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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

|(Mark One)                                                       |                                                                                         
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                                | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2004                     
|OR                                                              
|o                                                                | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                to

Commission File Number 000-50405

ACUSPHERE, INC.(Exact name of registrant as specified in its charter)

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

Registrant's telephone number, including area code:(617) 648-8800

Securities
registered pursuant to Section 12(b) of the Act: None

Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value(Title of class)

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

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

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

The aggregate market value of Common Stock held by non-affiliates of the registrant as of the last business day of the registrant's most recently
completed second fiscal quarter (based on the last reported sale price on The Nasdaq National Market as of such date) was $62,117,088, assuming that all officers, directors and persons deemed to be
the beneficial owner of 10% or more of our capital stock (in accordance with the rules of the Securities and Exchange Commission) are affiliates. As of March 11, 2005 there were 17,829,756
shares of the registrant's Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this report incorporates information by reference from the Company's definitive proxy statement, which proxy statement is due to be filed with
the Securities and Exchange Commission not later than 120 days after December 31, 2004.



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INTRODUCTORY NOTE

This report, including the documents incorporated by reference in this report, includes forward-looking statements. We have based these forward-looking statements
on our current expectations and projections about future events. Forward-looking statements involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor
provisions of the Private Securities Litigation 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," and similar expressions (as well as other words or expressions referencing future events, conditions or
circumstances) are intended to identify forward-looking statements. Forward-looking statements in these documents include, but are not limited to, those relating to:



Our
actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements. Any
forward-looking statement should be considered in light of factors discussed in Item 7 under "Certain Factors Which May Affect Future Results" and elsewhere in this Annual Report on
Form 10-K. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except
as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any
change in company expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set
forth in the forward-looking statements.

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TABLE OF CONTENTS



|PART I   |          | 
|-------- | -------- | 
|         | Item 1.  | 
|         | Item 2.  | 
|         | Item 3.  | 
|         | Item 4.  | 
|PART II  |          | 
|         | Item 5.  | 
|         | Item 6.  | 
|         | Item 7.  | 
|         | Item 7A. | 
|         | Item 8.  | 
|         | Item 9.  | 
|         | Item 9A. | 
|         | Item 9B. | 
|PART III |          | 
|         | Item 10. | 
|         | Item 11. | 
|         | Item 12. | 
|         | Item 13. | 
|         | Item 14. | 
|PART IV  |          | 
|         | Item 15. | 

|SIGNATURES    |  |                                                                                                                  
|------------- |  | -----------------------------------------------------------------------------------------------------------------
|EXHIBIT 3.01  |  | Amended and Restated Certificate of Incorporation                                                                
|EXHIBIT 3.03  |  | Certificate of Powers, Designations, Preferences and Rights of the 61/2% Convertible Exchangeable Preferred Stock
|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                                                                                      

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PART I

ITEM 1. BUSINESS

Overview

We are a specialty pharmaceutical company that develops new drugs and improved formulations of existing drugs using our proprietary porous microparticle
technology. We are focused on developing proprietary drugs that can offer significant benefits over existing drugs, including improved safety and efficacy, increased patient compliance, greater ease
of use, expanded indications or reduced cost. Our three product candidates for which we have clinical data are designed to address large unmet clinical needs in the areas of cardiology, oncology and
asthma. Our lead product candidate is an ultrasound contrast agent in Phase 3 clinical development for the detection of coronary heart disease, the leading cause of death in the United States.

Our
proprietary technology enables us to control the size and porosity of particles, including nanoparticles and microparticles, in a versatile manner, so that we can customize the
particles to address the delivery needs of a variety of drugs. We have initially applied this technology in our research and development efforts in the following areas:



Our Porous Microparticle Technology

Microparticles are useful in the delivery of a wide range of drugs. The suitability of microparticles for use in drug delivery depends on a variety of
characteristics, including size and porosity. Our technology enables us to control the size and porosity of nanoparticles and microparticles in a versatile manner so that we can customize the
particles to address the delivery needs of a variety of drugs. We are focused on creating porous particles that are smaller than red blood cells. These microparticles and nanoparticles can be used to
deliver gases or to deliver drugs to patients through various routes of delivery. Small microparticles are important for delivering drugs intravenously so that they can pass safely through the body's
smallest blood vessels, for increasing the surface area of a drug so that it will dissolve more rapidly, and for delivering drugs via inhalation. Porosity is important for a variety of applications,
including entrapping gases in microparticles, controlling the release rate of the drug from a microparticle, and targeting inhaled drugs to specific regions of the lung. We have developed proprietary
spray drying equipment and pore forming processes that enable us to produce these porous microparticles in a versatile manner.

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Using
our proprietary technology:



Our Strategy

In the last thirty years, a large worldwide market has emerged based on technologies that improve the delivery of established drugs in novel,
cost-effective ways by providing significant benefits, such as improved safety and efficacy, increased patient compliance, greater ease of use, expanded indications or reduced cost. Drug
delivery technologies can improve the commercial prospects for existing drugs by introducing new formulations that offer new delivery methods that may be patented and thereby protected. Traditionally,
drug delivery companies have earned royalties by applying their delivery technologies to create new formulations of existing drugs owned by others. Recently, some companies have begun developing new
drugs by using their proprietary 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 specialty pharmaceutical company that develops and commercializes new drugs and improved formulations of existing drugs using our porous microparticle
technology. Our strategy to accomplish that goal includes the following:

Advance Development of Our Lead Product Candidate, AI-700.We are currently enrolling patients in a Phase 3
clinical trial program for our lead product candidate, AI-700, a cardiovascular drug for the detection of coronary heart disease.

Focus on Proprietary Product Opportunities.We intend to focus on proprietary product opportunities, where we own broad
patent rights to the products. Due to our ownership interest in these product candidates and technology, we believe we would be able to negotiate corporate collaborations from a stronger position than
service-oriented companies that develop drug delivery technologies for patented drugs owned by pharmaceutical or biotechnology companies. We may retain the sales and marketing rights to our
proprietary products in specialty markets that we can readily address. For instance, our lead product candidate, AI-700, will initially be used by a subset of cardiologists, called
echocardiologists, who are generally hospital-based. We believe echocardiologists can be reached by a relatively small sales force of approximately 60 to 100 people in the United States. Therefore, we
believe AI-700 may be an attractive candidate for us to market and sell directly in the United States. In Europe, AI-700 will be marketed through Nycomed Danmark ApS (Nycomed),
a company with which we entered into a strategic collaboration in 2004. We intend to pursue other strategic partnering opportunities to market and sell AI-700 outside of the United States
and Europe. We may also in-license products or technologies which we believe are complementary or synergistic with our internally-developed product candidates or technologies.

Apply Our Proprietary Technology as Delivery Systems for Patented Drugs.We believe that our porous microparticle technology
can be applied to a wide variety of marketed as well as development stage drugs, including patented and off-patent drugs. Many patented drugs owned by large pharmaceutical companies are
hydrophobic or delivered by inhalation. These drugs could benefit from our HDDS and PDDS technologies. We plan to seek collaborations with companies that have patented

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drugs
that could benefit from the most compelling capabilities of our technologies. By focusing on drugs where the advantages of our technologies are most compelling, we believe we will be in an
attractive position when negotiating the terms of these collaborations.

Focus on Large Markets Where Our Product Candidates Can Address Significant Unmet Clinical Needs.We are focused on developing proprietary
drugs for large markets within cardiology, oncology and asthma where we believe our porous microparticle technology can provide compelling clinical advantages over current approaches. For example, we
believe our lead product candidate, AI-700, will provide a low cost and convenient alternative for the detection of coronary heart disease with respect to this initially targeted
indication. We believe the potential market opportunity for AI-700 is approximately $2.1 billion in the United States and even larger worldwide.

Product Development Programs

Our proprietary porous microparticle technology has been used to create product candidates that may address large unmet clinical needs within cardiology, oncology
and asthma.

AI-700, Intravenous Delivery of Gas for Ultrasound Contrast

Broad Applications for Ultrasound Contrast.We have developed an intravenous delivery system for gas that has the potential
to expand the usefulness of ultrasound in the detection of coronary heart disease. Ultrasound is one of the least expensive and most frequently used imaging techniques that permit physicians to view
the inside of the body. However, ultrasound is the only frequently used imaging technique without a commercially significant contrast agent. As a result, the clarity of ultrasound is often inadequate
for a definitive assessment of medical conditions. A contrast agent that could provide more detail and clarity and thereby improve the diagnostic image produced could expand the usefulness of
ultrasound. Gases are attractive contrast agents for ultrasound because they reflect ultrasound waves more efficiently than blood or body tissues, enabling their detection by the ultrasound machine.
Gas injected intravenously can potentially act as a tracer of abnormal blood flow, which is associated with many life-threatening diseases such as coronary heart disease. However, gas
rapidly dissolves in blood thereby losing its effectiveness. As a result, microparticles that can entrap the gas and be administered intravenously are necessary in order to develop an ultrasound
contrast agent with broad applications.

Coronary Heart Disease Market.According to the American Heart Association, or AHA, almost 13.0 million people in the
United States suffer from coronary heart disease, the leading cause of death in the United States. Coronary heart disease is characterized by the accumulation of plaque, which narrows coronary
arteries and reduces blood flow in the heart muscle. The AHA projects that in 2005, approximately $71.0 billion will be spent on direct medical expenses for coronary heart disease in the United
States. Early detection of coronary heart disease can reduce treatment costs, increase patient survival and improve quality of life.

The
definitive method for the detection of coronary heart disease is coronary angiography, an expensive and invasive procedure impractical for use as a routine screening tool. Two of the
most common methods for coronary heart disease screening are nuclear stress imaging and stress echocardiography, which is ultrasound of the heart. We estimate that 10.7 million of these
screening procedures were performed collectively in the United States in 2004. We believe that a contrast agent that enables the assessment of blood flow in the heart muscle, or myocardial perfusion,
with ultrasound could replace many of these screening procedures. We believe that an ultrasound contrast agent capable of myocardial perfusion assessment could be priced at $200 per procedure,
including both rest and stress evaluations. Assuming all of these procedures were performed using ultrasound with an effective contrast agent at this price, we estimate the potential U.S. ultrasound
contrast market for the cardiac indication of A1-700 to be approximately $2.1 billion.

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Current Practice for Coronary Heart Disease Screening.Nuclear stress tests assess myocardial perfusion, or blood flow in the
heart muscle. Nuclear stress tests involve the intravenous injection of a radioactive compound, followed by scans of the heart using a special camera while the patient is at rest and under stressed
conditions. These tests typically take about five hours to complete, the results are not available immediately as post-processing is required, do not provide real-time results,
cost approximately $770 per procedure, and, due to significant capital equipment costs and complex regulatory requirements associated with the use of radioactive materials, are not available in many
hospital or physician office settings. We estimate that 8.0 million nuclear stress tests were conducted in the United States in 2004.

Stress
echocardiography, or stress echo, assesses the motion of the heart wall. Advanced coronary heart disease typically results in abnormal blood flow in the heart muscle, which in
turn causes abnormal wall motion that can be detected by the ultrasound machine used in stress echo. Although myocardial perfusion information from nuclear stress tests provides the most direct
information about blood flow in the heart muscle, stress echo provides dynamic, real-time information about regional heart function. This additional information, along with the greater
availability of ultrasound over nuclear equipment, results in the use of stress echo as a screening method in many hospital and physician office settings. Stress echo involves the use of
high-frequency sound waves that are bounced off of the heart wall while the patient is at rest and under stressed conditions. We estimate that 2.7 million stress echo procedures
were conducted in the United States in 2004. However, stress echo is often inadequate for a definitive assessment of coronary heart disease. For instance, the motion of the heart wall can be difficult
to see under stress conditions, particularly in obese patients. In addition, stress echo without use of a contrast agent is not approved for the detection of defects in myocardial perfusion.

There
is no ultrasound contrast agent approved by the FDA for use in stress echo or myocardial perfusion imaging. Ultrasound contrast agents have been approved by the FDA for left
ventricular opacification ("LVO") and endocardial border delineation ("EBD") in patients with suboptimal images. LVO is image enhancement of blood volume in the left ventricular chamber of the heart.
EBD is image enhancement of the borders of the ventricular chambers. However, we believe that this indication has limited clinical utility because ultrasound is usually capable of assessing LVO and
EBD without a contrast agent. We estimate that less than 20% of all resting echocardiograms require a contrast agent for resting wall motion assessment.

Our Solution, AI-700, a Synthetic Polymer Microparticle.Using our porous microparticle technology, we
specifically designed AI-700 for myocardial perfusion assessment. Currently in Phase 3 clinical trials, AI-700 is an ultrasound contrast agent that is being developed to enable
stress echo to provide information on myocardial perfusion in addition to wall motion. Based on the results of our Phase 2 clinical trials, we believe that stress echo with AI-700 has the
potential to provide information comparable to the nuclear stress tests, while retaining the advantages of ultrasound.

We
believe we have overcome many of the limitations of other ultrasound contrast agents by developing an intravenous gas delivery system made from a synthetic polymer. All of the
ultrasound contrast agents currently approved by the FDA for LVO and EBD in patients with suboptimal images deliver gas intravenously in fragile systems made from natural materials. When exposed to
the power of the ultrasound beam during the imaging procedure, these natural materials are so fragile they rupture and release the gas into the blood, where it dissolves, thereafter rendering these
contrast agents ineffective. Moreover, some ultrasound contrast agents encapsulate nitrogen, which dissolves quickly in water. Such contrast agents have a very short duration of enhancement because
the nitrogen is quickly pushed out of the microbubble and displaced with water. Ultrasound contrast agents made from natural materials or containing nitrogen have only been approved by the FDA for LVO
and EBD in patients with suboptimal images and we believe they are difficult to use in myocardial perfusion imaging, which is more technically demanding. Unlike the natural materials used in
FDA-approved ultrasound contrast

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agents,
the synthetic polymers used in AI-700 do not break during the imaging procedure. In addition, perfluorocarbon gases are less soluble in water and therefore have the propensity to
stay inside the microparticle. As a result, we can deliver a higher concentration of gas to the myocardium over a longer period of time, thereby enabling AI-700 to target the broader
application of myocardial perfusion assessment. AI-700 is a dry powder consisting of small, porous microparticles filled with a perfluorocarbon gas. These microparticles are made of a
synthetic biodegradable polymer, called poly (D, L-lactide co-glycolide), or PLGA, that has been used in other drug delivery systems approved by the FDA. The composition and
structure of the microparticles, which also contain a phospholipid, and the properties of the perfluorocarbon gas slow the rate at which the gas dissolves and prevent the microparticles from being
quickly broken down inside the body. These microparticles are suspended in sterile water and injected into the body by intravenous injection. AI-700 was designed to be easy to use with
commercially available ultrasound equipment and established imaging techniques.

Potential Benefits of Stress Echo with AI-700 vs. Nuclear Stress Tests

Stress echo with AI-700 has the potential to significantly reduce the time, cost and resources needed in the assessment of myocardial perfusion.



Potential Benefits of Stress Echo with AI-700 vs. Stress Echo without Contrast

Stress echo with AI-700 has the potential to provide broader information for cardiac evaluation.

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Clinical Results.We enrolled over 200 human subjects in our Phase 1 and Phase 2 clinical trials for AI-700. Our
Phase 1 clinical trials evaluated the safety and feasibility of myocardial perfusion imaging with AI-700. Our Phase 2 clinical trials evaluated the preliminary safety and efficacy of
AI-700 enhanced ultrasound imaging. In our Phase 2 clinical trials, efficacy was measured by comparing the results obtained from myocardial perfusion assessment using AI-700
enhanced ultrasound with those obtained using nuclear stress tests. Our Phase 1 and Phase 2 clinical trials were conducted in the U.S. under an Investigational New Drug Application, or IND. The
results of our Phase 2 trials are summarized below. We have filed these results and our protocols for our Phase 3 trials with the FDA. We initiated our Phase 3 clinical program in 2003.

The "20" Trial.Our objectives in the "20" trial were to evaluate the safety of AI-700 in subjects with known
coronary heart disease as well as in healthy subjects and to determine the optimal imaging procedures for myocardial perfusion assessment using AI-700 enhanced echocardiography. The study
included 53 subjects, was conducted by echocardiologists and utilized a variety of commercially available equipment platforms. Subjects enrolled in the "20" trial received a single injection of
AI-700 at a variety of doses and were imaged under resting conditions only. The primary efficacy endpoint was agreement between echocardiography with AI-700 and nuclear.
Agreement was defined as the percentage of subjects who received the same diagnosis using AI-700 enhanced echocardiography as with nuclear. At the optimal imaging conditions identified
during the trial, we met the primary endpoint of this trial.

The "21" Trial.Our objectives in the "21" trial were to evaluate the safety and diagnostic efficacy of AI-700 in
patients with suspected or confirmed coronary heart disease as well as in healthy subjects. The study included 122 subjects, was conducted by echocardiologists and utilized a variety of commercially
available ultrasound equipment platforms and imaging techniques. A variety of doses of AI-700 were evaluated in the trial. Patients enrolled in the "21" trial received two injections of
AI-700, one under resting conditions and the other under stressed conditions. All patients received a nuclear stress test and either a stress echo with AI-700 or a stress echo
without contrast. The primary efficacy analysis was based on the
ability of independent echocardiologists, blinded to all other information, to detect myocardial defects when comparing stress echo images to nuclear stress. In the "21" trial we met the primary
efficacy endpoints, which were sensitivity, or the ability to detect disease, and specificity, or the ability to determine the absence of disease.

Efficacy data.Comparison of stress echo with AI-700 and nuclear stress for subjects in our Phase 2 trials
indicated the following:



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Safety Data.None of the subjects in our Phase 1 and 2 clinical trials had serious adverse experiences after the
administration of AI-700. The majority of the adverse experiences observed after administration of AI-700 were mild in intensity and of short duration.

The Phase 3 Program: Detection of Coronary Disease in Patients Being Evaluated for Ischemic Heart Disease.Our Phase 3 program for
AI-700 commenced in 2003 under a U.S. Investigational New Drug application and in compliance with applicable European regulatory requirements. The Phase 3 clinical plan provides for a
two-part program consisting of a pilot phase (the "pilot study"), under which new investigators and blinded readers have been qualified and trained, and two multi-center pivotal trials
(the "32" and "33" trials), each seeking to enroll
approximately 300 patients with known or suspected coronary heart disease. The Phase 3 pivotal studies are currently taking place at clinical sites located in North America, Europe and Australia with
data from the trials intended for submission to U.S., European and potentially other regulatory authorities. As of March 2005, over 300 patients have been enrolled in the Phase 3 pivotal trials
and over 400 patients have been enrolled in the Phase 3 program, including the pivotal trials and the pilot study. We currently anticipate completing cumulative enrollment of at least 600 patients in
the pivotal trials during the second half of 2005.

The Pilot Study.Our objectives in the pilot study were to train and qualify a sufficient number of clinical sites,
investigators and blinded readers for transition into one of the two pivotal trials. These objectives have been accomplished. Clinical sites that were trained in the pilot study transitioned into a
pivotal trial when, in our judgment, the clinical site demonstrated that it is prepared to meet the requirements of the clinical trial protocol which, in the pivotal trial requiring nuclear stress
tests in all patients, includes conducting both stress echo and stress nuclear studies on the same patient on the same day. Because the pilot study has been conducted for training purposes, there are
no defined clinical efficacy endpoints in this study.

The Pivotal Trials.More than twenty clinical sites are participating in the pivotal trials, and both trials are active in
enrolling patients. As part of the Phase 3 pivotal study design, the evaluation of the stress echo and nuclear stress images from the pivotal trials is performed by panels of blinded readers who
receive no information about the patient being evaluated other than the images. The primary efficacy endpoints relative to nuclear stress tests and angiography are set at thresholds that are the same
or lower than those already achieved in our Phase 2 trial results. Safety will continue to be tested and evaluated during our pivotal trials.

The "32" Trial.All of the patients enrolled in this trial will receive a stress echo study with AI-700 and a
nuclear stress test. Patients in this pivotal trial may undergo coronary angiography particularly if they have a positive nuclear stress test result. Patients in this pivotal trial who have a negative
nuclear stress test result will be evaluated for ninety days thereafter for cardiac events. The primary endpoints for this pivotal trial are sensitivity and specificity in comparison to nuclear stress
testing, angiography or clinical outcome.

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The "33" Trial.All of the patients enrolled in this trial will receive a stress echo study with
AI-700 and will
undergo coronary angiography. The majority of patients, but not all, will receive a nuclear stress test. The primary endpoints for this pivotal trial are sensitivity and specificity in comparison to
angiography.

Although
we are targeting these clinical endpoints and timing for clinical enrollment in our Phase 3 trials, we cannot assure you that we will successfully achieve results that meet or
exceed these clinical endpoints or that enrollment will be completed in 2005.

Future Indications.Since AI-700 circulates in the blood and acts as a tracer of blood flow, we believe it has
the potential to assist in the assessment of a wide variety of diseases in addition to coronary heart disease. Abnormal blood flow is associated with several life threatening diseases including
various forms of cancer, renal artery stenosis and deep vein thrombosis. These diseases often cannot be adequately assessed with ultrasound imaging without contrast, and as a result radiologists
currently detect these diseases with more expensive imaging techniques, such as computerized tomography, angiography, nuclear medicine and venography. Ultrasound imaging using AI-700 may
offer a cost-effective alternative to these expensive techniques.



Broad Applications for the Delivery of Hydrophobic Drugs.We have developed a proprietary formulation technology called HDDS
that converts drugs that do not dissolve well in water, or hydrophobic drugs, into microparticles or nanoparticles of the drugs embedded in small microparticles, such that the drugs can rapidly
dissolve in water. Formulation of hydrophobic drugs is often challenging. Since the human body is primarily composed of water, hydrophobic drugs do not dissolve well in the body, which can limit the
effectiveness of these drugs. Many promising drugs never make it to market because they are difficult to dissolve. Drug programs are often abandoned after significant investment because suitable
formulations for these insoluble drugs are elusive. Many hydrophobic drugs that do make it to market have less than ideal formulations. Developing intravenous formulations of hydrophobic drugs is
particularly challenging. Intravenous formulations of drugs can open new markets for drugs like antibiotics that could often be initially prescribed in a hospital setting. In addition, intravenous
formulations can expand the market for the oral dosage formulation because physicians typically prefer
to discharge patients on the oral formulation of the intravenous formulation administered to the patient in the hospital.

Market for Hydrophobic Drug Delivery.We believe that FDA-approved hydrophobic pharmaceuticals generated
$120 billion in revenues in 2002. Taxol®, a leading cancer drug with worldwide revenues of $991 million in 2004, is an example of a hydrophobic drug with a less than ideal
formulation.

Current Practice.Many hydrophobic drugs are comprised of particles that are relatively large and therefore have a limited
surface area available for interaction with water. These hydrophobic drugs are often formulated in less than ideal ways in order to make them dissolve. It is possible to increase the dissolution rate
of some hydrophobic drugs by increasing their aggregate surface area. To accomplish this, many pharmaceutical companies use a process called micronization, which entails grinding hydrophobic drugs
into smaller microparticles. However, the drug particles produced by micronization are often still not small enough to adequately improve dissolution, or to be administered intravenously.
Alternatively, oils like Cremophor® are used to dissolve the drugs. However, these oils are often not well tolerated and can require prolonged infusion rather than rapid injections to
minimize potential side effects. In addition, some hydrophobic drugs can be formulated into soft gelatin capsules, but these are only suitable for oral administration and encapsulate only a small
volume of drug, requiring the administration of many capsules. Sometimes development of these drugs must be terminated because no suitable formulation can be found.

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Our Solution: Rapidly Dissolving Sponge-Like Particles.We have demonstrated that our HDDS technology improves
the dissolution rate of a variety of hydrophobic drugs. HDDS has achieved up to 30-fold increases in the dissolution rate of a variety of hydrophobic drugs. HDDS has produced drug
formulations that are well-tolerated in pre-clinical studies and we believe would be suitable for all routes of administration, without resorting to the use of unsafe or
unproven additives to formulate the drug.

AI-850, Human Proof of HDDS Concept.AI-850, our initial product candidate utilizing our HDDS
technology, is a readily dissolving formulation of the hydrophobic drug, paclitaxel, the active ingredient in the cancer drug, Taxol®. To dissolve paclitaxel, Taxol® contains
Cremophor®, which is believed to cause severe hypersensitivity reactions, including an extreme allergic reaction called anaphylaxis. Therefore, Taxol® is typically administered
using pre-medications and by long infusions to patients with cancer. By putting paclitaxel into our sponge-like microparticles, we have created a paclitaxel formulation that is
free of Cremophor®.

Product Development Status.Our Phase 1 human safety study of AI-850 was completed during 2004. The primary goal
of the study was to provide human proof-of-concept that our Hydrophobic Drug Delivery System (HDDS) is capable of intravenously delivering hydrophobic drugs
without the need for co-solvents that are inconvenient to administer and are associated with undesirable side effects. The primary objective of this trial was to determine the maximum
tolerated dose ("MTD") of AI-850. In the dose escalation study, 22 patients with solid tumors (taxane naïve patients and patients who previously had received taxane therapy)
were treated with AI-850 without standard taxane pre-medications in doses up to 250 mg/m2. Infusions of AI-850 were delivered in less than 30 minutes
at all doses, which is significantly shorter that the three-hour infusion typically required by Taxol®. The MTD of AI-850 for patients with extensive prior taxane
therapy was 205 mg/m2, which is higher than the Taxol® dose of 175 mg/m2 typically used to treat taxane naïve patients with metastatic breast
cancer. It is our current plan to seek strategic collaborators for AI-850 before commencing additional clinical testing of this product candidate.

Future Hydrophobic Drug Delivery Product Candidates.In addition to the human data generated in the AI-850 Phase
1 trial, we have demonstrated that our HDDS technology improves the dissolution rate of a variety of orally administered, intravenously administered and inhaled hydrophobic drugs, including
COX-2 inhibitors, taxanes, calcium channel blockers and anti-fungals. We will seek opportunities to work with other companies on improving their patented hydrophobic drugs and
product candidates. In 2003, in conjunction with a large pharmaceutical company, we initiated a feasibility study for the potential application of our HDDS technology in order to create an intravenous
formulation of a patented drug approved by the FDA for oral administration. An intravenous formulation of this drug may enable the drug to address a new indication for a life-threatening
disease that is treated in the hospital setting. In addition, we will evaluate the feasibility of developing, on our own or in collaboration with others, improved formulations of
off-patent hydrophobic drugs.



Broad Applications for Sustained Release in the Lung.A sustained release delivery system for drugs delivered
locally to the lung would be desirable for the treatment of respiratory disease. Relative to systemic drug delivery by the oral or injectable routes, local delivery of respiratory drugs by the
pulmonary route allows smaller doses of the drug and minimizes systemic toxicity because the drug can be delivered directly to the site of the disease. Moreover, sustained release of respiratory drugs
may offer significant clinical benefit to millions of respiratory patients, including a growing percentage of pediatric patients, by allowing them to take treatments for such diseases as asthma less
frequently, and to receive more prolonged and steadier relief. We believe sustained delivery of drugs to the lung also offers the potential for improved safety, by moderating the drug peaks and
troughs of immediate

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release
drugs, which can cause added toxicity or reduced efficacy. Our initial development efforts have focused on developing sustained release formulations of asthma drugs. The worldwide 2003 market
for inhaled respiratory drugs was $9.7 billion. We believe the delivery of long-acting drugs to the lungs represents a significant medical opportunity. We are not aware of any other
sustained release respiratory drug that has been approved or is in clinical trials.

Current Practice.Current pulmonary delivery systems are not ideal, delivering inaccurate doses, requiring frequent dosing
and losing significant amounts of drug in the delivery process. Most asthma drugs delivered by inhalation are immediate release formulations that must be inhaled multiple times per day, which
discourages patient compliance. When patients forget to take their medicine during the day, they may experience complications which may result in increased emergency room visits and hospitalizations.
In a recent study, two thirds of all asthma patients did not take their medications as directed. In addition, immediate release formulations often deliver drug levels that peak and trough, causing
undesirable toxicity or inadequate efficacy.

Our Solution: Slowly Dissolving Whiffle Ball-Like Microparticles.By controlling particle size, particle porosity
and thus density, and particle composition, and therefore the aerodynamic properties of a particle, our PDDS technology controls where drug particles go in the lung and how quickly they release their
drug. This tight control of release rate, and targeting within the lungs, may enable our PDDS technology to address many of the hurdles of sustained release pulmonary delivery.

AI-128, Our Improved Formulation of an Asthma Drug.AI-128 is our initial product candidate utilizing
our PDDS technology. AI-128 is a sustained release, dry powder formulation of a widely used asthma drug. We believe that AI-128 is the first human demonstration of sustained
release drug administration in the lung. AI-128 was originally developed as part of a joint venture with Elan Corporation, plc and affiliates established in 2000. In 2002, for reasons
beyond our control, and, to our knowledge, not based on Elan's perception of the performance or prospects of our technology, Elan ceased funding the joint venture,
and the joint venture was terminated. In connection with the termination, we agreed to pay Elan a royalty if we commercialize AI-128.

Potential Benefits over Approved Formulations.With once-a-day dosing, we believe AI-128
would be more convenient for the patient, reducing non-compliance related complications and costs. By controlling the release rate of the drug to the lung, AI-128 offers the
potential for improved safety. Slowing drug release in the lung offers the potential for a lower peak concentration of drug in the systemic circulation.

Clinical Results.We completed a European Phase 1 clinical trial with AI-128. The study was conducted in
accordance with applicable local regulatory requirements. In this trial, we demonstrated that approximately 80% of inhaled AI-128 was delivered to the intended target, the upper lung.
These trials also demonstrated that the microparticles remained in the lung for up to 24 hours, the period of time that we believe is required for once-daily dosing, and that the
drug was released from the microparticles in the lung over a 12 to 24-hour period.

Future Applications.We believe our PDDS technology may enable improved formulations of other locally acting asthma drugs as
well as allow drugs that must be delivered into the bloodstream for systemic therapy to be administered by inhalation through the lung. We have demonstrated 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 the
benefits AI-128 potentially offers. Moreover, many large molecule drugs, such as proteins, cannot be delivered orally because they are destroyed by enzymes in the gastrointestinal system.
As a result, they often must be injected subcutaneously or intramuscularly several times per week in order to get an adequate amount of the drug into the body's general circulation. Since the lung
does not contain these destructive enzymes, systemic delivery of these drugs via the pulmonary route could be more

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convenient
and require less dosing. We plan to seek both proprietary and collaborative opportunities for these drug formulations.

Research and Development

Over the past three fiscal years, we have made material expenditures on research and development. In the fiscal years ending December 31, 2002, 2003, and
2004, research and development expenses were approximately $13.5 million, $14.2 million and $25.6 million, respectively.

Our Proprietary Microparticle Technology

Microparticles are useful in the delivery of a wide range of drugs. Suitability of microparticles for use in pharmaceuticals depends on a variety of factors,
including size and porosity. Smaller microparticles have a broader range of utility, such as intravenous and pulmonary delivery applications. Depending on the targeted site and desired route of
delivery, drug delivery technologies utilize microparticles of various sizes. Our porous microparticle technology enables us to produce very small microparticles that are smaller than a red blood cell
and with a wide range of porosities.



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

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

Small
microparticles are microparticles smaller than 10 microns, which is approximately the size of a human red blood cell. Small microparticles include nanoparticles, which are
particles smaller than 1 micron. Small microparticles are small enough to pass through the capillaries for intravenous delivery; are small enough to be readily inhaled for pulmonary delivery; and have
more total surface area per unit of weight relative to larger microparticles, making them a particularly efficient method for delivering hydrophobic drugs. Intravenous delivery is desirable 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 is also used for drugs that must be injected but with a dose
too high for intramuscular or subcutaneous delivery. Drugs are also administered intravenously, 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 as ultrasound contrast agents, as delivery systems for hydrophobic drugs, and as
delivery vehicles for asthma drugs.



The ability to vary the porosity of microparticles on a consistent basis can be critical to the successful use of microparticles in pharmaceutical products. For
instance, in ultrasound contrast imaging, we believe it is advantageous to use microparticles that are highly porous on the inside but

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with
limited porosity in the shell. Porosity on the inside of microparticles enables them to contain more of the active ingredient, which is gas, than particles that are dense. Limiting porosity in
the shell prevents gas leakage and enables the retention of the gas inside the particle. Furthermore, pores can facilitate absorption of water into a microparticle, which is useful in getting
hydrophobic drugs to dissolve more quickly, and useful for controlling the release of a drug from a sustained release system. Finally, in drug delivery to the lung, it is advantageous to use
microparticles of various porosities, which controls density, because the size and density of the microparticles dictates where in the lung they will be delivered.



We believe the use of small, porous microparticles has not reached its full potential in the delivery of drugs. We believe that current manufacturing processes
for creating small microparticles have low yields, have not been adapted for use with encapsulating materials like synthetic polymers, have low encapsulation efficiency and are difficult to combine
with other technologies, such as coating technologies. We believe that the use of porosity to improve drug formulations has been underutilized because an efficient process for creating porous
microparticles at commercial scale did not exist. Our porous microparticle technology was designed to address the limitations of existing manufacturing processes.

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



Our
proprietary porous microparticle technology platform consists of two key componentsa multi-chamber spray dryer and pore-forming agents.



We believe we have overcome the limitations of standard spray drying in producing small microparticles and nanoparticles through patented equipment innovations
that:



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

In
order to produce microparticles and nanoparticles to be used in drugs delivered intravenously, the particles must be produced aseptically. We have improved standard spray dryers by
making them suitable for aseptic processing. Our spray dryers operate under positive pressure, minimizing the risk of pulling contaminants into the process from the surrounding environment. In
addition, our spray dryers are composed of stainless steel and Teflon components to mitigate against shedding into the product during processing, and can be sterilized using steam sterilization
techniques.

We
have made these improvements to standard spray drying processes and equipment without altering the fundamental advantages of standard spray drying. Like standard spray dryers, our
spray dryers enable a single-step, continuous process that is efficient in encapsulating up to 100% of the active ingredient, and can be used with either synthetic or natural materials.



We have developed a patented process technology for creating porous microparticles. To create pores in our microparticles we add pore-forming agents
to the solution before we put it through the spray dryer. These pore-forming agents create bubbles, similar to the bubbles in carbonated beverages. These bubbles are formed while the
solution is being converted into a
microparticle in the spray dryer. The bubbles create pores in the microparticle and the pore-forming agents are removed during the drying process. We can vary the number and size of the
pores by varying the amount of pore-forming agents we add to the process. In this way we can design microparticles that are porous or sponge-like.

Reimbursement

We intend to focus on obtaining coverage and reimbursement from Medicare, Medicaid and private insurers for our product candidates. Although there can be no
assurance that we will be successful in obtaining third-party reimbursement, we believe we will be successful in obtaining this reimbursement for our lead product candidate, AI-700.

Effective
January 2001, the Centers for Medicare and Medicaid Services, formerly known as the Health Care Financing Administration, implemented a reimbursement code that provides
for reimbursement for the use of injectable contrast material in echocardiography in a physician's office and hospital outpatient setting. Currently, the reimbursed rate for all three of the
ultrasound contrast agents FDA-approved for use in LVO and EBD in patients with suboptimal images is over $100 per vial. Although private insurers make their own decisions on reimbursement, they
typically follow the lead of the Centers for Medicare and Medicaid Services, which manage reimbursement for Medicare and Medicaid.

We
plan to apply for a new reimbursement code at a higher rate. We believe ultrasound imaging using AI-700 for myocardial perfusion assessment, which involves dosing of
patients for a resting echo

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study
followed by a second dose for a stress echo study, will provide at least the same clinical information as nuclear stress tests (which also requires dosing for a rest study followed by dosing for
a stress study), but at much lower total study cost, due in part to higher capital equipment costs, longer procedure times and radioactive material handling issues associated with nuclear stress
tests. Given these expected cost advantages, we believe that AI-700 will ultimately obtain adequate reimbursement in this era of managed care, where the federal government and private
insurers are striving to lower the total cost of delivering state-of-the-art healthcare. Further, in the treatment of hospital inpatients, who are usually subject
to a fixed total reimbursement based solely on their diagnosis and not on the test used, we expect that hospital staffs will be encouraged to use the much lower cost ultrasound test with
AI-700, if and when it is approved by FDA, rather than the more expensive nuclear test. Our efforts to obtain a higher reimbursement rate can begin prior to our product's approval and will
probably require about two years for completion. The current reimbursement codes cover hospital outpatient and physician offices, which are the locations where almost all stress echoes are performed.
In the period immediately following the potential launch of our product, we believe that the current reimbursement rates for ultrasound contrast agents should enable us to sell our product at
attractive margins.

Manufacturing

In July 2004, we entered into a lease agreement for 58,000 square feet of commercial manufacturing and office space in Tewksbury, Massachusetts. In
September 2004, we began to build-out the manufacturing space of this facility for commercial manufacturing of AI-700. We intend to demonstrate that we can produce
AI-700 at a commercial manufacturing scale prior to our filing of a NDA for AI-700 and, subject to required regulatory approvals, we intend to manufacture AI-700 in
this facility for commercial use. We plan to produce AI-700 development batches in this facility commencing in late 2005 and to complete our qualification of the facility in 2006. This
commercial manufacturing facility must comply with current good manufacturing practices, or cGMPs, enforced by the FDA and overseas regulatory agencies. We have identified potential primary and
secondary suppliers of the raw materials used in the production of AI-700.

We
have historically outsourced the production of our product candidates used in our clinical trials to qualified third parties. For example, we produced the clinical trial materials to
be used in our Phase 3 clinical trials for AI-700 and our Phase 1 clinical trials for AI-850 at Hollister-Stier Laboratories with the involvement of our manufacturing
personnel. These third-party manufacturing facilities must comply with cGMPs, enforced by the FDA. We plan to manufacture some future materials, in particular for pre-clinical toxicology
testing, at our production facilities in Watertown, Massachusetts, and may continue to outsource production of pre-clinical or clinical trial materials to third party contract
manufacturers.

Patents and Proprietary Rights

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

As
of March 1, 2005, we owned sixteen issued U.S. patents, one allowed U.S. patent and fourteen U.S. patent applications. We charge all patent-related expenses to operations as
incurred. Three of our issued U.S. patents are directed to aspects of the spray drying method for manufacturing microparticles. Three issued U.S. patents and eight U.S. patent applications are related
to various aspects of our porous microparticle delivery technology. Four issued U.S. patents, one allowed U.S. patent application and five U.S. patent applications relate to aspects of the
AI-850 product and the delivery of

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hydrophobic
drugs. We also own a number of pending international and foreign patent applications corresponding to these U.S. patents and applications. Our issued U.S. patents are listed below:

|U.S. Patent No. |  | Date Issued       |  | Expiration Date   |  | Subject                                                                                         
|--------------- |  | ----------------- |  | ----------------- |  | ------------------------------------------------------------------------------------------------
|5,611,344       |  | March 18, 1997    |  | March 5, 2016     |  | Microencapsulated fluorinated gases for use as imaging agents.                                  
|5,837,221       |  | November 17, 1998 |  | July 29, 2016     |  | Polymer-lipid microencapsulated gases for use as imaging agents.                                
|5,853,698       |  | December 29, 1998 |  | March 5, 2016     |  | Method for making porous microparticles by spray drying.                                        
|6,045,777       |  | April 4, 2000     |  | June 30, 2017     |  | Method for enhancing the echogenicity and decreasing the attenuation of microencapsulated gases.
|6,132,699       |  | October 17, 2000  |  | March 5, 2016     |  | Microencapsulated fluorinated gases for use as imaging agents.                                  
|6,223,455       |  | May 1, 2001       |  | May 3, 2019       |  | Spray drying apparatus and methods of use.                                                      
|6,308,434       |  | October 30, 2001  |  | May 3, 2019       |  | Spray dry method.                                                                               
|6,395,300       |  | May 28, 2002      |  | November 4, 2019  |  | Porous drug matrices and method of manufacture.                                                 
|6,423,345       |  | July 23, 2002     |  | February 22, 2019 |  | Lipid polymer compositions for enhanced drug delivery.                                          
|6,560,897       |  | May 13, 2003      |  | June 15, 2019     |  | Spray drying apparatus and methods of use.                                                      
|6,589,557       |  | July 8, 2003      |  | November 4, 2019  |  | Porous celecoxib matrices and methods of manufacture.                                           
|6,610,317       |  | August 26, 2003   |  | May 25, 2020      |  | Porous paclitaxel matrices and methods of manufacture thereof.                                  
|6,645,528       |  | November 11, 2003 |  | November 4, 2019  |  | Porous drug matrices and methods of manufacture thereof.                                        
|6,689,390       |  | February 10, 2004 |  | February 22, 2019 |  | Matrices Formed of Polymer and Hydrophobic Compounds for Use in Drug Delivery.                  
|6,730,322       |  | May 4, 2004       |  | February 22, 2019 |  | Matrices Formed of Polymer and Hydrophobic Compounds for Use in Drug Delivery.                  
|6,800,297       |  | October 5, 2004   |  | November 4, 2019  |  | Porous COX-2 Matrices and Methods of Manufacture Thereof                                        

Our
planned and potential products will be protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are effectively
maintained as trade secrets. Patents owned by or licensed to us may not afford protection against competition, and our pending patent applications now or hereafter filed by or licensed to us may not
result in patents being issued. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States.

The
patent positions of companies like ours involve complex legal and factual questions and, therefore, their enforceability cannot be 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 to us, may be challenged, invalidated or circumvented, and the rights granted thereunder may not
provide us proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies or duplicate any
technology developed 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

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commercialized,
any related patent may expire or remain in force for only a short period following commercialization. Patent expiration could adversely affect our ability to protect future product
development and, consequently, our operating results and financial position.

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

Our
planned or potential products may be covered by third-party patents or other intellectual property rights, in which case we would need to obtain a license or sublicense to these
rights to continue developing or marketing these products. Although from time to time we receive correspondence from and have discussions with third-parties concerning the patent position of such
third-parties, as of the date of this prospectus we have never received correspondence from any third-party regarding an allegation of infringement. Any required licenses or sublicenses may not be
available to us on acceptable terms, if at all. If we do not obtain any required licenses or sublicense, we could encounter delays in product introductions while we attempt to design around these
patents, or could find that the development, manufacture or sale of products requiring these licenses is foreclosed.

We
know of U.S. and foreign patents issued to third parties that relate to aspects of our product candidates. We are aware of U.S. and foreign patents owned by third parties, including
potential competitors, that arguably cover aspects of our AI-700 contrast agent, although based on advice from our patent counsel we believe that these claims are not infringed and/or are
invalid. The owners or licensees of these patents may file one or more infringement actions against us. Any infringement action by the owners or licensees of these patents could cause us to incur
substantial costs defending the lawsuits and could distract our management from our business, even if the allegations of infringement are unwarranted. A U.S. or foreign court may find that the
relevant claims of the U.S. and foreign patents are valid and enforceable, and that the manufacture, use, sale, offer for sale or importation of the AI-700 product infringes these claims.
If our AI-700 contrast agent is found to infringe a third party's patent, the patent owners or licensees could secure judgments that require us to pay substantial damages and/or
injunctions or other court orders that could prevent us from making, using, selling, offering for sale or importing AI-700. They could also secure judgments that prevent our customers from
using AI-700. We also know of patent applications and issued patents filed by other parties in the United States and various foreign jurisdictions that relate to some aspects of our other
product candidates. These patents and
patent applications, if issued, could subject us to infringement actions or require that we obtain licenses which may not be available under reasonable terms or at all, although based on advice from
our patent counsel we believe that these claims are not infringed and/or are invalid.

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

We
may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect our proprietary technology and
processes, in part, by confidentiality agreements with our employees and contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any
breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property
owned by others in their work for us, disputes may also arise as to the rights in related or resulting know-how and inventions.

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Government Regulation



The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries regulate and impose substantial requirements 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 believe that our products will be regulated as drugs by the FDA.

The
process required by the FDA under the new drug provisions of the Federal Food, Drug and Cosmetic Act before our products may be marketed in the United States generally involves the
following:



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

Pre-clinical
tests include laboratory evaluation of the product candidate, its chemistry, formulation and stability, as well as animal studies to assess the potential safety
and efficacy of the product candidate. The results of the pre-clinical tests, together with manufacturing information and analytical data, are then submitted to the 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 is no guarantee that an IND based on
those tests and studies will become effective to permit clinical testing to begin. An IND becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time
period, raises concerns or questions about the conduct of the trials as outlined in the IND and imposes a clinical hold. In this case, the IND sponsor and the FDA must resolve any outstanding concerns
before clinical trials can begin. Prior to initiation of clinical studies, an independent Institutional Review Board at each medical site proposing to conduct the clinical trials must review and
approve each study protocol. Similar requirements exist in other countries where we may choose to perform clinical trials.

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



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We
cannot be certain that we will successfully complete Phase 1, Phase 2 or Phase 3 testing of our product candidates within any specific time period, if at all. Furthermore, the FDA,
the Institutional Review Board or the sponsor may suspend or terminate clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an
unacceptable health risk.

A
description of the manufacturing process and quality control methods, as well as results of pre-clinical studies, toxicology studies and clinical trials, among other
things, are submitted to the FDA as part of an NDA for approval prior to the marketing and commercial shipment of the product. The FDA may deny a new drug application if all applicable regulatory
criteria are not satisfied or may require additional data including clinical, toxicology or manufacturing data. Even after a new drug application is issued, the FDA may withdraw product approval if
compliance with regulatory standards is not maintained or if safety problems occur after the product reaches the market. In addition, the FDA requires surveillance programs to monitor the consistency
of manufacturing and the safety of approved products that have been commercialized. The agency has the power to require changes in labeling or to prevent further marketing of a product based on new
data that may arise after commercialization. Similar requirements exist in other countries where we may choose to seek marketing approval.

Satisfaction
of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary
substantially, based upon the type, complexity and novelty of the pharmaceutical product. Government regulation may delay or prevent marketing of potential products altogether or for a considerable
period of time and imposes costly and time-consuming requirements. We cannot be certain that the FDA or any other regulatory agency will grant approval for any of our products under
development on a timely basis, if at all. Success in pre-clinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from
pre-clinical and clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a product
receives regulatory approval, the approval is typically limited to specific clinical indications. Further, even after regulatory approval is obtained, later discovery of previously unknown problems
with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain regulatory approvals would have a
material adverse effect on our business. Marketing our products abroad will require similar regulatory approvals and is subject to similar risks. In addition, we cannot predict what adverse
governmental regulations may arise from future U.S. or foreign governmental action.

Any
products manufactured or distributed by us pursuant to FDA clearances or approvals are subject to continuing regulation by the FDA, including record-keeping requirements and
reporting of adverse experiences. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced
inspections by the FDA and state agencies for compliance with cGMPs, which impose procedural and documentation requirements upon us and our third party manufacturers. We cannot be certain that we, or
our present or future suppliers, will be able to comply with the cGMP regulations and other FDA regulatory requirements. Failure to comply with these requirements can result in, among other things,
total or partial suspension of production, failure of the government to grant approval for marketing, and withdrawal, suspension, or revocation of marketing approvals.

Once
the FDA approves a product, a manufacturer must provide certain updated safety and efficacy information. Product changes, as well as certain changes in a manufacturing process or
facility or other post-approval changes may necessitate additional FDA review and approval.

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

The
FDA's policies may change and additional government regulations may be enacted which could prevent or delay regulatory approval of our potential products. Moreover, increased
attention to the containment of health care costs in the United States and in foreign markets could result in new government regulations that could have a material adverse effect on our business. We
cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.



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

Under
European Union regulatory systems, marketing authorizations may be submitted either under a centralized or decentralized procedure. The centralized procedure provides for the grant
of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this
procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each
member state must decide whether to recognize approval.

We,
or a partner to whom we have assigned the right, will choose the appropriate route of European regulatory filing. In 2004, we entered into a strategic partnership with Nycomed under
which they are primarily responsible for regulatory strategy and approval in Europe for our lead product candidate, AI-700. However, the chosen regulatory strategy for our product
candidates may not secure regulatory approvals or approvals of the chosen product indications. These approvals, if obtained, may take longer than anticipated. We cannot assure you that any of our
product candidates will prove to be safe or effective, will receive regulatory approvals, or will be successfully commercialized.

Competition

The pharmaceutical and biotechnology industries in which we operate are characterized by rapidly advancing technologies, intense competition and an emphasis on
proprietary products. Our competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and
research institutions. All of these competitors currently engage in, have engaged in or may engage in the future in the development, manufacturing, marketing and commercialization of new
pharmaceuticals and pharmaceuticals, some of which may compete with our present or future product candidates.

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We
expect that our product candidates, if approved for marketing, will compete with existing drugs, therapies, drug delivery systems and technological approaches, as well as new drugs,
therapies, drug delivery systems or technological approaches that may be developed or commercialized in the future. Any of these drugs, therapies, systems or approaches may receive government approval
or gain market acceptance more rapidly than our product candidates, may offer therapeutic or cost advantages over our product candidates or may cure our targeted diseases or their underlying causes
completely. As a result, our product candidates may become noncompetitive or obsolete.

AI-700,
our ultrasound contrast agent for the assessment of myocardial perfusion, if approved for marketing and sale, will face intense competition. We believe that
ultrasound with AI-700 can be a cost-effective and convenient substitute for nuclear stress tests, the current standard of care in myocardial perfusion assessment. In addition,
we believe AI-700 will add useful myocardial perfusion information that stress echo cannot provide without a contrast agent. AI-700 is designed for use with widely available
ultrasound equipment and techniques currently used for wall motion studies using stress echo. We expect to face intense competition from companies that market products related to these existing
imaging techniques, as well as other companies that are developing ultrasound contrast agents for use in stress echo.

Nuclear
stress testing is an established technique for assessing myocardial perfusion. Radioactive contrast agents that are approved by the FDA for use in nuclear stress tests include
Cardiolite®, which is marketed by Bristol-Myers Squibb Company; Myoview®, which is marketed by GE Healthcare; and thallium, which is marketed by GE Healthcare, Bristol-Myers
Squibb and Tyco International.

Stress
echo without ultrasound contrast is an established technique for detecting abnormal wall motion, which some cardiologists may find satisfactory for the detection of coronary heart
disease. However, stress echo without contrast is incapable of assessing myocardial perfusion. We believe that ultrasound with AI-700 will enable stress echo to provide information on
myocardial perfusion in addition to wall motion.

No
ultrasound contrast agent has been approved by the FDA for use in myocardial perfusion imaging or stress echo. However, we are aware of other companies that are or may be developing
ultrasound contrast agents for use in stress echo. CardioSphere, which is being developed by Point Biomedical Corporation, is an ultrasound contrast agent for the assessment of myocardial
perfusion. In 2004, Point announced that it had completed two pivotal Phase 3 trials and plans to file an NDA with the FDA. In addition, some companies have ultrasound contrast agents that are FDA
approved for LVO and EBD in patients with suboptimal images or are in development. In the future, these companies may seek to broaden their indications to include stress echo and myocardial perfusion
assessment. These FDA-approved agents include Optison®, which is marketed by GE Healthcare; Definity®, which is marketed by Bristol-Myers Squibb; and
Imagent®, which is marketed by Imcor. SonoVue®, which is being developed by Bracco, is an ultrasound contrast agent which we believe is in late stage clinical development for
LVO and EBD and for radiology applications, but as of the date of this prospectus, to our knowledge, has not received final approval from the FDA.

AI-850,
our reformulation of paclitaxel, if approved for marketing and sale, will also face intense competition. We are aware of companies, such as American Pharmaceutical
Partners, NeoPharm and Sonus Pharmaceuticals that are applying significant resources and expertise to developing reformulations of paclitaxel for intravenous delivery that will compete with our
current product candidate. In early 2005, American Pharmaceutical Partners received FDA approval for their product. None of these other reformulations has received approval from the FDA. Other
companies, such as Cell Therapeutics, are developing new chemical entities that involve paclitaxel conjugated, or chemically bound, to another chemical. None of these new chemical entities have
received final approval from the FDA. In addition, a number of companies have developed technology for delivering hydrophobic drugs.

20

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Cardinal
Health, CyDex and Elan have created formulations of hydrophobic drugs that have been approved by the FDA.

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

Many
of our competitors in these markets have greater development, financial, manufacturing, marketing, and sales experience and resources than we do and we cannot be certain that they
will not succeed in developing products or technologies which will render our technologies and products obsolete or noncompetitive. We cannot assure you that our products will compete successfully
with these newly emerging technologies. In addition, many of those competitors have significantly greater experience than we do in their respective fields. Many of these competitors may have greater
name recognition than we do, and may offer discounts as a competitive tactic.

Employees

As of March 1, 2005, we had 79 full-time employees, including 64 in research and development and 15 in general and administrative. Ten of our
employees have M.D.s and/or Ph.D.s. From time to time, we also employ independent contractors to support our engineering and administrative organizations. None of our employees are represented by a
collective bargaining unit and we have never experienced a work stoppage. We consider our relations with our employees to be good.

Organization and Trademarks

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

We
have trademarks in the United States and other countries, including "Acusphere," "HDDS" and "PDDS" and our logo. This Annual Report on Form 10-K also contains the
trademarks and tradenames of other entities that are the property of their respective owners.

Financial Information

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

21

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ITEM 2. PROPERTIES

Our primary offices and laboratory facilities are located in one 47,500 square foot facility located in Watertown, Massachusetts. We lease the space in this
facility under a ten year operating lease that expires in December 2011. A portion of our 47,500 square foot facility has not been internally built-out pending our demand for the
space. We intend to improve and use this space when needed. We anticipate that this currently unused space will in the coming years be needed to expand our employee office area and our internal
laboratory and pilot-manufacturing capabilities.

In
July 2004, we entered into a lease agreement for 58,000 square feet of commercial manufacturing space in Tewksbury, Massachusetts. This lease has a five year, nine month term
with options to extend the lease for up to two additional five-year terms at predetermined rental rates. In September 2004, we began efforts to build-out this facility
to meet the initial commercial manufacturing requirements of AI-700. In 2005, we expect to spend an aggregate of approximately $20 million, excluding the cost of our manufacturing
equipment, to
build-out the Tewksbury facility. Historically, our personnel have manufactured clinical trial material at a manufacturing facility operated by a third-party contract manufacturer.

We
believe that our existing facilities, subject to the successful build-out and qualification of the commercial manufacturing facility in Tewksbury, Massachusetts, are
adequate to meet our current and foreseeable requirements and that suitable additional space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At our Special Meeting of Stockholders held on October 15, 2004, our stockholders approved the following:

The
issuance and sale of 574,478 shares of common stock and warrants to purchase up to 114,895 shares of our common stock in a private offering on the terms described in our Proxy
Statement dated September 17, 2004:

Votes for

Votes Withheld

Abstain11,531,664*

950,137

6,679




22

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock is currently traded on The Nasdaq National Market under the symbol "ACUS." The following table sets forth the high and low closing prices for our
Common Stock as reported on The Nasdaq National Market for the periods indicated, as adjusted to the nearest cent.

High

LowYear Ended December 31, 2005:First quarter (through March 11, 2005)

$
6.47

$
5.36Year Ended December 31, 2004:Fourth quarter

$
6.90

$
6.10Third quarter

$
8.07

$
5.98Second quarter

$
8.47

$
5.73First quarter

$
10.40

$
8.35Year Ended December 31, 2003:Fourth quarter (commencing with our first day of trading on October 8, 2003)

$
14.03

$
6.99


On
March 11, 2005, the last reported sale price of the Common Stock on The Nasdaq National Market was $5.50 per share. As of March 1, 2005, there were approximately
153 holders of record of the Common Stock, excluding multiple beneficial holders at depositories, banks and brokers included as a single holder in the single "street" name of each respective
depository, bank or broker.

Dividend Policy

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

In
February 2005 we issued and sold 900,000 shares of our 61/2% convertible exchangeable preferred stock. Cumulative dividends 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, commencing June 1, 2005. Any dividends must be declared by our board of directors and must
come from funds that are legally available for dividend payments.

Delaware
law limits our ability to pay cash dividends on the preferred stock. Under Delaware law, cash dividends may only be paid from "surplus" or, if there is no "surplus," from our
net profits for the current or preceding fiscal year. Delaware law defines "surplus" as the amount by which the total assets of a corporation, after subtracting its total liabilities, exceed the
corporation's capital, as determined by its board of directors. Although we currently intend to pay cash dividends on our preferred stock, our ability to pay these dividends will depend upon our
financial results, liquidity and financial condition. Unless we have paid or set aside cumulative dividends in full on our preferred stock for all past dividend periods and sufficient funds shall have
been set apart for the payment of the dividend for the current period with respect to our preferred stock, we may not declare or pay or set aside cash
dividends on our common stock and we may not redeem, purchase or otherwise acquire any of our common stock except under limited circumstances.

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

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Equity Compensation Plan Information

See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plans.

Recent Sales of Securities

In February 2005, we issued 900,000 shares of 61/2% convertible exchangeable preferred stock resulting in aggregrate gross proceeds to us of
$45.0 million (net proceeds of approximately $41.5 million after deducting underwriting discounts and commissions and estimated offering expenses). In conjunction with this offering, we
granted the underwriters a 30-day option to purchase up to an additional 100,000 shares of preferred stock solely to cover over-allotments, if any. Each share of preferred
stock has a liquidation preference of $50 per share and is convertible into 7.2886 shares of our common stock, representing a conversion price of $6.86 per share. Dividends will be cumulative from the
date of original issue at the annual rate of $3.25 per share of preferred stock, payable quarterly. The preferred shares were sold under a shelf registration statement that was declared effective by
the Securities and Exchange Commission on January 7, 2005.

In
October 2004, we completed the second and final closing of the $21.5 million private financing resulting in aggregate gross proceeds to us of approximately
$3.6 million (net proceeds of approximately $3.2 million) and the issuance of 574,478 shares of common stock at a price of $6.25 per share and warrants to purchase up to an additional
114,895 shares of common stock at an exercise price of $8.50 per share. We expect to use the net proceeds from the financing to further fund the development program for AI-700 and for
working capital and general corporate purposes.

All
of the shares of common stock sold in the $21.5 million private placement were registered under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-3 that was declared effective by the Securities and Exchange Commission on November 10, 2004. The warrants granted as part of this private placement expire four years
from their respective dates of grant and do not include a cashless exercise feature.

In
July 2004, we entered into definitive purchase agreements with institutional and accredited investors for a $21.5 million private placement of up to 3,440,000 newly
issued shares of common stock at a price of $6.25 per share and warrants to purchase up to an additional 688,000 shares of common stock at an exercise price of $8.50 per share. In August 2004,
a partial closing of this private placement was consummated, resulting in aggregate gross proceeds to us of approximately $17.9 million (net proceeds of approximately $16.5 million) and
the issuance of 2,865,522 shares of common stock and warrants to purchase up to an additional 573,105 shares of common stock.

On
October 14, 2003, we closed the sale of an aggregate of 3,750,000 shares of our common stock, $0.01 par value, in our initial public offering at a price to the public of $14.00
per share. The managing underwriters in the offering were SG Cowen Securities Corporation, Thomas Weisel Partners LLC, U.S. Bancorp Piper Jaffray and Friedman Billings Ramsey. All of the shares of
common stock sold in the offering were registered under the 1933 Act on a Registration Statement on Form S-1 (Reg. No. 333-106725) that was declared effective by the SEC on
October 7, 2003 and a Registration Statement filed pursuant to Rule 424(b) under the Securities Act that was filed on October 8, 2003 (Reg. No. 333-106725). The offering
commenced on October 7, 2003 and did not terminate until after the sale of all of the securities registered in the Registration Statement. There were no selling stockholders in the offering.

The
aggregate proceeds of the offering amount registered on our behalf was $52.5 million. In connection with the offering, we paid $3.7 million in underwriting discounts
and commissions to the underwriters and incurred an estimated $1.2 million in other offering expenses. None of the underwriting discounts and commissions or offering expenses were incurred or
paid to directors or officers of ours or their associates or to persons owning 10 percent or more of our common stock or to

24

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any
affiliates of ours. After deducting the underwriting discounts and commissions and offering expenses, we received net proceeds from the offering of approximately $47.6 million. The proceeds
to us have conformed with our intended use outlined in the prospectus related to the offering.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below has been derived from our audited financial statements. This information should be read in conjunction with the
financial statements and the related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere in this
Annual Report on Form 10-K.

|                                                                      |                            | Year Ended December 31,  |        
|--------------------------------------------------------------------- | -------------------------- | ------------------------ | -------
|
|
|Statement of Operations Data:                                         |                            |                          |        
|Collaboration Revenue                                                 |                            | $                        |       
|Operating Expenses:                                                   |                            |                          |        
|                                                                      | Research and development   |                          |        
|                                                                      | General and administrative |                          |        
|                                                                      | Stock-based compensation   |                          |        
|                                                                      |                            |                          |        
|                                                                      |                            | Total operating expenses |        
|Equity in loss of joint venture                                       |                            |                          | (12,015
|Interest and other income (expense), net                              |                            |                          | 97     
|                                                                      |                            |                          |        
|Net loss                                                              |                            |                          | (24,429
|Accretion of dividends and offering costs on preferred stock          |                            |                          | (4,218 
|                                                                      |                            |                          |        
|Net loss available to common stockholders                             |                            | $                        | (28,647
|Net loss available to common stockholders per shareBasic and diluted |                            | $                        | (64.18 
|Weighted average shares outstandingBasic and diluted                 |                            |                          | 446    
|                                                                      |                            |                          |        

|                                                  |  | As of December 31,
|------------------------------------------------- |  | ------------------
|
|
|Balance Sheet Data:                               |  |                   
|Cash, cash equivalents and short-term investments |  | $                 
|Working capital                                   |  |                   
|Total assets                                      |  |                   
|Long-term debt, net of current portion            |  |                   
|Redeemable convertible preferred stock            |  |                   
|Total stockholders' (deficit) equity              |  |                   

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements contained herein, including without limitation, "Management's Discussion and Analysis of Financial Condition and Results of
Operation," contains certain projections, estimates and other forward-looking statements. "Forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995,
are not historical facts and involve a number of risks and uncertainties. Words herein such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates,"
"projects," "predicts," "intends," "potential," and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify
forward-looking statements.

Forward-looking statements include, but are not limited to: our plans to develop and market new products and the timing of these development programs, in
particular the timing of clinical trials and regulatory milestones for AI-700; our clinical development of product candidates, clinical trials and our ability to obtain and maintain
regulatory approval for our product candidates; our estimates regarding our capital requirements and our needs for additional financing; our estimates of expenses and future revenues and
profitability; our estimates of the size of the potential markets for our product candidates; our selection and licensing of product candidates; our ability to attract collaborators with acceptable
development, regulatory and commercialization expertise; the benefits to be derived from corporate collaborations, license agreements and other collaborative efforts, including those relating to the
development and commercialization of our product candidates; sources of revenues and anticipated revenues, including contributions from corporate collaborations, license agreements and other
collaborative efforts for the development and commercialization of products; our ability to create an effective direct sales and marketing infrastructure for products we elect to market and sell
directly; the rate and degree of market acceptance of our product candidates; the timing and amount of reimbursement for our product candidates; the success of other competing therapies that may
become available; and the manufacturing capacity for our product candidates, including our plans to build out and qualify a commercial manufacturing facility for AI-700.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking
statements. Any forward-looking statement should be considered in light of factors discussed in Item 7 under "Certain Factors Which May Affect Future Results" and elsewhere in this Annual Report on
Form 10-K. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except
as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any change in company expectations or in events,
conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking
statements.

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual
Report on Form 10-K.

Overview

We are a specialty pharmaceutical company that develops new drugs and improved formulations of existing drugs using our proprietary porous microparticle
technology. We are focused on developing proprietary drugs that can offer significant benefits such as improved safety and efficacy, increased patient compliance, greater ease of use, expanded
indications or reduced cost. Our three initial product candidates are designed to address large unmet clinical needs within cardiology, oncology and asthma. Our lead product candidate is a
cardiovascular drug in Phase 3 clinical development for the detection of coronary heart disease, the leading cause of death in the United States.

We
created our initial product candidates using technology that enables us to control the size and porosity of particles in a versatile manner, so we can customize the particles to
address the delivery

26

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needs
of a variety of drugs. We are focused on creating porous microparticles that are smaller than red blood cells. Some of these microparticles are nanoparticles which are smaller than 1 micron.
Small microparticles are important for delivering drugs intravenously so that they can pass through the body's smallest blood vessels, for increasing the surface area of a drug so that the drug will
dissolve more rapidly, and for delivering drugs to the lung via inhalation. Porosity is important for entrapping gases in microparticles, for controlling the release rate of the drug from a
microparticle, and for targeting inhaled drugs to specific regions of the lung.

We
have incurred significant operating losses to develop our product candidates and we anticipate continuing to incur significant operating losses in the coming years. In particular, we
expect to incur significant additional expenses and experience other significant capital requirements for the conduct of our Phase 3 clinical program for AI-700 and to complete the
build-out and qualification of a manufacturing facility for the initial commercial manufacture of AI-700. Since our inception, we have funded our operations primarily through
private and public placements of equity securities, equipment-backed financings and other debt financings.

AI-700 Clinical Trial Update

The Phase 3 clinical plan provides for a two-part program consisting of a pilot phase (the "pilot study"), under which new investigators and blinded
readers have been qualified and trained, and two multi-center pivotal trials (the "32" and "33" trials), each seeking to enroll approximately 300 patients with known or suspected coronary heart
disease. The Phase 3 pivotal studies are currently taking place at clinical sites located in North America, Europe and Australia with data from the trials intended for submission to U.S., European and
potentially other regulatory authorities. As of March 2005, over 300 patients have been enrolled in the Phase 3 pivotal trials and over 400 patients have been enrolled in the Phase 3 program,
including the pivotal trials and the pilot study. We currently anticipate completing cumulative enrollment of at least 600 patients in the pivotal trials during the second half of 2005.

The Pilot Study.Our objectives in the pilot study were to train and qualify a sufficient number of clinical sites,
investigators and blinded readers for transition into one of the two pivotal trials. These objectives have been accomplished. Clinical sites trained in the pilot study transitioned into a pivotal
trial when, in our judgment, the clinical site demonstrated that it is prepared to meet the requirements of the clinical trial protocol which, in the pivotal trial requiring nuclear stress tests in
all patients, includes conducting both stress echo and stress nuclear studies on the same patient on the same day. Because the pilot study has been conducted for training purposes, there are no
defined clinical efficacy endpoints in this study.

The Pivotal Trials.More than twenty clinical sites are participating in the pivotal trials, and both trials are active in
enrolling patients. As part of the Phase 3 pivotal study design, the evaluation of the stress echo and nuclear stress images from the pivotal trials is performed by panels of blinded readers who
receive no information about the patient being evaluated other than the images. The primary efficacy endpoints relative to nuclear stress tests and angiography are set at thresholds that are the same
or lower than those already achieved in our Phase 2 trial results. Safety will continue to be tested and evaluated during our pivotal trials.

The "32" Trial.All of the patients enrolled in this trial will receive a stress echo study with AI-700 and a
nuclear stress test. Patients in this pivotal trial will undergo coronary angiography only if they have a positive nuclear stress test result. Patients in this pivotal trial who have a negative
nuclear stress test result will be evaluated for ninety days thereafter for cardiac events. The primary endpoints for this pivotal trial are sensitivity and specificity in comparison to nuclear stress
testing, angiography or clinical outcome.

27

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The "33" Trial.All of the patients enrolled in this trial will receive a stress echo study with AI-700 and will
undergo coronary angiography. The majority of patients, but not all, will receive a nuclear stress test. The primary endpoints for this pivotal trial are sensitivity and specificity in comparison to
angiography.

Although
we are targeting these clinical endpoints and timing for clinical enrollment in our Phase 3 trials, we cannot assure you that we will successfully achieve results that
meet or exceed these clinical endpoints or that enrollment will be completed in 2005.

European Collaboration Agreement

In July 2004, we entered into a collaboration, license and supply agreement with Nycomed pursuant to which we granted Nycomed rights to develop and market
AI-700 in Europe. As part of the Agreement, Nycomed has agreed to provide up to $70 million in license fees, research and development funding, and milestone payments, including
$12 million in payments over the first two years. These near-term payments include $4 million in upfront license fees and $8 million in research and development
funding payable in eight equal quarterly installments. The remaining $58 million in milestone payments are related to regulatory approvals and achievement of certain sales goals. In addition,
Nycomed has agreed to pay us to manufacture AI-700 for them and to pay us royalties on Nycomed's sales of AI-700. Nycomed will be responsible for sales, marketing and the
regulatory submissions required for marketing throughout its sales territory, which includes the member states of the European Union, as well as Russia/CIS and Turkey. During the fiscal year ended
December 31, 2004, we began to recognize revenues derived from our collaboration with Nycomed.

The
Nycomed agreement is subject to termination provisions. Under certain of these termination provisions, if the Company fails in any material respect to use all commercially reasonable
efforts to carry out referenced obligations under the agreement, we would be obligated to pay Nycomed liquidated damages of up to $12 million. We plan to carry out all of these obligations,
which we believe are in our control. There can be no assurance that termination of this agreement will not occur or that such termination would not result in the Company incurring liquidated damages
of up to $12 million.

Financial Operations Overview

Revenue.We have not generated any revenue from product sales since our inception. In connection with our collaboration
agreement with Nycomed, we expect to receive $12 million in license fees and research and development payments from July 2004 through June 2006. Further in the future, we will
seek to generate revenue from a combination of product sales, up-front or milestone payments and manufacturing payments in connection with collaborative or strategic relationships, and
royalties resulting from the license of our products and intellectual property. Upon commencement of our collaboration agreement with Nycomed, we emerged from development stage for accounting
purposes.

Research and Development Expense.Research and development expense consists of expenses incurred in developing, manufacturing
and testing product candidates. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers in conjunction with independently
monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical trials, costs of contract manufacturing services, costs of materials used in clinical trials and
research and development, depreciation of capital resources used to develop our products, costs of facilities and the legal costs of pursuing patent protection on select elements of our intellectual
property. We expense research and development costs, including patent related costs, as incurred. We believe that significant investment in product development is a competitive necessity and plan to
continue these investments in order to realize the potential of our product candidates and proprietary technologies. Development programs for later stage product candidates, such as
AI-700, tend to cost

28

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more
than earlier stage programs due to the length and the number of patients enrolled in clinical trials for later stage programs and due to costs of scaling production to commercial scale.

General and Administrative Expense.General and administrative expense consists primarily of salaries and other related costs
for personnel in executive, finance, accounting, information technology, business development and human resource functions. Other costs include facility costs not otherwise included in research and
development expense and professional fees for legal and accounting services.

Stock-Based Compensation Expense.Stock-based compensation expense, which is a non-cash charge, results
principally from stock option grants to our employees at exercise prices deemed for accounting purposes to be below the fair market value of our stock on the date the stock options were granted
("fixed awards"). Prior to our initial public offering, which closed on October 14, 2003, we granted certain stock options for which the exercise prices were deemed for accounting purposes to
be below the fair value of the underlying common stock resulting in our recording stock-based compensation expense associated with such grants. Stock-based compensation expense is also recorded for
stock option grants to non-employees and for restricted stock grants provided to directors and advisors in lieu of cash compensation. Deferred compensation (for accounting purposes) on
fixed awards is amortized as a charge to operations over the vesting periods of the options and grants, subject to adjustment for forfeiture during the vesting period.

Equity in Loss of Joint Venture.In June 2000, we established in collaboration with Elan Corporation, plc and its
affiliates ("Elan") a joint venture, Acusphere Newco, Ltd., a Bermuda corporation, to develop and commercialize pulmonary drug delivery product candidates. In September 2002, we reached
an
agreement with Elan terminating the joint venture in a cash-free transaction. Equity in loss of joint venture consists of our portion of the losses from Acusphere Newco, Ltd. from
June 2000, when the joint venture was established, until September 2002, when the joint venture was terminated. In connection with the termination of the joint venture we recorded a loss
of $381,000 for an amount previously recorded as due from Elan.

Interest and Other Income (Expense).Interest income consists of interest earned on our cash, and cash equivalents. Interest
expense consists of interest incurred on equipment leases and on debt financings.

Accretion of Dividends and Offering Costs on Convertible Preferred Stock.Accretion of dividends and offering costs on
convertible preferred stock primarily consists of dividends on convertible preferred stock. Prior to conversion of convertible preferred stock to common stock, which occurred on October 14,
2003 upon the completion of our initial public offering, our convertible preferred stock was entitled to accretion of dividends, the amount of which decreased the amount of stockholders' equity
available to common stockholders and effectively increases the loss per share of common stock. After October 14, 2003, no existing convertible preferred stock is outstanding, and accordingly
there will be no further accretion of dividends and offering costs on these shares. All preferred stock dividends which were accreted before October 14, 2003 were forfeited by the preferred
stockholders on that date in connection with the conversion of these preferred shares to common stock.

29

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Results of Operations

Revenue.Collaboration revenue was $1.7 million in the year ended December 31, 2004 compared to no
collaboration revenue recognized in 2003 and 2002. Collaboration revenue was earned under our agreement with Nycomed which was entered into in July 2004. Under this agreement, excluding any
payments that we might receive based upon the achievement of specified milestones, we are scheduled to receive $12 million in license fees and research and development payments through
June 2006, of which $6.0 million was received through December 31, 2004. We are recognizing revenue associated with these payments ratably over a period of forty-two
months, representing the estimated development period over which such fees are earned.

Research and Development Expense.Research and development expense for the year ended December 31, 2004 was
$25.6 million compared to $14.2 million in 2003 and $13.5 million in 2002. The $11.4 million increase in 2004 over 2003 represented an increase of 80% and the
$0.7 million increase in 2003 over 2002 represented an increase of 5%.

In
2004 compared to 2003, the higher research and development expense primarily resulted from increased activities in the AI-700 Phase 3 clinical program, including clinical
site costs, data management costs, independent clinical monitoring costs and costs of manufacturing clinical materials. The increase in research and development costs also includes costs associated
with increasing full and part-time personnel. In 2003 compared to 2002, the higher research and development expense primarily resulted from costs associated with the start of our Phase 3
clinical program for AI-700, including increased costs associated with clinical site training and clinical site monitoring.

The
following table summarizes the primary components of our research and development expense for the years ended December 31, 2002, 2003 and 2004. Because of our ability to
utilize resources across several projects, many of our research and development costs are not tied to any individual project and are allocated among multiple projects. We record direct costs on a
project-by-project basis. We record indirect costs in aggregate in support of all research and development.

|                                       |  | Years Ended December 31,
|-------------------------------------- |  | ------------------------
|
|
|AI-700                                 |  | $                       
|AI-850 and AI-128                      |  |                         
|Other                                  |  |                         
|                                       |  |                         
|Total direct costs                     |  |                         
|Facility costs                         |  |                         
|Depreciation                           |  |                         
|Patent costs                           |  |                         
|                                       |  |                         
|Total research and development expense |  | $                       
|                                       |  |                         

Research
and development costs generally increase as programs progress from early stage clinical trials to late stage clinical trials. Our primary research and
development programs are as follows:



30

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Each
of our research and development programs is subject to risks and uncertainties, including the requirement to seek regulatory approvals, which are outside of our control. For
example, our clinical trials may be subject to delays or rejections based on our inability to enroll patients at the rate that we expect or our inability to produce clinical trial material in
sufficient quantities and of sufficient quality to meet the schedule for our planned clinical trials. Moreover, the product 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 successfully
commercialized. As a result of these risks and uncertainties, we are unable to predict with any certainty the period in which material net cash inflows from such projects could be expected to commence
or the completion date of these programs. Failure to commercialize these product candidates on a timely basis could have a material adverse affect on our business, financial condition and results of
operations. We may seek to establish collaborative relationships to help us commercialize these product candidates, but there can be no assurance that we will be successful in doing so.

General and Administrative Expense.General and administrative expense for the year ended December 31, 2004 was
$5.6 million, compared to $4.2 million for 2003 and $3.9 million for 2002. The $1.4 million increase in 2004 over 2003 represented an increase of 34% while the $267,000
increase in 2003 over 2002 represented an increase of 7%.

In
2004 compared to 2003, the increase in general and administrative expense was principally due to the various costs of being a public company, including costs associated with investor
relations, legal counsel, auditing and additional personnel. Also contributing to the higher expenses are increased activities in business development and marketing, including market research
expenses.

In
2003 compared to 2002, the increase in general and administrative expense primarily resulted from hiring experienced personnel in both the finance and business development areas. This
increase also includes legal and other support costs associated with operating as a public company.

We
anticipate some overall increase in general and administrative expense, including increases in costs for investor relations and other activities associated with operating as a
publicly-traded company. These increases will also likely include the hiring of additional personnel. We intend to continue to incur various internal and external business development costs to support
our various product

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development
efforts, and certain of these expenses are likely to increase overall. However, until we are closer to substantially completing enrollment of the majority of patients required in the
AI-700 Phase 3 clinical program, we do not anticipate incurring significantly increased costs to accelerate preparations for the commercial introduction of AI-700.

Stock-Based Compensation Expense.Stock-based compensation expense for the year ended December 31, 2004 was
$0.9 million, compared to $1.3 million in 2003 and $2.2 million in 2002. The $367,000 decrease in 2004 over 2003 represented a decrease of 28%, and the $888,000 decrease in 2003
over 2002 represented a decrease of 40%. Stock-based compensation expense incurred in both years resulted principally from the vesting of stock options granted in prior periods on which deferred
compensation had previously been recorded and decreased as a result of certain prior year awards becoming fully vested in the current period.

Equity in Loss of Joint Venture.Our joint venture with Elan was terminated in September 2002. During the year ended
December 31, 2002, we recognized a $1.2 million loss from our 80.1% equity share in the loss of the Elan joint venture. This amount related to research and development of pulmonary drug
delivery product candidates and from the expense of an amount previously recorded as due from Elan.

Interest and Other Income (Expense).Interest and other income (expense) for the year ended December 31, 2004 was
$468,000 of net income, compared to $2.2 million of net expense in 2003 and $1.1 million of net expense in 2002. The $2.7 million increase in net income in 2004 over 2003
represented an increase of 121% and the $1.1 million increase in net expense in 2003 over 2002 represented an increase of 108%. During these years, interest and other income (expense) consisted
of the following:

|                 |            | Year Ended December 31, |       
|---------------- | ---------- | ----------------------- | ------
|
|
|Interest income  |            | $                       | 224   
|Other income     |            |                         | 9     
|Interest expense |            |                         | (1,300
|                 |            |                         |       
|                 | Total, net |                         | $     
|                 |            |                         |       

The
increase in interest income in 2004 compared to 2003 was primarily due to higher average fund balances available for investment resulting from funds received from the
initial public offering in October 2003 and the $21.5 million private placement completed in October 2004. The decrease in interest expense in 2004 compared to 2003 was primarily
due to interest costs associated with bridge
loans of $1.9 million, interest paid on the subordinated loans payable of $195,000 and amortization of the discount of $177,000 in 2003 compared to zero in 2004. The subordinated loans were
paid off in June of 2003 and the bridge loans converted into common stock upon completion of the Company's Initial Public Offering on October 14, 2003. In addition to this, the interest expense
on the lower capital lease balances has decreased $81,000 in 2004 compared to 2003.

The
decrease in interest income for the year ended December 31, 2003 compared to the year ended December 31, 2002 was primarily due to reduced yields on investments. The
increase in interest expense for the year ended December 31, 2003 compared to the year ended December 31, 2002 was primarily due to $762,000 of costs incurred from the amortization of
the discount recorded for accounting purposes on the warrants issued in connection with the 10% convertible promissory notes in April and June 2003 and to $984,000 of interest accrued on the
10% convertible promissory notes, partially offset by a decrease of $461,000 in interest paid on the subordinated loans payable and the decrease of $153,000 in amortization of the warrants issued in
connection with the subordinated loans payable, due to the early repayment in 2003 of these subordinated loans payable.

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Accretion of Dividends and Offering Costs on Convertible Preferred Stock.Accretion of dividends and offering costs on
convertible preferred stock was zero in 2004, $5.9 million in 2003 and $6.7 million in 2002. The $717,000 decrease in 2003 over 2002 represented a decrease of 11%.

In
2003 compared to 2002, the decrease in accretion of dividends and offering costs resulted primarily from the conversion of convertible preferred stock into common stock in conjunction
with the Company's initial public offering in October 2003. After October 14, 2003 and through December 31, 2003, no convertible preferred stock remained outstanding and,
accordingly, there was no further accretion of dividends and offering costs on these shares in 2003 after that date. In connection with the conversion of preferred stock to common stock, all
previously accreted dividends on the convertible preferred stock were forfeited by the holders.

Liquidity and Capital Resources

Historically, aside from payments received in connection with our strategic collaboration with Nycomed, we have financed our business through the issuance of
equity securities, debt financings and equipment leases. Our liquidity requirements have arisen primarily from research and development expenditures, equipment expenditures and payments on outstanding
indebtedness. As of December 31, 2004, we had cash and cash equivalents of $45.2 million. As of December 31, 2004 we owed $205,000 from capital leases, $3.4 million from notes
payable and had commitments totaling $19.9 million for rent under our facility leases, including the lease agreement signed in July 2004 for commercial manufacturing space in Tewksbury,
Massachusetts.

During
the year ended December 31, 2004, operating activities used $19.3 million of cash. Net cash used by operating activities during this period resulted primarily from a net
loss of $30.0 million. This use of cash was partially offset by an increase in deferred revenue of $6.0 million, an increase in accrued expenses of $2.3 million, an increase in
accounts payable of $2.7 million, non-cash charges for depreciation and amortization of $1.4 million and non-cash charges for stock-based compensation expense of
$0.9 million. In 2005, because we estimate a higher rate of patient enrollment in our Phase 3 clinical program than in 2004, we anticipate that our operating spending will be higher in
2005 than in 2004. We estimate such spending during 2005 to be approximately $8 to $10 million per quarter.

During
the year ended December 31, 2004, investing activities used $12.4 million in cash. This use of cash was primarily for purchases of equipment and costs incurred through
December 31, 2004 for the build-out and expansion of our manufacturing operations for AI-700.

During
the year ended December 31, 2004, financing activities provided $22.4 million in cash. Net cash provided by financing activities during this period resulted
primarily from the net proceeds of our $21.5 million private placement of our common stock, described below, of $19.8 million, entering into promissory notes under the equipment
financing line, described below, of $3.4 million, proceeds from stock option exercises of $90,000 and proceeds from the sale of common stock through the Employee Stock Purchase Plan of $24,000.
These proceeds were partially offset by payments on the capital leases and promissory notes of $980,000.

In
April 2004, we entered into an $8.0 million equipment financing line with an equipment financing company. Borrowings under this equipment line were originally available
for qualified purchases through March 2005, subject to the satisfaction of certain conditions, including an updated credit review, of the lender. In August 2004, the equipment financing
line was increased to $11.3 million, and in March 2005, the financing line was extended through August 31, 2005. Borrowings under the equipment financing line are secured by the
qualified purchases and repaid over 36 to 48 months, depending on the nature of the equipment financed. No warrants were granted in connection with this equipment line. The $11.3 million
equipment line is structured as a loan agreement. However, we may elect to borrow up to $4.0 million of this amount in the form of a capital

33

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lease.
The interest rate on this facility varies depending upon whether the borrowing is in the form of a loan or lease and whether the term is 36 months or 48 months. Such interest
rates are fixed at the time of each borrowing under the equipment line with such rates adjusted between borrowings based on the U.S. Federal Reserve's Three Year and Four Year Treasury Constant
Maturity Rates. As of December 31, 2004, we had approximately $7.9 million available for additional borrowings under this equipment line, subject to the satisfaction of certain
conditions, including an updated credit review, of the lender.

In
July 2004, we entered into a collaboration, license and supply agreement with Nycomed in which the Company granted Nycomed rights to develop and market AI-700 in
Europe. As part of this agreement, in July 2004 Nycomed paid to us a $4.0 million license fee and the first of eight consecutive quarterly installments of $1.0 million each. In
October 2004 and January 2005, Nycomed paid us the second and third quarterly installments of $1.0 million each, respectively. Beginning in April 2005, Nycomed is required to pay
us the remaining five consecutive quarterly installments of $1.0 million each. The agreement also provides for Nycomed to pay to us up to $58.0 million in milestone payments upon
achievement of certain regulatory milestones and sales goals. Under the agreement, Nycomed has agreed to pay us to manufacture AI-700 for them and to pay us royalties on Nycomed's sales of
AI-700. In connection with this transaction, we are obligated to pay a customary fee to our financial advisor. The fee is comprised of cash and warrants. The total amount of cash payments
is dependent upon the timing and magnitude of the amounts paid to us by Nycomed. In 2004, we paid our advisor $325,000 in connection with this transaction. On November 30, 2004, in connection
with the Nycomed transaction, we issued a warrant to our financial advisor to purchase up to 55,732 shares of our common stock at an exercise price of $6.28 per share.

In
July 2004, we entered into a lease agreement for 58,000 square feet of commercial manufacturing space in Tewksbury, Massachusetts. This lease has a five year, nine month term
with options to extend the lease for up to two additional five-year terms at predetermined rental rates. Initially, we will receive nine months of occupancy free of base rent, followed by
base rent of approximately $400,000 for the next twelve months with scheduled annual rental rate increases thereafter. In October 2004, we paid an initial security deposit of
$1.0 million to the landlord as part of the lease, subject to reduction if we make certain tenant improvements and upon the installation of equipment in the facility. In August 2004, we
entered into a $2.0 million loan agreement with the Massachusetts Development Finance Agency, the economic development authority of the Commonwealth of Massachusetts, to help fund tenant
improvements to the Tewksbury facility. Financing is available under this loan agreement upon completion by us of certain tenant improvements to the Tewksbury facility. The term of this facility, if
utilized, is expected to coincide with the term of the Tewksbury lease. As of December 31, 2004, no borrowings had been made under this loan agreement.

In
July 2004, we entered into definitive purchase agreements with institutional and accredited investors for a $21.5 million private placement of up to 3,440,000 newly
issued shares of common stock at a price of $6.25 per share and warrants to purchase up to an additional 688,000 shares of common stock at an exercise price of $8.50 per share. In August 2004,
a partial closing of this private placement was consummated, resulting in aggregate gross proceeds to us of approximately $17.9 million (net proceeds of approximately $16.5 million) and
the issuance of 2,865,522 shares of common stock and warrants to purchase up to an additional 573,105 shares of common stock.

In
October 2004, we completed the second and final closing of the $21.5 million private financing resulting in aggregate gross proceeds to us of approximately
$3.6 million (net proceeds of approximately $3.2 million) and the issuance of 574,478 shares of common stock at a price of $6.25 per share and warrants to purchase up to an additional
114,895 shares of common stock at an exercise price of $8.50 per share.

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All
of the shares of common stock sold in the $21.5 million private placement were registered under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-3 that was declared effective by the SEC on November 10, 2004.

In
February 2005, we issued 900,000 shares of 61/2% convertible exchangeable preferred stock resulting in aggregrate gross proceeds to us of $45.0 million
(net proceeds of approximately $41.5 million after deducting underwriting discounts and commissions and estimated offering expenses). In conjunction with this offering, we granted the
underwriters a 30-day option to purchase up to an additional 100,000 shares of preferred stock solely to cover over-allotments, if any. Each share of preferred stock has a
liquidation preference of $50 per share and is convertible into 7.2886 shares of our common stock, representing a conversion price of $6.86 per share. Dividends will be cumulative from the date of
original issue at the annual rate of $3.25 per share of preferred stock, payable quarterly. We may elect to automatically convert some or all of the preferred stock into shares of our common stock if
the closing price of our common stock has exceed $10.30 per share (150% of the conversion price) for at least 20 trading days during any 30-day trading period. Prior to March 1, 2009, if we
elect to automatically convert, or if any holder elects to voluntarily convert, the preferred stock, we will also make an additional payment equal to the aggregate amount of dividends that would have
been payable on the preferred stock so converted from the original date of issuance through and including March 1, 2009, less any dividends already paid on the preferred stock. This additional
payment is payable by us, at our option, in cash, in additional shares of our common stock or in a combination of both. The preferred shares were sold under a shelf registration statement that was
declared effective by the Securities and Exchange Commission on January 7, 2005.

We
believe, based on our operating plans, that our existing resources, including scheduled proceeds from Nycomed and the proceeds from the February 2005 sale of preferred stock,
will be adequate to fund our planned operations, including increases in spending for our AI-700 Phase 3 clinical program, for at least the next twelve months and, based on our current
operating plan, we believe these resources will be adequate to permit us to complete enrollment of patients in each of the AI-700 pivotal Phase 3 clinical trials, to complete the
90-day follow-up period on the required subset of patients, and to publicly announce a summary of the results of these Phase 3 clinical trials. We cannot assure you, however,
that our clinical trials or other plans will proceed as anticipated, and therefore we cannot assure you that the net proceeds will actually be adequate to reach these milestones. In addition, over the
coming months and years we may require significant additional funds to develop, conduct clinical trials, achieve regulatory approvals, build-out and qualify commercial manufacturing space
and, subject to regulatory approval, commercially launch AI-700, our other product candidates under development and future product candidates. Our future capital requirements will depend
on many factors, including the scope and progress made in our research and development activities and our clinical trials and the size and timing of creating expanded manufacturing capabilities. We
may also need additional funds for possible future strategic acquisitions of businesses, products or technologies complementary to our business. We do not expect to generate significant revenues,
other than possible license or milestone payments, from commercial sale of our products unless or until we or current or potential partners complete clinical trials for our products and receive
marketing approval from the applicable regulatory authorities. When additional funds are required or when we anticipate that funds will be needed, we may raise such funds from time to time through
public or private sales of equity or from borrowings or we may delay funding of certain development activities which could delay the completion of our AI-700 clinical trials, the filing of
our AI-700 NDA
and the commercialization of AI-700 which would have a materially adverse impact on our growth plans.

Shelf Registration Statement

On December 23, 2004, we filed with the Securities and Exchange Commission a "universal shelf" registration statement on Form S-3
(Registration No. 333-121618) providing for the offer, from time to

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time,
of common stock, preferred stock, debt securities and warrants up to an aggregate of $100.0 million. On January 7, 2005, the SEC declared effective the shelf registration
statement. In February 2005, we sold under the shelf registration statement 900,000 shares of our 61/2% convertible exchangeable preferred stock, resulting in net proceeds to us
of approximately $41.5 million, after deducting underwriting discounts and commissions and estimated offering expenses. As of the filing of this annual report, the shelf registration statement
remains effective and, subject to market conditions and our capital needs, we may again seek to use any remaining availability under the shelf registration statement by making an offering of
securities covered for sale under the registration statement. In addition, we may amend our shelf registration statement or file a new shelf registration statement to increase the Company's
potential access to capital. If we elect to raise additional capital using a shelf registration statement, we may use the net proceeds from the sale of these securities for general corporate purposes,
which may include funding clinical trials, research and development, regulatory activities and the build-out of our commercial manufacturing facility in Tewksbury, Massachusetts,
acquisitions, including acquisitions of companies, products, intellectual property or other technology, repayment or refinancing of existing indebtedness, investments, capital expenditures, repurchase
of our capital stock and for any other purposes that we may specify in any prospectus supplement.

Off-Balance Sheet Financing Arrangements

We currently do not have any special purpose entities or off-balance sheet financing arrangements other than operating leases.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2004 and the effect such obligations are expected to have on our liquidity
and cash flow in future periods:

Payments Due by Period

|Contractual Obligations                                          |  | Total
Obligations
All Years |        | 2005 Through
2006 |   | 2007 Through
2008 |  | 2009 Through
2010 |       | After 2010
|---------------------------------------------------------------- |  | --------------------------- | ------ | ----------------- | - | ----------------- |  | ----------------- | ----- | ----------
|
|Capital lease obligations (including interest)                   |  | $                           | 215    |                   | $ | 215               |  | $                 |      |           
|Operating lease obligations                                      |  |                             | 19,902 |                   |   | 5,239             |  |                   | 5,911 |           
|Notes payable (including interest)                               |  |                             | 3,956  |                   |   | 2,281             |  |                   | 1,675 |           
|Purchase orders for capital equipment and leasehold improvements |  |                             | 5,033  |                   |   | 5,033             |  |                   |      |           
|                                                                 |  |                             |        |                   |   |                   |  |                   |       |           
|Total contractual cash obligations                               |  | $                           | 29,106 |                   | $ | 12,768            |  | $                 | 7,586 |           
|                                                                 |  |                             |        |                   |   |                   |  |                   |       |           

Our
operating lease obligations relate to our facility leases.

As
of December 31, 2004, we have entered into purchase orders for capital equipment and leasehold improvements which total approximately $12.4 million. Against these
purchase orders we have paid approximately $7.4 million in deposits. The table above reflects the remaining amounts due on these purchase orders. In 2005, we anticipate expenditures for
equipment purchases totaling approximately $8.0 million in excess of the above reflected amounts.

A
substantial portion of the purchase orders for capital equipment and leasehold improvements in the table above is needed for expanded manufacturing of AI-700. The Company's
efforts to build-out a commercial manufacturing facility for AI-700 are in the early construction phases. On November 11, 2004, the Company entered into an engineering
and construction management services agreement with a contractor to perform on behalf of the Company, engineering, design and construction management

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services
in connection with the build-out of the commercial manufacturing facility in Tewksbury, Massachusetts. The total estimated value of this cost plus percentage fee type contract, as
amended on March 9, 2005, is $6.2 million of which $2.9 million is reflected in the total of $12.4 million of purchase orders for capital equipment and leasehold
improvements as of December 31, 2004. In 2004, the Company paid approximately $1.6 million against this contract. We expect that the build-out of this commercial manufacturing facility
will be substantially completed in 2005 and that our total payments in 2005 for this build-out will be approximately $20 million, excluding separately purchased equipment.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities and expenses. On an on-going basis, we evaluate our estimates and judgments, including those related to accrued expenses, fair valuation of stock
related to stock-based compensation and income taxes. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue.The year ended December 31, 2004 is the first year in which we recognized revenue. We recognize revenue from
license arrangements in accordance with Staff Accounting Bulletin 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"). We recognize revenue from license payments not tied to achieving a specific performance milestone ratably over the period
over which we are obligated to perform services. The period over which we are obligated to perform services is estimated based on available facts and circumstances. We recognize revenue from
performance payments, when such performance is substantially in our control and when we believe that completion of such performance is reasonably probable, ratably over the period over which we
estimate that we will perform such performance obligations. Substantive at-risk milestone payments, which are based on achieving a specific performance milestone when performance of such
milestone is contingent on performance by others or for which achievement can not be reasonably estimated or assured, are recognized as revenue when the milestone is achieved and the related payment
is due, provided that there is no substantial future service obligation associated with the milestone. Revenue in connection with license arrangements is recognized over the term of the arrangement
and is limited to payments collected or due and reasonably assured of collection. In circumstances where the arrangement includes a refund provision, we defer revenue recognition until the refund
condition is no longer applicable unless, in our judgment, the refund circumstances are within our operating control and unlikely to occur. Payments received in advance of being recognized as revenue
are deferred.

We
are recognizing collaboration revenue of $12.0 million associated with the initial license and performance-based payments under the Nycomed agreement based on an estimated
recognition period of forty-two months over which we are obligated to perform services supporting the agreement. This estimated recognition period may change if available facts and
circumstances change. A change in this estimate could result in a significant change to the amount of revenue recognized in future periods. In addition, if the Nycomed collaboration agreement is
terminated for reasons other than certain non-performance by us, we would recognize the remainder of the payments we have received or otherwise expect to collect over the amortization
period at the time of termination.
We will not recognize revenue associated with the potential $58 million in milestone-based payments that may be earned under the Nycomed agreement until the underlying regulatory and sales
milestones are achieved.

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Accrued Expenses.As part of the process of preparing consolidated financial statements we are
required to estimate accrued
expenses. This process involves identifying services which have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each
balance sheet date in our consolidated financial statements. Examples of estimated expenses for which we accrue include professional service fees, such as lawyers and accountants, and contract service
fees such as amounts paid to clinical monitors, data management organizations and investigators in conjunction with clinical trials, and fees paid to contract manufacturers in conjunction with the
production of clinical materials. In connection with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels
of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs which
have begun to be incurred or we under- or over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high.
The date on which certain services commence, the level of services performed on or before a given date and the cost of such services are often judgmental. We make these judgments based upon the facts
and circumstances known to us in accordance with accounting principles generally accepted in the United States of America.

Stock-Based Compensation and Other Equity Instruments.We have elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for our stock-based compensation plans, rather than the alternative
fair value accounting method provided for under SFAS No. 123,Accounting for Stock-Based Compensation. Accordingly, we have not recorded
stock-based compensation expense for stock options issued to employees in fixed amounts with exercise prices at least equal to the fair value of the underlying common stock on the date of grant. In
the notes to our consolidated financial statements we provide pro forma disclosures in accordance with SFAS No. 123 and related pronouncements. We account for transactions in which services are
received in exchange for equity instruments based on the fair value of such services received from non-employees or of the equity instruments issued, whichever is more reliably measured,
in accordance with SFAS No. 123 and EITF Issue No. 96-18,Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services. We account for transactions in which we grant warrants in connection with the issuance of debt in accordance with APB 14, Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants. The two factors which most affect charges or credits to operations related
to stock-based compensation are the fair value of the common stock underlying stock options for which stock-based compensation is recorded and the volatility of such fair value.

Accounting
for equity instruments granted or sold by us under APB No. 14, APB No. 25, SFAS No. 123 and EITF No. 96-18 requires fair value
estimates of the equity instrument granted or sold. If our estimates of the fair value of these equity instruments are too high or too low, it would have the effect of overstating or understating
expenses. When equity instruments are granted or sold in exchange for the receipt of goods or services and the value of those goods or services can be readily estimated, we use the value of such goods
or services to determine the fair value of the equity instruments. When equity instruments are granted or sold in exchange for the receipt of goods or services and the value of those goods or services
can not be readily estimated, as is true in connection with most stock options and warrants granted to employees or non-employees, we estimated the fair value of the equity instruments
based upon consideration of factors which we deemed to be relevant at the time using cost, market and/or income approaches to such valuations. Because shares of our common stock were not publicly
traded prior to our initial public offering in October 2003, market factors historically considered in valuing stock and stock option grants include comparative values of public companies
discounted for the risk and limited liquidity provided for in the shares we are issuing, pricing of private sales of our convertible preferred stock, prior valuations of stock grants and the effect of
events that have occurred between the time of such grants, economic trends, perspective provided by investment

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banks
and the comparative rights and preferences of the security being granted compared to the rights and preferences of our other outstanding equity.

Income Taxes.As part of the process of preparing our consolidated financial statements we are required to estimate our
income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from
differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. In addition, as of December 31, 2004, we had federal tax net
operating loss carryforwards of $84.0 million, which expire through 2024. We also have research and development credit carryforwards of $5.3 million. We have recorded a valuation
allowance to fully offset against these otherwise recognizable net deferred tax assets due to the uncertainty surrounding the timing of the realization of the tax benefit. In the event that we
determine in the future that we will be able to realize all or a portion of its net deferred tax benefit, an adjustment to deferred tax valuation allowance would increase net income in the period in
which such a determination is made. The Tax Reform Act of 1986 contains provisions that may limit the utilization of tax attributes (including net operating loss carryforwards and credits) available
to be used in any given year in the event of significant changes in ownership interest, as defined.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment
("SFAS No. 123R"). This Statement is a revision of SFAS No. 123 and supersedes Accounting Principles Board Opinion No. 25 and its related implementation guidance. SFAS
No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities
to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is
effective for the first interim or annual reporting period that begins after June 15, 2005. We expect to adopt SFAS No. 123R using the Statement's modified prospective application
method.

Certain Factors Which May Affect Future Results

Our operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of
factors. Except for the historical information in this report, the matters contained in this report include forward-looking statements that involve risks and uncertainties. The following factors,
among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time. Such
factors, among others, may have a material adverse effect upon our business, results of operations and financial condition.

Risks Related to Our Company

We have not generated any product revenue to date, and we may not achieve profitability for some time, if at all.

We are focused on product development and we have not generated any revenue from commercial sales of our products to date. We have incurred losses each year of
our operations and we expect to continue to incur operating losses for the next several years. The process of developing our products requires significant clinical, development and laboratory testing
and clinical trials as well as regulatory approvals. In addition, commercialization of our product candidates will require us to establish sales, marketing and manufacturing capabilities, either
through internal hiring or through contractual relationships with others. We expect our research and development and general and administrative expenses will increase over the next several years.

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If we fail to obtain regulatory approvals for our product candidates under development, and in particular our lead product candidate AI-700,
we will not be able to generate revenues from the commercialization or sale of our product candidates.

We must receive regulatory approval of each of our product candidates before we can commercialize or sell that product candidate. The pre-clinical
laboratory testing, formulation development, manufacturing and clinical trials of any product candidates we develop independently or in collaboration with third parties, as well as the distribution
and marketing of these product candidates, are regulated by numerous federal, state and local governmental authorities in the United States, principally the FDA, and by similar agencies in other
countries. The development and regulatory approval process takes many years, requires the expenditure of substantial resources, is uncertain and subject to delays, and will thus delay our receipt of
revenues, if any, from any of our product candidates. We cannot assure you that our clinical trials will demonstrate the safety and efficacy of any of our product candidates or will result in
marketable products.

No
product can receive FDA approval unless human clinical trials show both safety and efficacy for each target indication in accordance with FDA standards. A number of companies in the
pharmaceutical and biotechnology industries have suffered significant setbacks in late stage clinical trials even after achieving promising results in early stage development. We therefore cannot
assure you that the results from our Phase 2 clinical trials for AI-700 will be predictive of results obtained in our Phase 3 clinical trials. Many of the patients in our
AI-700 clinical trial have coronary heart disease. As part of our AI-700 Phase 3 clinical trials, patients will be exposed to potential safety risks associated with a stress
test, including risks associated with a pharmacological stressor, and AI-700. Given the nature of the AI-700 Phase 3 clinical trial, including administering AI-700
to larger numbers of at-risk patients and new clinical sites, adverse events are expected to be encountered during the clinical trial. Adverse events are also likely to be encountered in
clinical trials for our other products, which clinical trials also include at-risk patients. If significant adverse events are detected and these events are attributable to our products,
such events could delay, limit or prevent regulatory agency approval. Further, data obtained from pre-clinical and clinical activities are subject to varying interpretations that could
delay, limit or prevent regulatory agency approval. We cannot assure you that our Phase 3 plan for AI-700 will successfully address the concerns of the FDA or that the results of the Phase
3 program will establish the safety and efficacy of AI-700 sufficiently for us to obtain regulatory approval.

We
may also encounter delays or rejections based on our inability to enroll enough patients to complete our clinical trials. We may also encounter delays, resulting from the need to
enroll more patients than we currently plan for in our clinical trials, based on our inability to enroll a mix of patients that is consistent with our estimated clinical trial enrollment or a change
in the sample size required to meet the study endpoints. Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients
to clinical sites, and the eligibility criteria for the study and the freedom to operate with respect to intellectual property. Delays in planned patient enrollment, or the need to enroll more
patients, may result in increased costs and delays, which could have a harmful effect on our ability to develop products. We may encounter delays or rejections based on changes in regulatory agency
policies during the period in which we develop a drug or the period required for review of any application for regulatory agency approval of a particular compound. On May 1, 2004, changes went
into effect in the regulation of clinical trials in Europe. Our continuing compliance with these changes could lead to delays to our clinical trials. We also may encounter delays in the event we are
unable to produce clinical trial material in sufficient quantities and of sufficient quality to meet the schedule for our planned clinical trials. In addition, we rely on a number of third parties,
such as clinical research organizations, to help support the clinical trials by performing independent clinical monitoring, data acquisition and data evaluations. Any failure on the part of these
third parties could delay the regulatory approval process.

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Failure
to obtain regulatory approval or any delay or setback in obtaining regulatory agency approvals could:



In
particular, failure to obtain approval or substantial delays in obtaining approval for our lead product candidate, AI-700, would delay our receipt of product revenues and materially
adversely affect our business, financial condition and results of operations.

We
cannot be certain that we will obtain any regulatory approvals in other countries and the failure to obtain these approvals may materially adversely affect our business, financial
condition and results of operations. In order to market our products outside of the United States, we and our current, and potential future, collaborative partners must establish and comply with
numerous and varying regulatory requirements of other countries regarding safety and efficacy. The approval procedures vary among countries and can involve additional product testing and additional
administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may
include all of the risks associated with obtaining FDA approval detailed above. Approval by the FDA does not ensure approval by the regulatory authorities of other countries. In addition, many
countries outside the United States require a separate review process prior to marketing to determine whether their national health insurance scheme will pay for newly approved products, as well as
the price which may be charged for a product.

Our products, if approved, may fail to achieve market acceptance.

There can be no assurance that any products we successfully develop, if approved for marketing, will achieve market acceptance or generate significant revenues.
Each of our product candidates is intended to replace or alter existing therapies or procedures, and hospitals, physicians or patients may conclude that these products are less safe or effective or
otherwise less attractive than these existing therapies or procedures. For example, our lead product candidate, AI-700, is a contrast agent for use in ultrasound imaging procedures which
will compete with existing nuclear imaging and stress echocardiography. Hospitals, physicians or patients may prefer these existing procedures to AI-700 enhanced ultrasound imaging. If our
products do not receive market acceptance for any reason, it would adversely affect our business, financial condition and results of operations.

Further,
our competitors may develop new technologies or products that are more effective or less costly, or that seem more cost-effective, than our products. We can give no
assurance that hospitals, physicians, patients or the medical community in general will accept and use any products that we may develop.

If we cannot raise additional capital on acceptable terms, we may be unable to complete planned clinical trials, obtain regulatory approvals or
commercialize our product candidates.

We will require substantial future capital in order to continue to conduct the research and development, clinical and regulatory activities necessary to bring our
product candidates to market and to establish commercial manufacturing, marketing and sales capabilities. Our future capital requirements will depend on many factors, including:



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We
intend to seek additional funding through strategic collaborations and may seek funding through private or public sales of our securities or by licensing all or a portion of our
technology. This funding may significantly dilute existing stockholders or may limit our rights to our technology.

We
cannot assure you that we can obtain additional funding on reasonable terms, or at all. If we raise additional funds by issuing equity securities, our stock price may decline, our
existing stockholders may experience significant dilution, and the newly issued securities may have rights superior to those of our common stock. If we raise additional funds by issuing debt, we may
be subject to limitations on our operations and such debt may have rights senior to the debentures, if issued. If we cannot obtain adequate funds, we may:



Claims by other companies that we infringe their proprietary technology may result in liability for damages or stop our development and
commercialization efforts.

Competitors and other third parties may initiate patent litigation against us in the United States or in foreign countries based on existing patents or patents
that may be granted in the future. Many of our competitors have obtained patents covering products and processes generally related to our products and processes, and they may assert these patents
against us. Moreover, there can be no assurance that these competitors have not sought or will not seek additional patents that may cover aspects of our technology. As a result, there is a greater
likelihood of a patent dispute than would be expected if our competitors were pursuing unrelated technologies.

While
we conduct patent searches to determine whether the technologies used in our products infringe patents held by third parties, numerous patent applications are currently pending and
may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent
uncertainty in conducting patent searches, there can be no guarantee that we will not violate third-party patent rights that we have not yet identified.

We
know of U.S. and foreign 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 the
United States and various foreign jurisdictions that relate to some aspects of our product candidates, which, if issued, could subject us to infringement actions. In particular, we are aware of U.S.
and foreign patents owned by third parties, including potential competitors, that arguably cover aspects of our AI-700 contrast agent. We and several of these parties have recently been
actively engaged in opposing the grant of European patents with claims that arguably cover aspects of our AI-700 product. Parties may contest

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patents
in Europe prior to contesting the counterpart patents in the United States because of procedural differences between European and U.S. patent laws as well as economic considerations. There is
a significant possibility that one or more of these third parties will use litigation to assert their patents in the United States or Europe.

The
owners or licensees of these and other patents may file one or more infringement actions against us. In addition, a competitor may claim misappropriation of a trade secret by an
employee hired from that competitor. Any such infringement or misappropriation action could cause us to incur substantial costs defending the lawsuit and could distract our management from our
business, even if the allegations of infringement or misappropriation are unwarranted. The defense of multiple claims could have a disproportionately greater impact. Furthermore, a party making this
type of claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from making, using, selling,
offering for sale or importing our products or prevent our customers from using our products. If a court determined or if we independently concluded that any of our products or manufacturing processes
violated third-party proprietary rights, our clinical trials could be delayed and there can be no assurance that we would be able to reengineer the product or processes to avoid those rights, or to
obtain a license under those rights on commercially reasonable terms, if at all.

If we are unable to protect our intellectual propriety rights, our competitors may develop and market products with similar features that may reduce
demand for our products, and we may be prevented from establishing collaborative relationships on favorable terms.

The following factors are important to our success:



We
will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or
are effectively maintained as trade secrets.

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

We
also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by
entering into confidentiality agreements with parties that have access to it, such as our corporate partners, collaborators, employees and consultants. Any of these parties may breach the agreements
and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret,

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know-how
or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially
adversely affected.

We may become involved in lawsuits to protect or enforce our patents that would be expensive and time consuming.

In order to protect or enforce our patent rights, we may initiate patent litigation against third parties in the United States or in foreign countries. In
addition, we may become subject to interference or opposition proceedings conducted in patent and trademark offices to determine the priority of inventions. The defense of intellectual property
rights, including patent rights through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings would be costly and divert our technical and management
personnel from their normal responsibilities. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted
narrowly and could put our patent applications at risk of not issuing.

Furthermore,
because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation, confidential information may be inadvertently disclosed in the form of documents
or testimony in connection with discovery requests, depositions or trial testimony. This disclosure could materially adversely affect our business and financial results.

We have never manufactured any of our product candidates in commercial quantities, and if we fail to develop an effective manufacturing capability for
our products, including our lead product candidate AI-700, we may be unable to commercialize these products.

We have no experience in manufacturing our products for commercial use and limited experience in designing equipment for the manufacture of our products. We are
working to build out and qualify a commercial manufacturing facility in Tewksbury, Massachusetts and to demonstrate that we can produce AI-700 at a commercial manufacturing scale prior to
our filing of a NDA for AI-700 and, subject to required regulatory approvals, we intend to manufacture AI-700 in this facility for commercial use. We can not assure you that we
will be able to successfully manufacture our products in sufficient quantities for commercial sale, or obtain the necessary regulatory approvals for such commercial manufacture, at all or in a timely
or economical manner. Our intention to manufacture AI-700 or other products exposes us to the following risks, any of which could delay or prevent the approval of our products by the FDA
or corresponding state and foreign agencies, or the commercialization of our products, or result in higher costs or inability to meet demand for AI-700 leading to potential revenue loss,
and any of which would have a material adverse impact on our business, financial condition and results of operations.



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Under
the terms of our collaboration agreement with Nycomed, we are responsible for the commercial manufacture of AI-700 for marketing and sale by Nycomed in Europe. Failure
to manufacture AI-700 in a timely manner or on an economic basis, or in sufficient quantities, could jeopardize our relationship with Nycomed. We do not currently have a European sales
force, nor do we have experience with regard to the commercialization, marketing, sale or distribution of pharmaceutical products in Europe, and we rely entirely on Nycomed for this expertise. Any
termination of our relationship with Nycomed would have a material adverse impact on our business, financial condition and results of operations.

It is our intention to remove our AI-700 manufacturing equipment from the facilities of our third party contract manufacturer after which we
will have no facility within which to manufacture AI-700 until the new commercial manufacturing facility is built-out and qualified or until other arrangements are made.

It is our intention in 2005 to remove our AI-700 manufacturing equipment from its current location within the facilities of a third-party contract
manufacturer. When we remove this manufacturing equipment, we expect that we will have sufficient inventory of AI-700 clinical trial material to complete our Phase 3 program. However,
there can be no assurance that such inventory will prove sufficient or that the inventory will not get damaged or otherwise disqualified. After we remove this manufacturing equipment, we will have no
facility within which to manufacture AI-700 until the new commercial manufacturing facility is built-out and qualified or until other arrangements are made. If we lack
sufficient inventory of AI-700 clinical trial material to complete our Phase 3 program or are unable to manufacture sufficient inventory on a timely basis, our Phase 3 program could be
delayed and would consequently delay our ability to commercialize AI-700. These delays could have a material adverse effect on our business, financial condition and results of operations.

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If third-party manufacturers of our products fail to devote sufficient time and resources to our concerns, or if their performance is substandard, our
clinical trials may be delayed and our costs may rise.

We may rely substantially on third-party contract manufacturers to supply, store and distribute our potential products for our clinical trials and other
development needs. Our reliance on these third-party manufacturers will expose us to the following risks, any of which could delay or prevent the completion of our clinical trials, the approval of our
products by the FDA, or the commercialization of our products, result in higher costs, or deprive us of additional product candidates, and any of such effects would have a material adverse impact on
our business, financial condition and results of operations.



Drug
manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government
regulations and corresponding foreign standards. While we are obligated to audit the performance of third party contractors, we do not have control over our third-party manufacturers' compliance with
these regulations and standards. Failure by our third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil
penalties, failure of the government to grant market approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions,
any of which could significantly and adversely affect our business.

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

To date our product candidates have been manufactured in small quantities for pre-clinical and clinical trials. If any of these product candidates are
approved by the FDA or foreign regulatory authorities for commercial sale, we will need to manufacture them in larger quantities. For AI-700, it is our intention to seek regulatory
approval after we have demonstrated that we can manufacture AI-700 at a larger batch scale than is being used for clinical trial materials. We cannot assure you that we will be able to
successfully increase the manufacturing capacity or manufacture at a larger batch scale,

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whether
on our own or in collaboration with third party manufacturers, for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing
may require certain additional validation studies, which the FDA must review and approve. If we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory
approval or commercial launch of that product candidate may be delayed or there may be a shortage in supply of that product candidate. 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 maintaining reliable product packaging for
diverse environmental conditions, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could
seriously hurt our business.

Materials necessary to manufacture our products may not be available, which may delay our development and commercialization activities.

Only a few facilities manufacture some of the raw materials necessary to manufacture our products. If we need to purchase a raw material that is in limited supply
for our clinical trials, or for commercial distribution if we obtain marketing approval of a product candidate, we cannot assure you that one or more suppliers would be able to sell us that raw
material at the time we need it and on commercially reasonable terms. If we change suppliers for any of these materials or any of our suppliers experiences a shutdown or disruption in the facilities
used to produce these materials, due to technical, regulatory or other problems, it could harm our ability to manufacture our products. Our inability to obtain required raw materials for any reason
could substantially impair our development activities or the production, marketing and distribution of our products.

We have no experience selling, marketing or distributing our products and no internal capability to do so.

If we receive regulatory approval to commence commercial sales of any of our products, we will face competition with respect to commercial sales, marketing and
distribution. These are areas in which we have no experience. To market any of our products directly, we must develop a direct marketing and sales force with technical expertise and supporting
distribution capability. Alternatively, we may engage a pharmaceutical or other healthcare company with an existing distribution system and direct sales force to assist us. There can be no assurance
that we will successfully establish sales and distribution capabilities either on our own or in collaboration with third parties or gain market acceptance for our products. To the extent we have or
will enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties and there can be no assurance that our efforts will succeed.

We will establish collaborative relationships, and those relationships may expose us to a number of risks.

We will rely on a number of significant collaborative relationships with pharmaceutical or other healthcare companies for our manufacturing, research funding,
clinical development and/or sales and marketing performance. Reliance on collaborative relationships poses a number of risks, including the following:



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In
July 2004, we entered into a collaboration, license and supply agreement with Nycomed in which we granted Nycomed rights to develop and market AI-700 in Europe.
There can be no assurance that the regulatory goals, sales targets and other objectives 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 a material adverse impact on our business, financial condition and results of operations
including, under certain conditions, reduction of royalty rates, delays in regulatory approvals and product sales, penalties and termination of the agreement. Under certain provisions of this
collaboration agreement, if the Company fails in any material respect to use all commercially reasonable efforts to carry out referenced obligations under the agreement, we would be obligated to pay
Nycomed liquidated damages of up to $12 million. Although we plan to carry out all of these obligations, which we believe are in our control, there can be no assurance that termination of this
agreement will not occur or that such termination would not result in the Company incurring liquidated damages of up to $12 million.

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

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 extensive research efforts, rapid developments and intense competition. We cannot assure you that our products will
compete successfully or that research and development by others will not render our products obsolete or uneconomical. Our failure to compete effectively would materially adversely affect our
business, financial condition and results of operations. We expect that successful competition will depend, among other things, on product efficacy, safety, reliability, availability, timing and scope
of regulatory approval and price. Specifically, we expect important factors will include the relative speed with which we can develop products, complete the clinical, development and laboratory
testing and regulatory approval processes and supply commercial quantities of the product to the market.

We
expect competition to increase as technological advances are made and commercial applications broaden. In commercializing our initial product candidates and any additional products we
develop using our HDDS and PDDS technologies, we will face substantial competition from large pharmaceutical, biotechnology and other companies, universities and research institutions.



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Relative
to us, most of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and
obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Many of our competitors may achieve product commercialization or patent protection earlier than we
will. Furthermore, we believe that some of our competitors have used, and may continue to use, litigation to gain a competitive advantage. Finally, our competitors may use different technologies or
approaches to the development of products similar to the products we are seeking to develop.

If we are unable to retain key personnel and hire additional qualified scientific, sales and marketing, and other personnel, we may not be able to
successfully achieve our goals.

We depend on the principal members of our scientific and management staff. The loss of these principal members' services might significantly delay or prevent the
achievement of research, development or business objectives and could materially adversely affect our business, financial condition and results of operations. We do not maintain key person life
insurance on any of these principal members. We do not have employment contracts with any of these principal members.

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

Further,
we expect that our potential expansion into areas and activities requiring additional expertise, such as further clinical trials, governmental approvals, commercial
manufacturing and marketing, will place additional requirements on our management, operational and financial resources. We expect these demands will require an increase in management and scientific
personnel and the development of additional expertise by existing management personnel. The failure to attract and retain such personnel or to develop such expertise could materially adversely affect
prospects for our success.

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We expect to develop international operations that will expose us to additional business risks.

We expect, whether directly or through collaborative relationships, to develop operations outside the United States in order to market and distribute our
products. Regardless of the extent to which we seek to develop these operations ourselves or in collaboration with others, we cannot be sure that our international efforts will be successful. Any
expansion into international markets will require additional resources and management attention and will subject us to new business risks. These risks could lower the prices at which we can sell our
products or otherwise have an adverse effect on our operating results. Among the risks we believe are most likely to affect any international operations are:



Risks Relating to Our Industry

Even if we obtain marketing approval, our products will be subject to ongoing regulatory review.

If regulatory approval of a product is granted, such approval may be subject to limitations on the indicated uses for which the product may be marketed or contain
requirements for costly, post-marketing follow-up studies. As to products for which marketing approval is obtained, the manufacturer of the product and the manufacturing
facilities will be subject to continual review and periodic inspections by the FDA and other regulatory authorities. In addition, the labeling, packaging, adverse event reporting, storage,
advertising, promotion and record keeping related to the product will remain subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the product,
manufacturer or facility may result in restrictions on the product or the manufacturer, including withdrawal of 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 or policies.

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

Market acceptance of our products will be limited if users of our products are unable to obtain adequate reimbursement from third-party payors.

Government health administration authorities, private health insurers and other organizations generally provide reimbursement for products like our product
candidates, and our commercial success will depend in part on these third-party payors agreeing to reimburse patients for the costs of our products. Even if we succeed in bringing any of our proposed
products to market, we cannot assure you that third-party payors will consider our products cost-effective or provide reimbursement in whole or in part for their use.

Significant
uncertainty exists as to the reimbursement status of newly approved health care products. Each of our product candidates is intended to replace or alter existing therapies or
procedures. These third-party payors may conclude that our products are less safe, effective or

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cost-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 for reimbursement or fail to reimburse them adequately, sales will suffer as some physicians or their patients will opt for a competing
product that is approved for reimbursement or is adequately reimbursed. Even if third-party payors make reimbursement available, these payors' reimbursement policies may adversely affect the ability
of us and our potential collaborators to sell our products on a profitable basis.

Moreover,
the trend toward managed healthcare in the United States, the growth of organizations such as health maintenance organizations, and legislative proposals to reform healthcare
and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for our products which could adversely
affect our business, financial condition and results of operations.

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

We may be required to defend lawsuits or pay damages in connection with the alleged or actual harm caused by our products or product candidates.

We face an inherent business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in harm to others.
This risk exists in clinical trials as well as in commercial distribution. In addition, the pharmaceutical and biotechnology industries in general have been subject to significant medical malpractice
litigation. We may incur significant liability if product liability or malpractice lawsuits against us are successful. Furthermore, product liability claims, regardless of their merits, could be
costly and divert our management's attention from other business concerns, or adversely affect our reputation and the demand for our products. Although we maintain product liability insurance, we
cannot be certain that this coverage will be adequate or that it will continue to be available to us on acceptable terms.

Rapid technological change could make our products obsolete.

Pharmaceutical technologies have undergone rapid and significant change. We expect that pharmaceutical technologies will continue to develop rapidly. Our future
will depend in large part on our ability to maintain a competitive position with respect to these technologies. Any compounds, products or processes that we develop may become obsolete before we
recover any expenses incurred in connection with their development. Rapid technological change could make our products obsolete, which could materially adversely affect our business, financial
condition and results of operations.

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

Our research and development activities involve the use of hazardous materials, including chemicals and biological materials. We believe that our procedures for
handling hazardous materials comply with federal and state regulations. However, there can be no assurance that accidental injury or contamination from these materials will not occur. In the event of
an accident, we could be held liable for any damages, which could exceed our available financial resources. This liability could materially adversely affect our business, financial condition and
results of operations.

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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 spent
approximately $30,500 during the fiscal year ended December 31, 2004 to dispose of these hazardous materials and waste products. We may be required to incur significant costs to comply with
environmental laws and regulations in the future that could materially adversely affect our business, financial condition and results of operations.

Risks Related to Our Common Stock

We expect that our stock price will fluctuate significantly.

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



The
market price of our common stock may also fluctuate in response to the exercise by us of rights under the terms of our convertible preferred stock. For example, we may elect to automatically
convert
the preferred stock if our common stock price has exceeded 150% of the conversion price of the preferred stock for at least 20 trading days during a 30-day trading period ending within five trading
days prior to the notice of automatic conversion. There is a risk of fluctuation in the price of our common stock between the time when we may first elect to automatically convert the preferred stock
and the automatic conversion date. These fluctuations may adversely affect the value of the common stock.

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

In February 2005, we issued and sold 900,000 shares of our 61/2% convertible exchangeable preferred stock. The preferred stock is senior to
the common stock as to liquidation. In the event of our voluntary or involuntary dissolution, liquidation or winding up of Acusphere, holders of our preferred stock will receive a liquidation
preference in an amount equal to $50 per share, plus all accrued and unpaid dividends through the distribution date. Only after holders of the preferred stock have received their liquidation
preference and any accrued and unpaid dividends will we distribute assets, if any are remaining, to our common stock holders.

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We may be the subject of securities class action litigation due to future stock price volatility.

In the past, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the
company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of
our management.

Future sales of common stock by our existing stockholders may cause our stock price to fall.

The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception
that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate. As of March 14, 2005, we have
17,829,756 shares of common stock outstanding and 900,000 shares of convertible preferred stock outstanding that are convertible into approximately 6,559,740 shares of our common stock,
plus up to a maximum of approximately 1,959,799 additional shares of our common stock issuable at our option in satisfaction of the maximum dividend make-
whole payment on these shares of preferred stock. All of the shares of common stock issuable upon conversion of our preferred stock will be freely tradable without restriction under the federal
securities laws unless purchased by our affiliates. In addition, in November and December 2004 registration statements covering the re-sale of up to 4,128,000 and 8,032,276 shares of our common
stock, respectively, were declared effective by the U.S. Securities and Exchange Commission, at which time many of these shares first became eligible for re-sale without restriction under federal
securities laws. If our common or preferred stockholders sell substantial amounts of our stock in the public market, or the market perceives that such sales may occur, the market price of our common
and convertible preferred stock could fall.

Additionally,
in July and October of 2004, we completed two separate closings of a private financing resulting in the issuance of 3,440,000 and 574,478 shares of common stock,
respectively, and warrants to purchase up to an additional 688,000 and 114,895 shares of common stock, respectively. We filed a registration statement with the Securities and Exchange Commission
covering the resale of these shares and shares issued upon exercise of the warrants, which registration statement was declared effective by the SEC on November 10, 2004, facilitating the resale
of these shares from time to time, which could result in volatility of our stock price.

On
December 8, 2004, we filed a registration statement with the SEC covering the resale of an aggregate of 7,568,313 shares and 463,963 shares issued upon exercise of the warrants
held by stockholders and warrant holders that held their shares and/or warrants prior to our initial public offering or have subsequently received shares and/or warrants in connection with services
rendered to us. This registration statement was declared effective by the SEC on December 22, 2004, facilitating the resale of these shares from time to time, which could result in volatility
of our stock price.

Our directors and management will exercise significant control over our company.

Our directors and executive officers and their affiliates collectively control approximately 12.0% of our outstanding common stock, excluding unexercised options
and warrants. As a result, these stockholders, if they act together, will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the
market price of our common stock.

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The terms of our outstanding shares of preferred stock may restrict our ability to raise additional capital or hamper or prevent an acquisition of us.

In February 2005 we issued and sold 900,000 shares of our 61/2% convertible exchangeable preferred stock. In the event of our voluntary or
involuntary dissolution, liquidation or winding up of Acusphere, holders of our preferred stock will receive a liquidation preference in an amount equal to $50 per share, plus all accrued and
unpaid dividends through the distribution date. Only after holders of the preferred stock have received their liquidation preference and any accrued and unpaid dividends will we distribute assets, if
any are remaining, to our common stock holders. Without the vote or consent of the holders of at least a majority of the shares of preferred stock, we can not authorize or sell any equity security
that ranks senior to the preferred stock as to dividends or distributions of assets upon liquidation, dissolution or winding up of Acusphere. As a result of this liquidation preference, it may be
difficult for us to raise additional capital through the sale of common stock or junior preferred stock on acceptable terms, or at all.

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

Under some circumstances, the holders of our outstanding shares of preferred stock may be entitled to elect some of the directors of Acusphere.

In February 2005 we issued and sold 900,000 shares of our 61/2% convertible exchangeable preferred stock. Cumulative dividends 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, commencing June 1, 2005. Any dividends must be declared
by our board of directors and must come from funds that are legally available for dividend payments. If we have not paid dividends on the preferred stock in an aggregate amount equal to at least six
quarterly dividends whether or not consecutive, we must increase the size of our board of directors by two additional directors. After this time, and for so long as these dividends remain due and
unpaid, holders of the preferred stock, voting separately as a class with holders of preferred stock ranking on the same basis as to dividends having like voting rights, will be entitled to elect two
additional directors at any meeting of stockholders at which directors are to be elected. These directors will be appointed to classes on the board as determined by our board of directors. These
voting rights will terminate when we have declared and either paid or set aside for payment all accrued and unpaid dividends. The terms of office of all directors so elected will terminate immediately
upon the termination of these voting rights.

Provisions of Delaware law or our charter documents could delay or prevent an acquisition of us, even if the acquisition would be beneficial to our
stockholders, and could make it more difficult for you to change management.

Provisions of Delaware law or our charter or by-laws could hamper a third party's acquisition of us, or discourage a third party from attempting to
acquire control of us. Stockholders who wish to participate in these transactions may not have the opportunity to do so. These provisions could also limit the price that investors might be willing to
pay in the future for shares of our common stock. Further, these provisions make it more difficult for stockholders to change the composition of our board of directors in any one year.

54

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These
provisions include:



We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

We have paid no cash dividends on our common stock to date and, other than cash dividends paid on our 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 of any 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 your sole source of gain for the foreseeable future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not used derivative financial instruments for speculation or trading purposes. However, we are exposed to market risk related to changes in interest
rates. Our current policy is to maintain an investment portfolio consisting mainly of U.S. money market and government-grade securities, directly or through managed funds, with maturities of one year
or less. Our cash is deposited in and invested through highly rated financial institutions in North America. Our short-term investments are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at December 31, 2004, we estimate that the fair value of our
investment portfolio would decline by an immaterial amount. We currently have the ability to hold our fixed income investments until maturity, and therefore we do not expect our operating results or
cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments.

Effects of Inflation

Our assets are primarily monetary, consisting of cash, cash equivalents and short-term investments. Because of their liquidity, these assets are not
directly affected by inflation. We also believe that we have intangible assets in the value of our technology. In accordance with generally accepted accounting principles, we have not capitalized the
value of this intellectual property on our consolidated balance sheet. Due to the nature of this intellectual property, we believe that these intangible assets are not affected by inflation. Because
we intend to retain and continue to use our equipment, furniture and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not
materially affect our operations. However, the rate of inflation affects our

55

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expenses,
such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Financial Statements, together with the independent auditors' report, appear at pages F-2 through F-28, respectively, of this Annual
Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of December 31, 2004 (the "Evaluation Date"), the Company's management, with the participation of the Company's Chief Executive Officer and the
Company's Senior Vice President and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, the Company's Chief Executive Officer and the Company's Senior Vice President and Chief
Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in ensuring that material information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's
rules and forms, including ensuring that such material information is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and the Company's Senior
Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

During the period covered by this report, there have been no changes in the Company's internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

56

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy
statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2004.

Code of Ethics

We have adopted a "code of ethics" as defined by regulations promulgated under the Securities Act of 1933, as amended, and the Exchange Act and a "code of
conduct" as defined by qualitative listing requirements promulgated by The Nasdaq National Market that apply to all of our directors, officers and employees, including our principal executive officer,
principal financial officer, principal accounting officer or controller, or persons performing similar functions. We collectively refer to these codes as our Code of Business Conduct and Ethics, a
current copy of which is attached as an exhibit to this Annual Report on Form 10-K. A current copy of our Code of Business Conduct and Ethics may also be obtained by any person,
without charge, upon request directed to our Investor Relations department at: Acusphere, Inc., Attention: Investor Relations, 500 Arsenal Street, Watertown, MA 02472.

We
intend to disclose substantive amendments to or waivers (including implicit waivers) of any provision of the Code of Business Conduct and Ethics that apply to our principal executive
officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website available at
http://www.acusphere.com.

ITEM 11. EXECUTIVE COMPENSATION

The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy
statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2004.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy
statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2004.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy
statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy
statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2004.

57

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                  
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.01           |  | Form of Underwriting Agreement (incorporated herein by reference to Exhibit 1.01 to the registrant's Registration Statement on Form S-3, File No. 333-121618)                                                                                                                                                                                
|1.02           |  | Form of Underwriting Agreement (incorporated herein by reference to Exhibit 1.01 to the Registrant's Current Report on Form 8-K filed February 18, 2005)                                                                                                                                                                                     
|3.01*          |  | Amended and Restated Certificate of Incorporation of registrant                                                                                                                                                                                                                                                                              
|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                                                                                                                                                                                                               
|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)                                                                                                                                                                                                                                                
|               |  |                                                                                                                                                                                                                                                                                                                                              

58

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|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)                                                                                                                                                     
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 |  | 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)
|10.05 |  | 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)                                                                                 
|10.06  |  | 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)                        
|10.07  |  | Lease Agreement by and between the registrant and Forest City 38 Sidney Street, Inc., dated as of April 18, 1995, as amended (incorporated herein by reference to Exhibit 10.08 to the registrant's
Registration Statement on Form S-1, File No. 333-106725)                                                                   
|10.08  |  | 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)                                                                                                   
|10.09  |  | 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)                                                                                              
|10.10  |  | 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)                                                                                                
|10.11  |  | Warrant Agreement by and between the registrant and Gregory Stento, dated as of August 19, 1998 (incorporated herein by reference to Exhibit 10.13 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)                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                

59

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|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 warrantholders 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                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                    

60

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|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  |  | 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)                  
|10.33  |  | 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)                                                                                                                               
|10.34  |  | 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)                                                                       
|10.35  |  | 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)                                                             
|10.36  |  | 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)                                                            
|10.37  |  | 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)                                           
|10.38  |  | 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)                                  
|10.39  |  | 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)                                                               
|10.40  |  | Contract Work Authorization (Form 2) No. 2 for Engineering and Construction Managemetn Services (incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K filed
December 14, 2004)                                                                                                   
|10.41 |  | Form of Non-Qualified Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.12 to the registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 30,
 2004)                                                                                                      
|10.42 |  | Form of Incentive Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.13 to the registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 30,
2004)                                                                                                           
|10.43 |  | Form of Non-Qualified Stock Option Agreement (1 year vesting schedule) (incorporated herein by reference to Exhibit 10.14 to the registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 30,
 2004)                                                                                                      
|10.44  |  | 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)                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                             

61

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|12.01  |  | Computation of Ratios of Earnings to Fixed Charges (incorporated herein by reference to Exhibit 12.01 to the registrant's Registration Statement on Form S-3, File No. 333-121618)
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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                                                                                                                                                       

---

We hereby file as part of this Form 10-K the exhibits listed in Item 15(a)(3) above. Exhibits which are incorporated herein by reference can be
inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C., and at the Commission's regional offices at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60611-2511, and at 233 Broadway, New York, NY 10279. Copies of such material can also be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 29549, at prescribed rates.

Except for the schedule of Unaudited Quarterly Results of Operations, no financial statement schedules have been submitted because they are not required, not
applicable, or because the information required is included in the financial statements or the notes thereto.

62

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SIGNATURES

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

| | ACUSPHERE, INC.
| | ---------------
| | By:            
| |                

POWER OF ATTORNEY AND SIGNATURES

We, the undersigned officers and directors of Acusphere, Inc., hereby severally constitute and appoint Sherri C. Oberg and John F. Thero, and each of them
singly, our true and lawful attorneys, with full
power to them and each of them singly, to sign for us in our names in the capacities indicated below, all amendments to this report, and generally to do all things in our names and on our behalf in
such capacities to enable Acusphere, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|Signature                                     |  | Title                                                                                          |  | Date          
|--------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------------
|                                              |  |                                                                                                |  |               
|/s/SHERRI C. OBERGSherri C. Oberg             |  | President and Chief Executive Officer and Director (Principal Executive Officer)               |  | March 15, 2005
|/s/JOHN F. THEROJohn F. Thero                 |  | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 15, 2005
|/s/FRANK BALDINO, JR.Frank Baldino, Jr.       |  | Director                                                                                       |  | March 15, 2005
|/s/GAREN BOHLINGaren Bohlin                   |  | Director                                                                                       |  | March 15, 2005
|/s/SANDRA L. FENWICKSandra L. Fenwick         |  | Director                                                                                       |  | March 15, 2005
|/s/MARTYN GREENACREMartyn Greenacre           |  | Director                                                                                       |  | March 15, 2005
|/s/DEREK LEMKE-VON AMMONDerek Lemke-von Ammon |  | Director                                                                                       |  | March 15, 2005
|/s/KATE MITCHELLKate Mitchell                 |  | Director                                                                                       |  | March 15, 2005

63

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                  
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.01           |  | Form of Underwriting Agreement (incorporated herein by reference to Exhibit 1.01 to the registrant's Registration Statement on Form S-3, File No. 333-121618)                                                                                                                                                                                
|1.02           |  | Form of Underwriting Agreement (incorporated herein by reference to Exhibit 1.01 to the Registrant's Current Report on Form 8-K filed February 18, 2005)                                                                                                                                                                                     
|3.01*          |  | Amended and Restated Certificate of Incorporation of registrant                                                                                                                                                                                                                                                                              
|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                                                                                                                                                                                                               
|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)                                                                                                                                                                   
|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         |  | 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)              
|               |  |                                                                                                                                                                                                                                                                                                                                              

64

---



|10.05 |  | 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)                                                         
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.06  |  | 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)
|10.07  |  | Lease Agreement by and between the registrant and Forest City 38 Sidney Street, Inc., dated as of April 18, 1995, as amended (incorporated herein by reference to Exhibit 10.08 to the registrant's
Registration Statement on Form S-1, File No. 333-106725)                                           
|10.08  |  | 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)                                                                           
|10.09  |  | 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)                                                                      
|10.10  |  | 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)                                                                        
|10.11  |  | Warrant Agreement by and between the registrant and Gregory Stento, dated as of August 19, 1998 (incorporated herein by reference to Exhibit 10.13 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)                                                     
|       |  |                                                                                                                                                                                                                                                                                                        

65

---



|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 warrantholders 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  |  | 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)                                                                         
|10.33  |  | 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)                                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                    

66

---



|10.34  |  | 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)                                     
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.35  |  | 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)                           
|10.36  |  | 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)                          
|10.37  |  | 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)         
|10.38  |  | 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)
|10.39  |  | 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)                             
|10.40  |  | Contract Work Authorization (Form 2) No. 2 for Engineering and Construction Managemetn Services (incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K filed
December 14, 2004)                                                                 
|10.41 |  | Form of Non-Qualified Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.12 to the registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 30,
 2004)                                                                    
|10.42 |  | Form of Incentive Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.13 to the registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 30,
2004)                                                                         
|10.43 |  | Form of Non-Qualified Stock Option Agreement (1 year vesting schedule) (incorporated herein by reference to Exhibit 10.14 to the registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 30,
 2004)                                                                    
|10.44  |  | 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)                                                           
|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                                                                                                                                                                                                                                                               

---

67

---





ACUSPHERE, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACUSPHERE, INC. AND SUBSIDIARIES        TABLE OF CONTENTS

|                                                        |                                                                                                                 | Page
|------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ----
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |                                                                                                                 | F-2 
|CONSOLIDATED FINANCIAL STATEMENTS:                      |                                                                                                                 |     
|                                                        | Consolidated Balance Sheets                                                                                     |     
|                                                        | Consolidated Statements of Operations                                                                           |     
|                                                        | Consolidated Statements of Redeemable Convertible Preferred Stock, Stockholders' Equity, and Comprehensive Loss |     
|                                                        | Consolidated Statements of Cash Flows                                                                           |     
|                                                        | Notes to Consolidated Financial Statements                                                                      |     

F-1

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Acusphere, Inc.
Watertown, Massachusetts

We have audited the accompanying consolidated balance sheets of Acusphere, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2004,
and the related consolidated statements of operations, redeemable convertible preferred stock, stockholders' equity, and comprehensive loss, and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our
audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such
opinion.An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2003 and 2004, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States
of America.

/s/
DELOITTE & TOUCHE LLP

Boston,
Massachusetts
March 14, 2005

F-2

---





ACUSPHERE, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                         |                                                                                                                                                                                                                | As of December 31,          |           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ----------
|
|ASSETS                                                                                                                                                                   |                                                                                                                                                                                                               
|CURRENT ASSETS:                                                                                                                                                          |                                                                                                                                                                                                                |                             |           
|                                                                                                                                                                         | Cash and cash equivalents                                                                                                                                                                                      |                             | $         
|                                                                                                                                                                         | Other current assets                                                                                                                                                                                           |                             |           
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|                                                                                                                                                                         |                                                                                                                                                                                                                | Total current assets        |           
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|PROPERTY AND EQUIPMENT, at cost:                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|                                                                                                                                                                         | Property and equipment (Note 5)                                                                                                                                                                                |                             |           
|                                                                                                                                                                         | Less accumulated depreciation and amortization                                                                                                                                                                 |                             |           
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|                                                                                                                                                                         |                                                                                                                                                                                                                | Property and equipment, net |           
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|OTHER ASSETS                                                                                                                                                             |                                                                                                                                                                                                                |                             | 1,624,797 
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|TOTAL                                                                                                                                                                    |                                                                                                                                                                                                                | $                           | 58,924,253
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY                                                                                            |                                                                                                                                                                                                               
|CURRENT LIABILITIES:                                                                                                                                                     |                                                                                                                                                                                                                |                             |           
|                                                                                                                                                                         | Current portion of long-term obligations (Note 6)                                                                                                                                                              |                             | $         
|                                                                                                                                                                         | Current portion of deferred revenue (Note 7)                                                                                                                                                                   |                             |           
|                                                                                                                                                                         | Accounts payable                                                                                                                                                                                               |                             |           
|                                                                                                                                                                         | Accrued expenses                                                                                                                                                                                               |                             |           
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|                                                                                                                                                                         |                                                                                                                                                                                                                | Total current liabilities   |           
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|LONG-TERM LIABILITIES:                                                                                                                                                   |                                                                                                                                                                                                                |                             |           
|                                                                                                                                                                         | Long-term obligations, net of current portion                                                                                                                                                                  |                             |           
|                                                                                                                                                                         | Deferred revenue, net of current portion                                                                                                                                                                       |                             |           
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|                                                                                                                                                                         |                                                                                                                                                                                                                | Total long-term liabilities |           
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|COMMITMENTS (Notes 11 and 12)                                                                                                                                            |                                                                                                                                                                                                                |                             |           
|REDEEMABLE CONVERTIBLE PREFERRED STOCK, authorized, 5,000,000 shares as of December 31, 2003 and 2004: no shares issued and outstanding as of December 31, 2003 and 2004 |                                                                                                                                                                                                                |                             |          
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|STOCKHOLDERS' EQUITY:                                                                                                                                                    |                                                                                                                                                                                                                |                             |           
|                                                                                                                                                                         | Common stock, $0.01 par value; authorized, 98,500,000 shares as of December 31, 2003 and 2004; issued and outstanding, 14,294,533 shares as of December 31, 2003 and 17,810,922 shares as of December 31, 2004 |                             |           
|                                                                                                                                                                         | Additional paid-in capital                                                                                                                                                                                     |                             |           
|                                                                                                                                                                         | Deferred stock-based compensation                                                                                                                                                                              |                             |           
|                                                                                                                                                                         | Accumulated deficit                                                                                                                                                                                            |                             |           
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|                                                                                                                                                                         |                                                                                                                                                                                                                | Total stockholders' equity  |           
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           
|TOTAL                                                                                                                                                                    |                                                                                                                                                                                                                | $                           | 58,924,253
|                                                                                                                                                                         |                                                                                                                                                                                                                |                             |           

See
notes to consolidated financial statements.

F-3

---





ACUSPHERE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                      |                               | Year Ended December 31,  |            
|--------------------------------------------------------------------- | ----------------------------- | ------------------------ | -----------
|
|COLLABORATION REVENUE                                                 |                               | $                        |           
|OPERATING EXPENSES:                                                   |                               |                          |            
|                                                                      | Research and development(1)   |                          |            
|                                                                      | General and administrative(1) |                          |            
|                                                                      | Stock-based compensation      |                          |            
|                                                                      |                               |                          |            
|                                                                      |                               | Total operating expenses |            
|Equity in loss of joint venture                                       |                               |                          | (1,183,417 
|Interest income                                                       |                               |                          | 223,550    
|Other income                                                          |                               |                          | 9,114      
|Interest expense                                                      |                               |                          | (1,299,746 
|                                                                      |                               |                          |            
|NET LOSS                                                              |                               |                          | (21,896,250
|Accretion of dividends and offering costs on preferred stock          |                               |                          | (6,665,478 
|                                                                      |                               |                          |            
|NET LOSS AVAILABLE TO COMMON STOCKHOLDERS                             |                               | $                        | (28,561,728
|                                                                      |                               |                          |            
|NET LOSS AVAILABLE TO COMMON STOCKHOLDERS PER SHAREBasic and diluted |                               | $                        | (35.39     
|                                                                      |                               |                          |            
|WEIGHTED-AVERAGE SHARES OUTSTANDINGBasic and diluted                 |                               |                          | 807,119    
|                                                                      |                               |                          |            
|(1) Excludes stock-based compensation as follows:                     |                               |                          |            
|Research and development                                              |                               | $                        | 915,085    
|General and administrative                                            |                               |                          | 1,280,117  
|                                                                      |                               |                          |            
|                                                                      |                               | $                        | 2,195,202  
|                                                                      |                               |                          |            

See
notes to consolidated financial statements.

F-4

---





ACUSPHERE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK,  STOCKHOLDERS' EQUITY, AND COMPREHENSIVE LOSS

|                         |                                                                                            |                        |            |   |            | Stockholders' Equity |        
|------------------------ | ------------------------------------------------------------------------------------------ | ---------------------- | ---------- | - | ---------- | -------------------- | -------
|
|
|
|BALANCE, JANUARY 1, 2002 |                                                                                            | 21,214,326             |            | $ | 97,739,197 |                      | 510,905
|                         | Exercise of stock options                                                                  |                        |           |   |            |                     |        
|                         | Sale of Series J Redeemable Convertible Preferred Stock, net of issuance costs of $856,034 |                        | 10,736,960 |   |            | 14,283,074           |        
|                         | Exchange of Series B, E and F to Series J-1 for contribution greater than pro-rata share   |                        | 3,232,930  |   |            |                     |        
|                         | Conversion of preferred shares to common                                                   |                        | (4,039,133 | ) |            | (24,381,916          | )      
|                         | Reversal of deferred compensation for terminated employees                                 |                        |           |   |            |                     |        
|                         | Amortization of deferred stock-based compensation                                          |                        |           |   |            |                     |        
|                         | Unrealized loss on short-term investments                                                  |                        |           |   |            |                     |        
|                         | Accretion of dividends and offering costs on preferred stock                               |                        |           |   |            | 6,665,478            |        
|                         | Dividends forfeited on preferred stock conversion                                          |                        |           |   |            | (2,838,758           | )      
|                         |                                                                                            | Net loss               |            |  |            |                      |       
|                         |                                                                                            |                        |            |   |            |                      |        
|                         |                                                                                            | Comprehensive net loss |            |   |            |                      |        

|                         |                                                                                            |                        |       | Stockholders' Equity |   |            |           |   |            
|------------------------ | ------------------------------------------------------------------------------------------ | ---------------------- | ----- | -------------------- | - | ---------- | --------- | - | -----------
|
|
|BALANCE, JANUARY 1, 2002 |                                                                                            | $                      | 3,569 |                      | $ | (4,413,493 | )         | $ | (89,034,219
|                         | Exercise of stock options                                                                  |                        |       |                     |   |            |          |   |            
|                         | Sale of Series J Redeemable Convertible Preferred Stock, net of issuance costs of $856,034 |                        |       |                     |   |            |          |   |            
|                         | Exchange of Series B, E and F to Series J-1 for contribution greater than pro-rata share   |                        |       |                     |   |            |          |   |            
|                         | Conversion of preferred shares to common                                                   |                        |       |                     |   |            |          |   |            
|                         | Reversal of deferred compensation for terminated employees                                 |                        |       |                     |   |            | 424,887   |   |            
|                         | Amortization of deferred stock-based compensation                                          |                        |       |                     |   |            | 2,195,202 |   |            
|                         | Unrealized loss on short-term investments                                                  |                        |       | (3,281               | ) |            |          |   |            
|                         | Accretion of dividends and offering costs on preferred stock                               |                        |       |                     |   |            |          |   |            
|                         | Dividends forfeited on preferred stock conversion                                          |                        |       |                     |   |            |          |   |            
|                         |                                                                                            | Net loss               |       |                      |  |            |           |  |            
|                         |                                                                                            |                        |       |                      |   |            |           |   |            
|                         |                                                                                            | Comprehensive net loss |       |                      |   |            |           |   |            
|                         |                                                                                            |                        |       |                      |   |            |           |   |            

See notes to consolidated financial statements.

F-5

---





|                           |                                                                                      |                        |             |   |            | Stockholders' Equity |           
|-------------------------- | ------------------------------------------------------------------------------------ | ---------------------- | ----------- | - | ---------- | -------------------- | ----------
|
|
|BALANCE, DECEMBER 31, 2002 |                                                                                      | 31,145,083             |             |   | 91,467,075 |                      | 1,218,876 
|                           | Exercise of stock options                                                            |                        |            |   |            |                     |           
|                           | Issuance of restricted common stock                                                  |                        |            |   |            |                     |           
|                           | Warrants issued with convertible notes                                               |                        |            |   |            |                     |           
|                           | Retirement of treasury stock                                                         |                        |            |   |            |                     |           
|                           | Conversion of preferred shares to common                                             |                        | (3,731,999  | ) |            | (9,123,216           | )         
|                           | Amortization of deferred stock-based compensation                                    |                        |            |   |            |                     |           
|                           | Deferred stock-based compensation related to employees                               |                        |            |   |            |                     |           
|                           | Reversal of deferred compensation                                                    |                        |            |   |            |                     |           
|                           | Issuance of common stock from exercise of warrant                                    |                        |            |   |            |                     |           
|                           | Unrealized loss on short-term investments                                            |                        |            |   |            |                     |           
|                           | Accretion of dividends and offering costs on preferred stock                         |                        |            |   |            | 5,948,073            |           
|                           | Dividends forfeited on preferred stock conversion                                    |                        |            |   |            | (23,521,685          | )         
|                           | Issuance of common stock from initial public offering ("IPO"), net of offering costs |                        |            |   |            |                     |           
|                           | Issuance of common stock from convertible notes payable and accrued interest, at IPO |                        |            |   |            |                     |           
|                           | Conversion of preferred shares to common, at IPO                                     |                        | (27,413,084 | ) |            | (64,770,247          | )         
|                           |                                                                                      | Net loss               |             |  |            |                      |          
|                           |                                                                                      |                        |             |   |            |                      |           
|                           |                                                                                      | Comprehensive net loss |             |   |            |                      |           
|BALANCE, DECEMBER 31, 2003 |                                                                                      |                       |             | $ |           |                      | 14,294,533
|                           |                                                                                      |                        |             |   |            |                      |           

|                           |                                                                                      |                        |     | Stockholders' Equity |   |            |            |   |             
|-------------------------- | ------------------------------------------------------------------------------------ | ---------------------- | --- | -------------------- | - | ---------- | ---------- | - | ------------
|
|
|BALANCE, DECEMBER 31, 2002 |                                                                                      |                        | 288 |                      |   | (1,793,404 | )          |   | (117,595,947
|                           | Exercise of stock options                                                            |                        |     |                     |   |            |           |   |             
|                           | Issuance of restricted common stock                                                  |                        |     |                     |   |            | (102,299   | ) |             
|                           | Warrants issued with convertible notes                                               |                        |     |                     |   |            |           |   |             
|                           | Retirement of treasury stock                                                         |                        |     |                     |   |            |           |   |             
|                           | Conversion of preferred shares to common                                             |                        |     |                     |   |            |           |   |             
|                           | Amortization of deferred stock-based compensation                                    |                        |     |                     |   |            | 1,307,052  |   |             
|                           | Deferred stock-based compensation related to employees                               |                        |     |                     |   |            | (1,396,347 | ) |             
|                           | Reversal of deferred compensation                                                    |                        |     |                     |   |            | 261,769    |   |             
|                           | Issuance of common stock from exercise of warrant                                    |                        |     |                     |   |            |           |   |             
|                           | Unrealized loss on short-term investments                                            |                        |     | (288                 | ) |            |           |   |             
|                           | Accretion of dividends and offering costs on preferred stock                         |                        |     |                     |   |            |           |   |             
|                           | Dividends forfeited on preferred stock conversion                                    |                        |     |                     |   |            |           |   |             
|                           | Issuance of common stock from initial public offering ("IPO"), net of offering costs |                        |     |                     |   |            |           |   |             
|                           | Issuance of common stock from convertible notes payable and accrued interest, at IPO |                        |     |                     |   |            |           |   |             
|                           | Conversion of preferred shares to common, at IPO                                     |                        |     |                     |   |            |           |   |             
|                           | Net loss                                                                             |                        |     |                     |   |            |           |   |             
|                           |                                                                                      |                        |     |                      |   |            |            |   |             
|                           |                                                                                      | Comprehensive net loss |     |                      |   |            |            |   |             
|                           |                                                                                      |                        |     |                      |   |            |            |   |             
|BALANCE, DECEMBER 31, 2003 |                                                                                      | $                      |    |                      | $ | (1,723,229 | )          | $ | (145,467,457
|                           |                                                                                      |                        |     |                      |   |            |            |   |             

See notes to consolidated financial statements.

F-6

---





|                                                                       |                        |   |   |   |   | Stockholders' Equity
|---------------------------------------------------------------------- | ---------------------- | - | - | - | - | --------------------
|
|
|
|Exercise of stock options                                              |                        |  |   |   |  |                     
|Issuance of common stock from employee stock purchase plan             |                        |  |   |   |  |                     
|Issuance of common stock to board members for services performed       |                        |  |   |   |  |                     
|Issuance of common stock from private financing, net of offering costs |                        |  |   |   |  |                     
|Warrant issued to financial advisor                                    |                        |  |   |   |  |                     
|Reversal of deferred compensation for terminated employees             |                        |  |   |   |  |                     
|Amortization of deferred stock-based compensation                      |                        |  |   |   |  |                     
|Deferred stock-based compensation related to non- employees            |                        |  |   |   |  |                     
|                                                                       | Net loss               |   |  |   |   |                    
|                                                                       |                        |   |   |   |   |                     
|                                                                       | Comprehensive net loss |   |   |   |   |                     
|BALANCE, DECEMBER 31, 2004                                             |                        |  |   | $ |  |                     
|                                                                       |                        |   |   |   |   |                     

|                                                                       |  |   |   | Stockholders' Equity |   |          |   |   |             
|---------------------------------------------------------------------- |  | - | - | -------------------- | - | -------- | - | - | ------------
|
|
|Exercise of stock options                                              |  |   |  |                      |   |         |   |   |            
|Issuance of common stock from employee stock purchase plan             |  |   |  |                      |   |         |   |   |            
|Issuance of common stock for services performed                        |  |   |  |                      |   | (23,594  | ) |   |            
|Issuance of common stock from private financing, net of offering costs |  |   |  |                      |   |         |   |   |            
|Warrant issued to financial advisor                                    |  |   |  |                      |   |         |   |   |            
|Reversal of deferred compensation for terminated employees             |  |   |  |                      |   | 43,105   |   |   |            
|Amortization of deferred stock-based compensation                      |  |   |  |                      |   | 940,078  |   |   |            
|Deferred stock-based compensation related to non-employees             |  |   |  |                      |   | (150,852 | ) |   |            
|Net loss                                                               |  |   |  |                      |   |         |   |   | (29,959,048 
|                                                                       |  |   |   |                      |   |          |   |   |             
|Comprehensive net loss                                                 |  |   |   |                      |   |          |   |   |             
|                                                                       |  |   |   |                      |   |          |   |   |             
|BALANCE, DECEMBER 31, 2004                                             |  | $ |  |                      | $ | (914,492 | ) | $ | (175,426,505
|                                                                       |  |   |   |                      |   |          |   |   |             

(Concluded)

See notes to consolidated financial statements.

F-7

---





ACUSPHERE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                      |                                                                             | Year Ended December 31,                               |                       
|------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------------- | ----------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                             |                                                       |                       
|                                      | Net loss                                                                    |                                                       | $                     
|                                      | Adjustments to reconcile net loss to net cash used in operating activities: |                                                       |                       
|                                      |                                                                             | Stock-based compensation expense                      |                       
|                                      |                                                                             | Depreciation and amortization                         |                       
|                                      |                                                                             | Loss on disposal of property and equipment            |                       
|                                      |                                                                             | Noncash interest expense                              |                       
|                                      |                                                                             | Noncash rent expense                                  |                       
|                                      |                                                                             | Noncash amortization of deferred revenue              |                       
|                                      |                                                                             | Noncash amortization of fee to financial advisor      |                       
|                                      |                                                                             | Noncash amortization of warrants to financial advisor |                       
|                                      |                                                                             | Equity in loss from joint venture                     |                       
|                                      |                                                                             | Changes in operating assets and liabilities:          |                       
|                                      |                                                                             |                                                       | Due from joint venture
|                                      |                                                                             |                                                       | Deferred revenue      
|                                      |                                                                             |                                                       | Other current assets  
|                                      |                                                                             |                                                       | Accounts payable      
|                                      |                                                                             |                                                       | Accrued expenses      
|                                      |                                                                             |                                                       |                       
|                                      |                                                                             |                                                       |                       
|                                      |                                                                             |                                                       |                       
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                             |                                                       |                       
|                                      | Purchases of property and equipment                                         |                                                       |                       
|                                      | Increase in other assets                                                    |                                                       |                       
|                                      | Maturities of short-term investments                                        |                                                       |                       
|                                      |                                                                             |                                                       |                       
|                                      |                                                                             |                                                       |                       
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                                                             |                                                       |                       
|                                      | Payments on long-term obligations                                           |                                                       |                       
|                                      | Proceeds from long-term obligations                                         |                                                       |                       
|                                      | Net proceed from sale of redeemable convertible preferred stock             |                                                       |                       
|                                      | Net proceeds from sale of common stock in initial public offering           |                                                       |                       
|                                      | Net proceeds from sale of common stock in private placement                 |                                                       |                       
|                                      | Proceeds from exercise of stock options                                     |                                                       |                       
|                                      | Proceeds from issuance of common stock from employee stock purchase plan    |                                                       |                       
|                                      |                                                                             |                                                       |                       
|                                      | Net cash provided by financing activities                                   |                                                       |                       
|                                      |                                                                             |                                                       |                       

See
notes to consolidated financial statements.

F-8

---





|                                                         |                                                                           | Year Ended December 31, |          
|-------------------------------------------------------- | ------------------------------------------------------------------------- | ----------------------- | ---------
|
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     |                                                                           |                         | 1,539,770
|CASH AND CASH EQUIVALENTS, Beginning of period           |                                                                           |                         | 6,256,468
|                                                         |                                                                           |                         |          
|CASH AND CASH EQUIVALENTS, End of period                 |                                                                           | $                       | 7,796,238
|                                                         |                                                                           |                         |          
|SUPPLEMENTAL SCHEDULE OF CASH FLOWS INFORMATION:         |                                                                           |                         |          
|                                                         | Cash paid during the period for interest                                  |                         | $        
|                                                         |                                                                           |                         |          
|SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING TRANSACTIONS: |                                                                           |                         |          
|                                                         | Unrealized gain (loss) on investments                                     |                         | $        
|                                                         |                                                                           |                         |          
|                                                         | Deferred compensation for services to be performed                        |                         | $        
|                                                         |                                                                           |                         |          
|                                                         | Accretion of preferred stock dividends and offering costs                 |                         | $        
|                                                         |                                                                           |                         |          
|                                                         | Dividends forfeited on preferred stock conversion                         |                         | $        
|                                                         |                                                                           |                         |          
|                                                         | Write-off of net amount due from joint venture                            |                         | $        
|                                                         |                                                                           |                         |          
|                                                         | Common stock warrants issued with convertible notes                       |                         | $        
|                                                         |                                                                           |                         |          
|                                                         | Common stock warrants exercised                                           |                         | $        
|                                                         |                                                                           |                         |          
|                                                         | Common stock warrants issued to financial advisor                         |                         | $        
|                                                         |                                                                           |                         |          
|                                                         | Promissory notes and accrued interest converted into common stock, at IPO |                         | $        
|                                                         |                                                                           |                         |          

(Concluded)

See notes to consolidated financial statements.

F-9

---





ACUSPHERE, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Operations

Acusphere, Inc. and Subsidiaries ("Acusphere" or the "Company") is a specialty pharmaceutical company that develops new drugs and improved formulations of
existing drugs using its proprietary microparticle technology. The Company's lead product, AI-700, is in Phase 3 clinical trials.

Acusphere
is devoting substantially all of its efforts towards the research and development of its product candidates and raising capital. Acusphere is subject to a number of risks.
Principal among these risks are the need to develop commercially usable products, competition from substitute products and larger companies, dependence and the need to obtain adequate financing
necessary to fund product development.

The
Company emerged from development stage for accounting purposes in July 2004 upon the commencement of its collaboration agreement with Nycomed Danmark ApS (Nycomed).
Accordingly, the Company has removed the cumulative since inception disclosures from its accompanying consolidated financial statements.

2. Summary of Significant Accounting Policies

The accompanying consolidated financial statements reflect the application of certain accounting policies described below and elsewhere in the notes to the
consolidated financial statements.

Principles of ConsolidationThe accompanying consolidated financial statements include the amounts of
Acusphere, Inc. and its two wholly owned subsidiaries, Acusphere Securities Corporation and Acusphere Newco, Ltd. (to February 2003). Acusphere Securities Corporation was
established in December 1996 as a Massachusetts securities corporation. Acusphere Newco, Ltd., as established in June 2000 by the Company and Elan Corporation, plc. ("Elan"), was
80.1% owned by the Company. In September 2002, the joint venture relationship was terminated at which time Acusphere Newco, Ltd. became a wholly owned subsidiary of the Company. In
February 2003, Acusphere Newco, Ltd. was dissolved. The Company's investment in Acusphere Newco, Ltd. was accounted for under the equity method from inception through the
termination date of the joint venture relationship and consolidated from that date through February 2003 (see Note 4). All intercompany balances and transactions have been eliminated in
consolidation.

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

Cash and Cash EquivalentsCash equivalents consist of short-term, highly liquid
investments, including money market accounts, with original maturity dates of 90 days or less when purchased. Cash equivalents are carried at cost, which approximates their fair market value.

Property and EquipmentProperty and equipment are recorded at cost and depreciated over their
estimated useful lives of three to five years using the straight-line method. Equipment under capital leases and leasehold improvements are depreciated over the lesser of their useful
lives or the remainder of the lease term. Acusphere reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of certain assets
might not be recoverable and recognizes a loss when it is probable that the estimated future cash flows will be less

F-10

---



than
the carrying value of the asset. Expenditures for maintenance and repairs are charged to expense as incurred.

Other AssetsOther assets consist of deposits to vendors for the manufacture of laboratory equipment,
security deposits, and deferred rent expense.

Fair Value of Financial InstrumentsThe carrying amounts of Acusphere's financial instruments, which
include cash equivalents, accounts payable, accrued expenses, and long-term obligations, approximate their fair values.

Concentrations of Credit Risk and Limited SuppliersThe financial instruments that potentially subject
Acusphere to concentrations of credit risk are cash and cash equivalents. Acusphere's cash and cash equivalents are maintained with a highly rated commercial bank and its related investment management
company.

Acusphere
relies on certain materials used in its development process, each of which is available from limited sources. The failure of a supplier, including a subcontractor, to deliver
on schedule could delay or interrupt the development process and thereby adversely affect Acusphere's operating results.

Collaboration RevenueCollaboration revenue consists of revenue earned under license arrangements with
collaborative partners in accordance with Staff Accounting Bulletin 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 a specific performance milestone is recognized ratably over the
period over which services are obligated to be performed. The period over which services are obligated to be performed is estimated based on available facts and circumstances. Revenue is recognized
from performance payments, when such performance is substantially in Acusphere's control and when Acusphere believes that completion of such performance is reasonably probable, ratably over the period
over which it estimates that it will perform such performance obligations. Substantive at-risk milestone payments, which are based on achieving a specific performance milestone when
performance of such milestone is contingent on performance by others or for which achievement can not be reasonably estimated or assured, are recognized as revenue when the milestone is achieved and
the related payment is due, provided that there is no substantial future service obligation associated with the milestone. Revenue in connection with license arrangements is recognized over the term
of the arrangement and is limited to payments collected or due and reasonably assured of collection. In circumstances where the arrangement includes a refund provision, the Company defers revenue
recognition until the refund condition is no longer applicable unless, in Acusphere's judgment, the refund circumstances are within its operating control and unlikely to occur. Payments received in
advance of being recognized as revenue are deferred.

Research and Development ExpensesResearch and development costs primarily consist of salaries and
related expenses for personnel and capital resources. Other research and development expenses include fees paid to consultants and outside service providers and the costs of materials used in clinical
trials and research and development. Acusphere charges all research and development expenses to operations as incurred, net of expenses reimbursed from third parties.

Derivative Embedded in Facility Loan AgreementThe Company's loan agreement with MassDevelopment
contains a feature providing for a retroactive interest rate increase in the event the Company achieves a certain defined earnings level. This feature represents an embedded derivative

F-11

---



which
is required to be accounted for separately from the related loan. The estimated fair value of this feature is valued using a risk-weighted discounted cashflow methodology that
incorporates factors such as the Company's cost of capital and the probability of the Company achieving the defined earnings level. Changes in the estimated fair value of the liability represented by
these factors are charged to the consolidated statements of operations under interest expense. These adjustments will be required until the feature is either triggered or expires.

Income TaxesDeferred tax liabilities and assets are provided for differences between the book and tax
bases of existing assets and liabilities and tax loss carryforwards and credits, using tax rates expected to be in effect in the years in which differences are expected to reverse. Valuation
allowances are provided to the extent realization of tax assets is not considered likely.

Stock-Based CompensationAcusphere's employee stock option plan is accounted for using the
intrinsic-value-based method of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The intrinsic method requires that
compensation expense, if any, be determined by calculating the difference between the fair value of the Company's common stock and the strike price of the option at a measurement date. The measurement
date is generally when the number of shares and the strike price of the option are known. Acusphere uses the fair-value method to account for nonemployee stock-based compensation.

Acusphere
has computed the pro forma disclosures required under SFAS No. 123, "Accounting for Stock-Based Compensation," for options granted using the Black-Scholes option-pricing
model prescribed by SFAS No. 123. The assumptions used and weighted-average information are as follows:

December 31,2002

2003

2004Risk-free interest rate

3.22%4.76%

2.53%3.12%

2.31%3.66%Expected dividend yield





Expected lives

4 years

4 years

4 yearsExpected volatility

60%

60%-100%

44.27%-54.15%Weighted-average fair value of options granted

$4.38

$6.20

$3.21


F-12

---



Had
stock-based compensation expense for the plan been determined consistent with SFAS No. 123, Acusphere's net loss would have been the following pro forma
amounts:

Year Ended December 31,2002

2003

2004Applicable to common stockholders:Net lossas reported

$
(28,561,728
)
$
(27,871,510
)
$
(29,959,048
)Add: Stock-based employee compensation expense included in reported net loss


2,167,834


1,211,273


776,581Deduct: Stock-based employee compensation expense determined under fair value method


(2,279,228
)

(1,184,230
)

(1,738,994
)Net lossproforma

$
(28,673,122
)
$
(27,844,467
)
$
(30,921,461
)Net loss per share (basic and diluted):As reported

$
(35.39
)
$
(6.66
)
$
(1.92
)Pro forma

$
(35.53
)
$
(6.65
)
$
(1.98
)


Net Loss Per ShareBasic and diluted net loss per common share is calculated by dividing the net loss
applicable to common stockholders by the weighted-average number of unrestricted common shares outstanding during the period. Diluted net loss per common share is the same as basic net loss per common
share, since the effects of potentially dilutive securities are antidilutive for all periods presented. Antidilutive securities, which consisted of redeemable convertible preferred stock, stock
options, warrants, and restricted common stock that are not included in the diluted net loss per share calculation, aggregated 7,853,360, 1,758,029 and 3,155,942 as of December 31, 2002, 2003,
and 2004, respectively. The following table reconciles the weighted-average common shares outstanding to the shares used in the computation of basic and diluted weighted-average common shares
outstanding:

Year Ended December 31,Historical2002

2003

2004Weighted-average common shares outstanding

816,720

4,191,321

15,611,644Less weighted-average restricted common shares outstanding

(9,601
)
(3,649
)
(8,812
)Basic and diluted weighted-average common shares outstanding

807,119

4,187,672

15,602,832


Comprehensive LossComprehensive loss is defined as the change in stockholders' equity
during a period from transactions and other events and circumstances from non-owner sources. Acusphere has disclosed comprehensive loss for all periods presented in the accompanying
consolidated statements of redeemable convertible preferred stock, stockholders' equity, and comprehensive loss.

Disclosures About Segments of an EnterpriseOperating segments are identified as components of an
enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions regarding resource
allocation

F-13

---



and
assessing performance. To date, Acusphere has viewed its operations and manages its business as one operating segment.

Recent Accounting PronouncementsIn December 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment ("SFAS No. 123R"). This Statement is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R
focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation
expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the first interim
or annual reporting period that begins after June 15, 2005. Acusphere expects to adopt SFAS No. 123R using the Statement's modified prospective application method. The Company does not
yet have an estimate of the effect on its statements of operations of adopting SFAS No. 123.

3. Balance Sheet Data

As of December 31,2003

2004Other assets consist of the following:Deposits

$
1,195,672

$
1,212,996Other assets


429,125


644,310$
1,624,797

$
1,857,306Accrued expenses consist of the following:Accrued contract services

$
882,696

$
2,500,573Accrued vacation


316,644


398,230Accrued bonus


350,000


478,006Other accrued expenses


389,672


1,019,211$
1,939,012

$
4,396,020


4. Joint Venture

In June 2000, Acusphere and Elan formed a joint venture, Acusphere Newco, Ltd., to develop compounds to be delivered via the pulmonary route using
Acusphere's microparticle technology.

The
joint venture was formed by issuing preferred and common stock valued at $15,000,000 to Acusphere and Elan. Elan also purchased shares of Acupshere's Series G Nonvoting
Redeemable Convertible Preferred Stock for total proceeds of $12,015,003. As discussed above and in Note 2, until September 30, 2002, Acusphere owned an 80.1% interest in the joint
venture and Elan owned a 19.9% nonvoting interest. While Acusphere owned 100% of the voting common shares, Elan and its subsidiaries retained significant minority investor rights that were considered
"participating rights" as defined in Emerging Issues Task Force ("EITF") Issue No. 96-16, "Investors' Accounting for an Investee When the Investor Has a Majority of the Voting
Interest but the Minority Shareholder Has Certain Approval or Veto Rights." Elan's participating rights consisted of joint and equal participation

F-14

---



with
Acusphere in the joint venture's operating and capital decisions through equal representation and participation in the joint venture's management and research and development committees. Elan's
participating rights overcame the presumption that Acusphere exercised control over the joint venture. Accordingly, Acusphere did not consolidate the financial statements of the joint venture but,
instead, accounted for its investment in the joint venture under the equity method of accounting.

In
conjunction with a private equity financing completed by Acusphere in July 2002, the preferred stock then held by Elan and carried at an aggregate value of $21,049,000 was
converted into 419,575 shares of Acusphere common stock.

In
September 2002, Elan and Acusphere terminated the joint venture agreement. This termination resulted in the assignment to Acusphere of development rights to any project
undertaken by the joint venture since its formation in exchange for Elan's minority participation in certain revenues that may be realized in the future relating to technology developed by the joint
venture. In connection with the termination of the joint venture, Acusphere recognized as a loss an amount previously due from Elan of $374,000. Upon termination of the joint venture, Acusphere
Newco, Ltd. became a wholly owned subsidiary of Acusphere and was consolidated in the Company's financial statements until this subsidiary was dissolved in February 2003.

5. Property and Equipment

Property and equipment at cost consist of the following:

|                                                |                                   | As of December 31, |            |          
|----------------------------------------------- | --------------------------------- | ------------------ | ---------- | ---------
|
|
|Equipment                                       |                                   | $                  | 9,655,685  |          
|Furniture and fixtures                          |                                   |                    | 181,665    |          
|Leasehold improvements                          |                                   |                    | 122,505    |          
|                                                |                                   |                    |            |          
|                                                | Sub-total depreciable assets      |                    |            | 9,959,855
|Less: accumulated depreciation and amortization |                                   |                    | (7,935,450 | )        
|                                                |                                   |                    |            |          
|                                                | Total depreciable assets, net     |                    |            | 2,024,405
|Deposits on equipment purchases                 |                                   |                    |           |          
|Construction in progress                        |                                   |                    |           |          
|                                                |                                   |                    |            |          
|                                                | Total property and equipment, net |                    | $          | 2,024,405
|                                                |                                   |                    |            |          

Deposits
on equipment purchases represent progress payments for long-lead time capital equipment purchases, the majority of which are associated with
development and expansion of Acusphere's manufacturing operations for AI-700.

Amounts
recorded under construction in progress represent costs incurred through December 31, 2004 for the build-out of Acusphere's commercial manufacturing facility
in Tewksbury, Massachusetts.

F-15

---



6. Long-term Obligations

The carrying value of long-term obligations was as follows:

As of December 31,2003

2004Capital lease obligations

$
1,090,217

$
205,419Notes payable





3,368,7871,090,217


3,574,206Less current maturities


884,799


1,071,627Long-term obligations, net

$
205,418

$
2,502,579


Future
payments under all capital lease and notes payable agreements are as follows as of December 31, 2004:

Capital Lease
Obligations

Notes PayableYear Ending December 31,2005

$
208,524

$
866,2082006





949,5572007





1,143,2122008





409,810Total future minimum payments


208,524


3,368,787Less amount representing interest


3,105


Present value of future minimum payments


205,419


3,368,787Less current portion of long-term obligations


205,419


866,208Long-term portion of long-term obligations

$


$
2,502,579


Capital Lease ObligationsAcusphere leases capital equipment under various capital
lease arrangements. The remaining monthly payments range from $5,001 to $46,222 with maturities through April 2005. As part of these and prior lease agreements entered into by Acusphere, the
leasing companies were granted warrants to purchase an aggregate of 63,274 shares of common stock at
exercise prices ranging from $9.60 to $28.50. Of these warrants granted, 22,816 were deemed to be granted at an exercise price per share deemed to be below the then-current fair value, for
accounting purposes. In conjunction with these grants, Acusphere recorded the deemed fair value of these warrants as a reduction of the capital lease obligations based upon the Black-Scholes option-
pricing model and is amortizing these discounts using the effective-interest-rate method through the respective maturity dates of the leases. Interest rates for the above leases range from
6.7% to 8.6%. Acusphere does not have any additional borrowing availability under these lease arrangements as of December 31, 2004.

At
December 31, 2004, the cost and net carrying value of equipment under capital leases amounted to approximately $2,012,000 and $168,000, respectively.

Equipment Promissory NotesIn April 2004, Acusphere entered into an equipment financing line
with an equipment financing company. In August 2004, the amount of this equipment financing line increased from $8.0 million to $11.3 million. Borrowings under this equipment line
were originally available for qualified purchases approved by the equipment financing company through March 2005. In March 2005, the financing line was extended through August 31, 2005.
Such borrowings are to be

F-16

---



secured
by the qualified purchases and repaid over 36 to 48 months, depending on the nature of the equipment financed. While the $11.3 million equipment line is structured as a loan
agreement, Acusphere may elect to borrow up to $4.0 million of this amount in the form of a lease financing. The interest rate on this facility varies depending upon whether the borrowing is in
the form of a loan or lease and whether the term is 36 months or 48 months. Such interest rates are fixed at the time of each borrowing under the equipment line with such rates adjusted
between borrowings based on the U.S. Federal Reserve's Three Year and Four Year Treasury Constant Maturity Rates. The loans under this financing line are subject to acceleration upon the happening of
certain customary events of default, including failure to timely pay principal and interest.

As
of December 31, 2004, Acusphere has borrowed approximately $3.4 million in the form of promissory notes under this equipment line with remaining monthly payments ranging
from $518 to $54,272 with maturities through December 2008. Interest rates for the promissory notes range from 8.74% to 9.34%. As of December 31, 2004, Acusphere has approximately
$7.9 million available in additional borrowings under this equipment line.

Subordinated Loans PayableIn September 2001, Acusphere entered into notes payable agreements
(the "notes") with two financing institutions for a total amount of $5,000,000. The notes specified six monthly interest-only payments which began in October 2001 and
24 monthly principal and interest installments thereafter. The notes bore interest at 15% per annum. The balance of the notes was paid in full in 2003.

In
conjunction with the issuance of the notes, Acusphere issued warrants to purchase an aggregate of 28,138 shares of common stock at an exercise price of $28.50 per share, subject to
adjustment under certain circumstances, as defined. Based on the relative value of the notes and the deemed value of the warrants, Acusphere allocated a total of $594,698 of proceeds to the warrants.
The carrying value of the notes was reduced by the unamortized discount. Acusphere has amortized this discount using the effective-interest-rate method through June 2003 when the
debt was repaid in full.

During
2002 and 2003, Acusphere recorded $330,279 and $176,802, respectively of interest expense relating to the amortization of the discount on the notes.

Convertible Promissory NotesOn April 11, 2003, Acusphere issued subordinated convertible
promissory notes to existing investors in exchange for $19,100,000. The notes bore interest at a rate of 10% per annum. On June 27, 2003, Acusphere issued identical subordinated convertible
promissory notes to other existing investors in exchange for an additional $319,000. The outstanding balance of the notes and accrued interest automatically converted into common stock on
October 14, 2003 upon the close of the initial public offering ("IPO") of the Company's Common Stock. The secured subordinated convertible promissory notes, including accrued interest, were
converted at an effective price of $8.46 per share into 2,411,846 shares of common stock. At December 31, 2004 and 2003, none of these convertible promissory notes were outstanding and the
security interest previously held by the noteholders was released.

In
connection with the issuance of the subordinated convertible promissory notes, for no additional consideration, Acusphere issued warrants exercisable for 458,437 shares of common
stock at an exercise price of $8.46 per share and 684 shares of common stock at an exercise price of $14.00 per share (see Note 9). Based on the relative value of the notes and the deemed value
of the warrants, Acusphere allocated $761,500 of the proceeds to the warrants. The carrying value of the notes was reduced by the

F-17

---



unamortized
discount. As a result of the IPO on October 14, 2003, the discount was fully amortized into interest expense during 2003.

Facility Loan AgreementIn August 2004, Acusphere entered into a loan with MassDevelopment
under which up to $2.0 million of financing is available upon completion by Acusphere of certain tenant improvements to its commercial manufacturing facility in Tewksbury, Massachusetts.
Interest shall accrue under the loan at 5.0% per annum with retroactive adjustments to 9% upon reaching certain defined earning levels. The repayment of principal and accrued interest will coincide
with the term of the Tewksbury lease which has a five-year, nine-month term with options to extend the lease for up to two additional five-year terms. No payments
are due under the loan for the first twenty-four months. Unpaid interest during this twenty-four month period shall be accrued and principal and accrued interest shall be
repaid on a monthly basis thereafter
such that the total amount outstanding shall fully amortize over the balance of the term in equal installments. The loan is subject to acceleration upon certain customary events of default, including
failure to timely pay principal and interest. The loan, if utilized, would be secured by certain of the tenant improvements to be made at the Tewksbury facility. As of December 31, 2004,
Acusphere has $2.0 million available to borrow under this financing arrangement, subject to Acusphere providing evidence that it has spent at least $2.0 million to make improvements to
its commercial manufacturing facility.

The
retroactive interest rate adjustment feature of the loan agreement was deemed to be an embedded derivative instrument requiring separate accounting under FASB 133, Accounting
for Derivative Instruments and Hedging Activities, and was initially valued at $62,000. The derivative asset will be amortized as interest expense over a term beginning with the loan agreement
effective date and ending with the currently expected payment date of the retroactive interest. The fair value of the derivative liability will be re-measured at each reporting period,
with any change in value charged or credited to interest expense. There was no change in the estimated fair value of the derivative liability at December 31, 2004.

7. Deferred Revenue

In July 2004, Acusphere entered into a collaboration, license and supply agreement with Nycomed in which Acusphere granted Nycomed rights to develop and
market AI-700 in Europe. As part of this agreement, in July 2004 Nycomed paid Acusphere a $4.0 million license fee and the first of eight consecutive quarterly installments
of $1.0 million each for Acusphere's research and development efforts. In October 2004, Nycomed paid the second quarterly installment of $1.0 million. As of December 31,
2004, Acusphere recognized $1.7 million in revenue reflecting an estimated period of forty-two months over which the $12 million in payments are earned, and
$4.3 million of such payments were reported as deferred revenue.

In
connection with this agreement, the Company is obligated to pay a customary fee to its financial advisor in this transaction. The total fee, of which $325,000 was paid by the Company
in 2004, is comprised of cash and warrants and is dependent upon the timing and magnitude of the amounts to be paid by Nycomed to the Company.

8. Income Taxes

At December 31, 2004, Acusphere had a federal net operating loss ("NOL") carryforward for income tax purposes of approximately $83,959,000
that expires through 2024. Acusphere also has

F-18

---



approximately
$5,282,000 of research and development ("R&D") credits as of December 31, 2004 available to offset future income taxes payable, if any. The Tax Reform Act of 1986 contains
provisions that may limit the utilization of tax attributes (including NOL carryforwards and R&D credits) available to be used in any given year in the event of significant changes in ownership
interests, as defined.

The
components of Acusphere's deferred tax asset at December 31, 2003 and 2004 are as follows:

2003

2004Net operating loss carryforwards

$
26,610,000

$
33,144,000Temporary timing differences


11,406,000


17,694,000Research and development credit carryforwards


2,555,000


5,282,000Deferred tax asset


40,571,000


56,120,000Less valuation allowance


(40,571,000
)

(56,120,000
)$


$



The
temporary differences principally consist of capitalized start-up expenses for income tax purposes and, for 2004, the timing of Nycomed collaboration
revenue recognition. Acusphere has established a full valuation allowance equal to the amount of its deferred tax asset as the realization of such asset is uncertain.

9. Stockholders' Equity

Common StockIn July 2004, Acusphere entered into definitive purchase agreements with
institutional and accredited investors for a $21.5 million private placement of up to 3,440,000 newly issued shares of common stock at a price of $6.25 per share and warrants to purchase up to
an additional 688,000 shares of common stock at an exercise price of $8.50 per share. In August 2004, a partial closing of this private placement was consummated, resulting in aggregate gross
proceeds to Acusphere of approximately $17.9 million (net proceeds of approximately $16.5 million) and the issuance of 2,865,522 shares of common stock and warrants 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 aggregate gross proceeds to Acusphere of approximately
$3.6 million (net proceeds of approximately $3.2 million) and the issuance of 574,478 shares of common stock at a price of $6.25 per share and warrants to purchase up to an additional
114,895 shares of common stock at an exercise price of $8.50 per share. All of the shares of common stock sold in the $21.5 million private placement were registered under the Securities Act of
1933, as amended, on a Registration Statement on Form S-3 that was declared effective by the Securities and Exchange Commission on November 10, 2004.

On
October 14, 2003, Acusphere's Registration Statement on Form S-1, as amended, was declared effective by the Securities and Exchange Commission permitting the
Company to sell shares of common stock in an IPO. On October 7, 2003, Acusphere sold 3,750,000 shares of common stock in the IPO for $14.00 per share which resulted in net proceeds of
approximately $47,600,000 to the Company, after deducting $4,900,000 in underwriting fees and offering-related expenses.

Holders
of common stock are entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Holders
of

F-19

---



common
stock are entitled to receive ratably any dividends as may be declared by the Company's Board of Directors.

Conversions to Common StockOn July 1, 2003, in connection with the issuance of the
subordinated convertible promissory notes, 3,731,999 shares of outstanding preferred stock converted into 732,600 shares of common stock. At the IPO, all the remaining 27,413,084 outstanding shares of
preferred stock and all of Acusphere's outstanding subordinated convertible promissory notes, including accrued interest, converted into 8,548,735 shares of common stock.

Stock PlansIn March 1994, the 1994 Stock Plan (the "1994 Plan") was approved. The 1994 Plan,
as amended provides that a maximum of 1,423,663 shares of common stock may be issued as incentive stock options ("ISOs"), nonqualified stock options and stock grants. Options under the Plan may be
granted to key employees, directors, and consultants, as defined. ISOs may be granted at no less than fair market value on the date of grant, as determined by the Company's Board of Directors (no less
than 110% of fair market value on the date of grant for 10% or greater stockholders), subject to certain limitations, as defined. Options granted under the 1994 Plan are exercisable at varying dates,
as determined by the Board of Directors, and have terms not to exceed 10 years (five years for 10% or greater stockholders). The Board of Directors, at the request of the optionee, may, at its
discretion, convert the optionee's ISOs into nonqualified options at any time prior to the expiration of such ISOs. No new stock options or other stock grants can be made by the Company under the 1994
Plan after March 7, 2004.

In
July 2003, the 2003 Stock Option and Incentive Plan (the "2003 Plan") was approved. The 2003 Plan became effective on the closing of IPO on October 14, 2003 and provides
that a maximum of 2,500,000 shares of common stock may be issued as ISOs, nonqualified stock option, awards of common stock and direct purchases of common stock by Acusphere employees, officers,
directors and consultants. The maximum number of shares that may be granted to any employee under the 2003 Plan shall not exceed 583,334 shares of common stock during any calendar year. Acusphere had
1,810,083 shares available for future stock and option grants under the 2003 Plan at December 31, 2004.

In
July 2003, the 2003 Employee Stock Purchase Plan (the "Purchase Plan") was approved which became effective on October 14, 2003, the close of the Company's initial public
offering. The Purchase Plan provides for the issuance of a maximum of 233,334 shares of common stock. Eligible employee may contribute up to 10% of their total cash compensation with a maximum of 417
shares semi-annually. The first sale of shares under this plan occurred on February 29, 2004. Acusphere had 229,374 shares available for future sales of common stock under this plan
at December 31, 2004.

F-20

---



Stock
option activity under the 1994 and 2003 Plans was as follows:

Number of
Shares

Exercise Price
Per Share

Weighted-
Average
Exercise
Price Per
ShareBalance, January 1, 2002

424,482

$0.60    7.20

$
5.34Granted

366,429

0.84    7.20


1.68Exercised

(8,560
)
0.84    7.20


3.42Canceled

(18,421
)
0.84    7.20


5.88Balance December 31, 2002

763,930

0.60    7.20


3.36Granted

505,072

0.84  13.02


8.00Exercised

(34,395
)
0.60    7.20


1.98Canceled

(62,645
)
0.84    7.20


6.71Balance, December 31, 2003

1,171,962

0.60  13.02


5.23Granted

783,939

6.01    9.60


8.29Exercised

(68,734
)
0.60    7.20


1.30Canceled

(54,685
)
0.60  13.02


5.77Balance, December 31, 2004

1,832,482

$0.84$13.02


6.67Exercisable, December 31, 2004

777,432

$0.84$13.02

$
5.49Exercisable, December 31, 2003

443,048

0.60  13.02


3.63Exercisable, December 31, 2002

285,494

0.60    7.20


3.48


The
following table summarizes information relating to currently outstanding and exercisable options as of December 31, 2004 as follows:

|Exercise Price |  | Number of
Shares |  | Outstanding
Weighted-
Average
Remaining
Contractual
Life (in Years) |  | Weighted-
Average
Exercise
Price |       | Exercisable
Number of
Shares |         | Weighted-
Average
Exercise
Price
|-------------- |  | ---------------- |  | ------------------------------------------------------------------- |  | -------------------------------- | ----- | ---------------------------- | ------- | --------------------------------
|$  0.00  1.30 |  | 488,008          |  | 7.2                                                                 |  | $                                | 0.87  |                              | 269,322 |                                 
|1.31  2.60    |  | 62,554           |  | 4.0                                                                 |  |                                  | 1.89  |                              | 62,554  |                                 
|2.61  3.91    |  | 667              |  | 5.5                                                                 |  |                                  | 2.82  |                              | 667     |                                 
|3.92  6.51    |  | 210,454          |  | 9.1                                                                 |  |                                  | 6.15  |                              | 52,514  |                                 
|6.52  7.81    |  | 227,981          |  | 6.8                                                                 |  |                                  | 7.18  |                              | 175,006 |                                 
|7.82  9.11    |  | 339,972          |  | 8.8                                                                 |  |                                  | 8.68  |                              | 75,859  |                                 
|9.1210.42     |  | 218,500          |  | 9.1                                                                 |  |                                  | 9.59  |                              | 49,818  |                                 
|10.4313.02    |  | 284,346          |  | 8.7                                                                 |  |                                  | 13.02 |                              | 91,692  |                                 
|               |  |                  |  |                                                                     |  |                                  |       |                              |         |                                 
|               |  | 1,832,482        |  | 8.0                                                                 |  |                                  | 6.67  |                              | 777,432 |                                 

Grants Resulting in Stock-based Compensation ExpenseIn 2000, Acusphere issued 1,667
shares of common stock, 1,369 shares of restricted common stock, and 10,000 options to purchase common stock to non-employees in consideration of services rendered. During 2001 and 2003,
Acusphere issued 13,791 and 14,956 shares, respectively, of restricted common stock to a non-employee and certain directors in consideration of services rendered. These shares of
restricted common stock vest ratably from 6 to 48 months from their respective dates of issuance. Acusphere has the right to repurchase the

F-21

---



unvested
portion of the restricted common stock at the original issue price upon certain events. Acusphere recorded these issuances of securities (stock options and restricted stock) at fair value at
date of grant, which was $53,822, $419,594 and $102,299 in 2000, 2001 and 2003, respectively, and is recording stock-based compensation over the vesting periods. Pursuant to EITF Issue
No. 96-18, "Accounting for Equity Instruments Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services," Acusphere must periodically remeasure
the fair value of unvested non-employee equity instruments through the earlier of a performance commitment or performance completion, as defined in EITF Issue No. 96-18.
The periodic remeasurement of the fair value may result in additional charges to operations in future periods.

Acusphere
issued options to employees to purchase approximately 230,119, and 267,723 shares of common stock during the years ended December 31, 2001 and 2003, respectively, at
exercise prices deemed for accounting purposes to be below market value. Acusphere has recorded the difference between the exercise price and the fair value of $4,884,975 in 2001 and $1,396,347 in
2003 as deferred stock-based compensation and is amortizing this deferred compensation as charges to operations over the vesting periods of the options.

10. Convertible Preferred Stock and Warrants

During 2002 and 2003, all shares of Acusphere's outstanding preferred stock were converted into common stock. These conversions were made based upon conversion
ratios defined for each series of preferred stock. There were no outstanding shares of preferred stock at December 31, 2003. In connection with the Company's IPO, all remaining outstanding
shares of preferred stock converted to common stock. Prior to the IPO, sales of preferred stock provided the primary source of funding for the Company. The following table summarized the activity for
the convertible preferred stock.

F-22

---



ACUSPHERE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Convertible Preferred Stock and Warrants (Continued)

|                           |                                                                                          | Series A
Preferred Stock |          | Series B
Preferred Stock |         | Series C
Preferred Stock |           | Series D
Preferred Stock |   | Series E
Preferred Stock |           
|-------------------------- | ---------------------------------------------------------------------------------------- | ------------------------ | -------- | ------------------------ | ------- | ------------------------ | --------- | ------------------------ | - | ------------------------ | ----------
|
|Balance, January 1, 2002   |                                                                                          | 816,169                  |          |                          | 808,036 |                          | 2,265,625 |                          |   | 3,609,672                |           
|                           | Sale of Series J Preferred Stock, net of issuance costs of $856,034                      |                          |         |                          |         |                         |           |                         |   |                          |          
|                           | Conversion of preferred shares to common shares                                          |                          | (250,359 | )                        |         | (250,359                 | )         | (689,949                 | ) |                          | (1,103,920
|                           | Exchange of Series B, E and F to Series J-1 for contribution greater than pro-rata share |                          |         |                          |         |                         |           | (31,250                  | ) |                          | (50,000   
|                           | Write-off of forfeited dividends                                                         |                          |         |                          |         |                         |           |                         |   |                          |          
|                           | Accretion of dividends and offering costs                                                |                          |         |                          |         | 2,538                    |           |                         |   |                          | 4,776     
|                           |                                                                                          |                          |          |                          |         |                          |           |                          |   |                          |           
|Balance, December 31, 2002 |                                                                                          | 565,810                  |          | $                        | 560,215 |                          | 1,544,426 |                          | $ | 2,460,528                |           
|                           |                                                                                          |                          |          |                          |         |                          |           |                          |   |                          |           
|                           | Conversion of preferred shares to common shares                                          |                          |         |                          |         |                         |           | (218,750                 | ) |                          | (350,000  
|                           | Write-off of forfeited dividends                                                         |                          |         |                          |         |                         |           |                         |   |                          |          
|                           | Accretion of dividends and offering costs                                                |                          |         |                          |         | 5,593                    |           |                         |   |                          | 10,555    
|                           |                                                                                          |                          |          |                          |         |                          |           |                          |   |                          |           
|                           | Conversion of preferred shares to common shares in IPO                                   |                          | (565,810 | )                        |         | (565,808                 | )         | (1,325,676               | ) |                          | (2,121,083
|Balance, December 31, 2003 |                                                                                          |                         |          | $                        |        |                          |          |                          | $ |                         |           
|                           |                                                                                          |                          |          |                          |         |                          |           |                          |   |                          |           

F-23

---



ACUSPHERE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Convertible Preferred Stock and Warrants (Continued)

|                                                                                         |  | Series F
Preferred Stock |   | Series G
Preferred Stock |             | Series H
Preferred Stock |            | Series I
Preferred Stock |   | Series J
Preferred Stock |   | Series J-1
Preferred Stock |  
|---------------------------------------------------------------------------------------- |  | ------------------------ | - | ------------------------ | ----------- | ------------------------ | ---------- | ------------------------ | - | ------------------------ | - | -------------------------- | -
|
|Balance, January 1, 2002                                                                 |  | 6,325,329                |   |                          | 32,090,699  |                          | 1,232,308  |                          |   | 13,117,986               |   | 1,127,819                  |  
|Sale of Series J Preferred Stock, net of issuance costs of $856,034                      |  |                         |   |                          |            |                          |           |                          |   |                         |   |                           |  
|Conversion of preferred shares to common shares                                          |  | (47,544                  | ) |                          | (225,836    | )                        | (1,232,308 | )                        |   | (13,548,873              | ) | (1,127,819                 | )
|Exchange of Series B, E and F to Series J-1 for contribution greater than pro-rata share |  | (1,345,061               | ) |                          | (6,389,038  | )                        |           |                          |   |                         |   |                           |  
|Write-off of forfeited dividends                                                         |  |                         |   |                          | (856,359    | )                        |           |                          |   |                         |   |                           |  
|Accretion of dividends and offering costs                                                |  |                         |   |                          | 2,067,771   |                          |           |                          |   | 430,887                  |   |                           |  
|                                                                                         |  |                          |   |                          |             |                          |            |                          |   |                          |   |                            |  
|Balance, December 31, 2002                                                               |  | 4,932,724                |   | $                        | 26,687,237  |                          |           |                          | $ |                         |   |                           |  
|                                                                                         |  |                          |   |                          |             |                          |            |                          |   |                          |   |                            |  
|Conversion of preferred shares to common shares                                          |  | (116,500                 | ) |                          | (553,375    | )                        |           |                          | $ |                         |   |                           |  
|Write-off of forfeited dividends                                                         |  |                         |   |                          | (5,093,707  | )                        |           |                          |   |                         |   |                           |  
|Accretion of dividends and offering costs                                                |  |                         |   |                          | 1,836,914   |                          |           |                          |   |                         |   |                           |  
|                                                                                         |  |                          |   |                          |             |                          |            |                          |   |                          |   |                            |  
|Conversion of preferred shares to common shares in IPO                                   |  | (4,816,224               | ) |                          | (22,877,069 | )                        |           |                          |   |                         |   |                           |  
|                                                                                         |  |                          |   |                          |             |                          |            |                          |   |                          |   |                            |  
|Balance, December 31, 2003                                                               |  |                         |   | $                        |            |                          |           |                          | $ |                         |   |                           |  
|                                                                                         |  |                          |   |                          |             |                          |            |                          |   |                          |   |                            |  

(Concluded)

F-24

---





Common Stock WarrantsOn November 30, 2004, Acusphere issued a warrant to 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 the Company in connection with the consummation of its
collaborative agreement with Nycomed 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 the
exercise price thereof is subject to adjustment from time to time in the event of stock subdivisions, stock splits and stock combinations. The warrant does not include a cashless exercise feature.
Acusphere recorded the deemed fair value 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 being
amortized over the collaborative agreement's revenue recognition term as consulting expense. $34,520 of amortization has been recorded within general and administrative expense as of
December 31, 2004.

As
of December 31, 2004, warrants to purchase shares of the Company's stock, the origination of which were derived in connection with debt and lease financing transactions and the
collaborative agreement with Nycomed, were outstanding for an aggregate of 1,317,574 shares of common stock at an effective weighted average price of $9.73 per shares as follows:

Number of
Shares

Exercise Price
Per Share

Expiration
Date1,066

$
9.60

May 1, 20054,724


12.84

August 21, 20067,517


12.84

June 6, 20075,194


28.50

February 21, 20083,404


18.00

February 26, 2008450,897


8.46

April 11, 2008684


14.00

April 11, 20087,540


8.46

June 27, 2008573,105


8.50

August 2, 200816,212


19.80

October 16, 200814,934


19.80

October 19, 2008114,895


8.50

October 20, 200855,732


6.28

November 30, 20092,688


19.80

January 5, 201030,844


28.50

March 30, 201128,138


28.50

September 27, 20111,317,574


During
2003, warrants were exercised at $9.30 per share resulting in the issuance of 998 shares of common stock. No warrants were exercised during 2004 or 2002.

11. Research and License Agreements

Acusphere has clinical and pre-clinical study research agreements with various institutions. Total expenses incurred amounted to approximately
$1,350,000, $1,818,000 and $4,839,000 in sponsored-research expenses relating to such agreements during the years ended December 31, 2002, 2003 and 2004, respectively.

F-25

---



12. Commitments

Operating LeasesAcusphere has leased office, laboratory and manufacturing space under various
agreements classified as operating leases. During 2002, 2003 and 2004, rent expense totaled approximately $2,601,000, $2,473,000 and $2,920,000, respectively.

Acusphere's
headquarters is in Watertown, MA where it operates in a facility under a 10-year lease which began in December 2001.Acusphere is required to maintain a
security deposit totaling $997,500 as a condition of this lease. This deposit amount is included in other assets at December 31, 2003 and 2004. In conjunction with the lease agreement,
Acusphere issued a warrant to the lessor which allows for the purchase of 30,844 shares of common stock. Acusphere recorded the deemed fair value of the warrant of $536,402, based upon the
Black-Scholes option-pricing model, as a deferred rent expense included in other assets, which is being amortized over the lease term as rent expense. $53,640 of amortization has been recorded within
rent expense for each of the years ended December 31, 2002, 2003 and 2004.

In
July 2004, Acusphere entered into a lease agreement for 58,000 square feet of commercial manufacturing space in Tewksbury, Massachusetts. This lease has a five year, nine month
term with options to extend the lease for up to two additional five-year terms at predetermined rental rates. Under the lease, Acusphere receives nine months of occupancy free of base
rent, followed by base rent of approximately $400,000 for the next twelve months with scheduled annual rental rate increases thereafter. In October 2004, Acusphere paid an initial security
deposit of $1.0 million to the landlord as part of the lease, subject to reduction if the Company makes certain improvements to the facility. A total of $0.9 million of this deposit
amount is included in other current assets at December 31, 2004, and $0.1 million is included in other assets at December 31, 2004.

Future
minimum payments due under the noncancelable facility leases are as follows as of December 31, 2004:

Year Ending December 31,2005

$
2,493,0002006


2,746,0002007


2,885,0002008


3,026,0002009


3,171,000Thereafter


5,581,000$
19,902,000


Service ContractsOn November 11, 2004, as amended March 9, 2005, Acusphere entered into
an agency procurement agreement with Parsons Commercial Technology, Inc. ("Parsons") authorizing Parsons to procure as agent to the Company manufacturing and other equipment in connection with
the build-out of the commercial manufacturing facility in Tewksbury, Massachusetts. As of March 9, 2005, the total estimated value of equipment to be purchased under this agreement
was $4.6 million. As of December 31, 2004 the Company had entered into purchase orders totaling approximately $1.7 million for such capital equipment and made $528,000 in deposits
in connection with such purchase orders.

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On
November 11, 2004, as amended December 18, 2004 and March 9, 2005, Acusphere entered into an engineering and construction management services agreement with
Parsons authorizing Parsons to perform on behalf of the Company, during the period ending April 1, 2005, engineering, design and
construction management services in connection with the build-out of the commercial manufacturing facility in Tewksbury, Massachusetts. The total estimated value of this cost plus
percentage fee type contract is $6.2 million. As of December 31, 2004, Acusphere had paid approximately $1.6 million against this contract.

13.   Employee Benefit Plan

Acusphere has a 401(k) profit sharing plan covering all employees of the Company who meet certain defined requirements. Under the terms of the 401(k) plan, the
employees may elect to make tax-deferred contributions up to 20% of their salaries, subject to certain limitations as defined by the Internal Revenue Code. The Company does not make any
matching contributions to the 401(k) plan and employees are not eligible to invest directly in shares of Acusphere's stock under this plan.

14.   Subsequent Events

In February 2005, Acusphere issued 900,000 shares of 61/2% convertible exchangeable preferred stock resulting in aggregrate gross proceeds
to the Company of $45.0 million (net proceeds of approximately $41.5 million after deducting underwriting discounts and commissions and estimated offering expenses). In conjunction with
this offering, Acusphere granted the underwriters a 30-day option to purchase up to an additional 100,000 shares of preferred stock solely to cover over-allotments, if any.
Each share of preferred stock has a liquidation preference of $50 per share and is convertible into 7.2886 shares of common stock, representing a conversion price of $6.86 per share. Dividends will be
cumulative from the date of original issue at the annual rate of $3.25 per share of preferred stock, payable quarterly. Acusphere may elect to automatically convert some or all of the preferred stock
into shares of Acusphere's common stock if the closing price of its common stock has exceeded $10.30 per share (150% of the conversion price) for at least 20 trading days during any 30-day
trading period. Prior to March 1, 2009, if Acusphere elects to automatically convert, or if any holder elects to voluntarily convert, the preferred stock, Acusphere will also make an additional
payment ("Make-Whole" payment) equal to the aggregate amount of dividends that would have been payable on the preferred stock so converted from the original date of issuance through and
including March 1, 2009, less any dividends already paid on the preferred stock. This additional payment is payable by Acusphere, at its option, in cash, in additional shares of Acusphere's
common stock or in a combination of both. The preferred shares were sold under a shelf registration statement that was declared effective by the Securities and Exchange Commission on January 7,
2005.

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Item 15.2.Supplemental Financial Statement Schedule

Quarterly Results of Operations (Unaudited)

The following is a summary of our unaudited quarterly results of operations for the fiscal years ended December 31, 2003 and 2004:

|                             |                | Revenue |   | Net Loss |  | Net Loss
Available to
Common
Stockholders |            | Net Loss
Available to
Common
Stockholders
Per Share
Basic and Diluted |  
|---------------------------- | -------------- | ------- | - | -------- |  | ----------------------------------------- | ---------- | ---------------------------------------------------------------------- | -
|Year Ended December 31, 2003 |                |         |   |          |  |                                           |            |                                                                        |  
|                             | First Quarter  |         | $ |         |  | $                                         | (4,488,188 | )                                                                      | $
|                             | Second Quarter |         |   |         |  |                                           | (5,418,453 | )                                                                      |  
|                             | Third Quarter  |         |   |         |  |                                           | (5,284,572 | )                                                                      |  
|                             | Fourth Quarter |         |   |         |  |                                           | (6,732,224 | )                                                                      |  
|Year Ended December 31, 2004 |                |         |   |          |  |                                           |            |                                                                        |  
|                             | First Quarter  |         |   |         |  |                                           | (6,924,562 | )                                                                      |  
|                             | Second Quarter |         |   |         |  |                                           | (7,619,210 | )                                                                      |  
|                             | Third Quarter  |         |   | 857,143  |  |                                           | (6,318,640 | )                                                                      |  
|                             | Fourth Quarter |         |   | 857,143  |  |                                           | (9,096,636 | )                                                                      |  

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