31, 2006, with the cumulative total return on the (i) theNASDAQ Stock Market Global Market Index (“NASDAQ U.S. Index”) and (ii) thegroup consisting of 251 corporations in our Standard Industrial Classification(SIC) Code 2834—Pharmaceutical Preparations (“Peer Group Index”). Thecomparison assumes $100 was invested on October 8, 2003 in our CommonStock, the NASDAQ U.S. Index and the Peer Group Index and assumes reinvestmentof dividends, if any. In this year’s graph, the NASDAQ Composite Index replacesthe NASDAQ Stock Market (U.S. Companies) Index, which we have used in prioryears, because NASDAQ retired the NASDAQ Stock Market (U.S. Companies) Index inJuly 2006 and it is no longer available.

| ** **                              | ** ** | **ANNUAL RETURN PERCENTAGE** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **Years Ending**                  | ** ** |
| **Company Name / Index** | ** ** | ** **                             | ** ** | **12/31/03** | ** ** | **12/31/04** | ** ** | **12/31/05** | ** ** | **12/31/06** | ** ** |
| **ACUSPHERE,  INC.**                    |       |                                   | -37.29     |   |   |   | -30.18 |   |   |   | -12.89 |   |   |   | -54.31 |   |   |
| **NASDAQ  U.S. INDEX**                  |       |                                   | 5.65       |   |   |   | 8.83 |   |   |   | 2.13 |   |   |   | 9.87 |   |   |
| **PEER  GROUP**                         |       |                                   | 9.54       |   |   |   | -1.00 |   |   |   | 7.15 |   |   |   | 12.93 |   |   |
|                                         |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                              | ** ** | **Base**   | ** ** | **INDEXED RETURNS** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------------|------------|
| ** **                              | ** ** | **Period** | ** ** | **Years Ending**    | ** ** |
| **Company Name / Index** | ** ** | ** ** | ** ** | **10/8/03**              | ** ** | **12/31/03** | ** ** | **12/31/04** | ** ** | **12/31/05** | ** ** | **12/31/06** | ** ** |
| **ACUSPHERE,  INC.**                    | ** ** |       | **100**    |                     |       |   | 62.71 |   |   |   | 43.79 |   |   |   | 38.14 |   |   |   | 17.43 |   |   |
| **NASDAQ  U.S. INDEX**                  | ** ** |       | **100**    |                     |       |   | 105.65 |   |   |   | 114.97 |   |   |   | 117.42 |   |   |   | 129.00 |   |   |
| **PEER GROUP**                          | ** ** |       | **100**    |                     |       |   | 109.54 |   |   |   | 108.44 |   |   |   | 116.20 |   |   |   | 131.22 |   |   |
|                                         |            |            |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

****

51

----

**ITEM 6.**                SELECTEDFINANCIAL DATA

The selected financialdata set forth below has been derived from our audited financial statements.This information should be read in conjunction with the financial statementsand the related notes thereto, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and other financial informationincluded elsewhere in this Annual Report on Form 10-K.

| ** **                                                                  | ** ** | **Year Ended December 31,**                         | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2002**                                                           | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                  | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement of Operations Data:**                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue                                                                     |       | $                                                                  | —     |   | $ | — |   | $ | 1,714 |   | $ | 3,429 |   | $ | 1,781 |   |
| Operating Expenses:                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Research and development(1)                                                 |       | 14,460                                                             |       | 14,818 |   | 25,976 |   | 42,159 |   | 52,445 |   |
| General and administrative(1)                                               |       | 5,186                                                              |       | 4,890 |   | 6,165 |   | 7,446 |   | 11,615 |   |
| Total operating expenses                                                    |       | 19,646                                                             |       | 19,708 |   | 32,141 |   | 49,605 |   | 64,060 |   |
| Equity in loss of  joint venture                                            |       | (1,183                                                             | )          | — |   | — |   | — |   | — |   |
| Interest and  other income (expense), net                                   |       | (1,067                                                             | )          | (2,215 | ) | 468 |   | 1,551 |   | 1,190 |   |
| Net loss                                                                    |       | (21,896                                                            | )          | (21,923 | ) | (29,959 | ) | (44,625 | ) | (61,089 | ) |
| Accretion of dividends and offering costs on  preferred stock               |       | (6,666                                                             | )          | (5,948 | ) | — |   | (2,419 | ) | (2,381 | ) |
| Net loss available to common stockholders                                   |       | $                                                                  | (28,562    | ) | $ | (27,871 | ) | $ | (29,959 | ) | $ | (47,044 | ) | $ | (63,470 | ) |
| Net loss  available to common stockholders per share—Basic and diluted |       | $                                                                  | (35.39     | ) | $ | (6.66 | ) | $ | (1.92 | ) | $ | (2.49 | ) | $ | (2.30 | ) |
| Weighted average  shares outstanding—Basic and diluted                 |       | 807                                                                |       | 4,188 |   | 15,603 |   | 18,897 |   | 27,599 |   |

----

(1) Includes stock based compensation as follows:

| Research and development            |   | $     | 915    |   | $      | 590   |   | $   | 356    |   | $      | 199 |   | $ | 1,102 |   |
|-------------------------------------|--------|-------|--------|--------|--------|-------|--------|-----|--------|--------|--------|-----|--------|---|-------|--------|
| General and administrative expenses |   | 1,280 |   | 717    |   | 584   |   | 375 |   | 1,535  |   |
|                                |   | $     | 2,195  |   | $      | 1,307 |   | $   | 940    |   | $      | 574 |   | $ | 2,637 |   |

 

| ** **                                         | ** ** | **As of December 31,**                              | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2002**                                                           | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(in thousands, except per share data)** | ** ** |
| **Balance  Sheet Data:**                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and short-term investments |       | $                                                                  | 7,992      |   | $ | 54,562 |   | $ | 45,180 |   | $ | 51,112 |   | $ | 59,750 |   |
| Working capital                                    |       | 2,899                                                              |       | 50,931 |   | 34,142 |   | 31,011 |   | 38,266 |   |
| Total assets                                       |       | 13,367                                                             |       | 58,924 |   | 62,003 |   | 95,839 |   | 94,822 |   |
| Long-term  liabilities                             |       | 1,726                                                              |       | 205 |   | 2,503 |   | 14,601 |   | 9,381 |   |
| Redeemable  convertible preferred stock            |       | 91,467                                                             |       | — |   | — |   | — |   | — |   |
| Total stockholders’  (deficit) equity         |       | (85,348                                                            | )          | 54,375 |   | 45,509 |   | 57,417 |   | 58,449 |   |
|                                                    |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*Statementscontained herein, including without limitation, “Management’s Discussion andAnalysis of Financial Condition and Results of Operation,” contains certainprojections, estimates and other forward-looking statements. “Forward-lookingstatements,” as that term is defined in the Private Securities LitigationReform Act of 1995, are not historical facts and involve a number of risks anduncertainties. Words herein such*

52

----

*as “may,” “will,” “should,” “could,” “would,” “expects,”“plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,”“potential,” and similar expressions (as well as other words or expressionsreferencing future events, conditions or circumstances) are intended toidentify forward-looking statements.*

*Forward-lookingstatements include, but are not limited to: our plans to develop and market newproducts and the timing of these development programs, in particular the timingof clinical trials and regulatory milestones for Imagify; our clinicaldevelopment of product candidates, clinical trials and our ability to obtainand maintain regulatory approval for our product candidates; our ability toqualify a commercial manufacturing facility for Imagify; our estimatesregarding our capital requirements and our needs for additional financing; ourestimates of expenses and future revenues and profitability; our estimates ofthe size of the potential markets for our product candidates; our selection andlicensing of product candidates; our ability to attract collaborators withacceptable development, regulatory and commercialization expertise; thebenefits to be derived from corporate collaborations, license agreements andother collaborative efforts, including those relating to the development andcommercialization of our product candidates; sources of revenues andanticipated revenues, including contributions from corporate collaborations,license agreements and other collaborative efforts for the development andcommercialization of products; our ability to create an effective direct salesand marketing infrastructure for products we elect to market and sell directly;the rate and degree of market acceptance of our product candidates; the timingand amount of reimbursement for our product candidates; the success of othercompeting therapies that may become available; and the manufacturing capacityfor our product candidates.*

*Our actual resultsand the timing of certain events may differ materially from the resultsdiscussed, projected, anticipated or indicated in any forward-lookingstatements. Any forward-looking statement should be considered in light offactors discussed in Part II. Item 1A “Risk Factors” and elsewhere in thisreport. We caution readers not to place undue reliance on any suchforward-looking statements, which speak only as of the date they are made. Wedisclaim any obligation, except as specifically required by law and the rules ofthe Securities and Exchange Commission, to publicly update or revise any suchstatements to reflect any change in company expectations or in events,conditions or circumstances on which any such statements may be based, or thatmay affect the likelihood that actual results will differ from those set forthin the forward-looking statements.*

*The following discussion should be read in conjunctionwith our consolidated financial statements and related notes thereto includedelsewhere in this Annual Report on Form 10-K.*

**Overview**

We are a specialty pharmaceutical company that developsnew drugs and improved formulations of existing drugs using our proprietaryporous microparticle technology. We are focused on developing proprietary drugsthat can offer significant benefits such as improved safety and efficacy,increased patient compliance, greater ease of use, expanded indications orreduced cost. Our lead product candidate ImagifyTM (perflubutane polymer microspheres, formerly known as AI-700)is a cardiovascular drug in Phase 3 clinical development for thedetection of coronary artery disease, the leading cause of death in the UnitedStates. We also have demonstrated thatour technology can improve the formulation of hydrophobic drugs and asthmadrugs.

Our proprietary technology enables us to control thesize and porosity of particles, including nanoparticles and microparticles, ina versatile manner, so we can customize the particles to address the deliveryneeds of a variety of drugs. We are focused on creating porous microparticlesthat are smaller than red blood cells. Some of these microparticles arenanoparticles which are smaller than 1 micron. Small microparticles areimportant for delivering drugs intravenously so that they can pass through thebody’s smallest blood vessels, for increasing the surface area of a drug so thatthe drug will dissolve more rapidly, and for delivering drugs to the lung viainhalation. Porosity is important for entrapping gases in 

53

----

microparticles, forcontrolling the release rate of the drug from a microparticle, and fortargeting inhaled drugs to specific regions of the lung.

We have incurredsignificant operating losses to develop our product candidates and weanticipate continuing to incur significant operating losses in the comingyears. In particular, we expect to incur significant additional expenses andexperience other significant capital requirements to conduct our Phase 3clinical program for Imagify and to complete the build-out and qualification ofa manufacturing facility for the initial commercial manufacture of Imagify.Since our inception, we have funded our operations primarily through privateand public placements of equity securities, equipment-backed financings andother debt financings.

**Imagify Phase 3Clinical Trial**

Our Phase 3 clinical plan provides for a two-partprogram consisting of a pilot phase, under which new investigators and blindedreaders have been qualified and trained, and two independent multi-centerpivotal trials. These two pivotal trials, previously referred to as the “32”and “33” trials, have been re-named RAMP-1 and RAMP-2,respectively. “RAMP” stands for Real-time Assessment of Myocardial Perfusionwith echocardiography. Clinical investigators were qualified in the pilot phaseon a rolling basis. The pilot phase was completed in 2005. Clinicalinvestigators in the Phase 3 pivotal studies are located at clinical sites inNorth America, Europe and Australia. Data from the Phase 3 pivotal studies areintended for submission to U.S., European, and potentially other regulatoryauthorities.

*ThePivotal Trials.**  *ThePhase 3 pivotal studies are designed to demonstrate that Imagify-enhancedcardiac stress ultrasound is non-inferior to nuclear stress testing. Clinicalsites that participated in these studies were primarily in the U.S. and Europe.All patients enrolled in these studies received an Imagify-enhanced cardiacstress ultrasound. Most of these patients also received a nuclear stress test.The Imagify-enhanced cardiac stress ultrasound images and the nuclear stressimages resulting from these studies are forwarded by the clinical sites to anindependent clinical research organization where all information about thepatients, other than what is shown by the images themselves, is removed.Because all such patient information is removed from the images, evaluators ofthe images are referred to as “blinded readers”. Images produced byImagify-enhanced stress echo are evaluated by echocardiologists, who we referto as ultrasound blinded readers. Images produced by nuclear stress tests areevaluated by nuclear cardiologists, who we refer to as nuclear blinded readers.

A truth standard defines which patients have diseaseand which patients are normal, and serves as the basis for quantifying theperformance of the ultrasound blinded readers and the performance of the nuclearblinded readers. Non-inferiority is determined by comparing the performance ofthe ultrasound blinded read relative to the nuclear blinded read.

Non-inferiority of Imagify-enhanced cardiac stressultrasound relative to nuclear stress is evaluated in three ways, which are theprimary endpoints of the pivotal trials. First, non-inferiority is evaluated in all patients. We define “accuracy” as a measure of thepercentage of patients in which the test is correct relative to the truthstandard. Next, non-inferiority isevaluated in two different subsets of patients, those with disease and thosewithout disease. We define “sensitivity” as a measure of the effectiveness ofthe test in assessing the presence of disease in the patients who have beenshown by the truth standard as having coronary artery disease and “specificity” as a measure of theeffectiveness of the test in assessing the absence of disease in the patientswho have been shown by the truth standard to be free of coronary arterydisease.

During the pivotal trials, we intentionally have noaccess to efficacy data. We do not publicly disclose results from a pivotaltrial until after the trial is closed, quality control checks are completed,the database is locked, the data are revealed to us and we have had anopportunity to review and understand the data, 

54

----

including data regardingclinical outcomes and safety results. A total of 777 patients with known orsuspected coronary artery disease have been enrolled in the Phase 3 pivotaltrials.

*RAMP-1Trial.**  *320patients were enrolled in the RAMP-1 clinical trial. Patients eligiblefor this trial had, in accordance with current clinical practice, been referredfor a nuclear stress test. All RAMP-1 patients received anImagify-enhanced cardiac stress ultrasound as well as a nuclear stress test.The truth standard in this trial was angiography, clinical outcome or clinicaloutcome with the unblinded evaluation of the nuclear stress test. The truthstandard was angiography in 42% of patients.

In June 2006 we announced preliminary results ofthe RAMP-1 study. The accuracy and specificity results exceeded thecriteria for success.  Three of threeultrasound blinded readers had statistically non-inferior accuracy to thenuclear blinded reader, whose accuracy was 70% (all p value <0.005).  Two of three ultrasound blinded readers hadstatistically superior specificity to the nuclear blinded reader, whosespecificity was 63% (p value for both with respect to non-inferiority<0.001). The sensitivity results missed the criteria for success of thetrial with one of three ultrasound blinded readers having statisticalnon-inferior sensitivity (p=0.002) to the nuclear blinded reader’s sensitivityof 78%. Based upon our review of the safety data from this trial, we believeImagify was well tolerated. Greater than 99% of the images acquired frompatients enrolled in the trial were evaluable.

The majority of adverse events, or AEs, reported weremild in intensity, transient, and resolved without residual effects. The mostcommon AEs reported were headache, chest pain, nausea, flushing and dizzinessand the majority of these AEs occurred following the administration of thedipyridamole pharmacologic stress agent prior to stress imaging. Seriousadverse events, or SAEs, and dose discontinuation was experienced in four andfive of 320 patients, respectively. All SAEs were non-life threatening,transient, and resolved without residual effects.

*RAMP-2Trial.**  *In June 2006we completed the enrollment of 457 patients in this trial. Patients eligiblefor this trial had been referred for a coronary angiogram. All patientsenrolled in this clinical trial received an Imagify-enhanced cardiac stressultrasound. Approximately 420 patients also received a nuclear stress test forpurposes of evaluation against the primary endpoints of this study. The truthstandard for patients in this study is coronary angiography. As dictated by thetrial design, all patients in this trial were evaluated for up to 30 daysfollowing the Imagify-enhanced cardiac stress ultrasound. Once all images havebeen read, and all patient data from the follow-up period and angiography dataare collected, an independent third-party clinical research organization, onour behalf, will conduct quality control checks. These checks, which can takeup to 90 days, are designed to ensure that all of the required information hasbeen fully gathered and filed before locking the database. At that time, thedata may be unblinded and made available to us for analysis.

In October 2006, we completed an initiativedesigned to train all of the ultrasound blinded readers in the RAMP-2trial to increase their sensitivity while maintaining high accuracy. Wecontinue to train the ultrasound blinded readers in an effort to assure thatgains in sensitivity do not lower specificity below targeted levels. Based uponour findings from this training, we intend to have each of the RAMP-2ultrasound blinded readers evaluate all images for the primary efficacyanalysis of the RAMP-2 trial. Although this training and each of theother differences referred to above are intended to increase the likelihood ofsuccess for the RAMP-2 trial, we cannot assure you that the RAMP-2results will meet or exceed the clinical endpoints. We currently expect thatthe results from RAMP-2 will be publicly available in the second quarterof 2007, and that the NDA submission will occur in the fourth quarter of 2007.No additional patients are expected to be enrolled in the RAMP-2 study.

*TrialDesign and Purpose.**  *Webelieve that Imagify-enhanced cardiac stress ultrasound has the potential tosignificantly reduce the time, cost and resources needed in the assessment ofmyocardial perfusion, compared to nuclear stress testing. Myocardial perfusionis blood flow to the heart muscle, a sensitive marker for coronary arterydisease. There is no ultrasound contrast agent currently approved by 

55

----

FDA for use in cardiacultrasound of myocardial perfusion imaging. Based upon the endpoints describedabove, our RAMP-1 and RAMP-2 trials are designed to demonstratenon-inferiority of Imagify-enhanced cardiac stress ultrasound relative tonuclear stress testing. In April 2005, based in part upon feedback fromFDA, we revised the statistical analysis plan on which we base our patient enrollmentestimates for the Imagify Phase 3 clinical trials. Since that time we havecontinued discussions with FDA regarding trial design and our statisticalanalysis plan. As a result of our ongoing discussions with FDA, we may makefurther revisions. These discussions could lead to delays in the publicannouncement of the results from our RAMP-2 clinical trial and affectwhether Imagify is approved for the indication that we are seeking, the timingof such approval or whether Imagify is approved at all.

The discussion of ourtraining efforts in the RAMP-2 trial, and the estimates of and timing ofblinded reads, data lock, data release and NDA submission in our Phase 3trials reflect our current assumptions, based on our knowledge and experienceand the guidance of our advisors. We cannot assure you that these timelineswill be met, nor can we assure you that our estimates and assumptions will notchange based upon ongoing regulatory feedback or that, when the RAMP-2trial is completed, we will successfully achieve results that meet or exceedthe clinical endpoints or that FDA will accept and approve our NDA oncesubmitted.

**ImagifyManufacturing Facility Update**

Prior to filing an NDA for Imagify, we mustdemonstrate that we can successfully and repeatedly manufacture Imagify incompliance with current good manufacturing practices, or cGMPs, enforced by FDAand overseas regulatory agencies in the manufacturing facility that we intendto use to produce Imagify at commercial launch.

In July 2004, we entered into a lease agreementfor 58,000 square feet of commercial manufacturing space in Tewksbury,Massachusetts. In late 2005, we substantially completed the build-out of thisfacility and commenced start-up activities relating to the manufacturingequipment installed at the site. In early 2006 we completed commissioning ofthe manufacturing equipment and utilities within the facility, in mid-2006we produced full commercial scale development batches of Imagify in thisfacility and in late 2006 we substantially completed all InstallationQualification, or IQ, and Operational Qualification, or OQ, requirementsrelating to the equipment and utilities initially needed for this facility. Remainingsteps to qualification of the manufacturing facility include; aseptic validation,process qualification and completion of product stability testing. All suchqualification activities need to be completed under cGMPs. Data from theproduction of Imagify under cGMPs is intended to be part of our NDA submissionof Imagify. Based upon our current plans, we expect to complete thisqualification phase in time to support a NDA submission in the fourth quarterof 2007.

We believe that our existing facilities, subject tothe successful qualification of the commercial manufacturing facility inTewksbury, Massachusetts, are adequate to meet our current and initialcommercial requirements and that suitable additional space will be available asneeded. In support of our efforts to qualify our commercial manufacturingfacility for Imagify, in February 2006, we and Nycomed agreed to amend the2004 strategic collaboration agreement resulting in commitment by Nycomed toaccelerate $1.8 million in payments to us in order to fund certain activitiesassociated with the qualification of our manufacturing facility. During 2006 wereceived the full $1.8 million in payments from Nycomed.

Although the qualificationof the commercial manufacturing facility has completed IQ’s and OQ’s, we cannotassure you that we will not encounter complications in the qualification ofoperations in this facility which complications could add additional costs ordelay our filing of a NDA for Imagify.

56

----

**EuropeanCollaboration Agreement**

In July 2004, we entered into a collaboration,license and supply agreement with Nycomed pursuant to which we granted Nycomedrights to develop and market Imagify in Europe. As part of the agreement,Nycomed has agreed to provide up to $70.0 million in license fees,research and development funding, and milestone payments, including$12.0 million in payments over the first two years, of which the final$1.0 million was paid to us in April 2006. The remaining$58.0 million in milestone payments are related to regulatory approvalsand achievement of certain sales goals. In addition, Nycomed has agreed to payus to manufacture Imagify for them and to pay us royalties on Nycomed’s salesof Imagify. Nycomed will be responsible for sales, marketing and the regulatorysubmissions required for marketing throughout its sales territory, whichincludes the member states of the European Union, as well as Russia/CIS andTurkey.

In October 2005, we and Nycomed agreed to amendthe strategic collaboration agreement in order to accelerate $0.2 million inmilestone payments to support activities associated with Imagify branddevelopment, including related international trademark activities. InFebruary 2006, we and Nycomed further amended the agreement to accelerate$1.8 million in milestone payments in order to fund certain activitiesassociated with the qualification of our manufacturing facility, as discussedabove. The payments received pursuant to these amendments are consideredadvances against a future milestone payment for a European regulatory filing,or Marketing Authorization Application, or MAA, and will be deducted from thatmilestone payment. Payments received under these amendments will be classifiedas deferred revenue until the MAA milestone is achieved, provided that theapplicable revenue recognition criteria are met. As of December 31, 2006we have received the entire $1.8 million in payments from Nycomed and haveincluded this amount in deferred revenue.

The Nycomed agreement issubject to termination provisions. Under certain of these terminationprovisions, if we fail in any material respect to use all commerciallyreasonable efforts to carry out referenced obligations under the agreement, wewould be obligated to pay Nycomed liquidated damages of up to$12.0 million. We plan to carry out all of these obligations, which webelieve are in our control. However, there can be no assurance that terminationof this agreement will not occur or that such termination would not result inus incurring liquidated damages of up to $12.0 million.

**FinancialOperations Overview**

*Revenue.**  *We have not generated any revenuefrom product sales since our inception. Since July 2004, when we enteredinto our collaboration agreement with Nycomed, the majority of our revenue hasbeen collaboration revenue recognized in connection with research anddevelopment activities performed under this agreement. As of December 31,2006 Nycomed has paid us $12.0 million in license fees for our research and developmentefforts. We are recognizing this $12.0 million of initial license and researchand development payments ratably over a period currently estimated at 54months. The length of this research and development period, which is the periodover which we are obligated to perform services, is estimated based onavailable facts and circumstances. We periodically evaluate the assumptionsunderlying our estimate and change our estimate when appropriate.

Further in the future, we will seek to generaterevenue from a combination of product sales, up-front or milestone payments andmanufacturing payments in connection with collaborative or strategicrelationships, and royalties resulting from the license of our products andintellectual property.

*Researchand Development Expense.**  *Research and development expense consists of expensesincurred in developing, manufacturing and testing product candidates. Theseexpenses consist primarily of salaries and related expenses for personnel, feespaid to professional service providers in conjunction with independentlymonitoring our clinical trials and acquiring and evaluating data in conjunctionwith our clinical trials, costs of materials used in clinical trials andresearch and development, depreciation of capital resources used to develop ourproducts, costs of facilities, the legal costs of pursuing patent 

57

----

protection on selectelements of our intellectual property, costs for intellectual property rightswe have acquired or licensed and stock-based compensation. We expense researchand development costs, including patent related costs, as incurred. We believethat significant investment in product development is a competitive necessityand plan to continue these investments in order to realize the potential of ourproduct candidates and proprietary technologies. Development programs for laterstage product candidates, such as Imagify, tend to cost more than earlier stageprograms due to the length and the number of patients enrolled in clinicaltrials for later stage programs and due to costs of scaling production tocommercial scale.

*Generaland Administrative Expense.**  *General and administrative expense consists primarilyof salaries and other related costs for personnel in executive, finance,accounting, information technology, business development and human resourcefunctions. Other costs include facility costs not otherwise included inresearch and development expense, professional fees for legal and accountingservices and stock-based compensation. In addition, we categorize our marketresearch and other marketing-type costs as general and administrative expensebecause we have not yet obtained approval to market or sell our productcandidates.

*InterestIncome.**  *Interestincome consists of interest earned on our cash and cash equivalents.

*InterestExpense.**  *Interestexpense consists of interest incurred on equipment leases and other financingarrangements. Interest expense also includes interest recognized in connectionwith embedded derivatives.

*Changein Valuation of Derivative.**  *The terms of our February 2005 convertiblepreferred stock offering and our March 2005 Mass Development loanagreement contain features considered to be embedded derivatives which are recordedat estimated fair value in accordance with Statement of Financial AccountingStandards No. 133, *Accounting for DerivativeInstruments* (SFAS 133). Changein valuation of derivative consists of other income (expense) recognized on thechange in fair value of the derivative at the end of each reporting period. Thechange in the value of the derivative related to the preferred stock isaffected by a number of assumptions including the number of preferred sharesoutstanding, the amount of dividends paid and the probability and timing ofconversion into common stock. The derivative liability is reduced for anymake-whole payments made during the period upon conversions of preferred stockto common stock. The change in the value of the derivative related to the loanis affected by the expected timing of future positive net cash flows fromoperations.

*Dividends on PreferredStock.**  *Forthe years ended December 31, 2006 and 2005, dividends on preferred stockconsisted of dividends paid or accumulated on the convertible exchangeablepreferred stock which we issued in February 2005. Dividends on preferredstock exclude any make-whole payments on conversion of preferred stock tocommon stock. Dividends on our preferred stock are cumulative from the date oforiginal issue at the annual rate of $3.25 per share, payable quarterly on thefirst day of March, June, September, and December. Any dividend payment must bedeclared by our board of directors and must come from funds that are legallyavailable for dividend payments.

**Results ofOperations**

*Revenue*

*2006 versus 2005*

In connection with our collaboration agreement withNycomed entered into in July 2004, Nycomed has paid us $12.0 million inlicense fees for our research and development efforts. We had previously beenrecognizing this $12.0 million in research and development payments ratablyover the estimated development period, as defined, of 42 months. Estimation ofthis development period involves the evaluation of many assumptions anduncertainties inherent in the performance of a long term development 

58

----

project. We regularlyevaluate these assumptions and uncertainties and our estimated developmentrecognition period may change if facts and circumstances change. We reevaluatedthe assumptions underlying the development term and during 2006, and modifiedour estimate of the development period over which we are obligated to performservices to 54 months. Collaboration revenue recognized under this agreementwas $1.6 million for the year ended December 31, 2006 versus $3.4million in 2005 and $1.7 million in 2004.

In addition to our Nycomedcollaboration revenue, during 2006 we recognized revenue of approximately $0.2 millionupon the completion of a feasibility study utilizing our HDDS technology andthrough performance of certain services on a time and material basis.

*2005 versus 2004*

Revenue recognized underthe collaboration agreement with Nycomed was $3.4 million for the yearended December 31, 2005 versus $1.7 million during 2004. The increase wasdue to twelve months of revenue recognized during 2005, versus six months ofrevenue recognized during 2004, since the collaboration agreement began inJuly 2004.

*Research andDevelopment Expense*

*2006 versus 2005*

Research and development expense for the year endedDecember 31, 2006 was $52.4 million compared to $42.2 million in2005, an increase of $10.2 million, or 24%. The increase was primarily due toan increase of $6.4 million for depreciation, primarily associated with ourcommercial manufacturing facility which went into service for accountingpurposes in October 2005 and an increase of $3.9 million related to thelicensing of intellectual property. The increase in intellectual propertyexpense resulted from a $10.1 million charge in 2006 for the present valueof non-contingent payments made, or schedule to be made, under the GE andBracco agreements. We expensed the cost of these intellectual property rightsbecause, for accounting purposes, we have not demonstrated technologicalfeasibility or an alternative use for the rights acquired.

Direct research anddevelopment expense in 2006 decreased $1.4 million versus the prior year. Thesecosts include clinical trial expenses as well as expenses associated with thequalification of our commercial manufacturing facility. This decrease in directcosts was primarily due to a decrease in clinical costs, of which $3.0 millionwas in consulting and contract services reflecting the completion of RAMP-1enrollment in December 2005 and RAMP-2 enrollment in June 2006.However, as costs associated with clinical data management and evaluationdecreased in 2006 versus 2005, overall costs associated with qualification ofour commercial manufacturing facility for Imagify increased $3.4 million,offsetting this clinical expense reduction.

*2005 versus 2004*

Research and development expense for the year endedDecember 31, 2005 was $42.2 million compared to $26.0 million in2004, an increase of $16.2 million, or 62%. Included in the increase inresearch and development expense in 2005 is $6.2 million that we expensed inconnection with our acquisition of patents from Schering.

The remaining $10.0 million increase during 2005 inresearch and development expense was primarily due to a $5.8 million increasein direct costs, including a $1.9 million increase in salaries related toincreased staffing levels, a $1.1 million increase in consulting and contractservices and a $2.3 million increase in materials and supplies. These increasesare primarily due to activities relating to Imagify, including increased Phase3 clinical program costs and increased costs associated with preparing for 

59

----

commercial manufacturingof Imagify. The increases reflect costs associated with a higher number ofclinical sites enrolling patients in the Imagify Phase 3 clinical program, ahigher rate of patient enrollment in these clinical trials and relatedincreases in costs for clinical data management and independent clinical sitemonitoring. The increase in research and development costs also includesincreased costs associated with increasing full and part-time personnel andoperating costs associated with efforts to build-out and qualify a commercialmanufacturing facility for Imagify.

The higher research anddevelopment expense in 2005 compared to 2004 primarily resulted from increasedactivities in the Imagify Phase 3 clinical program, including clinical sitecosts, data management costs, independent monitoring costs and costs ofmanufacturing clinical materials. The increase in research and developmentcosts also includes costs associated with increasing full and part-timepersonnel. The increase in research and development costs in 2005 compared to2004 also includes increases in indirect costs. These increases included a $6.2million charge under the Schering Patent Transfer Agreement and increasedfacility and depreciation costs resulting primarily from the lease agreemententered into in 2004 our commercial manufacturing facility in Tewksbury,Massachusetts and the depreciation of improvements to that facility andequipment installed in that facility the majority of which went into service inOctober 2005.

*Research andDevelopment Expense Components*

Thefollowing table summarizes the primary components of our research anddevelopment expense for the years ended December 31, 2004, 2005 and 2006:

| ** **                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(In thousands)**                     | ** ** |
| Imagify                                 |       | $                                           | 18,522     |   | $ | 24,320 |   | $ | 21,958 |   |
| HDDS and PDDS                           |       | 151                                         |       | 152 |   | 1,066 |   |
| Other direct  costs                     |       | 2,022                                       |       | 2,003 |   | 2,086 |   |
| Total direct costs                      |       | $                                           | 20,695     |   | $ | 26,475 |   | $ | 25,110 |   |
| Indirect costs:                         |       |                                        |       |   |   |   |   |
| Facility rent costs                     |       | 2,745                                       |       | 4,523 |   | 5,236 |   |
| Depreciation                            |       | 1,261                                       |       | 3,571 |   | 9,934 |   |
| Stock-based compensation                |       | 356                                         |       | 199 |   | 1,102 |   |
| Patent acquisition/licensing            |       | —                                      |       | 6,218 |   | 10,137 |   |
| Other patent costs                      |       | 919                                         |       | 1,173 |   | 926 |   |
| Total indirect  costs                   |       | 5,281                                       |       | 15,684 |   | 27,335 |   |
| Total research and  development expense |       | $                                           | 25,976     |   | $ | 42,159 |   | $ | 52,445 |   |

 

We expect overallresearch and development expenses in 2007 to be lower than 2006, primarilybecause we do not anticipate entering into any new agreements to license oracquire additional intellectual property rights relating to Imagify whichagreements resulted in $10.1 million in expense in 2006.

·       LateStage Clinical Development Program (Imagify). Our lead product candidate,Imagify, is a cardiovascular drug designed for the detection of coronary arterydisease. Direct expense for research and development of Imagify was $21.9million in 2006, $24.3 million in 2005, and $18.5 million in 2004. Ofthese amounts, $11.4 million in 2006, $8.0 million in 2005 and $7.9 million in2004 were from manufacturing-related activities and manufacturing facilityqualification. The primary contributor to the overall decrease in 2006 comparedto 2005 with respect to direct costs related to Imagify research anddevelopment was lower clinical costs from the timing of patient enrollment.Patient enrollment in the Phase 3 clinical program for Imagify declined in 2006as we 

60

----

completed enrollment inthe RAMP-1 trial in December 2005 and in the RAMP-2 trial in June 2006.However, as costs associated with clinical data management and evaluationdecreased in 2006 versus 2005, overall costs associated with our commercialmanufacturing facility for Imagify increased, offsetting this clinical expensereduction. In 2005 compared to 2004, clinical trial enrollment increasedresulting in higher direct expense in 2005 than 2004 for Imagify research anddevelopment.

·       EarlyStage Clinical Development Programs (HDDS and PDDS). Our initial clinicalapplications of our HDDS technology, AI-850, and our PDDS technology, AI-128,have each completed a Phase 1 trial. In 2006 we completed our portion of afeasibility study regarding the use of our HDDS technology in connection with aproduct candidate under development by a large pharmaceutical company. Potentialexpansion of this collaboration is pending the completion of a review by thatpharmaceutical company. While we have given spending priority to Imagify, wecontinue to evaluate our HDDS and PDDS opportunities, including potentialopportunities with partners, the product candidates referenced above and otherpotential product candidates. During 2007, we anticipate the costs of earlystage development programs to increase as we increase our focus on developmentof new product candidates. However, because these programs are in relativelyearly stages of development, we anticipate that costs related to Imagify will continueto represent our primary research and development expenditures through 2007.

·       OtherCosts*.* Other direct research anddevelopment costs primarily consist of management and preclinical evaluation ofother product candidates.

Each of our research anddevelopment programs is subject to risks and uncertainties, including therequirement to seek regulatory approvals, which are outside of our control. Forexample, our clinical trials may be subject to delays or rejections based onour inability to enroll patients at the rate that we expect or our inability toproduce clinical trial material in sufficient quantities and of sufficientquality to meet the schedule for our planned clinical trials. Moreover, theproduct candidates identified in these research and development programs,particularly our early stage programs, must overcome significant technological,manufacturing and marketing challenges before they can be successfullycommercialized. As a result of these risks and uncertainties, we are unable to predictwith any certainty the period in which material net cash inflows from suchprojects could be expected to commence or the completion date of theseprograms. Failure to commercialize these product candidates on a timely basiscould have a material adverse affect on our business, financial condition andresults of operations. We may seek to establish collaborative relationships tohelp us commercialize these product candidates, but there can be no assurancethat we will be successful in doing so.

*General andAdministrative Expense*

*2006 versus 2005*

General and administrativeexpense in the year ended December 31, 2006 was $11.6 million versus$7.4 million in 2005, an increase of $4.2 million, or 57%. The primarycomponents of the increase to general and administrative expenses wereincreased costs for market research and business development activities andhigher staffing levels primarily from the addition of marketing personnel. Inaddition, $1.1 million of this increase related to stock-based compensationexpense from the adoption of Statement of Financial Accounting StandardsNo.123R*, Share Based Payment* (FAS 123R).

*2005 versus 2004*

General and administrativeexpense in the year ended December 31, 2005 was $7.4 million versus$6.2 million in 2004, an increase of $1.2 million, or 19%. General andadministrative expenses increased $1.2 

61

----

millionin 2005 versus 2004 primarily due to higher staffing levels, and increasedcosts for investor relations and business development activities.

*General andAdministrative Expense Components*

Thefollowing table summarizes the primary components of our general andadministrative expenses for the years ended December 31, 2004, 2005 and2006:

| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(In thousands)**                     | ** ** |
| Direct costs                              |       | $                                           | 5,252      |   | $ | 6,673 |   | $ | 9,338 |   |
| Indirect costs:                           |       |                                        |       |   |   |   |   |
| Facility costs                            |       | 303                                         |       | 253 |   | 531 |   |
| Depreciation                              |       | 27                                          |       | 145 |   | 212 |   |
| Stock-based compensation                  |       | 584                                         |       | 375 |   | 1,534 |   |
| Total indirect  costs                     |       | 914                                         |       | 773 |   | 2,277 |   |
| Total general and  administrative expense |       | $                                           | 6,166      |   | $ | 7,446 |   | $ | 11,615 |   |

 

We anticipate general andadministrative expenses to increase, including increases in expenses formarketing, sales and business development activities as we prepare for thecommercialization of Imagify as well as continue to evaluate opportunities forthe application of our HDDS and PDDS technology and to support other productdevelopment efforts.

*Interest and OtherIncome (Expense)*

*2006 versus 2005*

Interest income for theyear ended December 31, 2006 was $2.5 million versus $1.8 million in 2005,an increase of $0.7 million, or 38% as a result of higher average fund balancesavailable for investment resulting from the $37.7 million common stockfinancing in April 2006 and the $23.8 million common stock offeringcompleted in December 2006. Interest expense increased $1.7 million in2006, to $2.2 million, versus $0.6 million in 2005 primarily due to higheraverage debt balances under our equipment leases in 2006, the capitalization of$0.8 million of interest in 2005 related to the manufacturing facility, andnon-cash interest accretion charges in 2006 of $0.6 million related to the GEand Schering patent agreement payments.

*2005 versus 2004*

Interest income for theyear ended December 31, 2005 was $1.8 million versus $0.6 million in 2004,an increase of $1.3 million as a result of higher average fund balancesavailable for investment resulting from the $45.0 million preferred stockfinancing in February 2005 and the $18.7 million common stockoffering completed in September 2005. Interest expense increased $0.4million in 2005, versus 2004 primarily due to higher average debt balancesunder equipment leases, primarily related to increase in borrowings under ourtwo equipment financing lines and non-cash interest accretion charges of $0.3million related to the Schering patent agreement.

62

----

*Interest and OtherIncome (Expense) Components*

Thefollowing table summarizes the primary components of interest and other incomeand expense for the years ended December 31, 2004, 2005 and 2006:

| ** **                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(in thousands)**                    | ** ** |
| Interest income                    |       | $                                          | 558        |   | $ | 1,845 |   | $ | 2,541 |   |
| Other  income/(expense)            |       | 44                                         |       | — |   | — |   |
| Interest expense                   |       | (133                                       | )          | (551 | ) | (2,273 | ) |
| Change in  valuation of derivative |       | —                                     |       | 257 |   | 922 |   |
| Total, net                         |       | $                                          | 469        |   | $ | 1,551 |   | $ | 1,190 |   |

 

*Changein Valuation of Derivative.**  *The derivative is related to the embedded derivativeinstrument from the dividend make-whole payment feature of the preferred stockoffering that closed in February 2005. The change in valuation of derivativeamounted to $0.9 million in 2006 and $0.3 million in 2005. The derivativeliability value is reduced as dividends payments on the preferred stock aremade, as well as for any conversions of preferred stock into common stock. DuringApril 2006,we distributed 15,526 shares of our common stock with a fairvalue of $0.1 million in satisfaction of the make-whole provision relatedto the conversion of 10,000 shares of preferred stock into common stock. During2005, we distributed 288,526 shares of our common stock with a fair value of $1.7 millionin satisfaction of the make-whole provision related to the conversion of160,000 shares of preferred stock into common stock.

*Effectof Preferred Stock on Loss Available to Common Stockholders.**  *Our net loss available to commonstockholders includes dividends paid as well as dividends accumulated onpreferred stock. The accumulated portion represents one month of dividendaccumulated but not declared as of the end of the period. This amount ofdividends accumulated is included in the calculation of per share net lossavailable to common stockholders.

Dividends paid oraccumulated on preferred stock totaled $2.4 million in 2006 and 2005. Preferredstock dividends result from the issuance on February 24, 2005 of 900,000shares of 6.5% exchangeable preferred stock. Dividends paid in cash to holdersof this preferred stock during 2006 and 2005 totaled $2.4 million and $2.2million, respectively. During 2006 and 2005, voluntary conversions of shares ofpreferred stock into common stock totaled 10,000 and 160,000, respectively,resulting in an outstanding balance of preferred stock at December 31,2006 and 2005 of 730,000 and 740,000 shares, respectively. In February 2007,the board of directors declared a dividend on the shares of preferred stockoutstanding as of February 15, 2007. This dividend, which totaled $0.6million, was paid on March 1, 2007. In addition to dividends paid onpreferred stock, the calculation of per share net loss available to commonstockholders includes $0.2 million of dividends accumulated on preferred stockrepresenting one month of dividend accumulated but not declared as of December 31,2006.

**Liquidity andCapital Resources**

Historically, we have financed our business throughthe issuance of equity securities, debt financings and equipment leases and,more recently, with funds from our collaboration with Nycomed. Our liquidityrequirements have arisen primarily from research and development expenditures,equipment expenditures and payments on outstanding indebtedness. As of December 31,2006, we had cash and cash equivalents of $59.8 million. As of December 31,2006 we owed $0.1 million from capital leases and $22.2 million from notespayable and other long-term obligations. We also had operating leasecommitments totaling $16.3 million for rent of our facilities.

63

----

During the year ended December 31, 2006,operating activities used $48.1 million of cash. Net cash used byoperating activities during this period resulted primarily from a net loss of$61.1 million and a decrease in accounts payable and accrued expenses of $3.3 million.These uses of cash were partially offset by non-cash charges for depreciationand amortization of $10.3 million, non-cash charges for stock-basedcompensation of $2.7 million and an increase in deferred revenue of $2.8 million.

We estimate that quarterly cash spending fromoperating activities will be approximately $10 to $12 million in the firsthalf of 2007 including spending necessary to complete the RAMP-2 blindedreads. In addition, we anticipate net quarterly payments of approximately $1.5million per quarter for repayment of debt related to prior equipment purchasesand capital leases and quarterly payments of approximately $0.6 million perquarter for payment of dividends on outstanding preferred stock. We arescheduled to make payments of $3.0 million and $5.0 million, respectively, inconnection with the intellectual property agreements that we have entered intowith Schering and GE. Assuming favorable RAMP-2 results, we anticipatethat our rate of quarterly cash spending from operating activities in thesecond half of 2007 could increase to $12 to $15 million as we prepare forcommercialization of Imagify and advance other potential product candidates.

During the year ended December 31, 2006,investing activities used $1.2 million in cash. This use of cash was primarilyused for purchases of equipment incurred in connection with our commercialmanufacturing facility for Imagify. We anticipate that our capital expendituresduring the first half of 2007 will average less than $1.0 million per quarter. Capitalexpenditures in the second half of 2007 could average between $2.0 and $3.0million per quarter depending upon the results from our RAMP-2 clinicaltrial or changes in other assumptions used in our plans. We will continue toseek debt financing for such purchases.

During the year ended December 31, 2006,financing activities provided $59.9 million in cash. Net cash provided byfinancing activities during this period resulted primarily from the netproceeds of a common stock and warrant financing in April 2006 of $37.7million and the net proceeds of a common stock and warrant financing in December 2006of $23.8 million. These funding activities were partially offset by payments in2006 on long term obligations of $4.3 million and the payment of dividendson the redeemable convertible preferred stock of $2.4 million.

On December 12, 2006, we sold 9,259,254 unitsconsisting of (i) one share of common stock and (ii) one warrant topurchase 0.4 shares of common stock at an exercise price of $3.11 per share,for a purchase price of $2.75 per unit, resulting in aggregate gross proceedsto us of $25.5 million (net proceeds of approximately $23.8 million afterdeducting underwriting discounts and commissions and offering expenses). Unitsare not issued or certificated. The shares of common stock and warrants areimmediately separable and will be issued separately. The warrants will beexercisable beginning on June 12, 2007 and until December 12, 2011.

Effective June 9, 2006, we entered into apromissory note with General Electric Capital Corporation, or GE Capital, inaggregate original principal amount totaling $1.5 million for equipment alreadypurchased by us. The promissory note includes an annual interest rate of 10.69%and is payable over 42 consecutive months. The promissory note is secured bythe financed equipment pursuant to the terms of our Master Security Agreementwith GE Capital. The promissory note is subject to acceleration upon thehappening of customary events of default, including the failure to make timelypayments of principal and interest.

Effective June 1, 2006, we entered into anagreement to license on a non-exclusive basis various ultrasound-relatedintellectual property from GE Healthcare , or GE, a division of GeneralElectric Company. The agreement provides us with use of GE’s ultrasoundcontrast agent patents and patent applications in combination with our leadproduct candidate Imagify in the field of ultrasound contrast agents, as wellas any patents that GE acquires in the field within 12 months of the agreement.In 

64

----

consideration of thenon-exclusive license of these patents, we agreed to pay GE $10.0 million priorto commercial approval of Imagify, of which $5.0 million was paid in June 2006and $5.0 million is due in June 2007. In addition, we agreed to pay GE$5.0 million upon the commercial approval (defined as the first to occur of theapproval of a New Drug Application in the United States or the approval of aMarketing Authorization Application in Europe) of Imagify and $5.0 million uponthe one year anniversary of such commercial approval. The latter two $5.0million payments are contingent upon achievement of future milestone eventsand, accordingly, have not been recorded at this time.

Also effective June 1, 2006, we entered into anagreement to license on a non-exclusive basis various ultrasound-relatedintellectual property from Bracco International BV, or Bracco. The agreementprovides us with use of Bracco’s ultrasound-related patents and patentapplications in combination with our lead product candidate Imagify in thefield of ultrasound diagnostic imaging. In consideration the non-exclusivelicense of these patents, we agreed to pay Bracco up to a total royalty of Euros 3.0 million, of which Euros 0.5million (approximately $0.6 million at September 30, 2006) was paid in June 2006.An additional Euros 2.5 million is payable upon our achievement of certaindefined regulatory milestones. We also agreed to pay a royalty on futureImagify revenue, up to a maximum royalty amount of Euros 10.0 million, less aportion of the above-referenced milestone payments. Whereas the otherobligations are contingent upon the outcome of future events, they have notbeen recorded at this time.

On April 12, 2006, we sold 5,772,004 units, eachunit consisting of (i) one share of common stock and (ii) one warrantto purchase 0.3 shares of common stock at an exercise price of $7.97 per share,for a purchase price of $6.9675 per unit, resulting in aggregate gross proceedsto us of $40.2 million (net proceeds of approximately $37.7 million afterdeducting underwriting discounts and commissions and offering expenses). Unitsare not issued or certificated. The shares of common stock and warrants wereimmediately separable and were issued separately.  The warrants were exercisable beginning on October 12,2006 and until April 12, 2011.

In September 2005, we sold 3,566,000 shares ofcommon stock at $5.25 per share resulting in net proceeds of approximately$17.5 million after deducting underwriting discounts, commissions and offeringexpenses.

In June 2005, we entered into a equipmentfinancing line with Oxford Finance Corporation, or Oxford. In 2005 and 2006, weborrowed an aggregate of $7.0 million against this line. As of December 31,2006, net of repayments, we had $5.1 million outstanding under this line. Suchborrowings are collateralized by corresponding equipment and other capitalpurchases with repayment due in monthly installments over 36 to 48 months,depending on the nature of the equipment financed, with the last such repaymentscheduled for March 2010. Interest rates on these borrowings were fixed atthe time of each borrowing and range from 10.3% to 10.9% Loan amounts aresubject to acceleration upon the happening of certain customary events ofdefault including failure to timely pay principal and interest.

In March 2005, we borrowed $2.0 millionunder a loan agreement with MassDevelopment to help finance certain tenantimprovements to our commercial manufacturing facility in Tewksbury,Massachusetts. Interest accrues under the loan at 5.0% per annum withretroactive adjustments to 9% upon our reaching certain defined earning levels.The repayment of principal and accrued interest will coincide with the term ofthe Tewksbury lease which has a five-year, nine-month term with options toextend the lease for up to two additional five-year terms. No payments were dueunder the loan for the first 24 months and we are scheduled to begin repaymentson this loan in May 2007. Unpaid interest during this twenty-four monthperiod shall be accrued and principal and interest shall be repaid on a monthlybasis thereafter such that the total amount outstanding shall fully amortizeover the balance of the term in equal installments. The loan is subject toacceleration upon certain customary events of default, including failure totimely pay principal and interest. The loan is secured by certain of the tenantimprovements made at the Tewksbury facility.

65

----

In February  2005, we issued 900,000 shares of6.5% convertible exchangeable preferred stock, our Preferred Stock, at $50.00per share resulting in net proceeds of approximately $41.9 million afterdeducting underwriting discounts, commissions and offering expenses. Each shareof Preferred Stock has a liquidation preference of $50.00 per share. Dividendson the Preferred Stock are cumulative from the date of original issue at theannual rate of $3.25 per share, payable quarterly on the first day of March,June, September, and December. Any dividends must be declared by our board ofdirectors and must come from funds that are legally available for dividendpayments. During 2006 and 2005, we paid $2.4 and $2.2 million, respectively, individends on our Preferred Stock. As of December 31, 2006, 730,000 sharesof Preferred Stock were outstanding. In February 2007, our board ofdirectors declared a quarterly dividend on the Preferred Stock for all holdersas of February 15, 2007. This dividend, which totaled $0.6 million inaggregate, was paid on March 1, 2007.

We may elect to automatically convert some or all ofthe Preferred Stock into shares of our common stock if the closing price of ourcommon stock has exceeded $10.30 per share (150% of the conversion price) forat least 20 trading days during any 30-day trading period, ending withinfive trading days prior to notice of automatic conversion. Prior to March 1,2009, if we elect to automatically convert, or if any holder elects tovoluntarily convert, the Preferred Stock, we will also make an additionalpayment, the Make-Whole payment, equal to the aggregate amount of dividendsthat would have been payable on the Preferred Stock so converted from theoriginal date of issuance through and including March 1, 2009, less anydividends already paid on the Preferred Stock. This additional payment ispayable by us, at our option, in cash, in additional shares of its commonstock, or in a combination of cash and shares of common stock. We have reserveda maximum of approximately 900,000 shares of common stock for issuance underthis Make-Whole provision.

During 2006 and 2005, 10,000 and 160,000 shares,respectively, of Preferred Stock were voluntarily converted into 72,886 and 1,166,181 shares, respectively, ofour common stock. In addition, in connection with these conversions we issued15,526 and 288,526 shares, respectively, of our common stock in satisfaction ofthe required Make-Whole payment.

We may elect to redeem the Preferred Stock atdeclining redemption prices on or after March 6, 2009. The Preferred Stockis exchangeable, in whole but not in part, at our option on any dividendpayment date beginning on the exchange date (March 1, 2006) for our 6.5%convertible subordinated debentures, or the Debentures, at the rate of $50principal amount of Debentures for each share of Preferred Stock. TheDebentures, if issued, will mature 25 years after the exchange date and haveterms substantially similar to those of the Preferred Stock.

In April 2004, we entered into an equipmentfinancing line with General Electric Capital Corporation. In 2004 and 2005, weborrowed an aggregate of $10.5 million against this line. As of December 31,2006, net of repayments, we had $7.1 million outstanding under this line. In January 2006,the line was amended and the availability was increased by an additional $3.5million and was extended through May 2007. During 2006, we borrowedapproximately $1.5 million and have approximately $2.0 million , of this $3.5million available at December 31, 2006. Such borrowings are collateralizedby corresponding equipment and other capital purchases with repayment due inmonthly installments over 36 to 48 months, depending on the nature of theequipment financed, with the last such repayment scheduled for January 2010.Interest rates on these borrowings were fixed at the time of each borrowing andrange from 8.7% to 10.7%. The loans under this line are subject to accelerationupon the happening of certain customary events of default, including failure totimely pay principal and interest.

In July 2004, we entered into a collaboration,license and supply agreement with Nycomed in which we granted Nycomed rights todevelop and market Imagify in Europe. Under the original terms of thisagreement, Nycomed paid us license fees and research and development paymentstotaling $6.0 million in 2004, $5.0 million in 2005 and $1.0 million in2006. The original agreement also provides for Nycomed to 

66

----

pay to us up to$58.0 million in milestone payments upon achievement of certain regulatorymilestones and sales goals. Under the agreement, Nycomed has agreed to pay usto manufacture Imagify for them and to pay us royalties on Nycomed’s sales ofImagify. In October 2005, our agreement with Nycomed was amended such thatNycomed paid us an additional $0.2 million in 2005 for activitiesassociated with creating a brand name for Imagify and related trademarkactivities which amount decreased by $0.2 million the potential $58.0 inmilestone payments which may be earned under the agreement. In February 2006,we and Nycomed agreed to further amend the agreement to accelerate $1.8 millionin milestone payments in order to fund certain activities associated with thequalification of our manufacturing facility in Tewksbury, Massachusetts. Wereceived this $1.8 million in 2006 as the qualification costs wereincurred. Payments received pursuant to these amendments are consideredadvances against a future milestone payment for a European regulatory filing,or MAA, and are deducted from that milestone payment. In connection with ouroriginal agreement with Nycomed, we are obligated to pay a customary fee to ourfinancial advisor. The fee is comprised of cash and warrants. The total amountof cash payments is dependent upon the timing and magnitude of the amounts paidto us by Nycomed. In 2004, 2005 and 2006, we paid our advisor $325,000,$285,000 and $180,000, respectively. On November 30, 2004, in connectionwith the Nycomed transaction, we issued a warrant to our financial advisor topurchase up to 55,732 shares of our common stock at an exercise price of $6.28per share.

In July 2004, we entered into a lease agreementfor 58,000 square feet of commercial manufacturing space in Tewksbury,Massachusetts. This lease has a five year, nine month term with options toextend the lease for up to two additional five-year terms at predeterminedrental rates. Initially, we received nine months of occupancy free of baserent, followed by base rent of approximately $0.4 million for the next twelvemonths with scheduled annual rental rate increases thereafter.

In August 2004, we entered into a$2.0 million loan agreement with the Massachusetts Development FinanceAgency, the economic development authority of the Commonwealth ofMassachusetts, to help fund tenant improvements to the Tewksbury facility.Financing is available under this loan agreement upon completion by us ofcertain tenant improvements to the Tewksbury facility. The term of this facility,if utilized, is expected to coincide with the term of the Tewksbury lease.

We believe, based on ouroperating plans, that our existing resources, excluding potential proceeds fromthe equity line financing available to us effective August 2006, will beadequate to fund our planned operations, including spending necessary tocomplete the blinded reads of the RAMP-2 results, into early 2008, orlonger if we elect to reduce our rate of spending. Unless we reduce our currentrate of spending, we will require significant additional funds, which we mayraise through public or private sales of equity, or from borrowings, or fromstrategic partners. Our future capital requirements will depend on manyfactors, including the scope and progress made in our research and developmentactivities and our clinical trials and the size and timing of creating expandedmanufacturing capabilities. We may also need additional funds for possiblefuture strategic acquisitions of businesses, patent licenses, products or technologiescomplementary to our business. We do not expect to generate significantrevenues from Imagify, other than possible license or milestone payments,unless or until we or current or potential partners complete clinical trialsand receive marketing approval from the applicable regulatory authorities.Allowing our resources to become depleted may make future funding moredifficult or expensive. When additional funds are required or, in advance ofsuch requirements, we anticipate that funds will be needed, we may raise suchfunds from time to time through public or private sales of equity or fromborrowings or from strategic partners or we may delay funding of certaindevelopment activities which could delay the filing of our Imagify NDA and thecommercialization of Imagify which would have a materially adverse impact onour growth plans. We are evaluating our funding alternatives, additional equityfinancing may be dilutive to our stockholders; debt financing, if available,may involve significant cash payment obligations and covenants that restrictour ability to operate as a business; and strategic partnerships may result inroyalties or other terms which reduce our economic potential from productsunder development.

67

----

**Shelf RegistrationStatement**

We have on file with theU.S. Securities and Exchange Commission, or SEC, a “universal shelf”registration statement on Form S-3 (Registration No. 333-134263)and auniversal shelf registration statement on Form S-3 (Registration No. 333-123854),which provide for the offer, from time to time, of common stock,preferred stock, debt securities and warrants up to an aggregate remainingavailability of approximately $27.3 million and $33.0 million, respectively,net of financingamounts previously executed under these registration statements and amountsreserved for up to $30.0 million in potential financing under the equity lineof credit arrangement we entered into in August 2006 with AzimuthOpportunity, Ltd. The SEC declared the shelf registration statements effective on June 1,2006 and April 15, 2005, respectively. Subject to market conditionsand our capital needs, and so long as we are then eligible to use theregistration statements under SEC rules, we may again seek to use any remainingavailability under the shelf registration statements by making an offering ofsecurities covered for sale under the registration statements. In addition, wemay amend our shelf registration statements or file a new shelfregistration statement to increase our potential access to capital. If we electto raise additional capital using a shelf registration statement, we may usethe net proceeds from the sale of these securities for general corporatepurposes, which may include funding clinical trials, research and development,regulatory activities, acquisitions, including acquisitions of companies,products, intellectual property or other technology, repayment or refinancingof existing indebtedness, investments, capital expenditures, repurchase of ourcapital stock and for any other purposes that we may specify in any prospectussupplement.

**Equity Line ofCredit Arrangement**

In August 2006, weentered into what is sometimes termed an equity line of credit arrangement withAzimuth Opportunity Ltd. The arrangement provides that, upon the terms andsubject to the conditions set forth therein, Azimuth is committed to purchaseup to $30.0 million of our common stock, or up to a maximum of approximately7.6 million shares of common stock, whichever occurs first, over the 18-monthterm of the agreement. From time to time during the term of the agreement, andat our sole discretion, we may present Azimuth with draw down notices requiringAzimuth to purchase our common stock at a per share purchase price equal to thedaily volume weighted average price of the common stock, less a discountranging from 3.875% to 5.875%, based on the volume weighted average price ofthe common stock. As a result, our existing common stockholders will experienceimmediate dilution upon the purchase of any shares of our common stock byAzimuth under this agreement. The sale of shares under this equity line will bedilutive to existing stockholders and may have an adverse effect on the priceof our securities. The arrangement includes provisions under which we may, ifelected, terminate this equity line of credit without financial penalty.

**Off-Balance SheetFinancing Arrangements**

We currently do not haveany special purpose entities or off-balance sheet financing arrangements otherthan operating leases.

68

----

**ContractualObligations**

Thefollowing table summarizes our contractual obligations as of December 31,2006 and the effect such obligations are expected to have on our liquidity andcash flow in future periods:

| **Contractual**              | ** ** | **Payments due by period (in 000’s)** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------|------------|
| **obligations**              | ** ** | ** **                                                          | ** ** | **Total** | ** ** | **2007** | ** ** | **2008 - 2009** | ** ** | **2010 - 2011** | ** ** | **2012 and beyond** | ** ** |
| Long-Term Debt               |       | $                                                                   | 16,642     |   | $ | 6,337 |   |   | $ | 8,618 |   |   |   | $ | 719 |   |   |   | $ | 968 |   |   |
| Capital Lease  Obligations   |       | 107                                                                 |       | 32 |   |   | 65 |   |   |   | 10 |   |   |   | — |   |   |
| Operating Lease  Obligations |       | 16,267                                                              |       | 2,917 |   |   | 6,265 |   |   |   | 5,653 |   |   |   | 1,432 |   |   |
| Purchase  Obligations        |       | 238                                                                 |       | 238 |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Other Long-Term  Liabilities |       | 8,000                                                               |       | 8,000 |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total                        |       | $                                                                   | 41,254     |   | $ | 17,524 |   |   | $ | 14,948 |   |   |   | $ | 6,382 |   |   |   | $ | 2,400 |   |   |
|                              |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Long-Term Debt of $16.6 million includes $8.0 millionin principal and interest payable to General Electric Capital Corporation and$6.0 million in principal and interest payable to Oxford Finance Corporationunder equipment loans with payments due in monthly installments over 36 to 48months, collateralized by the corresponding equipment. The loans are subject toacceleration upon the occurrence of certain events of default, includingfailure to timely pay principal and interest. Also included under Long-TermDebt is $2.6 million in principal and interest payments due under theMassDevelopment loan, under which we borrowed $2.0 million to financeimprovements to our commercial manufacturing facility in Tewksbury,Massachusetts. Interest accrues under the loan at 5.0% per annum withretroactive adjustments to 9.0% in the event we achieve positive operating cashflow as defined in the agreement without prior repayment of the loan. Therepayment of principal and accrued interest coincides with the term of theTewksbury lease which has an initial five-year, nine-month term. No paymentswere due under the loan for the first 24 months, we are scheduled to begin loanrepayments in May 2007. The loan is subject to acceleration upon certainevents of default, including failure to timely pay principal and interest.

Capital Lease Obligations as classified pursuant toFASB Statement of Financial Accounting Standards No. 13, “*Accounting for Leases*” relate to leases for businessequipment. We leased capital equipment through Banc of America LeasingCorporation. The remaining monthly payments range from $460 to $1,019 withmaturities through June 2010.

Our operating lease obligations of $16.3 millionrelate primarily to our headquarters and manufacturing facility leases underwhich we pay monthly rent. Our Watertown, Massachusetts headquarters lease hasan original term of 10 years, which began in December 2001, and which wasextended by six months during 2005. The lease for our commercial manufacturingspace in Tewksbury, Massachusetts has an initial five year, nine month term,which began in July 2004, with options to extend the lease for up to twoadditional five-year terms at predetermined rental rates.

Purchase Obligations include one purchase order to asupplier for material.

Other Long-TermLiabilities of $8.0 million includes a $5.0 million payment due inJune 2007 to GE Healthcare pursuant to intellectual property licenseagreement and a $3.0 million payment due in May 2007 to Schering pursuantto intellectual property acquisition agreement. The $8.0 million amount excludescontingent milestone and royalty obligations.

**Critical AccountingPolicies and Estimates**

Our discussion andanalysis of our financial condition and results of operations are based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. On 

69

----

an on-goingbasis, we evaluate our estimates and judgments, including those related to revenues,accrued expenses, fair valuation of stock related to stock-based compensationand income taxes. We base our estimates on historical experience and on variousother assumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

We believe the following critical accounting policiesaffect our more significant judgments and estimates used in the preparation ofour consolidated financial statements.

*Revenue.**  *We recognize revenue from licensearrangements in accordance with Staff Accounting Bulletin No. 104, *Revenue Recognition* (“SAB 104”) and FASB Emerging Issue TaskForce Issue No. 00-21, *Accounting for RevenueArrangements with Multiple Deliverables* (“EITF 00-21”). Werecognize revenue from license payments not tied to achieving a specificperformance milestone ratably over the period over which we are obligated toperform services. The period over which we are obligated to perform services isestimated based on available facts and circumstances. We recognize revenue fromperformance payments, when such performance is substantially in our control andwhen we believe that completion of such performance is reasonably probable,ratably over the period over which we estimate that we will perform suchperformance obligations. Substantive at-risk milestone payments, which arebased on achieving a specific performance milestone when performance of suchmilestone is contingent on performance by others or for which achievement cannot be reasonably estimated or assured, are recognized as revenue when themilestone is achieved and the related payment is due, provided that there is nosubstantial future service obligation associated with the milestone. We do notrecognize revenue in connection with license arrangements until payments arecollected or due and reasonably assured of being collected. In addition, we donot recognize revenue in circumstances where the arrangement includes a refundprovision until the refund condition is no longer applicable unless, in ourjudgment, the refund circumstances are within our operating control andunlikely to occur. Payments received in advance of being recognized as revenueare deferred.

In connection with feasibility studies, contractamounts which are not due until the customer accepts or verifies the researchresults are not recognized as revenue until customer acceptance, assumingcollectibility is reasonable assured.

We are recognizing collaboration revenue of $12.0million associated with the initial license and performance-based paymentsunder the Nycomed agreement based on an estimated recognition period offifty-four months over which we are obligated to perform services supportingthe agreement and assumes that Imagify will be ready for commercialization inthe second half of 2008. At the time we entered into our agreement withNycomed, we estimated that the development period would be 42 months. Thisestimate was revised to 54 months in the third quarter of 2006. The effect ofthis change in estimate resulted in $1.9 million less revenue recorded in 2006than would have been recorded had the development period remained at 42 months.Estimation of this development period involves many assumptions, includingestimates relating to completion of activities for which we are reliant onNycomed and independent regulatory authorities to achieve. Our estimateddevelopment recognition period may change again if facts and circumstanceschange. Were the estimated development period to be extended, we may berequired to record a reduction in cumulative revenue recognized in ourstatement of operations in the period in which the change in development periodis determined.

Our agreement with Nycomed has been modified such thatNycomed has paid us $0.2 million for activities associated with creating abrand name for Imagify and related trademark activities and paid us $1.8million to support the validation of the our commercial manufacturing facilityfor Imagify. These amounts were originally scheduled to be paid to us uponNycomed’s filing for regulatory approval of Imagify in Europe. While theamounts are not refundable, we plan to defer recognition of these amounts 

70

----

until after the originalregulatory filing milestone has been achieved. Payments received for currentand potential HDDS and PDDS feasibility studies, which are offset by costsincurred for such studies, are recognized as revenue over the estimatedperformance period of each such study. A change in these estimates could resultin a significant change to the amount of revenue recognized in future periods.In addition, if the Nycomed collaboration agreement is terminated for reasonsother than certain non-performance by us, we would recognize the remainder ofthe payments we have received or otherwise expect to collect over theamortization period at the time of termination. We will not recognize revenueassociated with the potential additional $56 million in milestone-basedpayments that may be earned under the Nycomed agreement until the underlyingregulatory and sales milestones are achieved.

*Propertyand Equipment.**  *Propertyand equipment are recorded at cost and depreciated over their estimated usefullives of three to five years using the straight-line method. The majority ofour equipment is related to our ongoing research and development activities,including equipment which, subject to regulatory approvals, we intended to usefor commercial manufacture of Imagify. We consider that this equipment isplaced in service when operation of the equipment is started-up and begindepreciating the equipment at this time. The equipment in our commercialmanufacturing facility is currently undergoing research and development relatedactivities that result in wear and tear on the equipment including includeongoing calibration and testing.

Leasehold improvements and equipment under capitalleases are recorded at cost. We depreciate leasehold improvements and equipmentunder capital leases over the lesser of their useful lives or the remainder oftheir respective lease terms. We began depreciation of leasehold improvementsat our Tewksbury facility in October 2005 upon receipt of an occupancypermit and taking occupancy of the facility. Our leasehold improvements costson this facility approximate $30.3 million and are being depreciated ratablyover remaining term of our present lease, the initial term of which isscheduled in expire in April 2010. We believe that the use of the initialterm of the lease for the depreciation period, rather than assuming that thelease term is renewed, is appropriate given the inherent uncertainties with aproduct such as Imagify, which has not yet completed its phase 3 clinicaltrials and requires regulatory approvals before it can be marketed. The RiskFactors included under Section 1A of this document discuss theuncertainties associated with Imagify.

*AccruedExpenses.**  *Aspart of the process of preparing consolidated financial statements we arerequired to estimate accrued expenses. This process involves identifyingservices which have been performed on our behalf and estimating the level ofservice performed and the associated cost incurred for such service as of eachbalance sheet date in our consolidated financial statements. Examples ofestimated expenses for which we accrue include professional service fees, suchas lawyers and accountants, and contract service fees such as amounts paid toclinical monitors, data management organizations and investigators inconjunction with clinical trials, and fees paid to consultants used in thequalification of our commercial manufacturing facility for Imagify. Inconnection with such service fees, our estimates are most affected by ourunderstanding of the status and timing of services provided relative to theactual levels of services incurred by such service providers. The majority ofour service providers invoice us monthly in arrears for services performed. Inthe event that we do not identify certain costs which have begun to be incurredor we under- or over-estimate the level of services performed or the costs ofsuch services, our reported expenses for such period would be too low or toohigh. The date on which certain services commence, the level of servicesperformed on or before a given date and the cost of such services are oftenjudgmental, but have not varied materially from actual costs incurred. We makethese judgments based upon the facts and circumstances known to us inaccordance with accounting principles generally accepted in the United Statesof America.

*Stock-BasedCompensation and Other Equity Instruments.**  *We account for stock-basedcompensation in accordance with the fair value recognition provisions ofFAS 123R, “*Share Based Payment*”. UnderFAS 123R, stock-based compensation cost is measured at the grant datebased on the value of the award 

71

----

and is recognized asexpense over the appropriate vesting period. Determining the fair value ofstock-based awards at the grant date requires judgment, including estimatingthe expected term of stock options, the expected volatility of our stock andexpected dividends. In addition, judgment is required in estimating the amountof stock-based awards that are expected to be forfeited. If actual resultsdiffer significantly from these estimates or different key assumptions wereused, it could have a material effect on our Consolidated Financial Statements.See Note 3 of the Notes to the Consolidated Financial Statements foradditional information regarding stock-based compensation expense.

Prior to adopting the provisions of FAS 123R, werecorded estimated compensation expense for employee stock options based upontheir intrinsic value on the date of grant pursuant to Accounting PrinciplesBoard Opinion 25 (“APB 25”), “*Accounting for StockIssued to Employees*” and provided the required pro forma disclosuresof FAS 123. Because we established the exercise price based on the fair marketvalue of our stock at the date of grant, the stock options had no intrinsicvalue upon grant, and therefore no estimated expense was recorded for stockoption expense prior to adopting FAS 123R. Conversely, when the exercise pricefor accounting purposes was below fair value of our common stock at the date ofgrant, a non-cash charge to compensation expense was recorded ratably over theterm of the option vesting period in an amount equal to the difference betweenthe value calculated using the exercise price and the fair value. We did issueoptions prior to its initial S-1 filing in July 2003 at values lessthan fair market. These grants resulted in the recording of deferredcompensation. Stock options are not included in the calculation of diluted netloss per common share due to the antidilutive effect of the stock options forall periods presented.

Accounting for equity instruments granted or sold byus under APB No. 14, APB No. 25, FAS 123 and EITF No. 96-18requires fair value estimates of the equity instrument granted or sold. If ourestimates of the fair value of these equity instruments are too high or toolow, it would have the effect of overstating or understating expenses. Whenequity instruments are granted or sold in exchange for the receipt of goods orservices and the value of those goods or services can be readily estimated, weuse the value of such goods or services to determine the fair value of theequity instruments. When equity instruments are granted or sold in exchange forthe receipt of goods or services and the value of those goods or services cannot be readily estimated, as is true in connection with most stock options andwarrants granted to employees or non-employees, we estimated the fair value ofthe equity instruments based upon consideration of factors which we deemed tobe relevant at the time using cost, market and/or income approaches to suchvaluations.

The fair values of all stock option grants issued weredetermined using a Black-Scholes model in which we are required to makeassumptions for the risk-free interest rate, the expected volatility of theunderlying stock, forfeiture rates and expected life of option grants. Therisk-free rates are the weighted average of the yield rates on 5-yearU.S. Treasury notes on the dates of the stock option grants. We used thehistorical volatility of our market-traded stock for the expected volatilityassumption. Forfeiture rates are calculated based on actual historical forfeitures.The expected life of employee stock options represents the weighted-averageperiod the stock options are estimated to remain outstanding. The expected lifeof employee stock options is, in part, a function of the options’ remainingcontractual life and the extent to which the option is in-the-money (i.e., theaverage stock price during the period is above the strike price of the stockoption). We estimate that, based on these variables, options are likely onaverage to be exercised in approximately 5 years from the date of grant.

*DerivativeLiabilities.**  *Theterms of our February 2005 convertible preferred stock offering and our March 2005MassDevelopment loan agreement contain features considered to be embeddedderivatives which are recorded at estimated fair value in accordance with FAS133. The estimation of this fair value includes various assumptions andestimates, including assumptions and estimates of risk free interest rates,stock price volatility and the timing of future preferred stock conversions.Changes in these estimates and assumptions can increase or decrease the valueof this derivative liability. The unrealized gain or loss of the 

72

----

derivative financialinstrument is included in our statement of operations. The convertiblepreferred stock terms include a dividend make-whole payment provision, whichhas been initially recorded at its estimated fair value. This derivativeliability is reduced upon conversion of the preferred stock as well asdividends declared by our board of directors, if any. The MassDevelopment loanagreement includes a provision for a retroactive interest rate increase in theevent that we achieve certain defined positive operating cash flows. Theinitial fair value of the MassDevelopment loan derivative is being amortizedover a term beginning with the loan agreement effective date and ending withthe estimated payment date of the retroactive interest. The fair value of bothderivative liabilities are re-measured at each reporting period.

*Income Taxes.**  *As part of the process of preparingour consolidated financial statements we are required to estimate our incometaxes in each of the jurisdictions in which we operate. This process involvesus estimating our actual current tax exposure together with assessing temporarydifferences resulting from differing treatments of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities. Inaddition, as of December 31, 2006, we had federal tax net operating losscarryforwards of $70.8 million, which expire through 2026. We also haveresearch and development credit carryforwards of $8.1 million. We have recordeda valuation allowance to fully offset against these otherwise recognizable netdeferred tax assets due to the uncertainty surrounding the timing of therealization of the tax benefit. In the event that we determine in the futurethat we will be able to realize all or a portion of its net deferred taxbenefit, an adjustment to deferred tax valuation allowance would increase netincome in the period in which such a determination is made. The U.S. Tax Codecontains provisions that may limit the utilization of net operating losscarryforwards and credits available to be used in any given year in the eventof significant changes in ownership interest, as defined.

**Recently IssuedAccounting Pronouncements**

In June 2006 the FASB issued FASB Interpretation(“FIN”) No. 48, “*Accounting forUncertainty in Income Taxes—an interpretation of FASB Statement 109”.*FIN 48 prescribes a comprehensive model for recognizing, measuring,presenting and disclosing in the financial statements tax positions taken orexpected to be taken on a tax return, including a decision whether to file ornot to file in a particular jurisdiction. FIN 48 also provides guidance onde-recognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition and defines the criteria that must be metfor the benefits of a tax position to be recognized. FIN 48 is effectivefor fiscal years beginning after December 15, 2006. Changes in net assetsas a result of application of FIN 48 must be accounted for as anadjustment to opening retained earnings. We have completed our initialevaluation of the impact of the January 1, 2007 adoption of FIN 48 and determinedthat such adoption is not expected to have a material impact on our financialposition or results from operations.

In September 2006, FASB issued SFAS (FAS) No. 157,“*Fair Value Measurements*,” whichis effective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The purpose of FAS 157 isto clarify and set forth consistent rules for defining fair value,establishing a framework for measuring fair value in generally acceptedaccounting principles and expanding disclosures about fair value measurements.FAS 157 applies under other accounting pronouncements that require or permitfair value measurements where those accounting pronouncements have determinedthat fair value is the relevant measurement attribute. FAS 157 does not requireany new fair value measurements, but for some entities the application of FAS157 could change current practice. We are currently assessing what impact, ifany, the adoption of this statement will have on our consolidated financialstatements.

In September 2006, the SEC issued SAB No. 108,“*Considering the Effects of Prior YearMisstatements When Quantifying Misstatements in Current Year FinancialStatements,”* which provides interpretive guidance on how the effectsof the carryover or reversal of prior year misstatements should be considered 

73

----

in quantifying a currentyear misstatement. We adopted the provisions of SAB No. 108, as requiredand such adoption did not have any impact on our financial statements.

In February 2007, theFASB issued SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities,”* which is effective as of the beginning of an entity’sfirst fiscal year beginning after November 15, 2007. This statement allowsthe measurement at fair value of financial instruments and certain other itemsthat are currently not required to be measured at fair value. The objective ofFAS 159 is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. The fair value option established by thisStatement permits the measurement of eligible items at fair value at specifiedelection dates, with unrealized gains and losses on the items for which thefair value option has been elected reported in earnings at each subsequentreporting date. We are currently assessing what impact, if any, the adoption ofthis statement will have on our consolidated financial statements.

**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We have not usedderivative financial instruments for speculative or trading purposes. However,we are exposed to market risk related to changes in interest rates. Our currentpolicy is to maintain an investment portfolio consisting mainly of U.S. moneymarket and government-grade securities, directly or through managed funds, withmaturities of one year or less. Our cash is deposited in and invested throughhighly rated financial institutions in North America. Our cash equivalents aresubject to interest rate risk and will fall in value if market interest ratesincrease. If market interest rates were to increase immediately and uniformlyby 10% from levels at December 31, 2006, we estimate that the fair valueof our investment portfolio would decline by an immaterial amount. We currentlyhave the ability to hold our fixed income investments until maturity, andtherefore we do not expect our operating results or cash flows to be affectedto any significant degree by the effect of a change in market interest rates onour investments. Our equipment loans and capital leases are not subject to interestrate fluctuations because the interest rates are fixed at the time ofborrowing.

**Effects ofInflation**

Our assets are primarilymonetary, consisting of cash, cash equivalents and short-term investments.Because of their liquidity, these assets are not directly affected byinflation. We also believe that we have intangible assets in the value of ourtechnology. In accordance with generally accepted accounting principles, wehave not capitalized the value of this intellectual property on ourconsolidated balance sheet. Due to the nature of this intellectual property, webelieve that these intangible assets are not affected by inflation. Because weintend to retain and continue to use our equipment, furniture and fixtures andleasehold improvements, we believe that the incremental inflation related toreplacement costs of such items will not materially affect our operations.However, the rate of inflation affects our expenses, such as those for employeecompensation and contract services, which could increase our level of expensesand the rate at which we use our resources.

**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

Our Financial Statements,together with the report of the independent registered public accounting firm,appear at pages F-1 through F-28, respectively, of this AnnualReport on Form 10-K, and are incorporated herein by reference.

74

----

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

**ITEM 9A. CONTROLSAND PROCEDURES**

**Evaluation of DisclosureControls and Procedures**

As of the evaluation dateof December 31, 2006, our management, with the participation our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour disclosure controls and procedures pursuant to Rule 13a-15(b) promulgatedunder the Securities Exchange Act of 1934, as amended, or the Exchange Act.Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that, as of the evaluation date, our disclosure controls andprocedures were effective in ensuring that material information required to bedisclosed by us in the reports that it files or submits under the Exchange Actis recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms,including ensuring that such material information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

**Changes in InternalControl Over Financial Reporting**

During the period coveredby this report, there have been no changes in our internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

**Management’s Reporton Internal Control over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rule 13a—15(f). Under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, we conducted an evaluation of the effectiveness of ourinternal control over financial reporting based on the framework in “InternalControl—Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under theframework in “Internal Control—Integrated Framework”, our management concludedthat our internal control over financial reporting was effective as of December 31,2006.

Deloitte & ToucheLLP, an independent registered public accounting firm that audited ourfinancial statements included in this Annual Report on Form 10-K,has issued an attestation report on management’s assessment of our internalcontrol over financial reporting. Such attestation, which expresses unqualifiedopinions on management’s assessment and on the effectiveness of our internalcontrol over financial reporting as of December 31, 2006, is included inthis Item 9A under the heading “Report of Independent Registered PublicAccounting Firm.”

75

----

**Report Of Independent Registered Public AccountingFirm**

To the Board of Directors and Stockholders ofAcusphere, Inc.Watertown, Massachusetts

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting that Acusphere, Inc. and subsidiaries (the “Company”) maintainedeffective internal control over financial reporting as of December 31,2006, based on criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organization*s* of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

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

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

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2006, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2006, based on the criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission.

76

----

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as of and for the yearended December 31, 2006 of the Company and our report dated March 16,2007 expressed an unqualified opinion on those financial statements andincludes an explanatory paragraph relating to the adoption of Statement ofFinancial Accounting Standards No. 123R, *Share-BasedPayment*, effective January 1, 2006.

/s/ Deloitte & Touche LLP

**Boston,Massachusetts**

March 16, 2007

77

----

**ITEM9B. OTHER INFORMATION**

Our policygoverning transactions in its securities by its directors, officers andemployees permits its officers, directors and certain other persons to enterinto trading plans complying with Rule 10b5-1 under the SecuritiesExchange Act of 1934, as amended. We have been advised that, in accordance withRule 10b5-1 and our policy governing transactions in its securities,such a plan has been entered into with provisions requiring that anytrading of securities thereunder is to be reported when and if itoccurs in accordance with applicable law. We undertake no obligation toupdate or revise the information provided herein, including for revision ortermination of an established trading plan.

78

----

**PART III**

**ITEM 10. DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

The information requiredunder this item is incorporated herein by reference to our definitive proxystatement pursuant to Regulation 14A, which proxy statement will be filedwith the Securities and Exchange Commission not later than 120 days afterthe close of our fiscal year ended December 31, 2006.

**Code of Ethics**

We have adopted a “code of ethics” as defined byregulations promulgated under the Securities Act of 1933, as amended, and theExchange Act and a “code of conduct” as defined by qualitative listingrequirements promulgated by The NASDAQ Global Market that apply to all of ourdirectors, officers and employees, including our principal executive officer,principal financial officer, principal accounting officer or controller, orpersons performing similar functions. We collectively refer to these codes asour Code of Business Conduct and Ethics, a current copy of which is attached asan exhibit to this Annual Report on Form 10-K. A current copy of ourCode of Business Conduct and Ethics may also be obtained by any person, withoutcharge, upon request directed to our Investor Relations department at:Acusphere, Inc., Attention: Investor Relations, 500 Arsenal Street,Watertown, MA 02472.

We intend to disclosesubstantive amendments to or waivers (including implicit waivers) of anyprovision of the Code of Business Conduct and Ethics that apply to ourprincipal executive officer, principal financial officer, principal accountingofficer or controller, or persons performing similar functions, by posting suchinformation on our website available at http://www.acusphere.com.

**ITEM 11. EXECUTIVECOMPENSATION**

The information requiredunder this item is incorporated herein by reference to our definitive proxystatement pursuant to Regulation 14A, which proxy statement will be filedwith the Securities and Exchange Commission not later than 120 days afterthe close of our fiscal year ended December 31, 2006.

**ITEM 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

The information requiredunder this item is incorporated herein by reference to our definitive proxystatement pursuant to Regulation 14A, which proxy statement will be filedwith the Securities and Exchange Commission not later than 120 days afterthe close of our fiscal year ended December 31, 2006.

**ITEM 13. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

The information requiredunder this item is incorporated herein by reference to our definitive proxystatement pursuant to Regulation 14A, which proxy statement will be filedwith the Securities and Exchange Commission not later than 120 days afterthe close of our fiscal year ended December 31, 2006.

**ITEM 14. PRINCIPALACCOUNTANT FEES AND SERVICES**

The information requiredunder this item is incorporated herein by reference to our definitive proxystatement pursuant to Regulation 14A, which proxy statement will be filedwith the Securities and Exchange Commission not later than 120 days afterthe close of our fiscal year ended December 31, 2006.

79

----

**PART IV**

**ITEM 15. EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

***(a)***

**1. ConsolidatedFinancial Statements.**

For a list of thefinancial information included herein, see the Index on Page F-1.

**2. FinancialStatement Schedules.**

Except for the schedule ofUnaudited Quarterly Results of Operations no financial statement schedules havebeen submitted because they are not required, not applicable, or because theinformation required is included in the financial statements or the notesthereto.

**3. Exhibit Index.**

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                            |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.01            |       | Amended and Restated Certificate of Incorporation of  registrant (incorporated herein by reference to Exhibit 3.01 to the  registrant’s Annual Report on Form 10-K for the Fiscal Year ended  December 31, 2005)                                                                                                                                       |
| 3.02            |       | Amended and Restated By-laws of registrant  (incorporated herein by reference to Exhibit 3.04 to the registrant’s  Registration Statement on Form S-1, File No. 333-106725)                                                                                                                                                                            |
| 3.03            |       | Certificate of Powers, Designations, Preferences and  Rights of the registrant’s 61¤2%  Convertible Exchangeable Preferred Stock (incorporated herein by reference to  Exhibit 3.04 to the registrant’s Annual Report on Form 10-K  for the Fiscal Year ended December 31, 2005)                                                             |
| 4.01            |       | Specimen Certificate for shares of common stock of  registrant (incorporated herein by reference to Exhibit 4.01 to the  registrant’s Registration Statement on Form S-1, File No. 333-106725)                                                                                                                                                         |
| 4.02            |       | Form of Indenture between the registrant and  The Bank of New York, as trustee, relating to the issuance from time to time  in one or more series of debentures, notes, bonds or other evidences of  indebtedness (incorporated herein by reference to Exhibit 4.01 to the  registrant’s Registration Statement on Form S-3, File No. 333-121618) |
| 4.03            |       | Form of Debt Security (incorporated herein by  reference to Exhibit 4.02 to the registrant’s Registration Statement on  Form S-3, File No. 333-121618)                                                                                                                                                                                            |
| 4.04            |       | Form of Debt Warrant Agreement (together with  form of Debt Warrant Certificate (incorporated herein by reference to  Exhibit 4.03 to the registrant’s Registration Statement on Form S-3,  File No. 333-121618)                                                                                                                                  |
| 4.05            |       | Form of Common Stock Warrant Agreement  (together with form of Common Stock Warrant Certificate (incorporated herein  by reference to Exhibit 4.04 to the registrant’s Registration Statement  on Form S-3, File No. 333-121618)                                                                                                                  |
| 4.06            |       | Form of Preferred Stock Warrant Agreement  (together with form of Preferred Stock Warrant Certificate) (incorporated  herein by reference to Exhibit 4.05 to the registrant’s Registration  Statement on Form S-3, File No. 333-121618)                                                                                                           |
| 4.07            |       | Form of Designation for the Preferred Stock  (together with Preferred Stock Certificate) (incorporated herein by reference  to Exhibit 4.06 to the registrant’s Registration Statement on  Form S-3, File No. 333-121618)                                                                                                                         |
| 4.08            |       | Indenture between the registrant and The Bank of New  York, as trustee, relating to the issuance of 61¤2%  Convertible Subordinated Debentures (incorporated herein by reference to  Exhibit 4.2 to the registrant’s Current Report on Form 8-K  filed February 28, 2005)                                                                         |
| 4.09            |       | Amended and Restated Certificate of Incorporation  (incorporated by reference to Exhibit 3.01)                                                                                                                                                                                                                                                                        |

80

----

 

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                              |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.10            |       | Certificate of Powers, Designations, Preferences and  Rights of the registrant’s 612% Convertible Exchangeable Preferred  Stock (incorporated by reference to Exhibit 3.03)                                                                                                                                                                |
| 4.11            |       | Form of Common Stock Warrant Agreement  (together with form of Common Stock Warrant Certificate (incorporated herein  by reference to Exhibit 4.1 to the registrant’s Current Report on  Form 8-K filed April 7, 2006)                                                                                                              |
| 4.12            |       | Form of Common Stock Warrant Agreement  (together with form of Common Stock Warrant Certificate (incorporated herein  by reference to Exhibit 4.1 to the registrant’s Current Report on  Form 8-K filed December 7, 2006)                                                                                                           |
| 10.01†     |       | 1994 Stock Plan, as amended (incorporated herein by  reference to Exhibit 10.01 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725)                                                                                                                                                                            |
| 10.02†     |       | 2003 Stock Plan (incorporated herein by reference to  Exhibit 10.02 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725)                                                                                                                                                                                        |
| 10.03†     |       | 2003 Employee Stock Purchase Plan (incorporated  herein by reference to Exhibit 10.03 to the registrant’s Registration  Statement on Form S-1, File No. 333-106725)                                                                                                                                                                      |
| 10.04†     |       | Acusphere, Inc. 2005 Stock Option and Incentive  Plan, as amended (incorporated herein by reference to Exhibit 10.1 to  the Company’s current report on Form 8-K filed on June 20,  2005)                                                                                                                                           |
| 10.05†     |       | Acusphere, Inc. Management Incentive Plan  (incorporated herein by reference to Exhibit 10.1 to the Company’s  current report on Form 8-K filed on March 16, 2005)                                                                                                                                                                  |
| 10.06†     |       | Stock Repurchase and Registration Agreement by and  among the registrant, Harry R. Allcock, Sherri C. Oberg, Robert S. Langer,  Richard Kronenthal and Walter Levison, dated as of April 30, 1996  (incorporated herein by reference to Exhibit 10.05 to the registrant’s  Registration Statement on Form S-1, File No. 333-106725) |
| 10.07†     |       | Letter Agreement by and among the registrant, Sherri  C. Oberg and Robert S. Langer, dated as of April 30, 1996 (incorporated  herein by reference to Exhibit 10.06 to the registrant’s Registration  Statement on Form S-1, File No. 333-106725)                                                                                   |
| 10.08           |       | Tenth Amended and Restated Investors’ Rights  Agreement by and among registrant, Sherri C. Oberg and the Investors named  therein, dated as of April 11, 2003, as amended (incorporated herein by  reference to Exhibit 10.07 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725)                    |
| 10.09           |       | Warrant Agreement by and between the registrant and  Comdisco, Inc., dated as of June 6, 1997 (incorporated herein by  reference to Exhibit 10.09 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725)                                                                                                |
| 10.10           |       | Warrant Agreement by and between the registrant and  Comdisco, Inc., dated as of February 26, 1998 (incorporated herein  by reference to Exhibit 10.10 to the registrant’s Registration Statement  on Form S-1, File No. 333-106725)                                                                                           |
|  10.11     |       | Warrant Agreement by and between the registrant and  Comdisco, Inc., dated as of August 19, 1998 (incorporated herein by  reference to Exhibit 10.12 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725)                                                                                             |
| 10.12           |       | Warrant Agreement by and between the registrant and  Gregory Stento, dated as of August 19, 1998 (incorporated herein by  reference to Exhibit 10.14 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725)                                                                                                  |
| 10.13           |       | Warrant Agreement by and between the registrant and  Comdisco, Inc., dated as of October 16, 1998 (incorporated herein  by reference to Exhibit 10.15 to the registrant’s Registration Statement  on Form S-1, File No. 333-106725)                                                                                            |
| 10.14           |       | Warrant Agreement by and between the registrant and  Comdisco, Inc., dated as of October 19, 1998 (incorporated herein  by reference to Exhibit 10.16 to the registrant’s Registration Statement  on Form S-1, File No. 333-106725)                                                                                            |

81

----

 

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                             |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15           |       | Warrant Agreement by and between the registrant and  Comdisco, Inc., dated as of January 5, 2000 (incorporated herein by  reference to Exhibit 10.17 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725)                                                                                                                                                            |
| 10.16           |       | Master Lease Agreement by and among the registrant,  Acusphere Securities Corporation and Transamerica Business Credit  Corporation, dated as of February 21, 2001 (incorporated herein by  reference to Exhibit 10.18 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725)                                                                                               |
| 10.17           |       | Warrant Agreement by and between the registrant and  TBCC Funding Trust I, dated of February 21, 2001 (incorporated  herein by reference to Exhibit 10.19 to the registrant’s Registration  Statement on Form S-1, File No. 333-106725)                                                                                                                                                       |
| 10.18           |       | Lease Agreement, by and between registrant and ARE-500  Arsenal Street, LLC, dated as of March 30, 2001 (incorporated herein by  reference to Exhibit 10.20 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725)                                                                                                                                                          |
| 10.19           |       | Warrant Agreement by and between the registrant and  Alexandria Real Estate Equities, L.P., dated of March 30, 2001  (incorporated herein by reference to Exhibit 10.21 to the registrant’s  Registration Statement on Form S-1, File No. 333-106725)                                                                                                                                              |
| 10.20           |       | CTM Agreement by and between the registrant and  Hollister-Stier Laboratories LLC, dated as of September 7, 2001  (incorporated herein by reference to Exhibit 10.22 to the registrant’s  Registration Statement on Form S-1, File No. 333-106725)  (confidential treatment previously granted)                                                                                                    |
| 10.21           |       | Development and Supply Agreement by and between the  registrant and Hollister-Stier Laboratories LLC dated as of  November 30, 2001 (incorporated herein by reference to  Exhibit 10.23 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725) (confidential treatment previously granted)                                                                             |
| 10.22           |       | Warrant Agreement by and between the registrant and  GATX Ventures, Inc., dated as of September 27, 2001 (incorporated  herein by reference to Exhibit 10.25 to the registrant’s Registration  Statement on Form S-1, File No. 333-106725)                                                                                                                                                    |
| 10.23           |       | Warrant Agreement by and between the registrant and  Venture Lending & Leasing III, LLC, dated as of  September 27, 2001 (incorporated herein by reference to  Exhibit 10.26 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725)                                                                                                                           |
| 10.24           |       | Termination Agreement by and among the registrant,  Acusphere Newco, Ltd., Elan Corporation, plc, Elan Pharma  International Limited and Elan International Services, Ltd. dated as of  September 26, 2003 (incorporated herein by reference to  Exhibit 10.27 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725) (confidential treatment previously granted) |
|  10.25     |       | Form of Indemnification Agreement by and  between the registrant and each of its directors (incorporated herein by  reference to Exhibit 10.28 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725)                                                                                                                                                                       |
| 10.26           |       | Form of Warrant issued by the registrant dated  as of April 11, 2003 and June 27, 2003 to each of the investors  listed on the schedule of warrant holders attached thereto (incorporated herein  by reference to Exhibit 10.29 to the registrant’s Registration Statement  on Form S-1, File No. 333-106725)                                                                            |
| 10.27†     |       | Form of Indemnification Agreement by and  between the registrant and certain of its employees (incorporated herein by  reference to Exhibit 10.30 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725)                                                                                                                                                                    |
| 10.28           |       | Form of Stock and Warrant Purchase Agreement  dated as of July 29, 2004 (incorporated herein by reference to  Exhibit 10.01 to the registrant’s Current Report on Form 8-K  filed July 29, 2004 (File No. 000-50405))                                                                                                                                                                    |

82

----

 

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                     |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.29           |       | Form of Warrant issued by the registrant to  certain investors (incorporated herein by reference to Exhibit 10.02 to  the registrant’s Current Report on Form 8-K filed July 29,  2004)                                                                                                                                                    |
| 10.30           |       | Amendment No. 2 to Tenth Amended and Restated  Investors’ Rights Agreement dated as of July 29, 2004 (incorporated  herein by reference to Exhibit 10.03 to the registrant’s Current Report  on Form 8-K filed July 29, 2004)                                                                                                    |
| 10.31           |       | Collaboration, License and Supply Agreement by and  between the registrant and Nycomed Danmark ApS dated July 6, 2004  (incorporated herein by reference to Exhibit 10.04 to the registrant’s  Amendment No. 2 to Form S-1 Registration Statement on Form S-3,  File No. 333-119027) (confidential treatment previously granted) |
| 10.32           |       | First Amendment to Collaboration, License and Supply  Agreement by and between the registrant and Nycomed Danmark ApS dated  October 19, 2005 (incorporated herein by reference to Exhibit 10.1  to the registrant’s Current Report on Form 8-K filed  October 24, 2005)                                                                   |
| 10.33           |       | Commercial Building Lease by and between 890 East  LLC and the registrant dated as of July 20, 2004 (incorporated herein by  reference to Exhibit 10.05 to the registrant’s Amendment No. 2 to  Form S-1 Registration Statement on Form S-3, File  No. 333-119027) (confidential treatment previously granted)                   |
| 10.34           |       | Promissory Note with Massachusetts Development  Finance Agency (incorporated herein by reference to Exhibit 10.33 to the  registrant’s Registration Statement on Form S-1, File No. 333-119027)                                                                                                                                                 |
| 10.35           |       | Promissory Note with Massachusetts Development  Finance Agency (incorporated herein by reference to Exhibit 10.1 to the  registrant’s Current Report on Form 8-K filed March 25, 2005)                                                                                                                                                          |
| 10.36           |       | Master Security Agreement by and between the  registrant and General Electric Capital Corporation dated April 16, 2004  (incorporated herein by reference to Exhibit 10.34 to the registrant’s  Registration Statement on Form S-1, File No. 333-119027)                                                                                   |
| 10.37           |       | Form of Promissory Note with General Electric  Capital Corporation under Master Security Agreement, together with schedule  of borrowing (incorporated herein by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K filed on March 2,  2005)                                                                        |
| 10.38           |       | Form of Promissory Note with General Electric  Capital Corporation under Master Security Agreement, together with schedule  of borrowing (incorporated herein by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K filed December 23,  2004)                                                                       |
| 10.39           |       | Form of Promissory Note with General Electric  Capital Corporation under Master Security Agreement, together with schedule  of borrowing (incorporated herein by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K filed January 2,  2005)                                                                         |
|  10.40     |       | Form of Promissory Note with General Electric  Capital Corporation under Master Security Agreement, together with schedule  of borrowing (incorporated herein by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K filed March 2, 2005)                                                                            |
| 10.41           |       | Form of Promissory Note with General Electric  Capital Corporation under Master Security Agreement, together with schedule  of borrowing (incorporated herein by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K filed April 4, 2005)                                                                            |
| 10.42           |       | Master Security Agreement by and between the  registrant and Oxford Finance Corporation dated June 20, 2005  (incorporated herein by reference to Exhibit 10.1 to the registrant’s  Current Report on Form 8-K filed June 27, 2005)                                                                                                        |
| 10.43           |       | Form of Promissory Note with Oxford Finance  Corporation under Master Security Agreement, together with schedule of  borrowing (incorporated herein by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K filed June 27, 2005)                                                                                      |
| 10.44           |       | Form of Promissory Note with Oxford Finance  Corporation under Master Security Agreement, together with schedule of  borrowing (incorporated herein by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K filed August 31,  2005)                                                                                   |

83

----

 

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                              |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.45           |       | Form of Promissory Note with Oxford Finance  Corporation under Master Security Agreement, together with schedule of  borrowing (incorporated herein by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K filed September 29,  2005)                                         |
| 10.46           |       | Form of Promissory Note with Oxford Finance  Corporation under Master Security Agreement, together with schedule of  borrowing (incorporated herein by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K filed November 21,  2005)                                          |
| 10.47           |       | Form of Promissory Note with Oxford Finance  Corporation under Master Security Agreement, together with schedule of  borrowing (incorporated herein by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K filed December 21,  2005)                                          |
| 10.48           |       | Terms and Conditions for Engineering, Procurement  and Construction Management Services (incorporated herein by reference to  Exhibit 10.09 to the registrant’s Quarterly Report on Form 10-Q  for the Quarter Ended September 30, 2004) (confidential treatment  previously granted)                    |
| 10.49           |       | Contract Work Authorization (Form 1) No. 1  for Engineering and Construction Management Services (incorporated herein by  reference to Exhibit 10.10 to the registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended September 30, 2004)  (confidential treatment previously granted) |
| 10.50           |       | Contract Work Authorization (Form 1) No. 2  for Engineering and Construction Management Services (incorporated herein by reference  to Exhibit 10.2 to the registrant’s Current Report on Form 8-K  filed December 14, 2004)                                                                   |
| 10.51           |       | Contract Work Authorization (Form 1) No. 3  for Engineering and Construction Management Services (incorporated herein by  reference to Exhibit 10.2 to the registrant’s Current Report on  Form 8-K filed March 14, 2005)                                                                      |
| 10.52           |       | Contract Work Authorization (Form 1) No. 4  for Engineering and Construction Management Services (incorporated herein by  reference to Exhibit 10.1 to the registrant’s Current Report on  Form 8-K filed April 19, 2005)                                                                      |
| 10.53           |       | Contract Work Authorization (Form 1) No. 5  for Engineering and Construction Management Services (incorporated herein by  reference to Exhibit 10.1 to the registrant’s Current Report on  Form 8-K filed May 2, 2005)                                                                         |
| 10.54           |       | Contract Work Authorization (Form 1) No. 6  for Engineering and Construction Management Services (incorporated herein by  reference to Exhibit 10.1 to the registrant’s Current Report on  Form 8-K filed May 18, 2005)                                                                        |
|  10.55     |       | Contract Work Authorization (Form 1) No. 7  for Engineering and Construction Management Services (incorporated herein by  reference to Exhibit 10.1 to the registrant’s Current Report on  Form 8-K filed June 20, 2005)                                                                       |
| 10.56           |       | Contract Work Authorization (Form 1) No. 8  for Engineering and Construction Management Services (incorporated herein by  reference to Exhibit 10.1 to the registrant’s Current Report on  Form 8-K filed July 20, 2005)                                                                       |
| 10.57           |       | Contract Work Authorization (Form 1) No. 9  for Engineering and Construction Management Services (incorporated herein by  reference to Exhibit 10.1 to the registrant’s Current Report on  Form 8-K filed August 9, 2005)                                                                      |
| 10.58           |       | Contract Work Authorization (Form 1)  No. 10 for Engineering and Construction Management Services  (incorporated herein by reference to Exhibit 10.1 to the registrant’s  Current Report on Form 8-K filed September 7, 2005)                                                                  |
| 10.59           |       | Contract Work Authorization (Form 1)  No. 11 for Engineering and Construction Management Services  (incorporated herein by reference to Exhibit 10.1 to the registrant’s  Current Report on Form 8-K filed October 3, 2005)                                                                    |

84

----

 

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                    |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.60           |       | Contract Work Authorization (Form 2) No. 1  for Agency Procurements (incorporated herein by reference to  Exhibit 10.11 to the registrant’s Quarterly Report on Form 10-Q  for the Quarter Ended September 30, 2004) (confidential treatment  previously granted)    |
| 10.61           |       | Contract Work Authorization (Form 2) No. 2  for Agency Procurements (incorporated herein by reference to  Exhibit 10.1 to the registrant’s Current Report on Form 8-K  filed March 14, 2005)                                                                         |
| 10.62           |       | Contract Work Authorization (Form 2) No. 2  for Engineering and Construction Management Services (incorporated herein by  reference to Exhibit 10.1 to the registrant’s Current Report on  Form 8-K filed December 14, 2004)                                         |
| 10.63†     |       | Form of 2005 Stock Option and Incentive Plan  Incentive Stock Option Agreement (4 year vesting schedule) (incorporated  herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report  on Form 10-Q for the Quarter Ended June 30, 2005)                       |
| 10.64†     |       | Form of 2005 Stock Option and Incentive Plan  Non-Statutory Stock Option Agreement (4 year vesting schedule) (incorporated  herein by reference to Exhibit 10.2 to the registrant’s Quarterly Report  on Form 10-Q for the Quarter Ended June 30, 2005)                   |
| 10.65†     |       | Form of 2005 Stock Option and Incentive Plan  Non-Statutory Stock Option Agreement (1 year vesting schedule) (incorporated  herein by reference to Exhibit 10.3 to the registrant’s Quarterly Report  on Form 10-Q for the Quarter Ended June 30, 2005)                   |
| 10.66†     |       | Form of 2003 Stock Option and Incentive Plan  Incentive Stock Option Agreement (4 year vesting schedule) (incorporated  herein by reference to Exhibit 10.4 to the registrant’s Quarterly Report  on Form 10-Q for the Quarter Ended June 30, 2005)                       |
| 10.67†     |       | Form of 2003 Stock Option and Incentive Plan  Non-Statutory Stock Option Agreement (4 year vesting schedule) (incorporated  herein by reference to Exhibit 10.5 to the registrant’s Quarterly Report  on Form 10-Q for the Quarter Ended June 30, 2005)                   |
| 10.68†     |       | Form of 2003 Stock Option and Incentive Plan  Non-Statutory Stock Option Agreement (1 year vesting schedule) (incorporated  herein by reference to Exhibit 10.6 to the registrant’s Quarterly Report  on Form 10-Q for the Quarter Ended June 30, 2005)                   |
| 10.69           |       | Amendment No. 3 to Tenth Amended and Restated  Investors’ Rights Agreement dated as of October 26, 2004 (incorporated  herein by reference to Exhibit 10.1 to the registrant’s Current Report  on Form 8-K filed November 1, 2004)                              |
| 10.70           |       | Amendment to Lease between ARE-500 Arsenal  Street, LLC and Acusphere, Inc. (incorporated herein by reference  to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q  for the Quarter Ended March 31, 2005)                                              |
| 10.71           |       | Patent Transfer agreement dated May 11, 2005 between  Schering Aktiengesellschaft and Acusphere, Inc. (incorporated herein by  reference to Exhibit 10.2 to the registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended March 31, 2005)                    |
| 10.72           |       | Executive Employment Agreement dated as of  February 1, 2006 between Acusphere, Inc. and each of its Executive  Officers (incorporated herein by reference to Exhibit 10.1 to the  registrant’s Current Report on Form 8-K filed February 7,  2006)                  |
| 10.73           |       | Second Amendment to Collaboration, License and  Supply Agreement between Acusphere, Inc. and Nycomed Danmark ApS dated  February 9, 2006 (incorporated herein by reference to Exhibit 10.1  to the registrant’s Current Report on Form 8-K filed  February 14, 2006) |
| 10.74           |       | Form of Promissory Note with Oxford Finance  Corporation, together with schedule of borrowing (incorporated herein by reference  to Exhibit 10.1 to the registrant’s Current Report on Form 8-K  filed February 28, 2006)                                                 |
| 10.75           |       | Acusphere, Inc. Management Incentive  Compensation Plan (incorporated  herein by reference to Exhibit 10.1 to the registrant’s Current Report  on Form 8-K filed March 15, 2006)                                                                                          |
| 10.76           |       | Form of Promissory Note with General Electric  Capital Corporation (incorporated  herein by reference to Exhibit 10.1 to the registrant’s Current Report  on Form 8-K filed June 14, 2006)                                                                                |

85

----

 

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                               |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.77           |       | Common Stock Purchase Agreement, dated as of  August 31, 2006, by and between the registrant and Azimuth Opportunity  Ltd. (incorporated  herein by reference to Exhibit 10.1 to the registrant’s Current Report  on Form 8-K filed August 31, 2006) |
| 12.01*          |       | Computation of Ratios of Earnings to Fixed Charges                                                                                                                                                                                                                            |
| 14.01*          |       | Code of Business Conduct and Ethics                                                                                                                                                                                                                                           |
| 21.01*          |       | List of Subsidiaries                                                                                                                                                                                                                                                          |
| 23.01*          |       | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                     |
| 24.01*          |       | Power of Attorney (included in signature page)                                                                                                                                                                                                                                |
| 31.1*           |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                              |
| 31.2*           |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                              |
| 32.1**          |       | Section 1350 Certifications                                                                                                                                                                                                                                              |

 

----

****                   *Filedherewith.

**             Furnished herewith

*†**                   *Indicatesa management contract or any compensatory plan, contract or arrangement.

***(b)*Exhibits.**

Wehereby file as part of this Form 10-K the exhibits listed in Item15(a)(3) above. Exhibits which are incorporated herein by reference can beinspected and copied at the public reference facilities maintained by theSecurities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.,and at the Commission’s regional offices at Citicorp Center, 500 West MadisonStreet, Suite 1400, Chicago, IL 60611-2511, and at 233 Broadway, NewYork, NY 10279. Copies of such material can also be obtained from the PublicReference Section of the Commission, 450 Fifth Street, N.W., Washington,D.C. 29549, at prescribed rates.

***(c)*Financial Statement Schedule.**

Except for the schedule of Unaudited Quarterly Resultsof Operations no financial statement schedules have been submitted because theyare not required, not applicable, or because the information required isincluded in the financial statements or the notes thereto.

86

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|        | ACUSPHERE, INC. |
|--------|----------------------|
|   | By:                  | /s/ Sherri C. Oberg |
|   |                 | Sherri C. Oberg |
|   |                 | *President and Chief Executive Officer* |
|   |                 | Date: March 16,  2007 |

 

**POWER OF ATTORNEYAND SIGNATURES**

We, the undersigned officers and directors ofAcusphere, Inc., hereby severally constitute and appoint Sherri C. Obergand John F. Thero, and each of them singly, our true and lawful attorneys, withfull power to them and each of them singly, to sign for us in our names in thecapacities indicated below, all amendments to this report, and generally to doall things in our names and on our behalf in such capacities to enableAcusphere, Inc. to comply with the provisions of the Securities ExchangeAct of 1934, as amended, and all requirements of the Securities and ExchangeCommission.

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
|                                          | **Signature** | ** **                                          | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|------------------------------------------|---------------|-----------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/ SHERRI C. OBERG                      |          | President and  Chief Executive Officer and Director |       | March 16,  2007 |
| Sherri C. Oberg                          |          | (Principal Executive  Officer)                      |       |                 |
| /s/ JOHN F. THERO                        |          | Senior Vice  President and Chief Financial Officer  |       | March 16,  2007 |
| John F. Thero                            |          | (Principal Financial and  Accounting Officer)       |       |                 |
| /s/ FRANK BALDINO, JR.              |          | Director                                            |       | March 16,  2007 |
| Frank Baldino, Jr.                  |          |                                                |       |                 |
| /s/ GAREN BOHLIN                         |          | Director                                            |       | March 16,  2007 |
| Garen Bohlin                             |          |                                                |       |                 |
| /s/ SANDRA L. FENWICK                    |          | Director                                            |       | March 16,  2007 |
| Sandra L. Fenwick                        |          |                                                |       |                 |
| /s/ MARTYN GREENACRE                     |          | Director                                            |       | March 16,  2007 |
| Martyn Greenacre                         |          |                                                |       |                 |
| /s/ DEREK LEMKE-VON AMMON |          | Director                                            |       | March 16,  2007 |
| Derek Lemke-von Ammon                    |          |                                                |       |                 |

 

87

----

**EXHIBITINDEX**
| Exhibit   Number | ** **  | **Description** | ** ** |
|------------------|-------------|-----------------|------------|
|             | 3.01        |            |       | Amended  and Restated Certificate of Incorporation of registrant (incorporated herein  by reference to Exhibit 3.01 to the registrant’s Annual Report on Form 10-K  for the Fiscal Year ended December 31, 2005) |   |
|             | 3.02        |            |       | Amended  and Restated By-laws of registrant (incorporated herein by reference to  Exhibit 3.04 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725) |   |
|             | 3.03        |            |       | Certificate  of Powers, Designations, Preferences and Rights of the registrant’s 61¤2% Convertible  Exchangeable Preferred Stock (incorporated herein by reference to  Exhibit 3.04 to the registrant’s Annual Report on Form 10-K  for the Fiscal Year ended December 31, 2005) |   |
|             | 4.01        |            |       | Specimen  Certificate for shares of common stock of registrant (incorporated herein by  reference to Exhibit 4.01 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725) |   |
|             | 4.02        |            |       | Form of  Indenture between the registrant and The Bank of New York, as trustee,  relating to the issuance from time to time in one or more series of  debentures, notes, bonds or other evidences of indebtedness (incorporated  herein by reference to Exhibit 4.01 to the registrant’s Registration  Statement on Form S-3, File No. 333-121618) |   |
|             | 4.03        |            |       | Form of  Debt Security (incorporated herein by reference to Exhibit 4.02 to the  registrant’s Registration Statement on Form S-3, File No. 333-121618) |   |
|             | 4.04        |            |       | Form of  Debt Warrant Agreement (together with form of Debt Warrant Certificate  (incorporated herein by reference to Exhibit 4.03 to the registrant’s  Registration Statement on Form S-3, File No. 333-121618) |   |
|             | 4.05        |            |       | Form of  Common Stock Warrant Agreement (together with form of Common Stock Warrant  Certificate (incorporated herein by reference to Exhibit 4.04 to the  registrant’s Registration Statement on Form S-3, File No. 333-121618) |   |
|             | 4.06        |            |       | Form of  Preferred Stock Warrant Agreement (together with form of Preferred Stock  Warrant Certificate) (incorporated herein by reference to Exhibit 4.05  to the registrant’s Registration Statement on Form S-3, File  No. 333-121618) |   |
|             | 4.07        |            |       | Form of  Designation for the Preferred Stock (together with Preferred Stock  Certificate) (incorporated herein by reference to Exhibit 4.06 to the  registrant’s Registration Statement on Form S-3, File No. 333-121618) |   |
|             | 4.08        |            |       | Indenture  between the registrant and The Bank of New York, as trustee, relating to the  issuance of 61¤2% Convertible Subordinated Debentures  (incorporated herein by reference to Exhibit 4.2 to the registrant’s  Current Report on Form 8-K filed February 28, 2005) |   |
|             | 4.09        |            |       | Amended  and Restated Certificate of Incorporation (incorporated by reference to  Exhibit 3.01) |   |
|             | 4.10        |            |       | Certificate  of Powers, Designations, Preferences and Rights of the registrant’s 61¤2% Convertible  Exchangeable Preferred Stock (incorporated by reference to Exhibit 3.03) |   |
|             | 4.11        |            |       | Form of  Common Stock Warrant Agreement (together with form of Common Stock Warrant  Certificate (incorporated herein by reference to Exhibit 4.1 to the  registrant’s Current Report on Form 8-K filed April 7, 2006) |   |
|             | 4.12        |            |       | Form of  Common Stock Warrant Agreement (together with form of Common Stock Warrant  Certificate (incorporated herein by reference to Exhibit 4.1 to the  registrant’s Current Report on Form 8-K filed December 7,  2006) |   |
|             | 10.01† |            |       | 1994  Stock Plan, as amended (incorporated herein by reference to  Exhibit 10.01 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725) |   |
|             | 10.02† |            |       | 2003  Stock Plan (incorporated herein by reference to Exhibit 10.02 to the  registrant’s Registration Statement on Form S-1, File No. 333-106725) |   |
|             | 10.03† |            |       | 2003  Employee Stock Purchase Plan (incorporated herein by reference to  Exhibit 10.03 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725) |   |

----

 
|        | 10.04† |   |   | Acusphere, Inc.  2005 Stock Option and Incentive Plan, as amended (incorporated herein by  reference to Exhibit 10.1 to the Company’s current report on Form 8-K  filed on June 20, 2005)                                                                                                                                                           |   |
|--------|-------------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10.05† |   |   | Acusphere, Inc.  Management Incentive Plan (incorporated herein by reference to  Exhibit 10.1 to the Company’s current report on Form 8-K  filed on March 16, 2005)                                                                                                                                                                                 |   |
|   | 10.06† |   |   | Stock  Repurchase and Registration Agreement by and among the registrant, Harry R.  Allcock, Sherri C. Oberg, Robert S. Langer, Richard Kronenthal and  Walter Levison, dated as of April 30, 1996 (incorporated herein by  reference to Exhibit 10.05 to the registrant’s Registration Statement on  Form S-1, File No. 333-106725) |   |
|   | 10.07† |   |   | Letter  Agreement by and among the registrant, Sherri C. Oberg and Robert S.  Langer, dated as of April 30, 1996 (incorporated herein by reference to  Exhibit 10.06 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725)                                                                                             |   |
|   | 10.08       |   |   | Tenth  Amended and Restated Investors’ Rights Agreement by and among registrant,  Sherri C. Oberg and the Investors named therein, dated as of  April 11, 2003, as amended (incorporated herein by reference to  Exhibit 10.07 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725)                              |   |
|   | 10.09       |   |   | Warrant  Agreement by and between the registrant and Comdisco, Inc., dated as of  June 6, 1997 (incorporated herein by reference to Exhibit 10.09 to  the registrant’s Registration Statement on Form S-1, File  No. 333-106725)                                                                                                               |   |
|   | 10.10       |   |   | Warrant  Agreement by and between the registrant and Comdisco, Inc., dated as of  February 26, 1998 (incorporated herein by reference to  Exhibit 10.10 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725)                                                                                                          |   |
|   | 10.11       |   |   | Warrant  Agreement by and between the registrant and Comdisco, Inc., dated as of  August 19, 1998 (incorporated herein by reference to Exhibit 10.12  to the registrant’s Registration Statement on Form S-1, File  No. 333-106725)                                                                                                            |   |
|   | 10.12       |   |   | Warrant  Agreement by and between the registrant and Gregory Stento, dated as of  August 19, 1998 (incorporated herein by reference to Exhibit 10.14  to the registrant’s Registration Statement on Form S-1, File  No. 333-106725)                                                                                                                 |   |
|   | 10.13       |   |   | Warrant  Agreement by and between the registrant and Comdisco, Inc., dated as of  October 16, 1998 (incorporated herein by reference to Exhibit 10.15  to the registrant’s Registration Statement on Form S-1, File  No. 333-106725)                                                                                                           |   |
|   | 10.14       |   |   | Warrant  Agreement by and between the registrant and Comdisco, Inc., dated as of  October 19, 1998 (incorporated herein by reference to Exhibit 10.16  to the registrant’s Registration Statement on Form S-1, File  No. 333-106725)                                                                                                           |   |
|   | 10.15       |   |   | Warrant  Agreement by and between the registrant and Comdisco, Inc., dated as of  January 5, 2000 (incorporated herein by reference to Exhibit 10.17  to the registrant’s Registration Statement on Form S-1, File  No. 333-106725)                                                                                                            |   |
|   | 10.16       |   |   | Master  Lease Agreement by and among the registrant, Acusphere Securities Corporation  and Transamerica Business Credit Corporation, dated as of February 21,  2001 (incorporated herein by reference to Exhibit 10.18 to the  registrant’s Registration Statement on Form S-1, File No. 333-106725)                                                |   |
|   | 10.17       |   |   | Warrant  Agreement by and between the registrant and TBCC Funding Trust I, dated  of February 21, 2001 (incorporated herein by reference to  Exhibit 10.19 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725)                                                                                                       |   |
|   | 10.18       |   |   | Lease  Agreement, by and between registrant and ARE-500 Arsenal Street, LLC,  dated as of March 30, 2001 (incorporated herein by reference to  Exhibit 10.20 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725)                                                                                                          |   |
|   | 10.19       |   |   | Warrant  Agreement by and between the registrant and Alexandria Real Estate Equities,  L.P., dated of March 30, 2001 (incorporated herein by reference to  Exhibit 10.21 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725)                                                                                              |   |

----

 
|        | 10.20       |   |   | CTM  Agreement by and between the registrant and Hollister-Stier Laboratories LLC,  dated as of September 7, 2001 (incorporated herein by reference to  Exhibit 10.22 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725) (confidential treatment previously granted)                                                                                                     |   |
|--------|-------------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10.21       |   |   | Development  and Supply Agreement by and between the registrant and Hollister-Stier  Laboratories LLC dated as of November 30, 2001 (incorporated herein  by reference to Exhibit 10.23 to the registrant’s Registration Statement  on Form S-1, File No. 333-106725) (confidential  treatment previously granted)                                                                             |   |
|   | 10.22       |   |   | Warrant  Agreement by and between the registrant and GATX Ventures, Inc., dated  as of September 27, 2001 (incorporated herein by reference to  Exhibit 10.25 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725)                                                                                                                                                    |   |
|   | 10.23       |   |   | Warrant  Agreement by and between the registrant and Venture Lending &  Leasing III, LLC, dated as of September 27, 2001 (incorporated  herein by reference to Exhibit 10.26 to the registrant’s Registration  Statement on Form S-1, File No. 333-106725)                                                                                                                            |   |
|   | 10.24       |   |   | Termination  Agreement by and among the registrant, Acusphere Newco, Ltd., Elan  Corporation, plc, Elan Pharma International Limited and Elan  International Services, Ltd. dated as of September 26, 2003  (incorporated herein by reference to Exhibit 10.27 to the registrant’s  Registration Statement on Form S-1, File No. 333-106725)  (confidential treatment previously granted) |   |
|   | 10.25       |   |   | Form of  Indemnification Agreement by and between the registrant and each of its  directors (incorporated herein by reference to Exhibit 10.28 to the  registrant’s Registration Statement on Form S-1, File No. 333-106725)                                                                                                                                                                        |   |
|   | 10.26       |   |   | Form of  Warrant issued by the registrant dated as of April 11, 2003 and  June 27, 2003 to each of the investors listed on the schedule of warrant  holders attached thereto (incorporated herein by reference to  Exhibit 10.29 to the registrant’s Registration Statement on Form S-1,  File No. 333-106725)                                                                            |   |
|   | 10.27† |   |   | Form of  Indemnification Agreement by and between the registrant and certain of its  employees (incorporated herein by reference to Exhibit 10.30 to the  registrant’s Registration Statement on Form S-1, File No. 333-106725)                                                                                                                                                                     |   |
|   | 10.28       |   |   | Form of  Stock and Warrant Purchase Agreement dated as of July 29, 2004  (incorporated herein by reference to Exhibit 10.01 to the registrant’s  Current Report on Form 8-K filed July 29, 2004 (File  No. 000-50405))                                                                                                                                                                    |   |
|   | 10.29       |   |   | Form of  Warrant issued by the registrant to certain investors (incorporated herein by  reference to Exhibit 10.02 to the registrant’s Current Report on  Form 8-K filed July 29, 2004)                                                                                                                                                                                                             |   |
|   | 10.30       |   |   | Amendment  No. 2 to Tenth Amended and Restated Investors’ Rights Agreement dated as  of July 29, 2004 (incorporated herein by reference to Exhibit 10.03  to the registrant’s Current Report on Form 8-K filed July 29,  2004)                                                                                                                                                            |   |
|   | 10.31       |   |   | Collaboration,  License and Supply Agreement by and between the registrant and Nycomed  Danmark ApS dated July 6, 2004 (incorporated herein by reference to  Exhibit 10.04 to the registrant’s Amendment No. 2 to Form S-1  Registration Statement on Form S-3, File No. 333-119027)  (confidential treatment previously granted)                                                         |   |
|   | 10.32       |   |   | First  Amendment to Collaboration, License and Supply Agreement by and between the  registrant and Nycomed Danmark ApS dated October 19, 2005 (incorporated  herein by reference to Exhibit 10.1 to the registrant’s Current Report  on Form 8-K filed October 24, 2005)                                                                                                                            |   |
|   | 10.33       |   |   | Commercial  Building Lease by and between 890 East LLC and the registrant dated as of  July 20, 2004 (incorporated herein by reference to Exhibit 10.05 to  the registrant’s Amendment No. 2 to Form S-1 Registration  Statement on Form S-3, File No. 333-119027)  (confidential treatment previously granted)                                                                           |   |

----

 
|        | 10.34 |   |   | Promissory  Note with Massachusetts Development Finance Agency (incorporated herein by  reference to Exhibit 10.33 to the registrant’s Registration Statement on  Form S-1, File No. 333-119027)                                                                                                         |   |
|--------|-------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10.35 |   |   | Promissory  Note with Massachusetts Development Finance Agency (incorporated herein by  reference to Exhibit 10.1 to the registrant’s Current Report on  Form 8-K filed March 25, 2005)                                                                                                                  |   |
|   | 10.36 |   |   | Master  Security Agreement by and between the registrant and General Electric Capital  Corporation dated April 16, 2004 (incorporated herein by reference to  Exhibit 10.34 to the registrant’s Registration Statement on Form S-1,  File No. 333-119027)                                           |   |
|   | 10.37 |   |   | Form of  Promissory Note with General Electric Capital Corporation under Master  Security Agreement, together with schedule of borrowing (incorporated herein  by reference to Exhibit 10.2 to the registrant’s Current Report on  Form 8-K filed on March 2, 2005)                                 |   |
|   | 10.38 |   |   | Form of  Promissory Note with General Electric Capital Corporation under Master  Security Agreement, together with schedule of borrowing (incorporated herein  by reference to Exhibit 10.2 to the registrant’s Current Report on  Form 8-K filed December 23, 2004)                                |   |
|   | 10.39 |   |   | Form of  Promissory Note with General Electric Capital Corporation under Master  Security Agreement, together with schedule of borrowing (incorporated herein  by reference to Exhibit 10.2 to the registrant’s Current Report on  Form 8-K filed January 2, 2005)                                  |   |
|   | 10.40 |   |   | Form of  Promissory Note with General Electric Capital Corporation under Master  Security Agreement, together with schedule of borrowing (incorporated herein  by reference to Exhibit 10.2 to the registrant’s Current Report on  Form 8-K filed March 2, 2005)                                    |   |
|   | 10.41 |   |   | Form of  Promissory Note with General Electric Capital Corporation under Master  Security Agreement, together with schedule of borrowing (incorporated herein  by reference to Exhibit 10.2 to the registrant’s Current Report on  Form 8-K filed April 4, 2005)                                    |   |
|   | 10.42 |   |   | Master  Security Agreement by and between the registrant and Oxford Finance  Corporation dated June 20, 2005 (incorporated herein by reference to  Exhibit 10.1 to the registrant’s Current Report on Form 8-K  filed June 27, 2005)                                                                |   |
|   | 10.43 |   |   | Form of  Promissory Note with Oxford Finance Corporation under Master Security  Agreement, together with schedule of borrowing (incorporated herein by  reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K  filed June 27, 2005)                                              |   |
|   | 10.44 |   |   | Form of  Promissory Note with Oxford Finance Corporation under Master Security  Agreement, together with schedule of borrowing (incorporated herein by  reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K  filed August 31, 2005)                                            |   |
|   | 10.45 |   |   | Form of  Promissory Note with Oxford Finance Corporation under Master Security  Agreement, together with schedule of borrowing (incorporated herein by  reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K  filed September 29, 2005)                                         |   |
|   | 10.46 |   |   | Form of  Promissory Note with Oxford Finance Corporation under Master Security  Agreement, together with schedule of borrowing (incorporated herein by  reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K  filed November 21, 2005)                                          |   |
|   | 10.47 |   |   | Form of  Promissory Note with Oxford Finance Corporation under Master Security  Agreement, together with schedule of borrowing (incorporated herein by  reference to Exhibit 10.2 to the registrant’s Current Report on  Form 8-K filed December 21, 2005)                                          |   |
|   | 10.48 |   |   | Terms  and Conditions for Engineering, Procurement and Construction Management  Services (incorporated herein by reference to Exhibit 10.09 to the  registrant’s Quarterly Report on Form 10-Q for the Quarter Ended September 30,  2004) (confidential treatment previously granted)                    |   |
|   | 10.49 |   |   | Contract  Work Authorization (Form 1) No. 1 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.10  to the registrant’s Quarterly Report on Form 10-Q for the Quarter  Ended September 30, 2004) (confidential treatment previously granted) |   |

----

 
|        | 10.50       |   |   | Contract  Work Authorization (Form 1) No. 2 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.2 to  the registrant’s Current Report on Form 8-K filed  December 14, 2004)                                     |   |
|--------|-------------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10.51       |   |   | Contract  Work Authorization (Form 1) No. 3 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.2 to  the registrant’s Current Report on Form 8-K filed March 14,  2005)                                        |   |
|   | 10.52       |   |   | Contract  Work Authorization (Form 1) No. 4 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.1 to  the registrant’s Current Report on Form 8-K filed April 19,  2005)                                        |   |
|   | 10.53       |   |   | Contract  Work Authorization (Form 1) No. 5 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.1 to  the registrant’s Current Report on Form 8-K filed May 2,  2005)                                           |   |
|   | 10.54       |   |   | Contract  Work Authorization (Form 1) No. 6 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.1 to  the registrant’s Current Report on Form 8-K filed May 18,  2005)                                          |   |
|   | 10.55       |   |   | Contract  Work Authorization (Form 1) No. 7 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.1 to  the registrant’s Current Report on Form 8-K filed June 20,  2005)                                         |   |
|   | 10.56       |   |   | Contract  Work Authorization (Form 1) No. 8 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.1 to  the registrant’s Current Report on Form 8-K filed July 20,  2005)                                         |   |
|   | 10.57       |   |   | Contract  Work Authorization (Form 1) No. 9 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.1 to  the registrant’s Current Report on Form 8-K filed August 9,  2005)                                        |   |
|   | 10.58       |   |   | Contract  Work Authorization (Form 1) No. 10 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.1 to  the registrant’s Current Report on Form 8-K filed  September 7, 2005)                                    |   |
|   | 10.59       |   |   | Contract  Work Authorization (Form 1) No. 11 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.1 to  the registrant’s Current Report on Form 8-K filed October 3,  2005)                                      |   |
|   | 10.60       |   |   | Contract  Work Authorization (Form 2) No. 1 for Agency Procurements  (incorporated herein by reference to Exhibit 10.11 to the registrant’s  Quarterly Report on Form 10-Q for the Quarter Ended  September 30, 2004) (confidential treatment previously granted) |   |
|   | 10.61       |   |   | Contract  Work Authorization (Form 2) No. 2 for Agency Procurements  (incorporated herein by reference to Exhibit 10.1 to the registrant’s  Current Report on Form 8-K filed March 14, 2005)                                                                      |   |
|   | 10.62       |   |   | Contract  Work Authorization (Form 2) No. 2 for Engineering and Construction  Management Services (incorporated herein by reference to Exhibit 10.1 to  the registrant’s Current Report on Form 8-K filed  December 14, 2004)                                     |   |
|   | 10.63† |   |   | Form of  2005 Stock Option and Incentive Plan Incentive Stock Option Agreement (4 year  vesting schedule) (incorporated herein by reference to Exhibit 10.1 to  the registrant’s Quarterly Report on Form 10-Q for the Quarter  Ended June 30, 2005)                   |   |
|   | 10.64† |   |   | Form of  2005 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (4  year vesting schedule) (incorporated herein by reference to Exhibit 10.2  to the registrant’s Quarterly Report on Form 10-Q for the Quarter  Ended June 30, 2005)               |   |
|   | 10.65† |   |   | Form of  2005 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (1  year vesting schedule) (incorporated herein by reference to Exhibit 10.3  to the registrant’s Quarterly Report on Form 10-Q for the Quarter  Ended June 30, 2005)               |   |
|   | 10.66† |   |   | Form of  2003 Stock Option and Incentive Plan Incentive Stock Option Agreement (4 year  vesting schedule) (incorporated herein by reference to Exhibit 10.4 to  the registrant’s Quarterly Report on Form 10-Q for the Quarter  Ended June 30, 2005)                   |   |

----

 
|        | 10.67† |   |   | Form of  2003 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (4  year vesting schedule) (incorporated herein by reference to Exhibit 10.5  to the registrant’s Quarterly Report on Form 10-Q for the Quarter  Ended June 30, 2005)                  |   |
|--------|-------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 10.68† |   |   | Form of  2003 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (1  year vesting schedule) (incorporated herein by reference to Exhibit 10.6  to the registrant’s Quarterly Report on Form 10-Q for the Quarter  Ended June 30, 2005)                  |   |
|   | 10.69       |   |   | Amendment  No. 3 to Tenth Amended and Restated Investors’ Rights Agreement dated as  of October 26, 2004 (incorporated herein by reference to  Exhibit 10.1 to the registrant’s Current Report on Form 8-K  filed November 1, 2004)                             |   |
|   | 10.70       |   |   | Amendment  to Lease between ARE-500 Arsenal Street, LLC and  Acusphere, Inc. (incorporated herein by reference to  Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q  for the Quarter Ended March 31, 2005)                                             |   |
|   | 10.71       |   |   | Patent  Transfer agreement dated May 11, 2005 between Schering  Aktiengesellschaft and Acusphere, Inc. (incorporated herein by reference  to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q  for the Quarter Ended March 31, 2005)                   |   |
|   | 10.72       |   |   | Executive  Employment Agreement dated as of February 1, 2006 between  Acusphere, Inc. and each of its Executive Officers (incorporated herein  by reference to Exhibit 10.1 to the registrant’s Current Report on  Form 8-K filed February 7, 2006)                  |   |
|   | 10.73       |   |   | Second  Amendment to Collaboration, License and Supply Agreement between Acusphere, Inc.  and Nycomed Danmark ApS dated February 9, 2006 (incorporated herein by  reference to Exhibit 10.1 to the registrant’s Current Report on  Form 8-K filed February 14, 2006) |   |
|   | 10.74       |   |   | Form of  Promissory Note with Oxford Finance Corporation, together with schedule of  borrowing (incorporated  herein by reference to Exhibit 10.1 to the registrant’s Current Report  on Form 8-K filed February 28, 2006)                                                |   |
|   | 10.75       |   |   | Acusphere, Inc.  Management Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.1 to the  registrant’s Current Report on Form 8-K filed March 15, 2006)                                                                                           |   |
|   | 10.76       |   |   | Form of  Promissory Note with General Electric Capital Corporation (incorporated herein by reference  to Exhibit 10.1 to the registrant’s Current Report on Form 8-K  filed June 14, 2006)                                                                                |   |
|   | 10.77       |   |   | Common  Stock Purchase Agreement, dated as of August 31, 2006, by and between  the registrant and Azimuth Opportunity Ltd. (incorporated herein by reference to  Exhibit 10.1 to the registrant’s Current Report on Form 8-K  filed August 31, 2006)                      |   |
|   | 12.01*      |   |   | Computation  of Ratios of Earnings to Fixed Charges                                                                                                                                                                                                                                                |   |
|   | 14.01*      |   |   | Code  of Business Conduct and Ethics                                                                                                                                                                                                                                                               |   |
|   | 21.01*      |   |   | List  of Subsidiaries                                                                                                                                                                                                                                                                              |   |
|   | 23.01*      |   |   | Consent  of Deloitte & Touche LLP                                                                                                                                                                                                                                                         |   |
|   | 24.01*      |   |   | Power  of Attorney (included in signature page)                                                                                                                                                                                                                                                    |   |
|   | 31.1*       |   |   | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                   |   |
|   | 31.2*       |   |   | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                   |   |
|   | 32.1**      |   |   | Section 1350  Certifications                                                                                                                                                                                                                                                                  |   |

----

****                   *Filedherewith.

**             Furnished herewith

*†*                    Indicatesa management contract or any compensatory plan, contract or arrangement.

----

**ACUSPHERE, INC.AND SUBSIDIARIES**

**TABLEOF CONTENTS**

|                                                                              | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|
| REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                     |       | F-2      |       |
| CONSOLIDATED  FINANCIAL STATEMENTS:                                          |       |     |       |
| Consolidated Balance Sheets                                                  |       | F-3      |       |
| Consolidated Statements of Operations                                        |       | F-4      |       |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Loss |       | F-5      |       |
| Consolidated Statements of Cash Flows                                        |       | F-8      |       |
| Notes to Consolidated Financial Statements                                   |       | F-9      |       |
| Financial Statement Schedule                                                 |       | F-28     |       |

 

F-1

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**To the Board of Directors and Stockholders ofAcusphere, Inc.Watertown, Massachusetts**

We have audited the accompanying consolidated balancesheets of Acusphere, Inc. and subsidiaries (the “Company”) as of December 31,2005 and 2006, and the related consolidated statements of operations,stockholders’ equity and comprehensive loss, and cash flows for each of thethree years in the period ended December 31, 2006. These financialstatements are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyat December 31, 2005 and 2006, and the results of its operations and itscash flows for each of the three years in the period ended December 31,2006, in conformity with accounting principles generally accepted in the UnitedStates of America. 

As discussed in Note 3 to the consolidated financialstatements, the Company changed its method of accounting for stock-basedcompensation on January 1, 2006, upon adoption of Statement of FinancialAccounting Standards No. 123R, *Share-Based Payment*.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 16, 2007 expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting.

/s/ Deloitte & ToucheLLP

Boston, MassachusettsMarch 16, 2007

F-2

----

**PART I:FINANCIAL INFORMATION**

**ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS**

**ACUSPHERE, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands except share data)**

| ** **                                                                                                                                                                                                                                                                                                                                                   | ** ** | **As of**                  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                   | ** ** | **December 31, 2005** | ** ** | **December 31, 2006** | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                                                                              |       |                            |       |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                                                                   |       |                            | $          | 51,112 |   |   |   | $ | 59,750 |   |   |
| Other current assets                                                                                                                                                                                                                                                                                                                                         |       |                            | 1,142      |   |   |   | 841 |   |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                         |       |                            | 52,254     |   |   |   | 60,591 |   |   |
| PROPERTY AND EQUIPMENT, at cost:                                                                                                                                                                                                                                                                                                                             |       |                            |       |   |   |   |   |   |   |
| Property and equipment                                                                                                                                                                                                                                                                                                                                       |       |                            | 53,726     |   |   |   | 54,507 |   |   |
| Less accumulated  depreciation and amortization                                                                                                                                                                                                                                                                                                              |       |                            | 11,886     |   |   |   | 22,054 |   |   |
| Property and equipment,  net                                                                                                                                                                                                                                                                                                                                 |       |                            | 41,840     |   |   |   | 32,453 |   |   |
| OTHER ASSETS                                                                                                                                                                                                                                                                                                                                                 |       |                            | 1,745      |   |   |   | 1,778 |   |   |
| TOTAL ASSETS                                                                                                                                                                                                                                                                                                                                                 |       |                            | $          | 95,839 |   |   |   | $ | 94,822 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                               | ** ** |                            |       |   |   |   |   |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                                                                         |       |                            |       |   |   |   |   |   |   |
| Current portion of  long-term obligations                                                                                                                                                                                                                                                                                                                    |       |                            | $          | 6,727 |   |   |   | $ | 12,899 |   |   |
| Current portion of  deferred revenue                                                                                                                                                                                                                                                                                                                         |       |                            | 3,429      |   |   |   | 2,667 |   |   |
| Derivative liability                                                                                                                                                                                                                                                                                                                                         |       |                            | 1,078      |   |   |   | 59 |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                             |       |                            | 3,180      |   |   |   | 2,615 |   |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                                             |       |                            | 6,829      |   |   |   | 4,085 |   |   |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                                   |       |                            | 21,243     |   |   |   | 22,325 |   |   |
| LONG-TERM LIABILITIES:                                                                                                                                                                                                                                                                                                                                       |       |                            |       |   |   |   |   |   |   |
| Long-term obligations,  net of current portion                                                                                                                                                                                                                                                                                                               |       |                            | 14,601     |   |   |   | 9,381 |   |   |
| Deferred revenue, net of  current portion                                                                                                                                                                                                                                                                                                                    |       |                            | 2,578      |   |   |   | 4,667 |   |   |
| Total long-term  liabilities                                                                                                                                                                                                                                                                                                                                 |       |                            | 17,179     |   |   |   | 14,048 |   |   |
| COMMITMENTS (Note 13)                                                                                                                                                                                                                                                                                                                                        |       |                            |       |   |   |   |   |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                                                                                                                                                   |       |                            |       |   |   |   |   |   |   |
| Preferred stock, $0.01 par value per share                                                                                                                                                                                                                                                                                                                   |       |                            |       |   |   |   |   |   |   |
| Authorized - 5,000,000  shares as of December 31, 2005 and 2006; Designated 6.5% convertible  exchangeable - 1,000,000 shares as of December 31, 2005 and 2006; issued  and outstanding 740,000 shares as of December 31, 2005 and 730,000  shares as of December 31, 2006 (liquidation value $36,500,000 as of  December 31, 2006) |       |                            | 7          |   |   |   | 7 |   |   |
| Common stock, $0.01 par value per share                                                                                                                                                                                                                                                                                                                      |       |                            |       |   |   |   |   |   |   |
| Authorized, 98,500,000  shares as of December 31, 2005 and 2006; issued and outstanding  22,870,559 as of December 31, 2005 and 38,090,593 shares as of  December 31, 2006                                                                                                                                                                    |       |                            | 229        |   |   |   | 381 |   |   |
| Additional paid-in  capital                                                                                                                                                                                                                                                                                                                                  |       |                            | 277,592    |   |   |   | 339,224 |   |   |
| Deferred stock-based  compensation                                                                                                                                                                                                                                                                                                                           |       |                            | (359       | ) |   |   | (22 | ) |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                          |       |                            | (220,052   | ) |   |   | (281,141 | ) |   |
| Total stockholders’  equity                                                                                                                                                                                                                                                                                                                             |       |                            | 57,417     |   |   |   | 58,449 |   |   |
| TOTAL                                                                                                                                                                                                                                                                                                                                                        |       |                            | $          | 95,839 |   |   |   | $ | 94,822 |   |   |

 

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

F-3

----

**ACUSPHERE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**(in thousands, exceptshare and per share data)

| ** **                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| REVENUE                                                                     |       | $                                          | 1,714      |   | $ | 3,429 |   | $ | 1,781 |   |
| OPERATING EXPENSES:                                                         |       |                                       |       |   |   |   |   |
| Research and development                                                    |       | 25,976                                     |       | 42,159 |   | 52,445 |   |
| General and administrative                                                  |       | 6,166                                      |       | 7,446 |   | 11,615 |   |
| Total operating expenses                                                    |       | 32,142                                     |       | 49,605 |   | 64,060 |   |
| Interest income                                                             |       | 558                                        |       | 1,845 |   | 2,541 |   |
| Other income                                                                |       | 44                                         |       | — |   | — |   |
| Interest expense                                                            |       | (133                                       | )          | (551 | ) | (2,273 | ) |
| Change in  valuation of derivative                                          |       | —                                     |       | 257 |   | 922 |   |
| NET LOSS                                                                    |       | $                                          | (29,959    | ) | $ | (44,625 | ) | $ | (61,089 | ) |
| Dividends on  preferred stock                                               |       | —                                     |       | (2,419 | ) | (2,381 | ) |
| NET LOSS AVAILABLE TO COMMON STOCKHOLDERS                                   |       | $                                          | (29,959    | ) | $ | (47,044 | ) | $ | (63,470 | ) |
| NET LOSS AVAILABLE TO COMMON STOCKHOLDERS PER SHARE—Basic  and diluted |       | $                                          | (1.92      | ) | $ | (2.49 | ) | $ | (2.30 | ) |
| WEIGHTED-AVERAGE  SHARES OUTSTANDING—Basic and diluted                 |       | 15,602,832                                 |       | 18,897,130 |   | 27,599,220 |   |

 

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

F-4

----

**ACUSPHERE, INC.AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVELOSS**

| ** **                                                              | ** ** | **Convertible**          | ** ** | ** **            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **      | ** ** | ** **             | ** ** |              |
|-------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|--------------------|------------|------------|------------|----------------|------------|------------------|------------|-----------------|------------|------------------------|------------|-------------------|
| ** **                                                              | ** ** | **Exchangeable**         | ** ** | ** **            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **      | ** ** | ** **             | ** ** |              |
| ** **                                                              | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **      | ** ** |                   |
| ** **                                                              | ** ** | ** **               | ** ** | **$0.01**             | ** ** | ** **         | ** ** | **$0.01**  | ** ** | **Additional** | ** ** | **Deferred**     | ** ** | ** **      | ** ** | **Total**              | ** ** | ** **        | ** ** |   |
| ** **                                                              | ** ** | **Number of**       | ** ** | **Par**               | ** ** | **Number of** | ** ** | **Par**    | ** ** | **Paid-in**    | ** ** | **Stock-Based**  | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |   |
| ** **                                                              | ** ** | **Shares**               | ** ** | **Value**             | ** ** | **Shares**         | ** ** | **Value**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Deficit**     | ** ** | **Equity**             | ** ** | **Loss**          | ** ** |   |
| **BALANCE, JANUARY 1, 2004**                                       |       | —                   |       | —                |       | 14,295             |       | $          | 143        |           |       |             | $          | 201,422         |       |                   |       | $                 | (1,722 | ) |   |   | $ | (145,468 | ) |   |   | $ | 54,375 |   |   |   | $ |   |   |   |
| Exercise of stock options                                               |       |                     |       |                  |       | 69                 |       | 1          |       |           |       | 89               |       |            |       |                   |       |              |   |   |   |   |   | 90 |   |   |   |   |   |   |
| Issuance of common stock from employee stock  purchase plan        |       |                     |       |                  |       | 4                  |       |       |       |           |       | 24               |       |            |       |                   |       |              |   |   |   |   |   | 24 |   |   |   |   |   |   |
| Issuance of common stock to board members for  services performed       |       |                     |       |                  |       | 3                  |       |       |       |           |       | 24               |       |            |       | (24                    | )          |              |   |   |   |   |   | — |   |   |   |   |   |   |
| Amortization of deferred stock-based compensation                       |       |                     |       |                  |       |               |       |       |       |           |       |             |       |            |       | 940                    |       |              |   |   |   |   |   | 940 |   |   |   |   |   |   |
| Deferred stock-based compensation related to  non-employees             |       |                     |       |                  |       |               |       |       |       |           |       | 151              |       |            |       | (151                   | )          |              |   |   |   |   |   | — |   |   |   |   |   |   |
| Reversal of deferred compensation for terminated  employees             |       |                     |       |                  |       |               |       |       |       |           |       | (43              | )          |            |       | 43                     |       |              |   |   |   |   |   | — |   |   |   |   |   |   |
| Warrant issued to financial advisor                                     |       |                     |       |                  |       |               |       |       |       |           |       | 242              |       |            |       |                   |       |              |   |   |   |   |   | 242 |   |   |   |   |   |   |
| Issuance of common stock from private financing, net  of offering costs |       |                     |       |                  |       | 3,440              |       | 34         |       |           |       | 19,763           |       |            |       |                   |       |              |   |   |   |   |   | 19,797 |   |   |   |   |   |   |
| Net loss                                                                |       |                     |       |                  |       |               |       |       |       |           |       |             |       |            |       |                   |       |              |   | (29,959 | ) |   |   | (29,959 | ) |   |   | (29,959 | ) |   |
| **BALANCE,  DECEMBER 31, 2004**                                         |       | —                   |       | —                |       | 17,811             |       | 178        |       |           |       | 221,672          |       |            |       | (914                   | )          |              |   | (175,427 | ) |   |   | 45,509 |   |   |   |   |   |   |
|                                                                         |            |                          |            |                       |            |                    |            |            |            |                |            |                  |            |                 |            |                        |            |                   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

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

(continued)

F-5

----

**ACUSPHERE, INC.AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**ANDCOMPREHENSIVE LOSS (Continued)**

| ** **                                                                    | ** ** | **Convertible**          | ** ** | ** **            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **      | ** ** | ** **             | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|--------------------|------------|------------|------------|----------------|------------|------------------|------------|-----------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | **Exchangeable**         | ** ** | ** **            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **      | ** ** | ** **             | ** ** |
| ** **                                                                    | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **      | ** ** |
| ** **                                                                    | ** ** | ** **               | ** ** | **$0.01**             | ** ** | ** **         | ** ** | **$0.01**  | ** ** | **Additional** | ** ** | **Deferred**     | ** ** | ** **      | ** ** | **Total**              | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Number of**       | ** ** | **Par**               | ** ** | **Number of** | ** ** | **Par**    | ** ** | **Paid-in**    | ** ** | **Stock-Based**  | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                    | ** ** | **Shares**               | ** ** | **Value**             | ** ** | **Shares**         | ** ** | **Value**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Deficit**     | ** ** | **Equity**             | ** ** | **Loss** | ** ** |
| **BALANCE, DECEMBER 31,2004**                                            |       |                     | —     |                  |       |               | —     |       |       |           | 17,811     |             |       |            | 178        |                   |       |   | 221,672 |   |   |   | (914 | ) |   |   | (175,427 | ) |   |   | 45,509 |   |   |   |   |   |   |
| Exercise of  stock options                                                    |       |                     |       |                  |       |               |       |       |       |           | 20         |             |       |            |       |                   |       |   | 21 |   |   |   |   |   |   |   |   |   |   |   | 21 |   |   |   |   |   |   |
| Issuance of common stock from employee stock purchase  plan                   |       |                     |       |                  |       |               |       |       |       |           | 8          |             |       |            |       |                   |       |   | 38 |   |   |   |   |   |   |   |   |   |   |   | 38 |   |   |   |   |   |   |
| Issuance of common stock to board members for  services performed             |       |                     |       |                  |       |               |       |       |       |           | 11         |             |       |            |       |                   |       |   | 59 |   |   |   | (59 | ) |   |   |   |   |   |   | — |   |   |   |   |   |   |
| Amortization of deferred stock-based compensation                             |       |                     |       |                  |       |               |       |       |       |           |       |             |       |            |       |                   |       |   |   |   |   |   | 574 |   |   |   |   |   |   |   | 574 |   |   |   |   |   |   |
| Deferred stock-based compensation related to  non-employees                   |       |                     |       |                  |       |               |       |       |       |           |       |             |       |            |       |                   |       |   | (38 | ) |   |   | 38 |   |   |   |   |   |   |   | — |   |   |   |   |   |   |
| Reversal of deferred compensation for terminated  employees              |       |                     |       |                  |       |               |       |       |       |           |       |             |       |            |       |                   |       |   | (2 | ) |   |   | 2 |   |   |   |   |   |   |   | — |   |   |   |   |   |   |
| Issuance of common and preferred stock from  financing, net of offering costs |       |                     | 900        |                  |       |               | 9          |       |       |           | 3,566      |             |       |            | 36         |                   |       |   | 56,350 |   |   |   |   |   |   |   |   |   |   |   | 56,395 |   |   |   |   |   |   |
| Preferred stock conversion including make-whole  dividend                |       |                     | (160       | )                     |       |               | (2         | )          |       |           | 1,455      |             |       |            | 15         |                   |       |   | 1,710 |   |   |   |   |   |   |   |   |   |   |   | 1,723 |   |   |   |   |   |   |
| Dividends paid on preferred stock                                             |       |                     |       |                  |       |               |       |       |       |           |       |             |       |            |       |                   |       |   | (2,218 | ) |   |   |   |   |   |   |   |   |   |   | (2,218 | ) |   |   |   |   |   |
| Net loss                                                                      |       |                     |       |                  |       |               |       |       |       |           |       |             |       |            |       |                   |       |   |   |   |   |   |   |   |   |   | (44,625 | ) |   |   | (44,625 | ) |   |   | (44,625 | ) |   |
| **BALANCE,  DECEMBER 31,  2005**                                         |       |                     | 740        |                  |       |               | 7          |       |       |           | 22,871     |             |       |            | 229        |                   |       |   | 277,592 |   |   |   | (359 | ) |   |   | (220,052 | ) |   |   | 57,417 |   |   |   |   |   |   |

 

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

(continued)

F-6

----

**ACUSPHERE, INC.AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**ANDCOMPREHENSIVE LOSS (Continued)**
|                                                                        | ** ** | **Convertible**          | ** ** | ** **            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **      | ** ** |
|------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|--------------------|------------|------------|------------|----------------|------------|------------------|------------|-----------------|------------|
| ** **                                                             | ** ** | **Exchangeable**         | ** ** | ** **            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **      | ** ** |
| ** **                                                             | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **      | ** ** |
| ** **                                                             | ** ** | ** **               | ** ** | **$0.01**             | ** ** | ** **         | ** ** | **$0.01**  | ** ** | **Additional** | ** ** | **Deferred**     | ** ** | ** **      | ** ** | **Total** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Number of**       | ** ** | **Par**               | ** ** | **Number of** | ** ** | **Par**    | ** ** | **Paid-in**    | ** ** | **Stock-Based**  | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                             | ** ** | **Shares**               | ** ** | **Value**             | ** ** | **Shares**         | ** ** | **Value**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Deficit**     | ** ** | **Equity** | ** ** | **Loss** | ** ** |
| **BALANCE, DECEMBER 31,   2005**                                  |       |                     | 740        |                  |       |               | 7          |       |       |           | 22,871     |             |       |            | 229        |   |   |   | 277,592 |   |   |   | (359 | ) |   |   | (220,052 | ) |   |   | 57,417 |   |   |   |   |   |   |
| Exercise of stock options                                              |       |                     |       |                  |       |               |       |       |       |           | 68         |             |       |            | 1          |   |   |   | 122 |   |   |   |   |   |   |   |   |   |   |   | 123 |   |   |   |   |   |   |
| Issuance of common stock from employee stock purchase  plan            |       |                     |       |                  |       |               |       |       |       |           | 14         |             |       |            |       |   |   |   | 53 |   |   |   |   |   |   |   |   |   |   |   | 53 |   |   |   |   |   |   |
| Issuance of common stock to board members for  services performed      |       |                     |       |                  |       |               |       |       |       |           | 18         |             |       |            |       |   |   |   | 80 |   |   |   |   |   |   |   |   |   |   |   | 80 |   |   |   |   |   |   |
| Amortization of deferred stock-based compensation                      |       |                     |       |                  |       |               |       |       |       |           |       |             |       |            |       |   |   |   | 2,339 |   |   |   | 298 |   |   |   |   |   |   |   | 2,637 |   |   |   |   |   |   |
| Deferred stock-based compensation related to non-employees             |       |                     |       |                  |       |               |       |       |       |           |       |             |       |            |       |   |   |   | (39 | ) |   |   | 39 |   |   |   |   |   |   |   | — |   |   |   |   |   |   |
| Issuance of common and warrants from financing, net  of offering costs |       |                     |       |                  |       |               |       |       |       |           | 15,032     |             |       |            | 150        |   |   |   | 61,361 |   |   |   |   |   |   |   |   |   |   |   | 61,511 |   |   |   |   |   |   |
| Preferred stock conversion including make-whole  dividend              |       |                     | (10        | )                     |       |               |       |       |       |           | 88         |             |       |            | 1          |   |   |   | 97 |   |   |   |   |   |   |   |   |   |   |   | 98 |   |   |   |   |   |   |
| Dividends paid on preferred stock                                      |       |                     |       |                  |       |               |       |       |       |           |       |             |       |            |       |   |   |   | (2,381 | ) |   |   |   |   |   |   |   |   |   |   | (2,381 | ) |   |   |   |   |   |
| Net loss                                                               |       |                     |       |                  |       |               |       |       |       |           |       |             |       |            |       |   |   |   |   |   |   |   |   |   |   |   | (61,089 | ) |   |   | (61,089 | ) |   |   | (61,089 | ) |   |
| **BALANCE,  DECEMBER 31,   2006** |   |   | 730 |   |   |   | $ | 7 |   |   |   | 38,091 |   |   |   | $ | 381 |   |   |   | $ | 339,224 |   |   |   | $ | (22 | ) |   |   | $ | (281,141 | ) |   |   | $ | 58,449 |   |   |   |   |   |   |
|----------------------------------------|--------|--------|-----|--------|--------|--------|---|---|--------|--------|--------|--------|--------|--------|--------|---|-----|--------|--------|--------|---|---------|--------|--------|--------|---|-----|---|--------|--------|---|----------|---|--------|--------|---|--------|--------|--------|--------|--------|--------|--------|

 

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

(concluded)

F-7

----

**ACUSPHERE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**
|                                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                           |       |                                       |       |   |   |   |   |
| Net loss                                                                        |       | $                                          | (29,959    | ) | $ | (44,625 | ) | $ | (61,089 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:    |       |                                       |       |   |   |   |   |
| Stock-based  compensation expense                                               |       | 940                                        |       | 574 |   | 2,718 |   |
| Depreciation and  amortization                                                  |       | 1,368                                      |       | 4,007 |   | 10,291 |   |
| Loss on disposal  of property and equipment                                     |       | 31                                         |       | — |   | 214 |   |
| Write-off of  noncash intellectual property acquisition cost                    |       | —                                     |       | 5,218 |   | 1,492 |   |
| Noncash interest  expense                                                       |       | 43                                         |       | 795 |   | 756 |   |
| Noncash rent  expense                                                           |       | 244                                        |       | 511 |   | 63 |   |
| Noncash  amortization of deferred revenue                                       |       | (1,714                                     | )          | (3,429 | ) | (1,524 | ) |
| Noncash  amortization of fee to financial advisor                               |       | 100                                        |       | 200 |   | 89 |   |
| Noncash  amortization of warrants to financial advisor                          |       | 35                                         |       | 69 |   | 31 |   |
| Noncash change in  valuation of derivative                                      |       | —                                     |       | (257 | ) | (922 | ) |
| Changes in operating  assets and liabilities:                                   |       |                                       |       |   |   |   |   |
| Deferred revenue                                                                |       | 6,000                                      |       | 5,150 |   | 2,849 |   |
| Other current  assets                                                           |       | (1,391                                     | )          | 614 |   | 212 |   |
| Accounts payable                                                                |       | 2,718                                      |       | (1,058 | ) | (593 | ) |
| Accrued expenses                                                                |       | 2,267                                      |       | 1,549 |   | (2,676 | ) |
| Net cash used in  operating activities                                          |       | (19,318                                    | )          | (30,682 | ) | (48,089 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                           |       |                                       |       |   |   |   |   |
| Purchases of property and  equipment                                            |       | (12,183                                    | )          | (32,978 | ) | (1,090 | ) |
| Increase in other assets                                                        |       | (258                                       | )          | 112 |   | (130 | ) |
| Net cash used in  investing activities                                          |       | (12,441                                    | )          | (32,866 | ) | (1,220 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                           |       |                                       |       |   |   |   |   |
| Payments on long-term  obligations                                              |       | (980                                       | )          | (2,547 | ) | (4,302 | ) |
| Proceeds from long-term  obligations                                            |       | 3,445                                      |       | 14,733 |   | 2,943 |   |
| Net proceeds from sale of  preferred stock                                      |       | —                                     |       | 41,887 |   | — |   |
| Net proceeds from sales  of common stock                                        |       | 19,798                                     |       | 17,566 |   | 61,511 |   |
| Payment of preferred  stock dividends                                           |       | —                                     |       | (2,218 | ) | (2,381 | ) |
| Proceeds from exercise of  stock options                                        |       | 90                                         |       | 21 |   | 123 |   |
| Proceeds from issuance of  common stock from employee stock purchase plan  |       | 24                                         |       | 38 |   | 53 |   |
| Net cash provided  by financing activities                                      |       | 22,377                                     |       | 69,480 |   | 59,947 |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                           |       | (9,382                                     | )          | 5,932 |   | 8,638 |   |
| CASH AND CASH  EQUIVALENTS, Beginning of period                                 |       | 54,562                                     |       | 45,180 |   | 51,112 |   |
| CASH AND CASH  EQUIVALENTS, End of period                                       |       | $                                          | 45,180     |   | $ | 51,112 |   | $ | 59,750 |   |
| SUPPLEMENTAL SCHEDULE OF CASH FLOWS INFORMATION:                                |       |                                       |       |   |   |   |   |
| Cash paid during the  period for interest                                       |       | $                                          | 90         |   | $ | 990 |   | $ | 1,366 |   |
| Capitalized interest                                                            |       | —                                     |       | 813 |   | — |   |
| SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING  TRANSACTIONS:                       |       |                                       |       |   |   |   |   |
| Common stock  issued for preferred conversion, including make whole dividend    |       | $                                          | —     |   | $ | 1,723 |   | $ | 98 |   |
| Common stock  issued to board members for services performed                    |       | 24                                         |       | 59 |   | 80 |   |
| Common stock  warrants issued to financial advisor                              |       | 242                                        |       | — |   | — |   |

 

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

F-8

----

**ACUSPHERE, INC. ANDSUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**1. Operations**

Acusphere, Inc. and subsidiaries (“Acusphere” orthe “Company”) is a specialty pharmaceutical company that develops new drugsand improved formulations of existing drugs using its proprietary microparticletechnology. The Company is focused on developing proprietary drugs that canoffer significant benefits over existing drugs, including improved safety andefficacy, increased patient compliance, greater ease of use, expandedindications or reduced cost. The Company’s lead product, ImagifyTM (perflubutane polymer microspheresfor delivery in an injectable suspension, pronounced i-maj’-i-fi,formerly known as AI-700) isa cardiovascular drug in Phase 3 clinical development for the detection ofcoronary artery disease, the leading cause of death in the United States. TheCompany also has demonstrated that its technology has the potential to improvethe formulation of hydrophobic drugs and asthma drugs.

Acusphere is devotingsubstantially all of its efforts towards the research and development of itsproduct candidates and raising capital. Acusphere is subject to a number ofrisks. Principal among these risks are the need to develop regulatory approvedcommercially usable products, competition from substitute products and largercompanies and the need to obtain adequate financing necessary to fund productdevelopment. The Company expects research and development, general andadministrative and sales and marketing expenses will increase over the nextseveral years. The Company expects to continue to incur losses and capitalexpenditures for the foreseeable future. The Company may raise additionalcapital through public or private sales of equity, or from borrowings, or fromstrategic partners.

**2. Summary ofSignificant Accounting Policies**

The accompanying consolidated financial statementsreflect the application of certain accounting policies described below andelsewhere in the notes to the consolidated financial statements.

***Principles ofConsolidation—******The***accompanyingconsolidated financial statements include the amounts of Acusphere, Inc.and its wholly owned subsidiaries, Acusphere Securities Corporation andAcusphere Limited. Acusphere Securities Corporation was established in December 1996as a Massachusetts securities corporation. Acusphere Limited was establishedin 2004 for statutory purposes and has no operations, employees or assets.All intercompany balances and transactions have been eliminated inconsolidation.

***Use of Estimates—******The***preparationof financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimated or assumed.

***Cash and CashEquivalents—******Cash***equivalentsconsist of short-term, highly liquid investments, including money marketaccounts, with original maturity dates of 90 days or less when purchased.Cash equivalents are carried at cost, which approximates their fair marketvalue.

***Property andEquipment—******Property***andequipment are recorded at cost and depreciated over their estimated usefullives of three to five years using the straight-line method. The majority ofequipment is related to ongoing research and development activities, includingequipment intended for commercial manufacture of Imagify. The equipment in theCompany’s commercial manufacturing facility was placed in service in October 2005and is being utilized in research and development related activities, includingongoing calibration and testing. Depreciation commences on equipment when it isplaced in service. 

F-9

----

Expenditures formaintenance and repairs are charged to expense as incurred. Expenditures formanufacturing facility start-up, validation, commissioning and qualificationcosts are charged to expense as incurred. Interest costs associated with theconstruction of the facility were capitalized in accordance with the provisionsof Statement of Financial Accounting Standards “SFAS” No. 34, *Capitalization of Interest*.

Equipment under capital leases and leaseholdimprovements are depreciated over the lesser of their useful lives or theremainder of the lease term. Depreciation of such equipment and leaseholdimprovements commences when it is placed in service. Property and equipment isreviewed for impairment whenever events or changes in circumstances indicatethat the carrying value of certain assets might not be recoverable andrecognizes a loss when it is probable that the estimated future cash flows willbe less than the carrying value of the asset.

***Other Assets—******Other***assetsconsist primarily of lease related deposits and deferred rent expense.

***Fair Value ofFinancial Instruments—******The***carryingamounts of financial instruments, which include cash equivalents, accounts payable,accrued expenses, and long-term obligations, approximate their fair values.

***Concentrations ofCredit Risk and Limited Suppliers—******The***financialinstruments that potentially subject Acusphere to concentrations of credit riskare cash and cash equivalents. Acusphere’s cash and cash equivalents aremaintained in what management believes to be a highly rated commercial bank andits related investment management company.

Acusphere relies on certain materials used in itsdevelopment process, each of which is available from limited sources. Thefailure of a supplier or subcontractor to deliver on schedule could delay orinterrupt the development process and thereby adversely affect Acusphere’soperating results.

***Revenue—******Revenue***isrecognized from license arrangements in accordance with Staff AccountingBulletin No. 104, *Revenue Recognition*(“SAB 104”) and FASB Emerging Issue Task Force Issue No. 00-21, *Accounting for Revenue Arrangements with Multiple Deliverables*(“EITF 00-21”). Revenue from license payments not tied to achieving aspecific performance milestone is recognized ratably over the period over whichit is obligated to perform services. The period over which the Company isobligated to perform services is estimated based on available facts and circumstances.Revenue from performance payments is recognized when such performance issubstantially in its control and when the Company believes that completion ofsuch performance is reasonably probable, ratably over the period in time orcost over which it estimates that it will perform such performance obligations.Substantive at-risk milestone payments, which are based on achieving a specificperformance milestone when performance of such milestone is contingent onperformance by others or for which achievement cannot be reasonably estimatedor assured, are recognized as revenue when the milestone is achieved and therelated payment is due, provided that there is no substantial future serviceobligation associated with the milestone. Revenue in connection with licensearrangements is not recognized until payments are collected or due andreasonably assured of being collected. In addition, revenue is not recognizedin circumstances where the arrangement includes a refund provision until therefund condition is no longer applicable unless, in its judgment, the refundcircumstances are within the Company’s operating control and unlikely to occur.Payments received in advance of being recognized as revenue are deferred.

In connection with the Company’s feasibility study,contract amounts which are not due until the customer accepts or verifies theresearch results are not recognized as revenue until customer acceptance,assuming collectibility is reasonable assured.

***Research andDevelopment Expenses—******Research***anddevelopment costs primarily consist of salaries, consulting and contractservices and material costs. These expenses include related costs for clinicalsites enrolling patients in the Imagify Phase 3 clinical program, costs forclinical data management and independent clinical site monitoring and operatingcosts associated with efforts to build-out and qualify a 

F-10

----

commercial manufacturingfacility. Research and development expenses also include costs to acquirepatents, which are expensed if technological feasibility has yet to beachieved. Acusphere charges all research and development expenses to operationsas incurred.

***DerivativeFinancial Instruments—******The***Company’s6.5% convertible exchangeable preferred stock contains a feature whereby, priorto March 1, 2009, if the Company elects to automatically convert, or ifany holder elects to voluntarily convert, the preferred stock, the Company willalso make an additional payment (“make-whole payment”) equal to the aggregateamount of dividends that would have been payable on the preferred stock soconverted from the original date of issuance of February 24, 2005 throughand including March 1, 2009, less any dividends already paid on thepreferred stock. This feature represents an embedded derivative which isrequired to be accounted for separately from the preferred stock. The estimatedfair value of this feature is valued using a risk-weighted binomial model thatincorporates factors such as the Company’s cost of capital, stock pricevolatility and the estimated timing of preferred stock conversions. Changes inthe estimated fair value of the liability represented by these factors, as wellas any make-whole payments, are charged to the consolidated statements ofoperations as unrealized gain or loss on derivative. These adjustments will berequired until the feature is either triggered or expires.

The Company’s loan agreement with MassDevelopmentcontains a feature providing for a retroactive interest rate increase in theevent the Company achieves positive operating cash flow, as defined in theagreement, prior to repayment of the loan. This feature represents an embeddedderivative which is required to be accounted for separately from the relatedloan. The estimated fair value of this feature is valued using a risk-weighteddiscounted cash flow methodology that incorporates factors such as the Company’scost of capital and the probability and estimated timing of the Companyachieving positive operating cash flow, as defined. Changes in the estimatedfair value of the liability represented by these factors are charged to theconsolidated statements of operations as unrealized gain or loss on derivative.These adjustments will be required until the feature is either triggered orexpires.

***Income Taxes—******Deferred***taxliabilities and assets are provided for differences between the book and taxbases of existing assets and liabilities and tax loss carryforwards andcredits, using tax rates expected to be in effect in the years in whichdifferences are expected to reverse. Valuation allowances are provided to theextent realization of tax assets is not considered likely.

***Stock-BasedCompensation—******Effective***January 1,2006, the Company commenced accounting for stock-based compensation inaccordance with the fair value recognition provisions of FAS 123R, *Share-Based Payment*(“FAS123R”). Under SFAS 123R,stock-based compensation cost is measured at the grant date based on the valueof the award and is recognized as expense over the appropriate vesting period. Stock-basedcompensation expense is being recognized on a straight-line basis over therequisite period of the awards.  SeeNote 3 of the Notes to the Consolidated Financial Statements foradditional information regarding stock-based compensation expense.

Prior to adopting the provisions of FAS 123R, theCompany recorded estimated compensation expense for employee stock optionsbased upon their intrinsic value on the date of grant pursuant to AccountingPrinciples Board Opinion 25 (“APB 25”), *Accounting for StockIssued to Employees* and provided the required pro forma disclosuresof SFAS 123. Because the Company established the exercise price based on thefair market value of its stock at the date of grant, the stock options had nointrinsic value upon grant, and therefore no estimated expense was recordedprior to adopting SFAS 123R.

***Net Loss Per Share—******Basic***anddiluted net loss per common share is calculated by dividing the net lossapplicable to common stockholders by the weighted-average number of commonshares outstanding during the period, reduced by the weighted-average number ofrestricted common shares outstanding during the period. Diluted net loss percommon share is the same as basic net loss per common share, since the effectsof potentially dilutive securities are antidilutive for all periods presented.Antidilutive securities, 

F-11

----

convertible exchangeablepreferred stock, stock options, warrants, and restricted common stock notincluded in the diluted net loss per share calculation aggregated 3,155,942,9,846,627 and 16,028,904 as of December 31, 2004, 2005, and 2006,respectively.

Thefollowing table reconciles the weighted-average common shares outstanding tothe shares used in the computation of basic and diluted weighted-average commonshares outstanding:

| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Historical**                                                 | ** ** | ** **                                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Weighted-average  common shares outstanding                    |       | 15,611,644                                 |       | 18,900,260 |   | 27,599,537 |   |
| Less  weighted-average restricted common shares  Outstanding   |       | (8,812                                     | )          | (3,130 | ) | (317 | ) |
| Basic and diluted  weighted-average common shares  Outstanding |       | 15,602,832                                 |       | 18,897,130 |   | 27,599,220 |   |
|                                                                |            |                                            |            |  |  |  |  |  |  |

 

***Comprehensive Loss—******Comprehensive***lossis defined as the change in stockholders’ equity during a period fromtransactions and other events and circumstances from non-owner sources. Comprehensiveloss has been the same as net loss for all periods presented.

***Disclosures AboutSegments of an Enterprise—******Operating***segmentsare identified as components of an enterprise about which separate discretefinancial information is available for evaluation by the chief operatingdecision-maker, or decision-making group, in making decisions regardingresource allocation and assessing performance. To date, Acusphere has viewedits operations and manages its business as one operating segment.

***Recent AccountingPronouncements—******In***July 2006,the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48(“FIN 48”) *Accounting for Uncertainty inIncome Taxes*, which applies to all tax positions related to incometaxes subject to SFAS 109, *Accounting for IncomeTaxes*. FIN 48 requires a new evaluation process for all taxpositions taken. If the probability for sustaining the tax position is greaterthan 50%, then the tax position is warranted and recognition should be at thehighest amount which would be expected to be realized upon ultimate settlement.FIN 48 requires expanded disclosure at each annual reporting period unless asignificant change occurs in an interim period. Differences between the amountsrecognized in the statements of financial position prior to the adoption of FIN48 and the amounts reported after adoption are to be accounted for as anadjustment to the beginning balance of retained earnings. The Company hascompleted it initial evaluation of the impact of the January 1, 2007, adoptionof FIN 48 and determined that such adoption is not expected to have a materialimpact on the Company’s financial position or results from operations.

In September 2006, the Financial AccountingStandards Board “FASB” issued SFAS No. 157, *Fair Value Measurements*, which is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. The purpose of SFAS 157 is toclarify and set forth consistent rules for defining fair value,establishing a framework for measuring fair value in generally acceptedaccounting principles and expanding disclosures about fair value measurements. SFAS157 applies under other accounting pronouncements that require or permit fairvalue measurements where those accounting pronouncements have determined thatfair value is the relevant measurement attribute. SFAS 157 does not require anynew fair value measurements, but for some entities the application of SFAS 157could change current practice. The Company is currently assessing what impact,if any, the adoption of this statement will have on its consolidated financialstatements.

In September 2006, the SEC issued SAB No. 108,*Considering the Effects of Prior YearMisstatements When Quantifying Misstatements in Current Year FinancialStatements,* which provides interpretive guidance on how the effectsof the carryover or reversal of prior year misstatements should be consideredin 

F-12

----

quantifying a current yearmisstatement. The Company adopted the provisions of SAB No. 108 asrequired and such adoption did not have any impact on the financial statements.

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities,* which is effective as of the beginning of an entity’sfirst fiscal year beginning after November 15, 2007. This statement allowsthe measurement at fair value of financial instruments and certain other itemsthat are currently not required to be measured at fair value. The objective of SFAS159 is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. The fair value option established by thisStatement permits the measurement of eligible items at fair value at specifiedelection dates, with unrealized gains and losses on the items for which thefair value option has been elected reported in earnings at each subsequentreporting date. The Company is currently assessing what impact, if any, theadoption of this statement will have on its consolidated financial statements.

**3. Stock-basedCompensation**

***Summary of Stock-Based Compensation Plans***

In June 2005, the 2005 Stock Option and IncentivePlan (the “2005 Plan”) was approved. The 2005 Plan became effective on June 16,2005 and provides that a maximum of 1.7 million shares of common stock may beissued as incentive stock options (“ISO’s”), nonqualified stock option, awardsof common stock and direct purchases of common stock by Acusphere employees,officers, directors and consultants. The maximum number of shares that may begranted to any employee under the 2005 Plan shall not exceed 1.0 million sharesof common stock during any calendar year. Options granted have a term of10 years and generally vest over four years. The Company settles employeestock option exercises with newly issued shares. As of December 31, 2006,there were 0.6 million options outstanding under the 2005 Plan, and 1.1 millionshares available for future stock and option grants.

In July 2003, the 2003 Stock Option and IncentivePlan (the “2003 Plan”) was approved. The 2003 Plan became effective on theclosing of the Company’s IPO on October 14, 2003 and provides that amaximum of 2.5 million shares of common stock may be issued as ISO’s,nonqualified stock option, awards of common stock and direct purchases ofcommon stock by Acusphere employees, officers, directors and consultants. Themaximum number of shares that may be granted to any employee under the 2003Plan shall not exceed 583,334 shares of common stock during any calendar year.Options granted have a term of 10 years and generally vest over four years.The Company settles employee stock option exercises with newly issued shares.As of December 31, 2006, there were 2.4 million options outstanding underthe 2003 Plan and 0.1 million shares available for future stock and optionsgrants.

In July 2003, the 2003 Employee Stock PurchasePlan (the “Purchase Plan”) was approved which became effective on the closingof the Company’s IPO on October 14, 2003. The Purchase Plan provides forthe issuance of a maximum of 233,334 shares of common stock. Eligible employeemay contribute up to 10% of their total cash compensation with a maximum of 417shares semi-annually. The first sale of shares under this plan occurred on February 29,2004. During 2004, 2005 and 2006, 3,960, 8,017 and 14,172 shares, respectively,of common stock were sold to employees under this plan. Acuspherehad 207,185 shares available for future sales of common stock under thisplan at December 31, 2006.

In March 1994, the1994 Stock Plan (the “1994 Plan”) was approved. The 1994 Plan, as amended, providedthat a maximum of 1,423,663 shares of common stock could be issued as ISOs,nonqualified stock options and stock grants. The Company ceased granting awardsunder the 1994 Plan after March 7, 2004. As of December 31, 2006,there were 1.0 million options outstanding under the 1994 Plan.

F-13

----

***Change in Accounting for Stock-Based CompensationPlans***

Prior to January 1, 2006, the Company hadfollowed Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related interpretations, which resulted inthe accounting for grants of awards to employees at their intrinsic value inthe consolidated financial statements. Accordingly, no compensation expense wasrecorded for options issued to employees in fixed amounts and with fixedexercise prices at least equal to the fair market value of the Company’s commonstock at the date of grant. Conversely, when the exercise price for accountingpurposes was below fair value of the Company’s common stock at the date ofgrant, a non-cash charge to compensation expense was recorded ratably over theterm of the option vesting period in an amount equal to the difference betweenthe value calculated using the exercise price and the fair value. The Companydid issue options prior to its initial S-1 filing in July 2003 atvalues less than fair market. These grants resulted in the recording ofdeferred compensation. Effective January 1, 2006, the Company adopted SFASNo. 123R, *Share-Based Compensation* usingthe modified prospective method, which results in the provisions of SFAS 123Rbeing applied to the consolidated financial statements on a going-forwardbasis. As such, prior periods have not been restated. SFAS 123R requirescompanies to recognize stock-based compensation awards granted to its employeesas compensation expense on a fair value method. Under the fair valuerecognition provisions of SFAS 123R, stock-based compensation cost is measuredat the grant date based on the fair value of the award and is recognized asexpense over the service period, which generally represents the vesting period.The grant date fair value of stock options is calculated using theBlack-Scholes option-pricing model and the grant date fair value of restrictedstock is based on intrinsic value. The expense recognized over the serviceperiod is required to include an estimate of the awards that will be forfeited.Previously, the Company recorded the impact of forfeitures as they occurred.Options granted prior to the initial S-1 filing in 2003 continue to beaccounted for under APB No. 25.

All stock-based awards to non-employees are accountedfor at their fair market value in accordance with SFAS 123R and Emerging IssuesTask Force No. 96-18, *Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services*. Under this method, theequity-based instrument was valued at either the fair value of theconsideration received or the equity instrument issued on the date of grant.The resulting compensation cost was recognized and charged to operations overthe service period, which was usually the vesting period.

Adoption of SFAS 123R did not affect theCompany’s cash flow or financial position but it did increase its reported netloss and loss per share, since adopting SFAS 123R results in theCompany recording compensation cost for employee stock options.

Stock compensation expense in 2006 totaled$2.6 million, or $0.09 per share, of which $1.5 million was recordedin general and administrative expense and $1.1 million was recorded in researchand development expense. Of the $2.6 million total stock compensation expense,$0.3 million was related to options granted prior to the initial S-1filing in 2003, which continue to be accounted for under APB No. 25. Theincremental effect on stock compensation expense as a result of the adoption ofSFAS 123R in 2006 was an additional charge of approximately $2.3 million, or$0.08 per share. In accordance with SFAS 123R, the Company will report anyexcess tax benefits from the exercise of non-qualified stock options asfinancing cash flows. There were no excess tax benefits recorded from theexercise of non-qualified stock options for the fiscal year ended December 31,2006.

For purposes of recording stock option-basedcompensation expense as required by SFAS 123R, the fair values of eachstock option granted under the Company’s stock option plan for the fiscal yearended December 31, 2006 were estimated as of the date of grant using theBlack-Scholes option-pricing model. The weighted average fair value of allstock option grants issued for the fiscal year ended December 31, 2006 was$2.14.

F-14

----

For purposes of recording Employee Stock Purchase Plan(“ESPP”) compensation expense as required by SFAS 123R, the fair values ofeach share subject to purchase under the ESPP for the fiscal year ended December 31,2006 was estimated as of the beginning of the ESPP period using theBlack-Scholes option-pricing model.

Thefair values of all stock option grants and ESPP shares issued were determinedusing the following weighted average assumptions:

| ** **                                              | ** ** | **Year ended  December 31, 2006** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **Stock Option Plan**                  | ** ** | **ESPP** | ** ** |
| Risk-free  interest rate                                |       |                                             | 4.6        | % |   |   | 5.1 | % |   |
| Expected dividend  yield                                |       |                                             | 0.0        | % |   |   | 0.0 | % |   |
| Expected volatility of underlying stock 40.3%           |       |                                             | 40.3       | % |   |   | 51.3 | % |   |
| Expected life of option  grants and ESPP shares (years) |       |                                             | 5.0        |   |   |   | 0.5 |   |   |

 

The risk-free rates for the stock option plan and ESPPare the weighted average of the yield rates on 5-year U.S. Treasurynotes on the dates of the stock option grants and the yield rates on 6-monthU.S. Treasury bills at the inception of each quarterly ESPP period,respectively. The dividend yield of zero is based on the fact that the Companyhas never paid cash dividends and has no present intention to pay cashdividends. The Company used the historical volatility of the Company’smarket-traded stock for the expected volatility assumption input to the model.

As share-based compensation expense is recognizedbased on awards ultimately expected to vest, compensation expense is reducedfor estimated forfeitures. SFAS 123R requires forfeitures to be estimated atthe time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Forfeiture rates are calculated basedon actual historical forfeitures.

The expected life of employee stock options representsthe weighted-average period the stock options are estimated to remainoutstanding. The expected life of employee stock options is, in part, afunction of the options’ remaining contractual life and the extent to which theoption is in-the-money (i.e., the average stock price during the period isabove the strike price of the stock option). The Company estimates that, basedon these variables, options are likely on average to be exercised inapproximately 5 years. The option life for options under the Purchase Plan issix months, representing the time period under which the option may beexercised as defined in the plan.

SFAS No. 123requires the presentation of pro forma information for the comparative periodsprior to the adoption as if all of the Company’s employee stock options andESPP shares had been accounted for under the fair value method of the originalSFAS No. 123. The following table illustrates the effect on net lossand loss per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123 to stock-based employee compensation inthe prior-year periods:

| ** **                                                                            | ** ** | **Year Ended  December 31,**                            | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                                          | ** ** | **2005** | ** ** |
| ** **                                                                            | ** ** | **(in thousands, except per  share amounts)** | ** ** |
| Net loss  applicable to common stockholders, as reported:                             |       | $                                                                 | (29,959    | ) | $ | (47,044 | ) |
| Add: Stock-based employee compensation expense  recorded                              |       | 777                                                               |       | 460 |   |
| Deduct: Stock-based employee compensation expense determined  under fair value method |       | (1,739                                                            | )          | (2,095 | ) |
| Pro forma net  loss                                                                   |       | $                                                                 | (30,921    | ) | $ | (48,679 | ) |
| Loss per share  Basic and diluted—as reported                                    |       | $                                                                 | (1.92      | ) | $ | (2.49 | ) |
| Basic and diluted—pro  forma                                                     |       | $                                                                 | (1.98      | ) | $ | (2.58 | ) |

 

F-15

----

For purposes of determining the disclosures requiredby SFAS No. 123, the fair values of each stock option granted in thefiscal years ended December 31, 2004 and 2005 under the Company’s stockoption plan were estimated on the date of grant using the Black-Scholesoption-pricing model. As described above, the Company had previously recordeddeferred compensation for below fair value options granted prior to the initialS-1 filing in 2003. As of December 31, 2006, $22,000 of deferredcompensation has yet to be recognized. This amount will be recognized during thefirst quarter of 2007.

The Company granted 783,939 and 1,423,600 optionsunder its Stock Option Plans for the years ended December 31, 2004 and2005, respectively. The weighted average grant date fair value of all stockoption grants issued for the years ended December 31, 2004 and 2005 was$3.21 and $2.25, respectively.

The fair values of stock options granted during theyears ended December 31, 2005 and 2004 were calculated using the followingweighted-average assumptions:

| ** **                              | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Risk-free interest rate                 |       | 2.9                                    | %          | 3.8 | % |
| Expected dividend yield                 |       | 0.0                                    | %          | 0.0 | % |
| Volatility                              |       | 45.9                                   | %          | 45.8 | % |
| Expected life of option  grants (years) |       | 4.0                                    |       | 4.0 |   |

 

***Stock Option Activity***

During the yearended December 31, 2006, the Company granted stock options to existingemployees, as part of the Company’s performance review process, new employeesand Directors in lieu of cash based compensation. All such options were grantedwith exercise prices equal to the current market value of the underlying commonstock on the date of grant. Stock option activity under the 1994, 2003 and 2005Plans was as follows:

| ** **                                          | ** ** | **Number of  Shares** | ** ** | **Exercise Price  Per Share** | ** **    | **Weighted-  Average  Exercise  Price Per  Share** | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|-----------------------------------------|---------------|---------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Balance,  January 1, 2004                      |       | 1,171,962                  |       | $                                       | 0.60 - $13.02 |                                                    |       | $                                                    | 5.23       |                            |       |   |   |   |   |   |   |
| Granted                                             |       | 783,939                    |       | 6.01 -     9.60     |          |                                                    | 8.29       |                                                 |       |                            |       |   |   |   |   |
| Exercised                                           |       | (68,734                    | )          | 0.60 -     7.20     |          |                                                    | 1.30       |                                                 |       |                            |       |   |   |   |   |
| Canceled                                            |       | (54,685                    | )          | 0.60 -   13.02                |          |                                                    | 5.77       |                                                 |       |                            |       |   |   |   |   |
| Balance, December 31, 2004                     |       | 1,832,482                  |       | $                                       | 0.84 - $13.02 |                                                    |       | $                                                    | 6.67       |                            |       |   |   |   |   |   |   |
| Granted                                             |       | 1,423,600                  |       | 4.28 -     6.30     |          |                                                    | 5.59       |                                                 |       |                            |       |   |   |   |   |
| Exercised                                           |       | (20,089                    | )          | 0.84 -     2.82     |          |                                                    | 1.05       |                                                 |       |                            |       |   |   |   |   |
| Canceled                                            |       | (100,960                   | )          | 0.84 -     8.86     |          |                                                    | 6.22       |                                                 |       |                            |       |   |   |   |   |
| Balance, December 31, 2005                     |       | 3,135,033                  |       | $                                       | 0.84 - $13.02 |                                                    |       | $                                                    | 6.23       |                            |       |   |   |   |   |   |   |
| Granted                                             |       | 1,321,329                  |       | 2.40 -     6.72     |          |                                                    | 5.15       |                                                 |       |                            |       |   |   |   |   |
| Exercised                                           |       | (68,337                    | )          | 0.84 -     5.57     |          |                                                    | 1.80       |                                                 |       |                            |       |   |   |   |   |
| Canceled                                            |       | (426,907                   | )          | 0.84 -   13.02                |          |                                                    | 6.09       |                                                 |       |                            |       |   |   |   |   |
| Balance, December 31, 2006                     |       | 3,961,118                  |       | $                                       | 0.84 - $13.02 |                                                    |       | $                                                    | 5.96       |                            |       |   | 7.50 |   |   | $ | 23,615,442 |   |
| Vested or  Expected to Vest, December 31, 2006 |       | 3,765,551                  |       | $                                       | 0.84 - $13.02 |                                                    |       | $                                                    | 5.96       |                            |       |   | 7.50 |   |   | $22,480,247 |   |
| Exercisable,  December 31, 2006                |       | 2,168,566                  |       | 0.84 -   13.02                |          |                                                    | 6.09       |                                                 |       |                            | 6.70       |   |   | $13,210,356 |   |
| Exercisable,  December 31, 2005                |       | 1,420,500                  |       | 0.84 -   13.02                |          |                                                    | 5.95       |                                                 |       |                            |       |   |   |   |   |
| Exercisable,  December 31, 2004                |       | 777,432                    |       | 0.84 -   13.02                |          |                                                    | 5.49       |                                                 |       |                            |       |   |   |   |   |
|                                                     |            |                            |            |                                         |               |                                                         |            |                                                      |            |                                 |            |  |  |  |  |  |  |  |

 

F-16

----

Thefollowing table summarizes information relating to currently outstanding andexercisable options as of December 31, 2006 as follows:

| ** **               | ** ** | **Outstanding**                  | ** ** | **Weighted**  | ** ** | **Weighted**                                 | ** ** | ** **  | ** ** | ** **         | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------|------------|----------------------------------------------|------------|-------------|------------|--------------------|------------|
| ** **               | ** ** | ** Weighted-Average ** | ** ** | **Average**   | ** ** | **Exercisable**                              | ** ** | **Average** | ** ** | ** **         | ** ** |
| ** **               | ** ** | **Number of**               | ** ** | **Remaining** | ** ** | **Exercise**                                 | ** ** | **Number**  | ** ** | **Exercise**       | ** ** |
| **Exercise Price**  | ** ** | ** **                       | ** ** | **Shares**    | ** ** | **Contractual Life (in Yrs)** | ** ** | **Price**   | ** ** | **of Shares** | ** ** | **Price** | ** ** |
| $  0.00 - 1.30 |       |                             | 416,828    |          |       |                                         | 5.5        |        |       |               | $          | 0.87 |   |   | 411,173 |   |   | $ | 0.87 |   |   |
|   1.31 - 2.60  |       |                             | 55,993     |          |       |                                         | 2.5        |        |       |               | 1.93       |   |   | 52,416 |   |   | 1.90 |   |   |
|   2.61 - 3.91  |       |                             | 370,000    |          |       |                                         | 9.6        |        |       |               | 3.39       |   |   | 83,351 |   |   | 3.55 |   |   |
|   3.92 - 5.21  |       |                             | 287,900    |          |       |                                         | 8.6        |        |       |               | 4.83       |   |   | 148,010 |   |   | 4.84 |   |   |
|   5.22 - 6.51  |       |                             | 1,766,534  |          |       |                                         | 8.0        |        |       |               | 5.83       |   |   | 675,739 |   |   | 5.87 |   |   |
|   6.52 - 7.81  |       |                             | 285,868    |          |       |                                         | 6.1        |        |       |               | 7.00       |   |   | 207,283 |   |   | 7.14 |   |   |
|   7.82 - 9.11  |       |                             | 276,149    |          |       |                                         | 6.9        |        |       |               | 8.74       |   |   | 198,520 |   |   | 8.74 |   |   |
| 9.12 - 10.42             |       |                             | 218,500    |          |       |                                         | 7.1        |        |       |               | 9.59       |   |   | 159,067 |   |   | 9.59 |   |   |
|   10.43 - 13.02     |       |                             | 283,346    |          |       |                                         | 6.7        |        |       |               | 13.02      |   |   | 233,007 |   |   | 13.02 |   |   |
|                     |       |                             | 3,961,118  |          |       |                                         | 7.5        |        |       |               | $          | 5.96 |   |   | 2,168,566 |   |   | $ | 6.09 |   |   |
|                          |            |                                  |            |               |            |                                              |            |             |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The total cash received from employees as a result ofemployee stock option exercises during the fiscal 2006 was approximately$0.1 million. As of December 31, 2006, the aggregate intrinsic valueof fully vested and exercisable options is $13.2 million. The total numberof in-the-money options exercisable as of December 31, 2006 was 463,340. TheCompany settles employee stock option exercises with newly issued commonshares.

As of December 31, 2006, there was$4.0 million of total unrecognized compensation cost related to unvestedstock options granted under the Company’s stock-based compensation plans thatare expected to vest. That cost is expected to be recognized over aweighted-average period of 2.9 years.

In 2000, Acusphere issued 1,667 shares of commonstock, 1,369 shares of restricted common stock, and 10,000 options to purchasecommon stock to non-employees in consideration of services rendered. During2001 and 2003, Acusphere issued 13,791 and 14,956 shares, respectively, ofrestricted common stock to a non-employee and certain directors in considerationof services rendered. Acusphere recorded these issuances of securities (stockoptions and restricted stock) at fair value at date of grant, which was $0.1million, $0.4 million and $0.1 million in 2000, 2001 and 2003, respectively,and is recording stock-based compensation over the vesting periods. As of December 31,2006, all outstanding restricted shares were vested.

Acusphere issued optionsto employees to purchase approximately 230,119, and 267,723 shares of commonstock during the years ended December 31, 2001 and 2003, respectively, atexercise prices deemed for accounting purposes to be below market value.Acusphere has recorded the difference between the exercise price and the fairvalue of $4.9 million in 2001 and $1.4 million in 2003 as deferred stock-basedcompensation and is amortizing this deferred compensation as charges tooperations over the vesting periods of the options. As of December 31,2006, approximately $22,000 of deferred compensation has yet to be recognized. Thisamount will be recognized in the first quarter of fiscal 2007.

F-17

----

**4. Balance Sheet Data**

| ** **                                               | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                               | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| ** **                                               | ** ** | **(in thousands)**               | ** ** |
| Other assets  consist of the following:                  |       |                                  |       |   |   |
| Deposits                                                 |       | $                                     | 1,242      |   | $ | 1,373 |   |
| Other assets                                             |       | 503                                   |       | 405 |   |
|                                                     |       | $                                     | 1,745      |   | $ | 1,778 |   |
| Accrued expenses  consist of the following:              |       |                                  |       |   |   |
| Accrued contract services                                |       | $                                     | 2,113      |   | $ | 1,326 |   |
| Accrued vacation                                         |       | 480                                   |       | 517 |   |
| Accrued bonus                                            |       | 800                                   |       | 890 |   |
| Accrued construction, equipment and commissioning  costs |       | 1,898                                 |       | — |   |
| Other accrued expenses                                   |       | 1,538                                 |       | 1,352 |   |
|                                                     |       | $                                     | 6,829      |   | $ | 4,085 |   |

 

**5. Propertyand Equipment**

Propertyand equipment at cost consist of the following (in thousands):

| ** **                                       | ** ** | **As of December 31,** | ** ** | **Estimated** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|---------------|------------|
| ** **                                       | ** ** | **2005**                              | ** ** | **2006**      | ** ** | **Useful Life** | ** ** |
| Equipment                                        |       | $                                     | 20,589     |          | $          | 22,993 |   | 3-5  years |   |
| Furniture and  fixtures                          |       | 345                                   |       | 424           |       | 5  years |   |
| Leasehold  improvements                          |       | 30,986                                |       | 31,030        |       | Lease  term(a) |   |
| Sub-total depreciable assets                     |       | 51,920                                |       | 54,447        |       |   |   |
| Less: accumulated  depreciation and amortization |       | (11,886                               | )          | (22,054       | )          |   |   |
| Total depreciable assets, net                    |       | 40,034                                |       | 32,393        |       |   |   |
| Deposits on  equipment purchases                 |       | 1,806                                 |       | 60            |       | N/A |   |
| Total property  and equipment, net               |       | $                                     | 41,840     |          | $          | 32,453 |   |   |   |

----

(a)           The Company depreciatesleasehold improvements and equipment under capital leases over the lesser oftheir useful lives or the remainder of their respective lease terms.

Leasehold improvementsprimarily represent costs incurred for the build-out of the Company’scommercial manufacturing facility in Tewksbury, Massachusetts, which are beingdepreciated over the remaining initial lease term. Deposits on equipmentpurchases generally represent progress payments made for long-lead time capitalequipment purchases. Depreciation on leasehold improvements to this commercialmanufacturing facility commenced upon the latter of completion of theimprovements or October 2005, at which time the Company received anoccupancy permit and began operating use of the facility. Included in leaseholdimprovements at December 31, 2005 and 2006, prior to accumulateddepreciation and amortization, is capitalized interest in the amount of$813,000 related to the construction of the facility.

**6. IntellectualProperty**

The Company expenses intellectual property costsincurred in obtaining license rights and patents rights to technology orproducts for which technological feasibility has not been commerciallydemonstrated and no alternative future use has been shown to exist. No amounthas been capitalized by the Company relating to the costs of intellectualproperty developed or acquired by the Company.

F-18

----

Effective June 1, 2006, the Company entered intoan agreement to license on a non-exclusive basis various ultrasound-relatedintellectual property from GE Healthcare (“GE”), a division of General ElectricCompany. The agreement provides the Company with use of GE’s ultrasound contrastagent patents and patent applications in combination with the Company’s leadproduct candidate Imagify in the field of ultrasound contrast agents, as wellas any patents that GE acquires in the field within 12 months of the agreement.The term of the agreement extends until expiration of the last of the patentslicensed under the agreement. In consideration of the non-exclusive license ofthese patents, the Company agreed to pay GE $10.0 million prior to commercialapproval of Imagify, of which $5.0 million was paid in June 2006 and $5.0million is due in June 2007, which is included in current portion oflong-term obligations. In addition, the Company agreed to pay GE $5.0 millionupon the commercial approval of Imagify (defined as the first to occur of theapproval of a New Drug Application in the United States or the approval of aMarketing Authorization Application in Europe) and $5.0 million upon the oneyear anniversary of such commercial approval. The latter two $5.0 millionpayments are contingent upon achievement of future milestone events and,accordingly, have not been recorded at this time. For accounting purposes theCompany has not demonstrated technological feasibility or an alternative futureuse for these patents. Therefore, $9.5 million was expensed upon theconsummation of the agreement, representing the initial $5.0 million June 2006payment and the present value of the $5.0 million June 2007 payment.

Also effective June 1, 2006, the Company enteredinto an agreement to license on a non-exclusive basis variousultrasound-related intellectual property from Bracco International BV (“Bracco”).The agreement provides the Company with use of Bracco’s ultrasound-relatedpatents and patent applications in combination with the Company’s lead productcandidate Imagify in the field of ultrasound diagnostic imaging. The term ofthe agreement extends until expiration of the last of the patents licensedunder the agreement. In consideration for the non-exclusive license of thesepatents, the Company agreed to pay Bracco up to a total of Euros 3.0 million, of which Euros 0.5 million(approximately $0.6 million) was paid in June 2006. An additional Euros2.5 million is payable upon the Company’s achievement of certain definedregulatory milestones. The Company also agreed to pay a royalty on futureImagify revenue, up to a maximum royalty amount of Euros 10.0 million, less aportion of the above-referenced milestone payments. For accounting purposes theCompany has not demonstrated technological feasibility or an alternative futureuse for these patents. Therefore, the $0.6 million payment was expensed in June 2006when paid, whereas the other obligations have not been recorded since they arecontingent upon the outcome of future events.

On May 11, 2005, theCompany entered into a Patent Transfer Agreement with ScheringAktiengesellschaft (“Schering”) pursuant to which the Company acquired rights,title and interest in certain ultrasound-related patents from Schering. Inconsideration of the transfer and assignment of these patents, the Companyagreed to pay Schering a total of $7.0 million of which $1.0 million was paidin May 2005, $3.0 million was paid in May 2006, and $3.0 million isdue in May 2007. For accounting purposes the Company has not demonstratedtechnological feasibility or an alternative future use for these patents. Therefore,the present value of this acquisition cost, $6.2 million, was expensed in May 2005at the time of acquisition.

F-19

----

**7. Long-termObligations**

Thecarrying value of long-term obligations was as follows (in thousands):

| ** **                                          | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| Capital lease  obligations                          |       | $                                     | 65         |   | $ | 93 |   |
| Notes payable                                       |       | 15,696                                |       | 14,485 |   |
| Amounts due under  intellectual property agreements |       | 5,567                                 |       | 7,702 |   |
| Subtotal                                            |       | 21,263                                |       | 22,187 |   |
| Subtotal  long-term obligations                     |       | 21,328                                |       | 22,280 |   |
| Less current  maturities                            |       | 6,727                                 |       | 12,899 |   |
| Long-term obligations,  net                         |       | $                                     | 14,601     |   | $ | 9,381 |   |

 

Futurepayments under all capital leases, notes payable and other long-termobligations are as follows as of December 31, 2006:

| ** **                                     | ** ** | **Capital Lease  Obligations** | ** ** | **Notes Payable** | ** ** | **Other  Long-Term  Obligations** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|------------------------|------------|-----------------------------------|------------|
| **Year  Ending December 31,**             |       |                                |       |                   |       |                              |       |   |   |   |   |   |   |
| 2007                                           |       |                                | $          | 32                     |       |                              |       | $ | 6,337 |   |   |   | $ | 8,000 |   |   |
| 2008                                           |       |                                | 32         |                   |       |                              | 5,347      |   |   |   | — |   |   |
| 2009                                           |       |                                | 33         |                   |       |                              | 3,271      |   |   |   | — |   |   |
| 2010                                           |       |                                | 10         |                   |       |                              | 391        |   |   |   | — |   |   |
| 2011                                           |       |                                | —     |                   |       |                              | 328        |   |   |   | — |   |   |
| Thereafter                                     |       |                                | —     |                   |       |                              | 968        |   |   |   | — |   |   |
| Total future minimum payments                  |       |                                | 107        |                   |       |                              | 16,642     |   |   |   | 8,000 |   |   |
| Less amount  representing future interest      |       |                                | 14         |                   |       |                              | 2,157      |   |   |   | 298 |   |   |
| Present value of  future minimum payments      |       |                                | 93         |                   |       |                              | 14,485     |   |   |   | 7,702 |   |   |
| Less current portion  of long-term obligations |       |                                | 26         |                   |       |                              | 5,171      |   |   |   | 7,702 |   |   |
| Long-term portion of  long-term obligations    |       |                                | $          | 67                     |       |                              |       | $ | 9,314 |   |   |   | $ | — |   |   |

 

***Capital LeaseObligations***

The Company leases capitalequipment through Banc of America Leasing Corporation. The remaining monthlypayments range from $460 to $1,019 with maturities through June 2010.Interest rates for the above leases range from 7.3% to 9.4%. Acusphere does nothave any additional borrowing availability under these lease arrangements as ofDecember 31, 2006. At December 31, 2006 and 2005, the cost and netcarrying value of equipment under capital leases amounted to approximately $93,000 and $65,000.

***Notes Payable***

***Equipment Promissory Notes—***In April 2004, the Companyentered into an equipment financing line with General Electric CapitalCorporation. In 2004 and 2005, the Company borrowed an aggregate of $10.5million against this line. As of December 31, 2006, net of repayments, theCompany had $7.1 million outstandingunder this line. In January 2006, the line was amended and theavailability was increased by an additional $3.5 million and was extendedthrough May 2007. During 2006, the Company borrowed approximately $1.5million and has approximately $2.0 million, of this additional $3.5 million,remaining available at December 31, 2006. Such borrowings arecollateralized by equipment and other capital purchases made with the proceedsfrom these notes. Repayment due in monthly installments over 36 to 48 

F-20

----

***months, depending on the nature of the equipment financed,with the last such repayment scheduled for January 2010. Interest rates on these borrowings were fixed at the timeof each borrowing and range from 8.7% to 10.7%. The loans under this line aresubject to acceleration upon the occurrence of certain events of default,including failure to timely pay principal and interest.***

In June 2005, the Company entered into a $7.0million equipment financing line with Oxford Finance Corporation. In 2005 theCompany borrowed an aggregate of $7.0 million against this line. As of December 31,2006, net of repayments, the Company had $5.1 million outstanding under theline. Such borrowings are to be collateralized by corresponding qualifiedpurchases with repayment due in monthly installments over 36 to 48 months,depending on the nature of the equipment financed, with the last such repaymentscheduled for March 2010. Interest rates on these borrowings were fixed atthe time of each borrowing and range from 10.3% to 10.9%. No additional amountmay be borrowed under this line.

***Facility Loan Agreement—***In August 2004, Acusphereentered into a loan with MassDevelopment under which up to $2.0 million offinancing is available upon completion by Acusphere of certain tenantimprovements to its commercial manufacturing facility in Tewksbury,Massachusetts. Interest accrues under the loan at 5.0% per annum withretroactive adjustments to 9.0% in the event the Company achieves positiveoperating cash flow, as defined in the agreement, prior to repayment of theloan. The repayment of principal and accrued interest coincides with the termof the Tewksbury lease which has a five-year, nine-month term with options toextend the lease for up to two additional five-year terms. No payments were dueunder the loan for the first twenty-four months, the Company is scheduled tobegin loan repayments in May 2007. Unpaid interest during this twenty-fourmonth period is accrued and principal and accrued interest shall be repaid on amonthly basis thereafter such that the total amount outstanding shall fullyamortize over the balance of the term in equal installments. The loan issubject to acceleration upon certain customary events of default, includingfailure to timely pay principal and interest. In the first quarter of 2005, theCompany borrowed $2.0 million under this agreement, secured by certainimprovements made at the Tewksbury facility. As of December 31, 2006,Acusphere has $2.0 million outstanding under this financing arrangement,and has accrued interest payable of approximately $0.2 million related tothis loan.

The retroactive interestrate adjustment feature of the loan agreement was deemed to be an embeddedderivative instrument requiring separate accounting under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” and was initially valued at$62,000. The derivative asset is being amortized as interest expense over aterm beginning with the loan agreement effective date and ending with thecurrently expected payment date of the retroactive interest. The fair value ofthe derivative liability will be re-measured at each reporting period, with anychange in value charged or credited to interest expense. There was no change in the estimated fair value of thederivative liability at December 31, 2006.

***Amounts Due Under Intellectual Property Agreements***

***In connection with the Company’s intellectual propertyagreements with Schering and GE, the Company is scheduled to make payments of$3.0 million in May 2007 and $5.0 million in June 2007. As of December 31,2006, the Company has included $7.7 million in the current portion oflong-term obligations, representing the present value plus accreted interest ofthe payments due under the Schering and GE agreements.***

**8. DeferredRevenue**

In July 2004, the Company entered into acollaboration, license and supply agreement with Nycomed in which the Companygranted Nycomed rights to develop and market Imagify in Europe. As of December 31,2006, Nycomed has paid $12.0 million in license fees for the Company’s researchand 

F-21

----

development efforts, whichwas being recognized ratably in revenue over the development period, asdefined, initially estimated at 42 months in July 2004. Estimation of thisdevelopment period involves the evaluation of many assumptions and uncertaintiesinherent in the performance of a long term development project. The Companyregularly evaluates these assumptions and uncertainties and the estimateddevelopment recognition period may change if facts and circumstances change. Duringthe second and third quarters of 2006, management reevaluated the assumptionsunderlying the development term and revised the estimated development periodfrom 42 months as of March 31, 2006 to 48 months as of June 30, 2006,and then to 54 months as of September 30, 2006. The remaining $5.3 million of the $12.0 million indevelopment payments already received, but yet to be recognized as revenue, isincluded in deferred revenue at December 31, 2006 and will be recognizedover the remaining estimated development period.

In October 2005 and February 2006, theCompany and Nycomed amended the collaboration agreement to accelerate $2.0million in milestone payments in order to fund certain activities associatedwith brand development and qualification of a commercial manufacturingfacility. The $2.0 million in payments received pursuant to these amendmentsthrough December 31, 2006 are considered advances against a futuremilestone payment for a European regulatory filing, or Marketing AuthorizationApplication (“MAA”). This amount is classified as deferred revenue until theMAA milestone is achieved, provided that the applicable revenue recognitioncriteria are met.

In connection with theCompany’s agreement with Nycomed, the Company is obligated to pay a customaryfee to its financial advisor in this transaction. The total fee, of which$325,000, $285,000 and $180,000 was paidby the Company in 2004, 2005 and 2006, respectively, is comprised of cash andwarrants and is dependent upon the timing and magnitude of the amounts to bepaid by Nycomed to the Company.

**9. IncomeTaxes**

At December 31, 2006, Acusphere had a federal netoperating loss (“NOL”) carryforward for income tax purposes of approximately$182 million and a Massachusetts NOL of approximately $144 million. Acuspherealso has approximately $8.1 million of research and development (“R&D”)credits as of December 31, 2006 available to offset future income taxespayable, if any. The Tax Reform Act of 1986 contains provisions that may limitthe utilization of tax attributes (including NOL carryforwards and R&Dcredits) available to be used in any given year in the event of significantchanges in ownership interests, as defined in IRC Section 382.

Thecomponents of Acusphere’s deferred tax asset at December 31, 2005 and 2006are as follows:

| ** **                                     | ** ** | **2005**                | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                     | ** ** | **(in thousands)** | ** ** |
| Net operating  loss carryforwards              |       | $                       | 53,682     |     | $          | 70,761 |   |
| Temporary timing  differences:                 |       |                    |       |     |       |
| Revenue  recognition                           |       | 345                     |       | 2,550    |       |
| Start-up costs                                 |       | 6,849                   |       | 5,458    |       |
| Depreciation                                   |       | 3,077                   |       | 3,188    |       |
| Capitalized  patent costs                      |       | 2,694                   |       | 6,788    |       |
| Other                                          |       | 182                     |       | 2,032    |       |
| Subtotal                                       |       | 13,147                  |       | 20,016   |       |
| Research and  development credit carryforwards |       | 6,116                   |       | 8,139    |       |
| Deferred tax  asset                            |       | 72,945                  |       | 98,916   |       |
| Less valuation  allowance                      |       | (72,945                 | )          | (98,916  | )          |
|                                           |       | $                       | —     |     | $          | — |   |

 

F-22

----

The temporary differences principally consist ofcapitalized start-up expenses, capitalized patent license expenses anddepreciation adjustments for income tax purposes. Acusphere has established afull valuation allowance equal to the amount of its deferred tax asset as therealization of such asset is uncertain. The Company’s effective income tax rateis zero for all periods presented due to the full valuation allowance. Theincrease in the valuation allowance over the prior year is primarily due to theincrease in the NOL carryforward. The valuation allowance increased $16.8 millionfrom 2004 to 2005 primarily as a result of the Company’s net loss.

Theprimary factors affecting our income tax rates for U.S. federal statutorypurposes were as follows:

| ** **                              | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax provision at  U.S. statutory rate   |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| Research and  development credits       |       | (9.2     | )          | (1.8     | )          | (3.3     | )          |
| Permanent  differences                  |       | 0.5      |       | 2.3      |       | 1.0      |       |
| Temporary differences  fully valued     |       |     |       |     |       |     |       |
| Revenue recognition                     |       | 5.0      |       | 0.6      |       | 4.1      |       |
| Start-up costs                          |       | 9.4      |       | (3.7     | )          | (3.1     | )          |
| Capitalized intellectual property costs |       | --       |       | 5.0      |       | 5.8      |       |
| Other                                   |       | 3.4      |       | 0.8      |       | 3.0      |       |
| Valuation  allowance                    |       | (44.1    | )          | (38.2    | )          | (42.5    | )          |
| Effective tax rate                      |       | 0.0      | %          | 0.0      | %          | 0.0      | %          |

 

**10. Stockholders’Equity**

***Convertible Exchangeable Preferred Stock***

On February 24, 2005, the Company issued 900,000shares of 6.5% convertible exchangeable preferred stock (the “Preferred Stock”)at $50.00 per share resulting in aggregate gross proceeds to the Company of$45.0 million (net proceeds of approximately $41.9 million after deductingunderwriting discounts, commissions and offering expenses). Each share ofPreferred Stock has a liquidation preference of $50.00 per share. Dividends onthe Preferred Stock are cumulative from the date of original issue at theannual rate of $3.25 per share, payable quarterly on the first day of March,June, September, and December. Any dividends must be declared by the Company’sboard of directors and must come from funds that are legally available fordividend payments. As of December 31, 2006,dividends accumulated on the Preferred Stock totaled $4.8 million, of which$4.6 million have been paid.

In February 2007, the Company’s board of directorsdeclared a quarterly dividend on the Preferred Stock for all holders as ofFebruary 15, 2007. This dividend, which totalled $0.6 million inaggregate, was paid on March 1, 2007.

The Preferred Stock is convertible into the Company’scommon stock at any time at the option of the holder at a conversion rate of7.2886 shares of common stock for each share of Preferred Stock, based on aninitial conversion price of $6.86 per share. The initial conversion price issubject to adjustment in certain events, but is not subject to “price based”anti-dilution adjustment. The Company has reserved approximately 5.3 millionshares of common stock for issuance upon such conversion.

The Company may elect to automatically convert some orall of the Preferred Stock into shares of common stock if the closing price ofthe Company’s common stock has exceeded $10.30 per share (150% of theconversion price) for at least 20 trading days during any 30-day tradingperiod, ending within five trading days prior to notice of automaticconversion. Prior to March 1, 2009, if the Company elects to automaticallyconvert, or if any holder elects to voluntarily convert, the Preferred Stock,the Company will also make an additional payment (“Make-Whole” payment) equalto the aggregate amount of dividends that would have been payable on thePreferred Stock so converted from the original date of issuance 

F-23

----

through and including March 1,2009, less any dividends already paid on the Preferred Stock. This additionalpayment is payable by the Company, at its option, in cash, in additional sharesof its common stock, or in a combination of cash and shares of common stock.The Company has reserved a maximum of approximately 0.9 million shares ofcommon stock for issuance under this Make-Whole provision.

Through December 31, 2006, 170,000 shares ofPreferred Stock have been voluntarily converted into 1,239,067 shares of theCompany’s common stock. In connection with such conversions, the Company issuedan additional 304,052 shares of the Company’s common stock in satisfaction ofthe required Make-Whole payment. The fair valueof these Make-Whole payments was approximately $1.5 million, which was chargedagainst the derivative liability.

In accordance with SFAS No. 133, the Company isrequired to separate and account for as an embedded derivative, the dividendmake-whole payment feature of the Preferred Stock offering. As an embeddedderivative instrument, the dividend make-whole payment feature must be measuredat fair value and reflected as a liability. Changes in the fair value of thederivative are recognized in earnings as unrealized gain or loss on derivativein the statement of operations. The Company determined the fair value of thedividend make-whole payment feature to be $3.1 million at February 24,2005 (the commitment date). This amount was allocated from the proceeds of thePreferred Stock to the derivative liability. During 2005, make-whole paymentsrelated to the conversion of 160,000 shares were made and the derivativeliability was reduced for the fair value of these payments. At December 31,2005, the derivative liability was revalued at approximately $1.1 million.During 2006, make-whole payments related to the conversion of10,000 shares were made and the derivative liability was reduced for thefair value of these payments. At December 31, 2006, the derivative liabilitywas valued at approximately $0.1 million.

The Company may elect to redeem the Preferred Stock atdeclining redemption prices on or after March 6, 2009.

The Preferred Stock is exchangeable, in whole but notin part, at the option of the Company on any dividend payment date beginning onMarch 1, 2006 (the “Exchange Date”) for the Company’s 6.5% convertiblesubordinated debentures (“Debentures”) at the rate of $50 principal amount ofDebentures for each share of Preferred Stock. The Debentures, if issued, willmature 25 years after the Exchange Date and have terms substantially similar tothose of the Preferred Stock.

The Preferred Stock has no maturity date and no votingrights prior to conversion into common stock, except under limitedcircumstances.

***Conversions to Common Stock—***During the years ended December 31,2006 and 2005, 10,000 and 160,000 shares of Preferred Stock, respectively, werevoluntarily converted into 72,886 and 1,166,181 shares of the Company’s commonstock, respectively. In connection with such conversions, during 2006 and 2005the Company issued 15,526 and 288,526 additional shares of the Company’s commonstock in satisfaction of the required Make-Whole payment, respectively.

***Common Stock***

As of December 31, 2006, there were 98.5 millionshares of common stock authorized, 38.1 million shares of common stockoutstanding and 18.3 million shares of common stock reserved for issuances,representing 5.3 million shares reserved for issuance for in connection withoutstanding convertible exchangeable preferred stock, 0.9 million sharesreserved for issuance in connection with the make-whole payments provisions ofthe outstanding convertible exchangeable preferred stock, 6.7 million sharesreserved for issuance in connection with outstanding common stock warrants, 4.0million shares reserve for issuance in connection with outstanding stockoptions, 1.2 million shares reserved for issuance, in aggregate, in connectionwith shares available for future stock or option grants under the 2003 Plan and2005 Plan and 0.2 million shares reserved for issuance under the Purchase Plan.

F-24

----

On December 12, 2006, the Company sold 9,259,254units, each unit consisting of (i) one share of common stock and (ii) onefully vested warrant to purchase 0.4 shares of common stock at an exerciseprice of $3.11 per share, for a purchase price of $2.75 per unit, resulting inaggregate gross proceeds to the Company of $25.5 million (net proceeds ofapproximately $23.8 million after deducting underwriting discounts and commissionsand offering expenses). The shares of common stock and warrants wereimmediately separable and were issued separately. The warrants will beexercisable beginning on June 12, 2007 and until December 12, 2011.

On April 12, 2006, the Company sold 5,772,004 units,each unit consisting of (i) one share of common stock (ii) one fullyvested warrant to purchase 0.3 shares of common stock at an exercise price of$7.97 per share, for a purchase price of $6.9675 per unit, resulting inaggregate gross proceeds to the Company of $40.2 million (net proceeds ofapproximately $37.7 million after deducting underwriting discounts andcommissions and offering expenses). The shares of common stock and warrantswere immediately separable and were issued separately.  The warrants were exercisable beginning on October 12,2006 and until April 12, 2011.

On September 28, 2005, the Company sold 3,566,000shares of its common stock at $5.25 per share resulting in aggregate grossproceeds to the Company of $18.7 million (net proceeds of approximately $17.5million after deducting underwriting discounts, commissions and offeringexpenses).

In July 2004,Acusphere entered into definitive purchase agreements with institutional andaccredited investors for a $21.5 million private placement of up to3,440,000 newly issued shares of common stock at a price of $6.25 per share andwarrants to purchase up to an additional 688,000 shares of common stock at anexercise price of $8.50 per share. In August 2004, a partial closing ofthis private placement was consummated, resulting in aggregate gross proceedsto Acusphere of approximately $17.9 million (net proceeds of approximately$16.5 million) and the issuance of 2,865,522 shares of common stock andwarrants to purchase up to an additional 573,105 shares of common stock. In October 2004,a second and final closing of this private financing resulted in aggregategross proceeds to Acusphere of approximately $3.6 million (net proceeds ofapproximately $3.2 million) and the issuance of 574,478 shares of commonstock at a price of $6.25 per share and warrants to purchase up to anadditional 114,895 shares of common stock at an exercise price of $8.50 pershare.

***Equity Line of Credit Arrangement***

On August 31, 2006, the Company entered into whatis sometimes termed an equity line of credit arrangement with AzimuthOpportunity Ltd. The arrangement provides that, upon the terms and subject tothe conditions set forth therein, Azimuth is committed to purchase up to$30,000,000 of the Company’s common stock, or up to a maximum of approximately7.6 million shares of common stock (which would result in gross proceeds of$18.6 million based upon the $2.44 per share closing market price of theCompany’s common stock on December 29, 2006), whichever occurs first, overthe 18-month term of the agreement.

No share of common stock was issued nor was anycommitment fee paid to Azimuth in connection with the execution and delivery ofthe agreement. The Company is not required to sell any shares of common stockunder the agreement.

From time to time duringthe term of the agreement, and at the Company’s sole discretion, the Companymay present Azimuth with draw down notices requiring Azimuth to purchase theCompany’s common stock at a per share purchase price equal to the daily volumeweighted average price of the common stock, less a discount ranging from 3.875%to 5.875%. Through December 31, 2006 the Company has not issued any sharesunder this agreement.

F-25

----

**11. CommonStock Warrants**

As of December 31,2006, warrants to purchase shares of the Company’s common stock, theorigination of which were derived in connection with debt and lease financingtransactions, the collaborative agreement with Nycomed and the April 2006and December 2006 common stock offerings, were outstanding for anaggregate of 6,747,085 shares of common stock at an effective weighted averageprice of $5.64 per shares as follows:

| **Number of** | ** ** | **Exercise Price** | ** ** | **Expiration** | ** ** |
|--------------------|------------|-------------------------|------------|----------------|------------|
| **Shares**         | ** ** | **Per Share**      | ** ** | **Date**       | ** ** |
| 7,517              |       |                    | $          | 12.84          |       |   | June 6,  2007 |   |
| 5,194              |       |                    | 28.50      |           |       | February 21,  2008 |   |
| 3,404              |       |                    | 18.00      |           |       | February 26,  2008 |   |
| 450,897            |       |                    | 8.46       |           |       | April 11,  2008 |   |
| 684                |       |                    | 14.00      |           |       | April 11,  2008 |   |
| 7,540              |       |                    | 8.46       |           |       | June 27,  2008 |   |
| 573,105            |       |                    | 8.50       |           |       | August 2,  2008 |   |
| 16,212             |       |                    | 19.80      |           |       | October 16,  2008 |   |
| 14,934             |       |                    | 19.80      |           |       | October 19,  2008 |   |
| 114,895            |       |                    | 8.50       |           |       | October 20,  2008 |   |
| 55,732             |       |                    | 6.28       |           |       | November 30,  2009 |   |
| 2,688              |       |                    | 19.80      |           |       | January 5,  2010 |   |
| 30,844             |       |                    | 28.50      |           |       | March 30,  2011 |   |
| 28,138             |       |                    | 28.50      |           |       | September 27,  2011 |   |
| 1,731,600          |       |                    | 7.97       |           |       | April 12,  2011 |   |
| 3,703,701          |       |                    | 3.11       |           |       | December 12,  2011 |   |
| 6,747,085          |       |                    | $          | 5.64           |       |   |   |   |

 

On November 30, 2004, Acusphere issued a warrantto purchase up to 55,732 shares of its common stock at an exercise price of$6.28 per share to a financial adviser in consideration of its services to theCompany in connection with the consummation of its collaborative agreement withNycomed Danmark ApS. The warrant may be exercised any time and expires on November 30,2009. The number of shares issuable upon exercise of the warrant and theexercise price thereof is subject to adjustment from time to time in the eventof stock subdivisions, stock splits and stock combinations. The warrant doesnot include a cashless exercise feature. Acusphere recorded the deemed fairvalue of the warrant of $241,639, based upon the Black-Scholes option-pricing model,as a deferred consulting expense included in other assets, which is beingamortized over the collaborative agreement’s revenue recognition term asconsulting expense. Amortization expense recorded within general andadministrative costs during 2004, 2005 and 2006 totaled $35,000, $69,000 and$31,000, respectively.

No warrants were exercisedduring 2004, 2005 or 2006.

**12. Researchand License Agreements**

Acusphere has clinical andpre-clinical study research agreements with various institutions. Total expensesincurred amounted to approximately $4.8 million, $7.6 million and $5.3 millionin sponsored-research expenses relating to such agreements during the yearsended December 31, 2004, 2005 and 2006, respectively.

F-26

----

**13. Commitments**

***Operating Leases***—Acusphere has leased office,laboratory and manufacturing space under various agreements accounted for asoperating leases. During 2004, 2005 and 2006, rent expense totaledapproximately $2.9 million, $3.2 million and $3.4 million, respectively.

Acusphere’s Watertown, Massachusetts headquarters isunder a lease with an original term of 10-years, which began in December 2001.Acusphere maintains a $1.0 million security deposit as a condition of thislease. This deposit amount is included in other assets at December 31,2005 and 2006. In conjunction with the lease agreement Acusphere issued awarrant to the lessor allowing for the purchase of 30,844 shares of commonstock. Acusphere recorded the $0.5 million fair value of the warrant, basedupon the Black-Scholes option-pricing model, as deferred rent expense includedin other assets. This deferred rent is being amortized over the lease term asrent expense, with $0.1 million recordedwithin rent expense for each of the years ended December 31, 2004, 2005and 2006. During 2005, the term of this lease was extended by six months.

In July 2004, Acusphere entered into a leaseagreement for 58,000 square feet of commercial manufacturing space inTewksbury, Massachusetts. This lease has a five year, nine month term with optionsto extend the lease for up to two additional five-year terms at predeterminedrental rates. Under the lease, Acusphere received nine months of occupancy freeof base rent, followed by base rent of approximately $0.4 million for the nexttwelve months with scheduled annual rental rate increases thereafter. In October 2004,Acusphere paid an initial $1.0 million security deposit to the landlord aspart of the lease, subject to reduction if the Company made certainimprovements to the facility. As of December 31, 2004, $0.9 millionof this deposit amount was included in other current assets and$0.1 million was included in other assets. The $0.9 million wasrefunded to the Company during 2005. Theremaining $0.1 million is included in other assets at December 31, 2005and 2006.

Futureminimum payments due under the non-cancelable facility leases are as follows asof December 31, 2006 (in thousands):

| **Year Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                        |       | $          | 2,917      |       |
| 2008                                        |       | 3,060      |       |
| 2009                                        |       | 3,205      |       |
| 2010                                        |       | 2,887      |       |
| 2011                                        |       | 2,766      |       |
| Thereafter                                  |       | 1,432      |       |
|                                        |       | $          | 16,267     |       |

 

**14. EmployeeSavings Plan**

Acusphere has an employee savings plan covering allemployees of the Company who meet certain defined requirements. Under thisplan, which was adopted under Section 401(k) of the Internal RevenueCode, employees may elect to make tax-deferred contributions of up to 20% oftheir salaries, subject to certain limitations. During 2005 and 2006, theCompany provided a matching contribution of $142,000 and $205,000,respectively, representing 50% of contributions per employee, up to a maximumCompany contribution of $2,500 per employee. Under the 401(k) plan,employees are not eligible to invest directly in shares of Acusphere stock. TheCompany made no matching contributions in 2004.

F-27

----

**Item 15.2.**       SupplementalFinancial Statement Schedule - Quarterly Results of Operations (Unaudited)

Thefollowing is a summary of our unaudited quarterly results of operations for thefiscal years ended December 31, 2005 and 2006 (in thousands, except per sharedata):

| ** **                             | ** ** | **Revenue** | ** ** | **Net Loss** | ** ** | **Net Loss  Available to  Common  Stockholders** | ** ** | **Net Loss  Available to  Common  Stockholders  Per Share—  Basic and Diluted** | ** ** |
|----------------------------------------|------------|-------------|------------|-------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| **Year Ended December 31,  2005** |       |        |       |              |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| First Quarter                          |       |        | $          | 857               |       |                                                       | $          | (7,973                                                                                                        | )          |   | $ | (7,973 | ) |   |   | $ | (0.45 | ) |   |
| Second Quarter(1)                      |       |        | 857        |              |       | (15,343                                                    | )          |                                                                                                          | (16,375    | ) |   |   | (0.92 | ) |   |
| Third Quarter                          |       |        | 857        |              |       | (9,711                                                     | )          |                                                                                                          | (10,442    | ) |   |   | (0.58 | ) |   |
| Fourth Quarter                         |       |        | 857        |              |       | (11,599                                                    | )          |                                                                                                          | (12,254    | ) |   |   | (0.56 | ) |   |
| **Year Ended December 31,  2006** |       |        |       |              |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| First Quarter                          |       |        | 857        |              |       | (13,453                                                    | )          |                                                                                                          | (14,054    | ) |   |   | (0.61 | ) |   |
| Second Quarter(2) & (3)       |       |        | 246        |              |       | (22,877                                                    | )          |                                                                                                          | (23,470    | ) |   |   | (0.84 | ) |   |
| Third Quarter(3)                       |       |        | 12         |              |       | (12,742                                                    | )          |                                                                                                          | (13,335    | ) |   |   | (0.46 | ) |   |
| Fourth Quarter                         |       |        | 666        |              |       | (12,017                                                    | )          |                                                                                                          | (12,611    | ) |   |   | (0.39 | ) |   |
|                                        |            |             |            |                   |            |                                                            |            |                                                                                                               |            |  |  |  |  |  |  |  |  |  |  |

----

(1)          Our net loss for thesecond quarter of 2005 includes $6.2 million in expense from the Company’sacquisition of certain intellectual property rights from Schering in May 2005.

(2)          Our net loss for thesecond quarter of 2006 includes $10.1 million in expense from the Company’slicensing of certain intellectual property rights from GE and Bracco in June 2006.

(3)          Our revenue decreasefrom prior quarters reflects a change in the estimated development period overwhich the Nycomed collaboration revenue is being recognized. During the periodsof these changes in estimates, Q2 and Q3, no revenue was recognized under theNycomed development agreement.

F-28

----