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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2003                                             
|          
|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                                                                                    |  | 04-3208947                           
|(State or other jurisdiction
    of incorporation or organization)                          |  | (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 þ          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.     þ

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

The aggregate
market value of Common Stock held by non-affiliates of the
registrant as of March 16, 2004 (based on the last reported
sale price on The Nasdaq National Market as of such date) was
$73,962,997. As of March 1, 2004 there were
14,297,280 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, 2003.



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INTRODUCTORY NOTE

This report, including the documents incorporated
by reference in this report, includes statements that are not
historical facts, which statements we refer to as
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 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.                                                                                                                                                                

Our actual results and the timing of certain
events may differ materially from the results discussed,
projected, anticipated or indicated in any forward-looking
statement. 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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PART I



|        |         
|------- | --------
|Item 1. | Business

General

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 are in clinical development and 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 III clinical development for the
detection of coronary artery 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:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | AI-700, Intravenous Delivery of Gas for
    Ultrasound Contrast.We specifically
    designed AI-700 to assess myocardial perfusion, or blood flow in
    the heart muscle, a sensitive marker for coronary artery
    disease. AI-700 is an ultrasound contrast agent that enables
    stress echocardiography, or ultrasound of the heart, to obtain
    information on myocardial perfusion. Currently, there is no
    ultrasound contrast agent that is approved by the U.S. Food
    and Drug Administration, or FDA, to assess myocardial perfusion.
    We initiated the Phase III clinical program for AI-700 in
    early 2003 with the pivotal phase of this program initiated at
    selected sites in late 2003.
|
| |  | AI-850, First Clinical-Stage Product Candidate
    from our Hydrophobic Drug Delivery System,
    HDDS.Hydrophobic drugs, which are
    drugs that do not dissolve well in water, are often difficult to
    formulate, especially for intravenous delivery. We have
    demonstrated that our Hydrophobic Drug Delivery System, or HDDS,
    improves the dissolution rate of a variety of hydrophobic drugs.
    Our first clinical application of HDDS is AI-850, which is in
    Phase I clinical trials. AI-850 is an improved formulation
    of paclitaxel, the active ingredient in Taxol, a leading cancer
    drug.                                                                                               
|
| |  | AI-128, First Clinical-Stage Product Candidate
    from our Pulmonary Drug Delivery System,
    PDDS.Most asthma drugs delivered via
    inhalation are immediate release formulations that must be
    inhaled multiple times per day, reducing patient compliance. We
    have completed a Phase I study for AI-128, a sustained
    release formulation of an FDA-approved asthma drug.                                                                                                                                                                                                                                                                                                                                  

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. We created our three initial
product candidates using technology that 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 can be used to deliver gases or
these microparticles and nanoparticles can be used 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 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. Our porous microparticle
technology enables us to produce microparticles that are smaller
than red blood cells, with a wide range of porosities. 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:



| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have produced small, hollow microparticles,
    which are analogous in structure to ping pong balls, containing
    gas. Using these microparticles, we are developing AI-700, an
    ultrasound contrast agent for detection of coronary artery
    disease through the assessment of myocardial perfusion.
|
| |  | We have produced small microparticles with tiny
    pores throughout, which are analogous in structure to sponges.
    Using these microparticles, we are developing our HDDS
    technology, which may enable the dissolution of hydrophobic
    drugs in water.                                              
|
| |  | We have produced small microparticles with large
    pores throughout, which are analogous in structure to honeycombs
    or whiffle balls. Using these microparticles, we are developing
    our PDDS technology, which may enable the delivery of drugs via
    the pulmonary route.                         

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 III clinical trial program
for our lead product candidate, AI-700, a cardiovascular drug
for the detection of coronary artery disease. We intend to
complete enrollment in these Phase III trials for AI-700 by
the end of 2005 and submit a New Drug Application, or NDA, to
the U.S. Food and Drug Administration, or FDA, in the first
half of 2006.

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. We intend to pursue strategic partnering opportunities
to market and sell AI-700 outside of the United States.

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 FDA-approved and development stage drugs, as
well as 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 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.

3



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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 artery disease. We believe the
potential market opportunity for AI-700 is approximately
$1.9 billion.

Product Development Programs

We are employing the capabilities of our
proprietary porous microparticle technology to develop product
candidates that 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
artery 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 artery 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 Artery Disease
Market.According to the American
Heart Association, or AHA, almost 13.0 million people in
the United States suffer from coronary artery disease, the
leading cause of death in the United States. Coronary artery
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 2003, approximately
$61.0 billion was to be spent on direct medical expenses
for coronary artery disease in the United States. Early
detection of coronary artery disease can reduce treatment costs,
increase patient survival and improve quality of life.

The definitive method for the detection of
coronary artery 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
artery disease screening are nuclear stress imaging and stress
echocardiography, which is ultrasound of the heart. We estimate
that 9.5 million of these screening procedures were
performed collectively in the United States in 2002. We believe
that a contrast agent that enables the assessment of blood flow
in the heart muscle, or myocardial perfusion, with ultrasound
could replace each of these screening procedures. We believe
that an ultrasound contrast agent capable of myocardial
perfusion assessment could be priced at $100 per vial. In
myocardial perfusion assessment we anticipate two vials will be
used per procedure, one at stress and one at rest. Assuming all
of these procedures were performed using ultrasound with an
effective contrast agent at a price of $200 per procedure,
we estimate the potential U.S. ultrasound contrast market
for the cardiac indication of A1-700 to be approximately
$1.9 billion.

Current Practice for Coronary Artery 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, cost
approximately $935 per procedure, and due to significant
capital equipment costs and complex regulatory requirements

4



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associated with the use of radioactive materials,
are not available in many hospital or physician office settings.
We estimate that 7.0 million nuclear stress tests were
conducted in the United States in 2002.


Stress echocardiography, or stress echo, assesses
the motion of the heart wall. Advanced coronary artery 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 2.5 million
stress echo procedures were conducted in the United States in
2002. However, stress echo is often inadequate for a definitive
assessment of coronary artery 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 cannot detect 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, referred to as a resting wall
motion study, which is a procedure for looking at the heart wall
and chambers while the patient is at rest. However, we believe
that this indication has limited clinical utility because
ultrasound is usually capable of assessing resting wall motion
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 III
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 II 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 resting wall motion assessment 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 resting wall motion assessment 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 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, hollow
microparticles filled with a perfluorocarbon gas. These
microparticles have low porosity outer shells 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 outer shell, which contains a phospholipid, and
the properties of the perfluorocarbon gases 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 a
single

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intravenous injection prior to ultrasound
imaging. 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.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Less Expensive.We
    estimate that the cost of performing an ultrasound imaging
    procedure using our AI-700 contrast agent will be approximately
    $400 per procedure, representing costs of $200 for the
    contrast agent and $200 for administering the procedure. Nuclear
    stress tests typically cost approximately $935 per
    procedure. Nuclear stress tests are relatively more expensive
    because the equipment is large and costly and patient throughput
    is low. Ultrasound equipment is much smaller and generally half
    the cost of nuclear equipment used for the detection of coronary
    artery disease.
|
| |  | Less Time Consuming.Nuclear stress tests typically take five hours, while ultrasound
    procedures typically take 30 minutes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Greater
    Availability.Due to the technical
    complexity, high cost and the regulatory requirements associated
    with the use of radioactive materials, nuclear stress tests are
    not available in all hospitals, cardiology practices and
    emergency departments. In the United States, ultrasound
    equipment is widely available in all of these settings.                                                                                                                                                                                                                                                                    
|
| |  | More Information.Stress echo with AI-700 has the potential to provide information
    on both myocardial perfusion and wall motion, whereas nuclear
    stress tests typically provide information only on myocardial
    perfusion.                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | No Radioactivity.AI-700 is made from a synthetic polymer that does not require
    special licensing, has at least a two-year shelf life, and is
    convenient to use and store. Nuclear stress tests use
    radioactive materials that create additional costs due to
    preparation, storage and disposal requirements.                                                                                                                                                                                                                                                                                                                   
|
| |  | Expanded Opportunity for
    Cardiologists.We believe that many
    cardiologists will prefer ultrasound with AI-700 over nuclear
    stress tests because it may allow them to remain in closer
    contact with their patients. To assess myocardial perfusion with
    nuclear stress tests, many patients are referred by
    cardiologists to the radiology department, which is usually a
    different profit and care center within the hospital.                                                                                                                                                                                      



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | 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 cardiological evaluation.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | More Information.Stress echo with AI-700 has the potential to provide information
    on both myocardial perfusion and wall motion, whereas stress
    echo without contrast provides information only on wall motion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Potential for Increased Sensitivity with
    Perfusion.Cardiologists seek to
    identify coronary artery disease early in the disease
    progression in order to minimize the risk of heart attack. In
    early coronary artery disease, the coronary artery is only
    partially blocked, so there may be little or no wall motion
    abnormality, but there could be a perfusion abnormality. The
    potential for increased sensitivity has contributed to the
    popularity of nuclear stress tests. We estimate that in 2002,
    7.0 million nuclear stress tests were performed versus
    2.5 million stress echo tests without contrast. We believe
    that an ultrasound contrast agent capable of myocardial
    perfusion imaging would enable stress echo to compete more
    effectively with nuclear stress testing.

Clinical Results.We
enrolled over 200 human subjects in our Phase I and
Phase II clinical trials for AI-700. Our Phase I
clinical trials evaluated the safety and feasibility of
myocardial perfusion imaging with AI-700. Our Phase II
clinical trials evaluated the preliminary safety and efficacy of
AI-700 enhanced

6



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ultrasound imaging. In our Phase II 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 I and Phase II clinical trials were conducted in
the U.S. under an Investigational New Drug Application, or
IND, with the FDA. The results of our Phase II trials are
summarized below. We have filed these results and our protocol
for our Phase III trials with the FDA. We initiated our
Phase III program in early 2003. We initiated the pivotal
phase of our Phase III program at selected sites in late
2003. We plan to cumulatively enroll 300 patients in the
Phase III program by the end of 2004, to complete total
patient enrollment in the Phase III program by the end of
2005, which enrollment we estimate to be approximately
600 patients in the pivotal phase of our Phase III
program, and to file an NDA for AI-700 in the first half of
2006. Although these milestones and target completion dates
reflect our current plans, we cannot assure you that we will
complete these milestones on this schedule, or at all.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 20
    Trial.Our objectives in the
    20 trial were to evaluate the safety of AI-700 in
    subjects with known coronary artery disease 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 stress.
    Agreement was defined as the percentage of subjects who received
    the same diagnosis using AI-700 enhanced echocardiography as
    with nuclear stress tests. 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 artery 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 II trials indicated the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Stress echo with AI-700 versus stress echo
    without contrast.Stress echo with
    both low and high doses of AI-700 resulted in a 30% or greater
    increase in sensitivity compared to stress echo without
    contrast, and demonstrated a higher level of agreement with
    nuclear stress tests versus stress echo without contrast.                                                                                                                                                  
|
| |  | Stress echo with AI-700 versus the nuclear
    stress test.Stress echo with both low
    and high doses of AI-700 agreed with nuclear stress tests in
    more than three-quarters of all patients.                                                                                                                                                                                                                                                                                            
|
| |  | Stress echo with AI-700 versus coronary
    angiography.Nuclear imaging does not
    always result in a correct diagnosis of coronary artery disease.
    The generally agreed gold standard for the diagnosis of coronary
    artery disease is coronary angiography. In a retrospective
    exploratory analysis of those patients that underwent coronary
    angiography, stress echo with AI-700 had the same agreement as
    nuclear stress tests when compared to coronary angiography.



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Safety Data.None of
    the subjects in our Phase I and II clinical trials have had
    serious adverse experiences after the administration of AI-700.
    The majority of the adverse experiences observed after
    administration of AI-700 have been mild in intensity and of
    short duration.

7



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##### 



The Phase III Program: Detection of
Coronary Disease in Patients Being Evaluated for Ischemic Heart
Disease.Under a U.S. IND and in
compliance with applicable European regulatory requirements, our
Phase III program for AI-700 commenced in early 2003 and
the pivotal phase of our Phase III program commenced at
selected sites in late 2003. Before beginning the Phase III
program, we had extensive discussions with the FDA, and have
attempted to address its questions and incorporate its comments
into our protocols and endpoints. The Phase III clinical
plan provides for a two-part program consisting of a pilot
phase, which is currently ongoing at multiple clinical sites and
is designed to qualify and train new investigators, and two
multi-center pivotal trials each of approximately
300 patients with suspected coronary artery disease. As of
March 1, 2004, over twenty clinical sites, located in North
America and Europe, had been initiated in the Phase III
program. Clinical sites which demonstrate readiness in the pilot
phase are advanced on a rolling-basis into the pivotal phase,
such that certain clinical sites are currently participating in
the pivotal phase while others are at varying stages of progress
in the pilot phase. Safety will continue to be tested and
evaluated during our Phase III program. Data from the
trials are intended for submission to U.S., Canadian and
European regulatory authorities. The endpoints for the trial are
sensitivity and specificity in comparison to nuclear stress
testing, angiography or clinical outcome. For the Phase III
trials, 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 II
trial results. Although we are targeting these clinical
endpoints in our Phase III trials, we cannot assure you
that we will successfully achieve results that meet or exceed
these clinical endpoints.

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 diagnosis of a wide variety of
diseases in addition to coronary artery 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.



| |                                                                
| | ---------------------------------------------------------------
| | Products from Our Hydrophobic Drug Delivery
    System, or HDDS

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. Possessing
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 $108 billion in
revenues in 2000 and constituted up to 40% of all drugs in
development. Taxol, a leading cancer drug with worldwide
revenues of $934 million in 2003, 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 hydrophobic drugs by increasing their aggregate surface area.
To accomplish this, many

8



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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. 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.


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, Our Improved Formulation of
Paclitaxel.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, such as 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. In our Phase I clinical trial of AI-850,
patient pre-medication is not required as part of the study
protocol.

Potential Benefits of AI-850 Over
Taxol.We believe that our
pre-clinical studies demonstrate significant potential benefits
of AI-850 over Taxol and its generic, Cremophor-based
competitors. These potential benefits include increased
tolerance, shorter administration and increased efficacy at
higher dose.

Product Development
Status.Under a U.S. IND, we
commenced a Phase I clinical trial in 2002 of AI-850. This
is a dose escalation study designed to determine the maximum
tolerated dose of AI-850. Doses currently being evaluated in
patients in the Phase I study are higher than the doses of
paclitaxel customarily delivered using the same dosing schedule
for the treatment of metastatic breast cancer. We expect to
complete this study in 2004.

Future Hydrophobic Drug Delivery 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. If the feasibility study is successful, we
anticipate that we will enter into a research and development
agreement with this pharmaceutical company. 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 addition,
we will evaluate the feasibility of developing, on our own or in
collaboration with others, improved formulations of off-patent
hydrophobic drugs.



| |                                                              
| | -------------------------------------------------------------
| | Products from Our Pulmonary Drug Delivery
    System, or PDDS

Broad Applications for Sustained Release in
the Lung.We are developing a
sustained release delivery system for drugs delivered locally to
the lung, which is desirable for the treatment of respiratory
disease. Relative to systemic drug delivery via the oral or
injectable route, local delivery of respiratory drugs via the
pulmonary route requires smaller doses of the drug and minimizes
systemic toxicity because it 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. Sustained release drugs may allow patients
to take treatments for such diseases as

9



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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 release
drugs, which can cause added toxicity or reduced efficacy. Our
initial development efforts have focused on developing sustained
release formulations of asthma drugs.


Respiratory Market.The worldwide 2002 market for inhaled respiratory drugs was
$8.0 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. We are
developing AI-128, an improved formulation of an approved asthma
drug that is off-patent. The approved asthma drug generated
revenues in excess of $500 million in 2003.

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 via 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 the product 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 I 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 asthma drugs as well as allow drugs that must be
delivered into the bloodstream for systemic delivery 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

10



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into the bodys general circulation. Since
the lung does not contain these destructive enzymes, delivery of
these drugs via the pulmonary route could be more convenient and
require less dosing. We plan to seek both proprietary and
collaborative opportunities for these drug formulations.


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.



| |                   
| | ------------------
| | Microparticle Size

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.



| |                       
| | ----------------------
| | Microparticle Porosity

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 with limited porosity in the shell. Porosity on the
inside of microparticles enables them to deliver 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

11



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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.




| |                                                
| | -----------------------------------------------
| | Microparticle Production Using Spray
    Drying

We believe the use of small, porous
microparticles has not reached its full potential in the
delivery of drugs. We believe that 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 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:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Produces solid microparticlesrather than the porous microparticles,
    which are required for ultrasound contrast imaging and may be
    beneficial for hydrophobic and pulmonary drug delivery.            
|
| |  | Does not completely removemoisture from the microparticles,
    contributing to low yields and making standard spray drying
    uneconomic for the production of drugs made from expensive raw
    materials.
|
| |  | Results in high levels of residual
    solvents, which can be problematic for
    the stability and safety of the drug.                                                                                      
|
| |  | Often operates at high
    temperatures, making it difficult to
    use with drugs that are unstable at higher temperatures.                                                                                 
|
| |  | Is not well-suited to sterile, or aseptic,
    processing, which is required for most
    intravenously administered drugs and is beneficial for
    pulmonary-delivered drugs.                              

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



| |                          
| | -------------------------
| | Our Patented Spray Dryers

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



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Remove nearly all residual solvents such as
    moisturefrom the microparticles
    because our patented spray dryer increases the length of time
    the microparticles are dried.                                                    
|
| |  | Can be operated at low or high
    temperatures, due to increasing the
    drying time used for microparticles produced at lower
    temperatures, and reducing the drying time for microparticles
    produced at higher temperatures.
|
| |  | Are well suited to aseptic processingby using steam sterilization
    techniques and a positive pressure system, thereby minimizing
    the contaminants pulled into the spray dryer from the
    surrounding environment.             

We have improved the drying capability of
standard spray dryers by adding additional drying chambers
through which the microparticles travel. The additional drying
chamber contains 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 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

12



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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.



| |                                     
| | ------------------------------------
| | Our Patented Pore Forming
    Agents

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 hollow 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. The current reimbursement rate for
ultrasound contrast agents used in echocardiography varies
slightly by state but is generally 95% of the average wholesale
price. As of May 2003, the reimbursed rate for the FDA-approved
ultrasound contrast agents for resting wall motion assessment
was 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 we anticipate will
require two vials per study, will provide at least the same
clinical information as nuclear stress tests, but at much lower
total study cost. 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
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

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following the potential launch of our product, we
believe that the current reimbursement rates for ultrasound
contrast agents would enable us to sell our product at
attractive margins.


Manufacturing

We currently outsource the production of our
products used in our clinical trials to qualified third parties.
For example, we have contracted with Hollister-Stier
Laboratories for the production of the clinical trial materials
to be used in our Phase III clinical trials for AI-700 and
our Phase I clinical trials for AI-850. These third-party
manufacturing facilities must comply with current good
manufacturing practices, or cGMPs, enforced by the FDA. In
preparation for commercial readiness, we are currently
evaluating the extent to which we want to continue to build our
manufacturing capability through qualified third parties versus
the potential cost and control advantages of relocating all or a
portion of this manufacturing to an environment created and
directly managed by us. We currently plan to manufacture
products for our clinical trials at FDA-approved cGMP compliant
facilities in the United States. We have identified potential
primary and secondary suppliers of the raw materials used in the
production of AI-700 and are in the process of scaling the
manufacturing process in preparation for commercial production.
We plan to manufacture some future materials, in particular for
pre-clinical toxicology testing, at our production facilities in
Watertown, Massachusetts.

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, 2004 , we own fourteen issued
U.S. patents, one allowed U.S. patent application and
eleven U.S. patent applications. Five of our issued
U.S. patents are directed to aspects of our AI-700 product
candidate. Three of our issued U.S. patents are directed to
aspects of the spray drying method for manufacturing
microparticles. Two issued U.S. patents, one allowed
U.S. patent application and seven U.S. patent
applications are related to various aspects of our porous
microparticle drug delivery technology. Four issued
U.S. patents and four U.S. patent applications relate
to the AI-850 product and the delivery of other hydrophobic
drugs. We also own a number of pending international and foreign
patent applications corresponding to these U.S. patents and
applications. As of the date of this Annual Report, 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.                                                                                   

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|                |           |             |  |                 |                   |         |  |  |                   |  |  |                                                                                  
|--------------- | --------- | ----------- |  | --------------- | ----------------- | ------- |  |  | ----------------- |  |  | ---------------------------------------------------------------------------------
|U.S. Patent No. |           | Date Issued |  | Expiration Date |                   | Subject
|                |           |             |  |                 |                   |        
|                | 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

Four of the above patents, 6,560,897, 6,589,557,
6,610,317 and 6,645,528 were issued during 2003 and one of these
patents, 6,689,390, was issued in early 2004.

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
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 Annual
Report 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.

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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 judgements 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.

Government Regulation



| |                         
| | ------------------------
| | U.S. Regulatory Approval

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 Cosmetics Act
before our products may be marketed in the United States
generally involves the following:



| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pre-clinical laboratory and animal tests
    performed under the FDAs Good Laboratory Practices
    regulation;                                                        
|
| |  | development of manufacturing processes which
    conform to FDA-mandated cGMPs;                                                                                         
|
| |  | submission and acceptance of an Investigational
    New Drug application, or IND, which must become effective before
    clinical trials may begin in the United States;

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| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | adequate and well-controlled human clinical
    trials to establish the safety and efficacy of the product
    candidate in our intended use; and
|
| |  | FDA review and approval of an NDA, prior to any
    commercial sale or shipment of a product.                                                    

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:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase I:     The
    drug is initially introduced into healthy human subjects or
    patients and tested for safety and dosage tolerance. Absorption,
    metabolism, distribution and excretion studies are generally
    performed at this stage.                                                                                                                                                                                                                        
|
| |  | Phase II:     The
    drug is studied in exploratory therapeutic trials in a limited
    number of subjects with the disease or medical condition for
    which the new drug is intended to be used in order to identify
    possible adverse effects and safety risks, to determine the
    preliminary or potential efficacy of the product for specific
    targeted diseases or medical condition and to determine dosage
    tolerance and the optimal effective dose.
|
| |  | Phase III:     When
    Phase II evaluations demonstrate that a specific dosage
    range of the drug is likely to be effective and has an
    acceptable safety profile, confirmatory therapeutic
    Phase III trials are undertaken to demonstrate clinical
    efficacy and to further test for safety in an expanded patient
    population, often at geographically dispersed clinical study
    sites.                                                              

We cannot be certain that we will successfully
complete Phase I, Phase II or Phase III 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

17



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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.

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.



| |                            
| | ---------------------------
| | Foreign Regulatory Approval

Outside the United States, our ability to market
our products will also be contingent upon receiving marketing
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

18



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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 plan to choose the appropriate route of
European regulatory filing in an attempt to accomplish the most
rapid regulatory approvals. However, the chosen regulatory
strategy may not secure regulatory approvals or approvals of the
chosen product indications. In addition, 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.

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
Amersham plc; and thallium, which is marketed by Amersham,
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 artery 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 March 2004, Point announced that it
had recently completed two pivotal Phase III trials and
plans to file an NDA with the FDA later this year. In addition,
some companies have ultrasound contrast agents that are FDA

19



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approved for resting wall motion studies 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 Amersham; Definity, which is marketed by
Bristol-Myers Squibb; and Imagent, which is marketed by Imcor
(formerly Photogen Technologies). SonoVue, which is being
developed by Bracco, is an ultrasound contrast agent which we
believe is in late stage clinical development for detecting
abnormal wall motion and for radiology applications, but as of
the date of this Annual Report 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. None of these
reformulations have received final 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. 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, 2004, we had
58 full-time employees, including 48 in research and
development and 10 in general and administrative. Ten of our
employees had 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.

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|        |           
|------- | ----------
|Item 2. | Properties

Our 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. We conduct
our clinical manufacturing through a contract manufacturer that
is experienced in producing clinical material. 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 internal laboratory and pilot-manufacturing
capabilities. We believe that our existing facility is adequate
to meet our current and foreseeable requirements and that
suitable additional space will be available as needed. If we
decide not to use third-party contract manufactures for
production of commercial quantities of AI-700, additional space
may be required beginning in 2004.



|        |                  
|------- | -----------------
|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

None.

PART II



|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Price Range of Common Stock

Our common stock has been traded on the Nasdaq
National Market under the symbol ACUS since
October 8, 2004. Prior to that time, there was no public
market for the common stock. The following table sets forth the
range of high and low closing sale prices for the common stock
as reported on the Nasdaq National Market during the fourth
quarter of 2003.

|                                                                                     |  |      |       |     |  |   |      | 
|------------------------------------------------------------------------------------ |  | ---- | ----- | --- |  | - | ---- | 
|                                                                                     |  | High |       | Low
|                                                                                     |  |      |       |    
|Year ended December 31, 2003:                                                        |  |      |       |     |  |   |      | 
|Fourth quarter (commencing with our first day of
    trading on
    October 8, 2003) |  | $    | 14.03 |     |  | $ | 6.99 | 

On March 1, 2004, the last reported sale
price of the Common Stock on The Nasdaq National Market was
$8.66 per share. As of March 1, 2004, there were
approximately 938 holders of record of the Common Stock,
including 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 capital stock. We currently intend to retain any earnings
for use in our business and do not anticipate paying any cash
dividends on our capital stock in the foreseeable future.

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 April 2003, we issued and sold
10% convertible promissory notes in the principal amount of
$19,100,000 in a private placement to 23 investors. In June
2003, we issued and sold 10% convertible

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promissory notes in the principal amount of
$319,000 in a private placement to 6 investors. The convertible
promissory notes bore interest at a rate of 10% per annum.
The outstanding balance of the convertible promissory notes and
accrued interest thereon converted into 2,411,846 shares of
our common stock upon the closing of our initial public
offering. Concurrent with the issuance of these promissory
notes, we issued for no additional consideration warrants to
purchase 458,437 shares of our common stock at an exercise
price of $8.46 per share, and a warrant to purchase
684 shares of our common stock at an exercise price of
$14.00 per share. Warrants to purchase 451,581 shares
of our common stock are exercisable at the election of the
holder on or prior to the earlier of a change of control of the
Company and April 11, 2008, and warrants to purchase
7,540 shares of our common stock are exercisable at the
election of the holder on or prior to a change of control of the
Company and June 27, 2008. These securities were issued to
accredited investors in a private placement transaction exempt
from registration pursuant to Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D as
an issuer transaction not involving a public offering.


During the quarter ended December 31, 2003,
we granted options to purchase an aggregate of
17,000 shares of our common stock to employees under our
1994 Stock Plan, at a weighted average exercise price of
$7.30 per share. In addition, we issued 1,167 shares
of common stock during the quarter ended December 31, 2003
in connection with the exercise of outstanding options under our
1994 Stock Plan by one of our employees, at a weighted exercise
price of $0.96 per share. These option exercises resulted
in aggregate proceeds to us of approximately $1,120.

No underwriters were involved in the foregoing
stock or option issuances. The foregoing stock and option
issuances were exempt from registration under the Securities Act
of 1933, as amended, either pursuant to Rule 701 under the
Act, as transactions pursuant to a compensatory benefit plan, or
pursuant to Section 4(2) under the Act, as a transaction by
an issuer not involving a public offering.

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. As part of the initial public offering, we granted
the several underwriters an overallotment option to purchase up
to an additional 562,500 shares of our common stock from
us. The underwriters did not exercise the overallotment option.
There were no selling stockholders in the offering.

The aggregate price 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 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.

We anticipate using the net proceeds from the
offering for research and development activities, including
clinical trials for our lead product candidate, working capital
and other general corporate purposes. Pending such uses, we have
invested the net proceeds from the offering in short-term,
interest bearing investment grade securities. The amount and
timing of our actual expenditures will depend on numerous
factors, including the progress of our research and development
activities and clinical trials, the number and breadth of our
product development programs, our ability to establish and
maintain corporate collaborations and other arrangements and the
amount of cash, if any, generated by our operations. In
addition, a portion of the net proceeds may be used for the
acquisition of businesses, products and

22



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##### 



technologies that are complementary to our own,
although we currently do not have any understandings,
commitments or agreements with respect to acquisitions. We
retain broad discretion in the allocation and use of the net
proceeds.




|        |                        
|------- | -----------------------
|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,              
|                                                                            |                          |                                      
|                                                                            |                          | 1999                                  |         | 2000  |  | 2001 |         | 2002   |  | 2003
|                                                                            |                          |                                       |         |       |  |      |         |        |  |     
|                                                                            |                          |                                      
|                                                                            |                          | (In thousands, except per share data)
|Statement of Operations Data:                                               |                          |                                       |         |       |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Operating Expenses:                                                         |                          |                                       |         |       |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Research and development                                                    |                          | $                                     | 7,022   |       |  | $    | 9,978   |        |  | $    | 11,536  |        |  | $ | 13,545  |        |  | $ | 14,228  |       
|General and administrative                                                  |                          |                                       | 1,622   |       |  |      | 2,517   |        |  |      | 3,893   |        |  |   | 3,906   |        |  |   | 4,173   |       
|Stock-based compensation                                                    |                          |                                       | 5       |       |  |      | 16      |        |  |      | 1,076   |        |  |   | 2,195   |        |  |   | 1,307   |       
|                                                                            |                          |                                       |         |       |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|                                                                            | Total operating expenses |                                       |         | 8,649 |  |      |         | 12,511 |  |      |         | 16,505 |  |   |         | 19,646 |  |   |         | 19,708 | 
|Equity in loss of joint venture                                             |                          |                                       |        |       |  |      | (12,015 | )      |  |      | (1,965  | )      |  |   | (1,183  | )      |  |   |        |       
|Interest and other income (expense), net                                    |                          |                                       | (492    | )     |  |      | 97      |        |  |      | 193     |        |  |   | (1,067  | )      |  |   | (2,215  | )     
|                                                                            |                          |                                       |         |       |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Net loss                                                                    |                          |                                       | (9,141  | )     |  |      | (24,429 | )      |  |      | (18,277 | )      |  |   | (21,896 | )      |  |   | (21,923 | )     
|Accretion of dividends and offering costs on
    preferred stock            |                          |                                       | (2,604  | )     |  |      | (4,218  | )      |  |      | (6,249  | )      |  |   | (6,666  | )      |  |   | (5,948  | )     
|                                                                            |                          |                                       |         |       |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Net loss available to common stockholders                                   |                          | $                                     | (11,745 | )     |  | $    | (28,647 | )      |  | $    | (24,526 | )      |  | $ | (28,562 | )      |  | $ | (27,871 | )     
|                                                                            |                          |                                       |         |       |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Net loss available to common stockholders per
    share  Basic and diluted |                          | $                                     | (27.24  | )     |  | $    | (64.18  | )      |  | $    | (50.81  | )      |  | $ | (35.39  | )      |  | $ | (6.66   | )     
|                                                                            |                          |                                       |         |       |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Weighted average shares outstanding 
    Basic and diluted                 |                          |                                       | 432     |       |  |      | 446     |        |  |      | 483     |        |  |   | 807     |        |  |   | 4,188   |       
|                                                                            |                          |                                       |         |       |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       

|                                                  |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        | 
|------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------ | 
|                                                  |  |                                      
|                                                  |  | As of December 31,                   
|                                                  |  |                                      
|                                                  |  | 1999                                  |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                                                  |  |                                       |         |      |  |      |         |      |  |     
|                                                  |  |                                      
|                                                  |  | (In thousands, except per share data)
|Balance Sheet Data:                               |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        | 
|Cash, cash equivalents and short-term investments |  | $                                     | 2,230   |      |  | $    | 25,275  |      |  | $    | 15,599  |   |  | $ | 7,992   |   |  | $ | 54,562 | 
|Working capital                                   |  |                                       | (1,498  | )    |  |      | 18,457  |      |  |      | 10,749  |   |  |   | 2,899   |   |  |   | 50,931 | 
|Total assets                                      |  |                                       | 5,104   |      |  |      | 29,092  |      |  |      | 24,457  |   |  |   | 13,367  |   |  |   | 58,924 | 
|Long-term debt, net of current portion            |  |                                       | 4,288   |      |  |      | 1,104   |      |  |      | 5,290   |   |  |   | 1,726   |   |  |   | 205    | 
|Redeemable convertible preferred stock            |  |                                       | 32,540  |      |  |      | 85,009  |      |  |      | 97,739  |   |  |   | 91,467  |   |  |   |       | 
|Total stockholders (deficit) equity              |  |                                       | (35,482 | )    |  |      | (64,030 | )    |  |      | (86,228 | ) |  |   | (85,348 | ) |  |   | 54,375 | 

23



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Statements in the following discussion contain
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. Our actual results and the timing of certain events
may differ materially from the results discussed, projected,
anticipated or indicated in any forward-looking statement. 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.

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 in clinical development and are designed to
address large unmet clinical needs within cardiology, oncology
and asthma. Our lead product candidate is a cardiovascular drug
in Phase III clinical development for the detection of
coronary artery disease, the leading cause of death in the
United States.

We created our three 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 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 are a development stage company and have
devoted substantially all of our efforts towards the research
and development of our product candidates and raising capital.
Since our inception, we have had no revenue from product sales
and have funded our operations almost exclusively through the
private and public placement of equity securities, equipment
leases and debt financings. We have not been profitable and have
incurred a cumulative net loss of $115.2 million from
inception through December 31, 2003.

We expect to incur significant operating losses
for the next several years. Research and development expenses
relating to our product candidates will continue to increase. In
particular, we expect to incur increased costs for
Phase III clinical trials of AI-700. General and
administrative costs will increase as we prepare for the
commercialization of our product candidates and as we incur
costs associated with operating as a newly public company.
Manufacturing expenses, which are currently part of research and
development expenses, will also increase as we prepare for the
commercialization of our product candidates.

Financial Operations Overview

Revenues.We have
not generated any operating revenues since our inception and do
not expect operating revenues in the near future. Further in the
future, we will seek to generate revenues from a

24



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combination of product sales, up-front or
milestone payments in connection with collaborative or strategic
relationships, and royalties resulting from the license of our
intellectual property.


Research and Development
Expense.Research and development
expense consists of expenses incurred in developing 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 more than
earlier stage programs due to the length and the number of
patients enrolled in clinical trials for later stage programs.
From inception through December 31, 2003, we cumulatively
spent $72.6 million on research and development.
Additionally, from June 2000 through September 2002, we
performed research and development through a joint venture, as
discussed below.

General and Administrative
Expense.General and administrative
expense consists primarily of salaries and other related costs
for personnel in executive, finance, accounting, information
technology 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. From inception through December 31,
2003, we have cumulatively incurred $20.1 million in
general and administrative expense.

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). We have granted 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 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. As of December 31, 2003, we deferred
$1.7 million in stock-based compensation and, from
inception through December 31, 2003, recognized stock-based
compensation expense of $4.7 million.

Equity in Loss of Joint
Venture.In June 2000, we established
in collaboration with Elan Corporation, plc and its affiliates 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. During that period, we owned an 80.1%
interest in the joint venture and Elan owned a 19.9% interest in
the joint venture on a fully diluted basis. Elan had retained
significant minority investor rights that prevented us from
exercising full control over the joint venture. Accordingly,
during the period from June 2000 to September 2002, we recorded
net losses of the joint venture in accordance with our
percentage ownership (80.1%) of such entity and reported such
loss using the equity method of accounting. In connection with
the termination of the joint venture we recorded a loss of
$381,413 for an amount previously recorded as due from Elan.
Including this amount, from inception through the date on which
we terminated our joint venture with Elan, we cumulatively
incurred $15.2 million in equity in loss of joint venture.

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

25



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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 the Companys 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 per agreement forfeited by the
preferred stockholders on that date in connection with the
conversion of these preferred shares to common stock.

Results of Operations



| |                                                 
| | ------------------------------------------------
| | Years Ended December 31, 2001, 2002
    and 2003

Research and Development
Expense.Research and development
expense for the year ended December 31, 2003 was
$14.2 million, compared to $13.5 million in 2002 and
$11.5 million in 2001. The $684,000 increase in 2003 over
2002 represented an increase of 5% and the $2.0 million
increase in 2002 over 2001 represented an increase of 17%.

In 2003 compared to 2002, the higher research and
development expense primarily resulted from costs associated
with the start of our Phase III clinical program for
AI-700, including increased costs associated with clinical site
training and clinical site monitoring. In 2002 compared to 2001,
our increased research and development expense primarily
resulted from increased facility costs and increased pulmonary
drug development costs, net of costs attributable to the Elan
joint venture.

The following table summarizes the primary
components of our research and development expense for the years
ended December 31, 2001, 2002 and 2003. 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,
|                                       |  |                         
|                                       |  | 2001                     |        | 2002 |  | 2003
|                                       |  |                          |        |      |  |     
|                                       |  |                         
|                                       |  | (In thousands)          
|AI-700                                 |  | $                        | 5,209  |      |  | $    | 5,332  |  |  | $ | 8,560  | 
|AI-850 and AI-128                      |  |                          | 3,481  |      |  |      | 2,992  |  |  |   | 777    | 
|Other                                  |  |                          | 98     |      |  |      | 1,490  |  |  |   | 1,305  | 
|                                       |  |                          |        |      |  |      |        |  |  |   |        | 
|Total direct costs                     |  |                          | 8,788  |      |  |      | 9,814  |  |  |   | 10,642 | 
|Facility costs                         |  |                          | 1,093  |      |  |      | 2,106  |  |  |   | 1,962  | 
|Depreciation                           |  |                          | 1,280  |      |  |      | 1,363  |  |  |   | 1,299  | 
|Patent costs                           |  |                          | 375    |      |  |      | 262    |  |  |   | 325    | 
|                                       |  |                          |        |      |  |      |        |  |  |   |        | 
|Total research and development expense |  | $                        | 11,536 |      |  | $    | 13,545 |  |  | $ | 14,228 | 
|                                       |  |                          |        |      |  |      |        |  |  |   |        | 

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:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Late Stage Clinical Development Program
    (AI-700).Our lead product candidate,
    AI-700, is a cardiovascular drug for the detection of coronary
    artery disease. We incurred direct research and development
    expense for AI-700 in 2003 of $8.6 million,
    $5.3 million in 2002 and in 2001 of $5.2 million. Of
    these amounts, $1.7 million in 2003, $1.6 million in
    2002 and $1.4 million in 2001 were incurred in connection
    with the production of clinical trial material by a third-party
    contract manufacturer. In 2003, we commenced clinical studies in
    our Phase III clinical program for AI-700, and we
    identified and began training additional clinical sites to be
    part of this Phase III

26



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##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | clinical program. We anticipate that new clinical
    sites for this clinical trial, in both Europe and North America,
    will be trained and initiated during 2004. As clinical sites are
    initiated and increasing numbers of patients are enrolled in the
    Phase III clinical program, we anticipate incurring
    increased costs from professional service firms helping to
    support the clinical trial by providing services such as
    independent clinical monitoring, data acquisition and data
    evaluation. We also anticipate incurring increased costs related
    to hiring of additional research and development and clinical
    personnel. In addition, we anticipate incurring increased costs
    associated with production and distribution of clinical trial
    material, including production in 2004 of clinical trial
    material which meets our requirements for the pivotal trials of
    our Phase III clinical program, and with preparation for
    commercial production.                                                                                                                                                                                                             
|
| |  | Early Stage Clinical Development Programs
    (AI-850 and AI-128).Our initial
    clinical applications of our HDDS technology, AI-850, and our
    PDDS technology, AI-128, are in early stages of clinical
    development. We incurred direct research and development expense
    for AI-850 and AI-128 in 2003 of $777,000, $3.0 million in
    2002 and in 2001 of $3.5 million. Of these amounts,
    $781,000 in 2002 and $231,000 in 2001 was incurred in connection
    with the production of clinical trial material by a third-party
    contract manufacturer. There were no contract manufacturing
    costs incurred in connection with these product development
    programs in 2003. These amounts exclude direct costs of $731,000
    and $1.6 million incurred in 2002 and 2001 for pulmonary
    drug development through the Elan joint venture, which was
    terminated in September 2002. We anticipate that we will
    complete our Phase I study of AI-850 in 2004 and that our
    costs associated with these clinical programs will not increase
    until we are prepared to commence further pre-clinical and
    clinical testing using our own resources or through strategic
    collaborations.
|
| |  | Other.Other direct
    research and development costs primarily consist of management
    and preclinical evaluation of other product candidates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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, 2003 was
$4.2 million, compared to $3.9 million for 2002 and
$3.9 million in 2001. The $267,000 increase in 2003 over
2002 represented an increase of 7% while the activity from
between 2002 and 2001 remained stable.

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.

In 2002 compared to 2001, general and
administrative expense included increased office rent costs of
$239,000, increased payroll and benefit costs of $183,000 and
increases in various other costs of lesser individual amounts.
These increases were substantially offset by decreased legal,
accounting and printing costs of $623,000.

27



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##### 



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
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 III 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, 2003 was
$1.3 million, compared to $2.2 million in 2002 and
$1.1 million in 2001. The $888,000 decrease in 2003 over
2002 represented a decrease of 40% and the $1.1 million
increase in 2002 over 2001 represented an increase of 104%. The
variances between the years resulted principally from the timing
of the expense of the deferred stock-based compensation for
stock options granted in prior years.

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. Research and
development costs for pulmonary drug delivery product candidates
in 2003 are included in research and development expense, as
discussed above.

Interest and Other Income
(Expense).Interest and other income
(expense) for the year ended December 31, 2003 was
$2.2 million of net expense, compared to $1.1 million
of net expense in 2002 and $193,000 net interest income in
2001. The $1.1 million increase in net expense in 2003 over
2002 represented an increase of 108% and the $1.3 million
increase in net expense in 2002 over 2001 represented an
increase of 652%. During these periods, interest and other
income (expense) consisted of the following:

|                       |            |                         |          |         |  |      |            |            |   |   |            |            |  
|---------------------- | ---------- | ----------------------- | -------- | ------- |  | ---- | ---------- | ---------- | - | - | ---------- | ---------- | -
|                       |            |                        
|                       |            | Year Ended December 31,
|                       |            |                        
|                       |            | 2001                    |          | 2002    |  | 2003
|                       |            |                         |          |         |  |     
|Interest income        |            | $                       | 943,000  |         |  | $    | 224,000    |            |   | $ | 200,000    |           
|Other income (expense) |            |                         |         |         |  |      | 9,000      |            |   |   | 22,000     |           
|Interest expense       |            |                         | (750,000 | )       |  |      | (1,300,000 | )          |   |   | (2,437,000 | )         
|                       |            |                         |          |         |  |      |            |            |   |   |            |           
|                       | Total, net |                         | $        | 193,000 |  |      | $          | (1,067,000 | ) |   | $          | (2,215,000 | )
|                       |            |                         |          |         |  |      |            |            |   |   |            |           

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.

The decrease in interest income the year ended
December 31, 2002 compared to the year ended
December 31, 2001 resulted principally from reduced yields
on investments resulting from lower average interest rates and
to lower average fund balance available for investment. The
increase in interest expense in 2002 compared to 2001 primarily
resulted from the amortization of the fair value of warrants
issued in September 2001 in connection with subordinated loans
payable.

Accretion of Dividends and Offering Costs on
Convertible Preferred Stock.Accretion
of dividends and offering costs on convertible preferred stock
was $5.9 million in 2003, $6.7 million in 2002 and

28



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$6.2 million in 2001. The $717,000 decrease
in 2003 over 2002 represented a decrease of 11% and the $417,000
increase in 2002 over 2001 represented an increase of 7%.


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, no
convertible preferred stock remains outstanding and,
accordingly, there was no further accretion of dividends and
offering costs on these shares 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.

In 2002 compared to 2001, the increase in
accretion of dividends and offering costs reflected the increase
in accretion of dividends on convertible preferred stock issued
in June 2002, the Series J convertible preferred stock, and
in June 2001, the Series I convertible preferred stock.

Liquidity and Capital Resources

Historically, 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, 2003, we had cash, cash equivalents and
short-term investments of $54.6 million. Since our
inception in July 1993 through December 31, 2003, we have
raised $161.6 million through the issuance of equity
securities, including the Companys initial public offering
on October 14, 2003 and the $19.4 million in
convertible promissory notes which converted to common stock
upon the Companys initial public offering. As of
December 31, 2003 we owed $1.1 million from capital
leases and had commitments totaling $19.4 million for rent
under our facility lease.

On October 14, 2003 we closed our initial
public offering at a price to the public of $14.00 per
share. We sold 3,750,000 shares of our common stock in the
offering and the aggregate price of the offering registered on
our behalf was $52.5 million. In connection with the
offering, we paid $3.7 million in underwriting discounts
and commissions to underwriters and incurred approximately
$1.2 million in other offering expenses. After deducting
the underwriting discounts and commissions and estimated
offering expenses, we received net proceeds from the offering of
approximately $47.6 million.

On April 11, 2003 and June 27, 2003, we
raised $19.1 million and $319,000, respectively, from
existing preferred stockholders in exchange for
10% convertible promissory notes and warrants. Upon
completion of our initial public offering on October 14,
2003, the 10% convertible promissory notes and interest
accrued thereon converted into 2,411,846 shares of common
stock.

During the year ended December 31, 2003,
operating activities used $15.5 million of cash. Net cash
used by operating activities during this period resulted
primarily from a net loss of $21.9 million. This use of
cash was partially offset by increases in accrued expenses of
$1.7 million, increases in accounts payable of $782,000,
non-cash charges for depreciation and amortization of
$1.7 million, non-cash charges for stock-based compensation
expense of $1.3 and non-cash interest expense of
$1.1 million.

During the year ended December 31, 2003,
investing activities used $459,000 in cash. Purchases of
equipment used $535,000 and an increase in other assets of
$119,000, partially offset by maturities (purchases) of
short term investments of $195,000.

During the year ended December 31, 2003,
financing activities provided $62.7 million in cash, with
proceeds of $47.6 million from the Companys initial
public offering, $19.4 million from the issuance of
10% convertible promissory notes which were partially
offset by $4.4 million for scheduled and early repayment of
debt.

We believe, based on our operating plans, that
the proceeds of our initial public offering that closed
October 14, 2003 together with our existing resources will
be sufficient to fund our planned operations, including
increases in spending for our AI-700 Phase III clinical
program, for at least the next twelve months. However, over the
next several years we may require significant additional funds
to develop,

29



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##### 



conduct clinical trials, achieve regulatory
approvals 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. 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 potential partners complete clinical trials for our
products and receive marketing approval from the applicable
regulatory authorities. If additional funds are required, we may
raise such funds from time to time through public or private
sales of equity or from borrowings. Financing may not be
available on acceptable terms, or at all, and our failure to
raise capital when needed could materially adversely impact our
growth plans and our financial condition and results of
operations. Additional equity financing may be dilutive to the
holders of our common stock and debt financing, if available,
may involve significant cash payment obligations and covenants
that restrict our ability to operate our business.


Off-Balance Sheet Financing
Arrangements

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

Contractual Obligations

The following table summarizes our contractual
obligations as of December 31, 2003 and the effect such
obligations are expected to have on our liquidity and cash flow
in future periods:

Payments Due by Period

|                                   |  |                |        |         |  |         |       |         |  |       |       |  |  |   |       |  |  |   |       | 
|---------------------------------- |  | -------------- | ------ | ------- |  | ------- | ----- | ------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                   |  | Total          |        | 2004    |  | 2006    |       | 2008    |  |      
|                                   |  | Obligations    |        | Through |  | Through |       | Through |  | After
|                                   |  | All Years      |        | 2005    |  | 2007    |       | 2009    |  | 2009 
|                                   |  |                |        |         |  |         |       |         |  |      
|                                   |  |               
|                                   |  | (In thousands)
|Capital lease obligations          |  | $              | 1,090  |         |  | $       | 1,090 |         |  | $     |      |  |  | $ |      |  |  | $ |      | 
|Operating lease obligations        |  |                | 19,419 |         |  |         | 4,366 |         |  |       | 4,677 |  |  |   | 5,010 |  |  |   | 5,367 | 
|                                   |  |                |        |         |  |         |       |         |  |       |       |  |  |   |       |  |  |   |       | 
|Total contractual cash obligations |  | $              | 20,509 |         |  | $       | 5,456 |         |  | $     | 4,677 |  |  | $ | 5,010 |  |  | $ | 5,367 | 
|                                   |  |                |        |         |  |         |       |         |  |       |       |  |  |   |       |  |  |   |       | 

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. 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.

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

30



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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 generally accepted accounting principles.


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 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, 2003, we had federal tax net
operating

31



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loss carryforwards of $68.5 million, which
expire through 2023. We also have research and development
credit carryforwards of $2.6 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 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 January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46), which was amended by FIN 46R issued in
December 2003. This interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial
Statements, addresses consolidation by business
enterprises of variable interest entities (VIEs) that either:
(1) do not have sufficient equity investment at risk to
permit the entity to finance its activities without additional
subordinated financial support, or (2) for which the equity
investors lack an essential characteristic of a controlling
financial interest. This Interpretation applies immediately to
VIEs created after January 31, 2003. It also applies in the
first fiscal year or interim period ending after March 15,
2004, to VIEs created before February 1, 2003 in which an
enterprise holds a variable interest. FIN 46 requires
disclosure of VIEs in financial statements issued after
January 31, 2003, if it is reasonably possible that as of
the transition date: (1) the company will be the primary
beneficiary of an existing VIE that will require consolidation
or, (2) the company will hold a significant variable
interest in, or have significant involvement with, an existing
VIE. We are currently in the process of completing our review of
the requirements of FIN 46. However, we have not yet
identified any entities that require disclosure or entities that
would require consolidation under FIN 46 that had not
previously been consolidated as a result of FIN 46.

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 revenues 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 revenues 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. As of
December 31, 2003, our cumulative net loss was
$115.2 million. Our net loss was $21.9 million for the
full year 2002 and $21.9 million for the full year 2003.

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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 II clinical trials for AI-700 will be
predictive of results obtained in our Phase III clinical
trials. Many of the patients in our AI-700 clinical trial have
coronary heart disease. As part of our AI-700 Phase III
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 III 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.
For example, our AI-850 trial consists of patients being treated
for late-stage cancer. 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 III plan for AI-700 will successfully address the
concerns of the FDA or that the results of the Phase III
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. 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. Delays in planned patient
enrollment 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. 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.

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



| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | adversely affect our ability to market any drugs
    we develop independently or with collaborative partners;
|
| |  | impose additional costs and diminish any
    competitive advantages that we may attain; or                   
|
| |  | adversely affect our ability to generate
    royalties.                                                      

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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 collaborative partners, if any, 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:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | the progress of pre-clinical development and
    laboratory testing and clinical trials;                              
|
| |  | the time and costs involved in obtaining
    regulatory approvals;                                                    
|
| |  | the number of product candidates we pursue;                                                                           
|
| |  | the costs involved in filing and prosecuting
    patent applications and enforcing or defending patent
    claims; and
|
| |  | the establishment of selected strategic alliances
    and activities required for product commercialization.          

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.

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We cannot assure you that we can obtain
additional funding on reasonable terms, or at all. If we cannot
obtain adequate funds, we may:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | terminate or delay clinical trials for one or
    more of our product candidates;                                
|
| |  | delay our establishment of sales, marketing
    and/or manufacturing capabilities;                               
|
| |  | curtail significant product development programs
    that are designed to identify new product candidates; and/or
|
| |  | relinquish rights to our technologies or product
    candidates.                                                 

We believe that existing cash reserves will fund
our planned activities for at least twelve months.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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.

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
discovered that any of our products or manufacturing processes
violated third-party proprietary rights, 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.

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| |                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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:



| |   |                                                              
| | - | -------------------------------------------------------------
| |  | receiving patent protection for our product
    candidates;  
|
| |  | maintaining our trade secrets;                               
|
| |  | not infringing on the proprietary rights of
    others; and  
|
| |  | preventing others from infringing our proprietary
    rights.

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, 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.

36



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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 and product introductions may be delayed and our costs
    may rise.

We have limited manufacturing facilities, and we
have no experience in the commercial manufacturing of drugs and
limited experience in designing drug manufacturing equipment. We
have contracted with third party manufacturers to produce, in
collaboration with us, our product candidates for clinical
trials. We intend to rely, in part, on third-party contract
manufacturers to supply, store and distribute our potential
products for our clinical trials. We may continue to rely on
third-parties to manufacture and distribute our potential
products. 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 potential
product revenues:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Contract manufacturers often encounter
    difficulties in achieving volume production, quality control and
    quality assurance, as well as shortages of qualified personnel.
    Accordingly, a manufacturer might not be able to manufacture
    sufficient quantities of drugs to meet our clinical schedules or
    to commercialize our products.                                                                                                                                                                                               
|
| |  | Contract manufacturers are obliged to operate in
    accordance with FDA-mandated current good manufacturing
    practices, or cGMPs. A failure of these contract manufacturers
    to establish and follow cGMPs and to document their adherence to
    such practices may lead to significant delays in the
    availability of material for clinical study and may delay or
    prevent filing or approval of marketing applications for our
    products.                                                                                          
|
| |  | For each of our current product candidates we
    will initially rely on a single manufacturer. Changing these or
    future manufacturers may be difficult and the number of
    potential manufacturers is limited. Changing manufacturers may
    require re-validation of the manufacturing processes and
    procedures in accordance with FDA-mandated cGMPs. Such
    re-validation may be costly and time-consuming. It may be
    difficult or impossible for us to find replacement manufacturers
    on acceptable terms quickly, or at all.
|
| |  | Our contract manufacturers may not perform as
    agreed or may not remain in the contract manufacturing business
    for the time required to produce, store and distribute our
    products successfully.                                                                                                                                                                                                                                                                                                                                            

Drug manufacturers are subject to ongoing
periodic unannounced inspection by the FDA, the U.S. Drug
Enforcement Agency, or the DEA, 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.

In the event that we decide to manufacture all or
a portion of our potential products for commercial use, we may
encounter similar difficulties and challenges as well as the
need to create cGMP compliant facilities.



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | 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. We cannot
assure you that we will be able to successfully increase the
manufacturing capacity, whether on our own or in collaboration

37



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##### 



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 the incidence of
manufacturing errors, 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. For example,
the manufacture of AI-850 will require bulk quantities of
paclitaxel, a natural substance that is difficult to produce and
is in limited supply. We currently have no supply agreements in
place with any supply facility. 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 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:



| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we cannot effectively control whether our
    corporate partners will devote sufficient resources to our
    programs or product candidates;                                                               
|
| |  | disputes may arise in the future with respect to
    the ownership of rights to technology developed with
    collaborators;                                                                               
|
| |  | disagreements with collaborators could delay or
    terminate the research and development, regulatory approval or
    commercialization of product candidates, or result in litigation
    or arbitration;

38



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##### 





| |   |                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | corporate partners have considerable discretion
    in electing whether to pursue the development of any additional
    product candidates and may pursue technologies or products
    either on their own or in collaboration with our
    competitors; and
|
| |  | collaborators with marketing rights may choose to
    devote fewer resources to the marketing of our product
    candidates than they do to product candidates of their own
    development.                                                                

For example, we established a joint venture with
Elan Corporation, plc and affiliates in 2000. At the time, we
anticipated that we would share the cost of pre-clinical and
clinical trials for product candidates being developed by the
joint venture with Elan. In 2002, for reasons beyond our
control, 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 the asthma
product candidate that was being developed by the joint venture.
Future development of product candidates will require that we
provide all the funding for the cost of development and clinical
trials or identify collaborators to share in the costs.

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 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.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | AI-700, our ultrasound contrast agent and lead
    product candidate, if approved for marketing and sale, will
    compete with nuclear stress tests, the current standard of care
    in myocardial perfusion imaging. Nuclear contrast agents that
    are approved for use in myocardial perfusion imaging include
    products marketed by Amersham, Bristol-Myers Squibb and Tyco
    International. In addition, Amersham, Bristol-Myers Squibb and
    Imcor have developed ultrasound contrast agents that have been
    approved by the FDA for resting wall motion studies, and in the
    future they may seek to broaden their products to include stress
    echo and myocardial perfusion assessment. Moreover, we are aware
    that other companies, such as Bracco, are developing ultrasound
    contrast agents for wall imaging and for radiology applications,
    and that Point Biomedical is developing an ultrasound contrast
    agent specifically for myocardial perfusion imaging. In March
    2004, Point announced that it had recently completed two pivotal
    Phase III trials for this contrast agent and plans to file
    an NDA with the FDA later this year. Finally, some cardiologists
    may find it satisfactory to use stress echo without contrast for
    the detection of coronary artery disease.
|
| |  | AI-850, our reformulation of paclitaxel, if
    approved for marketing and sale, will also face intense
    competition from companies such as American Pharmaceutical
    Partners, NeoPharm and Sonus Pharmaceuticals, which are applying
    significant resources and expertise to developing reformulations
    of paclitaxel for intravenous delivery. Other companies, such as
    Cell Therapeutics, are developing new chemical entities that
    involve paclitaxel conjugated, or chemically bound, to another
    chemical.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

39



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | AI-128, our 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. In addition, large pharmaceutical companies that
    market FDA-approved asthma drugs may be developing sustained
    release versions of their asthma drugs that would compete with
    our product candidates.

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, including Sherri C. Oberg, our
president and chief executive officer, John F. Thero, our
senior vice president and chief financial officer, Howard
Bernstein, our senior vice president of research and
development, Charles P. Cox, our senior vice president of
corporate development and marketing, and Michael R. Slater,
our senior vice president of operations. The loss of any of
these individuals 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 individuals.

Ms. Oberg and Dr. Bernstein are
critical to the development of our technologies and business.
Dr. Cox, who joined us in August 2003, Mr. Thero, who
joined us in February 2003, and Mr. Slater, who joined us
in October 2001, are key additions to our management team and
are also critical to directing and managing our growth and
development in the future. We are not aware of any present
intention of any of these individuals to leave our company. We
have no employment contracts with any of our employees.

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.



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

In the future, we expect to develop operations
outside the United States in order to market and distribute our
products. 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

40



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##### 



have an adverse effect on our operating results.
Among the risks we believe are most likely to affect any
international operations are:




| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | different regulatory requirements for approval of
    our product candidates;            
|
| |  | dependence on local distributors;                                                        
|
| |  | longer payment cycles and problems in collecting
    accounts receivable;                
|
| |  | adverse changes in trade and tax regulations;                                            
|
| |  | the absence or significant lack of legal
    protection for intellectual property rights;
|
| |  | political and economic instability; and                                                  
|
| |  | currency risks.                                                                          

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
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

41



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##### 



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 or
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.

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 $32,000 in 2003 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 only recently completed our initial public
offering. Prior to this offering, you could not buy or sell our
common stock publicly. 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

42



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##### 



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:




| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | announcements of the introduction of new products
    by us or our competitors;       
|
| |  | market conditions in the pharmaceutical and
    biotechnology sectors;                
|
| |  | rumors relating to us or our competitors;                                             
|
| |  | litigation or public concern about the safety of
    our potential products;          
|
| |  | our quarterly operating results;                                                      
|
| |  | deviations in our operating results from the
    estimates of securities analysts; and
|
| |  | FDA or international regulatory actions.                                              



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | 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. In connection with our recently
completed initial public offering, our executive officers and
directors and substantially all of our pre-initial public
offering stockholders and optionholders executed lock-up
agreements that prohibit them from offering, selling,
contracting to sell, granting an option to purchase, making a
short sale or otherwise disposing of any shares of our common
stock or any option to purchase shares of our common stock or
any securities exchangeable for or convertible into shares of
common stock for the 180 day period from the date of our
initial public offering through April 4, 2004 without the
prior written consent of SG Cowen Securities Corporation. SG
Cowen has no pre-established conditions to waiving the terms of
the lock-up agreements, and any decision by it to waive those
conditions would depend on a number of factors, including market
conditions, the performance of the common stock in the market
and our financial condition at that time.



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

Our directors and executive officers and their
affiliates collectively control approximately 42.0% 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.



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

43



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##### 



These provisions include:



| |   |                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a provision allowing us to issue preferred stock
    with rights senior to those of the common stock without any
    further vote or action by the holders of the common stock;                                                                                                                                                 
|
| |  | the existence of a staggered board of directors
    in which there are three classes of directors serving staggered
    three-year terms, thus expanding the time required to change the
    composition of a majority of directors and potentially
    discouraging someone from making an acquisition proposal for us;        
|
| |  | the by-laws requirement that stockholders
    provide advance notice when nominating our directors;                                                                                                                                                                                                                            
|
| |  | the inability of stockholders to convene a
    stockholders meeting without the chairperson of the board,
    the chief executive officer, the president or a majority of the
    board of directors first calling the meeting; and                                                                                            
|
| |  | the application of Delaware law prohibiting us
    from entering into a business combination with the beneficial
    owner of 15% or more of our outstanding voting stock for a
    period of three years after the 15% or greater owner first
    reached that level of stock ownership, unless we meet specified
    criteria.

It is also likely that events arising out of the
conviction of Arthur Andersen would adversely affect its ability
to satisfy any claims we may have arising from its provision of
auditing and other services to us. Such services were provided
to us by Arthur Andersen before June 7, 2002.



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

We have paid no cash dividends on any of our
classes of capital stock to date and 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, 2003, 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 expenses, such as

44



---



##### 



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

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



|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

On June 7, 2002, upon the recommendation of
our audit committee and authorization by our board of directors,
we dismissed Arthur Andersen LLP as our independent accountants
and engaged Deloitte & Touche LLP as our independent
accountants.

During the year ended December 31, 2000, and
the interim period from December 31, 2000 to June 7,
2002, Arthur Andersen did not have any disagreement with us on
any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Arthur
Andersen, would have caused it to make reference to the subject
matter of the disagreement in connection with its report on our
financial statements. The report of Arthur Andersen on our
consolidated financial statements for our fiscal year ended
December 31, 2000 did not contain an adverse opinion or
disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope or accounting principles. We did not
consult with Deloitte & Touche LLP on any financial or
accounting reporting matters in the period before its
appointment.



|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

As of December 31, 2003 (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.

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, 2003.

45



---



##### 



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 of 1934, as amended, 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 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, in compliance with applicable rules and regulations.



|         |                       
|-------- | ----------------------
|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, 2003.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|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, 2003.



|         |                                                   
|-------- | --------------------------------------------------
|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, 2003.



|         |                                           
|-------- | ------------------------------------------
|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, 2003.

PART IV



|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a)1.     Consolidated
Financial Statements.

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

2.     Financial
Statement Schedules.

Unaudited Quarterly Results of Operations, as
previously reported for each of the fiscal quarters in the years
ended December 31, 2002 and 2003, except for the unaudited
results of operations for the fiscal quarter ended
December 31, 2003 which is reported in this schedule and
had not been previously reported. Except for the schedule of
Unaudited Quarterly Results of Operations, no financial
statement schedules

46



---



##### 



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.


3.     Exhibit Index.

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                    
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .01         |  | Amended and Restated Certificate of Incorporation
    of registrant (incorporated herein by reference to
    Exhibit 3.02 to the registrants Registration
    Statement on Form S-1, File No. 333-106725)                                                                                                                                         
|        | 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)                                                                                                                                                              
|        | 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)                                                                                                                                           
|        | 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 | .03        |  | 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 | .04        |  | 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 | .05         |  | 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 | .06         |  | 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 | .07         |  | 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 | .08         |  | 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 | .09         |  | 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 | .10         |  | 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 | .11         |  | 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 | .12         |  | 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 | .13         |  | 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)                                                                                                   

47



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .14         |  | 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 | .15         |  | 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 | .16         |  | 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 | .17         |  | 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 | .18         |  | 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 | .19         |  | 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 | .20         |  | 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 | .21         |  | 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 | .22         |  | 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 | .23         |  | 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 | .24         |  | 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 | .25         |  | 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 | .26        |  | 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)                                                                                                                                                               
|        | 14 | .01*        |  | Code of Ethics                                                                                                                                                                                                                                                                                                                                                                                             
|        | 21 | .01         |  | List of Subsidiaries (incorporated herein by
    reference to Exhibit 21.01 to the registrants
    Registration Statement on Form S-1, File
    No. 333-106725)                                                                                                                                                                                                                                           
|        | 23 | .01*        |  | Consent of Deloitte & Touche LLP
    relating to the consolidated financial statements of
    Acusphere, Inc.                                                                                                                                                                                                                                                                                              
|        | 24 | .01         |  | Power of Attorney (included in signature page)                                                                                                                                                                                                                                                                                                                                                             

48



---



##### 



|        |    |             |  |                                                                                                                                                              
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 31 | .1*         |  | Certification Pursuant to Rule 13a-14(a) and
    Rule 15d-14(a) of the Exchange Act, as Adopted Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002
|        | 31 | .2*         |  | Certification Pursuant to Rule 13a-14(a) and
    Rule 15d-14(a) of the Exchange Act, as Adopted Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002
|        | 32 | .1*         |  | Certification Pursuant to 18 u.s.c.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                               



---



|  |                
|- | ---------------
|* | Filed herewith.



|  |                                                                                       
|- | --------------------------------------------------------------------------------------
| | Indicates a management contract or any
    compensatory plan, contract or arrangement.

The other exhibits listed have previously been
filed with the Securities and Exchange Commission and are
incorporated herein by reference, as indicated.

(b) Reports on Form 8-K.

We furnished a current report on Form 8-K on
November 12, 2003 to furnish to the SEC under Item 12
of Form 8-K a copy of our quarterly earnings release for
the fiscal quarter ended September 30, 2003.

(c) Exhibits.

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.

(d) Financial Statement
Schedule.

Unaudited Quarterly Results of Operations, as
previously reported for each of the fiscal quarters in the years
ended December 31, 2002 and 2003, except for the unaudited
results of operations for the fiscal quarter ended
December 31, 2003 which is reported in this schedule and
had not been previously reported. 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.

49



---



##### 



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: | /s/ SHERRI C. OBERG

| |                                          
| | -----------------------------------------
| |                                          
| | Sherri C. Oberg                          
| | President and Chief Executive
    Officer

Date: March 17, 2004

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 17, 2004
|                                              
|/s/ JOHN F. THEROJohn F. Thero                 |  | Senior Vice President and
    Chief Financial Officer
    (Principal Financial and
    Accounting Officer) |  | March 17, 2004
|                                              
|/s/ TERRANCE MCGUIRETerrance McGuire           |  | Director                                                                                                   |  | March 17, 2004
|                                              
|/s/ DEREK LEMKE-VON AMMONDerek Lemke-von Ammon |  | Director                                                                                                   |  | March 17, 2004
|                                              
|/s/ KATE MITCHELLKate Mitchell                 |  | Director                                                                                                   |  | March 17, 2004
|                                              
|/s/ FRANK BALDINOFrank Baldino                 |  | Director                                                                                                   |  | March 17, 2004
|                                              
|/s/ MARTYN GREENACREMartyn Greenacre           |  | Director                                                                                                   |  | March 17, 2004

50



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)


TABLE OF CONTENTS

|                                                                                |                                                                                                                                   |      |     |      | 
|------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ---- | --- | ---- | 
|                                                                                |                                                                                                                                   | Page
|                                                                                |                                                                                                                                   |     
|INDEPENDENT AUDITORS REPORT 
    Years ended December 31, 2001, 2002 and 2003 |                                                                                                                                   |      | F-2 |     
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                        |                                                                                                                                   |      | F-3 |     
|CONSOLIDATED FINANCIAL STATEMENTS:                                              |                                                                                                                                   |      |     |     
|                                                                                | Consolidated Balance Sheets                                                                                                       |      |     | F-4  | 
|                                                                                | Consolidated Statements of Operations                                                                                             |      |     | F-5  | 
|                                                                                | Consolidated Statements of Redeemable Convertible
    Preferred Stock, Stockholders (Deficit) Equity, and
    Comprehensive Loss |      |     | F-6  | 
|                                                                                | Consolidated Statements of Cash Flows                                                                                             |      |     | F-13 | 
|                                                                                | Notes to Consolidated Financial Statements                                                                                        |      |     | F-15 | 

F-1



---



##### 



INDEPENDENT AUDITORS REPORT

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) (a development stage company) as of
December 31, 2002 and 2003, and the related consolidated
statements of operations, redeemable convertible preferred
stock, stockholders (deficit) equity, and comprehensive
loss, and cash flows for each of the three years in the period
ended December 31, 2003 and for the period from
July 12, 1993 (date of inception) through December 31,
2003. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. The
Companys financial statements for the period July 12,
1993 (date of inception) through December 31, 2000 were
audited by other auditors who have ceased operations. The
financial statements for the period July 12, 1993 (date of
inception) through December 31, 2000 reflect total net
losses of $53,113,128, of the related totals. The other
auditors report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for such prior
period, is based solely on the report of such other auditors.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
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, 2002 and
2003, and the results of its operations and its cash flows for
each of the three years in the period ended, December 31,
2003 and for the period from July 12, 1993 (date of
inception) through December 31, 2003, in conformity with
accounting principles generally accepted in the United States of
America.

As discussed above, the consolidated financial
statements of Acusphere, Inc. for the period from inception
(July 12, 1993) to December 31, 2000 were audited by
other auditors who have ceased operations. As described in
Note 2, these financial statements have been adjusted to
reflect a one-for-six reverse stock split that was effected on
September 12, 2003. We audited the adjustments described in
Note 2 that were applied to revise these financial
statements. Our audit procedures included (1) comparing the
previously reported shares issued and outstanding per the
Companys accounting analysis to the previously issued
financial statements, and (2) recalculating the reduction
in shares to give effect to the reverse stock split and testing
the mathematical accuracy of the underlying analysis. In our
opinion, such adjustments and disclosures are appropriate and
such adjustments have been properly applied. However, we were
not engaged to audit, review or apply any procedures to the
consolidated financial statements from inception (July 12,
1993) to December 31, 2000 of the Company other than with
respect to such adjustments and, accordingly, we do not express
an opinion or any other form of assurance on these consolidated
financial statements taken as a whole.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts

March 15, 2004


F-2



---



##### 



This is a copy of a report previously issued
by Arthur Andersen LLP. This report has not been reissued by
Arthur Andersen LLP nor has Arthur Andersen LLP provided a
consent to the inclusion of its report in these financial
statements. The financial statements as of December 31,
1999 and 2000 and for each of the years in the three-year period
ended December 31, 2000 are not presented herein.

REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Stockholders and Board of Directors of

Acusphere, Inc. and Subsidiary:


We have audited the accompanying consolidated
balance sheets of Acusphere, Inc. (a Delaware corporation
in the development stage) and subsidiary (the Company) as of
December 31, 1999 and 2000, and the related consolidated
statements of operations, redeemable convertible preferred stock
and stockholders deficit and cash flows for each of the
years in the three-year period ended December 31, 2000 and
for the period from inception (July 12, 1993) to
December 31, 2000. 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
auditing standards generally accepted in the 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. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
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, the financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of December 31, 1999 and 2000,
and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2000
and for the period from inception (July 12, 1993) to
December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts

February 12, 2001


F-3



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)




CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |            |              |            | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------ | --------- | ------------ | ----------- | ---------- | ---------- | ------------ | ---------- | 
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                 
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     | As of December 31,                              
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                 
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     | 2002                                             |                                      | 2003     
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |          
|ASSETS                                                                                                                                                                                                                                                                                             
|CURRENT ASSETS:                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|                                                                                                                                                                                                                                                                                                    | Cash and cash equivalents                                                                                                                                                                                                                                                                                                           |                                                  | $                                    | 7,796,238 |              |             | $          | 54,562,378 |             
|                                                                                                                                                                                                                                                                                                    | Short-term investments                                                                                                                                                                                                                                                                                                              |                                                  |                                      | 195,698   |              |             |            |           |             
|                                                                                                                                                                                                                                                                                                    | Other current assets                                                                                                                                                                                                                                                                                                                |                                                  |                                      | 428,837   |              |             |            | 712,673    |             
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     | Total current assets                             |                                      |           | 8,420,773    |             |            |            | 55,275,051   |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|PROPERTY AND EQUIPMENT, at cost:                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|                                                                                                                                                                                                                                                                                                    | Equipment and furniture                                                                                                                                                                                                                                                                                                             |                                                  |                                      | 8,887,930 |              |             |            | 9,837,350  |             
|                                                                                                                                                                                                                                                                                                    | Leasehold improvements                                                                                                                                                                                                                                                                                                              |                                                  |                                      | 98,195    |              |             |            | 122,505    |             
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     | Total property and equipment                     |                                      |           | 8,986,125    |             |            |            | 9,959,855    |           
|                                                                                                                                                                                                                                                                                                    | Less accumulated depreciation and amortization                                                                                                                                                                                                                                                                                      |                                                  |                                      | 6,202,033 |              |             |            | 7,935,450  |             
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     | Property and equipment, net                      |                                      |           | 2,784,092    |             |            |            | 2,024,405    |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|OTHER ASSETS                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                     |                                                  | 2,162,196                            |           |              |             | 1,624,797  |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|TOTAL                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                     | $                                                | 13,367,061                           |           |              | $           | 58,924,253 |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
    STOCK,
    AND STOCKHOLDERS (DEFICIT) EQUITY                                                                                                                                                                                                    
|CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|                                                                                                                                                                                                                                                                                                    | Current portion of long-term obligations                                                                                                                                                                                                                                                                                            |                                                  | $                                    | 3,564,655 |              |             | $          | 884,799    |             
|                                                                                                                                                                                                                                                                                                    | Accounts payable                                                                                                                                                                                                                                                                                                                    |                                                  |                                      | 737,715   |              |             |            | 1,519,981  |             
|                                                                                                                                                                                                                                                                                                    | Accrued expenses                                                                                                                                                                                                                                                                                                                    |                                                  |                                      | 1,219,744 |              |             |            | 1,939,012  |             
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     | Total current liabilities                        |                                      |           | 5,522,114    |             |            |            | 4,343,792    |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|LONG-TERM OBLIGATIONS, net of current portion                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                     |                                                  | 1,725,588                            |           |              |             | 205,418    |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|COMMITMENTS (Notes 9 and 10)                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|REDEEMABLE CONVERTIBLE PREFERRED STOCK, at
    carrying value; including accrued dividends; authorized,
    32,106,077 and 5,000,000 shares as of December 31,
    2002 and 2003, respectively; issued and outstanding, 31,145,083
    and no shares as of December 31, 2002 and 2003, respectively |                                                                                                                                                                                                                                                                                                                                     |                                                  | 91,467,075                           |           |              |             |           |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|STOCKHOLDERS (DEFICIT) EQUITY:                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|                                                                                                                                                                                                                                                                                                    | Common stock, $0.01 par value; authorized,
    11,741,127 and 98,500,000 shares as of December 31,
    2002 and 2003, respectively; issued, 1,218,876 and
    14,294,533 shares as of December 31, 2002 and 2003,
    respectively; outstanding, 1,212,849 and 14,294,533 shares
    as of December 31, 2002 and 2003, respectively |                                                  |                                      | 12,189    |              |             |            | 142,945    |             
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     | Additional paid-in capital                       |                                      |           | 34,029,519   |             |            |            | 201,422,784  |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     | Less treasury stock, 6,027 shares, at cost       |                                      |           | (361         | )           |            |            |             |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     | Accumulated other comprehensive income           |                                      |           | 288          |             |            |            |             |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     | Deferred stock-based compensation                |                                      |           | (1,793,404   | )           |            |            | (1,723,229   | )         
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     | Deficit accumulated during the development stage |                                      |           | (117,595,947 | )           |            |            | (145,467,457 | )         
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  | Total stockholders (deficit) equity |           |              | (85,347,716 | )          |            |              | 54,375,043 | 
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           
|TOTAL                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                     | $                                                | 13,367,061                           |           |              | $           | 58,924,253 |           
|                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                     |                                                  |                                      |           |              |             |            |           

See notes to consolidated financial statements.

F-4



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)




CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                            |                               |                            |             |                 |            |      |             |             |            |   |             |            |            |   |              |            |            | 
|--------------------------------------------------------------------------- | ----------------------------- | -------------------------- | ----------- | --------------- | ---------- | ---- | ----------- | ----------- | ---------- | - | ----------- | ---------- | ---------- | - | ------------ | ---------- | ---------- | 
|                                                                            |                               |                            |             |                 |            |      |             | Period from
|                                                                            |                               |                            |             | Inception      
|                                                                            |                               | Year Ended December 31,    |             | (July 12, 1993)
|                                                                            |                               |                            |             | to December 31,
|                                                                            |                               | 2001                       |             | 2002            |            | 2003 |             | 2003       
|                                                                            |                               |                            |             |                 |            |      |             |            
|OPERATING EXPENSES:                                                         |                               |                            |             |                 |            |      |             |             |            |   |             |            |            |   |              |           
|                                                                            | Research and development(1)   |                            | $           | 11,535,574      |            |      | $           | 13,545,084  |            |   | $           | 14,228,611 |            |   | $            | 72,553,098 |           
|                                                                            | General and administrative(1) |                            |             | 3,893,553       |            |      |             | 3,905,465   |            |   |             | 4,172,726  |            |   |              | 20,124,922 |           
|                                                                            | Stock-based compensation      |                            |             | 1,075,606       |            |      |             | 2,195,202   |            |   |             | 1,307,052  |            |   |              | 4,667,585  |           
|                                                                            |                               |                            |             |                 |            |      |             |             |            |   |             |            |            |   |              |           
|                                                                            |                               | Total operating expenses   |             |                 | 16,504,733 |      |             |             | 19,645,751 |   |             |            | 19,708,389 |   |              |            | 97,345,605 | 
|Equity in loss of joint venture                                             |                               |                            | (1,965,840  | )               |            |      | (1,183,417  | )           |            |   |            |            |            |   | (15,164,257  | )         
|Interest income                                                             |                               |                            | 943,430     |                 |            |      | 223,550     |             |            |   | 199,883     |            |            |   | 3,973,938    |           
|Other income(expense)                                                       |                               |                            |            |                 |            |      | 9,114       |             |            |   | 22,701      |            |            |   | 31,815       |           
|Interest expense                                                            |                               |                            | (750,049    | )               |            |      | (1,299,746  | )           |            |   | (2,437,632  | )          |            |   | (6,705,898   | )         
|                                                                            |                               |                            |             |                 |            |      |             |             |            |   |             |            |            |   |              |           
|NET LOSS                                                                    |                               |                            | (18,277,192 | )               |            |      | (21,896,250 | )           |            |   | (21,923,437 | )          |            |   | (115,210,007 | )         
|Accretion of dividends and offering costs on
    preferred stock            |                               |                            | (6,248,616  | )               |            |      | (6,665,478  | )           |            |   | (5,948,073  | )          |            |   | (30,257,450  | )         
|                                                                            |                               |                            |             |                 |            |      |             |             |            |   |             |            |            |   |              |           
|NET LOSS AVAILABLE TO COMMON STOCKHOLDERS                                   |                               | $                          | (24,525,808 | )               |            | $    | (28,561,728 | )           |            | $ | (27,871,510 | )          |            | $ | (145,467,457 | )         
|                                                                            |                               |                            |             |                 |            |      |             |             |            |   |             |            |            |   |              |           
|NET LOSS AVAILABLE TO COMMON STOCKHOLDERS PER
    SHARE  Basic and diluted |                               | $                          | (50.81      | )               |            | $    | (35.39      | )           |            | $ | (6.66       | )          |            |   |              |           
|                                                                            |                               |                            |             |                 |            |      |             |             |            |   |             |            |            |   |              |           
|WEIGHTED-AVERAGE SHARES OUTSTANDING 
    Basic and diluted                 |                               |                            | 482,713     |                 |            |      | 807,119     |             |            |   | 4,187,672   |            |            |   |              |           
|                                                                            |                               |                            |             |                 |            |      |             |             |            |   |             |            |            |   |              |           
|(1) Excludes
    stock-based compensation as follows:                       |                               |                            |             |                 |            |      |             |             |            |   |             |            |            |   |              |           
|                                                                            |                               | Research and development   |             | $               | 417,413    |      |             | $           | 915,085    |   |             | $          | 589,642    |   |              | $          | 1,994,143  | 
|                                                                            |                               | General and administrative |             |                 | 658,193    |      |             |             | 1,280,117  |   |             |            | 717,410    |   |              |            | 2,673,442  | 
|                                                                            |                               |                            |             |                 |            |      |             |             |            |   |             |            |            |   |              |           
|                                                                            |                               | $                          | 1,075,606   |                 |            | $    | 2,195,202   |             |            | $ | 1,307,052   |            |            | $ | 4,667,585    |           
|                                                                            |                               |                            |             |                 |            |      |             |             |            |   |             |            |            |   |              |           

See notes to consolidated financial statements.

F-5



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)




CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK,


STOCKHOLDERS (DEFICIT) EQUITY, AND
COMPREHENSIVE LOSS


Period from Inception (July 12, 1993) to
December 31, 2003


|                                    |                                                                                                     |                        |           |              |   |                                |           |                |   |         |         |           |   |      |       |       |   |  |        |        |   |  |       |       |   |  |      |      |   | 
|----------------------------------- | --------------------------------------------------------------------------------------------------- | ---------------------- | --------- | ------------ | - | ------------------------------ | --------- | -------------- | - | ------- | ------- | --------- | - | ---- | ----- | ----- | - |  | ------ | ------ | - |  | ----- | ----- | - |  | ---- | ---- | - | 
|                                    |                                                                                                     |                        |           |              |   |                               
|                                    |                                                                                                     |                        |           |              |   | Stockholders (Deficit) Equity
|                                    |                                                                                                     |                        |           |             
|                                    |                                                                                                     | Redeemable Convertible |           |              |   |                                |           |               
|                                    |                                                                                                     | Preferred Stock        |           | Common Stock |   |                                |           | Treasury Stock
|                                    |                                                                                                     |                        |           |              |   | Additional                     |           |               
|                                    |                                                                                                     | Number of              |           | Carrying     |   | Number of                      |           | $0.01          |   | Paid-in |         | Number of |   |     
|                                    |                                                                                                     | Shares                 |           | Value        |   | Shares                         |           | Par Value      |   | Capital |         | Shares    |   | Cost
|                                    |                                                                                                     |                        |           |              |   |                                |           |                |   |         |         |           |   |     
|INCEPTION OF COMPANY, JULY 12, 1993 |                                                                                                     |                        |           |              |   |                                |           |                |   |         |         |           |   |      |       |       |   |  |        |        |   |  |       |       |   |  |      |     
|                                    | Sale of common stock                                                                                |                        |           |             |   |                                | $         |               |   |         |         | 416,664   |   |      | $     | 4,167 |   |  | $      | 20,833 |   |  |       |      |   |  | $    |     |  
|                                    | Sale of Series A Redeemable Convertible
    Preferred Stock, net of stock issuance costs of $26,813 |                        |           | 775,000      |   |                                |           | 748,187        |   |         |         |          |   |      |       |      |   |  |        |       |   |  |       |      |   |  |      |     |  
|                                    | Accretion of offering costs                                                                         |                        |           |             |   |                                |           | 1,957          |   |         |         |          |   |      |       |      |   |  |        |       |   |  |       |      |   |  |      |     |  
|                                    |                                                                                                     | Net loss               |           |              |  |                                |           |                |  |         |         |           |  |      |       |       |  |  |        |        |  |  |       |       |  |  |      |      |  | 
|                                    |                                                                                                     |                        |           |              |   |                                |           |                |   |         |         |           |   |      |       |       |   |  |        |        |   |  |       |       |   |  |      |     
|BALANCE, DECEMBER 31, 1994          |                                                                                                     |                        | 775,000   |              |   |                                | 750,144   |                |   |         | 416,664 |           |   |      | 4,167 |       |   |  | 20,833 |        |   |  |      |       |   |  |     |     
|                                    | Sale of common stock                                                                                |                        |           |             |   |                                |           |               |   |         |         | 5,585     |   |      |       | 56    |   |  |        | 3,295  |   |  |       |      |   |  |      |     |  
|                                    | Sale of Series B Redeemable Convertible
    Preferred Stock, net of issuance costs of $45,024       |                        |           | 2,265,625    |   |                                |           | 3,579,976      |   |         |         |          |   |      |       |      |   |  |        |       |   |  |       |      |   |  |      |     |  
|                                    | Issuance of common stock for services performed                                                     |                        |           |             |   |                                |           |               |   |         |         | 32,435    |   |      |       | 324   |   |  |        | 20,829 |   |  |       |      |   |  |      |     |  
|                                    | Issuance of preferred stock for services performed                                                  |                        |           | 41,169       |   |                                |           | 41,169         |   |         |         |          |   |      |       |      |   |  |        |       |   |  |       |      |   |  |      |     |  
|                                    | Purchase of treasury stock                                                                          |                        |           |             |   |                                |           |               |   |         |         |          |   |      |       |      |   |  |        |       |   |  |       | 6,027 |   |  |      | (361 | )
|                                    | Accretion of offering costs                                                                         |                        |           |             |   |                                |           | 5,055          |   |         |         |          |   |      |       |      |   |  |        |       |   |  |       |      |   |  |      |     |  
|                                    |                                                                                                     | Net loss               |           |              |  |                                |           |                |  |         |         |           |  |      |       |       |  |  |        |        |  |  |       |       |  |  |      |      |  | 
|                                    |                                                                                                     |                        |           |              |   |                                |           |                |   |         |         |           |   |      |       |       |   |  |        |        |   |  |       |       |   |  |      |     
|BALANCE, DECEMBER 31, 1995          |                                                                                                     |                        | 3,081,794 |              |   |                                | 4,376,344 |                |   |         | 454,684 |           |   |      | 4,547 |       |   |  | 44,957 |        |   |  | 6,027 |       |   |  | (361 | )   
|                                    | Exercise of stock options                                                                           |                        |           |             |   |                                |           |               |   |         |         | 1,736     |   |      |       | 17    |   |  |        | 1,094  |   |  |       |      |   |  |      |     |  
|                                    | Issuance of common stock for services performed                                                     |                        |           |             |   |                                |           |               |   |         |         | 6,322     |   |      |       | 63    |   |  |        | 7,102  |   |  |       |      |   |  |      |     |  
|                                    | Sale of Series C Redeemable Convertible
    Preferred Stock, net of issuance costs of $44,915       |                        |           | 3,913,551    |   |                                |           | 8,330,084      |   |         |         |          |   |      |       |      |   |  |        |       |   |  |       |      |   |  |      |     |  
|                                    | Purchase and retirement of common stock                                                             |                        |           |             |   |                                |           |               |   |         |         | (47,860   | ) |      |       | (479  | ) |  |        | (520   | ) |  |       |      |   |  |      |     |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                    |                                                                                                     |                                |   |              |   |             |   |                  |   |               |            |         |            |   |            |        |            |   |  |   |            |  
|----------------------------------- | --------------------------------------------------------------------------------------------------- | ------------------------------ | - | ------------ | - | ----------- | - | ---------------- | - | ------------- | ---------- | ------- | ---------- | - | ---------- | ------ | ---------- | - |  | - | ---------- | -
|                                    |                                                                                                     |                                |   |             
|                                    |                                                                                                     | Stockholders (Deficit) Equity |   |             
|                                    |                                                                                                     |                                |   |             
|                                    |                                                                                                     |                                |   | Deficit      |   |             |   |                 
|                                    |                                                                                                     | Accumulated                    |   |              |   | Accumulated |   |                  |   |              
|                                    |                                                                                                     | Other                          |   | Deferred     |   | During the  |   | Total            |   |              
|                                    |                                                                                                     | Comprehensive                  |   | Stock-Based  |   | Development |   | Stockholders    |   | Comprehensive
|                                    |                                                                                                     | Income                         |   | Compensation |   | Stage       |   | (Deficit) Equity |   | Loss         
|                                    |                                                                                                     |                                |   |              |   |             |   |                  |   |              
|INCEPTION OF COMPANY, JULY 12, 1993 |                                                                                                     |                                |   |              |   |             |   |                  |   |               |            |         |            |   |            |        |            |   |  |  
|                                    | Sale of common stock                                                                                |                                | $ |             |   |             | $ |                 |   |               | $          | (19,819 | )          |   | $          | 5,181  |            |   |  |   |           
|                                    | Sale of Series A Redeemable Convertible
    Preferred Stock, net of stock issuance costs of $26,813 |                                |   |             |   |             |   |                 |   |               |            |        |            |   |            |       |            |   |  |   |           
|                                    | Accretion of offering costs                                                                         |                                |   |             |   |             |   |                 |   |               |            | (1,957  | )          |   |            | (1,957 | )          |   |  |   |           
|                                    |                                                                                                     | Net loss                       |   |              |  |             |   |                  |  |               |            |         | (561,812   | ) |            |        | (561,812   | ) |  | $ | (561,812   | )
|                                    |                                                                                                     |                                |   |              |   |             |   |                  |   |               |            |         |            |   |            |        |            |   |  |  
|BALANCE, DECEMBER 31, 1994          |                                                                                                     |                                |  |              |   |             |  |                  |   |               | (583,588   | )       |            |   | (558,588   | )      |            |   |  |  
|                                    | Sale of common stock                                                                                |                                |   |             |   |             |   |                 |   |               |            |        |            |   |            | 3,351  |            |   |  |   |           
|                                    | Sale of Series B Redeemable Convertible
    Preferred Stock, net of issuance costs of $45,024       |                                |   |             |   |             |   |                 |   |               |            |        |            |   |            |       |            |   |  |   |           
|                                    | Issuance of common stock for services performed                                                     |                                |   |             |   |             |   |                 |   |               |            |        |            |   |            | 21,153 |            |   |  |   |           
|                                    | Issuance of preferred stock for services performed                                                  |                                |   |             |   |             |   |                 |   |               |            |        |            |   |            |       |            |   |  |   |           
|                                    | Purchase of treasury stock                                                                          |                                |   |             |   |             |   |                 |   |               |            |        |            |   |            | (361   | )          |   |  |   |           
|                                    | Accretion of offering costs                                                                         |                                |   |             |   |             |   |                 |   |               |            | (5,055  | )          |   |            | (5,055 | )          |   |  |   |           
|                                    |                                                                                                     | Net loss                       |   |              |  |             |   |                  |  |               |            |         | (1,970,102 | ) |            |        | (1,970,102 | ) |  | $ | (1,970,102 | )
|                                    |                                                                                                     |                                |   |              |   |             |   |                  |   |               |            |         |            |   |            |        |            |   |  |  
|BALANCE, DECEMBER 31, 1995          |                                                                                                     |                                |  |              |   |             |  |                  |   |               | (2,558,745 | )       |            |   | (2,509,602 | )      |            |   |  |  
|                                    | Exercise of stock options                                                                           |                                |   |             |   |             |   |                 |   |               |            |        |            |   |            | 1,111  |            |   |  |   |           
|                                    | Issuance of common stock for services performed                                                     |                                |   |             |   |             |   |                 |   |               |            |        |            |   |            | 7,165  |            |   |  |   |           
|                                    | Sale of Series C Redeemable Convertible
    Preferred Stock, net of issuance costs of $44,915       |                                |   |             |   |             |   |                 |   |               |            |        |            |   |            |       |            |   |  |   |           
|                                    | Purchase and retirement of common stock                                                             |                                |   |             |   |             |   |                 |   |               |            |        |            |   |            | (999   | )          |   |  |   |           

See notes to consolidated financial statements.

F-6



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)


CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK,

STOCKHOLDERS (DEFICIT) EQUITY, AND
COMPREHENSIVE LOSS  (Continued)


Period from Inception (July 12, 1993) to
December 31, 2003


|                           |                                                                                                                     |                        |            |              |   |                                |            |                |   |         |         |           |   |      |       |    |   |  |        |         |   |  |       |   |   |  |      |   |   | 
|-------------------------- | ------------------------------------------------------------------------------------------------------------------- | ---------------------- | ---------- | ------------ | - | ------------------------------ | ---------- | -------------- | - | ------- | ------- | --------- | - | ---- | ----- | -- | - |  | ------ | ------- | - |  | ----- | - | - |  | ---- | - | - | 
|                           |                                                                                                                     |                        |            |              |   |                               
|                           |                                                                                                                     |                        |            |              |   | Stockholders (Deficit) Equity
|                           |                                                                                                                     |                        |            |             
|                           |                                                                                                                     | Redeemable Convertible |            |              |   |                                |            |               
|                           |                                                                                                                     | Preferred Stock        |            | Common Stock |   |                                |            | Treasury Stock
|                           |                                                                                                                     |                        |            |              |   | Additional                     |            |               
|                           |                                                                                                                     | Number of              |            | Carrying     |   | Number of                      |            | $0.01          |   | Paid-in |         | Number of |   |     
|                           |                                                                                                                     | Shares                 |            | Value        |   | Shares                         |            | Par Value      |   | Capital |         | Shares    |   | Cost
|                           |                                                                                                                     |                        |            |              |   |                                |            |                |   |         |         |           |   |     
|                           | Unrealized loss on short-term investments                                                                           |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |   |   |  |        |        |   |  |       |  |   |  |      |  |  
|                           | Accretion of dividends and offering costs on
    preferred stock                                                    |                        |            |             |   |                                |            | 720,015        |   |         |         |          |   |      |       |   |   |  |        |        |   |  |       |  |   |  |      |  |  
|                           |                                                                                                                     | Net loss               |            |              |  |                                |            |                |  |         |         |           |  |      |       |    |  |  |        |         |  |  |       |   |  |  |      |   |  | 
|                           |                                                                                                                     |                        |            |              |   |                                |            |                |   |         |         |           |   |      |       |    |   |  |        |         |   |  |       |   |   |  |      |  
|                           |                                                                                                                     | Comprehensive net loss |            |              |   |                                |            |                |   |         |         |           |   |      |       |    |   |  |        |         |   |  |       |   |   |  |      |   |   | 
|BALANCE, DECEMBER 31, 1996 |                                                                                                                     |                        | 6,995,345  |              |   |                                | 13,426,443 |                |   |         | 414,882 |           |   |      | 4,148 |    |   |  | 52,633 |         |   |  | 6,027 |   |   |  | (361 | )
|                           | Exercise of stock options                                                                                           |                        |            |             |   |                                |            |               |   |         |         | 352       |   |      |       | 4  |   |  |        | 207     |   |  |       |  |   |  |      |  |  
|                           | Sale of Series D Redeemable Convertible
    Preferred Stock, net of issuance costs of $39,895                       |                        |            | 3,405,624    |   |                                |            | 10,176,977     |   |         |         |          |   |      |       |   |   |  |        |        |   |  |       |  |   |  |      |  |  
|                           | Unrealized gain on short-term investments                                                                           |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |   |   |  |        |        |   |  |       |  |   |  |      |  |  
|                           | Accretion of dividends and offering costs on
    preferred stock                                                    |                        |            |             |   |                                |            | 1,435,260      |   |         |         |          |   |      |       |   |   |  |        |        |   |  |       |  |   |  |      |  |  
|                           |                                                                                                                     | Net loss               |            |              |  |                                |            |                |  |         |         |           |  |      |       |    |  |  |        |         |  |  |       |   |  |  |      |   |  | 
|                           |                                                                                                                     |                        |            |              |   |                                |            |                |   |         |         |           |   |      |       |    |   |  |        |         |   |  |       |   |   |  |      |  
|                           |                                                                                                                     | Comprehensive net loss |            |              |   |                                |            |                |   |         |         |           |   |      |       |    |   |  |        |         |   |  |       |   |   |  |      |   |   | 
|BALANCE, DECEMBER 31, 1997 |                                                                                                                     |                        | 10,400,969 |              |   |                                | 25,038,680 |                |   |         | 415,234 |           |   |      | 4,152 |    |   |  | 52,840 |         |   |  | 6,027 |   |   |  | (361 | )
|                           | Exercise of stock options                                                                                           |                        |            |             |   |                                |            |               |   |         |         | 6,570     |   |      |       | 66 |   |  |        | 4,755   |   |  |       |  |   |  |      |  |  
|                           | Sale of Series E Redeemable Convertible
    Preferred Stock, net of issuance costs of $13,140                       |                        |            | 757,577      |   |                                |            | 2,486,864      |   |         |         |          |   |      |       |   |   |  |        |        |   |  |       |  |   |  |      |  |  
|                           | Deferred stock-based compensation related to
    issuance of common stock for services performed                    |                        |            |             |   |                                |            |               |   |         |         | 8,334     |   |      |       | 83 |   |  |        | 16,417  |   |  |       |  |   |  |      |  |  
|                           | Issuance of Series D and E Redeemable
    Convertible Preferred Stock warrants in connection with debt
    offering |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |   |   |  |        | 311,000 |   |  |       |  |   |  |      |  |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                           |                                                                                                                     |                                |         |              |   |             |   |                  |   |               |             |            |            |   |             |            |            |   |   |         |            |  
|-------------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ------- | ------------ | - | ----------- | - | ---------------- | - | ------------- | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | - | - | ------- | ---------- | -
|                           |                                                                                                                     |                                |         |             
|                           |                                                                                                                     | Stockholders (Deficit) Equity |         |             
|                           |                                                                                                                     |                                |         |             
|                           |                                                                                                                     |                                |         | Deficit      |   |             |   |                 
|                           |                                                                                                                     | Accumulated                    |         |              |   | Accumulated |   |                  |   |              
|                           |                                                                                                                     | Other                          |         | Deferred     |   | During the  |   | Total            |   |              
|                           |                                                                                                                     | Comprehensive                  |         | Stock-Based  |   | Development |   | Stockholders    |   | Comprehensive
|                           |                                                                                                                     | Income                         |         | Compensation |   | Stage       |   | (Deficit) Equity |   | Loss         
|                           |                                                                                                                     |                                |         |              |   |             |   |                  |   |              
|                           | Unrealized loss on short-term investments                                                                           |                                |         | (17,499      | ) |             |   |                 |   |               |             |           |            |   |             | (17,499    | )          |   | $ | (17,499 | )         
|                           | Accretion of dividends and offering costs on
    preferred stock                                                    |                                |         |             |   |             |   |                 |   |               |             | (720,015   | )          |   |             | (720,015   | )          |   |   |         |           
|                           |                                                                                                                     | Net loss                       |         |              |  |             |   |                  |  |               |             |            | (2,633,519 | ) |             |            | (2,633,519 | ) |   |         | (2,633,519 | )
|                           |                                                                                                                     |                                |         |              |   |             |   |                  |   |               |             |            |            |   |             |            |            |   |   |        
|                           |                                                                                                                     | Comprehensive net loss         |         |              |   |             |   |                  |   |               |             |            |            |   |             |            |            |   |   | $       | (2,651,018 | )
|                           |                                                                                                                     |                                |         |              |   |             |   |                  |   |               |             |            |            |   |             |            |            |   |   |        
|BALANCE, DECEMBER 31, 1996 |                                                                                                                     |                                | (17,499 | )            |   |             |  |                  |   |               | (5,912,279  | )          |            |   | (5,873,358  | )          |            |   |   |        
|                           | Exercise of stock options                                                                                           |                                |         |             |   |             |   |                 |   |               |             |           |            |   |             | 211        |            |   |   |         |           
|                           | Sale of Series D Redeemable Convertible
    Preferred Stock, net of issuance costs of $39,895                       |                                |         |             |   |             |   |                 |   |               |             |           |            |   |             |           |            |   |   |         |           
|                           | Unrealized gain on short-term investments                                                                           |                                |         | 19,367       |   |             |   |                 |   |               |             |           |            |   |             | 19,367     |            |   | $ | 19,367  |           
|                           | Accretion of dividends and offering costs on
    preferred stock                                                    |                                |         |             |   |             |   |                 |   |               |             | (1,435,260 | )          |   |             | (1,435,260 | )          |   |   |         |           
|                           |                                                                                                                     | Net loss                       |         |              |  |             |   |                  |  |               |             |            | (4,942,576 | ) |             |            | (4,942,576 | ) |   |         | (4,942,576 | )
|                           |                                                                                                                     |                                |         |              |   |             |   |                  |   |               |             |            |            |   |             |            |            |   |   |        
|                           |                                                                                                                     | Comprehensive net loss         |         |              |   |             |   |                  |   |               |             |            |            |   |             |            |            |   |   | $       | (4,923,209 | )
|                           |                                                                                                                     |                                |         |              |   |             |   |                  |   |               |             |            |            |   |             |            |            |   |   |        
|BALANCE, DECEMBER 31, 1997 |                                                                                                                     |                                | 1,868   |              |   |             |  |                  |   |               | (12,290,115 | )          |            |   | (12,231,616 | )          |            |   |   |        
|                           | Exercise of stock options                                                                                           |                                |         |             |   |             |   |                 |   |               |             |           |            |   |             | 4,821      |            |   |   |         |           
|                           | Sale of Series E Redeemable Convertible
    Preferred Stock, net of issuance costs of $13,140                       |                                |         |             |   |             |   |                 |   |               |             |           |            |   |             |           |            |   |   |         |           
|                           | Deferred stock-based compensation related to
    issuance of common stock for services performed                    |                                |         |             |   |             |   | (16,500          | ) |               |             |           |            |   |             |           |            |   |   |         |           
|                           | Issuance of Series D and E Redeemable
    Convertible Preferred Stock warrants in connection with debt
    offering |                                |         |             |   |             |   |                 |   |               |             |           |            |   |             | 311,000    |            |   |   |         |           

See notes to consolidated financial statements.

F-7



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)


CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK,

STOCKHOLDERS (DEFICIT) EQUITY, AND
COMPREHENSIVE LOSS  (Continued)


Period from Inception (July 12, 1993) to
December 31, 2003


|                           |                                                                                                                              |                        |            |              |   |                                |            |                |   |         |         |           |   |      |       |     |   |   |         |        |   |  |       |   |   |   |      |   |   | 
|-------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ---------- | ------------ | - | ------------------------------ | ---------- | -------------- | - | ------- | ------- | --------- | - | ---- | ----- | --- | - | - | ------- | ------ | - |  | ----- | - | - | - | ---- | - | - | 
|                           |                                                                                                                              |                        |            |              |   |                               
|                           |                                                                                                                              |                        |            |              |   | Stockholders (Deficit) Equity
|                           |                                                                                                                              |                        |            |             
|                           |                                                                                                                              | Redeemable Convertible |            |              |   |                                |            |               
|                           |                                                                                                                              | Preferred Stock        |            | Common Stock |   |                                |            | Treasury Stock
|                           |                                                                                                                              |                        |            |              |   | Additional                     |            |               
|                           |                                                                                                                              | Number of              |            | Carrying     |   | Number of                      |            | $0.01          |   | Paid-in |         | Number of |   |     
|                           |                                                                                                                              | Shares                 |            | Value        |   | Shares                         |            | Par Value      |   | Capital |         | Shares    |   | Cost
|                           |                                                                                                                              |                        |            |              |   |                                |            |                |   |         |         |           |   |     
|                           | Unrealized loss on short-term investments                                                                                    |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |    |   |   |         |       |   |  |       |  |   |   |      |  |  
|                           | Accretion of dividends and offering costs on
    preferred stock                                                             |                        |            |             |   |                                |            | 2,410,878      |   |         |         |          |   |      |       |    |   |   |         |       |   |  |       |  |   |   |      |  |  
|                           |                                                                                                                              | Net loss               |            |              |  |                                |            |                |  |         |         |           |  |      |       |     |  |   |         |        |  |  |       |   |  |   |      |   |  | 
|                           |                                                                                                                              | Comprehensive net loss |            |              |   |                                |            |                |   |         |         |           |   |      |       |     |   |   |         |        |   |  |       |   |   |   |      |   |   | 
|BALANCE, DECEMBER 31, 1998 |                                                                                                                              |                        | 11,158,546 |              |   | $                              | 29,936,422 |                |   |         | 430,138 |           |   | $    | 4,301 |     |   | $ | 385,012 |        |   |  | 6,027 |   |   | $ | (361 | )
|                           | Exercise of stock options                                                                                                    |                        |            |             |   |                                |            |               |   |         |         | 3,500     |   |      |       | 35  |   |   |         | 2,265  |   |  |       |  |   |   |      |  |  
|                           | Deferred stock-based compensation related to
    issuance of common stock options to nonemployees for services
    performed |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |    |   |   |         | 9,562  |   |  |       |  |   |   |      |  |  
|                           | Amortization of deferred stock-based compensation                                                                            |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |    |   |   |         |       |   |  |       |  |   |   |      |  |  
|                           | Unrealized loss on short-term investments                                                                                    |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |    |   |   |         |       |   |  |       |  |   |   |      |  |  
|                           | Accretion of dividends and offering costs on
    preferred stock                                                             |                        |            |             |   |                                |            | 2,603,723      |   |         |         |          |   |      |       |    |   |   |         |       |   |  |       |  |   |   |      |  |  
|                           |                                                                                                                              | Net loss               |            |              |  |                                |            |                |  |         |         |           |  |      |       |     |  |   |         |        |  |  |       |   |  |   |      |   |  | 
|                           |                                                                                                                              |                        |            |              |   |                                |            |                |   |         |         |           |   |      |       |     |   |   |         |        |   |  |       |   |   |   |      |  
|                           |                                                                                                                              | Comprehensive net loss |            |              |   |                                |            |                |   |         |         |           |   |      |       |     |   |   |         |        |   |  |       |   |   |   |      |   |   | 
|BALANCE, DECEMBER 31, 1999 |                                                                                                                              |                        | 11,158,546 |              |   |                                | 32,540,145 |                |   |         | 433,638 |           |   |      | 4,336 |     |   |   | 396,839 |        |   |  | 6,027 |   |   |   | (361 | )
|                           | Exercise of stock options                                                                                                    |                        |            |             |   |                                |            |               |   |         |         | 24,618    |   |      |       | 246 |   |   |         | 24,791 |   |  |       |  |   |   |      |  |  
|                           | Sale of Series F Redeemable Convertible
    Preferred Stock, net of issuance costs of $1,309,965                             |                        |            | 6,325,329    |   |                                |            | 28,735,348     |   |         |         |          |   |      |       |    |   |   |         |       |   |  |       |  |   |   |      |  |  
|                           | Sale of Series G Redeemable Convertible
    Preferred Stock                                                                  |                        |            | 1,232,308    |   |                                |            | 12,015,003     |   |         |         |          |   |      |       |    |   |   |         |       |   |  |       |  |   |   |      |  |  
|                           | Sale of Series H Redeemable Convertible
    Preferred Stock                                                                  |                        |            | 1,127,819    |   |                                |            | 7,499,996      |   |         |         |          |   |      |       |    |   |   |         |       |   |  |       |  |   |   |      |  |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                           |                                                                                                                              |                                |       |              |   |             |         |                  |   |               |             |            |            |   |             |            |            |   |   |        |            |  
|-------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ----- | ------------ | - | ----------- | ------- | ---------------- | - | ------------- | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | - | - | ------ | ---------- | -
|                           |                                                                                                                              |                                |       |             
|                           |                                                                                                                              | Stockholders (Deficit) Equity |       |             
|                           |                                                                                                                              |                                |       |             
|                           |                                                                                                                              |                                |       | Deficit      |   |             |         |                 
|                           |                                                                                                                              | Accumulated                    |       |              |   | Accumulated |         |                  |   |              
|                           |                                                                                                                              | Other                          |       | Deferred     |   | During the  |         | Total            |   |              
|                           |                                                                                                                              | Comprehensive                  |       | Stock-Based  |   | Development |         | Stockholders    |   | Comprehensive
|                           |                                                                                                                              | Income                         |       | Compensation |   | Stage       |         | (Deficit) Equity |   | Loss         
|                           |                                                                                                                              |                                |       |              |   |             |         |                  |   |              
|                           | Unrealized loss on short-term investments                                                                                    |                                |       | (694         | ) |             |         |                 |   |               |             |           |            |   |             | (694       | )          |   | $ | (694   | )         
|                           | Accretion of dividends and offering costs on
    preferred stock                                                             |                                |       |             |   |             |         |                 |   |               |             | (2,410,878 | )          |   |             | (2,410,878 | )          |   |   |        |           
|                           |                                                                                                                              | Net loss                       |       |              |  |             |         |                  |  |               |             |            | (9,415,091 | ) |             |            | (9,415,091 | ) |   |        | (9,415,091 | )
|                           |                                                                                                                              |                                |       |              |   |             |         |                  |   |               |             |            |            |   |             |            |            |   |   |       
|                           |                                                                                                                              | Comprehensive net loss         |       |              |   |             |         |                  |   |               |             |            |            |   |             |            |            |   |   | $      | (9,415,785 | )
|                           |                                                                                                                              |                                |       |              |   |             |         |                  |   |               |             |            |            |   |             |            |            |   |   |       
|BALANCE, DECEMBER 31, 1998 |                                                                                                                              | $                              | 1,174 |              |   | $           | (16,500 | )                |   | $             | (24,116,084 | )          |            | $ | (23,742,458 | )          |            |   |   |       
|                           | Exercise of stock options                                                                                                    |                                |       |             |   |             |         |                 |   |               |             |           |            |   |             | 2,300      |            |   |   |        |           
|                           | Deferred stock-based compensation related to
    issuance of common stock options to nonemployees for services
    performed |                                |       |             |   |             |         | (9,562           | ) |               |             |           |            |   |             |           |            |   |   |        |           
|                           | Amortization of deferred stock-based compensation                                                                            |                                |       |             |   |             |         | 4,620            |   |               |             |           |            |   |             | 4,620      |            |   |   |        |           
|                           | Unrealized loss on short-term investments                                                                                    |                                |       | (1,174       | ) |             |         |                 |   |               |             |           |            |   |             | (1,174     | )          |   | $ | (1,174 | )         
|                           | Accretion of dividends and offering costs on
    preferred stock                                                             |                                |       |             |   |             |         |                 |   |               |             | (2,603,723 | )          |   |             | (2,603,723 | )          |   |   |        |           
|                           |                                                                                                                              | Net loss                       |       |              |  |             |         |                  |  |               |             |            | (9,141,450 | ) |             |            | (9,141,450 | ) |   |        | (9,141,450 | )
|                           |                                                                                                                              |                                |       |              |   |             |         |                  |   |               |             |            |            |   |             |            |            |   |   |       
|                           |                                                                                                                              | Comprehensive net loss         |       |              |   |             |         |                  |   |               |             |            |            |   |             |            |            |   |   | $      | (9,142,624 | )
|                           |                                                                                                                              |                                |       |              |   |             |         |                  |   |               |             |            |            |   |             |            |            |   |   |       
|BALANCE, DECEMBER 31, 1999 |                                                                                                                              |                                |      |              |   |             | (21,442 | )                |   |               | (35,861,257 | )          |            |   | (35,481,885 | )          |            |   |   |       
|                           | Exercise of stock options                                                                                                    |                                |       |             |   |             |         |                 |   |               |             |           |            |   |             | 25,037     |            |   |   |        |           
|                           | Sale of Series F Redeemable Convertible
    Preferred Stock, net of issuance costs of $1,309,965                             |                                |       |             |   |             |         |                 |   |               |             |           |            |   |             |           |            |   |   |        |           
|                           | Sale of Series G Redeemable Convertible
    Preferred Stock                                                                  |                                |       |             |   |             |         |                 |   |               |             |           |            |   |             |           |            |   |   |        |           
|                           | Sale of Series H Redeemable Convertible
    Preferred Stock                                                                  |                                |       |             |   |             |         |                 |   |               |             |           |            |   |             |           |            |   |   |        |           

See notes to consolidated financial statements.

F-8



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)


CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK,

STOCKHOLDERS (DEFICIT) EQUITY, AND
COMPREHENSIVE LOSS  (Continued)


Period from Inception (July 12, 1993) to
December 31, 2003


|                           |                                                                                                                          |                        |            |              |   |                                |            |                |   |         |         |           |   |      |       |     |   |  |         |         |   |  |       |   |   |  |      |   |   | 
|-------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ---------------------- | ---------- | ------------ | - | ------------------------------ | ---------- | -------------- | - | ------- | ------- | --------- | - | ---- | ----- | --- | - |  | ------- | ------- | - |  | ----- | - | - |  | ---- | - | - | 
|                           |                                                                                                                          |                        |            |              |   |                               
|                           |                                                                                                                          |                        |            |              |   | Stockholders (Deficit) Equity
|                           |                                                                                                                          |                        |            |             
|                           |                                                                                                                          | Redeemable Convertible |            |              |   |                                |            |               
|                           |                                                                                                                          | Preferred Stock        |            | Common Stock |   |                                |            | Treasury Stock
|                           |                                                                                                                          |                        |            |              |   | Additional                     |            |               
|                           |                                                                                                                          | Number of              |            | Carrying     |   | Number of                      |            | $0.01          |   | Paid-in |         | Number of |   |     
|                           |                                                                                                                          | Shares                 |            | Value        |   | Shares                         |            | Par Value      |   | Capital |         | Shares    |   | Cost
|                           |                                                                                                                          |                        |            |              |   |                                |            |                |   |         |         |           |   |     
|                           | Issuance of restricted common stock for services
    performed                                                           |                        |            |             |   |                                |            |               |   |         |         | 1,369     |   |      |       | 14  |   |  |         | 7,786   |   |  |       |  |   |  |      |  |  
|                           | Issuance of common stock for services performed                                                                          |                        |            |             |   |                                |            |               |   |         |         | 1,667     |   |      |       | 17  |   |  |         | 3,283   |   |  |       |  |   |  |      |  |  
|                           | Issuance of Series E Redeemable Convertible
    Preferred Stock warrants in connection with capital lease
    obligation |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |    |   |  |         | 33,880  |   |  |       |  |   |  |      |  |  
|                           | Deferred stock-based compensation related to
    employees and nonemployees                                              |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |    |   |  |         | 162,442 |   |  |       |  |   |  |      |  |  
|                           | Amortization of deferred stock-based compensation                                                                        |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |    |   |  |         |        |   |  |       |  |   |  |      |  |  
|                           | Unrealized gain on short-term investments                                                                                |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |    |   |  |         |        |   |  |       |  |   |  |      |  |  
|                           | Accretion of dividends and offering costs on
    preferred stock                                                         |                        |            |             |   |                                |            | 4,218,395      |   |         |         |          |   |      |       |    |   |  |         |        |   |  |       |  |   |  |      |  |  
|                           |                                                                                                                          | Net loss               |            |              |  |                                |            |                |  |         |         |           |  |      |       |     |  |  |         |         |  |  |       |   |  |  |      |   |  | 
|                           |                                                                                                                          |                        |            |              |   |                                |            |                |   |         |         |           |   |      |       |     |   |  |         |         |   |  |       |   |   |  |      |  
|                           |                                                                                                                          | Comprehensive net loss |            |              |   |                                |            |                |   |         |         |           |   |      |       |     |   |  |         |         |   |  |       |   |   |  |      |   |   | 
|BALANCE, DECEMBER 31, 2000 |                                                                                                                          |                        | 19,844,002 |              |   |                                | 85,008,887 |                |   |         | 461,292 |           |   |      | 4,613 |     |   |  | 629,021 |         |   |  | 6,027 |   |   |  | (361 | )
|                           | Exercise of stock options                                                                                                |                        |            |             |   |                                |            |               |   |         |         | 35,823    |   |      |       | 358 |   |  |         | 51,762  |   |  |       |  |   |  |      |  |  
|                           | Issuance of restricted common stock                                                                                      |                        |            |             |   |                                |            |               |   |         |         | 13,790    |   |      |       | 138 |   |  |         | 347,539 |   |  |       |  |   |  |      |  |  
|                           | Sale of Series I Redeemable Convertible
    Preferred Stock, net of issuance costs of $27,345                            |                        |            | 1,370,324    |   |                                |            | 6,481,694      |   |         |         |          |   |      |       |    |   |  |         |        |   |  |       |  |   |  |      |  |  
|                           | Issuance of Series F Redeemable Convertible
    Preferred Stock warrants in connection with facility lease               |                        |            |             |   |                                |            |               |   |         |         |          |   |      |       |    |   |  |         | 536,402 |   |  |       |  |   |  |      |  |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                           |                                                                                                                          |                                |        |              |   |             |          |                  |   |               |             |            |             |   |             |            |             |   |   |        |             |  
|-------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ------------------------------ | ------ | ------------ | - | ----------- | -------- | ---------------- | - | ------------- | ----------- | ---------- | ----------- | - | ----------- | ---------- | ----------- | - | - | ------ | ----------- | -
|                           |                                                                                                                          |                                |        |             
|                           |                                                                                                                          | Stockholders (Deficit) Equity |        |             
|                           |                                                                                                                          |                                |        |             
|                           |                                                                                                                          |                                |        | Deficit      |   |             |          |                 
|                           |                                                                                                                          | Accumulated                    |        |              |   | Accumulated |          |                  |   |              
|                           |                                                                                                                          | Other                          |        | Deferred     |   | During the  |          | Total            |   |              
|                           |                                                                                                                          | Comprehensive                  |        | Stock-Based  |   | Development |          | Stockholders    |   | Comprehensive
|                           |                                                                                                                          | Income                         |        | Compensation |   | Stage       |          | (Deficit) Equity |   | Loss         
|                           |                                                                                                                          |                                |        |              |   |             |          |                  |   |              
|                           | Issuance of restricted common stock for services
    performed                                                           |                                |        |             |   |             |          |                 |   |               |             |           |             |   |             | 7,800      |             |   |   |        |            
|                           | Issuance of common stock for services performed                                                                          |                                |        |             |   |             |          |                 |   |               |             |           |             |   |             | 3,300      |             |   |   |        |            
|                           | Issuance of Series E Redeemable Convertible
    Preferred Stock warrants in connection with capital lease
    obligation |                                |        |             |   |             |          |                 |   |               |             |           |             |   |             | 33,880     |             |   |   |        |            
|                           | Deferred stock-based compensation related to
    employees and nonemployees                                              |                                |        |             |   |             |          | (162,442         | ) |               |             |           |             |   |             |           |             |   |   |        |            
|                           | Amortization of deferred stock-based compensation                                                                        |                                |        |             |   |             |          | 12,318           |   |               |             |           |             |   |             | 12,318     |             |   |   |        |            
|                           | Unrealized gain on short-term investments                                                                                |                                |        | 16,511       |   |             |          |                 |   |               |             |           |             |   |             | 16,511     |             |   | $ | 16,511 |            
|                           | Accretion of dividends and offering costs on
    preferred stock                                                         |                                |        |             |   |             |          |                 |   |               |             | (4,218,395 | )           |   |             | (4,218,395 | )           |   |   |        |            
|                           |                                                                                                                          | Net loss                       |        |              |  |             |          |                  |  |               |             |            | (24,428,759 | ) |             |            | (24,428,759 | ) |   |        | (24,428,759 | )
|                           |                                                                                                                          |                                |        |              |   |             |          |                  |   |               |             |            |             |   |             |            |             |   |   |       
|                           |                                                                                                                          | Comprehensive net loss         |        |              |   |             |          |                  |   |               |             |            |             |   |             |            |             |   |   | $      | (24,412,248 | )
|                           |                                                                                                                          |                                |        |              |   |             |          |                  |   |               |             |            |             |   |             |            |             |   |   |       
|BALANCE, DECEMBER 31, 2000 |                                                                                                                          |                                | 16,511 |              |   |             | (171,566 | )                |   |               | (64,508,411 | )          |             |   | (64,030,193 | )          |             |   |   |       
|                           | Exercise of stock options                                                                                                |                                |        |             |   |             |          |                 |   |               |             |           |             |   |             | 52,120     |             |   |   |        |            
|                           | Issuance of restricted common stock                                                                                      |                                |        |             |   |             |          | (344,391         | ) |               |             |           |             |   |             | 3,286      |             |   |   |        |            
|                           | Sale of Series I Redeemable Convertible
    Preferred Stock, net of issuance costs of $27,345                            |                                |        |             |   |             |          |                 |   |               |             |           |             |   |             |           |             |   |   |        |            
|                           | Issuance of Series F Redeemable Convertible
    Preferred Stock warrants in connection with facility lease               |                                |        |             |   |             |          |                 |   |               |             |           |             |   |             | 536,402    |             |   |   |        |            

See notes to consolidated financial statements.

F-9



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)


CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK,

STOCKHOLDERS (DEFICIT) EQUITY, AND
COMPREHENSIVE LOSS  (Continued)


Period from Inception (July 12, 1993) to
December 31, 2003


|                           |                                                                                                                          |                                                                                                |            |              |            |                                |            |                |             |         |         |           |         |      |       |   |       |   |           |           |            |   |       |   |   |   |      |   |   | 
|-------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ---------- | ------------ | ---------- | ------------------------------ | ---------- | -------------- | ----------- | ------- | ------- | --------- | ------- | ---- | ----- | - | ----- | - | --------- | --------- | ---------- | - | ----- | - | - | - | ---- | - | - | 
|                           |                                                                                                                          |                                                                                                |            |              |            |                               
|                           |                                                                                                                          |                                                                                                |            |              |            | Stockholders (Deficit) Equity
|                           |                                                                                                                          |                                                                                                |            |             
|                           |                                                                                                                          | Redeemable Convertible                                                                         |            |              |            |                                |            |               
|                           |                                                                                                                          | Preferred Stock                                                                                |            | Common Stock |            |                                |            | Treasury Stock
|                           |                                                                                                                          |                                                                                                |            |              |            | Additional                     |            |               
|                           |                                                                                                                          | Number of                                                                                      |            | Carrying     |            | Number of                      |            | $0.01          |             | Paid-in |         | Number of |         |     
|                           |                                                                                                                          | Shares                                                                                         |            | Value        |            | Shares                         |            | Par Value      |             | Capital |         | Shares    |         | Cost
|                           |                                                                                                                          |                                                                                                |            |              |            |                                |            |                |             |         |         |           |         |     
|                           | Issuance of Series F Redeemable Convertible
    Preferred Stock warrants in connection with capital lease
    obligation |                                                                                                |            |             |            |                                |            |               |             |         |         |          |         |      |       |  |       |   |           | 79,134    |            |   |       |  |   |   |      |  |  
|                           | Issuance of Series F Redeemable Convertible
    Preferred Stock warrants in connection with debt offering                |                                                                                                |            |             |            |                                |            |               |             |         |         |          |         |      |       |  |       |   |           | 594,698   |            |   |       |  |   |   |      |  |  
|                           | Deferred stock-based compensation related to
    employees and nonemployees                                              |                                                                                                |            |             |            |                                |            |               |             |         |         |          |         |      |       |  |       |   |           | 5,004,423 |            |   |       |  |   |   |      |  |  
|                           | Reversal of deferred compensation for terminated
    employees                                                           |                                                                                                |            |             |            |                                |            |               |             |         |         |          |         |      |       |  |       |   |           | (31,281   | )          |   |       |  |   |   |      |  |  
|                           | Amortization of deferred stock-based compensation                                                                        |                                                                                                |            |             |            |                                |            |               |             |         |         |          |         |      |       |  |       |   |           |          |            |   |       |  |   |   |      |  |  
|                           | Unrealized loss on short-term investments                                                                                |                                                                                                |            |             |            |                                |            |               |             |         |         |          |         |      |       |  |       |   |           |          |            |   |       |  |   |   |      |  |  
|                           | Accretion of dividends and offering costs on
    preferred stock                                                         |                                                                                                |            |             |            |                                |            | 6,248,616      |             |         |         |          |         |      |       |  |       |   |           |          |            |   |       |  |   |   |      |  |  
|                           |                                                                                                                          | Net loss                                                                                       |            |              |           |                                |            |                |            |         |         |           |        |      |       |   |      |   |           |           |           |   |       |   |  |   |      |   |  | 
|                           |                                                                                                                          |                                                                                                |            |              |            |                                |            |                |             |         |         |           |         |      |       |   |       |   |           |           |            |   |       |   |   |   |      |  
|                           |                                                                                                                          | Comprehensive net loss                                                                         |            |              |            |                                |            |                |             |         |         |           |         |      |       |   |       |   |           |           |            |   |       |   |   |   |      |   |   | 
|BALANCE, DECEMBER 31, 2001 |                                                                                                                          |                                                                                                | 21,214,326 |              |            | $                              | 97,739,197 |                |             |         | 510,905 |           |         | $    | 5,109 |   |       | $ | 7,211,698 |           |            |   | 6,027 |   |   | $ | (361 | )
|                           |                                                                                                                          | Exercise of stock options                                                                      |            |              |           |                                |            |                |            |         |         |           | 8,560   |      |       |   | 86    |   |           |           | 29,028     |   |       |   |  |   |      |   |  | 
|                           |                                                                                                                          | 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 | )       |         |           | 699,411 |      |       |   | 6,994 |   |           |           | 24,374,922 |   |       |   |  |   |      |   |  | 
|                           |                                                                                                                          | Reversal of deferred compensation for terminated
    employees                                 |            |              |           |                                |            |                |            |         |         |           |        |      |       |   |      |   |           |           | (424,887   | ) |       |   |  |   |      |   |  | 
|                           |                                                                                                                          | Amortization of deferred stock-based compensation                                              |            |              |           |                                |            |                |            |         |         |           |        |      |       |   |      |   |           |           |           |   |       |   |  |   |      |   |  | 
|                           |                                                                                                                          | Unrealized loss on short-term investments                                                      |            |              |           |                                |            |                |            |         |         |           |        |      |       |   |      |   |           |           |           |   |       |   |  |   |      |   |  | 
|                           |                                                                                                                          | Accretion of dividends and offering costs on
    preferred stock                               |            |              |           |                                |            |                | 6,665,478   |         |         |           |        |      |       |   |      |   |           |           |           |   |       |   |  |   |      |   |  | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                           |                                                                                                                          |                                                                                                |       |              |        |             |            |                  |           |               |             |            |             |   |             |            |             |   |   |         |             |  
|-------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ----- | ------------ | ------ | ----------- | ---------- | ---------------- | --------- | ------------- | ----------- | ---------- | ----------- | - | ----------- | ---------- | ----------- | - | - | ------- | ----------- | -
|                           |                                                                                                                          |                                                                                                |       |             
|                           |                                                                                                                          | Stockholders (Deficit) Equity                                                                 |       |             
|                           |                                                                                                                          |                                                                                                |       |             
|                           |                                                                                                                          |                                                                                                |       | Deficit      |        |             |            |                 
|                           |                                                                                                                          | Accumulated                                                                                    |       |              |        | Accumulated |            |                  |           |              
|                           |                                                                                                                          | Other                                                                                          |       | Deferred     |        | During the  |            | Total            |           |              
|                           |                                                                                                                          | Comprehensive                                                                                  |       | Stock-Based  |        | Development |            | Stockholders    |           | Comprehensive
|                           |                                                                                                                          | Income                                                                                         |       | Compensation |        | Stage       |            | (Deficit) Equity |           | Loss         
|                           |                                                                                                                          |                                                                                                |       |              |        |             |            |                  |           |              
|                           | Issuance of Series F Redeemable Convertible
    Preferred Stock warrants in connection with capital lease
    obligation |                                                                                                |       |             |        |             |            |                 |           |               |             |           |             |   |             | 79,134     |             |   |   |         |            
|                           | Issuance of Series F Redeemable Convertible
    Preferred Stock warrants in connection with debt offering                |                                                                                                |       |             |        |             |            |                 |           |               |             |           |             |   |             | 594,698    |             |   |   |         |            
|                           | Deferred stock-based compensation related to
    employees and nonemployees                                              |                                                                                                |       |             |        |             |            | (5,004,423       | )         |               |             |           |             |   |             |           |             |   |   |         |            
|                           | Reversal of deferred compensation for terminated
    employees                                                           |                                                                                                |       |             |        |             |            | 31,281           |           |               |             |           |             |   |             |           |             |   |   |         |            
|                           | Amortization of deferred stock-based compensation                                                                        |                                                                                                |       |             |        |             |            | 1,075,606        |           |               |             |           |             |   |             | 1,075,606  |             |   |   |         |            
|                           | Unrealized loss on short-term investments                                                                                |                                                                                                |       | (12,942      | )      |             |            |                 |           |               |             |           |             |   |             | (12,942    | )           |   | $ | (12,942 | )          
|                           | Accretion of dividends and offering costs on
    preferred stock                                                         |                                                                                                |       |             |        |             |            |                 |           |               |             | (6,248,616 | )           |   |             | (6,248,616 | )           |   |   |         |            
|                           |                                                                                                                          | Net loss                                                                                       |       |              |       |             |            |                  |          |               |             |            | (18,277,192 | ) |             |            | (18,277,192 | ) |   |         | (18,277,192 | )
|                           |                                                                                                                          |                                                                                                |       |              |        |             |            |                  |           |               |             |            |             |   |             |            |             |   |   |        
|                           |                                                                                                                          | Comprehensive net loss                                                                         |       |              |        |             |            |                  |           |               |             |            |             |   |             |            |             |   |   | $       | (18,290,134 | )
|                           |                                                                                                                          |                                                                                                |       |              |        |             |            |                  |           |               |             |            |             |   |             |            |             |   |   |        
|BALANCE, DECEMBER 31, 2001 |                                                                                                                          | $                                                                                              | 3,569 |              |        | $           | (4,413,493 | )                |           | $             | (89,034,219 | )          |             | $ | (86,227,697 | )          |             |   |   |        
|                           |                                                                                                                          | Exercise of stock options                                                                      |       |              |       |             |            |                  |          |               |             |            |            |   |             |            | 29,114      |   |   |         |             |  
|                           |                                                                                                                          | 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                                                       |       |              |       |             |            |                  |          |               |             |            |            |   |             |            | 24,381,916  |   |   |         |             |  
|                           |                                                                                                                          | Reversal of deferred compensation for terminated
    employees                                 |       |              |       |             |            |                  | 424,887   |               |             |            |            |   |             |            |            |   |   |         |             |  
|                           |                                                                                                                          | Amortization of deferred stock-based compensation                                              |       |              |       |             |            |                  | 2,195,202 |               |             |            |            |   |             |            | 2,195,202   |   |   |         |             |  
|                           |                                                                                                                          | Unrealized loss on short-term investments                                                      |       |              | (3,281 | )           |            |                  |          |               |             |            |            |   |             |            | (3,281      | ) |   | $       | (3,281      | )
|                           |                                                                                                                          | Accretion of dividends and offering costs on
    preferred stock                               |       |              |       |             |            |                  |          |               |             |            | (6,665,478  | ) |             |            | (6,665,478  | ) |   |         |             |  

See notes to consolidated financial statements.

F-10



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)


CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK,

STOCKHOLDERS (DEFICIT) EQUITY, AND
COMPREHENSIVE LOSS  (Continued)


Period from Inception (July 12, 1993) to
December 31, 2003


|                           |                                                            |                                                   |                        |              |   |                                |            |                |            |         |           |           |   |      |        |       |   |   |            |           |           |   |       |        |   |   |      |     |   |   | 
|-------------------------- | ---------------------------------------------------------- | ------------------------------------------------- | ---------------------- | ------------ | - | ------------------------------ | ---------- | -------------- | ---------- | ------- | --------- | --------- | - | ---- | ------ | ----- | - | - | ---------- | --------- | --------- | - | ----- | ------ | - | - | ---- | --- | - | - | 
|                           |                                                            |                                                   |                        |              |   |                               
|                           |                                                            |                                                   |                        |              |   | Stockholders (Deficit) Equity
|                           |                                                            |                                                   |                        |             
|                           |                                                            | Redeemable Convertible                            |                        |              |   |                                |            |               
|                           |                                                            | Preferred Stock                                   |                        | Common Stock |   |                                |            | Treasury Stock
|                           |                                                            |                                                   |                        |              |   | Additional                     |            |               
|                           |                                                            | Number of                                         |                        | Carrying     |   | Number of                      |            | $0.01          |            | Paid-in |           | Number of |   |     
|                           |                                                            | Shares                                            |                        | Value        |   | Shares                         |            | Par Value      |            | Capital |           | Shares    |   | Cost
|                           |                                                            |                                                   |                        |              |   |                                |            |                |            |         |           |           |   |     
|                           |                                                            | Dividends forfeited on preferred stock conversion |                        |              |  |                                |            |                | (2,838,758 | )       |           |           |  |      |        |       |  |   |            |           | 2,838,758 |   |       |        |  |   |      |     |  |  
|                           |                                                            |                                                   | Net loss               |              |   |                               |            |                |            |        |           |           |   |     |        |       |   |  |            |           |           |  |       |        |   |  |      |     |   |  | 
|                           |                                                            |                                                   |                        |              |   |                                |            |                |            |         |           |           |   |      |        |       |   |   |            |           |           |   |       |        |   |   |      |    
|                           |                                                            |                                                   | Comprehensive net loss |              |   |                                |            |                |            |         |           |           |   |      |        |       |   |   |            |           |           |   |       |        |   |   |      |     |   |   | 
|BALANCE, DECEMBER 31, 2002 |                                                            |                                                   | 31,145,083             |              |   |                                | 91,467,075 |                |            |         | 1,218,876 |           |   |      | 12,189 |       |   |   | 34,029,519 |           |           |   | 6,027 |        |   |   | (361 | )  
|                           | Exercise of stock options                                  |                                                   |                        |             |   |                                |            |               |            |         |           | 34,395    |   |      |        | 344   |   |   |            | 67,800    |           |   |       |       |   |   |      |    |  
|                           | Issuance of restricted common stock                        |                                                   |                        |             |   |                                |            |               |            |         |           | 14,956    |   |      |        | 150   |   |   |            | 102,149   |           |   |       |       |   |   |      |    |  
|                           | Warrants issued with convertible notes                     |                                                   |                        |             |   |                                |            |               |            |         |           |          |   |      |        |      |   |   |            | 761,500   |           |   |       |       |   |   |      |    |  
|                           | Retirement of treasury stock                               |                                                   |                        |             |   |                                |            |               |            |         |           | (6,027    | ) |      |        | (60   | ) |   |            | (301      | )         |   |       | (6,027 | ) |   |      | 361 |  
|                           | Conversion of preferred shares to common                   |                                                   |                        | (3,731,999   | ) |                                |            | (9,123,216     | )          |         |           | 732,600   |   |      |        | 7,326 |   |   |            | 9,115,890 |           |   |       |       |   |   |      |    |  
|                           | Amortization of deferred stock-based compensation          |                                                   |                        |             |   |                                |            |               |            |         |           |          |   |      |        |      |   |   |            |          |           |   |       |       |   |   |      |    |  
|                           | Deferred stock-based compensation related to
    employees |                                                   |                        |             |   |                                |            |               |            |         |           |          |   |      |        |      |   |   |            | 1,396,347 |           |   |       |       |   |   |      |    |  
|                           | Reversal of deferred compensation                          |                                                   |                        |             |   |                                |            |               |            |         |           |          |   |      |        |      |   |   |            | (261,769  | )         |   |       |        |   |   |      |    |  
|                           | Issuance of common stock from exercise of warrant          |                                                   |                        |             |   |                                |            |               |            |         |           | 998       |   |      |        | 10    |   |   |            | (10       | )         |   |       |       |   |   |      |    |  
|                           | Unrealized loss on short-term investments                  |                                                   |                        |             |   |                                |            |               |            |         |           |          |   |      |        |      |   |   |            |          |           |   |       |       |   |   |      |    |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                           |                                                            |                                                   |                        |              |   |             |            |                  |   |               |              |   |   |             |             |           |           |             |   |      |   |             |  
|-------------------------- | ---------------------------------------------------------- | ------------------------------------------------- | ---------------------- | ------------ | - | ----------- | ---------- | ---------------- | - | ------------- | ------------ | - | - | ----------- | ----------- | --------- | --------- | ----------- | - | ---- | - | ----------- | -
|                           |                                                            |                                                   |                        |             
|                           |                                                            | Stockholders (Deficit) Equity                    |                        |             
|                           |                                                            |                                                   |                        |             
|                           |                                                            |                                                   |                        | Deficit      |   |             |            |                 
|                           |                                                            | Accumulated                                       |                        |              |   | Accumulated |            |                  |   |              
|                           |                                                            | Other                                             |                        | Deferred     |   | During the  |            | Total            |   |              
|                           |                                                            | Comprehensive                                     |                        | Stock-Based  |   | Development |            | Stockholders    |   | Comprehensive
|                           |                                                            | Income                                            |                        | Compensation |   | Stage       |            | (Deficit) Equity |   | Loss         
|                           |                                                            |                                                   |                        |              |   |             |            |                  |   |              
|                           |                                                            | Dividends forfeited on preferred stock conversion |                        |              |  |             |            |                  |  |               |              |   |  |             |             |           | 2,838,758 |             |   |      |   |            
|                           |                                                            |                                                   | Net loss               |              |   |            |            |                  |   |              |              |   |   | (21,896,250 | )           |           |           | (21,896,250 | ) |      |   | (21,896,250 | )
|                           |                                                            |                                                   |                        |              |   |             |            |                  |   |               |              |   |   |             |             |           |           |             |   |     
|                           |                                                            |                                                   | Comprehensive net loss |              |   |             |            |                  |   |               |              |   |   |             |             |           |           |             |   |      | $ | (21,899,531 | )
|                           |                                                            |                                                   |                        |              |   |             |            |                  |   |               |              |   |   |             |             |           |           |             |   |     
|BALANCE, DECEMBER 31, 2002 |                                                            |                                                   | 288                    |              |   |             | (1,793,404 | )                |   |               | (117,595,947 | ) |   |             | (85,347,716 | )         |           |             |   |     
|                           | Exercise of stock options                                  |                                                   |                        |             |   |             |            |                 |   |               |              |  |   |             |             | 68,144    |           |             |   |      |  
|                           | Issuance of restricted common stock                        |                                                   |                        |             |   |             |            | (102,299         | ) |               |              |  |   |             |             |          |           |             |   |      |  
|                           | Warrants issued with convertible notes                     |                                                   |                        |             |   |             |            |                 |   |               |              |  |   |             |             | 761,500   |           |             |   |      |  
|                           | Retirement of treasury stock                               |                                                   |                        |             |   |             |            |                 |   |               |              |  |   |             |             |          |           |             |   |      |  
|                           | Conversion of preferred shares to common                   |                                                   |                        |             |   |             |            |                 |   |               |              |  |   |             |             | 9,123,216 |           |             |   |      |  
|                           | Amortization of deferred stock-based compensation          |                                                   |                        |             |   |             |            | 1,307,052        |   |               |              |  |   |             |             | 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         | ) |             |            |                 |   |               |              |  |   |             |             | (288      | )         |             | $ | (288 | )

See notes to consolidated financial statements.

F-11



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)


CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK,

STOCKHOLDERS (DEFICIT) EQUITY, AND
COMPREHENSIVE LOSS  (Continued)


Period from Inception (July 12, 1993) to
December 31, 2003


|                           |                                                                                          |                        |          |              |   |                                |   |                |   |         |            |           |  |      |         |        |  |   |             |            |  |   |   |   |  |   |   |   |  |   | 
|-------------------------- | ---------------------------------------------------------------------------------------- | ---------------------- | -------- | ------------ | - | ------------------------------ | - | -------------- | - | ------- | ---------- | --------- |  | ---- | ------- | ------ |  | - | ----------- | ---------- |  | - | - | - |  | - | - | - |  | - | 
|                           |                                                                                          |                        |          |              |   |                               
|                           |                                                                                          |                        |          |              |   | Stockholders (Deficit) Equity
|                           |                                                                                          |                        |          |             
|                           |                                                                                          | Redeemable Convertible |          |              |   |                                |   |               
|                           |                                                                                          | Preferred Stock        |          | Common Stock |   |                                |   | Treasury Stock
|                           |                                                                                          |                        |          |              |   | Additional                     |   |               
|                           |                                                                                          | Number of              |          | Carrying     |   | Number of                      |   | $0.01          |   | Paid-in |            | Number of |  |     
|                           |                                                                                          | Shares                 |          | Value        |   | Shares                         |   | Par Value      |   | Capital |            | Shares    |  | Cost
|                           |                                                                                          |                        |          |              |   |                                |   |                |   |         |            |           |  |     
|                           | Accretion of dividends and offering costs on
    preferred stock                         |                        |          |             |   |                                |   | 5,948,073      |   |         |            |          |  |      |         |       |  |   |             |           |  |   |   |  |  |   |   |  | 
|                           | Dividends forfeited on preferred stock conversion                                        |                        |          |             |   |                                |   | (23,521,685    | ) |         |            |          |  |      |         |       |  |   |             | 23,521,685 |  |   |   |  |  |   |   |  | 
|                           | Issuance of common stock from initial public
    offering (IPO), net of offering costs |                        |          |             |   |                                |   |               |   |         |            | 3,750,000 |  |      |         | 37,500 |  |   |             | 47,580,943 |  |   |   |  |  |   |   |  | 
|                           | Issuance of common stock from convertible notes
    payable and accrued interest, at IPO |                        |          |             |   |                                |   |               |   |         |            | 2,411,846 |  |      |         | 24,118 |  |   |             | 20,400,152 |  |   |   |  |  |   |   |  | 
|                           | Conversion of preferred shares to common, at IPO                                         |                        |          | (27,413,084  | ) |                                |   | (64,770,247    | ) |         |            | 6,136,889 |  |      |         | 61,368 |  |   |             | 64,708,879 |  |   |   |  |  |   |   |  | 
|                           |                                                                                          |                        | Net loss |              |   |                               |   |                |   |        |            |           |  |     |         |        |  |  |             |            |  |  |   |   |  |  |   |   |  |  | 
|                           |                                                                                          |                        |          |              |   |                                |   |                |   |         |            |           |  |      |         |        |  |   |             |            |  |   |   |   |  |   |   |  
|                           |                                                                                          | Comprehensive net loss |          |              |   |                                |   |                |   |         |            |           |  |      |         |        |  |   |             |            |  |   |   |   |  |   |   |   |  |  
|BALANCE, DECEMBER 31, 2003 |                                                                                          |                        |         |              |   | $                              |  |                |   |         | 14,294,533 |           |  | $    | 142,945 |        |  | $ | 201,422,784 |            |  |   |  |   |  | $ |  |  
|                           |                                                                                          |                        |          |              |   |                                |   |                |   |         |            |           |  |      |         |        |  |   |             |            |  |   |   |   |  |   |   |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                           |                                                                                          |                                |          |              |  |             |            |                  |  |               |              |            |   |             |            |            |   |             |   |   |             |             |  
|-------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------ | -------- | ------------ |  | ----------- | ---------- | ---------------- |  | ------------- | ------------ | ---------- | - | ----------- | ---------- | ---------- | - | ----------- | - | - | ----------- | ----------- | -
|                           |                                                                                          |                                |          |             
|                           |                                                                                          | Stockholders (Deficit) Equity |          |             
|                           |                                                                                          |                                |          |             
|                           |                                                                                          |                                |          | Deficit      |  |             |            |                 
|                           |                                                                                          | Accumulated                    |          |              |  | Accumulated |            |                  |  |              
|                           |                                                                                          | Other                          |          | Deferred     |  | During the  |            | Total            |  |              
|                           |                                                                                          | Comprehensive                  |          | Stock-Based  |  | Development |            | Stockholders    |  | Comprehensive
|                           |                                                                                          | Income                         |          | Compensation |  | Stage       |            | (Deficit) Equity |  | Loss         
|                           |                                                                                          |                                |          |              |  |             |            |                  |  |              
|                           | Accretion of dividends and offering costs on
    preferred stock                         |                                |          |             |  |             |            |                 |  |               |              | (5,948,073 | ) |             |            | (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 |                                |          |             |  |             |            |                 |  |               |              |           |   |             |            | 47,618,443 |   |             |   |   |            
|                           | Issuance of common stock from convertible notes
    payable and accrued interest, at IPO |                                |          |             |  |             |            |                 |  |               |              |           |   |             |            | 20,424,270 |   |             |   |   |            
|                           | Conversion of preferred shares to common, at IPO                                         |                                |          |             |  |             |            |                 |  |               |              |           |   |             |            | 64,770,247 |   |             |   |   |            
|                           |                                                                                          |                                | Net loss |              |  |            |            |                  |  |              |              |            |   | (21,923,437 | )          |            |   | (21,923,437 | ) |   |             | (21,923,437 | )
|                           |                                                                                          |                                |          |              |  |             |            |                  |  |               |              |            |   |             |            |            |   |             |   |  
|                           |                                                                                          | Comprehensive net loss         |          |              |  |             |            |                  |  |               |              |            |   |             |            |            |   |             |   | $ | (21,923,725 | )          
|                           |                                                                                          |                                |          |              |  |             |            |                  |  |               |              |            |   |             |            |            |   |             |   |  
|BALANCE, DECEMBER 31, 2003 |                                                                                          | $                              |         |              |  | $           | (1,723,229 | )                |  | $             | (145,467,457 | )          |   | $           | 54,375,043 |            |   |             |   |  
|                           |                                                                                          |                                |          |              |  |             |            |                  |  |               |              |            |   |             |            |            |   |             |   |  

(Concluded)

See notes to consolidated financial statements.

F-12



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)




CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                      |                                                                                 |                                              |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |              |            |            |             |  
|------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------- | ------------------------------------------------------- | --------- | ---------- | ----------- | ----------- | --------- | -------- | ----------- | ----------- | --------- | --------- | ----------- | ------------ | ---------- | ---------- | ----------- | -
|                                      |                                                                                 |                                              |                        |                                                         |           |            |             | Period From
|                                      |                                                                                 |                                              |                        | Inception                                              
|                                      |                                                                                 | Year Ended December 31,                      |                        | (July 12, 1993)                                        
|                                      |                                                                                 |                                              |                        | to December 31,                                        
|                                      |                                                                                 | 2001                                         |                        | 2002                                                    |           | 2003       |             | 2003       
|                                      |                                                                                 |                                              |                        |                                                         |           |            |             |            
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                                 |                                              |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |             
|                                      | Net loss                                                                        |                                              | $                      | (18,277,192                                             | )         |            | $           | (21,896,250 | )         |          | $           | (21,923,437 | )         |           | $           | (115,210,007 | )         
|                                      | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                              |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |              |           
|                                      |                                                                                 | Stock-based compensation expense             |                        |                                                         | 1,075,606 |            |             |             | 2,195,202 |          |             |             | 1,307,052 |           |             |              | 4,667,585  |           
|                                      |                                                                                 | Depreciation and amortization                |                        |                                                         | 1,652,334 |            |             |             | 1,747,372 |          |             |             | 1,733,417 |           |             |              | 8,749,764  |           
|                                      |                                                                                 | Noncash interest expense                     |                        |                                                         | 186,050   |            |             |             | 383,698   |          |             |             | 1,120,526 |           |             |              | 1,969,268  |           
|                                      |                                                                                 | Noncash rent expense                         |                        |                                                         |          |            |             |             | 53,640    |          |             |             | 53,640    |           |             |              | 107,280    |           
|                                      |                                                                                 | Equity in loss from joint venture            |                        |                                                         | 1,965,840 |            |             |             | 1,183,417 |          |             |             |          |           |             |              | 15,164,257 |           
|                                      |                                                                                 | Changes in operating assets and liabilities: |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |              |            |           
|                                      |                                                                                 |                                              | Due from joint venture |                                                         |           | (2,371,572 | )           |             |           | (777,685 | )           |             |           |          |             |              |            | (3,149,257 | )          
|                                      |                                                                                 |                                              | Other current assets   |                                                         |           | (243,070   | )           |             |           | 4,599    |             |             |           | (283,836  | )           |              |            | (829,934   | )          
|                                      |                                                                                 |                                              | Accounts payable       |                                                         |           | 333,148    |             |             |           | (717,721 | )           |             |           | 782,267   |             |              |            | 1,519,983  |            
|                                      |                                                                                 |                                              | Accrued expenses       |                                                         |           | (533,224   | )           |             |           | 141,585  |             |             |           | 1,703,194 |             |              |            | 2,922,939  |            
|                                      |                                                                                 |                                              |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |             
|                                      |                                                                                 |                                              |                        | Net cash used in operating activities                   |           |            | (16,212,080 | )           |           |          | (17,682,143 | )           |           |           | (15,507,177 | )            |            |            | (84,088,122 | )
|                                      |                                                                                 |                                              |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |             
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                                 |                                              |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |             
|                                      | Purchases of property and equipment                                             |                                              |                        | (47,153                                                 | )         |            |             | (686,613    | )         |          |             | (534,713    | )         |           |             | (1,777,598   | )         
|                                      | (Increase) decrease in other assets                                             |                                              |                        | (288,033                                                | )         |            |             | (33,640     | )         |          |             | (119,220    | )         |           |             | (1,738,246   | )         
|                                      | Investment in joint venture                                                     |                                              |                        |                                                        |           |            |             |            |           |          |             |            |           |           |             | (12,015,000  | )         
|                                      | Maturities (purchases) of short-term
    investments                            |                                              |                        | 11,206,122                                              |           |            |             | 9,143,199   |           |          |             | 195,410     |           |           |             | 17,499       |           
|                                      |                                                                                 |                                              |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |             
|                                      |                                                                                 |                                              |                        | Net cash provided by (used in) investing
    activities |           |            | 10,870,936  |             |           |          | 8,422,946   |             |           |           | (458,523    | )            |            |            | (15,513,345 | )
|                                      |                                                                                 |                                              |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |             
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                                                                 |                                              |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |             
|                                      | Payments on long-term debt                                                      |                                              |                        | (4,653,813                                              | )         |            |             | (3,513,221  | )         |          |             | (4,395,089  | )         |           |             | (17,781,218  | )         
|                                      | Proceeds from long-term debt                                                    |                                              |                        | 5,000,000                                               |           |            |             |            |           |          |             | 19,440,342  |           |           |             | 29,440,342   |           
|                                      | Proceeds from financing of equipment                                            |                                              |                        |                                                        |           |            |             |            |           |          |             |            |           |           |             | 347,960      |           
|                                      | Net proceeds from sale of redeemable convertible
    preferred stock            |                                              |                        | 6,481,694                                               |           |            |             | 14,283,074  |           |          |             |            |           |           |             | 94,337,203   |           
|                                      | Net proceeds from sale of common stock in initial
    public offering           |                                              |                        |                                                        |           |            |             |            |           |          |             | 47,618,443  |           |           |             | 47,618,443   |           
|                                      | Proceeds from exercise of stock options                                         |                                              |                        | 55,406                                                  |           |            |             | 29,114      |           |          |             | 68,144      |           |           |             | 202,475      |           
|                                      | Purchase of treasury stock                                                      |                                              |                        |                                                        |           |            |             |            |           |          |             |            |           |           |             | (1,360       | )         
|                                      |                                                                                 |                                              |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |             
|                                      |                                                                                 |                                              |                        | Net cash provided by financing activities               |           |            | 6,883,287   |             |           |          | 10,798,967  |             |           |           | 62,731,840  |              |            |            | 154,163,845 |  
|                                      |                                                                                 |                                              |                        |                                                         |           |            |             |             |           |          |             |             |           |           |             |             

See notes to consolidated financial statements.

F-13



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)




CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)


|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |            | 
|------------------------------------------------------------ | ----------------------------------------------------------------------------- | ----------------------- | --------- | --------------- | - | ---- | --------- | ----------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | 
|                                                             |                                                                               |                         |           |                 |   |      |           | Period From
|                                                             |                                                                               |                         |           | Inception      
|                                                             |                                                                               | Year Ended December 31, |           | (July 12, 1993)
|                                                             |                                                                               |                         |           | to December 31,
|                                                             |                                                                               | 2001                    |           | 2002            |   | 2003 |           | 2003       
|                                                             |                                                                               |                         |           |                 |   |      |           |            
|NET INCREASE IN CASH AND CASH EQUIVALENTS                    |                                                                               |                         | 1,542,143 |                 |   |      | 1,539,770 |             |   |   | 46,766,140 |            |   |   | 54,562,378 |           
|CASH AND CASH EQUIVALENTS, Beginning of period               |                                                                               |                         | 4,714,325 |                 |   |      | 6,256,468 |             |   |   | 7,796,238  |            |   |   |           |           
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|CASH AND CASH EQUIVALENTS, End of period                     |                                                                               | $                       | 6,256,468 |                 |   | $    | 7,796,238 |             |   | $ | 54,562,378 |            |   | $ | 54,562,378 |           
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|SUPPLEMENTAL SCHEDULE OF CASH FLOWS INFORMATION:             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Cash paid during the period for interest                                      |                         | $         | 563,999         |   |      | $         | 916,048     |   |   | $          | 1,317,106  |   |   | $          | 4,735,941  | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
    TRANSACTIONS: |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Equipment acquired under capital lease obligations                            |                         | $         | 3,230,272       |   |      | $         |            |   |   | $          |           |   |   | $          | 8,894,983  | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Unrealized (loss) on investments                                              |                         | $         | (12,942         | ) |      | $         | (3,281      | ) |   | $          | (288       | ) |   | $          |           | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Warrant issued with facility lease                                            |                         | $         | 536,402         |   |      | $         |            |   |   | $          |           |   |   | $          | 536,402    | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Discount on long-term debt and capital lease
    obligations                  |                         | $         | 673,832         |   |      | $         |            |   |   | $          |           |   |   | $          | 1,018,712  | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Deferred compensation for services to be performed                            |                         | $         | 5,340,204       |   |      | $         |            |   |   | $          | 1,236,877  |   |   | $          | 6,768,885  | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Accretion of preferred stock dividends and
    offering costs                 |                         | $         | 6,248,616       |   |      | $         | 6,665,478   |   |   | $          | 5,948,073  |   |   | $          | 30,257,450 | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Dividends forfeited on preferred stock conversion                             |                         | $         |                |   |      | $         | 2,838,758   |   |   | $          | 23,521,685 |   |   | $          | 26,360,443 | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Write-off of net amount due from joint venture                                |                         | $         |                |   |      | $         | 371,953     |   |   | $          |           |   |   | $          | 371,953    | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Warrants issued with convertible notes                                        |                         | $         |                |   |      | $         |            |   |   | $          | 761,500    |   |   | $          | 761,500    | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Warrants exercised for common stock                                           |                         | $         |                |   |      | $         |            |   |   | $          | 10         |   |   | $          | 10         | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           
|                                                             | Promissory notes and accrued interest converted
    into common stock, at IPO |                         | $         |                |   |      | $         |            |   |   | $          | 20,424,270 |   |   | $          | 20,424,270 | 
|                                                             |                                                                               |                         |           |                 |   |      |           |             |   |   |            |            |   |   |            |           

(Concluded)

See notes to consolidated financial statements.

F-14



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES

(A Development Stage Company)




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.

Acusphere is in the development stage and 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 similar to those of
other development stage companies. Principal among these risks
are the need to develop commercially usable products,
competition from substitute products and larger companies,
dependence on key individuals, and the need to obtain adequate
financing necessary to fund product development.



|   |                                               
|-- | ----------------------------------------------
|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. 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.

Stock
Split On
September 12, 2003, the Company effected a 1-for-6 reverse
stock split. All share and per share amounts in the consolidated
financial statements have been retroactively adjusted for all
periods presented to give effect to the reverse stock split,
including reclassifying an amount equal to the reduction in par
value to additional paid-in capital.

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, Cash Equivalents, and Short-Term
Investments 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.
Short-term investments at December 31, 2002 primarily
consisted of investments in U.S. Treasury bonds that mature
within one year from the date of purchase, are reported at fair
value and are classified as available for sale.

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 is depreciated over the remainder of the
lease term. Acusphere reviews its property and equipment for
impairment whenever events or changes in circumstances indicate
that the

F-15



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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, short-term investments, 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 are 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.

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.

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,
|                                               |  |             
|                                               |  | 2001         |  | 2002        |  | 2003       
|                                               |  |              |  |             |  |            
|Risk-free interest rate                        |  | 3.54%-4.76%  |  | 3.22%-4.76% |  | 2.53%-3.12%
|Expected dividend yield                        |  |             |  |            |  |           
|Expected lives                                 |  | 4 years      |  | 4 years     |  | 4 years    
|Expected volatility                            |  | 60%          |  | 60%         |  | 60%-100%   
|Weighted-average fair value of options granted |  | $24.48       |  | $4.38       |  | $6.20      

F-16



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Had compensation cost 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,
|                                        |                                                                                 |                        
|                                        |                                                                                 | 2001                    |   | 2002        |   | 2003
|                                        |                                                                                 |                         |   |             |   |     
|Applicable to common stockholders:      |                                                                                 |                         |   |             |   |      |   |             |   |  |   |            
|                                        | Net loss  as reported                                                          |                         | $ | (24,525,808 | ) |      | $ | (28,561,728 | ) |  | $ | (27,871,510 | )
|                                        | Add: Stock-based compensation expense included in
    reported net loss         |                         |   | 929,389     |   |      |   | 2,167,834   |   |  |   | 1,211,273   |  
|                                        | Deduct: Stock-based compensation expense
    determined under fair value method |                         |   | (1,364,928  | ) |      |   | (2,279,228  | ) |  |   | (1,184,230  | )
|                                        |                                                                                 |                         |   |             |   |      |   |             |   |  |   |            
|                                        | Net loss  proforma                                                             |                         | $ | (24,961,347 | ) |      | $ | (28,673,122 | ) |  | $ | (27,844,467 | )
|                                        |                                                                                 |                         |   |             |   |      |   |             |   |  |   |            
|Net loss per share (basic and diluted): |                                                                                 |                         |   |             |   |      |   |             |   |  |   |            
|                                        | As reported                                                                     |                         | $ | (50.81      | ) |      | $ | (35.39      | ) |  | $ | (6.66       | )
|                                        |                                                                                 |                         |   |             |   |      |   |             |   |  |   |            
|                                        | Pro forma                                                                       |                         | $ | (51.71      | ) |      | $ | (35.53      | ) |  | $ | (6.65       | )
|                                        |                                                                                 |                         |   |             |   |      |   |             |   |  |   |            

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 consist 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 4,120,371, 7,853,360,
and 1,758,029 as of December 31, 2001, 2002, and 2003,
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,
|                                                                 |  |                        
|Historical                                                       |  | 2001                    |         | 2002 |  | 2003
|                                                                 |  |                         |         |      |  |     
|Weighted-average common shares outstanding                       |  |                         | 490,330 |      |  |      | 816,720 |   |  |  | 4,191,321 |  
|Less weighted-average restricted common shares
    outstanding   |  |                         | (7,617  | )    |  |      | (9,601  | ) |  |  | (3,649    | )
|                                                                 |  |                         |         |      |  |      |         |   |  |  |           |  
|Basic and diluted weighted-average common shares
    outstanding |  |                         | 482,713 |      |  |      | 807,119 |   |  |  | 4,187,672 |  
|                                                                 |  |                         |         |      |  |      |         |   |  |  |           |  

Comprehensive
Loss Comprehensive
loss is defined as the change in stockholders
(deficit) 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 (deficit)
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 and assessing performance. To date, Acusphere has
viewed its operations and manages its business as principally
one operating segment.

Recently Issued Accounting
Pronouncements In
January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), which was amended by
FIN 46R issued in December 2003. This interpretation of
Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business
enterprises of variable interest entities (VIEs) that either:
(1) do not have sufficient equity investment at risk to
permit the

F-17



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

entity to finance its activities without
additional subordinated financial support, or (2) for which
the equity investors lack an essential characteristic of a
controlling financial interest. This Interpretation applies
immediately to VIEs created after January 31, 2003. It also
applies in the first fiscal year or interim period ending after
March 15, 2004, to VIEs created before February 1,
2003 in which an enterprise holds a variable interest.
FIN 46 requires disclosure of VIEs in financial statements
issued after January 31, 2003, if it is reasonably possible
that as of the transition date: (1) the company will be the
primary beneficiary of an existing VIE that will require
consolidation or, (2) the company will hold a significant
variable interest in, or have significant involvement with, an
existing VIE. We are currently in the process of completing our
review of the requirements of FIN 46. However, we have not
yet identified any entities that require disclosure or entities
that would require consolidation under FIN 46 that had not
previously been consolidated as a result of FIN 46.



|   |                   
|-- | ------------------
|3. | Balance Sheet Data

|                                           |                           |                    |           |           |  |   |           |           | 
|------------------------------------------ | ------------------------- | ------------------ | --------- | --------- |  | - | --------- | --------- | 
|                                           |                           |                   
|                                           |                           | As of December 31,
|                                           |                           |                   
|                                           |                           | 2002               |           | 2003     
|                                           |                           |                    |           |          
|Other assets consist of the following:     |                           |                    |           |           |  |   |           |          
|                                           | Deposits                  |                    | $         | 1,647,038 |  |   | $         | 1,195,672 | 
|                                           | Other assets              |                    |           | 515,158   |  |   |           | 429,125   | 
|                                           |                           |                    |           |           |  |   |           |          
|                                           |                           | $                  | 2,162,196 |           |  | $ | 1,624,797 |          
|                                           |                           |                    |           |           |  |   |           |          
|Accrued expenses consist of the following: |                           |                    |           |           |  |   |           |          
|                                           | Accrued contract services |                    | $         | 522,002   |  |   | $         | 882,696   | 
|                                           | Accrued vacation          |                    |           | 315,771   |  |   |           | 316,644   | 
|                                           | Accrued bonus             |                    |           |          |  |   |           | 350,000   | 
|                                           | Other accrued expenses    |                    |           | 381,971   |  |   |           | 389,672   | 
|                                           |                           |                    |           |           |  |   |           |          
|                                           |                           | $                  | 1,219,744 |           |  | $ | 1,939,012 |          
|                                           |                           |                    |           |           |  |   |           |          



|   |              
|-- | -------------
|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 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.

F-18



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. | Long-Term Debt

The carrying value of long-term debt is as
follows at December 31:

|                           |  |      |           |      |  |   |           | 
|-------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                           |  | 2002 |           | 2003
|                           |  |      |           |     
|Capital lease obligations  |  | $    | 2,342,045 |      |  | $ | 1,090,217 | 
|Subordinated loans payable |  |      | 2,948,198 |      |  |   |          | 
|                           |  |      |           |      |  |   |           | 
|                           |  |      | 5,290,243 |      |  |   | 1,090,217 | 
|Less current maturities    |  |      | 3,564,655 |      |  |   | 884,799   | 
|                           |  |      |           |      |  |   |           | 
|Long-term debt, net        |  | $    | 1,725,588 |      |  | $ | 205,418   | 
|                           |  |      |           |      |  |   |           | 

Capital Lease
Obligations Acusphere
leases capital equipment under various capital lease
arrangements. The remaining monthly payments range from $3,708
to $46,222 with maturities through April 2005. As part of these
and prior lease agreements entered into by the Company, the
leasing companies were granted warrants to purchase an aggregate
of 32,128 shares of common stock at a purchase price per
share equal to the then-current fair value. 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, 2003.

Future payments under all capital lease
agreements are as follows as of December 31, 2003:

|                                               |  |   |           | 
|---------------------------------------------- |  | - | --------- | 
|Year Ending December 31,                       |  |   |           | 
|2004                                           |  | $ | 941,180   | 
|2005                                           |  |   | 208,524   | 
|                                               |  |   |           | 
|Total future minimum lease payments            |  |   | 1,149,704 | 
|Less amount representing interest              |  |   | 59,487    | 
|                                               |  |   |           | 
|Present value of future minimum lease payments |  |   | 1,090,217 | 
|Less current portion of capital leases         |  |   | 884,799   | 
|                                               |  |   |           | 
|Long-term portion of capital leases            |  | $ | 205,418   | 
|                                               |  |   |           | 

At December 31, 2003, the cost and net
carrying value of equipment under capital leases amounted to
approximately $2,549,000 and $905,000, respectively.

F-19



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 for $650,000, 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 2001, 2002 and 2003,
Acusphere recorded $87,617, $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, the Company 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, the Company 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, 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, the Company 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 8). Based
on the relative value of the notes and the deemed value of the
warrants, the Company allocated $761,500 of the proceeds to the
warrants. The carrying value of the notes was reduced by the
unamortized discount. As a result of the IPO on October 14,
2003, the discount was fully amortized into interest expense
during 2003.



|   |             
|-- | ------------
|6. | Income Taxes

At December 31, 2003, Acusphere had a net
operating loss (NOL) carryforward for income tax
purposes of approximately $68,528,000 that expires through 2023.
Acusphere also has approximately $2,555,000 of research and
development (R&D) credits as of
December 31, 2003 available to offset future income taxes
payable, if any. The Tax Reform Act of 1986 contains provisions
that may limit the utilization of 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.

F-20



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of Acuspheres deferred tax
asset at December 31, 2002 and 2003 are as follows:

|                                              |  |      |             |      |  |   |             |  
|--------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                                              |  | 2002 |             | 2003
|                                              |  |      |             |     
|Net operating loss carryforwards              |  | $    | 22,321,000  |      |  | $ | 26,610,000  |  
|Joint venture loss                            |  |      | 6,066,000   |      |  |   |            |  
|Temporary timing differences                  |  |      | 7,645,000   |      |  |   | 11,406,000  |  
|Research and development credit carryforwards |  |      | 2,119,000   |      |  |   | 2,555,000   |  
|                                              |  |      |             |      |  |   |             |  
|Deferred tax asset                            |  |      | 38,151,000  |      |  |   | 40,571,000  |  
|Less valuation allowance                      |  |      | (38,151,000 | )    |  |   | (40,571,000 | )
|                                              |  |      |             |      |  |   |             |  
|                                              |  | $    |            |      |  | $ |            |  
|                                              |  |      |             |      |  |   |             |  

The net operating loss carryforward associated
with the joint venture expired when Acusphere Newco, Ltd. (a
Bermuda company) was liquidated in February 2003 and,
accordingly, the deferred tax asset was eliminated.

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



|   |                               
|-- | ------------------------------
|7. | Stockholders (Deficit) Equity

Common
Stock On
October 14, 2003, the Company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,
the Company 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 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 June 17,
2002, in connection with the Series J preferred stock
financing, 4,039,133 shares of outstanding preferred stock
were converted into 699,411 shares of 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 the Company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 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. The Company had 77,809 shares

F-21



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

available for future stock and option grants
under the Plan at December 31, 2003. 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 shall not exceed 583,334 shares of common
stock during any calendar year. Acusphere had
2,500,000 shares available for future stock and option
grants under the 2003 Plan at December 31, 2003.

In July 2003, the 2003 Employee Stock 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.

As of December 31, 2003, no stock option
activity had occurred under the 2003 Plan. Stock option activity
under the 1994 Plan was as follows:

|                           |           |           |         |                |   |           |                |               |  |   |      |      | 
|-------------------------- | --------- | --------- | ------- | -------------- | - | --------- | -------------- | ------------- |  | - | ---- | ---- | 
|                           |           |           |         |                |   | Weighted-
|                           |           |           |         |                |   | Average  
|                           |           |           |         |                |   | Exercise 
|                           |           | Number of |         | Exercise Price |   | Price Per
|                           |           | Shares    |         | Per Share      |   | Share    
|                           |           |           |         |                |   |          
|Balance, December 31, 1995 |           |           | 61,176  |                |   |           | $0.60 - $ 1.02 |               |  | $ | 0.66 |     
|                           | Granted   |           |         | 23,976         |   |           |                | 0.96 -   1.26 |  |   |      | 1.08 | 
|                           | Exercised |           |         | (1,736         | ) |           |                | 0.60 -   0.96 |  |   |      | 0.66 | 
|                           | Canceled  |           |         | (598           | ) |           |                | 0.60 -   0.96 |  |   |      | 0.90 | 
|                           |           |           |         |                |   |           |                |               |  |   |      |     
|Balance, December 31, 1996 |           |           | 82,818  |                |   |           | 0.60 -   1.26  |               |  |   | 0.78 |     
|                           | Granted   |           |         | 76,799         |   |           |                | 1.26 -   1.80 |  |   |      | 1.44 | 
|                           | Exercised |           |         | (352           | ) |           |                | 0.60          |  |   |      | 0.60 | 
|                           |           |           |         |                |   |           |                |               |  |   |      |     
|Balance, December 31, 1997 |           |           | 159,265 |                |   |           | 0.60 -   1.80  |               |  |   | 1.08 |     
|                           | Granted   |           |         | 64,871         |   |           |                | 1.80 -   1.98 |  |   |      | 1.86 | 
|                           | Exercised |           |         | (6,570         | ) |           |                | 0.60 -   1.80 |  |   |      | 0.72 | 
|                           | Canceled  |           |         | (12,079        | ) |           |                | 0.60 -   1.98 |  |   |      | 1.74 | 
|                           |           |           |         |                |   |           |                |               |  |   |      |     
|Balance, December 31, 1998 |           |           | 205,487 |                |   |           | 0.60 -   1.98  |               |  |   | 1.32 |     
|                           | Granted   |           |         | 30,987         |   |           |                | 1.98          |  |   |      | 1.98 | 
|                           | Exercised |           |         | (3,500         | ) |           |                | 0.60 -   1.80 |  |   |      | 0.66 | 
|                           | Canceled  |           |         | (18,646        | ) |           |                | 1.80 -   1.98 |  |   |      | 1.80 | 
|                           |           |           |         |                |   |           |                |               |  |   |      |     
|Balance, December 31, 1999 |           |           | 214,328 |                |   |           | 0.60 -   1.98  |               |  |   | 1.38 |     
|                           | Granted   |           |         | 81,101         |   |           |                | 1.98 -   5.70 |  |   |      | 4.20 | 
|                           | Exercised |           |         | (24,618        | ) |           |                | 0.60 -   1.98 |  |   |      | 1.02 | 
|                           | Canceled  |           |         | (27,697        | ) |           |                | 1.26 -   1.98 |  |   |      | 1.92 | 
|                           |           |           |         |                |   |           |                |               |  |   |      |     

F-22



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                               |           |           |           |                |   |           |                |               |  |   |      |      | 
|------------------------------ | --------- | --------- | --------- | -------------- | - | --------- | -------------- | ------------- |  | - | ---- | ---- | 
|                               |           |           |           |                |   | Weighted-
|                               |           |           |           |                |   | Average  
|                               |           |           |           |                |   | Exercise 
|                               |           | Number of |           | Exercise Price |   | Price Per
|                               |           | Shares    |           | Per Share      |   | Share    
|                               |           |           |           |                |   |          
|Balance, December 31, 2000     |           |           | 243,114   |                |   |           | 0.60 -   5.70  |               |  |   | 2.28 |     
|                               | Granted   |           |           | 230,119        |   |           |                | 5.70 -   7.20 |  |   |      | 7.20 | 
|                               | Exercised |           |           | (35,823        | ) |           |                | 0.60 -   7.20 |  |   |      | 1.44 | 
|                               | Canceled  |           |           | (12,928        | ) |           |                | 1.80 -   7.20 |  |   |      | 4.32 | 
|                               |           |           |           |                |   |           |                |               |  |   |      |     
|Balance, December 31, 2001     |           |           | 424,482   |                |   |           | 0.60 -   7.20  |               |  |   | 5.34 |     
|                               | Granted   |           |           | 366,429        |   |           |                | 0.84 -   7.20 |  |   |      | 1.68 | 
|                               | Exercised |           |           | (8,560         | ) |           |                | 0.84 -   7.20 |  |   |      | 3.42 | 
|                               | Canceled  |           |           | (18,421        | ) |           |                | 0.84 -   7.20 |  |   |      | 5.88 | 
|                               |           |           |           |                |   |           |                |               |  |   |      |     
|Balance December 31, 2002      |           |           | 763,930   |                |   |           | 0.60 -   7.20  |               |  |   | 3.36 |     
|                               | Granted   |           |           | 505,072        |   |           |                | 0.84 -  13.02 |  |   |      | 8.00 | 
|                               | Exercised |           |           | (34,395        | ) |           |                | 0.60 -   7.20 |  |   |      | 1.98 | 
|                               | Canceled  |           |           | (62,645        | ) |           |                | 0.84 -   7.20 |  |   |      | 6.71 | 
|                               |           |           |           |                |   |           |                |               |  |   |      |     
|Balance, December 31, 2003     |           |           | 1,171,962 |                |   |           | $0.60 - $13.02 |               |  |   | 5.23 |     
|                               |           |           |           |                |   |           |                |               |  |   |      |     
|Exercisable, December 31, 2003 |           |           | 443,048   |                |   |           | $0.60 - $13.02 |               |  | $ | 3.63 |     
|Exercisable, December 31, 2002 |           |           | 285,494   |                |   |           | 0.60 -   7.20  |               |  |   | 3.48 |     
|Exercisable, December 31, 2001 |           |           | 181,713   |                |   |           | 0.60 -   7.20  |               |  |   | 2.64 |     
|Exercisable, December 31, 2000 |           |           | 176,144   |                |   |           | 0.60 -   5.70  |               |  |   | 1.02 |     

The following table summarizes information
relating to currently outstanding and exercisable options as of
December 31, 2003 as follows:

|               |  |             |           |                 |  |           |     |           |  |           |       |  |  |  |         |  |  |   |      | 
|-------------- |  | ----------- | --------- | --------------- |  | --------- | --- | --------- |  | --------- | ----- |  |  |  | ------- |  |  | - | ---- | 
|               |  |             |           |                
|               |  | Outstanding |           | Exercisable    
|               |  |             |           |                
|               |  |             |           | Weighted-       |  |           |     |          
|               |  |             |           | Average         |  | Weighted- |     |           |  | Weighted-
|               |  |             |           | Remaining       |  | Average   |     |           |  | Average  
|               |  | Number of   |           | Contractual     |  | Exercise  |     | Number of |  | Exercise 
|Exercise Price |  | Shares      |           | Life (in Years) |  | Price     |     | Shares    |  | Price    
|               |  |             |           |                 |  |           |     |           |  |          
|$0.60 - $ 0.84 |  |             | 517,993   |                 |  |           | 8.8 |           |  | $         | 0.84  |  |  |  | 160,909 |  |  | $ | 0.83 | 
|0.96 -   1.26  |  |             | 45,596    |                 |  |           | 2.7 |           |  |           | 1.17  |  |  |  | 45,596  |  |  |   | 1.17 | 
|1.80 -   2.82  |  |             | 68,123    |                 |  |           | 5.5 |           |  |           | 1.92  |  |  |  | 67,897  |  |  |   | 1.92 | 
|$5.70 - $13.02 |  |             | 540,250   |                 |  |           | 8.9 |           |  |           | 10.20 |  |  |  | 168,646 |  |  |   | 7.67 | 
|               |  |             |           |                 |  |           |     |           |  |           |       |  |  |  |         |  |  |   |      | 
|               |  |             | 1,171,962 |                 |  |           |     |           |  |           |       |  |  |  | 443,048 |  |  |   |      | 
|               |  |             |           |                 |  |           |     |           |  |           |       |  |  |  |         |  |  |   |      | 

Grants Resulting in Stock-based
Compensation Expense
In 2000, the Company 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, the Company 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 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

F-23



---



##### 



ACUSPHERE, INC. AND
SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. Acusphere
expects to record approximately $786,000, $481,000, $324,000 and
$25,000 of stock-based compensation expense related to the
amortization of deferred compensation for the years ending
December 31, 2004, 2005, 2006 and 2007, respectively.



|   |                                             
|-- | --------------------------------------------
|8. | Convertible Preferred Stock and
    Warrants

During 2002 and 2003, all shares of the
Company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-24



---



##### 



ACUSPHERE, INC. AND SUBSIDIARIES

(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                      |                                                                        |                 |         |                 |  |                 |         |                 |  |                 |           |           |  |        |           |           |  |        |           |           |  |  |            |           |  |  |           |           |  |  |            |            |  |  |         |         |  |  |           |           | 
|------------------------------------- | ---------------------------------------------------------------------- | --------------- | ------- | --------------- |  | --------------- | ------- | --------------- |  | --------------- | --------- | --------- |  | ------ | --------- | --------- |  | ------ | --------- | --------- |  |  | ---------- | --------- |  |  | --------- | --------- |  |  | ---------- | ---------- |  |  | ------- | ------- |  |  | --------- | --------- | 
|                                      |                                                                        |                 |         |                 |  |                 |         |                 |  |                
|                                      |                                                                        | Series A        |         | Series B        |  | Series C        |         | Series D        |  | Series E       
|                                      |                                                                        | Preferred Stock |         | Preferred Stock |  | Preferred Stock |         | Preferred Stock |  | Preferred Stock
|                                      |                                                                        |                 |         |                 |  |                 |         |                 |  |                
|                                      |                                                                        | Number          |         |                 |  | Number          |         |                 |  | Number          |           |           |  | Number |           |           |  | Number |           |          
|                                      |                                                                        | of              |         | Carrying        |  | of              |         | Carrying        |  | of              |           | Carrying  |  | of     |           | Carrying  |  | of     |           | Carrying 
|                                      |                                                                        | Shares          |         | Value           |  | Shares          |         | Value           |  | Shares          |           | Value     |  | Shares |           | Value     |  | Shares |           | Value    
|                                      |                                                                        |                 |         |                 |  |                 |         |                 |  |                 |           |           |  |        |           |           |  |        |           |          
|Inception of Company (July 12, 1993): |                                                                        |                 |         |                 |  |                 |         |                 |  |                 |           |           |  |        |           |           |  |        |           |           |  |  |            |           |  |  |           |           |  |  |            |            |  |  |         |         |  |  |           |          
|                                      | Sale of Series A Preferred Stock, net of
    issuance costs of $26,813 |                 |         | 775,000         |  |                 | $       | 748,187         |  |                 |           |          |  |        | $         |          |  |        |           |          |  |  | $          |          |  |  |           |          |  |  | $          |           |  |  |         |        |  |  | $         |          | 
|                                      | Accretion of offering costs                                            |                 |         |                |  |                 |         | 1,957           |  |                 |           |          |  |        |           |          |  |        |           |          |  |  |            |          |  |  |           |          |  |  |            |           |  |  |         |        |  |  |           |          | 
|                                      |                                                                        |                 |         |                 |  |                 |         |                 |  |                 |           |           |  |        |           |           |  |        |           |           |  |  |            |           |  |  |           |           |  |  |            |            |  |  |         |         |  |  |           |          
|Balance, December 31, 1994            |                                                                        |                 | 775,000 |                 |  |                 | 750,144 |                 |  |                 |          |           |  |        |          |           |  |        |          |           |  |  |           |           |  |  |          |           |  |  |           |            |  |  |        |         |  |  |          |          
|                                      | Sale of Series B Preferred Stock, net of
    issuance costs of $45,024 |                 |         |                |  |                 |         |                |  |                 |           | 2,265,625 |  |        |           | 3,579,976 |  |        |           |          |  |  |            |          |  |  |           |          |  |  |            |           |  |  |         |        |  |  |           |          | 
|                                      | Issuance of preferred stock for services                               |                 |         | 41,169          |  |                 |         | 41,169          |  |                 |           |          |  |        |           |          |  |        |           |          |  |  |            |          |  |  |           |          |  |  |            |           |  |  |         |        |  |  |           |          | 
|                                      | Accretion of offering costs                                            |                 |         |                |  |                 |         | 2,389           |  |                 |           |          |  |        |           | 2,666     |  |        |           |          |  |  |            |          |  |  |           |          |  |  |            |           |  |  |         |        |  |  |           |          | 
|                                      |                                                                        |                 |         |                 |  |                 |         |                 |  |                 |           |           |  |        |           |           |  |        |           |           |  |  |            |           |  |  |           |           |  |  |            |            |  |  |         |         |  |  |           |          
|Balance, December 31, 1995            |                                                                        |                 | 816,169 |                 |  |                 | 793,702 |                 |  |                 | 2,265,625 |           |  |        | 3,582,642 |           |  |        |          |           |  |  |           |           |  |  |          |           |  |  |           |            |  |  |        |         |  |  |          |          
|                                      | Sale of Series C Preferred Stock, net of
    issuance costs of $44,915 |                 |         |                |  |                 |         |                |  |                 |           |          |  |        |           |          |  |        |           | 3,913,551 |  |  |            | 8,330,084 |  |  |           |          |  |  |            |           |  |  |         |        |  |  |           |          | 
|                                      | Accretion of dividends and offering costs                              |                 |         |                |  |                 |         | 2,389           |  |                 |           |          |  |        |           | 4,505     |  |        |           |          |  |  |            | 713,121   |  |  |           |          |  |  |            |           |  |  |         |        |  |  |           |          | 
|                                      |                                                                        |                 |         |                 |  |                 |         |                 |  |                 |           |           |  |        |           |           |  |        |           |           |  |  |            |           |  |  |           |           |  |  |            |            |  |  |         |         |  |  |           |          
|Balance, December 31, 1996            |                                                                        |                 | 816,169 |                 |  |                 | 796,091 |                 |  |                 | 2,265,625 |           |  |        | 3,587,147 |           |  |        | 3,913,551 |           |  |  | 9,043,205  |           |  |  |          |           |  |  |           |            |  |  |        |         |  |  |          |          
|                                      | Sale of Series D Preferred Stock, net of
    issuance costs of $39,895 |                 |         |                |  |                 |         |                |  |                 |           |          |  |        |           |          |  |        |           |          |  |  |            |          |  |  |           | 3,405,624 |  |  |            | 10,176,977 |  |  |         |        |  |  |           |          | 
|                                      | Accretion of dividends and offering costs                              |                 |         |                |  |                 |         | 2,389           |  |                 |           |          |  |        |           | 4,505     |  |        |           |          |  |  |            | 1,257,339 |  |  |           |          |  |  |            | 171,027    |  |  |         |        |  |  |           |          | 
|                                      |                                                                        |                 |         |                 |  |                 |         |                 |  |                 |           |           |  |        |           |           |  |        |           |           |  |  |            |           |  |  |           |           |  |  |            |            |  |  |         |         |  |  |           |          
|Balance, December 31, 1997            |                                                                        |                 | 816,169 |                 |  |                 | 798,480 |                 |  |                 | 2,265,625 |           |  |        | 3,591,652 |           |  |        | 3,913,551 |           |  |  | 10,300,544 |           |  |  | 3,405,624 |           |  |  | 10,348,004 |            |  |  |        |         |  |  |          |          
|                                      | Sale of Series E Preferred Stock, net of
    issuance costs of $13,140 |                 |         |                |  |                 |         |                |  |                 |           |          |  |        |           |          |  |        |           |          |  |  |            |          |  |  |           |          |  |  |            |           |  |  |         | 757,577 |  |  |           | 2,486,864 | 
|                                      | Accretion of dividends and offering costs                              |                 |         |                |  |                 |         | 2,389           |  |                 |           |          |  |        |           | 4,505     |  |        |           |          |  |  |            | 1,257,339 |  |  |           |          |  |  |            | 1,095,078  |  |  |         |        |  |  |           | 51,567    | 
|                                      |                                                                        |                 |         |                 |  |                 |         |                 |  |                 |           |           |  |        |           |           |  |        |           |           |  |  |            |           |  |  |           |           |  |  |            |            |  |  |         |         |  |  |           |          
|Balance, December 31, 1998            |                                                                        |                 | 816,169 |                 |  |                 | 800,869 |                 |  |                 | 2,265,625 |           |  |        | 3,596,157 |           |  |        | 3,913,551 |           |  |  | 11,557,883 |           |  |  | 3,405,624 |           |  |  | 11,443,082 |            |  |  | 757,577 |         |  |  | 2,538,431 |          
|                                      | Accretion of dividends and offering costs                              |                 |         |                |  |                 |         | 2,389           |  |                 |           |          |  |        |           | 4,505     |  |        |           |          |  |  |            | 1,257,339 |  |  |           |          |  |  |            | 1,095,078  |  |  |         |        |  |  |           | 244,412   | 
|                                      |                                                                        |                 |         |                 |  |                 |         |                 |  |                 |           |           |  |        |           |           |  |        |           |           |  |  |            |           |  |  |           |           |  |  |            |            |  |  |         |         |  |  |           |          

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                      |                                                                        |                 |   |                 |  |                 |   |                 |  |                 |   |                 |  |        |   |          |  |        |   |          |  |        |   |          |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   | 
|------------------------------------- | ---------------------------------------------------------------------- | --------------- | - | --------------- |  | --------------- | - | --------------- |  | --------------- | - | --------------- |  | ------ | - | -------- |  | ------ | - | -------- |  | ------ | - | -------- |  |  | - | - |  |  | - | - |  |  | - | - |  |  | - | - |  |  | - | - |  |  | - | - | 
|                                      |                                                                        |                 |   |                 |  |                 |   |                 |  |                 |   |                
|                                      |                                                                        | Series F        |   | Series G        |  | Series H        |   | Series I        |  | Series J        |   | Series J-1     
|                                      |                                                                        | Preferred Stock |   | Preferred Stock |  | Preferred Stock |   | Preferred Stock |  | Preferred Stock |   | Preferred Stock
|                                      |                                                                        |                 |   |                 |  |                 |   |                 |  |                 |   |                
|                                      |                                                                        | Number          |   |                 |  | Number          |   |                 |  | Number          |   |                 |  | Number |   |          |  | Number |   |          |  | Number |   |         
|                                      |                                                                        | of              |   | Carrying        |  | of              |   | Carrying        |  | of              |   | Carrying        |  | of     |   | Carrying |  | of     |   | Carrying |  | of     |   | Carrying
|                                      |                                                                        | Shares          |   | Value           |  | Shares          |   | Value           |  | Shares          |   | Value           |  | Shares |   | Value    |  | Shares |   | Value    |  | Shares |   | Value   
|                                      |                                                                        |                 |   |                 |  |                 |   |                 |  |                 |   |                 |  |        |   |          |  |        |   |          |  |        |   |         
|Inception of Company (July 12, 1993): |                                                                        |                 |   |                 |  |                 |   |                 |  |                 |   |                 |  |        |   |          |  |        |   |          |  |        |   |          |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |  
|                                      | Sale of Series A Preferred Stock, net of
    issuance costs of $26,813 |                 |   |                |  |                 | $ |                |  |                 |   |                |  |        | $ |         |  |        |   |         |  |        | $ |         |  |  |   |  |  |  | $ |  |  |  |   |  |  |  | $ |  |  |  |   |  |  |  | $ |  | 
|                                      | Accretion of offering costs                                            |                 |   |                |  |                 |   |                |  |                 |   |                |  |        |   |         |  |        |   |         |  |        |   |         |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  | 
|                                      |                                                                        |                 |   |                 |  |                 |   |                 |  |                 |   |                 |  |        |   |          |  |        |   |          |  |        |   |          |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |  
|Balance, December 31, 1994            |                                                                        |                 |  |                 |  |                 |  |                 |  |                 |  |                 |  |        |  |          |  |        |  |          |  |        |  |          |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |  
|                                      | Sale of Series B Preferred Stock, net of
    issuance costs of $45,024 |                 |   |                |  |                 |   |                |  |                 |   |                |  |        |   |         |  |        |   |         |  |        |   |         |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  | 
|                                      | Issuance of preferred stock for services                               |                 |   |                |  |                 |   |                |  |                 |   |                |  |        |   |         |  |        |   |         |  |        |   |         |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  | 
|                                      | Accretion of offering costs                                            |                 |   |                |  |                 |   |                |  |                 |   |                |  |        |   |         |  |        |   |         |  |        |   |         |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  | 
|                                      |                                                                        |                 |   |                 |  |                 |   |                 |  |                 |   |                 |  |        |   |          |  |        |   |          |  |        |   |          |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |  
|Balance, December 31, 1995            |                                                                        |                 |  |                 |  |                 |  |                 |  |                 |  |                 |  |        |  |          |  |        |  |          |  |        |  |          |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |  
|                                      | Sale of Series C Preferred Stock, net of
    issuance costs of $44,915 |                 |   |                |  |                 |   |                |  |                 |   |                |  |        |   |         |  |        |   |         |  |        |   |         |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  | 
|                                      | Accretion of dividends and offering costs                              |                 |   |                |  |                 |   |                |  |                 |   |                |  |        |   |         |  |        |   |         |  |        |   |         |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  | 
|                                      |                                                                        |                 |   |                 |  |                 |   |                 |  |                 |   |                 |  |        |   |          |  |        |   |          |  |        |   |          |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |  
|Balance, December 31, 1996            |                                                                        |                 |  |                 |  |                 |  |                 |  |                 |  |                 |  |        |  |          |  |        |  |          |  |        |  |          |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |  
|                                      | Sale of Series D Preferred Stock, net of
    issuance costs of $39,895 |                 |   |                |  |                 |   |                |  |                 |   |                |  |        |   |         |  |        |   |         |  |        |   |         |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  | 
|                                      | Accretion of dividends and offering costs                              |                 |   |                |  |                 |   |                |  |                 |   |                |  |        |   |         |  |        |   |         |  |        |   |         |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  | 
|                                      |                                                                        |                 |   |                 |  |                 |   |                 |  |                 |   |                 |  |        |   |          |  |        |   |          |  |        |   |          |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |  
|Balance, December 31, 1997            |                                                                        |                 |  |                 |  |                 |  |                 |  |                 |  |                 |  |        |  |          |  |        |  |          |  |        |  |          |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |  
|                                      | Sale of Series E Preferred Stock, net of
    issuance costs of $13,140 |                 |   |                |  |                 |   |                |  |                 |   |                |  |        |   |         |  |        |   |         |  |        |   |         |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  | 
|                                      | Accretion of dividends and offering costs                              |                 |   |                |  |                 |   |                |  |                 |   |                |  |        |   |         |  |        |   |         |  |        |   |         |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  | 
|                                      |                                                                        |                 |   |                 |  |                 |   |                 |  |                 |   |                 |  |        |   |          |  |        |   |          |  |        |   |          |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |  
|Balance, December 31, 1998            |                                                                        |                 |  |                 |  |                 |  |                 |  |                 |  |                 |  |        |  |          |  |        |  |          |  |        |  |          |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |  
|                                      | Accretion of dividends and offering costs                              |                 |   |                |  |                 |   |                |  |                 |   |                |  |        |   |         |  |        |   |         |  |        |   |         |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  | 
|                                      |                                                                        |                 |   |                 |  |                 |   |                 |  |                 |   |                 |  |        |   |          |  |        |   |          |  |        |   |          |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |  

F-25



---



##### 



ACUSPHERE, INC. AND SUBSIDIARIES

(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                           |                                                                                              |                 |         |                 |   |                 |         |                 |   |                 |           |            |   |        |           |            |   |        |           |            |   |   |            |            |   |  |           |            |   |   |            |            |   |  |         |          |   |   |           |            |  
|-------------------------- | -------------------------------------------------------------------------------------------- | --------------- | ------- | --------------- | - | --------------- | ------- | --------------- | - | --------------- | --------- | ---------- | - | ------ | --------- | ---------- | - | ------ | --------- | ---------- | - | - | ---------- | ---------- | - |  | --------- | ---------- | - | - | ---------- | ---------- | - |  | ------- | -------- | - | - | --------- | ---------- | -
|                           |                                                                                              |                 |         |                 |   |                 |         |                 |   |                
|                           |                                                                                              | Series A        |         | Series B        |   | Series C        |         | Series D        |   | Series E       
|                           |                                                                                              | Preferred Stock |         | Preferred Stock |   | Preferred Stock |         | Preferred Stock |   | Preferred Stock
|                           |                                                                                              |                 |         |                 |   |                 |         |                 |   |                
|                           |                                                                                              | Number          |         |                 |   | Number          |         |                 |   | Number          |           |            |   | Number |           |            |   | Number |           |           
|                           |                                                                                              | of              |         | Carrying        |   | of              |         | Carrying        |   | of              |           | Carrying   |   | of     |           | Carrying   |   | of     |           | Carrying  
|                           |                                                                                              | Shares          |         | Value           |   | Shares          |         | Value           |   | Shares          |           | Value      |   | Shares |           | Value      |   | Shares |           | Value     
|                           |                                                                                              |                 |         |                 |   |                 |         |                 |   |                 |           |            |   |        |           |            |   |        |           |           
|Balance, December 31, 1999 |                                                                                              |                 | 816,169 |                 |   |                 | 803,258 |                 |   |                 | 2,265,625 |            |   |        | 3,600,662 |            |   |        | 3,913,551 |            |   |   | 12,815,222 |            |   |  | 3,405,624 |            |   |   | 12,538,160 |            |   |  | 757,577 |          |   |   | 2,782,843 |           
|                           | Sale of Series F Preferred Stock, net of
    issuance costs of $1,309,965                    |                 |         |                |   |                 |         |                |   |                 |           |           |   |        |           |           |   |        |           |           |   |   |            |           |   |  |           |           |   |   |            |           |   |  |         |         |   |   |           |           |  
|                           | Sale of Series G Preferred Stock, net of
    issuance costs of $0                            |                 |         |                |   |                 |         |                |   |                 |           |           |   |        |           |           |   |        |           |           |   |   |            |           |   |  |           |           |   |   |            |           |   |  |         |         |   |   |           |           |  
|                           | Sale of Series H Preferred Stock, net of
    issuance costs of $0                            |                 |         |                |   |                 |         |                |   |                 |           |           |   |        |           |           |   |        |           |           |   |   |            |           |   |  |           |           |   |   |            |           |   |  |         |         |   |   |           |           |  
|                           | Accretion of dividends and offering costs                                                    |                 |         |                |   |                 |         | 2,389           |   |                 |           |           |   |        |           | 4,505      |   |        |           |           |   |   |            | 1,257,339  |   |  |           |           |   |   |            | 1,095,078  |   |  |         |         |   |   |           | 244,412    |  
|                           |                                                                                              |                 |         |                 |   |                 |         |                 |   |                 |           |            |   |        |           |            |   |        |           |            |   |   |            |            |   |  |           |            |   |   |            |            |   |  |         |          |   |   |           |           
|Balance, December 31, 2000 |                                                                                              |                 | 816,169 |                 |   |                 | 805,647 |                 |   |                 | 2,265,625 |            |   |        | 3,605,167 |            |   |        | 3,913,551 |            |   |   | 14,072,561 |            |   |  | 3,405,624 |            |   |   | 13,633,238 |            |   |  | 757,577 |          |   |   | 3,027,255 |           
|                           | Sale of Series I Preferred Stock, net of
    issuance costs of $27,345                       |                 |         |                |   |                 |         |                |   |                 |           |           |   |        |           |           |   |        |           |           |   |   |            |           |   |  |           |           |   |   |            |           |   |  |         |         |   |   |           |           |  
|                           | Accretion of dividends and offering costs                                                    |                 |         |                |   |                 |         | 2,389           |   |                 |           |           |   |        |           | 4,505      |   |        |           |           |   |   |            | 1,257,339  |   |  |           |           |   |   |            | 1,095,078  |   |  |         |         |   |   |           | 244,412    |  
|                           |                                                                                              |                 |         |                 |   |                 |         |                 |   |                 |           |            |   |        |           |            |   |        |           |            |   |   |            |            |   |  |           |            |   |   |            |            |   |  |         |          |   |   |           |           
|Balance, December 31, 2001 |                                                                                              |                 | 816,169 |                 |   |                 | 808,036 |                 |   |                 | 2,265,625 |            |   |        | 3,609,672 |            |   |        | 3,913,551 |            |   |   | 15,329,900 |            |   |  | 3,405,624 |            |   |   | 14,728,316 |            |   |  | 757,577 |          |   |   | 3,271,667 |           
|                           | 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 | ) |        |           | (431,612   | ) |   |            | (923,650   | ) |  |           | (167,182   | ) |   |            | (501,548   | ) |  |         | (76,536  | ) |   |           | (252,570   | )
|                           | Exchange of Series B, E and F to
    Series J-1 for contribution greater than pro-rata share |                 |         |                |   |                 |         |                |   |                 |           | (31,250    | ) |        |           | (50,000    | ) |        |           |           |   |   |            |           |   |  |           |           |   |   |            |           |   |  |         | (31,742  | ) |   |           | (104,749   | )
|                           | Write-off of forfeited dividends                                                             |                 |         |                |   |                 |         |                |   |                 |           |           |   |        |           |           |   |        |           |           |   |   |            | (876,524   | ) |  |           |           |   |   |            | (247,155   | ) |  |         |         |   |   |           | (110,107   | )
|                           | Accretion of dividends and offering costs                                                    |                 |         |                |   |                 |         | 2,538           |   |                 |           |           |   |        |           | 4,776      |   |        |           |           |   |   |            | 1,236,058  |   |  |           |           |   |   |            | 1,066,670  |   |  |         |         |   |   |           | 208,707    |  
|                           |                                                                                              |                 |         |                 |   |                 |         |                 |   |                 |           |            |   |        |           |            |   |        |           |            |   |   |            |            |   |  |           |            |   |   |            |            |   |  |         |          |   |   |           |           
|Balance, December 31, 2002 |                                                                                              |                 | 565,810 |                 |   | $               | 560,215 |                 |   |                 | 1,544,426 |            |   | $      | 2,460,528 |            |   |        | 3,481,939 |            |   | $ | 14,765,784 |            |   |  | 3,238,442 |            |   | $ | 15,046,283 |            |   |  | 649,299 |          |   | $ | 3,012,948 |           
|                           |                                                                                              |                 |         |                 |   |                 |         |                 |   |                 |           |            |   |        |           |            |   |        |           |            |   |   |            |            |   |  |           |            |   |   |            |            |   |  |         |          |   |   |           |           
|                           | Conversion of preferred shares to common shares                                              |                 |         |                |   |                 |         |                |   |                 |           | (218,750   | ) |        |           | (350,000   | ) |        |           | (140,187   | ) |   |            | (300,000   | ) |  |           | (1,819,209 | ) |   |            | (5,457,627 | ) |  |         | (145,263 | ) |   |           | (479,368   | )
|                           | Write-off of forfeited dividends                                                             |                 |         |                |   |                 |         |                |   |                 |           |           |   |        |           |           |   |        |           |           |   |   |            | (8,189,466 | ) |  |           |           |   |   |            | (5,989,123 | ) |  |         |         |   |   |           | (1,024,807 | )
|                           | Accretion of dividends and offering costs                                                    |                 |         |                |   |                 |         | 5,593           |   |                 |           |           |   |        |           | 10,555     |   |        |           |           |   |   |            | 875,034    |   |  |           |           |   |   |            | 658,167    |   |  |         |         |   |   |           | 154,543    |  
|                           |                                                                                              |                 |         |                 |   |                 |         |                 |   |                 |           |            |   |        |           |            |   |        |           |            |   |   |            |            |   |  |           |            |   |   |            |            |   |  |         |          |   |   |           |           
|                           | Conversion of preferred shares to common shares
    in IPO                                   |                 |         | (565,810        | ) |                 |         | (565,808        | ) |                 |           | (1,325,676 | ) |        |           | (2,121,083 | ) |        |           | (3,341,752 | ) |   |            | (7,151,352 | ) |  |           | (1,419,233 | ) |   |            | (4,257,700 | ) |  |         | (504,036 | ) |   |           | (1,663,316 | )
|Balance, December 31, 2003 |                                                                                              |                 |        |                 |   | $               |        |                 |   |                 |          |            |   | $      |          |            |   |        |          |            |   | $ |           |            |   |  |          |            |   | $ |           |            |   |  |        |          |   | $ |          |           
|                           |                                                                                              |                 |         |                 |   |                 |         |                 |   |                 |           |            |   |        |           |            |   |        |           |            |   |   |            |            |   |  |           |            |   |   |            |            |   |  |         |          |   |   |           |           

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                           |                                                                                              |                 |           |                 |   |                 |            |                 |   |                 |           |                 |   |        |            |             |   |        |           |            |   |        |           |            |   |  |           |            |   |   |           |            |   |  |            |            |   |   |            |             |   |  |           |            |   |   |           |            |  
|-------------------------- | -------------------------------------------------------------------------------------------- | --------------- | --------- | --------------- | - | --------------- | ---------- | --------------- | - | --------------- | --------- | --------------- | - | ------ | ---------- | ----------- | - | ------ | --------- | ---------- | - | ------ | --------- | ---------- | - |  | --------- | ---------- | - | - | --------- | ---------- | - |  | ---------- | ---------- | - | - | ---------- | ----------- | - |  | --------- | ---------- | - | - | --------- | ---------- | -
|                           |                                                                                              |                 |           |                 |   |                 |            |                 |   |                 |           |                
|                           |                                                                                              | Series F        |           | Series G        |   | Series H        |            | Series I        |   | Series J        |           | Series J-1     
|                           |                                                                                              | Preferred Stock |           | Preferred Stock |   | Preferred Stock |            | Preferred Stock |   | Preferred Stock |           | Preferred Stock
|                           |                                                                                              |                 |           |                 |   |                 |            |                 |   |                 |           |                
|                           |                                                                                              | Number          |           |                 |   | Number          |            |                 |   | Number          |           |                 |   | Number |            |             |   | Number |           |            |   | Number |           |           
|                           |                                                                                              | of              |           | Carrying        |   | of              |            | Carrying        |   | of              |           | Carrying        |   | of     |            | Carrying    |   | of     |           | Carrying   |   | of     |           | Carrying  
|                           |                                                                                              | Shares          |           | Value           |   | Shares          |            | Value           |   | Shares          |           | Value           |   | Shares |            | Value       |   | Shares |           | Value      |   | Shares |           | Value     
|                           |                                                                                              |                 |           |                 |   |                 |            |                 |   |                 |           |                 |   |        |            |             |   |        |           |            |   |        |           |           
|Balance, December 31, 1999 |                                                                                              |                 |          |                 |   |                 |           |                 |   |                 |          |                 |   |        |           |             |   |        |          |            |   |        |          |            |   |  |          |            |   |   |          |            |   |  |           |            |   |   |           |             |   |  |          |            |   |   |          |           
|                           | Sale of Series F Preferred Stock, net of
    issuance costs of $1,309,965                    |                 |           | 6,325,329       |   |                 |            | 28,735,348      |   |                 |           |                |   |        |            |            |   |        |           |           |   |        |           |           |   |  |           |           |   |   |           |           |   |  |            |           |   |   |            |            |   |  |           |           |   |   |           |           |  
|                           | Sale of Series G Preferred Stock, net of
    issuance costs of $0                            |                 |           |                |   |                 |            |                |   |                 |           | 1,232,308       |   |        |            | 12,015,003  |   |        |           |           |   |        |           |           |   |  |           |           |   |   |           |           |   |  |            |           |   |   |            |            |   |  |           |           |   |   |           |           |  
|                           | Sale of Series H Preferred Stock, net of
    issuance costs of $0                            |                 |           |                |   |                 |            |                |   |                 |           |                |   |        |            |            |   |        |           | 1,127,819  |   |        |           | 7,499,996  |   |  |           |           |   |   |           |           |   |  |            |           |   |   |            |            |   |  |           |           |   |   |           |           |  
|                           | Accretion of dividends and offering costs                                                    |                 |           |                |   |                 |            | 1,073,766       |   |                 |           |                |   |        |            | 360,455     |   |        |           |           |   |        |           | 180,451    |   |  |           |           |   |   |           |           |   |  |            |           |   |   |            |            |   |  |           |           |   |   |           |           |  
|                           |                                                                                              |                 |           |                 |   |                 |            |                 |   |                 |           |                 |   |        |            |             |   |        |           |            |   |        |           |            |   |  |           |            |   |   |           |            |   |  |            |            |   |   |            |             |   |  |           |            |   |   |           |           
|Balance, December 31, 2000 |                                                                                              |                 | 6,325,329 |                 |   |                 | 29,809,114 |                 |   |                 | 1,232,308 |                 |   |        | 12,375,458 |             |   |        | 1,127,819 |            |   |        | 7,680,447 |            |   |  |          |            |   |   |          |            |   |  |           |            |   |   |           |             |   |  |          |            |   |   |          |           
|                           | Sale of Series I Preferred Stock, net of
    issuance costs of $27,345                       |                 |           |                |   |                 |            |                |   |                 |           |                |   |        |            |            |   |        |           |           |   |        |           |           |   |  |           | 1,370,324  |   |   |           | 6,481,694  |   |  |            |           |   |   |            |            |   |  |           |           |   |   |           |           |  
|                           | Accretion of dividends and offering costs                                                    |                 |           |                |   |                 |            | 2,281,585       |   |                 |           |                |   |        |            | 742,528     |   |        |           |           |   |        |           | 360,901    |   |  |           |           |   |   |           | 259,879    |   |  |            |           |   |   |            |            |   |  |           |           |   |   |           |           |  
|                           |                                                                                              |                 |           |                 |   |                 |            |                 |   |                 |           |                 |   |        |            |             |   |        |           |            |   |        |           |            |   |  |           |            |   |   |           |            |   |  |            |            |   |   |            |             |   |  |           |            |   |   |           |           
|Balance, December 31, 2001 |                                                                                              |                 | 6,325,329 |                 |   |                 | 32,090,699 |                 |   |                 | 1,232,308 |                 |   |        | 13,117,986 |             |   |        | 1,127,819 |            |   |        | 8,041,348 |            |   |  | 1,370,324 |            |   |   | 6,741,573 |            |   |  |           |            |   |   |           |             |   |  |          |            |   |   |          |           
|                           | Sale of Series J Preferred Stock, net of
    issuance costs of $856,034                      |                 |           |                |   |                 |            |                |   |                 |           |                |   |        |            |            |   |        |           |           |   |        |           |           |   |  |           |           |   |   |           |           |   |  |            | 10,736,960 |   |   |            | 14,283,074  |   |  |           |           |   |   |           |           |  
|                           | Conversion of preferred shares to common shares                                              |                 |           | (47,544         | ) |                 |            | (225,836        | ) |                 |           | (1,232,308      | ) |        |            | (13,548,873 | ) |        |           | (1,127,819 | ) |        |           | (7,499,996 | ) |  |           | (15,824    | ) |   |           | (75,164    | ) |  |            |            |   |   |            |             |   |  |           |            |   |   |           |            |  
|                           | Exchange of Series B, E and F to
    Series J-1 for contribution greater than pro-rata share |                 |           | (1,345,061      | ) |                 |            | (6,389,038      | ) |                 |           |                |   |        |            |            |   |        |           |           |   |        |           |           |   |  |           |           |   |   |           |           |   |  |            |           |   |   |            |            |   |  |           | 4,640,983  |   |   |           | 6,543,787  |  
|                           | Write-off of forfeited dividends                                                             |                 |           |                |   |                 |            | (856,359        | ) |                 |           |                |   |        |            |            |   |        |           |           |   |        |           | (743,310   | ) |  |           |           |   |   |           | (5,303     | ) |  |            |           |   |   |            |            |   |  |           |           |   |   |           |           |  
|                           | Accretion of dividends and offering costs                                                    |                 |           |                |   |                 |            | 2,067,771       |   |                 |           |                |   |        |            | 430,887     |   |        |           |           |   |        |           | 201,958    |   |  |           |           |   |   |           | 442,892    |   |  |            |           |   |   |            | 728,113     |   |  |           |           |   |   |           | 275,108    |  
|                           |                                                                                              |                 |           |                 |   |                 |            |                 |   |                 |           |                 |   |        |            |             |   |        |           |            |   |        |           |            |   |  |           |            |   |   |           |            |   |  |            |            |   |   |            |             |   |  |           |            |   |   |           |           
|Balance, December 31, 2002 |                                                                                              |                 | 4,932,724 |                 |   | $               | 26,687,237 |                 |   |                 |          |                 |   | $      |           |             |   |        |          |            |   | $      |          |            |   |  | 1,354,500 |            |   | $ | 7,103,998 |            |   |  | 10,736,960 |            |   | $ | 15,011,187 |             |   |  | 4,640,983 |            |   | $ | 6,818,895 |           
|                           |                                                                                              |                 |           |                 |   |                 |            |                 |   |                 |           |                 |   |        |            |             |   |        |           |            |   |        |           |            |   |  |           |            |   |   |           |            |   |  |            |            |   |   |            |             |   |  |           |            |   |   |           |           
|                           | Conversion of preferred shares to common shares                                              |                 |           | (116,500        | ) |                 |            | (553,375        | ) |                 |           |                |   |        |            |            |   |        |           |           |   |        |           |           |   |  |           | (48,203    | ) |   |           | (228,964   | ) |  |            | (1,074,156 | ) |   |            | (1,514,561  | ) |  |           | (169,731   | ) |   |           | (239,321   | )
|                           | Write-off of forfeited dividends                                                             |                 |           |                |   |                 |            | (5,093,707      | ) |                 |           |                |   |        |            |            |   |        |           |           |   |        |           |           |   |  |           |           |   |   |           | (1,022,713 | ) |  |            |           |   |   |            | (1,530,770  | ) |  |           |           |   |   |           | (671,099   | )
|                           | Accretion of dividends and offering costs                                                    |                 |           |                |   |                 |            | 1,836,914       |   |                 |           |                |   |        |            |            |   |        |           |           |   |        |           |           |   |  |           |           |   |   |           | 352,583    |   |  |            |           |   |   |            | 1,658,693   |   |  |           |           |   |   |           | 395,991    |  
|                           |                                                                                              |                 |           |                 |   |                 |            |                 |   |                 |           |                 |   |        |            |             |   |        |           |            |   |        |           |            |   |  |           |            |   |   |           |            |   |  |            |            |   |   |            |             |   |  |           |            |   |   |           |           
|                           | Conversion of preferred shares to common shares
    in IPO                                   |                 |           | (4,816,224      | ) |                 |            | (22,877,069     | ) |                 |           |                |   |        |            |            |   |        |           |           |   |        |           |           |   |  |           | (1,306,297 | ) |   |           | (6,204,904 | ) |  |            | (9,662,804 | ) |   |            | (13,624,549 | ) |  |           | (4,471,252 | ) |   |           | (6,304,466 | )
|Balance, December 31, 2003 |                                                                                              |                 |          |                 |   | $               |           |                 |   |                 |          |                 |   | $      |           |             |   |        |          |            |   | $      |          |            |   |  |          |            |   | $ |          |            |   |  |           |            |   | $ |           |             |   |  |          |            |   | $ |          |           
|                           |                                                                                              |                 |           |                 |   |                 |            |                 |   |                 |           |                 |   |        |            |             |   |        |           |            |   |        |           |            |   |  |           |            |   |   |           |            |   |  |            |            |   |   |            |             |   |  |           |            |   |   |           |           

(Concluded)

F-26



---



##### 



ACUSPHERE, INC. AND SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Common Stock
Warrants As of
December 31, 2003, warrants to purchase shares of the
Companys stock, the origination of which were derived from
debt and lease financing transactions, were outstanding for an
aggregate of 573,842 shares of common stock at an effective
weighted average price of $10.67 per shares as follows:

|       |         |           |  |            |       |  |  |                   
|------ | ------- | --------- |  | ---------- | ----- |  |  | ------------------
|Number |         | Exercise  |  |           
|of     |         | Price Per |  | Expiration
|Shares |         | Share     |  | Date      
|       |         |           |  |           
|       | 1,066   |           |  | $          | 9.30  |  |  | May 1, 2005       
|       | 4,724   |           |  |            | 11.64 |  |  | August 21, 2006   
|       | 7,517   |           |  |            | 11.64 |  |  | June 6, 2007      
|       | 5,194   |           |  |            | 23.10 |  |  | February 21, 2008 
|       | 3,404   |           |  |            | 15.42 |  |  | February 26, 2008 
|       | 450,897 |           |  |            | 8.46  |  |  | April 11, 2008    
|       | 684     |           |  |            | 14.00 |  |  | April 11, 2008    
|       | 7,540   |           |  |            | 8.46  |  |  | June 27, 2008     
|       | 16,212  |           |  |            | 15.42 |  |  | October 16, 2008  
|       | 14,934  |           |  |            | 16.74 |  |  | October 19, 2008  
|       | 2,688   |           |  |            | 16.74 |  |  | January 5, 2010   
|       | 30,844  |           |  |            | 23.10 |  |  | March 30, 2011    
|       | 28,138  |           |  |            | 23.10 |  |  | September 27, 2011
|       |         |           |  |            |       |  |  |                   
|       | 573,842 |           |  |            |       |  |  |                   

During 2003, warrants were exercised at
$9.30 per share resulting in the issuance of
998 shares of common stock.



|   |                                
|-- | -------------------------------
|9. | Research and License Agreements

Acusphere has clinical and pre-clinical study
research agreements with various institutions. Total expenses
incurred amounted to approximately $2,761,000, $1,350,000 and
$1,818,000 in sponsored-research expenses relating to such
agreements during the years ended December 31, 2001, 2002,
and 2003, respectively.



|    |            
|--- | -----------
|10. | Commitments

Operating
Leases Acusphere has
leased office and laboratory space under various agreements
classified as operating leases. During 2001, 2002, and 2003,
rent expense totaled approximately $1,349,000, $2,601,000, and
$2,473,000, respectively.

Acusphere operates from 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, 2002 and 2003. 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.
$0, $53,640 and $53,640 of amortization has been recorded within
rent expense as of December 31, 2001, 2002 and 2003,
respectively.

F-27



---



##### 



ACUSPHERE, INC. AND SUBSIDIARIES


(A Development Stage Company)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Future minimum payments due under the
noncancelable facility lease are as follows as of
December 31, 2003:

|                         |  |   |            | 
|------------------------ |  | - | ---------- | 
|Year Ending December 31, |  |  
|                         |  |  
|2004                     |  | $ | 2,145,000  | 
|2005                     |  |   | 2,220,000  | 
|2006                     |  |   | 2,298,000  | 
|2007                     |  |   | 2,379,000  | 
|2008                     |  |   | 2,462,000  | 
|Thereafter               |  |   | 7,915,000  | 
|                         |  |   |            | 
|                         |  | $ | 19,419,000 | 
|                         |  |   |            | 



|    |                      
|--- | ---------------------
|11. | 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.

F-28



---



##### 





|           |                                              
|---------- | ---------------------------------------------
|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, 2002 and 2003:

|                             |                |          |   |              |   |                   |   |            |   |  |   |        |  
|---------------------------- | -------------- | -------- | - | ------------ | - | ----------------- | - | ---------- | - |  | - | ------ | -
|                             |                |          |   |              |   | Net Loss         
|                             |                |          |   |              |   | Available to     
|                             |                |          |   | Net Loss     |   | Common           
|                             |                |          |   | Available to |   | Stockholders     
|                             |                |          |   | Common       |   | Per Share       
|                             |                | Net Loss |   | Stockholders |   | Basic and Diluted
|                             |                |          |   |              |   |                  
|Year Ended December 31, 2002 |                |          |   |              |   |                   |   |            |   |  |   |       
|                             | First Quarter  |          | $ | (6,353,618   | ) |                   | $ | (7,986,375 | ) |  | $ | (16.14 | )
|                             | Second Quarter |          |   | (5,420,147   | ) |                   |   | (7,071,476 | ) |  |   | (14.16 | )
|                             | Third Quarter  |          |   | (5,701,435   | ) |                   |   | (7,401,784 | ) |  |   | (7.20  | )
|                             | Fourth Quarter |          |   | (4,421,050   | ) |                   |   | (6,102,093 | ) |  |   | (5.10  | )
|Year Ended December 31, 2003 |                |          |   |              |   |                   |   |            |   |  |   |       
|                             | First Quarter  |          |   | (4,488,190   | ) |                   |   | (6,097,357 | ) |  |   | (5.05  | )
|                             | Second Quarter |          |   | (5,418,451   | ) |                   |   | (7,044,229 | ) |  |   | (5.83  | )
|                             | Third Quarter  |          |   | (5,284,572   | ) |                   |   | (6,709,425 | ) |  |   | (3.42  | )
|                             | Fourth Quarter |          |   | (6,732,224   | ) |                   |   | (8,020,499 | ) |  |   | (0.65  | )

F-29