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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


FORM 10-K



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|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(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 000-50516

Eyetech Pharmaceuticals, Inc.

(Exact name of Registrant as specified in its
Charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 13-4104684                          
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

3 Times Square, 12th Floor

New York, New York 10036


(Address of principal executive offices) (Zip
Code)


(212) 997-9241

(Registrants telephone number, including
area code)


Securities registered pursuant to
Section 12(b) of the Securities Exchange Act of
1934:

None


Securities registered pursuant to
Section 12(g) of the Securities Exchange Act of
1934:

Common Stock, Par Value $0.01 Per
Share


(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

Aggregate market
value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sale price
for such stock on June 30, 2003: Not applicable because
trading of the registrants common stock on the NASDAQ
National Market did not commence until January 30, 2004.

The number of
shares of registrants common stock outstanding on
March 23, 2004 was 39,660,272.

Portions of the
registrants Definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders of the registrant to be held
May 12, 2004 are incorporated by reference into
Part III of this Form 10-K.



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TABLE OF CONTENTS

|                                                |  |                                                                                          |  |  |    | 
|----------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  |  | -- | 
|PART I                                         
|Item 1.                                         |  | Business                                                                                 |  |  | 2  | 
|Item 2.                                         |  | Properties                                                                               |  |  | 29 | 
|Item 3.                                         |  | Legal Proceedings                                                                        |  |  | 29 | 
|Item 4.                                         |  | Submission of Matters to a
    Vote of Security Holders                                  |  |  | 29 | 
|PART II                                        
|Item 5.                                         |  | Market for Registrants
    Common Equity and Related Stockholder Matters                |  |  | 30 | 
|Item 6.                                         |  | Selected Consolidated
    Financial Data                                                 |  |  | 32 | 
|Item 7.                                         |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operation |  |  | 33 | 
|Item 7a.                                        |  | Quantitative and Qualitative
    Disclosures About Market Risk                           |  |  | 55 | 
|Item 8.                                         |  | Financial Statements and
    Supplementary Data                                          |  |  | 55 | 
|Item 9.                                         |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure |  |  | 55 | 
|Item 9a.                                        |  | Controls and Procedures                                                                  |  |  | 55 | 
|PART III                                       
|Item 10.                                        |  | Directors and Executive
    Officers of the Registrant                                   |  |  | 56 | 
|Item 11.                                        |  | Executive Compensation                                                                   |  |  | 59 | 
|Item 12.                                        |  | Security Ownership of
    Certain Beneficial Owners and Management                       |  |  | 59 | 
|Item 13.                                        |  | Certain Relationships and
    Related Transactions                                       |  |  | 59 | 
|Item 14.                                        |  | Principal Accountant Fees
    and Services                                               |  |  | 59 | 
|PART IV                                        
|Item 15.                                        |  | Exhibits, Financial
    Statements and Schedules and Reports on Form 8-K                 |  |  | 60 | 
|AMENDED & RESTATED CERTIFICATE OF INCORPORATION
|AMENDED & RESTATED BYLAWS                      
|2003 STOCK INCENTIVE PLAN                      
|2003 EMPLOYEE STOCK PURCHASE PLAN              
|LIST OF SUBSIDIARIES                           
|CONSENT OF ERNST & YOUNG LLP                   
|CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER   
|CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER   
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER       
|CERTIFICATION OF CHIEF FINANCIAL OFFICER       



EyetechTM, Eyetech
PharmaceuticalsTM and MacugenTM are our
trademarks. Each of the other trademarks, trade names or service
marks appearing in this document belongs to its respective
holder.

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PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

This Annual Report on Form 10-K contains
forward-looking statements relating to future events and our
future performance within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are
cautioned that such statements involve risks and uncertainties.
These forward-looking statements are based on current
expectations, estimates, forecasts and projections about the
industry and markets in which we operate and managements
beliefs and assumptions. All statements, other than statements
of historical facts, included in this report regarding our
strategy, future operations, future financial position, future
revenues, projected costs, prospects, plans and objectives of
management are forward-looking statements. The words
anticipates, believes,
estimates, expects, intends,
may, plans, projects,
will, would, and similar expressions are
intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words.
We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you
should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the
forward-looking statements we make. We have included important
factors in the cautionary statements included in this report,
particularly in the Risk Factors that May Affect
Results section, that we believe could cause actual
results or events to differ materially from the forward-looking
statements that we make. Our forward-looking statements do not
reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures or investments that we may
make. We do not assume any obligation to update any
forward-looking statements.






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

Overview

Eyetech Pharmaceuticals, Inc. is a
biopharmaceutical company that specializes in the development
and commercialization of novel therapeutics to treat diseases of
the eye. Our initial focus is on diseases affecting the back of
the eye, particularly the retina, because we believe that these
diseases have the greatest unmet medical need and represent the
largest potential market opportunities in ophthalmology. Our
most advanced product candidate is MacugenTM
(pegaptanib sodium), which we are developing for the treatment
of the wet form of age-related macular degeneration, known as
AMD, and diabetic macular edema, known as DME. Both AMD and DME
are serious diseases of the retina that can lead to severe
vision loss and blindness. In the second half of 2001, we
initiated two Phase 2/3 pivotal clinical trials of Macugen
for the treatment of wet AMD. Based on the results from the
first year of these trials, we plan to prepare and file in the
third quarter of 2004 an NDA with the FDA seeking marketing
approval for the 0.3 mg dose of Macugen for the treatment
of wet AMD. The FDA has given fast track designation
to Macugen for the treatment of both wet AMD and DME. We have
entered into a collaboration with Pfizer Inc. to develop and
commercialize Macugen for the prevention and treatment of
diseases of the eye.

Wet AMD and DME are two of the leading causes of
severe vision loss and blindness in the adult population. In the
United States, we estimate that as many as 15 million
people suffer from some form of AMD and that there are more than
1.6 million cases of wet AMD. Approximately 200,000 new
cases of wet AMD arise each year in the United States. Although
wet AMD represents approximately 10% of all AMD cases, it is
responsible for up to 90% of the severe vision loss associated
with AMD, with a majority of wet AMD patients experiencing
severe vision loss in the affected eye within months to two
years after diagnosis of the disease. Because AMD generally
affects adults over 50 years of age, we expect the
incidence of AMD to increase significantly as the baby boom
generation ages and overall life expectancy increases.

In the United States, there are approximately
500,000 people suffering from DME, with approximately 75,000 new
cases each year. We expect the incidence of DME in the United
States to increase as the number of people with diabetes
increases. We believe that the prevalence and incidence of AMD
and DME in the European Union are similar to those in the United
States. Because the existing treatments for both wet AMD

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and DME have significant limitations, there is a
significant unmet medical need for a new therapy for these
diseases.


We believe that Macugen may provide considerable
benefits over the existing therapies for wet AMD and DME because
it addresses the abnormal blood vessel growth and blood vessel
leakage associated with wet AMD and the blood vessel leakage
associated with DME. Significant scientific evidence suggests
that the presence in the eye of elevated levels of a protein
known as vascular endothelial growth factor, or VEGF, plays an
important role in causing this abnormal blood vessel growth and
blood vessel leakage. Based on animal tests that we conducted,
we believe that Macugen prevents VEGF from binding to its
natural receptor, thereby inhibiting such abnormal blood vessel
growth and blood vessel leakage.

In December 2002, we entered into our
collaboration with Pfizer under which we and Pfizer are jointly
completing the development of Macugen and have agreed to
co-promote Macugen in the United States. We have granted Pfizer
the exclusive right to develop and commercialize Macugen outside
the United States pursuant to a royalty-bearing license. Under
the collaboration, we are entitled to participate in the United
States in detailing Pfizers product, Xalatan, for the
treatment of glaucoma.

We are led by a team of experienced
pharmaceutical industry executives and recognized experts in
ophthalmology and vision research. We believe that this team
provides us with a significant complement of capabilities in the
discovery, development and commercialization of novel therapies
to treat diseases of the eye.

We were incorporated under the laws of the State
of Delaware in February 2000.

Our Business Strategy

Our mission is to develop and commercialize novel
therapeutics to treat diseases of the eye, with an initial focus
on diseases of the back of the eye. The key elements of our
strategy in support of this mission are to:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maximize Commercial Potential of
    Macugen.We are devoting most of our
    efforts to completing the clinical and regulatory development of
    Macugen and preparing for the commercial launch of the product.
    Based on the results of the first year of our Phase 2/3
    pivotal clinical trials, we plan to prepare and file an NDA in
    the third quarter of 2004 with the FDA covering Macugen for the
    treatment of wet AMD. We are also exploring the application of
    Macugen to a range of additional ophthalmic indications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Establish Specialized Ophthalmic Sales and
    Marketing Capabilities.We are in the
    process of establishing focused domestic sales and marketing
    capabilities for Macugen, Xalatan and other ophthalmic products
    that we may develop or acquire. Based on our examination of the
    membership lists of three prominent organizations for retinal
    specialists, The Macula Society, The American Society of Retina
    Specialists and the Retina Society, we estimate that there are
    approximately 1,400 identifiable retinal specialists in the
    United States who perform most of the medical procedures
    involving back of the eye diseases. We plan to target most of
    our sales and marketing efforts at these specialists. In selling
    and marketing Macugen in the United States, our personnel will
    collaborate with Pfizer, which has substantial sales and
    marketing capabilities and will have primary responsibility for
    promoting this product in the domestic market to general
    ophthalmologists.
|
| |  | Develop Alternative Drug Delivery
    Technologies.We are working to
    develop or acquire alternative technologies for the
    administration of drugs to the back of the eye. We believe that
    these new drug delivery technologies could facilitate the use of
    Macugen and other drugs as chronic or even preventative
    treatments for various back of the eye diseases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Identify New Ophthalmic
    Products.We have established an
    internal research program with the goal of discovering and
    validating new ophthalmic disease targets and developing novel
    therapies for the treatment of ophthalmic diseases. We are also
    seeking to license or otherwise acquire the rights to potential
    new drugs and drug targets for the treatment of ophthalmic
    disease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Explore Additional Non-Ophthalmic Indications
    for Macugen.Third party preclinical
    and clinical research suggests that VEGF plays a key role in
    some non-ophthalmic diseases, particularly some types of cancer
    and psoriasis. We are using our preclinical research expertise
    to evaluate whether the anti-VEGF characteristics of Macugen and
    the underlying stability of its active molecule may make it a
    suitable local treatment for these and other diseases. For
    indications outside of ophthalmology, we may seek collaborators
    or licensees for drug development and commercialization.

Eye Disease

The human eye possesses focusing elements in the
front, the cornea and lens, and a light-sensing element in the
back, the retina. Light falls on the photoreceptors that are
part of the retina, called rods and cones, and is converted into
electrical energy, which travels via the optic nerve to the
brain. The central most portion of the retina is the macula,
which is the region responsible for seeing color and the acute
central vision necessary for activities such as reading, face
recognition, watching television and driving. The brain
processes the complex signals sent from the retina into vision.
The following diagram illustrates the principal elements of the
anatomy of a healthy eye, including a detailed cross-section of
the back of the eye.

(NORMAL MACULA CROSS SECTION GRAPHIC)

Eye disease can be caused by many factors and can
affect both the front and back of the eye. In its most extreme
cases, eye disease can result in either partial or total
blindness. In the developed world, the major diseases that
result in blindness are those affecting the retina, including
AMD, diabetic retinopathy, of which DME is a manifestation, and
glaucoma. These diseases deny patients of their sight, and, as a
result, their ability to live independently and perform daily
activities.



| |                                     
| | ------------------------------------
| | Age-Related Macular
    Degeneration

AMD is a chronic, progressive disease of the
macula that results in the loss of central vision. The most
common symptoms are a central blurred or blank spot, distortion
of objects or simply blurred vision. Peripheral vision usually
remains intact. The disease typically affects patients initially
in one eye, with a high likelihood of it occurring in the second
eye over time. Because AMD is strongly correlated with aging, we
believe that it is likely for the disease to recur,
notwithstanding treatment, as the aging process continues. Thus,
patients who have been administered the existing therapies for
AMD frequently have required retreatment.

AMD is the leading cause of severe vision loss
and blindness in patients over the age of 50 in the developed
world. According to the Macula Vision Research Foundation, as
many as 15 million people in the United States suffer from
some form of AMD, with more than 1.6 million experiencing
the active blood vessel growth and blood vessel leakage
associated with wet AMD. In addition, AMD Alliance International
reports

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that approximately 200,000 new cases of wet AMD
arise each year in the United States. According to the Centers
for Disease Control and Prevention, or CDC, the rate of AMD
increases sharply with age, from 18% among people
70-74 years of age to 47% among people 85 years and
older. According to the U.S. census bureau, the number of
people in the United States aged 50 or older is approximately
80 million and is expected to increase by approximately 40%
over the next two decades. We expect that this increase in the
number of elderly people will result in a significant increase
in the number of cases of AMD in the United States.


There are two forms of AMD, dry AMD
and wet AMD.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Dry AMD.Dry AMD is
    the most common form, representing approximately 90% of all AMD
    cases. However, dry AMD accounts for only 10% of the severe
    vision loss associated with AMD. Dry AMD is characterized by the
    development of yellow-white deposits under the retina, known as
    drusen, and sometimes the deterioration of the retina, although
    without abnormal blood vessel growth and bleeding. There is no
    generally accepted treatment for dry AMD, although vitamins,
    antioxidants and zinc supplements may slow its progression. Over
    time, dry AMD cases often develop into wet AMD.                                                                                                                                                                                                                                                                                                                                  
|
| |  | Wet AMD.Wet AMD
    represents approximately 10% of all cases of AMD, but is
    responsible for up to 90% of the severe vision loss associated
    with the disease. Wet AMD occurs when new blood vessels from the
    tissue layer in the eye just beneath the retina, called the
    choroid, invade into the retinal layers through a membrane known
    as Bruchs membrane. This abnormal blood vessel growth
    generally is known as angiogenesis and, in the context of wet
    AMD, is called choroidal neovascularization. These new blood
    vessels tend to be fragile and often bleed and leak fluid into
    the macula, resulting in loss of vision. Untreated, this blood
    vessel growth and leakage can lead to scarring and, eventually,
    to the destruction of the macula. The majority of patients with
    wet AMD experience severe vision loss in the affected eye within
    months to two years after diagnosis of the disease.

The following diagram is a detailed cross-section
of the back of the eye as affected by wet AMD.

(WET AGE-RELATED MACULAR DEGENERATION)

The abnormal blood vessel growth of wet AMD can
be located either directly under the area at the center of the
macula, known as the fovea, or away from the fovea. Wet AMD that
occurs directly under the fovea is known as subfoveal wet AMD.
Wet AMD that occurs elsewhere in the macula is known as either
extrafoveal or juxtafoveal wet AMD. The fovea is responsible for
the ability to see fine detail and color. More than 90% of wet
AMD cases are subfoveal.

Subfoveal wet AMD is divided into three principal
subtypes based on the pattern of the abnormal blood vessels, or
lesions, as seen in the retina through an imaging procedure
known as angiography. The classic pattern consists of
well-defined abnormal blood vessels with distinct edges. In the
occult pattern, the edges of

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the abnormal blood vessels are more poorly
demarcated and diffuse. The principal subtypes of subfoveal wet
AMD, based on the patterns of the abnormal blood vessels, are
the following:




| |   |                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Predominantly
    Classic.In the predominantly classic
    subtype, classic blood vessels comprise more than 50% of the
    patients lesion. We estimate that this subtype accounts
    for approximately 25% of the cases of subfoveal wet AMD and
    generally has the most aggressive disease pathology, leading to
    more rapid vision loss than the other subtypes.           
|
| |  | Minimally Classic.In the minimally classic subtype, classic blood vessels comprise
    from 1% to 49% of the patients lesion. We estimate that
    this subtype accounts for approximately 35% of the cases of
    subfoveal wet AMD and generally has a less rapid rate of vision
    loss than the predominantly classic subtype, but a more rapid
    rate than the occult subtype.
|
| |  | Occult.In the
    occult subtype, all of the patients abnormal blood vessels
    are of the occult pattern. We estimate that this subtype
    accounts for approximately 40% of the cases of subfoveal wet AMD
    and generally has a less rapid rate of vision loss.                                                                                                                

We based the foregoing estimates of the
percentages of patients suffering from each subtype on a survey
of ophthalmologists that we conducted. This estimate is also
supported by the enrollment data from our Phase 2/3 pivotal
clinical trials.

In the United States, there is an FDA-approved
therapy only for the predominantly classic subtype of wet AMD.
In the European Union, there is an approved therapy for only the
predominantly classic and occult subtypes. As a result, we
estimate that the approved therapy is only indicated for
approximately 25% of United States patients and 65% of European
patients, thus leaving a significant unmet medical need for the
balance.



| |                       
| | ----------------------
| | Diabetic Macular Edema

DME is a complication of diabetic retinopathy, a
disease affecting the blood vessels of the retina. Diabetic
retinopathy results in multiple abnormalities in the retina,
including retinal thickening, hemorrhages, impeded blood flow,
excessive leakage of fluid from blood vessels and, in the final
stages, abnormal blood vessel growth. This blood vessel growth
can lead to large hemorrhages and severe retinal damage. When
the blood vessel leakage of diabetic retinopathy causes swelling
in the macula, it is referred to as DME. The principal symptom
of DME is a loss of central vision. Risk factors associated with
DME include poorly controlled blood glucose levels, high blood
pressure, abnormal kidney function causing fluid retention, high
cholesterol levels and other general systemic factors.

According to the World Health Organization,
diabetic retinopathy is the leading cause of blindness in
working age adults and a leading cause of vision loss in
diabetics. The American Diabetes Association reports that there
are approximately 18 million diabetics in the United States
and approximately 1.3 million newly diagnosed cases of
diabetes in the United States each year. Prevent Blindness
America and the National Eye Institute estimate that in the
United States there are over 5.3 million people aged 18 or
older with diabetic retinopathy, including approximately 500,000
with DME. The CDC estimates that there are approximately 75,000
new cases of DME in the United States each year.



| |                                                             
| | ------------------------------------------------------------
| | Limitations of Currently Available
    Therapies for Wet AMD

The two therapies currently available for the
treatment of wet AMD are photodynamic therapy and thermal laser
treatment.

Photodynamic
Therapy.Photodynamic therapy involves
the use of a light-activated drug, or photosensitizer, named
Visudyne® to treat wet AMD. The therapy involves a two-step
process in which the drug is administered systemically by
intravenous infusion and then a dose of low energy light is
delivered to the target site to activate the photosensitizer and
destroy the newly grown abnormal blood vessels. Worldwide sales
of Visudyne in 2003 were approximately $357 million.

Visudyne therapy has an important therapeutic
indication limitation in that it is approved in the United
States only for the treatment of the predominantly classic
subtype of subfoveal wet AMD and in the European

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Union only for the treatment of the predominantly
classic and occult subtypes of subfoveal wet AMD. However, in
January 2004, the Centers for Medicare & Medicaid
Services issued a decision stating its intention to expand
reimbursement for Visudyne therapy to include coverage for its
use in the treatment of the minimally classic and occult
subtypes, but only in situations in which the patients
lesions are small (less than 4 disc areas) at the time of
initial treatment or within three months prior to initial
treatment and have shown evidence of progression within the
three months prior to initial treatment. We expect this change
to go into effect on July 1, 2004.


Visudyne therapy also has a number of clinical
shortcomings, including side effects such as photosensitivity
and back pain. In the pivotal clinical trial of Visudyne,
approximately 91% of the patients who received Visudyne for the
treatment of wet AMD experienced a recurrence of the condition
within three months of treatment, necessitating retreatment.
Furthermore, the method of administering this therapy requires
the physician to invest in expensive laser equipment and retain
paramedical personnel to assist in the intravenous infusion of
the photosensitizer.

Thermal Laser
Treatment.Thermal laser treatment,
also known as photocoagulation, for the treatment of wet AMD
entails the use of a high-energy laser to destroy the abnormal
blood vessels that are growing and leaking in the macula. This
is a surgical procedure and is not subject to FDA approval.
Because the lasered portions of the retina are irreversibly
destroyed, thermal laser treatment generally is used only for
the minority of wet AMD patients with the extrafoveal and
juxtafoveal forms of the disease, in which the abnormal blood
vessel growth and vessel leakage occur away from the center of
the macula. Thermal laser treatment is generally not used for
subfoveal wet AMD because of the risk of immediate and permanent
vision loss resulting from the laser burns to the center of the
macula. Approximately 50% of the patients who receive thermal
laser therapy for the treatment of wet AMD experience recurrence
of the condition during the ensuing year as a result of regrowth
of the abnormal blood vessels. In addition, patients treated
with thermal laser therapy frequently experience blind spots,
known as scotomas, as a result of the destruction of the area of
the retina where the treatment is administered.



| |                                                         
| | --------------------------------------------------------
| | Limitations of Currently Available
    Therapies for DME

There is no approved drug therapy for DME in the
United States or the European Union. The current therapies for
the treatment of DME are thermal laser treatment and steroid
treatment administered by physicians on an off-label basis.

Thermal Laser
Treatment.Thermal laser treatment
does not result in an improvement in vision in most patients,
and some patients continue to lose vision. As discussed above,
thermal laser treatment results in focused, localized
destruction of portions of the retina. As a result, patients
treated with this procedure frequently experience scotomas.

Steroid Therapy.Some physicians recently have begun to treat DME on an off-label
basis with injections of corticosteroids into the vitreous, the
jelly-like fluid that fills the back of the eye. This method of
administering drugs to the back of the eye is known as
intravitreal injection. The efficacy of steroid therapy for DME
is unknown. Based on the product labels for steroids and
numerous published studies, we believe that steroid therapy for
DME may have a number of significant side effects that can lead
to loss of vision, including worsening of cataracts and
steroid-induced glaucoma. The steroids typically used for this
treatment are off patent and inexpensive.

Macugen

We are developing Macugen as a novel therapy for
the treatment of wet AMD and DME. Based on research regarding
the pathologies of wet AMD and DME, our knowledge of the
mechanism of action of Macugen and the molecular and clinical
attributes of this product candidate, we believe that Macugen
will overcome many of the limitations of the existing therapies
for wet AMD and DME.

Mechanism of Action.The active pharmaceutical ingredient in Macugen is a chemically
synthesized aptamer that binds to, and inhibits the function of,
VEGF. An aptamer is a single strand of nucleic acid that

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binds with specificity to a particular target,
such as VEGF. VEGF is a protein that has been shown to play an
important role in the abnormal blood vessel growth and blood
vessel leakage associated with wet AMD and the blood vessel
leakage associated with DME. In multiple preclinical studies in
animals, VEGF has been shown to be associated with blood vessel
growth and leakage in the eye. In addition, in numerous animal
species, anti-VEGF agents have inhibited blood vessel formation
and leakage in multiple blood vessel layers of the eye,
including the iris, the retina and the choroid. In substantial
human clinical research, VEGF concentrations in eyes afflicted
with wet AMD or DME were found to correlate with the presence
and severity of these diseases.


The following diagram illustrates how we believe
VEGF is blocked from binding with its natural receptor after
Macugen binds with VEGF.

ANTI-VEGF ACTIVITY OF MACUGEN

Method of
Administration.Macugen is currently
administered by intravitreal injection. Before a physician
administers the injection of Macugen, the patient receives a
pre-injection preparation consisting of a broad-spectrum
antibiotic and/or iodine-based topical anti-bacterial followed
by topical numbing drops and/or a superficial pre-injection of a
local anesthetic to numb the eye. This procedure can be
administered by a skilled clinician and can be completed in a
typical office visit or other outpatient setting. By injecting
this medication into the vitreous, the physician delivers
Macugen directly to the affected eye. Intravitreous injections
are commonly used in many other therapies for eye disorders,
including antibiotic and steroid therapies.

Specificity.In
humans, there are at least five subtypes, or isoforms, of VEGF.
Based on preclinical in vitroand animal studies
that we have conducted, we believe that two of these VEGF
isoforms, isoforms 165 and 121, are present in the eye in
meaningful levels. In these studies, elevated levels of the
animal counterpart of human isoform 165 was required for
abnormal blood vessel growth in the retina. We believe that the
unique shape of the Macugen aptamer allows it to bind to VEGF
isoform 165 with high specificity through a lock and key
type mechanism. In multiple animal models of pathological ocular
vessel growth and leakage, we found that the animal counterpart
of VEGF isoform 165 was specifically increased in animals with
these conditions. In these tests, we also found that Macugen
binding with the animal counterpart of isoform 165 was highly
effective in inhibiting abnormal blood vessel growth in the
retina. Macugen did not bind with the animal counterpart of
isoform 121 to any significant degree. In an animal study
conducted by us involving a direct comparison with a VEGF
inhibitor that blocks all isoforms, Macugen was as effective at
inhibiting abnormal blood vessel growth in the retina as the
other VEGF inhibitor. Conversely, in these tests, Macugen did
not affect the normal vessels of the retina whereas the pan-VEGF
isoform inhibitor altered their growth and survival.

Anti-permeability.VEGF is a very strong inducer of blood vessel permeability. For
example, in animal tests VEGF has been shown to be 50,000 times
more potent than histamine, the molecule commonly associated
with blood vessel leakage related to allergies. Also in animal
tests, it has been shown that VEGF is required for the blood
vessel permeability associated with wet AMD and diabetic
retinopathy. In addition to its anti-angiogenic property of
inhibiting abnormal blood vessel growth, Macugen has been shown
in animal

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tests to inhibit blood vessels from leaking into
the retina. By preventing blood vessel leakage as well as
abnormal blood vessel growth, Macugen offers a potential
two-pronged approach to the treatment of wet AMD. By preventing
blood vessel leakage, Macugen also offers a potential treatment
for DME. In animal models of diabetes-related blood vessel
leakage, the animal counterpart of isoform 165 was specifically
increased in the retina. This is the isoform that is selectively
inhibited by Macugen in animal models.


No Observed
Immunogenecity.Aptamers in general
tend not to trigger adverse immune responses. To date, we have
not observed any meaningful clinical immunologic reactions to
Macugen.

Stability and Attractive Pharmacokinetic
Profile.Macugen is a PEGylated
molecule, which means that a molecule of polyethylene glycol is
attached to the strand of nucleic acid. This PEGylation
increases the half-life of the product, which in turn increases
the time that Macugen actively targets the disease site. This
may allow for less frequent dosing. The unPEGylated Macugen
aptamer also demonstrates high stability under various
temperature and pH levels, which suggests that the aptamer may
be suitable for administration via different delivery methods.

Clinical Development of Macugen

We are conducting two Phase 2/3 pivotal
clinical trials for the use of Macugen in the treatment of wet
AMD and a Phase 2 clinical trial of Macugen for the use of
Macugen in the treatment of DME. We are also conducting or
planning to conduct a number of additional trials of Macugen.
The following table summarizes our material ongoing and planned
clinical trials of Macugen.

|                           |  |            |          |       |  |                   |  |                                      |  |                               |               |           |              |            |              |  |     |  |        |                                              |                |                                               |                |  |  | 
|-------------------------- |  | ---------- | -------- | ----- |  | ----------------- |  | ------------------------------------ |  | ----------------------------- | ------------- | --------- | ------------ | ---------- | ------------ |  | --- |  | ------ | -------------------------------------------- | -------------- | --------------------------------------------- | -------------- |  |  | 
|                           |  |            |          |       |  |                   |  |                                      |  | First Patient                 |               | Number of |              | Enrollment
|Indication                 |  | Trial Name |          | Phase |  | Objectives        |  | Geography                            |  | Enrolled                      |               | Patients  |              | Status    
|                           |  |            |          |       |  |                   |  |                                      |  |                               |               |           |              |           
|AMD                        |  |            | EOP 1003 |       |  | 2/3
    (Pivotal) |  | SafetyDose findingEfficacy           |  | International(including U.S.) |               |           | October 2001 |            |              |  | 612 |  |        | Year one complete;continuation study ongoing
|                           |  |            | EOP 1004 |       |  | 2/3
    (Pivotal) |  | SafetyDose findingEfficacy           |  |                               | North America |           |              |            | August 2001  |  |     |  | 578    |                                              |                | Year one complete; continuation study ongoing
|                           |  |            | EOP 1006 |       |  | 2                 |  | PharmacokineticsSafetyEfficacy       |  |                               | North America |           |              |            | January 2003 |  |     |  | 147    |                                              |                |                                               | Fully enrolled | 
|DME                        |  |            | EOP 1005 |       |  | 2                 |  | Dose findingSafetyProof of concept   |  | International(including U.S.) |               |           | October 2002 |            |              |  | 169 |  |        |                                              | Fully enrolled |                                              
|Retinal Vein
    Occlusion |  |            | EOP 1011 |       |  | 2                 |  | Safety Dose finding Proof of concept |  |                               | North America |           |              |            | 2004         |  |     |  | 50-100 |                                              |                |                                               | Pending        | 



| |                                                 
| | ------------------------------------------------
| | Clinical Trials for the Treatment of Wet
    AMD



| |                                      
| | -------------------------------------
| | Phase 2/3 Pivotal Clinical
    Trials

Trial Design.In the
second half of 2001, we initiated two Phase 2/3 pivotal
clinical trials for the use of Macugen in the treatment of
subfoveal wet AMD. We are conducting one of these trials in
North America and one primarily outside North America. We have
enrolled 578 patients in the North American trial and
612 patients in the international trial. Retinal
specialists at 117 leading medical centers are
participating in these two Phase 2/3 clinical trials.

We designed the enrollment criteria for the
trials to assess the treatment effect of Macugen in a broad
patient population. Both trials enrolled patients with subfoveal
wet AMD of all three lesion subtypes, with a wide range of
lesion sizes and with a variety of other lesion characteristics.
Patients who had previously received subfoveal thermal laser
therapy or who had significant subfoveal scarring or atrophy
were not eligible to participate in the trials.

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Prior to enrollment in the studies, we measured
each patients visual acuity to establish a baseline.
Patients with a broad range of baseline visual acuity were
included in both trials. To qualify for enrollment, the visual
acuity in the patients study eye had to be between 20/40
and 20/320. Visual acuity in the patients other eye had to
be better than or equal to 20/800. In these trials, visual
acuity is measured as the number of letters that the patient can
read on the Early Treatment Diabetic Retinopathy Study, or
ETDRS, eye chart. This is the standard eye chart used in these
types of trials. Five letters on the ETDRS eye chart equates to
one line of visual acuity.

To ensure that uniform criteria were applied in
characterizing patients lesions, we engaged the Wilmer
Technology Assessment Program, part of the Wilmer Eye Institute
at Johns Hopkins University School of Medicine, to review the
angiogram of each patients affected eye. Through the use
of this centralized reading center, we were able to confirm
patient eligibility and properly classify patients by wet AMD
subtype before enrolling them in the study.

In these pivotal trials, we randomly assigned
patients to one of four groups. Three groups were treated with
an intravitreal injection of Macugen. The fourth group served as
the control group and received a sham injection. In the first
54 weeks of the trials, the three treated groups received
different doses of Macugen: 0.3 mg per injection, 1 mg
per injection or 3 mg per injection. To reduce potential
bias, both trials use a double-masked study design so that
neither the patient nor the investigational staff involved with
assessing the vision of the patient knows to which group each
patient belongs. The sham injection included all steps involved
in the intravitreal treatment injections with the exception that
patients in the control group had an empty syringe pressed
against their eye walls without a needle. This procedure mimics
an intravitreal injection and helps to maintain proper masking.
Patients received a treatment every six weeks during the first
54 weeks. At the discretion of the treating physician,
patients with predominantly classic subfoveal wet AMD who were
eligible for photodynamic therapy could receive Visudyne
treatment before enrollment on up to one occasion between 8 and
13 weeks prior to enrollment, at baseline and during the
trials. In this sense, the control group used in these studies
represents usual care and is substantively different from
previously published studies in which control groups did not
receive treatment.

In North America, we are conducting the trials
ourselves. We have engaged a clinical research organization to
conduct the clinical trials in Europe, South America, Australia
and Israel.

First-Year Clinical Trial
Results.Of the 1,208 patients
who were enrolled in these trials, the 1,186 patients who
received at least one injection and were tested for changes in
visual acuity constituted the intent-to-treat population for
purposes of analysis of efficacy data. The two trials are
scheduled to continue for 154 weeks. However, the primary
efficacy endpoint was based on this intent-to-treat patient
population at 54 weeks. The following table describes the
combined safety patient populations from the two trials.

|                                             |                       |              |       |         |  |  |       |      | 
|-------------------------------------------- | --------------------- | ------------ | ----- | ------- |  |  | ----- | ---- | 
|                                             |                       | Treated with |       |        
|                                             |                       | Macugen      |       | Control
|                                             |                       |              |       |        
|Number of patients                           |                       |              | 892   |         |  |  | 298   |     
|Male/ Female (%)                             |                       |              | 42/58 |         |  |  | 40/60 |     
|Average age at baseline                      |                       |              | 76.0  |         |  |  | 75.7  |     
|Mean baseline visual acuity score (letters): |                       |              |       |         |  |  |       |     
|                                             | Treated eye           |              |       | 51.5    |  |  |       | 52.7 | 
|                                             | Non-treated eye       |              |       | 55.6    |  |  |       | 57.1 | 
|Wet AMD subtype (%):                         |                       |              |       |         |  |  |       |     
|                                             | Predominantly classic |              |       | 26.0    |  |  |       | 26.0 | 
|                                             | Minimally classic     |              |       | 36.0    |  |  |       | 34.0 | 
|                                             | Occult                |              |       | 38.0    |  |  |       | 40.0 | 

Patient characteristics such as gender, age and
baseline vision were balanced across the treatment and control
groups. Patients also were randomized to establish balanced
representation of each subtype of subfoveal wet AMD across the
treatment and control groups.

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There was a high compliance rate in the first
54 weeks of these trials. For the patients who received at
least one study treatment, the combined average number of
treatments for trial participants was approximately 8.5 out of 9
possible treatments. Further, the completion rate across both
trials was also high, with over 90% of all patients remaining in
the trials for the full 54 weeks.

Primary Efficacy
Endpoint.The primary efficacy
endpoint in these trials was the proportion of patients losing
less than 15 letters, or three lines, of visual acuity on the
ETDRS eye chart from baseline after 54 weeks. This is the
same primary clinical endpoint that was used in the pivotal
clinical trials for Visudyne. We discussed our trial protocols
and statistical analysis plan with the FDA prior to unmasking
the data.

Based on our analysis of the data from the
combined patient populations of both trials, the primary
efficacy endpoint was met with statistical significance for all
three doses of Macugen. In connection with our analysis of the
combined patient data, we determined statistical significance
based on a widely used, conventional statistical method that
establishes the p-value of clinical results. Under this method,
a p-value of 0.05 or less represents statistical significance.
The following table summarizes the combined trial results.

|               |  |                      |  |            |  |        
|-------------- |  | -------------------- |  | ---------- |  | -------
|               |  |                      |  |           
|               |  | Patients Losing Less |  |           
|               |  | Than 15 Letters      |  |           
|               |  |                      |  |           
|Dose           |  | Individuals          |  | Percentage |  | p-value
|               |  |                      |  |            |  |        
|0.3 mg Macugen |  | 206/294              |  | 70%        |  | 0.0001 
|1 mg Macugen   |  | 213/300              |  | 71%        |  | 0.0003 
|3 mg Macugen   |  | 193/296              |  | 65%        |  | 0.0310 
|Control        |  | 164/296              |  | 55%        |  |       

Based on the data from the combined patient
populations of both trials, the 0.3 mg dose of Macugen was
the lowest effective dose of the three doses tested. On a
combined basis, 70% of the patients treated with the 0.3 mg
dose of Macugen lost fewer than 15 letters of visual acuity at
54 weeks compared to 55% of the patients in the usual care
control group, resulting in a relative difference of 27% between
the treated and the control groups. This result had a p-value of
0.0001. In addition, based on our preliminary analysis of the
safety data from these trials, each of the three dose levels
tested in the trials appears to have a favorable safety profile.
To address statistical and other regulatory requirements, we
plan to seek approval for the 0.3 mg dose of Macugen in our
NDA for wet AMD.

To qualify for FDA approval, a drug candidate
typically has to demonstrate a clinically relevant treatment
effect with statistical significance in replicate trials.
Moreover, when multiple doses of a drug are tested against a
single control group, a more stringent statistical method that
accounts for multiple comparisons must be applied. For this
purpose, we used the Hochberg multiple comparison procedure.
Under the Hochberg procedure, in order to demonstrate
statistical significance for any particular dose, it is
necessary to establish a p-value that meets a stricter standard
than the conventional standard of a p-value of 0.05 or less. We
designed our two separate, but substantially identical, North
American and international clinical trials to meet these
regulatory requirements. For the 0.3 mg Macugen dose, the
primary clinical endpoint was achieved with statistical
significance in both the North American and international trials
using the more stringent Hochberg statistical methodology. The
p-value was 0.003 in the North American trial and 0.011 in the
international trial.

Efficacy Across All Wet AMD
Subtypes.The combined data from the
two trials demonstrate that the treatment effect of Macugen is
consistent across all three subtypes of subfoveal wet AMD with
respect to both mean vision loss and prevention of three line
loss. To assess the consistency in treatment effect across
lesion subtypes, we performed an analysis known as the
Breslow-Day test. The analysis showed no evidence of interaction
between wet AMD subtypes and Macugen treatment effect,
demonstrating that the results for any single lesion subtype did
not disproportionately contribute to the overall efficacy
observed in the trials and that the treatment effect of Macugen
is consistent across all subtypes. Accordingly, in our NDA
filing, we and Pfizer have jointly agreed to seek approval for
the use of the 0.3 mg dose of Macugen in the treatment of
patients with all three subtypes of subfoveal wet AMD. Moreover,
the following chart depicts for the combined patient populations
of both trials the mean change in visual acuity by subtype for
patients treated

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with the 0.3 mg dose of Macugen and for
patients in the control group. The mean change in visual acuity
is expressed as the average number of letters lost by patients
with each wet AMD subtype.


(MEAN VISUAL ACUITY LOSS BAR GRAPH)

Secondary Endpoints and Other Clinical
Observations.In addition to the
primary endpoint data described above, we analyzed the results
from the combined populations of patients from both trials
treated with the 0.3 mg dose of Macugen to assess the
degree, rate and durability of change in visual acuity compared
to the combined control group populations.

To assess the degree of change in visual acuity,
one of the secondary endpoints measured the proportion of
patients whose visual acuity remained at baseline or improved
over the 54-week trial period, and a second measured the
proportion of patients whose visual acuity improved by 15 or
more letters, or three or more lines, over the 54-week trial
period. Although not prospectively specified in the trial
protocols as secondary endpoints, we also assessed the
proportion of patients who gained one or more lines of visual
acuity over the 54-week trial period, the proportion of patients
who gained two or more lines of visual acuity over the 54-week
trial period and the proportion of patients who experienced
severe loss of vision, defined as a loss of 30 or more letters,
or six or more lines, of visual acuity over the 54-week trial
period. The following table summarizes the combined results from
both trials as to these secondary endpoints and additional
analyses.

|                                  |                         |                        |  |         |   |         |  |    |   |  |  |        | 
|--------------------------------- | ----------------------- | ---------------------- |  | ------- | - | ------- |  | -- | - |  |  | ------ | 
|                                  |                         |                        |  |        
|                                  |                         | Proportion of Patients |  |        
|                                  |                         |                        |  |        
|                                  |                         | Macugen 0.3 mg         |  | Control |   | p-value
|                                  |                         |                        |  |         |   |        
|Maintenance of or gain in vision: |                         |                        |  |         |   |         |  |    |   |  |  |       
|                                  | 30 line vision
    gain |                        |  | 33      | % |         |  | 23 | % |  |  | 0.0032 | 
|Gain in vision:                   |                         |                        |  |         |   |         |  |    |   |  |  |       
|                                  | 31 line vision
    gain |                        |  | 22      | % |         |  | 12 | % |  |  | 0.0043 | 
|                                  | 32 line vision
    gain |                        |  | 11      | % |         |  | 6  | % |  |  | 0.0239 | 
|                                  | 33 line vision
    gain |                        |  | 6       | % |         |  | 2  | % |  |  | 0.0401 | 
|Severe loss of vision:            |                         |                        |  |         |   |         |  |    |   |  |  |       
|                                  | 36 line vision
    loss |                        |  | 10      | % |         |  | 22 | % |  |  | 0.0001 | 

All observations of the combined trial results
summarized in the above table were statistically significant
using the conventional p-value method, including the results
from the two pre-specified secondary endpoints.

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Additional secondary endpoints measured the rate
and sustainability of Macugens clinical effect.
Specifically, these endpoints compared the mean change in visual
acuity after 6, 12 and 54 weeks between the combined
populations from both trials receiving the 0.3 mg dose of
Macugen and the combined populations from both trials in the
control group. The following table summarizes the data for these
secondary endpoints.

|                   |  |                       |      |         |  |         |       |   |  |  |        | 
|------------------ |  | --------------------- | ---- | ------- |  | ------- | ----- | - |  |  | ------ | 
|                   |  |                       |      |        
|                   |  | Mean Change in Visual |      |        
|                   |  | Acuity (Letters)      |      |        
|                   |  |                       |      |        
|Observation Period |  | Macugen 0.3 mg        |      | Control |  | p-value
|                   |  |                       |      |         |  |        
|6 weeks            |  |                       | (1.5 | )       |  |         | (4.0  | ) |  |  | 0.0069 | 
|12 weeks           |  |                       | (3.2 | )       |  |         | (6.3  | ) |  |  | 0.0037 | 
|54 weeks           |  |                       | (8.0 | )       |  |         | (15.0 | ) |  |  | 0.0000 | 

These data suggest that the onset of clinical
benefit for patients with wet AMD may be observed as early as
six weeks after initial treatment. At 54 weeks, the
combined population of patients from both trials receiving the
0.3 mg dose of Macugen on average continued to lose fewer
letters of vision than patients in the combined control group.

Analysis of the data suggests that the overall
efficacy is independent of lesion size and patient age.
Specifically, statistical interaction tests indicate that
efficacy is similar in small and large lesions as well as in
younger and older patients. For these tests, small lesions were
those of less than four disc areas, whereas large lesions were
those of four or more disc areas, and younger patients were
those less than 75 years of age, whereas older patients
were those of 75 years of age or more.

Visudyne Use During the
Trials.We did not design the trials
to investigate the efficacy of Macugen treatment combined with
photodynamic therapy using Visudyne. However, patients with a
history of up to one prior administration of photodynamic
therapy using Visudyne between 8 and 13 weeks before their
first study visit were eligible for enrollment in our trials.
Also, patients with predominantly classic subfoveal wet AMD at
baseline who were eligible for Visudyne treatment could receive
such treatment at baseline and during the studies at the
discretion of the treating physician. Only 26% of all enrolled
patients in the combined trials were eligible for Visudyne
treatment at the beginning of the study. Of the 26% eligible,
only 65% actually received Visudyne treatment at any time. In
addition, a small number of patients originally classified as
minimally classic or occult converted to the predominantly
classic subtype and received Visudyne. Overall, 75% of the
patients in the trials did not receive any Visudyne treatment.
Excluding those patients that received Visudyne treatment prior
to study enrollment, investigators administered Visudyne
treatment to approximately 50% more patients in the control
group than in the Macugen 0.3 mg group. Overall, 24% more
patients in the control group than in the Macugen 0.3 mg
group received photodynamic therapy at any time, whether prior
to, at or after baseline. The 0.3 mg dose of Macugen
demonstrated a statistically significant, clinically relevant
treatment benefit relative to control despite this higher rate
of Visudyne usage in the control group. Therefore, we believe
that the results of treatment with the 0.3 mg dose of
Macugen are independent of Visudyne usage.

Safety.In the first
year of the trials, Macugen was well-tolerated at all three
doses. Our preliminary assessment of adverse event data
indicates that there is no apparent increased risk of systemic
adverse events to patients as a result of the use of Macugen.
Few patients in either the treated or control groups
discontinued their participation in the trials as a result of
adverse events. Injection-related serious adverse events were
low in number and included endophthalmitis, which is an
infection of the eye, retinal detachment and physician-induced,
or iatrogenic, traumatic cataract. During the first year of the
trial, there were 12 cases of endophthalmitis reported,
representing an incidence of 0.16% per injection or
1.3% per patient over the first year of treatment, five
cases of retinal detachment reported, representing an incidence
of 0.07% per injection or 0.6% per patient over the
first year of treatment, and five cases of traumatic cataract,
representing an incidence of 0.07% per injection or
0.6% per patient over the first year of treatment. Of the
five cases of retinal detachment, two were exudative in nature
and likely attributable to the underlying disease and three were
due to a tear or hole in the retina, known as rhegmatogenous,
and may be attributable to the injection procedure. Only four of
the patients who developed endophthalmitis experienced vision
loss of 15 or more letters at week 54 compared to their vision
prior to the event. Only one patient who developed
endophthalmitis experienced severe vision loss of six or more
lines, which represents approximately 0.1% of the patients
treated with

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Macugen in the trials. The incidence of these
injection-related adverse events is well within what we believe
to be the tolerable limits for a drug that is administered by
intravitreal injection. There was no evidence of drug-associated
cataract or persistently elevated intraocular pressure or
glaucoma in patients in the trials. Furthermore, the percentage
of reported deaths was similar in the treated and control
groups. We believe that the observed death rates and the serious
adverse event profiles are consistent with those of the general
population of patients with demographic characteristics similar
to those of patients in the trials. Side effects from clinical
and preclinical trials of other VEGF inhibitors have included
hypertension, thromboembolic events, bleeding and proteinuria.
None of these side effects was noted to have been associated
with the use of Macugen in our trials.


Second and Third Year of the
Trials.Because of the role of the
aging process in wet AMD, we believe that there is a significant
possibility that the disease will recur following the initial
one-year course of Macugen treatment and, therefore, that some
patients may require Macugen treatment for more than one year.
We are treating patients in a second year extension protocol of
our Phase 2/3 pivotal clinical trials to determine whether
continued therapy with Macugen provides additional benefits and
acceptable safety. We recently added a third year of follow up
to the trials in order to better characterize the long-term
safety of Macugen.



| |                     
| | --------------------
| | Phase 1 and 2 Trials

We completed a Phase 1 and two Phase 2
clinical trials for the use of Macugen in the treatment of wet
AMD prior to June 2001. These trials included patients with all
three subtypes of subfoveal wet AMD. The primary purpose of
these trials was to test for product safety. In each of the
three trials, Macugen was well tolerated, and there were no
serious adverse events determined by the clinical trial
investigators as related to the drug. Although these trials were
conducted on a relatively small number of patients and there
were no randomized controls or long-term patient follow up, we
observed encouraging effects of the drug on trial participants.

In the Phase 1 trial, 15 patients
received escalating doses of Macugen one time via an
intravitreal injection in the affected eye. The patients were
distributed into five groups of three patients. Each group
received a different dose of Macugen. In this trial, 80% of the
patients showed stabilized or improved vision at the end of the
three-month period following the injection. For purposes of this
trial and our two Phase 2 trials described below, we
defined stabilized vision as no loss of, or an increase in,
letters of visual acuity on the ETDRS eye chart. Approximately
27% of the patients in this trial showed the ability to read 15
or more additional letters on the ETDRS eye chart at the end of
the three-month period.

In the first Phase 2 trial, 10 patients
received Macugen via an intravitreal injection in the affected
eye once a month for three months. Eight of the treated patients
were tested at the end of the three-month period, with
approximately 88% of the tested group showing stabilized or
improved vision and 25% showing the ability to read 15 or more
additional letters on the ETDRS eye chart at the end of the
three-month period.

In the second Phase 2 trial,
11 patients received Macugen via intravitreal injection in
the affected eye once a month for three months. This trial
consisted solely of patients with the predominantly classic form
of subfoveal wet AMD who were also receiving photodynamic
therapy with Visudyne. Ten of the treated patients were tested
at the end of the three-month period, with 90% of the tested
group showing stabilized or improved vision and 60% showing the
ability to read 15 or more additional letters on the ETDRS
eye chart at the end of the three-month period.



| |                              
| | -----------------------------
| | Phase 2 Pharmacokinetic Study

In January 2003, we began a Phase 2 clinical
trial designed to obtain additional pharmacokinetic data from
the use of Macugen in the treatment of wet AMD. The
147 patients enrolled in this trial each receive one year
of treatment. Treatment occurs every six weeks. Entry criteria
for this trial were similar to those for our Phase 2/3
pivotal clinical trials. We conduct extensive blood sampling for
pharmacokinetic data for each patient on two occasions during
the trial. Safety and efficacy are secondary endpoints of the
trial.

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| |                                                     
| | ----------------------------------------------------
| | Phase 2 Clinical Trials for the
    Treatment of DME

We have completed a Phase 2 clinical trial
for the use of Macugen in the treatment of DME. Two clinical
centers enrolled 10 patients with DME. Patients were
administered an intravitreal injection in the affected eye once
a month for three months. As in the wet AMD Phase 1 and 2
studies, the therapy was well tolerated, and there were no
serious adverse events determined by the clinical trial
investigators as related to the drug or its administration.

We completed enrollment of 169 patients in a
Phase 2 clinical trial for the use of Macugen in the
treatment of DME in July 2003. The patients enrolled in this
study were required to have been eligible for laser therapy for
DME. In this randomized, double-masked placebo controlled trial,
patients receive varying doses of Macugen via intravitreal
injection every six weeks for at least 12 weeks and, at the
discretion of the investigators, for up to 30 weeks. The
endpoints for this trial are retinal thickness, visual acuity
and the need for laser treatment at 36 weeks after
commencement of Macugen treatment. We expect to complete this
trial in June 2004.



| |                                         
| | ----------------------------------------
| | Planned Retinal Vein Occlusion
    Trial

In 2004, we plan to commence a Phase 2
clinical trial designed to test the efficacy and safety of
Macugen for the treatment of retinal vein occlusion, a condition
that is characterized by high VEGF levels, abnormal blood vessel
growth and blood vessel leakage. Retinal vein occlusion occurs
when the circulation of a retinal vein becomes obstructed,
causing blood vessel bleeding and leakage in the retina. Laser
therapy is sometimes used to treat this condition, but with
limited efficacy. We intend to enroll between 50 and
100 patients and plan to treat these patients for at least
12 to 30 weeks. We expect the endpoints to include change
in retinal thickness and change in visual acuity.

Collaboration with Pfizer



| |        
| | -------
| | Macugen

In December 2002, we entered into collaboration,
license and related agreements with Pfizer to develop,
manufacture and commercialize Macugen for the prevention and
treatment of diseases of the eye and related conditions. Under
the terms of the agreements:



| |   |                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Upon effectiveness of the collaboration
    arrangements in February 2003, Pfizer paid us $100 million,
    consisting of a $75 million initial license fee and a
    $25 million equity investment;                                                         
|
| |  | Pfizer purchased an additional $10 million
    of our common stock at the closing of our initial public
    offering in February 2004;                                                                                                                       
|
| |  | Pfizer is obligated to purchase up to an
    additional $15 million of our common stock in specified
    circumstances;                                                                                                                                      
|
| |  | Pfizer will co-promote Macugen with us in the
    United States and will share with us in profits and losses from
    the commercialization of Macugen in the United States, with our
    having the right to book all United States product sales;          
|
| |  | Pfizer will commercialize Macugen outside the
    United States pursuant to an exclusive license and pay us a
    royalty on net sales;                                                                                                                      
|
| |  | Pfizer will generally fund a majority of the
    ongoing development costs incurred pursuant to an agreed
    development plan covering the development of Macugen for AMD,
    DME, retinal vein occlusion and other agreed upon ophthalmic
    indications;
|
| |  | Pfizer is potentially obligated to pay us up to
    $195.5 million in milestone payments based on the
    achievement of worldwide regulatory submissions and
    approvals; and                                                                             
|
| |  | Pfizer is potentially obligated to pay us up to
    $450 million in milestone payments based upon attainment of
    agreed upon sales levels of Macugen.                                                                                                     

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Under the agreements, the parties sharing
of profits and losses from the commercialization of Macugen in
the United States extends until the later of 15 years after
commercial launch in the United States and the expiration of the
United States patent rights licensed to Pfizer. The payment of
royalties to us by Pfizer based on net sales of Macugen outside
the United States extends, on a country-by-country basis, until
the later of 15 years after commercial launch and the
expiration of the patent rights licensed to Pfizer in each
particular country. The royalty rate on net sales of Macugen
outside the United States is reduced on a country-by-country
basis to the extent that the patent rights in a particular
country expire or a generic form of Macugen is marketed in that
country. The United States patent rights licensed by us to
Pfizer expire between 2010 and 2017. The corresponding foreign
rights include patents that expire between 2011 and 2017 and
patent applications which, if issued as patents, are expected to
expire between 2011 and 2020. Pfizer may terminate the
collaboration relationship without cause upon six to twelve
months prior notice, depending on when such notice is
given. Either party may terminate the collaboration relationship
based upon material uncured breaches by the other party. In
addition, we may terminate the collaboration relationship if,
during specified periods, net sales of Macugen do not reach
specified levels. If we elect to terminate the collaboration in
this situation, we would be required to pay royalties to Pfizer
based on net sales of Macugen following such termination.

The collaboration is governed by a joint
operating committee, consisting of an equal number of
representatives of us and Pfizer. There are also subcommittees
with equal representation from both parties that have
responsibility over development and regulatory, manufacturing
and commercialization matters. In the case of unresolved
disagreement, ultimate decision-making authority is vested in us
as to some matters and in Pfizer as to other matters. A third
category of decisions requires the approval of both us and
Pfizer. Outside the United States, ultimate decision-making
authority as to most matters is vested in Pfizer.



| |        
| | -------
| | Xalatan

In connection with the Macugen collaboration, we
entered into an agreement with Pfizer under which our sales
force is entitled to participate in selling activities, or
detailing, Pfizers Xalatan glaucoma product on a
nonexclusive basis in the United States. Xalatan is a once-a-day
prescription eye drop marketed by Pfizer as a primary, or first
line, therapy for glaucoma, an eye disease that is associated
with the degeneration of the retinal cells responsible for
transmitting images from the eye to the brain.

Under this agreement, Pfizer is obligated to pay
us a per detail fee for our details to general ophthalmologists
and a percentage of incremental net revenues that are above a
baseline threshold for our details to retinal specialists. We
expect that our sales activities will commence three to six
months prior to our planned commercial launch of Macugen and
will continue for a period of three years after we start
detailing Xalatan. The agreement automatically terminates upon a
termination of the Macugen collaboration or upon Pfizers
sale, assignment, exclusive license or other disposition of the
Xalatan product. In addition, we may terminate the agreement
upon four months prior notice. Either party may terminate
the agreement based upon material uncured breaches by the other
party.

By participating in the detailing of Xalatan, we
expect that our domestic sales force will be able to access and
form relationships with retinal specialists and general
ophthalmologists prior to commercial launch of Macugen. We view
the Xalatan agreement as primarily a strategic arrangement and
anticipate only a modest economic impact.

Pipeline Initiatives

In order to expand our pipeline of products to
treat diseases of the eye with unmet medical need, we are
actively pursuing a strategy to develop new drugs internally and
to license or otherwise acquire rights to potential new drugs
from third parties. We are also seeking to develop internally
and acquire rights to alternative mechanisms for delivering
ophthalmic drugs to the back of the eye.

We conduct our internal research and development
activities at our Eyetech Research Center located in Woburn,
Massachusetts. We had 41 employees at this facility,
including a total of 18 employees who hold M.D. or Ph.D.
degrees as of March 1, 2004. We are conducting research
into the causes of AMD and diabetic

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##### Table of Contents



retinopathy as well as novel methods of drug
delivery to the back of the eye. We also are investigating the
use of Macugen for non-ophthalmic indications. We have developed
proprietary models that accelerate the study of disease
processes and the identification and validation of attractive
molecular targets for ophthalmic drug development. We have also
developed tools for studying the basic disease processes
involved in the degeneration of retinal cells associated with
glaucoma.


Our current pipeline initiatives include the
following:



| |                                                  
| | -------------------------------------------------
| | Additional Ophthalmic Indications for
    Macugen

In addition to wet AMD, DME and retinal vein
occlusion, there are a number of ophthalmic conditions with
unmet medical need for which the VEGF inhibition of Macugen may
prove beneficial. We are conducting preclinical animal tests to
assess the potential therapeutic benefit of Macugen for the
treatment of the following indications:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | High risk dry AMD, in which the
    patient is at risk of developing wet AMD more rapidly than other
    dry AMD patients. It is possible to identify this form of dry
    AMD through a routine eye examination. We believe that these
    high risk patients may benefit from treatment with Macugen to
    control the progression of high risk dry AMD to wet AMD.                                                                                                                   
|
| |  | Proliferative diabetic retinopathy, the most
    severe stage of diabetic retinopathy. The disease is
    characterized by angiogenesis and blood vessel leakage. The new
    vessels frequently bleed and damage the retina. Although laser
    therapy is effective at lowering the rate of blindness
    associated with the disease, the destruction of the retina
    resulting from the treatment leads to adverse side effects,
    including night blindness and visual field loss.
|
| |  | Uveitis, an inflammatory condition of the eye
    that often leads to macular edema. The swelling is largely a
    function of increased blood vessel leakage. Steroids are
    effective in some cases as a treatment for this condition,
    although their use is often complicated by the formation of
    cataracts and glaucoma.                                                                                                                                                     
|
| |  | Cystoid macular edema following cataract surgery,
    a condition that results from the inflammation caused by
    surgery. Steroid treatment is effective in some patients, but
    carries the risk of cataracts and glaucoma.                                                                                                                                                                                                                                                           
|
| |  | Myopic macular degeneration, a condition in which
    a patient with a high degree of nearsightedness develops
    choroidal neovascularization. The blood vessel growth and
    leakage in this condition closely mirrors that seen in wet AMD.                                                                                                                                                                                                                                           
|
| |  | Inflammatory macular degeneration, a condition in
    which a patient with inflammation in the macular area from
    infections or other causes develops choroidal
    neovascularization. The blood vessel growth and leakage in this
    condition is similar to that seen in wet AMD.                                                                                                                                                                                                   
|
| |  | Iris neovascularization, a serious complication
    of diabetic retinopathy or retinal vein occlusion involving new
    blood vessel growth on the surface of the colored part of the
    eye, or iris. This process leads to an intractable type of
    glaucoma that often leads to blindness. Animal testing has
    revealed that this process requires VEGF.                                                                                                                          



| |                                    
| | -----------------------------------
| | Alternate Delivery
    Technologies

We believe that technologies for the long-term
administration of drugs to the back of the eye which are more
convenient for physicians and patients than existing methods may
expand the potential markets for Macugen and other ophthalmic
therapies. We are working to develop alternative, more
convenient long-term drug delivery technologies. In particular,
we are developing a number of alternative delivery methods and
are testing them in preclinical tests. The approaches that we
are exploring include alternative drug formulations that may
permit less frequent administration of Macugen.

17



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| |                       
| | ----------------------
| | Other Ophthalmic Drugs

Through our research activities, we are seeking
to develop other novel drugs to treat other ophthalmic diseases,
including drugs that may enhance the efficacy of Macugen. We
have identified distinct molecular targets in addition to VEGF
that we believe are attractive sites for pharmaceutical
intervention to treat ophthalmic blood vessel disease. One of
these targets is involved in the formation of new blood vessels
through a process that is independent of the activity of VEGF. A
second target affects blood borne cells involved in the
formation of new vessels and abnormal vessel leakage. This
second target also plays a role in the development and
progression of diabetic retinopathy. In animal studies, the
second target was operative at all stages of diabetic
retinopathy and the inhibition of this target both prevented and
reversed diabetic retinopathy. Human correlative data also
support the role of this target in human diabetic retinopathy.

We are directing our research at developing drugs
against these and other targets that can be used either alone or
in combination with Macugen therapy for the treatment of eye
diseases. We are also seeking opportunities to license or
develop drug candidates that address these and other targets.



| |                                                      
| | -----------------------------------------------------
| | Additional Non-Ophthalmic Indications for
    Macugen

VEGF appears to play a pivotal role in several
non-ophthalmic diseases, including cancer and psoriasis. We are
using our preclinical expertise to research the potential
application of Macugen to these diseases. Because these diseases
are outside of our core expertise in ophthalmology and are not
part of our collaboration with Pfizer, we expect to pursue
collaboration or out-licensing opportunities if our research
suggests that Macugen is a promising therapy.

Cancer.Solid tumors
and their metastases rely on new blood vessel growth for their
survival. VEGF has been extensively validated in numerous
preclinical trials as a drug target for the treatment of some
types of cancers. In addition, Genentech Inc. recently received
FDA approval of its drug candidate AvastinTM,
validating VEGF as a drug target for renal cancer and colon
cancer. In light of the stability of the unPEGylated Macugen
aptamer, we believe that we may be able to formulate novel
locally administered, sustained release versions of Macugen for
use in the treatment of some types of solid tumors. We expect
that these formulations would be used at the time of cancer
surgery to provide therapy directly at the site of the disease.
We believe that these Macugen formulations might possess
advantages over intravenously administered drugs. For example, a
locally administered formulation of Macugen might be able to
access some types of brain tumors that are not accessible to
anti-VEGF drugs administered intravenously.

Psoriasis.Psoriasis
is a chronic inflammatory skin condition that causes skin cells
to grow too quickly, resulting in thick white or red patches of
skin. It represents a significant underserved medical need.
Preclinical and clinical data suggest that VEGF-induced blood
vessel growth and blood vessel leakage play a role in the
development of this condition. We are researching novel topical
formulations of Macugen for the treatment of psoriasis. We
believe that the ability to treat psoriasis in this manner might
prove to be superior to or synergistic with medications that are
delivered intravenously.

Sales and Marketing

We currently have limited sales and marketing
capabilities and no distribution capabilities. However, we are
building our sales and marketing organization and will rely on
Pfizer for distribution of Macugen if approved. We have
recruited a Chief Operating Officer, a Senior Vice President of
Marketing and Sales and other senior personnel with significant
experience in sales and marketing roles at large pharmaceutical
companies. Our plan is to develop our own specialized domestic
sales and marketing infrastructure to commercialize Macugen and
other ophthalmic products that we acquire or develop in the
future and to participate with Pfizer in selling Xalatan. We are
beginning to recruit our domestic ophthalmic sales force and
expect to begin participating in detailing Xalatan three to six
months prior to our planned commercial launch of Macugen. By
participating in the detailing of Xalatan, we expect that our
domestic sales force will be able to access and form
relationships with retinal specialists and general
ophthalmologists prior to commercial launch of Macugen.

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We expect to focus our sales and marketing
efforts on retinal specialists. The ophthalmic medical community
in the United States is relatively small. We estimate that there
are approximately 1,400 identifiable retinal specialists in
the United States who perform most of the medical procedures
involving back of the eye diseases. Because of the small size of
our target provider audience in the United States, we believe
that we can best serve this market through a dedicated specialty
sales force of approximately 50 sales specialists. Under
our United States copromotion arrangement with Pfizer for
Macugen, our domestic sales force will have primary
responsibility for promoting and detailing Macugen to retinal
specialists, and Pfizer will have primary responsibility for
promoting Macugen to general ophthalmologists.

Outside the United States, we currently plan to
market and sell our products that receive regulatory approval
through established industry participants. However, we may
determine to establish our own sales and marketing organization
in key markets, including the European Union. We have granted
Pfizer exclusive commercialization rights with respect to
Macugen outside the United States.

We expect to distribute Macugen in the United
States through Pfizers distribution system. Under this
arrangement, the manufacturers of the drug product would ship
the product to Pfizers distribution warehouses, and Pfizer
would perform order entry, customer service and accounts
receivable collection services on our behalf on a contract
basis. It is possible that we will develop the capabilities in
the future to perform these services on our own behalf.

Manufacturing

We currently have limited experience in, and we
do not own facilities for, manufacturing any products. Although
we intend to rely on contract manufacturers to produce our
products, we have recruited personnel with manufacturing
experience to oversee the production of Macugen and future
products that we may develop.

The manufacturing process of the active
pharmaceutical ingredient of Macugen consists of chemical
synthesis of the oligonucleotide, purification, PEGylation,
further purification and finally freeze drying to form a powder.
Each of these steps involves a relatively common chemical
engineering process. The chemical synthesis uses conventional
synthetic techniques for this type of molecule. The components
of the active pharmaceutical ingredient are generally available
from a number of suppliers. However, we rely on a single source
of supply for the PEGylation reagent.

In order to obtain marketing approval for
Macugen, we will be required to consistently produce the active
pharmaceutical ingredient used in Macugen in commercial
quantities and of specified quality on a repeated basis and
document our ability to do so. This is referred to as process
validation. We have not yet satisfied this process validation
requirement, and if we are unable to do so, our business will be
materially adversely affected.

For our clinical trials of Macugen, we engaged a
third party manufacturer to manufacture the active
pharmaceutical ingredient used in Macugen. In November 2003, we
entered into an agreement with Raylo Chemicals Inc. for the
commercial manufacture and supply of the active pharmaceutical
ingredient. Raylo is an affiliate of the third party that
manufactured our clinical supply. Under the terms of our
agreement with Raylo, we are obligated to purchase all of our
requirements for the active pharmaceutical ingredient from Raylo
through 2005 and to purchase minimum specified percentages of
our requirements for the active pharmaceutical ingredient
thereafter. We are required to provide Raylo with binding
forecasts of our orders for each calendar quarter at least two
months prior to the commencement of the calendar quarter. Raylo
is obligated to timely satisfy our orders up to 100% of our
binding forecasts and to use its best efforts to satisfy our
orders in excess of these binding forecasts. We have agreed to
pay Raylo a minimum monthly fee of approximately
$0.6 million until the manufacturing process is validated
or our manufacturing relationship is terminated. Following the
validation of Raylos manufacturing process, the purchase
price for the active pharmaceutical ingredient will be
calculated on a cost-based formula that adjusts over time
depending on a variety of factors. We are also required to
reimburse Raylo for royalties payable to a third party for
intellectual property related to the manufacturing process. The
initial term of the agreement is five years. We have the right
to extend the agreement, at our option, for up to an additional
six years. We have the right to terminate

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the agreement if Raylo fails to supply at price
levels that are as low as those available to us from an
alternative supplier after December 31, 2005, if we abandon
our efforts to commercialize Macugen, if validation of
Raylos manufacturing process has not occurred on or before
January 1, 2005, if Raylo is not able to meet specified
legal and regulatory requirements or if a change in control of
Raylo occurs. In addition, either party may terminate the
agreement if the other party materially breaches the agreement
and fails to cure the breach or in the event of the bankruptcy,
liquidation or insolvency of the other party.


Raylo plans to produce commercial quantities of
Macugen at a different site than the site used by its affiliate
to manufacture the active pharmaceutical ingredient for clinical
trial use. We and Raylo have completed the relevant
manufacturing technology transfer to the new site. However,
because of this change of site, the FDA is requiring us to
perform analytical tests to demonstrate that changing the
manufacturing location has not affected the characteristics of
the product. If we cannot establish that the products are
equivalent to the satisfaction of the FDA, we may be delayed in
obtaining, or may by unable to obtain, approval to launch
Macugen.

For our clinical supply of Macugen, we also
engaged Gilead as a separate fill and finish manufacturer to
formulate the active pharmaceutical ingredient from a powder
into a solution and to fill the solution into syringes. In
December 2003, we entered into an agreement with Gilead to
provide fill and finish services for the commercial supply of
Macugen. Under the terms of the agreement, we are obligated to
purchase all of our requirements for these fill and finish
services from Gilead through the first anniversary of the
commercial launch of Macugen in the United States and to
purchase minimum specified percentages of our requirements
through the third anniversary of the commercial launch of
Macugen in the United States. The purchase price for the fill
and finish services is based on fixed batch and per-unit charges
that vary depending on annual order volumes and additional costs
that depend on costs of materials procured from third parties
and Gileads costs of providing specified ancillary
services not covered by the fixed batch and per-unit charges.
The term of the agreement runs through the third anniversary of
the commercial launch of Macugen in the United States. We have
the right to terminate the agreement if we abandon our efforts
to develop and commercialize Macugen, if Gilead fails to achieve
specified order fulfillment requirements or is unable to
manufacture in accordance with regulatory requirements, if
Gilead acquires, is acquired by or becomes an affiliate of a
company that is a manufacturer, supplier or distributor of a
product competitive with Macugen or in the event of the
bankruptcy or insolvency of, or appointment of a receiver for,
Gilead. In addition, either party may terminate the agreement if
the other party materially breaches the agreement and fails to
cure the breach or if either party is prevented by a force
majeureevent from performing its obligations under the
agreement for more than three months.

In order to produce Macugen in the quantities
that we expect to be required to meet anticipated market demand,
we and Raylo will need to increase the manufacturing capacity
for the active pharmaceutical ingredient. We initially intend to
increase manufacturing capacity for the active pharmaceutical
ingredient by installing additional manufacturing lines at
Raylos facility. We are also exploring alternatives for
increasing manufacturing capacity, including developing
alternative manufacturing methods for the active pharmaceutical
ingredient.

In the future, we plan to enter into commercial
supply arrangements with alternative active pharmaceutical
ingredient and fill and finish manufacturers. It is possible
that either we or Pfizer may perform these functions ourselves.

License Agreements

We are parties to two license agreements that we
believe are material to our business.



| |                
| | ---------------
| | Gilead Sciences

In March 2000, we entered into an agreement with
Gilead and its wholly owned subsidiary NeXstar
Pharmaceuticals, Inc. for an exclusive worldwide license,
under the patents and know-how related to Macugen controlled by
Gilead and its affiliates, to develop, manufacture and
commercialize products containing

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Macugen. This license extends to all therapeutic
indications. Subject to a right of first negotiation in favor of
Gilead as to a limited set of indications, we have the right to
grant sublicenses under this license.


In exchange for the rights licensed from Gilead,
we paid Gilead an up-front license fee of $7 million and
issued Gilead a warrant to purchase 833,333 shares of our
series B preferred stock at an exercise price of $6.00 per
share. We also agreed to make payments to Gilead aggregating up
to $25 million based on achieving specified development and
commercial launch milestones and to pay royalties to Gilead
based on net sales of Macugen by us or our affiliates or
sublicensees. Our royalty obligation extends on a
country-by-country basis until the later of ten years after
first commercial sale of Macugen or the expiration of the
last-to-expire patent licensed from Gilead in each particular
country. The United States patent rights relating to Macugen
licensed to us by Gilead expire between 2010 and 2017. The
corresponding foreign rights include patents that expire between
2011 and 2017 and patent applications which, if issued as
patents, are expected to expire between 2011 and 2019. Upon the
expiration of the last-to-expire royalty term, the agreement
expires and, at our option, our license from Gilead either (1)
survives and remains exclusive, in which case we would be
obligated to continue paying Gilead a reduced royalty on product
sales or (2) survives and converts to nonexclusive, in
which case would not have any further royalty obligation to
Gilead.

The agreement obligates us to use commercially
reasonable efforts to develop, obtain regulatory approvals for
and commercialize Macugen. Each party has the right to terminate
the agreement if the other party materially breaches the
agreement.



| |                    
| | -------------------
| | Nektar Therapeutics

In February 2002, we entered into a license,
manufacturing and supply agreement with Nektar Therapeutics,
formerly Shearwater Corporation, relating to the PEGylation of
Macugen. Pursuant to that agreement, Nektar supplies us with the
reagent that we link to the aptamer to create the active
pharmaceutical ingredient. Under the terms of the agreement,
Nektar granted us various exclusive and nonexclusive worldwide
licenses, with the right to grant sublicenses, under patents and
know-how related to the reagent controlled by Nektar, to
develop, manufacture and commercialize Macugen.

In exchange for these rights, we paid Nektar an
up-front license fee of $1.5 million, agreed to make
payments to Nektar aggregating up to $4.5 million based on
achieving specified development milestones with respect to
Macugen and agreed to pay Nektar royalties based on net sales of
Macugen by us or our affiliates or sublicensees. We may credit a
portion of our potential future milestone payments to Nektar
against a portion of the royalty payments that we may be
required to make. We also agreed to purchase the PEGylation
reagent for Macugen exclusively from Nektar, subject to Nektar
meeting its supply obligations.

Unless we and Nektar agree to extend the term,
the agreement expires upon the expiration of the last-to-expire
patent licensed by us from Nektar. The United States patent
rights licensed to us by Nektar expire between 2013 and 2016.
The corresponding foreign rights include a patent that expires
in 2015 and patent applications which, if issued as patents, are
expected to expire between 2015 and 2020. The agreement imposes
development and commercialization diligence requirements on us.
Each party has the right to terminate the agreement if the other
party materially breaches the agreement and upon the occurrence
of specified bankruptcy or insolvency events as to the other
party.

Patents and Proprietary Rights

Our success depends in part on our ability to
obtain and maintain proprietary protection for our product
candidates, technology and know-how, to operate without
infringing on 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 United States and foreign patent applications
related to our proprietary technology, inventions and
improvements that are important to the development of our
business. We also rely on trade secrets, know-how, continuing
technological innovation and in-licensing opportunities to
develop and maintain our proprietary position.

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We own or license a total of 25 United
States patents and 22 United States patent applications as well
as numerous foreign counterparts to many of these patents and
patent applications. Our patent portfolio includes patents and
patent applications with claims covering the composition of
matter and methods of manufacturing and use of Macugen, as well
as the composition of matter and method of manufacturing of both
modified and unmodified aptamers in general and modified and
unmodified VEGF aptamers in particular. In addition, we have
patent applications covering various aspects of ophthalmic drug
delivery.

We license patent rights from other patent owners
from time to time, both on an exclusive basis and on a
nonexclusive basis. Examples of such patent licenses include the
patent rights that we have licensed from Gilead and Nektar and a
nonexclusive, royalty-bearing patent license that we entered
into with Isis Pharmaceuticals, Inc. in December 2001,
which grants us rights under patents owned or controlled by Isis
to make, have made, use and sell the Macugen compound worldwide.
In addition to the obligation to pay royalties to Isis, we paid
an initial license fee of $2 million and we agreed to make
payments to Isis aggregating up to $4 million based on
achieving specified regulatory milestones with respect to the
use of Macugen for the treatment of AMD and aggregating up to
$2.75 million based on achieving specified regulatory
milestones with respect to the use of Macugen for other
therapeutic indications.

United States patents generally have a term of
20 years from the date of filing. The patent rights
relating to Macugen owned and licensed to us by Gilead consist
of fourteen United States patents that expire between 2010 and
2017 and counterpart filings to these patents in a number of
other jurisdictions, including patents issued in several
jurisdictions and patent applications pending in a number of
other jurisdictions, including Europe and Japan. The patents
licensed to us by Nektar consist of nine United States patents
that expire between 2013 and 2016 and foreign counterpart
filings to these patents in a number of jurisdictions. The
patents licensed to us by Isis consist of two United States
patents that expire in 2010 and 2014 and foreign counterpart
filings to these patents in a number of jurisdictions.

The patent positions of companies like ours are
generally uncertain and involve complex legal and factual
questions. Our ability to maintain and solidify our proprietary
position for our technology will depend on our success in
obtaining effective claims and enforcing those claims once
granted. We do not know whether any of our patent applications
or those patent applications that we license will result in the
issuance of any patents. Our issued patents and those that may
issue in the future, or those licensed to us, may be challenged,
invalidated or circumvented, which could limit our ability to
stop competitors from marketing related products or the length
of term of patent protection that we may have for our products.
In addition, the rights granted under any issued patents may not
provide us with 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, thereby reducing any advantage of the patent.

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, consultants, scientific advisors and other
contractors. These agreements may be breached, and we may not
have adequate remedies for any breach. In addition, our trade
secrets may 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 arise as to the rights
in related or resulting know-how and inventions.

Competition

The development and commercialization of new
drugs and drug delivery technologies is highly competitive. We
will face competition with respect to Macugen and any products
we may develop or commercialize in the future from major
pharmaceutical companies, specialty pharmaceutical companies and
biotechnology companies worldwide.

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If Macugen receives marketing approval, it will
compete against the currently approved therapies for the
treatment of wet AMD and DME described above under the captions
 Eye Disease  Limitations of
Currently Available Therapies for Wet AMD and
 Eye Disease  Limitations of
Currently Available Therapies for DME. There are also a
number of companies working to develop new drugs and other
therapies to treat wet AMD and DME. We believe that the
following product candidates are in Phase 2 or Phase 3
clinical trials, except as noted:



| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Genentech, Inc. and Novartis are
    collaborating to develop a humanized monoclonal antibody
    fragment, administered by intravitreal injection, that targets
    VEGF for the treatment of wet AMD.                                                                              
|
| |  | Alcon, Inc. is developing a steroid for the
    treatment and prevention of predominantly classic subfoveal wet
    AMD. This drug candidate is injected behind the eye using a
    customized injector inserted around the eye.                                                     
|
| |  | Miravant Medical Technologies is developing a
    photodynamic therapy that is similar to Visudyne for the
    treatment of wet AMD.                                                                                                                                                 
|
| |  | Bausch & Lomb Incorporated and Control
    Delivery Systems, Inc. are developing a surgically placed
    non-erodable intraocular implant for the delivery of steroids to
    treat DME and swelling resulting from other causes.                                                    
|
| |  | Allergan, Inc., which recently acquired
    Oculex Pharmaceuticals, is developing a bioerodable steroid
    implant for the treatment of persistent macular edema.                                                                                                                   
|
| |  | Eli Lilly & Co. is developing an orally
    administered inhibitor of an enzyme named PKC beta for the
    treatment of diabetic retinopathy.                                                                                                                                        
|
| |  | Regeneron Pharmaceuticals, Inc. and Aventis
    S.A. are collaborating to develop a receptor fusion protein that
    contains portions of the extracellular domains of two different
    VEGF receptors and announced the start of a Phase 1
    clinical trial in AMD in March 2004.
|
| |  | Genaera Corporation is developing a small
    molecule derived from the Dogfish shark and announced plans to
    initiate Phase 2 clinical trials in first half of 2004. The
    Phase 1/2 trial was conducted without a placebo arm and
    followed patients for 2 and 4 months.   

In addition, there are a number of other
companies that are developing anti-VEGF technologies. Some of
these companies may seek to apply their technologies to AMD, DME
and other ophthalmic indications.

The key competitive factors affecting the success
of Macugen are likely to be its efficacy, safety profile, price
and method of administration. The efficacy and safety profile of
Macugen will depend upon the results of our clinical trials of
this product and experience with the product in the commercial
marketplace. Based on the results of our clinical trials to
date, we believe that Macugen will have an acceptable side
effect profile. We have not yet determined the price for Macugen
and do not expect to do so before commercial launch. The method
of administration of Macugen, intravitreal injection, is
commonly used to administer ophthalmic drugs and generally
accepted by patients facing the prospect of blindness and other
serious back of the eye complications such as DME. However, a
therapy that offers a less invasive method of administration may
have a competitive advantage over one administered by
intravitreal injection. Moreover, future competitive products
may have superior efficacy, improved safety and convenience or
reduced frequency of administration compared to Macugen.

The licensing and acquisition of pharmaceutical
products, which is part of our strategy, is a highly competitive
area. A number of more established companies also are pursuing
strategies to license or acquire products. These established
companies may have a competitive advantage over us due to their
size, cash flow and institutional experience.

Government Regulation

Government authorities in the United States, at
the federal, state and local level, and other countries
extensively regulate, among other things, the research,
development, testing, manufacture, labeling, promo-

23



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tion, advertising, distribution, marketing and
export and import of pharmaceutical products such as those we
are developing.




| |                                        
| | ---------------------------------------
| | United States Government
    Regulation

In the United States, the FDA regulates drugs and
biologics under the Federal Food, Drug, and Cosmetic Act, and,
in the case of biologics, also under the Public Health Service
Act, and implementing regulations. If we fail to comply with the
applicable United States requirements at any time during the
product development process, approval process or after approval,
we may become subject to administrative or judicial sanctions.
These sanctions could include the FDAs refusal to approve
pending applications, license suspension or revocation,
withdrawal of an approval, a clinical hold, warning letters,
product recalls, product seizures, total or partial suspension
of production or distribution, injunctions, fines, civil
penalties or criminal prosecution. Any agency enforcement action
could have a material adverse effect on us.

The steps required before a drug or biologic may
be marketed in the United States include:



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | preclinical laboratory tests, animal studies and
    formulation studies under FDAs good laboratory practices
    regulations;                                                                                  
|
| |  | submission to the FDA of an Investigational New
    Drug application, or IND, for human clinical testing, which must
    become effective before human clinical trials may begin;                                
|
| |  | adequate and well-controlled clinical trials to
    establish the safety and efficacy of the product for each
    indication;                                                                                    
|
| |  | submission to the FDA of a New Drug Application,
    or NDA, or Biologics License Application, or BLA;                                                                                                           
|
| |  | satisfactory completion of an FDA inspection of
    the manufacturing facility or facilities at which the product is
    produced to assess compliance with current good manufacturing
    practice, or cGMP; and
|
| |  | FDA review and approval of the NDA or BLA.                                                                                                                                                                       

Preclinical tests include laboratory evaluations
of product chemistry, toxicity, and formulation, as well as
animal studies. An IND sponsor must submit the results of the
preclinical tests, together with manufacturing information and
analytical data, to the FDA as part of the IND. The IND must
become effective before human clinical trials may begin. An IND
will automatically become effective 30 days after receipt
by the FDA, unless before that time the FDA raises concerns or
questions about issues such as the conduct of the trials as
outlined in the IND. In that case, the IND sponsor and the FDA
must resolve any outstanding FDA concerns or questions before
clinical trials can proceed. Submission of an IND may not result
in the FDA allowing clinical trials to commence.

Clinical trials involve the administration of the
investigational product to human subjects under the supervision
of qualified investigators. Clinical trials are conducted under
protocols detailing, among other things, the objectives of the
study, the parameters to be used in monitoring safety and the
effectiveness criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND.

Clinical trials typically are conducted in three
sequential phases, but the phases may overlap or be combined.
Each trial must be reviewed and approved by an independent
Institutional Review Board before it can begin. Phase 1
trials usually involve the initial introduction of the
investigational drug into humans to evaluate the products
safety, dosage tolerance and pharmacodynamics and, if possible,
to gain an early indication of its effectiveness.

Phase 2 trials usually involve controlled
trials in a limited patient population to:



| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | evaluate dosage tolerance and appropriate dosage;                            
|
| |  | identify possible adverse effects and safety
    risks; and                  
|
| |  | evaluate preliminarily the efficacy of the drug
    for specific indications.

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Phase 3 trials usually further evaluate
clinical efficacy and test further for safety in an expanded
patient population. Phase 1, Phase 2 and Phase 3
testing may not be completed successfully within any specified
period, if at all. Furthermore, the FDA or we 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.

Assuming successful completion of the required
clinical testing, the results of the preclinical studies and of
the clinical studies, together with other detailed information,
including information on the manufacture and composition of the
product, are submitted to the FDA in the form of an NDA or BLA
requesting approval to market the product for one or more
indications. The FDA reviews an NDA to determine, among other
things, whether a product is safe and effective for its intended
use. The FDA reviews a BLA to determine, among other things,
whether the product is safe, pure and potent and the facility in
which it is manufactured, processed, packed or held meets
standards designed to assure the products continued
safety, purity and potency.

As part of the drug approval process, we must
conduct a comprehensive assessment of the carcinogenic potential
of our product candidates. This often requires the completion of
several in vitrotests and tests in laboratory
animals designed to detect compounds that may induce cancer
directly or indirectly by various mechanisms. Based on our
testing of Macugen to date and our review of the carcinogenic
potential of Macugen with an independent advisory board engaged
by us, we believe that Macugen poses a low carcinogenicity risk.
In particular, in a test of Macugen and its metabolites in the
Syrian Hamster Embryo Assay, which we performed at the request
of the FDA, the results were negative for carcinogenic
potential. However, one of the animal tests that we performed
suggests that two of the metabolites of Macugen are compounds as
to which there may be carcinogenicity risk. As a result, we may
be required to conduct additional carcinogenicity testing of
Macugen. Based on our discussions with the FDA to date, if we
are required to conduct further carcinogenicity testing of
Macugen in connection with its use in the treatment of wet AMD,
we believe that the FDA will allow us to conduct any such
testing as a post-NDA approval study, because those who suffer
from the disease tend to be elderly and the significant unmet
medical need for a treatment for wet AMD. However, we will not
be certain of this until the NDA review process of Macugen for
the treatment of wet AMD is completed. In addition, because
patients with DME tend to be younger than those with wet AMD, it
is likely that the FDA will require us to complete satisfactory
carcinogenicity testing of Macugen prior to any approval of its
use in the treatment of DME. This may result in delays in our
ability to submit an NDA relating to the use of Macugen in the
treatment of DME.

Before approving an application, the FDA will
inspect the facility or the facilities at which the product is
manufactured. The FDA will not approve the product unless cGMP
compliance is satisfactory. The FDA will issue an approval
letter if it determines that the application, manufacturing
process and manufacturing facilities are acceptable. If the FDA
determines the application, manufacturing process or
manufacturing facilities are not acceptable, it will outline the
deficiencies in the submission and often will request additional
testing or information. Notwithstanding the submission of any
requested additional information, the FDA ultimately may decide
that the application does not satisfy the regulatory criteria
for approval.

The testing and approval process requires
substantial time, effort and financial resources, and each may
take several years to complete. The FDA may not grant approval
on a timely basis, or at all. We may encounter difficulties or
unanticipated costs in our efforts to secure necessary
governmental approvals, which could delay or preclude us from
marketing our products. The FDA may limit the indications for
use or place other conditions on any approvals that could
restrict the commercial application of the products. After
approval, some types of changes to the approved product, such as
adding new indications, manufacturing changes and additional
labeling claims, are subject to further FDA review and approval.

After regulatory approval of a product is
obtained, we are required to comply with a number of
post-approval requirements. For example, as a condition of
approval of an application, the FDA may require post marketing
testing and surveillance to monitor the products safety or
efficacy.

In addition, holders of an approved NDA or BLA
are required to report certain adverse reactions and production
problems to the FDA, to provide updated safety and efficacy
information and to comply with requirements concerning
advertising and promotional labeling for their products. Also,
quality control and

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manufacturing procedures must continue to conform
to cGMP after approval. The FDA periodically inspects
manufacturing facilities to assess compliance with cGMP, which
imposes certain procedural and documentation requirements.
Accordingly, manufacturers must continue to expend time, money
and effort in the area of production and quality control to
maintain compliance with cGMP and other aspects of regulatory
compliance.


We use, and will continue to use in at least the
near term, third party manufacturers to produce our products in
clinical and commercial quantities. Future FDA inspections may
identify compliance issues at our facilities or at the
facilities of our contract manufacturers that may disrupt
production or distribution, or require substantial resources to
correct. In addition, discovery of problems with a product or
the failure to comply with requirements may result in
restrictions on a product, manufacturer or holder of an approved
NDA or BLA, including withdrawal or recall of the product from
the market or other voluntary or FDA-initiated action that could
delay further marketing. Also, new government requirements may
be established that could delay or prevent regulatory approval
of our products under development.



| |                   
| | ------------------
| | Foreign Regulation

In addition to regulations in the United States,
we will be subject to a variety of foreign regulations governing
clinical trials and commercial sales and distribution of our
products, including Macugen. Whether or not we obtain FDA
approval for a product, we must obtain approval of a product by
the comparable regulatory authorities of foreign countries
before we can commence clinical trials or marketing of the
product in those countries. The approval process varies from
country to country, and the time may be longer or shorter than
that required for FDA approval. The requirements governing the
conduct of clinical trials, product licensing, pricing and
reimbursement vary greatly from country to country.

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

Third Party Reimbursement and Pricing
Controls



| |        
| | -------
| | General

In the United States and elsewhere, sales of
therapeutic and other pharmaceutical products depend in
significant part on the availability of reimbursement to the
consumer from third party payors, such as government and private
insurance plans. Third party payors are increasingly challenging
the prices charged for medical products and services. It will be
time consuming and expensive for us to go through the process of
seeking reimbursement from Medicare and private payors. Our
products may not be considered cost-effective, and reimbursement
may not be available or sufficient to allow us to sell our
products on a competitive and profitable basis.

In many foreign markets, including the countries
in the European Union, pricing of pharmaceutical products is
subject to governmental control. In the United States, there
have been, and we expect that there will continue to be, a
number of federal and state proposals to implement similar
governmental pricing control. While we cannot predict whether
such legislative or regulatory proposals will be adopted, the
adoption of such proposals could have a material adverse effect
on our business, financial condition and profitability.



| |         
| | --------
| | Medicare

Subject to obtaining required marketing
approvals, we plan to market Macugen to physicians for use in
the treatment of conditions such as wet AMD and DME. We expect
that in the United States a majority of the patients who are
treated with Macugen for these indications will be Medicare
beneficiaries. The Centers for Medicare & Medicaid
Services, or CMS, is the agency within the Department of Health
and Human

26



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Services that administers Medicare and will be
responsible for reimbursement of the cost of Macugen when
administered to Medicare beneficiaries and for the cost of
physician services for administering the drug.


In general, Medicare makes separate payment to
the physician or other purchaser for drugs, such as Macugen,
that meet statutorily covered requirements, are not usually
self-administered and are furnished by physicians in the office
or in other outpatient settings. Prior to 2004, Medicare paid
for part of the cost of these physician-administered drugs at
the lower of the amount the physician charges for the drug or
95% of the drugs national average wholesale
price as published by certain data sources. Patients, or
their secondary insurer, are responsible for a coinsurance
amount. Specifically, for physician-administered drugs, Medicare
paid 80% of 95% of the average wholesale price, while patients,
or their secondary insurer, are responsible for the remaining
20%. As described below, these payment amounts will change under
the recently enacted Medicare prescription drug coverage
legislation.

If Macugen is approved for marketing by the FDA,
it will be covered by Medicare when administered in the
physician office unless CMS or a local Medicare contractor
decides not to cover it. CMS has asserted the authority of
Medicare not to cover particular drugs if it determines that
they are not reasonable and necessary for Medicare
beneficiaries. CMS may create a national coverage determination
for a product, which establishes on a nationwide basis the
indications that will be covered and the frequency limits for
administration of the product. However, for most new drugs that
are eligible for payment, CMS does not create a national
coverage determination and we do not know whether or not we will
obtain a national coverage determination for Macugen or our
other potential products. In these cases, the local Medicare
contractors who are responsible for administering the program on
a state by state basis have the discretion to issue local
coverage decisions. These policies can include both coverage
criteria for the drug and frequency limits for the
administration of the drug. The local contractors in different
areas of the country may establish varying coverage criteria and
frequency limits for Macugen.

In addition to payment for the drug itself, CMS
also reimburses physicians for administering the product to
Medicare beneficiaries. Medicare payment for physician services
is determined according to a prospectively set payment rate,
determined by a procedure code established by the American
Medical Association. These codes, called Current Procedural
Terminology, or CPT, codes, describe the procedure performed,
but generally are not drug specific. We believe that there is an
existing CPT code to describe the procedure for administering
Macugen and that most physicians will find this code to be
adequate to cover the cost of administration. However, if it is
determined that the existing CPT code and associated payment
amount are not applicable to Macugen, it may affect the
willingness of physicians to perform the procedure.

In December 2003, President Bush signed into law
new Medicare prescription drug coverage legislation that
includes provisions that will change Medicare payment for
physician-administered drugs effective in January 2004.
Effective January 1, 2004, the legislation reduces the
percentage of the average wholesale price reimbursed by Medicare
from 95% to 85% and grants the Secretary of Health and Human
Services the authority to further reduce the rate to 80%. New
drugs coming on the market will be allowed to retain the 95%
rate through the end of 2004. Effective January 2005,
reimbursement will be limited to a statutorily defined
manufacturers average sale price plus 6%. The definition
of manufacturers average sale price is intended to lead to
lower levels of reimbursement to physicians than currently
provided under the average wholesale price method. In addition,
starting in January 2006, this legislation directs the Secretary
to contract with procurement organizations to purchase
physician-administered drugs from the manufacturers and provides
physicians with the option to obtain drugs through these
organizations as an alternative to purchasing from the
manufacturers, which some physicians may find advantageous.

These changes may reduce our potential revenues
as a result of two principal factors. First, because physicians
will likely receive lower levels of reimbursement under the
manufacturers average sale price methodology than under
the current average wholesale price methodology, physicians may
be less likely to purchase Macugen directly and more likely to
obtain the product through procurement organizations. Second,
the negotiated payment that we receive from procurement
organizations may be less than the amount that we could
otherwise have obtained from sales to physicians. Because we
have not received marketing approval for Macugen or established
a price for the product, it is difficult to predict the effect
on us of this new legislation

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and the other changes to Medicare proposed by
CMS. However this new legislation and other changes could
adversely affect our potential future revenues and results of
operations, possibly materially.




| |                                                                  
| | -----------------------------------------------------------------
| | Commercial Insurers Payment for
    Physician-Administered Drugs

Commercial insurers usually offer two types of
benefits: medical benefits and pharmacy benefits. In most
private insurance plans, physician-administered injectable
drugs, such as Macugen, are provided under the medical benefit.
If private insurers decide to cover Macugen, they will reimburse
for the drug in a variety of ways depending on the particular
insurance plan and the contract that the plan has negotiated
with physicians. Like Medicare, commercial insurers have the
authority to place coverage and utilization limits on
physician-administered drugs. In response to the recent
prescription drug coverage legislation that could result in
reduced Medicare payment for physician-administered drugs,
private insurers may adopt similar reduced payment amounts.

Employees

We believe that our success will depend greatly
on our ability to identify, attract and retain capable
employees. As of March 1, 2004, we had 159 full time
employees, including a total of 32 employees who hold M.D. or
Ph.D. degrees. Our employees are not represented by any
collective bargaining unit, and we believe our relations with
our employees are good.

Recruiting and retaining qualified scientific
personnel to perform research and development work in the future
will also be critical to our success. We face the risk that we
may not be able to attract and retain personnel on acceptable
terms given the competition among biotechnology, pharmaceutical
and health care companies, universities and non profit research
institutions. In addition we rely on member of our Scientific
Advisory Board and a significant number of consultants to assist
us in formulating our research and development strategies.

Trademarks

EyetechTM, Eyetech
PharmaceuticalsTM and MacugenTM are our
trademarks. All are covered by pending applications for
registration in the United States Patent and Trademark Office.

Access to Our Filings with the Securities and
Exchange Commission

Our Internet address is www.eyetech.com.
The information on our website is not a part of, or incorporated
into, this Annual Report on Form 10-K. We make our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those
reports, filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 available, without
charge, on our website as soon as reasonably practicable after
they are filed electronically with, or otherwise furnished to,
the Securities and Exchange Commission.

28



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

As of March 1, 2004, we leased a total of
approximately 114,300 square feet of office and laboratory
space. Our leased properties are described below.

|                                           |  |             |        |     |  |                                                |  |  |               | 
|------------------------------------------ |  | ----------- | ------ | --- |  | ---------------------------------------------- |  |  | ------------- | 
|                                           |  | Approximate |        |     |  | Lease                                         
|Property Location                          |  | Square Feet |        | Use |  | Expiration Date                               
|                                           |  |             |        |     |  |                                               
|3 Times Square,
    New York, New York     |  |             | 62,000 |     |  | New Corporate, Clinical, Safety and Regulatory |  |  | November 2021 | 
|500 Seventh Avenue,
    New York, New York |  |             | 16,700 |     |  | Old Corporate, Clinical, Safety and Regulatory |  |  | December 2010 | 
|Woburn, Massachusetts                      |  |             | 10,600 |     |  | Laboratory                                     |  |  | July 2007     | 
|Cedar Knolls, New Jersey                   |  |             | 25,000 |     |  | Laboratory                                     |  |  | April 2008    | 

In January 2004, we entered into a lease for our
new corporate headquarters in New York City, located at
3 Times Square. We expect to complete the transition into
our new corporate headquarters in the second quarter of 2004 and
are currently seeking to sublet our old corporate headquarters.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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






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

In December 2003, our stockholders authorized by
written consent the following actions in connection with our
initial public offering:



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the adoption of our Second Amended and Restated
    Certificate of Incorporation to become effective following the
    closing of our initial public offering;
|
| |  | the adoption of our Second Amended and Restated
    Bylaws Incorporation to become effective following the closing
    of our initial public offering;        
|
| |  | the adoption of our 2003 Stock Incentive Plan,
    which became effective at the effective date of our initial
    public offering;                           
|
| |  | the adoption of our 2003 Employee Stock Purchase
    Plan, which became effective at the effective date of our
    initial public offering; and               
|
| |  | the ratification of Ernst & Young LLP as
    our independent auditors for the fiscal year ended
    December 31, 2003.                                        

All such actions were effected pursuant to an
action by written consent of our stockholders in compliance with
Section 228 of the Delaware General Corporation Law. We
received the requisite consents on December 1, 2003.

The written consent was adopted by holders of
25,091,972 shares of our stock out of
29,284,299 shares issued and outstanding as of
December 1, 2003, including 21,798,327 shares out of
25,181,563 shares of our Series A, Series B,
Series C-1, Series C-2 and Series D preferred
stock issued and outstanding.

29



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PART II






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



| |                         
| | ------------------------
| | Market for Common Equity

Our common stock has been traded on the NASDAQ
National Market System under the symbol EYET since our initial
public offering on January 30, 2004. Prior to that time
there was no established public trading market for our common
stock. The closing share price for our common stock on
March 22, 2004, as reported by the NASDAQ National Market
System, was $33.76.

As of March 23, 2004, there were
approximately 269 stockholders of record of our common stock.

We have never declared or paid cash dividends on
either our common stock or preferred stock. We currently intend
to retain all of our future earnings to finance the growth and
development of our business. We do not intend to pay cash
dividends to our stockholders in the foreseeable future.



| |                                 
| | --------------------------------
| | Sales of Unregistered Securities

Set forth below is information regarding shares
of common stock and preferred stock that we issued, and options
and restricted stock awards that we granted, during the year
ended December 31, 2003. Also included is the
consideration, if any, received by us for those shares, and
information relating to the section of the Securities Act of
1933, or rule of the Securities and Exchange Commission, under
which exemption from registration was claimed.

(a) Issuances of Capital Stock



| |                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. In February 2003, we issued
    2,747,253 shares of series D convertible preferred
    stock to an affiliate of Pfizer Inc. at a price per share of
    $9.10.                                                                                                                       
|
| | 2. In September, October, November and
    December 2003, upon the exercise of warrants, we issued an
    aggregate of 532,560 shares of series C-1 convertible
    preferred stock at a price per share of $6.80 to MPM Capital,
    LP, Biotech Growth N.V. and individual investors. 
|
| | 3. In September, October, November and
    December 2003, upon the exercise of warrants, we issued an
    aggregate of 507,557 shares of series C-2 convertible
    preferred stock at a price per share of $7.20 to MPM Capital,
    LP, Biotech Growth, N.V. and individual investors.
|
| | 4. In October 2003, upon the exercise of a
    warrant, we issued an aggregate of 3,333 shares of
    series B convertible preferred stock at a price per share
    of $6.00 to an individual investor.                                                                                 

No underwriters were involved in the foregoing
sales of securities. We issued these securities in reliance upon
the exemption from the registration requirements of the
Securities Act, as set forth in Section 4(2) under the
Securities Act and Rule 506 of Regulation D
promulgated thereunder relative to sales by an issuer not
involving any public offering, to the extent an exemption from
such registration was required. All purchasers of shares of our
convertible preferred stock described above represented to us in
connection with their purchase that they were accredited
investors and were acquiring the shares for investment and not
distribution, that they could bear the risks of the investment
and could hold the securities for an indefinite period of time.
The purchasers received written disclosures that the securities
had not been registered under the Securities Act and that any
resale must be made pursuant to a registration or an available
exemption from such registration.

(b) Stock Option Grants

In 2003, we issued to employees, directors and
consultants 365,736 shares of common stock upon the
exercise of stock options at a weighted average exercise price
of $0.78 per share. During the same period, we granted
options to purchase 1,518,500 shares of common stock at a
weighted average exercise price of $5.18 per share.

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The issuance of stock options and the common
stock issuable upon the exercise of such options as described
above were issued pursuant to written compensatory plans or
arrangements with the our employees, directors and consultants,
in reliance on the exemption provided by Rule 701
promulgated under the Securities Act. All recipients either
received adequate information about us or had access, through
employment or other relationships, to such information.

All of the foregoing securities are deemed
restricted securities for purposes of the Securities Act. All
certificates representing the issued shares of common stock
described above included appropriate legends setting forth that
the securities had not been registered and the applicable
restrictions on transfer.



| |                                                
| | -----------------------------------------------
| | Use of Proceeds from Registered
    Securities.

We registered shares of our common stock in
connection with our initial public offering under the Securities
Act of 1933, as amended. Our Registration Statement on
Form S-1 (Reg. No. 333-108781) in connection with our
initial public offering was declared effective by the SEC on
January 29, 2004. The offering commenced as of
January 29, 2004. The offering did not terminate before any
securities were sold. As of the date of the filing of this
report, the offering has terminated and 7,475,000 shares of
our common stock registered were sold. The underwriters of the
offering were Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated, Bear,
Stearns & Co. Inc. and Credit Suisse First Boston
Corporation.

All 7,475,000 shares of our common stock
registered in the offering were sold at the initial public
offering price per share of $21.00. The aggregate purchase price
of the offering was $156,975,000. The net offering proceeds to
us after deducting total expenses were $142,877,000. We incurred
total expenses in connection with the offering of $14,098,000,
which consisted of direct payments of:



| |                                                                           
| | --------------------------------------------------------------------------
| | (i) $2,493,000 in legal, accounting and
    printing fees;                
|
| | (ii) $10,988,000 in underwriters
    discounts, fees and commissions; and
|
| | (iii) $617,000 in miscellaneous expenses.                                 

No payments for such expenses were made directly
or indirectly to (i) any of our directors, officers or
their associates, (ii) any person(s) owning 10% or more of
any class of our equity securities or (iii) any of our
affiliates.

We completed our initial public offering on
February 4, 2004. The net offering proceeds have been
invested into short-term investment-grade securities and money
market accounts.

There has been no material change in the planned
use of proceeds from our initial public offering as described in
our final prospectus filed with the SEC pursuant to
Rule 424(b).

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|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

You should read the following selected financial
information together with our consolidated financial statements
and the related notes appearing at the end of this report and
the Managements Discussion and Analysis of Financial
Condition and Results of Operations section of this
report. We have derived the statement of operations information
for the period from our inception to December 31, 2000 and
for the years ended December 31, 2001, 2002 and 2003 and
the balance sheet information as of December 31, 2002 and
2003 from our audited consolidated financial statements which
are included in this report. We have derived the balance sheet
information as of December 31, 2000 and 2001 from our
audited consolidated financial statements, which are not
included in this report. Our historical results for any prior or
interim period are not necessarily indicative of results to be
expected for a full fiscal year or for any future period. The
pro forma net loss attributable to common stockholders per share
information is computed using the weighted average number of
common shares outstanding, after giving pro forma effect to the
automatic conversion of all outstanding shares of our
convertible preferred stock into shares of our common stock
effective upon the completion of our initial public offering, as
if the conversion had occurred at the date of the original
issuance. This pro forma information does not give effect to the
exercise of outstanding warrants.

|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |        | 
|------------------------------------------------------------------------------------------------ | ---------------------------------- | ---------------------------------------- | --------- | ----------------------- |  | ---- | --------- | ------ |  | - | --------- | ------ |  | - | ---------- | ------ | 
|                                                                                                 |                                    | Period from                              |           |                         |  |      |           |       
|                                                                                                 |                                    | February 9,                              |           |                         |  |      |           |       
|                                                                                                 |                                    | 2000 (Date of                            |           |                        
|                                                                                                 |                                    | Inception) to                            |           | Year Ended December 31,
|                                                                                                 |                                    | December 31,                             |           |                        
|                                                                                                 |                                    | 2000                                     |           | 2001                    |  | 2002 |           | 2003  
|                                                                                                 |                                    |                                          |           |                         |  |      |           |       
|                                                                                                 |                                    |                                         
|                                                                                                 |                                    | (In thousands, except per share numbers)
|Consolidated Statement of Operations
    Information:                                            |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|Collaboration revenue                                                                            |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|                                                                                                 | License fees                       |                                          | $         |                        |  |      | $         |       |  |   | $         |       |  |   | $          | 4,583  | 
|                                                                                                 | Reimbursement of development costs |                                          |           |                        |  |      |           |       |  |   |           |       |  |   |            | 36,836 | 
|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|Total collaboration revenue                                                                      |                                    | $                                        |          |                         |  | $    |          |        |  | $ |          |        |  | $ | 41,419     |       
|Operating expenses:                                                                              |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|                                                                                                 | Research and development           |                                          |           | 10,879                  |  |      |           | 22,157 |  |   |           | 39,663 |  |   |            | 70,932 | 
|                                                                                                 | Sales and marketing                |                                          |           |                        |  |      |           |       |  |   |           |       |  |   |            | 4,599  | 
|                                                                                                 | General and administrative         |                                          |           | 1,413                   |  |      |           | 4,338  |  |   |           | 5,287  |  |   |            | 6,822  | 
|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|Total operating expenses                                                                         |                                    |                                          | 12,292    |                         |  |      | 26,495    |        |  |   | 44,950    |        |  |   | 82,353     |       
|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|Loss from operations                                                                             |                                    |                                          | (12,292   | )                       |  |      | (26,495   | )      |  |   | (44,950   | )      |  |   | (40,934    | )     
|Interest income                                                                                  |                                    |                                          | 1,181     |                         |  |      | 1,815     |        |  |   | 1,809     |        |  |   | 2,171      |       
|Interest expense                                                                                 |                                    |                                          |          |                         |  |      |          |        |  |   | (32       | )      |  |   | (248       | )     
|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|Loss before income taxes                                                                         |                                    |                                          | (11,111   | )                       |  |      | (24,680   | )      |  |   | (43,173   | )      |  |   | (39,011    | )     
|Provision for income taxes                                                                       |                                    |                                          |          |                         |  |      |          |        |  |   |          |        |  |   | (1,688     | )     
|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|Net loss                                                                                         |                                    |                                          | (11,111   | )                       |  |      | (24,680   | )      |  |   | (43,173   | )      |  |   | (40,699    | )     
|Preferred stock accretion                                                                        |                                    |                                          | (1,080    | )                       |  |      | (2,494    | )      |  |   | (5,096    | )      |  |   | (9,160     | )     
|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|Net loss attributable to common stockholders                                                     |                                    | $                                        | (12,191   | )                       |  | $    | (27,174   | )      |  | $ | (48,270   | )      |  | $ | (49,860    | )     
|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|Basic and diluted net loss attributable to common
    stockholders per share                     |                                    | $                                        | (5.49     | )                       |  | $    | (7.43     | )      |  | $ | (13.06    | )      |  | $ | (12.62     | )     
|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|Weighted average shares outstanding 
    basic and diluted                                      |                                    |                                          | 2,219,178 |                         |  |      | 3,659,422 |        |  |   | 3,697,192 |        |  |   | 3,950,481  |       
|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|Unaudited pro forma basic and diluted net loss
    attributable to common stockholders per share |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  | $ | (1.77      | )     
|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       
|Unaudited pro forma weighted average shares
    outstanding  basic and diluted                  |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   | 28,094,165 |       
|                                                                                                 |                                    |                                          |           |                         |  |      |           |        |  |   |           |        |  |   |            |       

|                                                                                   |  |                    |         |      |  |      |         |      |  |   |          |   |  |   |          |  
|---------------------------------------------------------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                                   |  |                   
|                                                                                   |  | As of December 31,
|                                                                                   |  |                   
|                                                                                   |  | 2000               |         | 2001 |  | 2002 |         | 2003
|                                                                                   |  |                    |         |      |  |      |         |     
|                                                                                   |  |                   
|                                                                                   |  | (In thousands)    
|Balance Sheet Information:                                                         |  |                    |         |      |  |      |         |      |  |   |          |   |  |   |          |  
|Cash, cash equivalents and marketable securities                                   |  | $                  | 24,012  |      |  | $    | 57,019  |      |  | $ | 69,151   |   |  | $ | 131,374  |  
|Total assets                                                                       |  |                    | 25,252  |      |  |      | 60,090  |      |  |   | 76,589   |   |  |   | 149,480  |  
|Deferred revenue, less current portion                                             |  |                    |         |      |  |      |         |      |  |   |          |   |  |   | (65,417  | )
|Long-term capital lease obligations and
    redeemable convertible preferred stock |  |                    | (33,433 | )    |  |      | (88,458 | )    |  |   | (145,980 | ) |  |   | (186,545 | )
|Accumulated deficit                                                                |  |                    | (11,111 | )    |  |      | (39,365 | )    |  |   | (87,635  | ) |  |   | (137,495 | )
|Total stockholders deficit                                                        |  |                    | (8,981  | )    |  |      | (34,327 | )    |  |   | (78,036  | ) |  |   | (123,006 | )

32



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

You should read the following discussion and
analysis of our financial condition and results of operations
together with our consolidated financial statements and the
related notes appearing at the end of this report. Some of the
information contained in this discussion and analysis or set
forth elsewhere in this report, including information with
respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve
risks and uncertainties. You should review the Risk
Factors that May Affect Results section of this report for
a discussion of important factors that could cause actual
results to differ materially from the results described in or
implied by the forward-looking statements contained in the
following discussion and analysis.

Overview

We are a biotechnology company with our first
product candidate, Macugen, currently in two Phase 2/3
pivotal clinical trials for use in the treatment of wet AMD.
Macugen is also in a Phase 2 clinical trial for use in the
treatment of DME. Our revenue for the year ended
December 31, 2003 was $41.4 million, consisting of
amortization of the initial non-refundable, up-front, license
payment that we received from Pfizer under our collaboration
with Pfizer and reimbursement to us by Pfizer of a portion of
the ongoing development costs for Macugen. As a result of our
collaboration with Pfizer, we ceased to be a development-stage
company in February 2003. We have had no other income since
inception other than interest on short-term investments.

We commenced operations in April 2000. Since our
inception, we have generated significant losses. As of
December 31, 2003, we had an accumulated deficit of
$137.5 million. We expect to continue to spend significant
amounts on the development of Macugen and our other programs. We
expect to incur significantly greater commercialization costs as
we are beginning to recruit a domestic ophthalmic sales force.
We expect to begin to participate in detailing Xalatan together
with Pfizer three to six months prior to our planned commercial
launch of Macugen. We also plan to continue to invest in
research for additional applications of Macugen and to develop
new drugs and drug delivery technologies and to build the
appropriate infrastructure to support our business.
Additionally, we plan to continue to evaluate possible
acquisitions or licenses of rights to potential new drugs, drug
targets and drug delivery technologies that would fit within our
growth strategy. Accordingly, we will need to generate
significant revenues to achieve and then maintain profitability.

Most of our expenditures to date have been for
research and development activities and general and
administrative expenses. Research and development expenses
represent costs incurred for product acquisition, clinical
trials and activities relating to regulatory filings and
manufacturing development efforts. We outsource our foreign
clinical trials and our global manufacturing development
activities to third parties to maximize efficiency and minimize
our internal overhead. We expense our research and development
costs as they are incurred.

Our research and development expenses incurred
through December 31, 2003 were expenses related primarily
to the development of Macugen. We expect to incur additional
research and development expenses of approximately
$25 million to $35 million relating to Macugen prior
to its commercial launch in the United States for use in the
treatment of wet AMD. These additional expenses are subject to
the risks and uncertainties associated with clinical trials and
the FDA and foreign regulatory review and approval process. As a
result, these additional expenses could exceed our estimated
amounts, possibly materially. Under our agreements with Pfizer,
Pfizer is obligated to fund specified percentages of the ongoing
development costs incurred pursuant to an agreed development
plan.

Sales and marketing and general and
administrative expenses consist primarily of salaries and
related expenses, general corporate activities and costs
associated with building a commercial infrastructure to market
and sell Macugen and to detail Xalatan. We anticipate that
general and administrative expenses will increase as a result of
the expected expansion of our operations, facilities and other
activities associated with the planned expansion of our
business, together with the additional costs associated with
operating as a public company. In particular, we have recently
entered into a lease for new corporate headquarters space that
we expect will increase our facilities expenses, which we
allocate among general and administrative, research and
development and sales and marketing expenses, by
$3.2 million per year. We expect sales and marketing

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expenses to increase as we build our sales force
and marketing capabilities to support detailing Xalatan and to
prepare to sell Macugen, which is subject to receiving required
regulatory approvals prior to sale.


For the year ended December 31, 2003,
license fees paid to us by Pfizer resulted in current taxable
income to us. Net operating losses available to offset future
taxable income for federal income tax purposes were
approximately $43.3 million as of December 31, 2003.
If not utilized, federal net operating loss carry-forwards will
begin to expire in 2020. To date, we have not recognized the
potential tax benefit of our net operating losses on our balance
sheets or statements of operations. The future utilization of
our net operating loss carryforwards may be limited based upon
changes in ownership pursuant to regulations promulgated under
the Internal Revenue Code.

Critical Accounting Policies and Significant
Judgments and Estimates

Our managements discussion and analysis of
our financial condition and results of operations are based on
our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported revenues and
expenses during the reporting periods. On an ongoing basis, we
evaluate our estimates and judgments related to revenue
recognition. We base our estimates on historical experience and
on various other factors that we believe are reasonable under
the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.

While our significant accounting policies are
more fully described in Note 2 to our consolidated
financial statements appearing at the end of this report, we
believe that the following accounting policies relating to
revenue recognition and stock-based compensation charges are
most critical to aid you in fully understanding and evaluating
our reported financial results.



| |                    
| | -------------------
| | Revenue Recognition

In connection with our collaboration with Pfizer,
we recognize revenue from non-refundable, up-front, license and
milestone payments not specifically tied to a separate earnings
process ratably over the term of the collaboration, license and
related agreements. When the period of deferral cannot be
specifically identified from the agreement, our management
estimates the period based upon other critical factors contained
within the agreement. We continually review these estimates
which could result in a change in the deferral period and which
might impact the timing and the amount of revenue recognized.
When payments are specifically tied to a separate earnings
process, we will recognize revenue when the specific performance
obligation associated with the payment is completed. Performance
obligations typically consist of significant milestones in the
development life cycle of the related technology, such as
initiation of clinical trials, filing for approval with
regulatory agencies and receipt of approvals by regulatory
agencies. To date, we have received $75 million as an
initial license fee from Pfizer. We will amortize this initial
license fee over 15 years, the effective life of the
agreement. During the year ended December 31, 2003, we
recognized $4.6 million of license fee revenue. At
December 31, 2003, we had $5.0 million of deferred
license fee revenue as current and the balance of
$65.4 million as long-term on our balance sheet.

We report our revenues on a gross reporting
basis, which includes reimbursement to us from Pfizer of
Pfizers share of our cost of development of Macugen for
the period. We have determined that our responsibilities under
our contracts with Pfizer to manage and assume responsibilities
for obtaining FDA approvals for Macugen, including our separate
contractual relationships and responsibilities to our clinical
development contractors and our interaction with monitors and
patients qualify us as principal under the criteria set forth in
Emerging Issues Task Force, or EITF, Issue 99-19
Reporting Gross Revenue as a Principal vs. Net as an
Agent. Additionally, under EITF Issue 01-14,
Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred,
in those cases where we have a primary obligation to conduct
clinical studies and bear risk for selection of and payment to
vendors, among

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other conditions, we recognize reimbursements of
those costs to us by Pfizer as revenue, instead of as an offset
to the expense incurred. We record as expenses costs incurred by
Pfizer for which we are contractually liable. In future periods
we may be liable for costs incurred where we do not meet the
criteria to be considered as the principal. We would record
these costs as expenses, and we may be required to reimburse
Pfizer.




| |                                     
| | ------------------------------------
| | Stock-based Compensation
    Charges

Stock-based compensation charges represent the
difference between the exercise price of options granted to
employees and directors and the fair value of our common stock
on the date of grant for financial statement purposes in
accordance with Accounting Principles Board Opinion No. 25
and its related interpretations. We recognize this compensation
charge over the vesting periods of the shares purchasable upon
exercise of options.

We recorded deferred stock-based compensation
related to stock options granted to employees and directors of
$0.3 million and related amortization of $0.1 million
during 2001, of $1.3 million and related amortization of
$0.2 million during 2002, and of $15.0 million and
related amortization of $2.3 million during the year ended
December 31, 2003. We expect to amortize approximately
$14.0 million of deferred stock-based compensation with
respect to stock options granted through December 31, 2003
in future periods, including $4.1 million during 2004,
$4.1 million during 2005, $3.9 million during 2006 and
$1.9 million during 2007

Accounting Pronouncements

During the year ended December 31, 2003, the
Financial Accounting Standards Board (FASB) issued
various accounting standards and interpretations, including
FASB Statement No 150 Accounting for Certain
Financial Instruments with Characteristics of both Liability and
Equity (SFAS 150), Interpretation
No. 46 (FIN 46), Consolidation of
Variable Interest Entities, an interpretation of
ARB 51 and Interpretation No. 46-R
Consolidation of Variable Interest Entities
(FIN 46-R). We believe that our adoption of
these standards and interpretations has not had a material
effect on our financial condition, results of operations or
liquidity.

Results of Operations



| |                                          
| | -----------------------------------------
| | Year Ended December 31, 2003 and
    2002

Revenue.We
recognized revenue of $41.4 million during 2003, consisting
of $36.8 million from reimbursement of development costs
and $4.6 million from the amortization of the initial
non-refundable, up-front license payment that we received from
Pfizer in connection with our collaboration. 2003 was the first
year in which we generated revenue.

Research and Development
Expenses.Research and development
expenses increased 79% from $39.7 million for 2002 to
$70.9 million for 2003. The increase in research and
development expenses of $31.2 million was attributable to a
$14.9 million increase from the expansion during 2003 of
our Phase 2/3 pivotal clinical trials for the use of
Macugen in the treatment of wet AMD, which became fully enrolled
in August 2002 and related costs, an increase of
$10.2 million relating to the continued development of
manufacturing capabilities and related costs, an increase of
$3.9 million relating to the addition of 51 research and
development staff, an increase of $3.3 million relating to
the opening of our laboratory facilities in Cedar Knolls, New
Jersey and Woburn, Massachusetts and an increase of
$0.9 million associated with the development of drug
delivery technologies and related costs. These increases in cost
were offset by a $2.0 million decrease in licensing fees
and expenses related to development of drug delivery and
manufacturing technologies. We anticipate that research and
development expenses will continue to increase as we further
advance Macugen to commercialization and begin to devote
additional resources to other research and development projects.

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Sales and Marketing
Expenses.Sales and marketing expenses
were $4.6 million for 2003. We had no sales and marketing
expenses in 2002 or 2001. The sales and marketing expenses in
2003 reflect market research expenses and personnel expenses
relating to Macugen.

General and Administrative
Expenses.General and development
expenses increased 29% from $5.3 million for 2002 to
$6.8 million for 2003. The increase resulted from increased
management and personnel expenses and increases in facilities
and infrastructure needed to support our Pfizer collaboration
and further development efforts.

Interest Income.Interest income increased from $1.8 million in 2002 to
$2.2 million in 2003 as a result of a higher level of cash
and marketable securities available for investment during 2003
compared to 2002.



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

Research and Development
Expenses.Research and development
expenses increased 79% from $22.2 million in 2001 to
$39.7 million in 2002. The $17.5 million increase was
attributable principally to an increase of $10.7 million
from the expansion in 2002 of our clinical development programs
relating to Macugen and related costs, primarily our
Phase 2/3 pivotal clinical trials of Macugen as a treatment
for wet AMD, which became fully enrolled in August 2002, to an
increase of $5.4 million relating to the opening of our
laboratory facilities in Cedar Knolls, New Jersey and Woburn,
Massachusetts and the addition of 34 research and
development staff and to an increase of $3.9 million
associated with the development of manufacturing capabilities,
drug delivery technology and related costs, which were partially
offset by a $2.5 million decrease in technology license
fees.

General and Administrative
Expenses.General and administrative
expenses increased 23% from $4.3 million in 2001 to
$5.3 million in 2002. The increase of $1.0 million
resulted principally from an increase in rent related to the
opening of our laboratory facilities in Cedar Knolls, New Jersey
and Woburn, Massachusetts and from an increase in professional
fees arising from the negotiation of the Pfizer collaboration.

Interest Income.Interest income remained constant at $1.8 million for 2002
and 2001.

Liquidity and Capital Resources



| |                     
| | --------------------
| | Sources of Liquidity

Since our inception, we have financed our
operations through the sale of our capital stock, the initial
up-front license fee that we received from Pfizer as part of our
Macugen collaboration and the receipt of interest income.
Through December 31, 2003, we have received net proceeds of
$171.4 million from the issuance of shares of common stock,
convertible preferred stock and warrants. We have also received
net proceeds from capital equipment financing of
$2.4 million. The table below summarizes our initial
issuances of convertible preferred stock and warrants.

|       |     |      |  |                  |  |                     |           |                |  |  |           |  |  |   |        | 
|------ | --- | ---- |  | ---------------- |  | ------------------- | --------- | -------------- |  |  | --------- |  |  | - | ------ | 
|       |     |      |  | Number of        |  | Number of Shares    |           | Approximate   
|Series |     | Date |  | Shares           |  | Underlying Warrants |           | Gross Proceeds
|       |     |      |  |                  |  |                     |           |               
|       |     |      |  |                  |  |                     |           | (In thousands)
|       | A   |      |  | March 2000       |  |                     | 120,000   |                |  |  |          |  |  | $ | 150    | 
|       | B   |      |  | April 2000       |  |                     | 5,766,332 |                |  |  | 1,142,902 |  |  |   | 34,600 | 
|       | B   |      |  | January 2001     |  |                     | 20,666    |                |  |  |          |  |  |   | 124    | 
|       | C-1 |      |  | July-August 2001 |  |                     | 7,964,229 |                |  |  | 1,592,846 |  |  |   | 54,200 | 
|       | C-2 |      |  | August 2002      |  |                     | 7,521,777 |                |  |  | 1,504,354 |  |  |   | 54,200 | 
|       | D   |      |  | February 2003    |  |                     | 2,747,253 |                |  |  |          |  |  |   | 25,000 | 

As of December 31, 2003, warrants to
purchase 3,333 shares of series B convertible
preferred stock, 531,825 shares of series C-1
convertible preferred stock and 506,863 shares of
series C-2 convertible preferred stock had been exercised,
for which we received aggregate cash proceeds of
$7.3 million.

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In connection with our collaboration with Pfizer,
we received the $25.0 million series D investment
reflected in the above table and a $75.0 million up-front
license fee and Pfizer has agreed generally to fund a majority
of the ongoing development costs incurred pursuant to an agreed
development plan covering the development of Macugen for AMD,
DME, retinal vein occlusion and other agreed upon ophthalmic
indications. Pfizer purchased an additional $10 million of
our common stock at the closing of our initial public offering
in February 2004 and is obligated to purchase up to an
additional $15 million of our common stock in specified
circumstances. These obligations of Pfizer are currently our
only committed external source of funds.

As of December 31, 2003, we had
$131.4 million in cash, cash equivalents and marketable
securities. Also as of that date, we had pledged
$5.6 million of restricted cash as collateral for letters
of credit for certain of our leased facilities. We believe that
our available cash, cash equivalents and marketable securities,
together with the net proceeds from our initial public offering,
expected milestone payments and reimbursements from Pfizer under
our collaboration and interest income will be sufficient to fund
anticipated levels of operations through at least the end of
2005. We had no material capital expenditures during 2003 and
expect to have no material capital expenditures in 2004.

On February 4, 2004, we completed our
initial public offering. We sold 7,475,000 shares of our
common stock at $21.00 per share and received net proceeds
of $142,877,000 after deducting underwriting discounts and
commissions and other offering expenses.



| |             
| | ------------
| | Income Taxes

As of December 31, 2003, we had net
operating loss carryforwards for federal income taxes of
$43.3 million. Our utilization of the net operating loss
and tax credit carryforwards may be subject to annual
limitations pursuant to Section 382 of the Internal Revenue
Code, and similar state provisions, as a result of changes in
our ownership structure. The annual limitations may result in
the expiration of net operating losses and credits prior to
utilization.

At December 31, 2003 and 2002, we had
deferred tax assets representing the benefit of net operating
loss carryforwards and certain start up costs capitalized for
tax purposes. We did not record a benefit for the deferred tax
asset because realization of the benefit was uncertain and,
accordingly, a valuation allowance is provided to offset the
deferred tax asset.

During the year ended December 31, 2003, the
$75 million license fee paid by Pfizer resulted in current
taxable income to us. Although we have generated net operating
losses in prior years, we may be liable for payment of
alternative minimum tax in 2003. Accordingly, we have provided
$1.7 million for federal alternative minimum tax and state
income taxes.



| |           
| | ----------
| | Cash Flows

For the year ended December 31, 2003, our
operating activities generated net cash inflows of
$39.4 million. This consisted of a net loss for the period
of $40.7 million and an increase in amounts due from Pfizer
of $2.6 million, offset by the receipt of deferred revenue
in connection with the Pfizer collaboration of
$75.0 million, $4.6 million of which was recorded as
revenue in the year ended December 31, 2003, and an
increase in accounts payable and accrued expenses of
$6.9 million. We used $51.9 million for investing
activities for the year ended December 31, 2003, which
consisted primarily of net purchases of marketable securities.
We received $31.7 million from financing activities during
the year ended December 31, 2003, principally relating to
the issuance of convertible preferred stock to Pfizer for net
proceeds, after transaction costs, of $24.7 million and the
issuance of convertible preferred stock upon the exercise of
warrants for net proceeds of $7.3 million, offset by the
repayment of capital leases of $0.6 million.

For the year ended December 31, 2002, we
used net cash of $39.8 million in operating activities.
This consisted of a net loss for the period of
$43.2 million, offset in part by an increase in accounts
payable and accrued expenses of $1.6 million. We used
$11.9 million for investing activities in 2002, which
consisted principally of net purchases of marketable securities.
We received $54.0 million from financing activities during
2002 relating primarily to the issuance of convertible preferred
stock and warrants in connection with

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our series C-2 preferred stock financing. In
addition, during 2002, we purchased $2.4 million of
equipment under capital leases with a repayment period of four
years.




| |                     
| | --------------------
| | Funding Requirements

We expect to devote substantial resources to
continue our research and development efforts and to expand our
sales, marketing and manufacturing programs associated with the
commercialization and launch of Macugen and other future
products. Our funding requirements will depend on numerous
factors, including:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the success of our collaborative arrangement with
    Pfizer for the development and commercialization of Macugen;                                                                                          
|
| |  | the scope and results of our clinical trials;                                                                                                                                                               
|
| |  | advancement of other product candidates into
    development;                                                                                                                                               
|
| |  | potential acquisition or in-licensing of other
    products or technologies;                                                                                                                                
|
| |  | the timing of, and the costs involved in,
    obtaining regulatory approvals;                                                                                                                               
|
| |  | the cost of manufacturing activities;                                                                                                                                                                       
|
| |  | the cost of commercialization activities,
    including product marketing, sales and distribution;                                                                                                          
|
| |  | the costs involved in preparing, filing,
    prosecuting, maintaining and enforcing patent claims and other
    patent-related costs, including litigation costs and the results
    of such litigation; and
|
| |  | our ability to establish and maintain additional
    collaborative arrangements.                                                                                                                            

We do not expect to generate significant
additional funds, other than payments that we receive from our
collaboration with Pfizer, until we successfully obtain
marketing approval for, and begin selling, Macugen. We believe
that the key factors that will affect our internal and external
sources of cash are:



| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to successfully obtain marketing
    approval for and to commercially launch Macugen;                                                      
|
| |  | the success of our other preclinical and clinical
    development programs;                                                                            
|
| |  | the receptivity of the capital markets to
    financings by biotechnology companies; and                                                               
|
| |  | our ability to enter into additional strategic
    collaborations with corporate and academic collaborators and the
    success of such collaborations.

If our existing resources, including the proceeds
from our initial public offering, are insufficient to satisfy
our liquidity requirements or if we acquire or license rights to
additional product candidates, we may need to raise additional
external funds through the sale of additional equity or debt
securities. The sale of additional equity securities may result
in additional dilution to our stockholders. Additional financing
may not be available in amounts or on terms acceptable to us or
at all. If we are unable to obtain additional financing, we may
be required to reduce the scope of, delay or eliminate some or
all of our planned research, development and commercialization
activities, which could harm our financial condition and
operating results.

Contractual Obligations

Our major outstanding contractual obligations
relate to our capital leases from equipment financings,
facilities leases and obligations under a number of our
collaboration and alliance agreements to pay milestone payments
and royalties to the other parties to these agreements.

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We have summarized in the table below our fixed
contractual cash obligations as of December 31, 2003.

|                                              |  |                        |           |           |  |             |           |            |  |            |           |  |  |   |           |  |  |   |         | 
|--------------------------------------------- |  | ---------------------- | --------- | --------- |  | ----------- | --------- | ---------- |  | ---------- | --------- |  |  | - | --------- |  |  | - | ------- | 
|                                              |  |                       
|                                              |  | Payments Due by Period
|                                              |  |                       
|                                              |  |                        |           | Less Than |  | One to      |           | Four to    |  | After     
|Contractual Obligations                       |  | Total                  |           | One Year  |  | Three Years |           | Five Years |  | Five Years
|                                              |  |                        |           |           |  |             |           |            |  |           
|Capital lease obligations, including interest |  | $                      | 1,656,629 |           |  | $           | 618,350   |            |  | $          | 1,038,279 |  |  | $ |          |  |  | $ |        | 
|Operating leases                              |  |                        | 8,314,003 |           |  |             | 1,555,946 |            |  |            | 4,378,222 |  |  |   | 1,628,065 |  |  |   | 751,770 | 
|                                              |  |                        |           |           |  |             |           |            |  |            |           |  |  |   |           |  |  |   |         | 
|Total contractual cash obligations            |  | $                      | 9,970,632 |           |  | $           | 2,174,296 |            |  | $          | 5,416,501 |  |  | $ | 1,628,065 |  |  | $ | 751,770 | 
|                                              |  |                        |           |           |  |             |           |            |  |            |           |  |  |   |           |  |  |   |         | 

Under our agreements with Gilead, Nektar and
Isis, we are obligated to make payments aggregating up to
$36.3 million upon achieving specified milestones relating
to the development and regulatory approval of Macugen and to pay
royalties based on net sales of Macugen. The events that trigger
the milestone payments include filing of an NDA with the FDA,
making similar filings with foreign regulatory authorities,
receiving marketing approval for Macugen by the FDA or similar
foreign regulatory authorities and the first commercial sale of
Macugen in various countries. These contingent milestone and
royalty payment obligations are not included in the above table.
The above table also excludes minimum monthly payments of
approximately $0.6 million that we are required to pay to
one of our contract manufacturers pending the validation of the
manufacturing process for Macugen.

In January 2004, we entered into a sub-sublease
arrangement for new corporate headquarters, clinical, safety and
regulatory space in New York City. Our rent under the lease
is expected to be $3.2 million for financial statement
purposes in 2004. However, due to rent abatements, we expect
cash expenditures for this property in 2004 to be
$0.1 million. As security for the sublease, we have named
the sub-landlord as beneficiary under a secured bank letter of
credit in the amount of $3,000,000.

If we are not successful in locating a tenant to
assume our sub-lease at 500 Seventh Avenue, New York,
New York, we will be required under generally accepted
accounting principles to assess the recoverability of the
carrying value of our lease. If it is determined that the
amounts due under the lease will not be recoverable, we will
record a loss in connection with this lease. The loss could be
approximately $2.4 million. In connection with our
cessation of use of this facility, we could also incur
additional expenses of approximately $0.3 million during
2004 for the acceleration of amortization and depreciation
expenses in connection with certain leasehold improvements and
furniture and fixtures used at this facility.

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RISK FACTORS THAT MAY AFFECT RESULTS

Risks Relating to Our Business



| |                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend heavily on the success of our
    lead product candidate, Macugen, which is still under
    development and with respect to which pivotal clinical trial
    data became available only recently. If we are unable to
    commercialize Macugen, or experience significant delays in doing
    so, our business will be materially harmed.

We have invested a significant portion of our
time and financial resources since our inception in the
development of Macugen. We anticipate that in the near term our
ability to generate revenues will depend solely on the
successful development and commercialization of Macugen. The
commercial success of Macugen will depend on several factors,
including the following:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | successful completion of clinical trials;                                                                                              
|
| |  | producing batches of the active pharmaceutical
    ingredient used in Macugen in commercial quantities through a
    validated process;
|
| |  | receipt of marketing approvals from the FDA and
    similar foreign regulatory authorities;                                            
|
| |  | success with our manufacturing processes;                                                                                              
|
| |  | launching commercial sales of the product in
    collaboration with Pfizer; and                                                        
|
| |  | acceptance of the product in the medical
    community and with third party payors.                                                    

Based on the results from the first year of our
ongoing Phase 2/3 pivotal clinical trials for the use of
Macugen in the treatment of wet AMD, we plan to prepare and file
a new drug application with the FDA seeking marketing approval
for the 0.3 mg dose of Macugen for the treatment of wet
AMD. We believe that these results warrant this filing. However,
the clinical data have only become available recently. New
information may arise from our continuing analysis of the data
that may be less favorable than currently anticipated. Clinical
data often is susceptible to varying interpretations and many
companies that have believed that their products performed
satisfactorily in clinical trials have nonetheless failed to
obtain FDA approval for their products. Upon the FDAs
review of the data from the first year of our pivotal clinical
trials, it may request that we conduct additional analyses of
the data and, if it believes that the data are not satisfactory,
could advise us to delay our filing of a new drug application.
We may not file our new drug application for Macugen within our
anticipated time frame and, even after we make the filing, the
FDA may not accept the filing, may request additional
information from us, including data from additional clinical
trials, and, ultimately, may not grant marketing approval for
Macugen. If we are not successful in commercializing Macugen, or
are significantly delayed in doing so, our business will be
materially harmed and we may need to curtail or cease operations.



| |                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The success of Macugen depends heavily on
    our collaboration with Pfizer, which was established only
    recently and involves a complex sharing of control over
    decisions, responsibilities and costs and benefits. Any loss of
    Pfizer as a collaborator, or adverse development in the
    collaboration, would materially harm our business.

In December 2002, we entered into our
collaboration with Pfizer to develop and commercialize Macugen
for the prevention and treatment of diseases of the eye. The
collaboration involves a complex sharing of control over
decisions, responsibilities and costs and benefits. For example,
with respect to the sharing of costs and benefits, Pfizer will
co-promote Macugen with us in the United States and will share
with us in profits and losses. Outside the United States, Pfizer
will commercialize Macugen pursuant to an exclusive license and
pay us a royalty on net sales. In addition, Pfizer generally is
required to fund a majority of ongoing development costs
incurred pursuant to an agreed development plan. With respect to
control over decisions and responsibilities, the collaboration
is governed by a joint operating committee, consisting of an
equal number of representatives of us and Pfizer. There are also
subcommittees with equal representation from both parties that
have responsibility over development and regulatory,
manufacturing and commercialization matters.

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Ultimate decision-making authority is vested in
us as to some matters and in Pfizer as to other matters. A third
category of decisions requires the approval of both us and
Pfizer. Outside the United States, ultimate decision-making
authority as to most matters is vested in Pfizer. Pfizer may
terminate the collaboration relationship without cause upon six
to twelve months prior notice, depending on when such
notice is given. Any loss of Pfizer as a collaborator in the
development or commercialization of Macugen, dispute over the
terms of, or decisions regarding, the collaboration or other
adverse development in our relationship with Pfizer would
materially harm our business and might accelerate our need for
additional capital.




| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our clinical trials are unsuccessful, or
    if we experience significant delays in these trials, our ability
    to commercialize Macugen and our future product candidates will
    be impaired.

We must provide the FDA and similar foreign
regulatory authorities with preclinical and clinical data that
demonstrate that our product candidates are safe and effective
for each target indication before they can be approved for
commercial distribution. The preclinical testing and clinical
trials of any product candidates that we develop must comply
with regulation by numerous federal, state and local government
authorities in the United States, principally the FDA, and by
similar agencies in other countries. Clinical development is a
long, expensive and uncertain process and is subject to delays.
We may 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 trial protocol, the
proximity of patients to clinical sites and the eligibility
criteria for the study. Our ongoing clinical trials for the use
of Macugen in the treatment of wet AMD and DME are currently
fully enrolled. We expect to commence enrollment of patients for
a Phase 2 clinical trial for the use of Macugen in the
treatment of retinal vein occlusion in 2004, and we may commence
additional clinical trials in the future. Although, we have not
to date experienced any significant delays in enrolling clinical
trial patients, delays in patient enrollment for future trials
may result in increased costs and delays, which could have a
harmful effect on our ability to develop products.

It may take several years to complete the testing
of a product, and failure can occur at any stage of testing. For
example:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interim results of preclinical or clinical
    studies do not necessarily predict their final results, and
    acceptable results in early studies might not be seen in later
    studies, in large part because earlier phases of studies are
    often conducted on smaller groups of patients than later
    studies, and without the same trial design features, such as
    randomized controls and long-term patient follow-up and analysis;
|
| |  | potential products that appear promising at early
    stages of development may ultimately fail for a number of
    reasons, including the possibility that the products may be
    ineffective, less effective than products of our competitors or
    cause harmful side effects;                                                                                                                                                               
|
| |  | any preclinical or clinical test may fail to
    produce results satisfactory to the FDA or foreign regulatory
    authorities;                                                                                                                                                                                                                                                                                                                   
|
| |  | preclinical and clinical data can be interpreted
    in different ways, which could delay, limit or prevent
    regulatory approval;                                                                                                                                                                                                                                                                                                              
|
| |  | negative or inconclusive results from a
    preclinical study or clinical trial or adverse medical events
    during a clinical trial could cause a preclinical study or
    clinical trial to be repeated or a program to be terminated,
    even if other studies or trials relating to the program are
    successful;                                                                                                                         
|
| |  | the FDA can place a clinical hold on a trial if,
    among other reasons, it finds that patients enrolled in the
    trial are or would be exposed to an unreasonable and significant
    risk of illness or injury;                                                                                                                                                                                                                              
|
| |  | 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; and                                                                                                                                                                                                            
|
| |  | our clinical trials may not demonstrate the
    safety and efficacy needed for our products to receive
    regulatory approval.                                                                                                                                                                                                                                                                                                                   

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We have completed the first year of our
Phase 2/3 pivotal clinical trials for the use of Macugen in
the treatment of wet AMD based on which we plan to file an NDA
in the third quarter of 2004. We are currently conducting a
second year of these trials. We have also fully enrolled a
Phase 2 clinical trial for the use of Macugen in the
treatment of DME. To obtain marketing approval, we may decide
to, or the FDA or other regulatory authorities may require us
to, pursue additional clinical trials or other studies of
Macugen. For example, in addition to our pending Phase 2
clinical trial for the use of Macugen in the treatment of DME,
we will need to conduct Phase 3 clinical trials before
filing a new drug application for this indication.

In addition, as part of the drug approval
process, we must conduct a comprehensive assessment of the
carcinogenic, or cancer causing, potential of our product
candidates. Our testing of Macugen to date indicates that the
products carcinogenic potential is low, although one of
the animal tests that we performed suggests that two of the
metabolites of Macugen are compounds as to which there may be
carcinogenicity risk. As a result, we may be required to conduct
additional carcinogenicity testing of Macugen. Based on our
discussions with the FDA to date, if we are required to conduct
further carcinogenicity testing of Macugen in connection with
its use in the treatment of wet AMD, we believe that the FDA
will allow us to conduct any such testing as a post-NDA approval
study. However, we will not be certain of this until the NDA
review process of Macugen for this indication is completed. We
expect that the FDA will require us to complete satisfactory
carcinogenicity testing of Macugen prior to any approval of the
use of Macugen in the treatment of DME.

If we are required to conduct additional clinical
trials or other studies of Macugen beyond those that we
currently contemplate, if we are unable to successfully complete
our clinical trials or other studies or if the results of these
trials or studies are not positive or are only modestly
positive, we may be delayed in obtaining marketing approval for
Macugen, we may not be able to obtain marketing approval or we
may obtain approval for indications that are not as broad as
intended. Our product development costs will also increase if we
experience delays in testing or approvals. Significant clinical
trial delays could allow our competitors to bring products to
market before we do and impair our ability to commercialize our
products or potential products. If any of this occurs, our
business will be materially harmed.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face substantial competition which may
    result in others discovering, developing or commercializing
    products before or more successfully than us.

The development and commercialization of new
drugs is highly competitive. We will face competition with
respect to Macugen and any products we may develop or
commercialize in the future from major pharmaceutical companies,
specialty pharmaceutical companies and biotechnology companies
worldwide. Our competitors may develop products or other novel
technologies that are more effective, safer or less costly than
any that we are developing. Our competitors may also obtain FDA
or other regulatory approval for their products more rapidly
than we may obtain approval for ours.

The two therapies currently available for the
treatment of wet AMD are photodynamic therapy, which was
developed by QLT, Inc. and is marketed by Novartis AG, and
thermal laser treatment. The current therapies for the treatment
of DME are thermal laser treatment and steroid treatment
administered by physicians on an off-label basis. Unless
additional therapies are approved, these existing therapies will
represent the principal competition for Macugen if Macugen is
approved for marketing. In January 2004, the Centers for
Medicare & Medicaid Services issued a decision stating
its intention to expand the patient population for which it
would provide reimbursement for photodynamic therapy.

Additional treatments for AMD and DME are in
various stages of preclinical or clinical testing. If approved,
these treatments would also compete with Macugen. Potential
treatments in late stage clinical trials include drugs sponsored
by Alcon, Inc., a collaboration of Genentech, Inc. and
Novartis, Allergan, Inc. through its recent acquisition of
Oculex Pharmaceuticals, Inc., Miravant Medical
Technologies, Eli Lilly and Co. and Bausch & Lomb
Incorporated. Some of the sponsors of these potential products
have recently announced favorable results from Phase 1 or
Phase 2 clinical trials. The Genentech/ Novartis
collaboration is developing an anti-VEGF humanized antibody
fragment for intravitreal injection. This product candidate may
be viewed as particularly competitive with Macugen because of
the similarity of its mechanism of action. In addition, Alcon is
testing anecortave acetate, an angiostatic steroid, for the
treatment of wet AMD patients

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which features a less invasive injectable
delivery that requires less frequent administration (every six
months). Other laser, surgical or pharmaceutical treatments for
AMD and DME may also compete against Macugen. These competitive
therapies may result in pricing pressure if we receive marketing
approval for Macugen even if Macugen is otherwise viewed as a
preferable therapy.


Many of our competitors have substantially
greater financial, technical and human resources than we have.
Additional mergers and acquisitions in the pharmaceutical and
biotechnology industries may result in even more resources being
concentrated in our competitors. Competition may increase
further as a result of advances made in the commercial
applicability of technologies and greater availability of
capital for investment in these fields.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | We may not be successful in our efforts to
    expand our portfolio of products.

A key element of our strategy is to commercialize
a portfolio of new ophthalmic drugs in addition to Macugen. We
are seeking to do so through our internal research programs and
through licensing or otherwise acquiring the rights to potential
new drugs and drug targets for the treatment of ophthalmic
disease.

A significant portion of the research that we are
conducting involves new and unproven technologies. Research
programs to identify new disease targets and product candidates
require substantial technical, financial and human resources
whether or not we ultimately identify any candidates. Our
research programs may initially show promise in identifying
potential product candidates, yet fail to yield product
candidates for clinical development for a number of reasons,
including:



| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the research methodology used may not be
    successful in identifying potential product candidates; or                                                                        
|
| |  | potential product candidates may on further study
    be shown to have harmful side effects or other characteristics
    that indicate they are unlikely to be effective drugs.

We may be unable to license or acquire suitable
product candidates or products from third parties for a number
of reasons. In particular, the licensing and acquisition of
pharmaceutical products is a competitive area. A number of more
established companies are also pursuing strategies to license or
acquire products in the ophthalmic field. These established
companies may have a competitive advantage over us due to their
size, cash resources and greater clinical development and
commercialization capabilities. Other factors that may prevent
us from licensing or otherwise acquiring suitable product
candidates include the following:



| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may be unable to license or acquire the
    relevant technology on terms that would allow us to make an
    appropriate return from the product;
|
| |  | companies that perceive us to be their
    competitors may be unwilling to assign or license their product
    rights to us; or                    
|
| |  | we may be unable to identify suitable products or
    product candidates within our areas of expertise.                                            

If we are unable to develop suitable potential
product candidates through internal research programs or by
obtaining rights to novel therapeutics from third parties, our
business will suffer.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | Market acceptance of Macugen and other
    products we develop in the future that are based on new
    technologies may be limited.

The commercial success of the products for which
we may obtain marketing approval from the FDA or other
regulatory authorities will depend upon the acceptance of these
products by the medical community and third party payors as
clinically useful, cost-effective and safe. Even if a potential
product displays a favorable efficacy and safety profile in
clinical trials, market acceptance of the product will not be
known until after it is commercially launched. We expect that
many of the products that we develop will be based upon new
technologies. For example, Macugen is an aptamer, which is a
type of nucleic acid. To date, no aptamer has been approved as a
pharmaceutical by the FDA. As a result, it may be more difficult
for us to achieve market acceptance of our products,
particularly the first products that we introduce to the market
based on new technologies. Our efforts to educate the medical
community about these potentially unique approaches may

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require greater resources than would be typically
required for products based on conventional technologies. The
safety, efficacy, convenience and cost-effectiveness of our
products as compared to competitive products will also affect
market acceptance.




| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are in the process of establishing our
    sales and marketing capabilities. We will need to successfully
    recruit marketing and sales personnel and build a marketing and
    sales infrastructure to successfully commercialize Macugen and
    other products that we develop, acquire or
    license.

We have limited experience in marketing or
selling products and are in the process of establishing our
sales and marketing capabilities. To achieve commercial success
for any approved product, we must either develop a sales and
marketing organization or outsource these functions to third
parties. We are beginning to recruit a specialty sales force to
participate in detailing Xalatan and, assuming regulatory
approval, to market and sell Macugen in the United States in
collaboration with Pfizer. If we are not successful in
recruiting sales and marketing personnel or in building a sales
and marketing infrastructure, our business will materially
suffer. Moreover, if the commercial launch of Macugen is delayed
as a result of FDA requirements or other reasons, we may
establish sales and marketing capabilities too early relative to
the launch of Macugen. This may be expensive, and our investment
would be lost if we cannot retain our sales and marketing
personnel.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | We expect to depend on collaborations with
    third parties to develop and commercialize our
    products.

Our business strategy includes entering into
collaborations with corporate and academic collaborators for the
research, development and commercialization of additional
product candidates, such as our collaboration with Pfizer. These
arrangements may not be scientifically or commercially
successful. The termination of any of these arrangements might
adversely affect our ability to develop, commercialize and
market our products.

The success of our collaboration arrangements
will depend heavily on the efforts and activities of our
collaborators. Our collaborators will have significant
discretion in determining the efforts and resources that they
will apply to these collaborations. The risks that we face in
connection with these collaborations, including our
collaboration with Pfizer, include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our collaboration agreements are, or are expected
    to be, for fixed terms and subject to termination under various
    circumstances, including, in many cases, on short notice without
    cause;                                                                                                                                                                                                                                                                          
|
| |  | we expect to be required in our collaboration
    agreements not to conduct specified types of research and
    development in the field that is the subject of the
    collaboration. These agreements may have the effect of limiting
    the areas of research and development that we may pursue, either
    alone or in cooperation with third parties;                                                                                                                   
|
| |  | our collaborators may develop and commercialize,
    either alone or with others, products and services that are
    similar to or competitive with our products that are the subject
    of the collaboration with us; and                                                                                                                                                                                                                                                    
|
| |  | our collaborators may change the focus of their
    development and commercialization efforts. Pharmaceutical and
    biotechnology companies historically have re-evaluated their
    priorities following mergers and consolidations, which have been
    common in recent years in these industries. The ability of our
    products to reach their potential could be limited if our
    collaborators decrease or fail to increase spending relating to
    such products.

Collaborations with pharmaceutical companies and
other third parties often are terminated or allowed to expire by
the other party. Such terminations or expirations can adversely
affect us financially as well as harm our business reputation.



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be successful in establishing
    additional collaborations, which could adversely affect our
    ability to develop and commercialize products and
    services.

An important element of our business strategy is
entering into collaborations for the development and
commercialization of products when we believe that doing so will
maximize product value. If we are unable to

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reach agreements with suitable collaborators, we
may fail to meet our business objectives for the affected
product or program. We face significant competition in seeking
appropriate collaborators. Moreover, these collaboration
arrangements are complex to negotiate and time consuming to
document. We may not be successful in our efforts to establish
additional collaborations or other alternative arrangements. The
terms of any additional collaborations or other arrangements
that we establish may not be favorable to us. Moreover, these
collaborations or other arrangements may not be successful.




| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have no manufacturing capabilities and
    limited manufacturing personnel. We will depend on third parties
    to manufacture Macugen and future products. If these
    manufacturers fail to meet our requirements, our product
    development and commercialization efforts may be materially
    harmed.

We have limited personnel with experience in, and
we do not own facilities for, manufacturing any products. We
will depend on third parties to manufacture Macugen and any
future products that we may develop.

For our clinical trials of Macugen, we engaged a
third party manufacturer to produce the active pharmaceutical
ingredient used in Macugen. We have entered into an agreement
with an affiliate of this third party for commercial supply of
the active pharmaceutical ingredient. For our clinical trials of
Macugen, we also engaged a separate fill and finish manufacturer
for the finished drug product to formulate the active
pharmaceutical ingredient from a powder into a solution and to
fill the solution into syringes. We have entered into an
agreement with this manufacturer to provide these finished
product services for commercial supply. These manufacturers of
Macugen will be single source suppliers to us for a significant
period of time. We also expect to continue to rely on a single
source of supply for the PEGylation reagent used in the
manufacture of Macugen.

We have manufactured Macugen at commercial scale
but not with the consistency and at the capacity that we believe
will be required for commercial sale. In addition, we have not
completed the manufacturing process validations that are part of
the regulatory requirements to obtain marketing approval for
Macugen. Furthermore, in order to produce Macugen in the
quantities necessary to meet anticipated market demand if the
product is approved, we and our contract manufacturer will need
to increase the manufacturing capacity for the active
pharmaceutical ingredient. We initially intend to increase
manufacturing capacity for the active pharmaceutical ingredient
by installing additional manufacturing lines at the contract
manufacturers facility. We are also exploring alternatives
for increasing manufacturing capacity, including developing
alternative manufacturing methods for the active pharmaceutical
ingredient. If we are unable to validate our commercial scale
manufacturing process or increase our manufacturing capacity, or
if the cost of this increased capacity is uneconomic to us, we
may not be able to produce Macugen in a sufficient quantity to
meet the requirements for the launch of the product or to meet
future demand. In addition, our revenues and gross margins could
be adversely affected.

Reliance on third party manufacturers entails
risks to which we would not be subject if we manufactured
products ourselves, including:



| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | reliance on the third party for regulatory
    compliance and quality assurance;                                                                                                 
|
| |  | the possible breach of the manufacturing
    agreement by the third party because of factors beyond our
    control; and                                                         
|
| |  | the possibility of termination or non-renewal of
    the agreement by the third party, based on its own business
    priorities, at a time that is costly or inconvenient for us.

We may in the future elect to manufacture some of
our products in our own manufacturing facilities. We would need
to invest substantial additional funds and recruit qualified
personnel in order to build or lease and operate any
manufacturing facilities.

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| |                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The manufacture and packaging of
    pharmaceutical products such as Macugen are subject to the
    requirements of the FDA and similar foreign regulatory bodies.
    If we or our third party manufacturers fail to satisfy these
    requirements, our product development and commercialization
    efforts may be materially harmed.

The manufacture and packaging of pharmaceutical
products, such as Macugen and our future product candidates, are
regulated by the FDA and similar foreign regulatory bodies and
must be conducted in accordance with the FDAs current good
manufacturing practices and comparable requirements of foreign
regulatory bodies. There are a limited number of manufacturers
that operate under these current good manufacturing practices
regulations who are both capable of manufacturing Macugen and
willing to do so. Failure by us or our third party manufacturers
to comply with applicable regulations, requirements, or
guidelines could result in sanctions being imposed on us,
including fines, injunctions, civil penalties, failure of
regulatory authorities to grant marketing approval of our
products, delays, suspension or withdrawal of approvals, license
revocation, seizures or recalls of product, operating
restrictions and criminal prosecutions, any of which could
significantly and adversely affect our business.

Changes in the manufacturing process or
procedure, including a change in the location where the product
is manufactured or a change of a third party manufacturer, may
require prior FDA review or approval or revalidation of the
manufacturing process and procedures in accordance with the
FDAs current good manufacturing practices. There may be
comparable foreign requirements. This review or revalidation may
be costly and time consuming and could delay or prevent the
launch of a product. For example, our third party contract
manufacturer of the active pharmaceutical ingredient of Macugen
plans to produce commercial quantities at a different site than
the site used by our contract manufacturers affiliate to
manufacture the active pharmaceutical ingredient for clinical
trial use. To effect this change of site, we and the
manufacturer need to transfer the relevant manufacturing
technology to the new site. This is a detailed and time
consuming process that we have not yet fully completed. Because
of this change of site, the FDA is requiring us to perform
analytical tests to demonstrate that changing the manufacturing
location has not affected the characteristics of the product. If
we cannot establish that the products manufactured at the new
site are equivalent to those manufactured at the prior site to
the satisfaction of the FDA, we may not obtain or may be delayed
in obtaining approval to launch Macugen. In addition, if we
elect to manufacture products in our own facility or at the
facility of another third party, we would need to ensure that
the new facility and the manufacturing process are in
substantial compliance with current good manufacturing
practices. Any such new facility would be subject to a
pre-approval inspection by FDA.

Furthermore, in order to obtain approval of our
products, including Macugen, by the FDA and foreign regulatory
agencies, we need to complete testing on both the active
pharmaceutical ingredient and on the finished product in the
packaging we propose for commercial sales. This includes testing
of stability, identification of impurities and testing of other
product specifications by validated test methods. If the
required testing is delayed or produces unfavorable results, we
may not obtain approval to launch the product or approval may be
delayed. With respect to Macugen, the testing is ongoing and has
not been completed. If there are delays or if the testing
produces unfavorable results, we may not obtain or may be
delayed in obtaining approval to launch Macugen.

The FDA and similar foreign regulatory bodies may
also implement new standards, or change their interpretation and
enforcement of existing standards and requirements, for
manufacture, packaging, or testing of products at any time. If
we are unable to comply, we may be subject to regulatory, civil
actions or penalties which could significantly and adversely
affect our business.



| |                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Macugen and our other potential products
    may not be commercially viable if we fail to obtain an adequate
    level of reimbursement for these products by Medicare and other
    third party payors. The markets for our products may also be
    limited by the indications for which their use may be reimbursed
    or the frequency in which they may be
    administered.

The availability and levels of reimbursement by
governmental and other third party payors affect the market for
products such as Macugen and others that we may develop. These
third party payors continually

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attempt to contain or reduce the costs of
healthcare by challenging the prices charged for medical
products and services. In some foreign countries, particularly
the countries of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities
can take six to twelve months or longer after the receipt of
regulatory marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be
required to conduct a clinical trial that compares the
cost-effectiveness of our products, including Macugen, to other
available therapies. If reimbursement for our products is
unavailable or limited in scope or amount or if pricing is set
at unsatisfactory levels, our business could be materially
harmed.


Because most persons suffering from wet AMD are
elderly, we expect that coverage for Macugen in the United
States will be primarily through the Medicare program. Although
drugs that are not usually self-administered are ordinarily
covered by Medicare, the Medicare program has taken the position
that it can decide not to cover particular drugs if it
determines that they are not reasonable and
necessary for Medicare beneficiaries. Our business would
be materially adversely affected if the Medicare program were to
make such a determination and deny reimbursement of Macugen. Our
business also could be adversely affected if physicians are not
reimbursed by Medicare for the cost of the procedure in which
they administer Macugen on a basis satisfactory to the
administering physicians. If the local contractors that
administer the Medicare program are slow to reimburse physicians
for Macugen, the physicians may pay us more slowly, which would
adversely affect our working capital requirements.

We also will need to obtain approvals for payment
for Macugen from private insurers, including managed care
organizations. We expect that private insurers will consider the
efficacy, cost-effectiveness and safety of Macugen in
determining whether to approve reimbursement for Macugen therapy
and at what level. Obtaining these approvals can be a time
consuming and expensive process. Our business would be
materially adversely affected if we do not receive approval for
reimbursement of Macugen from private insurers on a satisfactory
basis.

Our business could also be adversely affected if
the Medicare program or other reimbursing bodies or payors limit
the indications for which Macugen will be reimbursed to a
smaller set than we believe it is effective in treating or
establish a limitation on the frequency with which Macugen may
be administered that is less often than we believe would be
effective.

We expect to experience pricing pressures in
connection with the sale of Macugen and our future products due
to the trend toward programs aimed at reducing healthcare costs,
the increasing influence of health maintenance organizations and
additional legislative proposals.



| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The recent Medicare prescription drug
    coverage legislation and future legislative or regulatory reform
    of the healthcare system may affect our ability to sell our
    products profitably.

In both the United States and some foreign
jurisdictions, there have been a number of legislative and
regulatory proposals to change the healthcare system in ways
that could affect our ability to sell our products profitably.
In the United States, new legislation has been proposed at the
federal and state levels that would result in significant
changes to the healthcare system, either nationally or at the
state level. In particular, in December 2003, President Bush
signed into law new Medicare prescription drug coverage
legislation. In January 2004, the legislation changed the
methodology used to calculate reimbursement for drugs such as
Macugen that are administered in physicians offices in a
manner intended to reduce the amount that is subject to
reimbursement. In addition, beginning in January 2006, the
legislation directs the Secretary of Health and Human Services
to contract with procurement organizations to purchase
physician-administered drugs from the manufacturers and provides
physicians with the option to obtain drugs through these
organizations as an alternative to purchasing from the
manufacturers, which some physicians may find advantageous.
These changes may also cause private insurers to reduce the
amounts that they will pay for physician-administered drugs. In
addition, the Centers for Medicare & Medicaid Services,
or CMS, the agency within the Department of Health and Human
Services that administers Medicare and will be responsible for
reimbursement of the cost of Macugen, has asserted the authority
of Medicare not to cover particular drugs if it determines that
they are not reasonable and necessary for Medicare
beneficiaries or to

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cover them at a lesser rate, comparable to that
for drugs already reimbursed that CMS considers to be
therapeutically comparable. Further federal and state proposals
and healthcare reforms are likely. Our results of operations
could be materially adversely affected by the Medicare
prescription drug coverage legislation, by the possible effect
of this legislation on amounts that private insurers will pay
and by other healthcare reforms that may be enacted or adopted
in the future.




| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | We face the risk of product liability
    claims and may not be able to obtain insurance.

Our business exposes us to the risk of product
liability claims that is inherent in the manufacturing, testing
and marketing of drugs and related products. If the use of one
or more of our products harms people, we may be subject to
costly and damaging product liability claims. We have product
liability insurance that covers our clinical trials up to a
$10 million annual aggregate limit. We intend to expand our
insurance coverage to include the sale of commercial products if
we obtain marketing approval for any of the products that we may
develop. Insurance coverage is increasingly expensive. We may
not be able to obtain or maintain adequate protection against
potential liabilities. If we are unable to obtain insurance at
acceptable cost or otherwise protect against potential product
liability claims, we will be exposed to significant liabilities,
which may materially and adversely affect our business and
financial position. These liabilities could prevent or interfere
with our product development and commercialization efforts.



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on our key personnel. If we are
    not able to retain them or recruit additional technical
    personnel, our business will suffer.

We are highly dependent on the principal members
of our management and scientific staff, particularly
Dr. David R. Guyer, our co-founder and Chief Executive
Officer, and Dr. Anthony P. Adamis, our co-founder, Chief
Scientific Officer and Senior Vice President, Research. Our
employment agreements with these and our other executive
officers are terminable on short or no notice. We do not carry
key man life insurance on any of our key personnel. The loss of
service of any of our key employees could harm our business.

In addition, our growth will require us to hire a
significant number of qualified technical, commercial and
administrative personnel. There is intense competition from
other companies and research and academic institutions for
qualified personnel in the areas of our activities. If we cannot
continue to attract and retain, on acceptable terms, the
qualified personnel necessary for the continued development of
our business, we may not be able to sustain our operations or
grow.



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on third parties in the conduct
    of our clinical trials for Macugen and any failure of those
    parties to fulfill their obligations could adversely affect our
    development and commercialization plans.

We depend on independent clinical investigators,
contract research organizations and other third party service
providers in the conduct of our clinical trials for Macugen and
expect to do so with respect to other product candidates. We
rely heavily on these parties for successful execution of our
clinical trials, but do not control many aspects of their
activities. For example, the investigators are not our
employees. However, we are responsible for ensuring that each of
our clinical trials is conducted in accordance with the general
investigational plan and protocols for the trial. Third parties
may not complete activities on schedule, or may not conduct our
clinical trials in accordance with regulatory requirements or
our stated protocols. The failure of these third parties to
carry out their obligations could delay or prevent the
development, approval and commercialization of Macugen and
future product candidates.

Regulatory Risks



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to obtain marketing
    approval for any of the products resulting from our development
    efforts, including Macugen. Failure to obtain these approvals
    could materially harm our business.

All of the products that we are developing or may
develop in the future will require additional research and
development. The research and development work that we must
perform will include extensive preclinical

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studies and clinical trials. We will be required
to obtain an effective investigational new drug application, or
IND, prior to initiating human clinical trials and must obtain
regulatory approval prior to any commercial distribution. This
process is expensive, uncertain and lengthy, often taking a
number of years until a product is approved for commercial
distribution. We have only one product, Macugen, that has
advanced to the point that it is undergoing clinical trials. We
have not received regulatory approval to market Macugen in any
jurisdiction. Failure to obtain required regulatory approvals
could materially harm our business.


We may need to successfully address a number of
technological challenges in order to complete the development of
Macugen or any of our future products. For example, to obtain
marketing approval for Macugen, we will be required to
consistently produce the active pharmaceutical ingredient in
commercial quantities and of specified quality on a repeated
basis and document our ability to do so. This is referred to as
process validation. We have not yet satisfied this process
validation requirement and, if we are unable to do so, our
business will be materially adversely affected.

In addition, administration of a drug via
intravitreal injection is a new method for the potentially
long-term treatment of chronic eye disease. As a result, the FDA
and other regulatory agencies may apply new standards for
safety, manufacturing, packaging and distribution of drugs using
this mode of administration, including Macugen. We are working
with the FDA in connection with its development of appropriate
standards for drugs using this mode of administration. We expect
the FDA to finalize these standards in the near future. As part
of this process, we also support efforts by the United States
Pharmacopoeia, which works with the FDA to establish standards,
to devise a particulate limit and a standard to measure
particulate matter for ophthalmologic treatments that would be
appropriate for treatments to be administered via ultra
low-volume injectables. It may be time consuming or expensive
for us to comply with these standards. This could result in
delays in our obtaining marketing approval for Macugen, or
possibly preclude us from obtaining such approval. This could
also increase our commercialization costs, possibly materially.

Furthermore, Macugen and any of our future
products may not be effective, may be only moderately effective
or may prove to have undesirable or unintended side effects,
toxicities or other characteristics that may preclude our
obtaining regulatory approval or prevent or limit commercial
use, which could have a material adverse effect on our business.
The FDA and other regulatory authorities may not approve any
product that we develop.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fast track designation for
    development of Macugen may not actually lead to a faster
    development or regulatory review or approval
    process.

If a drug is intended for the treatment of a
serious or life-threatening condition and the drug demonstrates
the potential to address unmet medical needs for this condition,
the drug sponsor may apply for FDA fast track
designation. The fast track classification does not apply to the
product alone, but applies to the combination of the product and
the specific indication or indications for which it is being
studied. The FDAs fast track programs are designed to
facilitate the clinical development and evaluation of the
drugs safety and efficacy for the fast track indication or
indications. Marketing applications filed by sponsors of
products in fast track development may qualify for expedited
review under policies or procedures offered by the FDA, but the
fast track designation does not assure such qualification.
Although we have obtained a fast track designation from the FDA
for Macugen for the treatment of both wet AMD and DME, we may
not experience a faster development process, review or approval
compared to conventional FDA procedures. Our fast track
designation may be withdrawn by the FDA if it believes that the
designation is no longer supported by data from our clinical
development program. Our fast track designation does not
guarantee that we will qualify for or be able to take advantage
of the expedited review procedures.



| |                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products could be subject to
    restrictions or withdrawal from the market and we may be subject
    to penalties if we fail to comply with regulatory requirements,
    or if we experience unanticipated problems with our products,
    when and if any of them are approved.

Any product for which we obtain marketing
approval, along with the manufacturing processes, post-approval
clinical data, advertising and promotional activities for such
product, will be subject to continual

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requirements, review and periodic inspections by
the FDA and other regulatory bodies. Even if regulatory approval
of a product is granted, the approval may be subject to
limitations on the indicated uses for which the product may be
marketed or to the conditions of approval, or contain
requirements for costly post-marketing testing and surveillance
to monitor the safety or efficacy of the product. Later
discovery of previously unknown problems with our products,
manufacturer or manufacturing processes, or failure to comply
with regulatory requirements, may result in:




| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | restrictions on such products or manufacturing
    processes;    
|
| |  | withdrawal of the products from the market;                      
|
| |  | voluntary or mandatory recall;                                   
|
| |  | fines;                                                           
|
| |  | suspension of regulatory approvals;                              
|
| |  | product seizure; and                                             
|
| |  | injunctions or the imposition of civil or
    criminal penalties.

We may be slow to adapt, or we may never adapt,
to changes in existing regulatory requirements or adoption of
new regulatory requirements or policies.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | Failure to obtain regulatory approval in
    foreign jurisdictions would prevent us from marketing our
    products abroad.

We intend to have our products marketed outside
the United States. In order to market our products in the
European Union and many other foreign jurisdictions, we must
obtain separate regulatory approvals and comply with numerous
and varying regulatory requirements. In the case of Macugen,
Pfizer has responsibility to obtain regulatory approvals outside
the United States, and we will depend on Pfizer to obtain these
approvals. The approval procedure varies among countries and can
involve additional testing. The time required to obtain approval
may differ from that required to obtain FDA approval. The
foreign regulatory approval process may include all of the risks
associated with obtaining FDA approval. We may not obtain
foreign regulatory approvals on a timely basis, if at all.
Approval by the FDA does not ensure approval by regulatory
authorities in other countries, and approval by one foreign
regulatory authority does not ensure approval by regulatory
authorities in other foreign countries or by the FDA. We and our
collaborators may not be able to file for regulatory approvals
and may not receive necessary approvals to commercialize our
products in any market. The failure to obtain these approvals
could materially adversely affect our business, financial
condition and results of operations.



| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have only limited experience in
    regulatory affairs, and some of our products may be based on new
    technologies. These factors may affect our ability or the time
    we require to obtain necessary regulatory
    approvals.

We have only limited experience in filing and
prosecuting the applications necessary to gain regulatory
approvals. Moreover, some of the products that are likely to
result from our product development, licensing and acquisition
programs may be based on new technologies that have not been
extensively tested in humans. The regulatory requirements
governing these types of products may be less well defined or
more rigorous than for conventional products. As a result, we
may experience a longer regulatory process in connection with
obtaining regulatory approvals of any products that we develop,
license or acquire.

Risks Relating to Intellectual
Property



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to obtain and maintain
    protection for the intellectual property incorporated into our
    products, the value of our technology and products will be
    adversely affected.

Our success will depend in large part on our
ability or the ability of our licensors to obtain and maintain
protection in the United States and other countries for the
intellectual property incorporated into our products.

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The patent situation in the field of
biotechnology and pharmaceuticals generally is highly uncertain
and involves complex legal and scientific questions. Neither we
nor our licensors may be able to obtain additional issued
patents relating to our technology. Even if issued, patents may
be challenged, narrowed, invalidated, or circumvented, which
could limit our ability to stop competitors from marketing
similar products or limit the length of term of patent
protection we may have for our products. In addition, our
patents and our licensors patents also may not afford us
protection against competitors with similar technology. Because
patent applications in the United States and many foreign
jurisdictions are typically not published until 18 months
after filing, or in some cases not at all, and because
publications of discoveries in the scientific literature often
lag behind actual discoveries, neither we nor our licensors can
be certain that we or they were the first to make the inventions
claimed in issued patents or pending patent applications, or
that we or they were the first to file for protection of the
inventions set forth in these patent applications.




| |                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to comply with our obligations
    in the agreements under which we license development or
    commercialization rights to products or technology from third
    parties, we could lose license rights that are important to our
    business.

We are a party to a number of technology licenses
that are important to our business and expect to enter into
additional licenses in the future. For example, we hold licenses
from Gilead, Nektar Therapeutics and Isis Pharmaceuticals under
patents relating to Macugen. These licenses impose various
commercialization, milestone payment, royalty, insurance, and
other obligations on us. If we fail to comply with these
obligations, the licensor may have the right to terminate the
license, in which event we would not be able to market products,
including Macugen, that were covered by the license.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to protect the
    confidentiality of our proprietary information and know-how, the
    value of our technology and products could be adversely
    affected.

In addition to patented technology, we rely upon
unpatented proprietary technology, processes, and know-how. We
seek to protect this information in part by confidentiality
agreements with our employees, consultants and third parties.
These agreements may be breached, and we may not have adequate
remedies for any such breach. In addition, our trade secrets may
otherwise become known or be independently developed by
competitors.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Third parties may own or control patents or
    patent applications that would be infringed by our technologies,
    drug targets or potential products. This could cause us to
    become involved in expensive patent litigation or other
    proceedings, which could result in our incurring substantial
    costs and expenses and liability for damages. This could also
    require us to seek licenses, which could increase our
    development and commercialization costs. In either case, this
    could require us to stop some of our development and
    commercialization efforts.

We may not have rights under some patents or
patent applications that would be infringed by technologies that
we use in our research, drug targets that we select or product
candidates that we seek to develop and commercialize. Third
parties may own or control these patents and patent applications
in the United States and abroad. These third parties could bring
claims against us or our collaborators that would cause us to
incur substantial expenses and, if successful against us, could
cause us to pay substantial damages. Further, if a patent
infringement suit were brought against us or our collaborators,
we or they could be forced to stop or delay research,
development, manufacturing or sales of the product or product
candidate that is the subject of the suit.

As a result of patent infringement claims, or in
order to avoid potential claims, we or our collaborators may
choose to seek, or be required to seek, a license from the third
party and would most likely be required to pay license fees or
royalties or both. These licenses may not be available on
acceptable terms, or at all. Even if we or our collaborators
were able to obtain a license, the rights may be nonexclusive,
which would give our competitors access to the same intellectual
property. Ultimately, we could be prevented from commercializing
a product, or be forced to cease some aspect of our business
operations if, as a result of actual or threatened

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patent infringement claims, we or our
collaborators are unable to enter into licenses on acceptable
terms. This could harm our business significantly.


There has been substantial litigation and other
proceedings regarding the patent and other intellectual property
rights in the pharmaceutical and biotechnology industries. In
addition to infringement claims against us, we may become a
party to other patent litigation and other proceedings,
including interference proceedings declared by the United States
Patent and Trademark Office and opposition proceedings in the
European Patent Office, regarding intellectual property rights
with respect to our products and technology. The cost to us of
any patent litigation or other proceeding, even if resolved in
our favor, could be substantial. Some of our competitors may be
able to sustain the costs of such litigation or proceedings more
effectively than we can because of their substantially greater
financial resources. Uncertainties resulting from the initiation
and continuation of patent litigation or other proceedings could
have a material adverse effect on our ability to compete in the
marketplace. Patent litigation and other proceedings may also
absorb significant management time.

Risks Relating to Our Financial Results and
Need for Financing



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have a limited operating history and
    have incurred losses since inception. If we do not generate
    significant revenues, we will not be able to achieve
    profitability.

We have no current source of product revenue. We
have a limited operating history and have not yet commercialized
any products. To date, we have focused primarily on the
development of Macugen. We began operations in 2000, and we have
not been profitable in any quarter since inception. As of
December 31, 2003, we had an accumulated deficit of
approximately $137.5 million. We expect to increase our
spending significantly as we continue to expand our
infrastructure, development programs and commercialization
activities. As a result, we will need to generate significant
revenues to pay these costs and achieve profitability. We do not
know whether or when we will become profitable because of the
significant uncertainties with respect to our ability to
generate revenues from the sale of our products and from our
existing and potential future collaborations.



| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need additional financing, which may
    be difficult to obtain. Our failure to obtain necessary
    financing or doing so on unattractive terms could adversely
    affect our development programs and other
    operations.

We will require substantial funds to conduct
development, including preclinical testing and clinical trials,
of our potential products. We will also require substantial
funds to meet our obligations to our collaborators and maximize
the prospective benefits to us from our collaborations,
manufacture and market products that are approved for commercial
sale in the future, including Macugen.

We currently believe that our available cash,
cash equivalents and marketable securities, together with our
net proceeds from this offering, expected milestone payments and
reimbursements from Pfizer under our collaboration and interest
income will be sufficient to fund our anticipated levels of
operations through at least the end of 2005. However, our future
capital requirements will depend on many factors, including:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | the success of our collaboration with Pfizer to
    develop and commercialize Macugen;            
|
| |  | the scope and results of our clinical trials;                                                     
|
| |  | advancement of other product candidates into
    development;                                     
|
| |  | potential acquisition or in-licensing of other
    products or technologies;                      
|
| |  | the timing of, and the costs involved in,
    obtaining regulatory approvals;                     
|
| |  | the cost of manufacturing activities;                                                             
|
| |  | the cost of commercialization activities,
    including product marketing, sales and distribution;

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| |   |                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the costs involved in preparing, filing,
    prosecuting, maintaining and enforcing patent claims and other
    patent-related costs, including litigation costs and the results
    of such litigation;
|
| |  | our ability to establish and maintain additional
    collaborative arrangements; and                                                                                                                    
|
| |  | the success of our detailing agreement with
    Pfizer relating to Xalatan.                                                                                                                             

Additional financing may not be available to us
when we need it or it may not be available on favorable terms.
If we are unable to obtain adequate financing on a timely basis,
we may be required to significantly curtail one or more of our
development, licensing or acquisition programs. We could be
required to seek funds through arrangements with collaborators
or others that may require us to relinquish rights to some of
our technologies, product candidates or products which we would
otherwise pursue on our own. If we raise additional funds by
issuing equity securities, our then-existing stockholders will
experience dilution and the terms of any new equity securities
may have preferences over our common stock.

General Company Related Risks



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our executive officers, directors and major
    stockholders will maintain the ability to control all matters
    submitted to stockholders for approval.

Our executive officers, directors and
stockholders who own more than 5% of our outstanding common
stock, in the aggregate, beneficially own shares representing
approximately 65% of our capital stock as of March 23,
2004. As a result, if these stockholders were to choose to act
together, they would be able to control all matters submitted to
our stockholders for approval, as well as our management and
affairs. For example, these persons, if they choose to act
together, will control the election of directors and approval of
any merger, consolidation or sale of all or substantially all of
our assets. This concentration of voting power could delay or
prevent an acquisition of our company on terms that other
stockholders may desire.



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions in our charter documents and
    under Delaware law may prevent or frustrate attempts by our
    stockholders to change our management and hinder efforts to
    acquire a controlling interest in us.

Provisions of our corporate charter and bylaws
may discourage, delay or prevent a merger, acquisition or other
change in control that stockholders may consider favorable,
including transactions in which you might otherwise receive a
premium for your shares. These provisions may also prevent or
frustrate attempts by our stockholders to replace or remove our
management. These provisions include:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | a classified board of directors;                                                                                                             
|
| |  | limitations on the removal of directors;                                                                                                     
|
| |  | advance notice requirements for stockholder
    proposals and nominations;                                                                   
|
| |  | the inability of stockholders to act by written
    consent or to call special meetings; and                                                 
|
| |  | the ability of our board of directors to
    designate the terms of and issue new series of preferred stock
    without stockholder approval.

The affirmative vote of the holders of at least
75% of our shares of capital stock entitled to vote is necessary
to amend or repeal the above provisions of our certificate of
incorporation. In addition, absent approval of our board of
directors, our bylaws may only be amended or repealed by the
affirmative vote of the holders of at least 75% of our shares of
capital stock entitled to vote.

In addition, Section 203 of the Delaware
General Corporation Law prohibits a publicly held Delaware
corporation from engaging in a business combination with an
interested stockholder, generally a person which together with
its affiliates owns or within the last three years has owned 15%
of our voting stock, for a period of three years after the date
of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner. Accordingly, Section 203 may discourage,
delay or prevent a change in control of our company.

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If
our stock price is volatile, purchasers of our common stock
could incur substantial losses.

Our stock price is likely to be volatile. The
stock market in general and the market for biotechnology
companies in particular have experienced extreme volatility that
has often been unrelated to the operating performance of
particular companies. As a result of this volatility, investors
may not be able to sell their common stock at or above the
initial public offering price. The market price for our common
stock may be influenced by many factors, including:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | results of our clinical trials or those of our
    competitors;                                      
|
| |  | the regulatory status of Macugen and our other
    potential products;                               
|
| |  | failure of any of our product candidates, if
    approved, to achieve commercial success;            
|
| |  | developments concerning our collaborators,
    including Pfizer;                                     
|
| |  | regulatory developments in the United States and
    foreign countries;                              
|
| |  | developments or disputes concerning patents or
    other proprietary rights;                         
|
| |  | our ability to manufacture products to commercial
    standards;                                     
|
| |  | public concern over our drugs;                                                                       
|
| |  | litigation;                                                                                          
|
| |  | the departure of key personnel;                                                                      
|
| |  | future sales of our common stock;                                                                    
|
| |  | variations in our financial results or those of
    companies that are perceived to be similar to us;
|
| |  | changes in the structure of healthcare payment
    systems;                                          
|
| |  | investors perceptions of us; and                                                                    
|
| |  | general economic, industry and market conditions.                                                    



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | If there are substantial sales of our
    common stock, our stock price could decline.

If our existing stockholders sell a large number
of shares of our common stock or the public market perceives
that existing stockholders might sell shares of common stock,
the market price of our common stock could decline
significantly. All of the shares being sold in this offering
will be freely tradable without restriction or further
registration under the federal securities laws, unless purchased
by our affiliates as that term is defined in
Rule 144 under the Securities Act. Substantially all of our
remaining shares will be eligible for sale pursuant to
Rule 144 upon the expiration of 180-day lock-up agreements
on July 28, 2004.

Holders of an aggregate of approximately
28 million shares of common stock have rights with respect
to the registration of their shares of common stock with the
Securities and Exchange Commission. If we register their shares
of common stock following the expiration of the lock-up
agreements, they can sell those shares in the public market.

We have registered approximately
9,543,000 shares of common stock that are authorized for
issuance under our stock plans. As of December 31, 2003,
4,696,916 shares were subject to outstanding options, all
of which were immediately exercisable, but with respect to which
we had the right to repurchase at the initial exercise price all
but 1,844,793 of the shares issuable upon exercise of these
options. Because they are registered, the shares authorized for
issuance under our stock plans, can be freely sold in the public
market upon issuance, subject to our repurchase rights, the
lock-up agreements referred to above and the restrictions
imposed on our affiliates under Rule 144.

54



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|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
    About Market Risk

Our exposure to market risk is confined to our
cash, cash equivalents and marketable securities. We invest in
high-quality financial instruments, primarily money market
funds, federal agency notes, asset backed securities, corporate
debt securities and United States treasury notes, with the
effective duration of the portfolio less than nine months and no
security with an effective duration in excess of 2 years,
which we believe are subject to limited credit risk. We
currently do not hedge interest rate exposure. Due to the
short-term nature of our investments, we do not believe that we
have any material exposure to interest rate risk arising from
our investments.

Most of our transactions are conducted in United
States dollars, although we do have some development and
commercialization agreements with vendors located outside the
United States. Transactions under certain of these agreements
are conducted in United States dollars, subject to adjustment
based on significant fluctuations in currency exchange rates.
Transactions under certain other of these agreements are
conducted in the local foreign currency. If the exchange rate
undergoes a change of 10%, we do not believe that it would have
a material impact on our results of operations or cash flows.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Our financial statements are annexed to this
report beginning on page F-1.






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

None.






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

As required by Rule 13a-15 under the
Exchange Act, within 90 days prior to filing this report,
we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act. This evaluation was carried out under the supervision and
with the participation of our management, including our chief
executive officer and our chief financial officer. Based on that
evaluation, these officers have concluded that, as of
December 31, 2003, our disclosure controls and procedures
were adequate and designed to ensure that material information
relating to us and would be made known to them by others. There
have been no changes in our internal controls over financial
reporting (as defined in Rules 13a-15(b) and 15(d)-15(f)
under the Exchange Act) or in other factors that has materially
affected or is reasonably likely to materially affect internal
controls over financial reporting.

Disclosure controls and procedures are controls
and other procedures that are designed to ensure that
information required to be disclosed in our reports filed under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
regulations. Disclosure controls and procedures include controls
and procedures designed to ensure that information required to
be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including our chief
executive officer and chief financial officer as appropriate, to
allow timely decisions regarding disclosure.

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PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required with respect to
directors is incorporated herein by reference to the information
contained in the definitive proxy statement for our 2004 Annual
Meeting of Stockholders (the Proxy Statement). The
information with respect to our audit committee financial expert
is incorporated herein by reference to the information contained
in the section captioned Audit Committee of the
Proxy Statement.

We have adopted a Code of Business Conduct and
Ethics for our directors, officers (including our principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions) and employees. Our Code of Business Conduct and
Ethics is available in the Corporate Governance section of the
Investor Relations section of our website at
www.eyetech.com. We intend to disclose any amendments to,
or waivers from, our Code of Business Conduct and Ethics on our
website. Stockholders may request a free copy of the Code of
Business Conduct and Ethics by writing to us at Eyetech
Pharmaceuticals, Inc., 3 Times Square, New York,
New York 10036, Attention: Investor Relations.

Information about compliance with
Section 16(a) of the Exchange Act appears under
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement. That portion of the
Proxy Statement is incorporated by reference into this report.

EXECUTIVE OFFICERS AND OTHER SIGNIFICANT
EMPLOYEES

Our executive officers and other significant
employees and their respective ages as of March 24, 2004
are as follows:

|                            |  |     |    |          |  |                                                                 
|--------------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------
|Name                        |  | Age |    | Position
|                            |  |     |    |         
|Executive Officers          |  |     |    |          |  |                                                                 
|David R. Guyer, M.D.        |  |     | 44 |          |  | Chief Executive Officer and Director                            
|Paul G. Chaney              |  |     | 46 |          |  | Chief Operating Officer                                         
|Glenn P. Sblendorio         |  |     | 48 |          |  | Chief Financial Officer and Senior Vice
    President, Finance  
|Anthony P. Adamis, M.D.     |  |     | 45 |          |  | Chief Scientific Officer and Senior Vice
    President, Research
|Douglas H. Altschuler       |  |     | 48 |          |  | Senior Vice President, Legal, General Counsel and
    Secretary 
|                           
|Other Significant Employees |  |     |    |          |  |                                                                 
|Denis OShaughnessy, Ph.D.  |  |     | 53 |          |  | Senior Vice President, Clinical Development                     
|Arda Ural                   |  |     | 37 |          |  | Senior Vice President, Marketing and Sales                      

David R.
Guyer, M.D.is a co-founder of
our company and has been our Chief Executive Officer and a
director since February 2000. Dr. Guyer is also currently a
voluntary Clinical Professor of Ophthalmology at the
New York University School of Medicine. From June 2000 to
October 2002, he was also Professor and Chairman of the
Department of Ophthalmology at the New York University
School of Medicine. Dr. Guyer was Clinical Associate
Professor of Ophthalmology at Cornell University Medical Center
from July 1995 until June 2000, during which time he also served
as Director of Residency Training at Manhattan Eye,
Ear & Throat Hospital and was in private practice.
Dr. Guyer has also served as the chief medical editor of
Ophthalmology Times from July 1996 to the present. From 1992 to
2000, Dr. Guyer was the Study Co-chairman of the
Pharmacological Therapy for Macular Degeneration Study Group, a
45-center worldwide group of retinal specialists studying drug
therapy for AMD. Dr. Guyer received his M.D. from The Johns
Hopkins University School of Medicine and his undergraduate
degree from Yale College. He was an ophthalmology resident at
The Wilmer Eye Institute, The Johns Hopkins University School of
Medicine and completed his fellowship training in retinal
surgery at the Massachusetts Eye and Ear Infirmary, a teaching

56



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affiliate of Harvard Medical School, where he was
a Heed-Knapp Fellow. Dr. Guyer is the author of more
than 100 scientific articles concerning ophthalmic diseases.


Paul G. Chaneyhas
been our Chief Operating Officer since August 2003.
Mr. Chaney has more than 20 years of experience in the
pharmaceutical industry, including from 1996 to August 2003,
serving in various senior management positions at Pharmacia
Corporation, a pharmaceutical company acquired by Pfizer in
April 2003, where he was responsible for the launch of several
ophthalmic products, including Tecnis®, Xalatan and
Xalcom®. More specifically, from July 2002 to August 2003,
Mr. Chaney served as Vice President, Global Commercial
Operations, Ophthalmology Franchise; from May 2001 to June 2002,
he served as Vice President, Global Ophthalmology Business; from
February 2000 to April 2001, he served as Vice President, Global
Pharmaceutical Ophthalmology; from February 1998 to February
2000, he served as Business Director, Ophthalmology, North
America; and from February 1996 to February 1998, he served as
Director, U.S. Ophthalmology Business. Mr. Chaney
received a double B.A. with honors in English and Biological
Sciences from the University of Delaware.

Glenn P. Sblendoriohas been our Chief Financial Officer and Senior Vice President,
Finance since February 2002. From July 2000 to February 2002,
Mr. Sblendorio served as Senior Vice President of Business
Development for The Medicines Company, a specialty
pharmaceutical company. From 1998 to July 2000,
Mr. Sblendorio was the Chief Executive Officer, Chief
Financial Officer and Managing Director of MPM Capital
Advisors, LLC, an investment bank specializing in
healthcare related transactions. Mr. Sblendorios
pharmaceutical experience also includes 12 years at
Hoffmann-La Roche, Inc., a pharmaceutical company, in
a variety of senior financial positions, including Chief
Financial Officer of Roche Molecular Systems and Head of
Finance-Controller for Amgen/ Roche Europe. Mr. Sblendorio
received his B.A. in Accounting from Pace University and his
M.B.A. in Finance from Fairleigh Dickinson University.

Anthony P.
Adamis, M.D.is a co-founder of
our company and has been our Chief Scientific Officer and Senior
Vice President, Research since July 2002. Dr. Adamis has
served as a member of our Scientific Advisory Board since
February 2002 and was our Director of Preclinical Research from
April 2000 to June 2002. From January 1998 to June 2002,
Dr. Adamis was an Associate Professor of Ophthalmology at
Harvard Medical School. From 1992 to June 2002, Dr. Adamis
served as Director of Residency Training in Ophthalmology at the
Massachusetts Eye and Ear Infirmary, a teaching affiliate of
Harvard Medical School. From 2000 to 2002, he also served as a
principal investigator and co-director of the Retina Research
Institute for Diabetic Retinopathy and Macular Degeneration at
the Massachusetts Eye and Ear Infirmary. From January 2001 to
December 2001, Dr. Adamis also served as President of the
Medical Staff and from January 2001 to December 2001 was a
member of the board of directors of the Massachusetts Eye and
Ear Infirmary. Dr. Adamis is a specialist in ocular
vascular disease and ocular drug delivery. He co-discovered the
role that VEGF plays in new blood vessel growth and blood vessel
leakage related to various diseases of the eye. Dr. Adamis
received his M.D. with Honors from the University of Chicago
Pritzker School of Medicine and his undergraduate degree from
the University of Illinois, Urbana. Dr. Adamis completed
his ophthalmology residency training at the University of
Michigan. Dr. Adamis is the author of more than
100 scientific articles concerning ophthalmic diseases.

Douglas H.
Altschulerhas been our Senior Vice
President, Legal, General Counsel and Secretary since May 2003.
From September 2001 to May 2003, Mr. Altschuler was the
General Counsel of Nektar Therapeutics, a provider of drug
delivery technology. From December 2000 through November 2001,
he was the General Counsel of AXYS Pharmaceuticals, a company
that researched and developed new therapeutics. AXYS
Pharmaceuticals merged with Celera Genomics in November 2001.
From 1996 to October 2000, Mr. Altschuler was the Vice
President/ General Counsel and Compliance Officer of Mentor
Corporation, a medical device company. Mr. Altschuler
received his J.D. from the University of Arizona School of Law
and a B.S. in chemistry and biology from the University of
Arizona.

Denis
OShaughnessy, Ph.D.has
been our Senior Vice President, Clinical Development since
August 2000. From November 1990 to July 2000,
Dr. OShaughnessy held various clinical research and
management roles with Hoffmann-La Roche Inc., including
Senior Manager responsible for overseeing global clinical

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research programs. Dr. OShaughnessy
received his Ph.D. from Royal Post-Graduate Medical School in
the United Kingdom and his undergraduate degree from London
University.


Arda Uralhas been
our Senior Vice President, Marketing and Sales since September
2002. From 1992 to August 2002, Mr. Ural held various
positions at Pfizer Inc. in which he had marketing, sales and
business development responsibilities in several therapeutic
areas. More specifically, from January 2002 until September
2002, Mr. Ural was a Director/ Team Leader for
Pfizers Celebrex® U.S. Team, from August 2000
until December 2001, Mr. Ural was a Director/ Team Leader
for Pfizers Cardura/ XL Worldwide Team and from September
1998 until August 2000, Mr. Ural was a Marketing Director
for Pfizers Viagra® U.S. team. Mr. Ural
received B.Sc. and M.Sc. degrees in mechanical engineering from
Bosporus University in Istanbul, Turkey. He has also received an
M.B.A. from Marmara University in Istanbul.

Scientific Advisory Board

We have established a scientific advisory board
made up of leading experts in the field of retinal disease.
Members of our scientific advisory board consult with us
regularly on matters relating to:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | our research and development programs;                                     
|
| |  | the design and implementation of our clinical
    trials;                  
|
| |  | market opportunities from a clinical perspective;                          
|
| |  | new technologies relevant to our research and
    development programs; and
|
| |  | scientific and technical issues relevant to our
    business.              

The current members of our scientific advisory
board are:

|                             |  |                                                                                                                                                                                          
|---------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                         |  | Professional Affiliation                                                                                                                                                                 
|                             |  |                                                                                                                                                                                          
|Anthony P. Adamis, M.D.      |  | Senior Vice President, Research, Eyetech
    Pharmaceuticals, Inc.                                                                                                                       
|                            
|Mark Blumenkranz, M.D.       |  | Professor and Chairman of Ophthalmology, Stanford
    University                                                                                                                         
|                            
|Evangelos S. Gragoudas, M.D. |  | Acting Chairman Emeritus, Department of
    Ophthalmology and Professor of Ophthalmology, Harvard Medical
    School; Director of Retina Service, Massachusetts Eye and Ear
    Infirmary
|                            
|Morton F. Goldberg, M.D.     |  | Professor and Chairman, Emeritus, of
    Ophthalmology, Johns Hopkins University School of Medicine                                                                                      
|                            
|Dennis Henner, Ph.D.         |  | General Partner, MPM Capital Partners                                                                                                                                                    
|                            
|Joan W. Miller, M.D.         |  | Professor and Chair of Ophthalmology,
    Massachusetts Eye and Ear Infirmary Harvard Medical School                                                                                     
|                            
|Steven Schwartz, M.D.        |  | Chief of Retina Division, Doris Stein Eye
    Research Center, University of California, Los Angeles Medical
    School                                                                  
|                            
|Lawrence Singerman, M.D.     |  | Clinical Professor of Ophthalmology, Case Western
    Reserve University School of Medicine; Ophthalmologist, Retina
    Associates of Cleveland; Founder, Macula Society                
|                            
|Lawrence A. Yannuzzi, M.D.   |  | Professor of Clinical Ophthalmology, Columbia
    University                                                                                                                             

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|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information about compensation of our named
executive officers appears under Executive
Compensation and under Compensation Committee
Interlocks and Insider Participation in the Proxy
Statement. Information about compensation of our directors
appears under Director Compensation Arrangements and
Stock Ownership of Certain Beneficial Owners and
Management in the Proxy Statement. Those portions of the
Proxy Statement are incorporated by reference into this report.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Information about security ownership of certain
beneficial owners and management appears under Stock
Ownership of Certain Beneficial Owners and Management in
the Proxy Statement. Information regarding securities authorized
for issuance under equity compensation plans appears under
Equity Compensation Plan Information in the Proxy
Statement. Those portions of the Proxy Statement are
incorporated by reference into this report. Information
regarding securities authorized for issuance under equity
compensation plans appears under Equity Compensation Plan
Information in the Proxy Statement.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information about certain relationships and
related transactions appears under Certain Relationships
and Related Transactions in the Proxy Statement. That
portion of the Proxy Statement is incorporated by reference into
this report.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Information about principal accountant fees and
services as well as related pre-approval policies appears under
Independent Auditors Fees and Audit
Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors in the Proxy Statement.
Those portions of the Proxy Statement are incorporated by
reference into this report.

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PART IV






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

(a) Financial Statements and Schedules

Index to consolidated financial statements
appears on page F-1.

(b) Current Reports on Form 8-K

None filed in the quarter ended December 31,
2003.

(c) Exhibits

|        |    |             |  |                                                                                                                                                                                     
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Amended and Restated Certificate of Incorporation
    of the Registrant                                                                                                             
|        | 3  | .3          |  | Amended and Restated Bylaws of the Registrant                                                                                                                                       
|        | 4  | .1(1)       |  | Specimen Certificate evidencing shares of common
    stock                                                                                                                          
|        | 4  | .2(2)       |  | Warrant Agreement, dated as of March 31,
    2000, by and between the Registrant and Gilead
    Sciences, Inc.                                                                      
|        | 4  | .3(2)       |  | Warrant Agreement Amendment, dated as of
    September 4, 2003, by and among the Registrant, Gilead
    Sciences, Inc. and University License Equity
    Holdings, Inc.             
|        | 4  | .4(3)      |  | Series D Preferred Stock Purchase Agreement,
    dated as of December 17, 2002, by and between the
    Registrant, Pfizer Ireland Pharmaceuticals and Pfizer Inc.                   
|        | 4  | .5(2)       |  | Amended and Restated Investors Rights
    Agreement, dated as of February 7, 2003, by and among the
    Registrant and the parties listed therein                                  
|        | 10 | .1(2)       |  | 2001 Stock Plan, as amended                                                                                                                                                         
|        | 10 | .2          |  | 2003 Stock Incentive Plan                                                                                                                                                           
|        | 10 | .3          |  | 2003 Employee Stock Purchase Plan                                                                                                                                                   
|        | 10 | .4(3)      |  | License Agreement, dated as of December 17,
    2002, by and between Pfizer Inc. and the Registrant                                                                                 
|        | 10 | .5(3)      |  | Collaboration Agreement, dated as of
    December 17, 2002, by and between Pfizer Inc. and the
    Registrant                                                                       
|        | 10 | .6(3)      |  | License, Manufacturing and Supply Agreement,
    dated February 5, 2002, by and between Shearwater
    Corporation and the Registrant                                               
|        | 10 | .7(3)      |  | Licensing Agreement, dated as of March 30,
    2000 and amended on May 9, 2000, December 4, 2001 and
    April 12, 2002, by and between Gilead Sciences, Inc.
    and the Registrant
|        | 10 | .8(3)      |  | License Agreement, dated as of December 31,
    2001, by and between Isis Pharmaceuticals, Inc. and the
    Registrant                                                              
|        | 10 | .9(2)       |  | Consulting Agreement, dated as of
    October 30, 2001, by and between the Registrant and Samir
    Patel                                                                           
|        | 10 | .10(2)      |  | Executive Employment Agreement, dated as of
    April 12, 2000, by and between the Registrant and David R.
    Guyer                                                                
|        | 10 | .11(2)      |  | Amendment to Executive Employment Agreement,
    dated as of August 25, 2003, by and between the Registrant
    and David R. Guyer                                                  
|        | 10 | .12(2)      |  | Employment Agreement, dated as of August 25,
    2003, by and between Paul Chaney and the Registrant                                                                                
|        | 10 | .13(2)      |  | Employment Agreement, dated as of
    February 1, 2002, by and between the Registrant and Glenn
    Sblendorio                                                                      
|        | 10 | .14(1)      |  | Amendment to Employment Agreement, dated as of
    October 17, 2003, by and between the Registrant and Glenn
    Sblendorio                                                         
|        | 10 | .15(2)      |  | Employment Agreement, dated as of April 12,
    2002, by and between the Registrant and Anthony P. Adamis                                                                           

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|        |    |             |  |                                                                                                                                                                                                                     
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .16(1)      |  | Amendment to Employment Agreement, dated as of
    October 20, 2003, by and between the Registrant and Anthony
    P. Adamis                                                                                        
|        | 10 | .17(2)      |  | Employment Agreement, dated as of August 25,
    2003, by and between Douglas H. Altschuler and the Registrant                                                                                                      
|        | 10 | .18(2)      |  | Restricted Stock Purchase Promissory Note, dated
    July 1, 2002, issued by Anthony P. Adamis to the Registrant                                                                                                    
|        | 10 | .19(2)      |  | Stock Pledge Agreement, dated July 1, 2002,
    by and between Anthony P. Adamis and the Registrant                                                                                                                 
|        | 10 | .20(2)      |  | Sublease Agreement, dated as of December 19,
    2001 and amended as of February 22, 2002, by and between
    AnswerThink, Inc., successor in interest to AnswerThink
    Consulting Group, Inc., and the Registrant
|        | 10 | .21(2)      |  | Lease Agreement, dated March 14, 2002, by
    and between First Industrial, L.P. and the Registrant                                                                                                                 
|        | 10 | .22(2)      |  | Commercial Lease, dated March 27, 2002, by
    and between Cummings Properties, LLC and the Registrant                                                                                                              
|        | 10 | .23(3)     |  | Manufacturing and Supply Agreement, dated as of
    November 11, 2003, by and between Raylo
    Chemicals, Inc. and the Registrant                                                                                  
|        | 10 | .24(4)     |  | Letter of Understanding, effective as of
    September 1, 2003, by and between the Registrant and Raylo
    Chemicals, Inc., as amended                                                                             
|        | 10 | .25(4)     |  | Manufacturing and Supply Agreement, dated as of
    November 26, 2003 by and between the Registrant and Gilead
    Sciences, Inc.                                                                                   
|        | 10 | .26(5)      |  | Sub-Sublease Agreement, dated December 19,
    2003, by and between Instinet Global Holdings, Inc. and the
    Registrant                                                                                           
|        | 21 | .1          |  | List of Subsidiaries                                                                                                                                                                                                
|        | 23 | .1          |  | Consent of Ernst & Young LLP                                                                                                                                                                                        
|        | 31 | .1          |  | Rule 13a-14(a)/15d-14(a) Certification of
    Principal Executive Officer                                                                                                                                           
|        | 31 | .2          |  | Rule 13a-14(a)/15d-14(a) Certification of
    Principal Financial Officer                                                                                                                                           
|        | 32 | .1          |  | Section 1350 Certification of Chief
    Executive Officer                                                                                                                                                           
|        | 32 | .2          |  | Section 1350 Certification of Chief
    Financial Officer                                                                                                                                                           



---



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (SEC File
    No. 333-108781) filed on October 21, 2003  
|   
|(2) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (SEC File
    No. 333-108781) filed on September 12, 2003
|   
|(3) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (SEC File
    No. 333-108781) filed on January 22, 2004  
|   
|(4) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (SEC File
    No. 333-108781) filed on December 18, 2003 
|   
|(5) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (SEC File
    No. 333-108781) filed on January 27, 2004  



|  |                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment granted as to certain
    portions, which portions have been omitted and filed separately
    with the Securities and Exchange Commission.

61



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, New York on the
24th day of March, 2004.



| |                              
| | -----------------------------
| | EYETECH PHARMACEUTICALS, INC.



| |     |                   
| | --- | ------------------
| | By: | /s/ DAVID R. GUYER

| |                                  
| | ---------------------------------
| |                                  
| | David R. Guyer, M.D.             
| | Chief Executive Officer, Director

Pursuant to the requirements of the Securities
Act of 1934, as amended, this Annual Report on Form 10-K
has been signed by the following persons in the capacities and
on the dates indicated.

|                                                                 |  |                                                                          |  |      |                |  |  | 
|---------------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | ---- | -------------- |  |  | 
|                                                                 |  |                                                                          |  |     
|Signature                                                        |  | Title                                                                    |  | Date
|                                                                 |  |                                                                          |  |     
|                                                                
|/s/ DAVID R. GUYER. M.D.David R. Guyer, M.D.                     |  | Chief Executive Officer, Director (Principal
    Executive Officer)      |  |      | March 24, 2004 | 
|                                                                
|/s/ GLENN P. SBLENDORIOGlenn P. Sblendorio                       |  | Chief Financial Officer (Principal Financial and
    Accounting Officer) |  |      | March 24, 2004 | 
|                                                                
|/s/ JOHN P. MCLAUGHLINJohn P. McLaughlin                         |  | Chairman of the Board of Directors                                       |  |      | March 24, 2004 | 
|                                                                
|/s/ SRINIVAS AKKARAJU, M.D., PH.D.Srinivas Akkaraju, M.D., Ph.D. |  | Director                                                                 |  |      | March 24, 2004 | 
|                                                                
|/s/ MARTY GLICKMarty Glick                                       |  | Director                                                                 |  |      | March 24, 2004 | 
|                                                                
|/s/ MICHAEL G. MULLEN, CFAMichael G. Mullen, CFA                 |  | Director                                                                 |  |      | March 24, 2004 | 
|                                                                
|/s/ SAMIR PATEL, M.D.Samir Patel, M.D.                           |  | Director                                                                 |  |      | March 24, 2004 | 
|                                                                
|/s/ EDWARD PENHOET, PH.D.Edward Penhoet, Ph.D.                   |  | Director                                                                 |  |      | March 24, 2004 | 
|                                                                
|/s/ HENRY SIMONHenry Simon                                       |  | Director                                                                 |  |      | March 24, 2004 | 
|                                                                
|/s/ DAMION E. WICKER, M.D.Damion E. Wicker, M.D.                 |  | Director                                                                 |  |      | March 24, 2004 | 

62



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


|                                                                                                              |  |  |     | 
|------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of Independent Auditors                                                                                |  |  | F-2 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2003                                              |  |  | F-3 | 
|Consolidated Statements of Operations for the
    Years ended December 31, 2001, 2002 and 2003                |  |  | F-4 | 
|Consolidated Statements of Stockholders
    Deficit for the Years Ended December 31, 2001, 2002
    and 2003 |  |  | F-5 | 
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2001 and 2002 and 2003             |  |  | F-7 | 
|Notes to Consolidated Financial Statements                                                                    |  |  | F-8 | 

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Eyetech Pharmaceuticals, Inc.


We have audited the accompanying consolidated
balance sheets of Eyetech Pharmaceuticals, Inc. as of
December 31, 2002 and 2003, and the related consolidated
statements of operations, stockholders deficit, and cash
flows for each of the three years in the period ended
December 31, 2003. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements 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
consolidated financial position of Eyetech
Pharmaceuticals, Inc. at December 31, 2002 and 2003,
and the consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

MetroPark, New Jersey

February 19, 2004


F-2



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             |                   |   |             |              |              |   |   |             |              |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ----------- | ----------------- | - | ----------- | ------------ | ------------ | - | - | ----------- | ------------ | -
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             |                  
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           | December 31, |             | December 31, 2003
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             | Pro Forma        
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           | 2002         |             | 2003              |   | (Note 2)   
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             |                   |   |            
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             |                   |   | (Unaudited)
|ASSETS                                                                                                                                                                                                                                                                                       
|Current assets:                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                           |              |             |                   |   |             |              |              |   |   |             |             
|                                                                                                                                                                                                                                                                                              | Cash and cash equivalents                                                                                                                                                                                                                                                 |              | $           | 5,791,845         |   |             | $            | 25,013,756   |   |   | $           | 25,013,756   |  
|                                                                                                                                                                                                                                                                                              | Marketable securities                                                                                                                                                                                                                                                     |              |             | 63,359,128        |   |             |              | 106,360,073  |   |   |             | 106,360,073  |  
|                                                                                                                                                                                                                                                                                              | Collaboration receivable                                                                                                                                                                                                                                                  |              |             |                  |   |             |              | 2,562,000    |   |   |             | 2,562,000    |  
|                                                                                                                                                                                                                                                                                              | Prepaid expenses and other current assets                                                                                                                                                                                                                                 |              |             | 971,007           |   |             |              | 1,301,027    |   |   |             | 1,301,027    |  
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             |                   |   |             |              |              |   |   |             |             
|Total current assets                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                           |              | 70,121,980  |                   |   |             | 135,236,856  |              |   |   | 135,236,856 |             
|Property and equipment, net                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                           |              | 3,012,001   |                   |   |             | 5,867,582    |              |   |   | 5,867,582   |             
|Restricted cash                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                           |              | 2,665,640   |                   |   |             | 5,623,865    |              |   |   | 5,623,865   |             
|Other assets                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                           |              | 789,395     |                   |   |             | 2,751,375    |              |   |   | 2,751,375   |             
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             |                   |   |             |              |              |   |   |             |             
|Total assets                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                           | $            | 76,589,016  |                   |   | $           | 149,479,678  |              |   | $ | 149,479,678 |             
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             |                   |   |             |              |              |   |   |             |             
|                                                                                                                                                                                                                                                                                             
|LIABILITIES AND STOCKHOLDERS
    (DEFICIT) EQUITY                                                                                                                                                                                                                                           
|Current liabilities:                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                           |              |             |                   |   |             |              |              |   |   |             |             
|                                                                                                                                                                                                                                                                                              | Accounts payable and accrued expenses                                                                                                                                                                                                                                     |              | $           | 7,442,478         |   |             | $            | 14,308,103   |   |   | $           | 14,308,103   |  
|                                                                                                                                                                                                                                                                                              | Deferred license fee revenue, current portion                                                                                                                                                                                                                             |              |             |                  |   |             |              | 5,000,000    |   |   |             | 5,000,000    |  
|                                                                                                                                                                                                                                                                                              | Capital lease obligations, current portion                                                                                                                                                                                                                                |              |             | 560,128           |   |             |              | 618,350      |   |   |             | 618,350      |  
|                                                                                                                                                                                                                                                                                              | Deferred rent liability, current portion                                                                                                                                                                                                                                  |              |             | 149,840           |   |             |              | 171,856      |   |   |             | 171,856      |  
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             |                   |   |             |              |              |   |   |             |             
|Total current liabilities                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                           |              | 8,152,446   |                   |   |             | 20,098,309   |              |   |   | 20,098,309  |             
|Deferred license fee revenue, net of current
    portion                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                           |              |            |                   |   |             | 65,416,663   |              |   |   | 65,416,663  |             
|Capital lease obligations, net of current portion                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                           |              | 1,656,629   |                   |   |             | 1,038,279    |              |   |   | 1,038,279   |             
|Other liabilities, net of current portion                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                           |              | 492,636     |                   |   |             | 425,761      |              |   |   | 425,761     |             
|Redeemable convertible preferred
    stock  $.01 par value; 29,093,695 shares
    authorized; 21,273,004, 25,062,278 and no shares issued and
    outstanding at December 31, 2002, 2003 and pro forma,
    respectively, liquidation preference of $252,053,310 as of
    December 31, 2003 |                                                                                                                                                                                                                                                                           |              | 144,323,381 |                   |   |             | 185,506,532  |              |   |   |            |             
|Stockholders (deficit) equity:                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                           |              |             |                   |   |             |              |              |   |   |             |             
|                                                                                                                                                                                                                                                                                              | Convertible preferred stock 
    $.01 par value; 120,000 shares authorized, issued and
    outstanding at December 31, 2002 and 2003 and no shares pro
    forma, liquidation preference of $225,000 as of
    December 31, 2003                                         |              |             | 150,000           |   |             |              | 150,000      |   |   |             |             |  
|                                                                                                                                                                                                                                                                                              | Common stock  $.01 par value;
    60,000,000 shares authorized; 4,162,000 issued and
    3,737,000 outstanding at December 31, 2002; 4,527,736
    issued and 4,102,736 outstanding at December 31, 2003; and
    29,710,014 issued and 29,285,014 outstanding pro forma |              |             | 41,620            |   |             |              | 45,277       |   |   |             | 297,100      |  
|                                                                                                                                                                                                                                                                                              | Additional paid-in capital                                                                                                                                                                                                                                                |              |             | 11,125,808        |   |             |              | 28,804,713   |   |   |             | 214,209,422  |  
|                                                                                                                                                                                                                                                                                              | Loans to stockholders                                                                                                                                                                                                                                                     |              |             | (397,000          | ) |             |              | (430,666     | ) |   |             | (430,666     | )
|                                                                                                                                                                                                                                                                                              | Deferred compensation                                                                                                                                                                                                                                                     |              |             | (1,299,163        | ) |             |              | (13,956,265  | ) |   |             | (13,956,265  | )
|                                                                                                                                                                                                                                                                                              | Treasury stock, at cost                                                                                                                                                                                                                                                   |              |             | (255,000          | ) |             |              | (255,000     | ) |   |             | (255,000     | )
|                                                                                                                                                                                                                                                                                              | Accumulated other comprehensive income                                                                                                                                                                                                                                    |              |             | 232,788           |   |             |              | 130,831      |   |   |             | 130,831      |  
|                                                                                                                                                                                                                                                                                              | Accumulated deficit                                                                                                                                                                                                                                                       |              |             | (87,635,129       | ) |             |              | (137,494,756 | ) |   |             | (137,494,756 | )
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             |                   |   |             |              |              |   |   |             |             
|Total stockholders (deficit) equity                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                           |              | (78,036,076 | )                 |   |             | (123,005,866 | )            |   |   | 62,500,666  |             
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             |                   |   |             |              |              |   |   |             |             
|Total liabilities and stockholders
    (deficit) equity                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                           | $            | 76,589,016  |                   |   | $           | 149,479,678  |              |   | $ | 149,479,678 |             
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                           |              |             |                   |   |             |              |              |   |   |             |             

See accompanying notes.

F-3



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |            | 
|----------------------------------------------------------------------------------------------- | ---------------------------------- | ----------------------- | ----------- | ---------- |  | ---- | ----------- | ---------- |  | - | ----------- | ---------- | 
|                                                                                                |                                    |                        
|                                                                                                |                                    | Year Ended December 31,
|                                                                                                |                                    |                        
|                                                                                                |                                    | 2001                    |             | 2002       |  | 2003
|                                                                                                |                                    |                         |             |            |  |     
|Collaboration revenue:                                                                          |                                    |                         |             |            |  |      |             |            |  |   |             |           
|                                                                                                | License fees                       |                         | $           |           |  |      | $           |           |  |   | $           | 4,583,337  | 
|                                                                                                | Reimbursement of development costs |                         |             |           |  |      |             |           |  |   |             | 36,835,829 | 
|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |           
|Total collaboration revenue                                                                     |                                    |                         |            |            |  |      |            |            |  |   | 41,419,166  |           
|Operating expenses:                                                                             |                                    |                         |             |            |  |      |             |            |  |   |             |           
|                                                                                                | Research and development           |                         |             | 22,156,808 |  |      |             | 39,663,303 |  |   |             | 70,931,916 | 
|                                                                                                | Sales and marketing                |                         |             |           |  |      |             |           |  |   |             | 4,598,588  | 
|                                                                                                | General and administrative         |                         |             | 4,338,401  |  |      |             | 5,286,707  |  |   |             | 6,822,949  | 
|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |           
|Total operating expenses                                                                        |                                    |                         | 26,495,209  |            |  |      | 44,950,010  |            |  |   | 82,353,453  |           
|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |           
|Loss from operations                                                                            |                                    |                         | (26,495,209 | )          |  |      | (44,950,010 | )          |  |   | (40,934,287 | )         
|Interest income                                                                                 |                                    |                         | 1,815,279   |            |  |      | 1,808,727   |            |  |   | 2,171,226   |           
|Interest expense                                                                                |                                    |                         |            |            |  |      | (32,179     | )          |  |   | (248,184    | )         
|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |           
|Loss before income taxes                                                                        |                                    |                         | (24,679,930 | )          |  |      | (43,173,462 | )          |  |   | (39,011,245 | )         
|Provision for income taxes                                                                      |                                    |                         |            |            |  |      |            |            |  |   | (1,688,000  | )         
|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |           
|Net loss                                                                                        |                                    |                         | (24,679,930 | )          |  |      | (43,173,462 | )          |  |   | (40,699,245 | )         
|Preferred stock accretion                                                                       |                                    |                         | (2,494,312  | )          |  |      | (5,096,282  | )          |  |   | (9,160,382  | )         
|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |           
|Net loss attributable to common stockholders                                                    |                                    | $                       | (27,174,242 | )          |  | $    | (48,269,744 | )          |  | $ | (49,859,627 | )         
|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |           
|Historical  Basic and diluted net loss
    attributable to common stockholders per share       |                                    | $                       | (7.43       | )          |  | $    | (13.06      | )          |  | $ | (12.62      | )         
|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |           
|Weighted average shares outstanding 
    historical basic and diluted                          |                                    |                         | 3,659,422   |            |  |      | 3,697,192   |            |  |   | 3,950,481   |           
|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |           
|Pro forma basic and diluted net loss attributable
    to common stockholders per share (Note 2) |                                    |                         |             |            |  |      |             |            |  | $ | (1.77       | )         
|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |           
|Pro forma weighted average shares
    outstanding  basic and diluted (Note 2)                  |                                    |                         |             |            |  |      |             |            |  |   | 28,094,165  |           
|                                                                                                |                                    |                         |             |            |  |      |             |            |  |   |             |           

See accompanying notes.

F-4



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
DEFICIT

For the Years Ended December 31, 2001 and
2002 and 2003


|                                                                         |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |   | 
|------------------------------------------------------------------------ | ------------------------------------------------ | -------------------- | ------- | ------------ |  | ---------- | ------- | -------- |  | --------------- | --------- | ------------ |  | ------------ | ------ |  |  | - | ---------- |  |  | - | -------- | - |  | - | ----------- | - | 
|                                                                         |                                                  |                      |         |              |  |            |         |          |  |                 |           |             
|                                                                         |                                                  | Series A Convertible |         |              |  |            |         |          |  |                
|                                                                         |                                                  | Preferred Stock      |         | Common Stock |  |            |         |          |  |                
|                                                                         |                                                  |                      |         |              |  | Additional |         | Loans to |  | Deferred       
|                                                                         |                                                  | Shares               |         | Amount       |  | Shares     |         | Amount   |  | Paid-in Capital |           | Stockholders |  | Compensation
|                                                                         |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |             
|Balance at December 31, 2000                                             |                                                  |                      | 120,000 |              |  | $          | 150,000 |          |  |                 | 3,000,000 |              |  | $            | 30,000 |  |  | $ | 1,895,718  |  |  | $ |         |   |  | $ |            |  
|Warrants issued in connection with the issuance
    of Series C-1        |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   | 2,134,414  |  |  |   |          |   |  |   |             |  
|Deferred compensation related to stock options,
    net of cancellations |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   | 321,000    |  |  |   |          |   |  |   | (321,000    | )
|Amortization of deferred compensation                                    |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   | 118,000     |  
|Exercise of stock options                                                |                                                  |                      |         |              |  |            |         |          |  |                 | 1,152,000 |              |  |              | 11,520 |  |  |   | 679,680    |  |  |   | (600,000 | ) |  |   |             |  
|Options granted to nonemployees                                          |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   | 264,000    |  |  |   |          |   |  |   |             |  
|Repurchase of common stock                                               |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   | 300,000  |   |  |   |             |  
|Preferred stock accretion                                                |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|Net loss                                                                 |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|Other comprehensive loss:                                                |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|                                                                         | Unrealized appreciation on marketable securities |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |   | 
|Comprehensive loss                                                       |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|                                                                         |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|Balance at December 31, 2001                                             |                                                  |                      | 120,000 |              |  |            | 150,000 |          |  |                 | 4,152,000 |              |  |              | 41,520 |  |  |   | 5,294,812  |  |  |   | (300,000 | ) |  |   | (203,000    | )
|Warrants issued in connection with the issuance
    of Series C-2        |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   | 3,384,794  |  |  |   |          |   |  |   |             |  
|Deferred compensation related to stock options,
    net of cancellations |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   | 1,334,763  |  |  |   |          |   |  |   | (1,334,763  | )
|Amortization of deferred compensation                                    |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   | 238,600     |  
|Exercise of stock options                                                |                                                  |                      |         |              |  |            |         |          |  |                 | 10,000    |              |  |              | 100    |  |  |   | 5,900      |  |  |   |          |   |  |   |             |  
|Loan to purchase restricted stock                                        |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   | 57,000     |  |  |   | (102,000 | ) |  |   |             |  
|Repayment of loan to purchase restricted stock                           |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   | 5,000    |   |  |   |             |  
|Options granted to nonemployees                                          |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   | 1,048,539  |  |  |   |          |   |  |   |             |  
|Preferred stock accretion                                                |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|Net loss                                                                 |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|Other comprehensive loss:                                                |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|                                                                         | Unrealized depreciation on marketable securities |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |   | 
|Comprehensive loss                                                       |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|                                                                         |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|Balance at December 31, 2002                                             |                                                  |                      | 120,000 |              |  |            | 150,000 |          |  |                 | 4,162,000 |              |  |              | 41,620 |  |  |   | 11,125,808 |  |  |   | (397,000 | ) |  |   | (1,299,163  | )
|Deferred compensation related to stock options,
    net of cancellations |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   | 15,001,255 |  |  |   |          |   |  |   | (15,001,255 | )
|Amortization of deferred compensation                                    |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   | 2,344,153   |  
|Exercise of stock options                                                |                                                  |                      |         |              |  |            |         |          |  |                 | 365,736   |              |  |              | 3,657  |  |  |   | 280,496    |  |  |   | (34,416  | ) |  |   |             |  
|Repayment of loan to purchase restricted stock                           |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   | 750      |   |  |   |             |  
|Options granted to nonemployees                                          |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   | 2,397,154  |  |  |   |          |   |  |   |             |  
|Preferred stock accretion                                                |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|Net loss                                                                 |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|Other comprehensive loss:                                                |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|                                                                         | Unrealized depreciation on marketable securities |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |   | 
|Comprehensive loss                                                       |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|                                                                         |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  
|Balance at December 31, 2003                                             |                                                  |                      | 120,000 |              |  | $          | 150,000 |          |  |                 | 4,527,736 |              |  | $            | 45,277 |  |  | $ | 28,804,713 |  |  | $ | (430,666 | ) |  | $ | (13,956,265 | )
|                                                                         |                                                  |                      |         |              |  |            |         |          |  |                 |           |              |  |              |        |  |  |   |            |  |  |   |          |   |  |   |             |  

F-5



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##### Table of Contents



|                                                                         |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |              |          |  
|------------------------------------------------------------------------ | ------------------------------------------------ | -------------- | ------- | ------------- |  | ----------- | -------- | ------------- |  | ------- | ------- | -------- | - | - | ------------ | - |  | - | ------------ | -------- | -
|                                                                         |                                                  |                |         | Other         |  |             |          |              
|                                                                         |                                                  | Treasury Stock |         | Comprehensive |  |             |          | Total        
|                                                                         |                                                  |                |         | Income        |  | Accumulated |          | Stockholders
|                                                                         |                                                  | Shares         |         | Amount        |  | (Loss)      |          | Deficit       |  | Deficit
|                                                                         |                                                  |                |         |               |  |             |          |               |  |        
|Balance at December 31, 2000                                             |                                                  |                |        |               |  | $           |         |               |  | $       | 54,035  |          |   | $ | (12,191,143  | ) |  | $ | (10,061,390  | )       
|Warrants issued in connection with the issuance
    of Series C-1        |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 2,134,414    |         
|Deferred compensation related to stock options,
    net of cancellations |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |             |         
|Amortization of deferred compensation                                    |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 118,000      |         
|Exercise of stock options                                                |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 91,200       |         
|Options granted to nonemployees                                          |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 264,000      |         
|Repurchase of common stock                                               |                                                  |                | 500,000 |               |  |             | (300,000 | )             |  |         |         |          |   |   |              |   |  |   |             |         
|Preferred stock accretion                                                |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   | (2,494,312   | ) |  |   | (2,494,312   | )       
|Net loss                                                                 |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   | (24,679,930  | ) |  |   | (24,679,930  | )       
|Other comprehensive loss:                                                |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |              |         
|                                                                         | Unrealized appreciation on marketable securities |                |         |               |  |             |          |               |  |         |         | 300,660  |   |   |              |   |  |   |              | 300,660  |  
|                                                                         |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |              |         
|Comprehensive loss                                                       |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | (24,379,270  | )       
|                                                                         |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |              |         
|Balance at December 31, 2001                                             |                                                  |                | 500,000 |               |  |             | (300,000 | )             |  |         | 354,695 |          |   |   | (39,365,385  | ) |  |   | (34,327,358  | )       
|Warrants issued in connection with the issuance
    of Series C-2        |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 3,384,794    |         
|Deferred compensation related to stock options,
    net of cancellations |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |             |         
|Amortization of deferred compensation                                    |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 238,600      |         
|Exercise of stock options                                                |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 6,000        |         
|Loan to purchase restricted stock                                        |                                                  |                | (75,000 | )             |  |             | 45,000   |               |  |         |         |          |   |   |              |   |  |   |             |         
|Repayment of loan to purchase restricted stock                           |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 5,000        |         
|Options granted to nonemployees                                          |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 1,048,539    |         
|Preferred stock accretion                                                |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   | (5,096,282   | ) |  |   | (5,096,282   | )       
|Net loss                                                                 |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   | (43,173,462  | ) |  |   | (43,173,462  | )       
|Other comprehensive loss:                                                |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |              |         
|                                                                         | Unrealized depreciation on marketable securities |                |         |               |  |             |          |               |  |         |         | (121,907 | ) |   |              |   |  |   |              | (121,907 | )
|                                                                         |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |              |         
|Comprehensive loss                                                       |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | (43,295,369  | )       
|                                                                         |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |              |         
|Balance at December 31, 2002                                             |                                                  |                | 425,000 |               |  |             | (255,000 | )             |  |         | 232,788 |          |   |   | (87,635,129  | ) |  |   | (78,036,076  | )       
|Deferred compensation related to stock options,
    net of cancellations |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |             |         
|Amortization of deferred compensation                                    |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 2,344,153    |         
|Exercise of stock options                                                |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 249,737      |         
|Repayment of loan to purchase restricted stock                           |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 750          |         
|Options granted to nonemployees                                          |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | 2,397,154    |         
|Preferred stock accretion                                                |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   | (9,160,382   | ) |  |   | (9,160,382   | )       
|Net loss                                                                 |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   | (40,699,245  | ) |  |   | (40,699,245  | )       
|Other comprehensive loss:                                                |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |              |         
|                                                                         | Unrealized depreciation on marketable securities |                |         |               |  |             |          |               |  |         |         | (101,957 | ) |   |              |   |  |   |              | (101,957 | )
|                                                                         |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |              |         
|Comprehensive loss                                                       |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   | (40,801,202  | )       
|                                                                         |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |              |         
|Balance at December 31, 2003                                             |                                                  |                | 425,000 |               |  | $           | (255,000 | )             |  | $       | 130,831 |          |   | $ | (137,494,756 | ) |  | $ | (123,005,866 | )       
|                                                                         |                                                  |                |         |               |  |             |          |               |  |         |         |          |   |   |              |   |  |   |              |         

See accompanying notes.

F-6



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |           |            |  
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ----------------------------------------- | ------------ | -------- | --------- | ---- | ------------ | --------- | --------- | - | ------------ | --------- | ---------- | -
|                                                                                              |                                                                                           |                                          
|                                                                                              |                                                                                           | Year Ended December 31,                  
|                                                                                              |                                                                                           |                                          
|                                                                                              |                                                                                           | 2001                                      |              | 2002     |           | 2003
|                                                                                              |                                                                                           |                                           |              |          |           |     
|Operating activities                                                                          |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Net loss                                                                                      |                                                                                           | $                                         | (24,679,930  | )        |           | $    | (43,173,462  | )         |           | $ | (40,699,245  | )        
|Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|                                                                                              | Depreciation and amortization                                                             |                                           |              | 92,743   |           |      |              | 316,728   |           |   |              | 891,177   |           
|                                                                                              | Loss on disposal of assets                                                                |                                           |              |         |           |      |              |          |           |   |              | 31,268    |           
|                                                                                              | Noncash stock-based compensation                                                          |                                           |              | 382,000  |           |      |              | 1,287,134 |           |   |              | 4,741,307 |           
|                                                                                              | Noncash license expense                                                                   |                                           |              |         |           |      |              |          |           |   |              |          |           
|                                                                                              | Gain on sale of marketable securities                                                     |                                           |              | (142,803 | )         |      |              | (333,235  | )         |   |              | (16,077   | )         
|                                                                                              | Changes in operating assets and liabilities:                                              |                                           |              |          |           |      |              |           |           |   |              |           |           
|                                                                                              |                                                                                           | Collaboration receivable                  |              |          |          |      |              |           |          |   |              |           | (2,562,000 | )
|                                                                                              |                                                                                           | Prepaid expenses and other current assets |              |          | (79,907   | )    |              |           | (43,073   | ) |              |           | 77,643     |  
|                                                                                              |                                                                                           | Other assets                              |              |          |          |      |              |           |          |   |              |           | (260,757   | )
|                                                                                              |                                                                                           | Accounts payable and accrued expenses     |              |          | 5,105,096 |      |              |           | 1,626,614 |   |              |           | 6,865,625  |  
|                                                                                              |                                                                                           | Deferred license fee revenue              |              |          |          |      |              |           |          |   |              |           | 70,416,663 |  
|                                                                                              |                                                                                           | Other liabilities                         |              |          | 54,025    |      |              |           | 498,212   |   |              |           | (44,859    | )
|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Net cash provided by (used in) operating
    activities                                       |                                                                                           |                                           | (19,268,776  | )        |           |      | (39,821,082  | )         |           |   | 39,440,745   |          
|Investing activities                                                                          |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Purchases of property and equipment                                                           |                                                                                           |                                           | (192,840     | )        |           |      | (582,330     | )         |           |   | (3,778,026   | )        
|Purchase of marketable securities                                                             |                                                                                           |                                           | (289,359,394 | )        |           |      | (136,447,734 | )         |           |   | (400,556,838 | )        
|Proceeds from sale of marketable securities                                                   |                                                                                           |                                           | 255,017,214  |          |           |      | 126,796,094  |           |           |   | 357,470,013  |          
|Increase in restricted cash                                                                   |                                                                                           |                                           | (980,561     | )        |           |      | (1,084,543   | )         |           |   | (2,958,225   | )        
|Repayment of loan to stockholders                                                             |                                                                                           |                                           |             |          |           |      | 255,000      |           |           |   | 750          |          
|Increase in prepaid expenses and other current
    assets                                     |                                                                                           |                                           | (370,779     | )        |           |      | (39,538      | )         |           |   | (407,663     | )        
|Increase in other assets                                                                      |                                                                                           |                                           | (300,000     | )        |           |      | (839,395     | )         |           |   | (1,701,223   | )        
|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Net cash (used in) provided by investing
    activities                                       |                                                                                           |                                           | (36,186,360  | )        |           |      | (11,942,446  | )         |           |   | (51,931,212  | )        
|Financing activities                                                                          |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Proceeds from issuance of common stock                                                        |                                                                                           |                                           | 91,200       |          |           |      | 6,000        |           |           |   | 249,737      |          
|Proceeds from issuance of redeemable convertible
    preferred stock and warrants, net        |                                                                                           |                                           | 53,585,050   |          |           |      | 54,154,200   |           |           |   | 32,022,769   |          
|Repayment of capital lease obligations                                                        |                                                                                           |                                           |             |          |           |      | (127,184     | )         |           |   | (560,128     | )        
|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Net cash provided by (used in) financing
    activities                                       |                                                                                           |                                           | 53,676,250   |          |           |      | 54,033,016   |           |           |   | 31,712,378   |          
|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Net increase (decrease) in cash and cash
    equivalents                                      |                                                                                           |                                           | (1,778,886   | )        |           |      | 2,269,488    |           |           |   | 19,221,911   |          
|Cash and cash equivalents at beginning of period                                              |                                                                                           |                                           | 5,301,243    |          |           |      | 3,522,357    |           |           |   | 5,791,845    |          
|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Cash and cash equivalents at end of period                                                    |                                                                                           | $                                         | 3,522,357    |          |           | $    | 5,791,845    |           |           | $ | 25,013,756   |          
|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Noncash financing and investing
    activities                                                |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Repurchase of restricted common stock                                                         |                                                                                           | $                                         | 300,000      |          |           | $    |             |           |           | $ |             |          
|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Fixed assets capitalized using capital leases                                                 |                                                                                           | $                                         |             |          |           | $    | 2,355,686    |           |           | $ |             |          
|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|                                                                                              | Loans to stockholders in connection with exercise
    of stock options and stock purchase |                                           | $            | 600,000  |           |      | $            | 102,000   |           |   | $            | 34,416    |           
|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Supplemental disclosures of cash flow
    information                                         |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|Cash paid during the period for:                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|                                                                                              | Interest                                                                                  |                                           | $            |         |           |      | $            | 32,179    |           |   | $            | 248,184   |           
|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          
|                                                                                              | Income taxes paid                                                                         |                                           | $            |         |           |      | $            |          |           |   | $            | 1,709,890 |           
|                                                                                              |                                                                                           |                                           |              |          |           |      |              |           |           |   |              |          

See accompanying notes.

F-7



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003




|   |                                             
|-- | --------------------------------------------
|1. | Organization and Description of
    Business

Eyetech Pharmaceuticals, Inc. and its wholly
owned subsidiary (collectively, Eyetech or the
Company), is a biopharmaceutical company that
specializes in the development and commercialization of novel
therapeutics to treat diseases of the eye. The Companys
initial focus is on diseases affecting the back of the eye,
particularly the retina. The Companys most advanced
product candidate is MacugenTM (pegaptanib sodium),
which it is developing for the treatment of both the wet form of
age-related macular degeneration, known as AMD, and for the
treatment of diabetic macular edema, known as DME, which is a
complication of diabetic retinopathy. In the second half of
2001, the Company initiated two phase 2/3 pivotal clinical
trials of Macugen for the treatment of wet AMD. Based on the
results from the first year of these trials, the Company plans
to prepare and file in 2004 a new drug application with the Food
and Drug Administration seeking marketing approval of Macugen
for the treatment of wet AMD. The Company is also currently
conducting a phase 2 clinical trial for the use of Macugen in
the treatment of DME.

The Company formed a wholly owned subsidiary in
Ireland in 2002. There has been no activity in this company
since inception in 2002. The Company operates in a single
business segment.

Prior to February 2003, the Company operated as a
development-stage company and did not generate any revenue.
Effective February 2003, the Company exited the development
stage when it entered into several concurrent agreements with
Pfizer Inc. (Pfizer) (see Note 11).

On February 4, 2004, the Company
successfully completed an initial public offering (IPO) of
its common stock. The IPO consisted of the sale of
6,500,000 shares of common stock at a price of
$21.00 per share. As part of the offering, the Company
granted to the underwriters an option to purchase an additional
975,000 shares within 30 days of the IPO to cover
over-allotments. This option was exercised in tandem with the
IPO. In addition, 476,190 shares of common stock were
purchased concurrently with the IPO by Pfizer for $10,000,000 as
part of its commitment under Pfizers collaboration with
the Company. (Note 11)

Net proceeds of the IPO, including the sale of
stock to Pfizer, after deducting underwriters discounts
and commission and offering expenses are estimated to be
$152,870,000. An additional $2,600,000 was received for the
issuance of 469,360 shares of preferred stock in connection
with the exercise of preferred stock warrants. An additional
1,867,124 shares of preferred stock were issued on a
cashless basis to the holders of 2,728,661 preferred stock
warrants, who will surrender 861,567 preferred stock warrants as
payment for those shares. All outstanding shares of preferred
stock, including those shares issued in connection with warrant
exercises, automatically converted to common shares upon the
completion of the IPO.



|   |                                                              
|-- | -------------------------------------------------------------
|2. | Basis of Presentation and Significant
    Accounting Policies



| |              
| | -------------
| | Consolidation

The accompanying consolidated financial
statements include the accounts of Eyetech
Pharmaceuticals, Inc. and its wholly owned subsidiary. All
intercompany significant account balances and transactions have
been eliminated in consolidation.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.

F-8



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                 
| | ----------------
| | Cash Equivalents

The Company considers all highly liquid
investments with an original maturity of three months or less to
be cash equivalents. At December 31, 2003 the Company has
substantially all of its cash and cash equivalents deposited
with one financial institution.



| |                      
| | ---------------------
| | Marketable Securities

Marketable securities are classified as
available-for-sale and are carried at market value
with unrealized gains and losses reported as other comprehensive
income or loss, which is a separate component of
stockholders deficit.



| |                
| | ---------------
| | Restricted Cash

Restricted cash of $5,600,000 at
December 31, 2003 collateralizes $5,600,000 of outstanding
letters of credit associated with the leases of the
Companys office and laboratory facilities. The funds are
invested in certificates of deposit. (Notes 13 and 16)



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash
equivalents and marketable securities. The Company has
established guidelines relating to diversification and
maturities that allows the Company to manage risk.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The carrying amounts of the Companys
financial instruments, which include cash and cash equivalents,
accounts payable and accrued expenses, approximate their fair
values. The estimated fair value of the redeemable convertible
preferred stock at December 31, 2002 is approximately
$194,000,000, based on the February 2003 preferred stock sales
price of $9.10 per share and at December 31, 2003 is
approximately $526,000,000, based on the IPO common stock value
of $21.00 per share.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment is stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets which range from three to
seven years. Leasehold improvements are amortized over the
estimated useful lives of the assets or related lease terms,
whichever is shorter.



| |                                   
| | ----------------------------------
| | Impairment of Long-Lived
    Asset

Effective January 1, 2002, the Company
assesses impairment of long-lived assets in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Assessments of the
recoverability of long-lived assets are conducted when events or
changes in circumstances occur that indicate that the carrying
value of the asset may not be recoverable. The assessment of
possible impairment is based upon the ability to recover the
asset from the expected future undiscounted cash flows of
related operations. No events have been identified that caused
an evaluation of the recoverability of the long-lived assets for
the years ended December 31, 2001, 2002 and 2003.



| |                    
| | -------------------
| | Revenue Recognition

Revenues associated with the Companys
collaboration with Pfizer consist of non-refundable, up-front
license fees and reimbursement of development expenses.

F-9



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company uses revenue recognition criteria
outlined in Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements and
Emerging Issues Task Force (EITF) Issue 00-21
Revenue Arrangements with Multiple Deliverables
(EITF 00-21). Accordingly, revenues from
licensing agreements are recognized based on the performance
requirements of the agreement. Non-refundable up-front fees,
where the Company has an ongoing involvement or performance
obligation, are generally recorded as deferred revenue in the
balance sheet and amortized into license fees in the statement
of operations over the term of the performance obligation.

Revenues derived from reimbursements of costs
associated with the development of Macugen are recorded in
compliance with EITF Issue 99-19 Reporting Revenue Gross
as a Principal Versus Net as an Agent (EITF
99-19), and EITF Issue 01-14 Income Statement
Characterization of Reimbursements Received For
Out-of-Pocket Expenses Incurred
(EITF 01-14). According to the criteria
established by these EITF Issues, in transactions where the
Company acts as a principal, with discretion to choose
suppliers, bears credit risk and performs part of the services
required in the transaction, the Company has met the criteria to
record revenue for the gross amount of the reimbursements.



| |                                   
| | ----------------------------------
| | Research and Development
    Costs

Research and development costs are expensed as
incurred.



| |                         
| | ------------------------
| | Stock-Based Compensation

In December 2002, SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure  an amendment of FASB
Statement No. 123 (SFAS 148) was
issued. SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation from the
intrinsic value-based method of accounting prescribed by APB
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). In addition,
SFAS 148 amends the disclosure requirements of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). The Company
adopted the disclosure requirements of SFAS 148 effective
December 31, 2002. As allowed by SFAS 123, the Company
has elected to continue to apply the intrinsic value-based
method of accounting prescribed in APB 25 and, accordingly,
does not recognize compensation expense for stock option grants
made at an exercise price equal to or in excess of the fair
market value of the stock at the date of grant.

F-10



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Had compensation cost for the Companys
outstanding employee stock options been determined based on the
fair value at the grant dates for those options consistent with
SFAS 123, the Companys net loss and basic and diluted
net loss per share, would have been changed to the following pro
forma amounts:

|                                                                                                                                  |  |                         |             |      |  |      |             |   |  |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                                                                                                  |  |                        
|                                                                                                                                  |  | Year Ended December 31,
|                                                                                                                                  |  |                        
|                                                                                                                                  |  | 2001                    |             | 2002 |  | 2003
|                                                                                                                                  |  |                         |             |      |  |     
|Net loss attributable to common stockholders, as
    reported                                                                     |  | $                       | (27,174,242 | )    |  | $    | (48,269,744 | ) |  | $ | (49,859,627 | )
|Add: Non-cash employee compensation as reported                                                                                   |  |                         | 118,000     |      |  |      | 238,600     |   |  |   | 2,344,153   |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards               |  |                         | (216,155    | )    |  |      | (350,877    | ) |  |   | (2,450,510  | )
|                                                                                                                                  |  |                         |             |      |  |      |             |   |  |   |             |  
|SFAS 123 pro forma net loss                                                                                                       |  | $                       | (27,272,397 | )    |  | $    | (48,382,021 | ) |  | $ | (49,965,984 | )
|                                                                                                                                  |  |                         |             |      |  |      |             |   |  |   |             |  
|Basic and diluted loss attributable to common
    stockholders per share, as reported                                             |  | $                       | (7.43       | )    |  | $    | (13.06      | ) |  | $ | (12.62      | )
|                                                                                                                                  |  |                         |             |      |  |      |             |   |  |   |             |  
|Basic and diluted loss attributable to common
    stockholders per share, SFAS 123 pro forma                                      |  | $                       | (7.45       | )    |  | $    | (13.09      | ) |  | $ | (12.65      | )
|                                                                                                                                  |  |                         |             |      |  |      |             |   |  |   |             |  
|Unaudited pro forma basic and diluted net loss
    attributable to common stockholders per share (Note 2),
    SFAS 123 pro forma |  |                         |             |      |  |      |             |   |  | $ | (1.78       | )
|                                                                                                                                  |  |                         |             |      |  |      |             |   |  |   |             |  

SFAS 123 pro forma information regarding net
loss is required by SFAS 123, and has been determined as if
the Company had accounted for its stock-based employee
compensation under the fair value method prescribed in
SFAS 123. The fair value of the options was estimated at
the date of grant using the minimum value pricing model since
the Company did not complete its IPO until January
29February      , 2004, with the
following assumptions:

|                        |  |                         |          |      |  |      |           |   |  |  |           |  
|----------------------- |  | ----------------------- | -------- | ---- |  | ---- | --------- | - |  |  | --------- | -
|                        |  |                        
|                        |  | Year Ended December 31,
|                        |  |                        
|                        |  | 2001                    |          | 2002 |  | 2003
|                        |  |                         |          |      |  |     
|Risk-free interest rate |  |                         | 5.0      | %    |  |      | 3.5%- 5.0 | % |  |  | 2.8%- 4.2 | %
|Dividend yield          |  |                         | 0        | %    |  |      | 0         | % |  |  | 0         | %
|Expected life           |  |                         | 7  years |      |  |      | 7 years   |   |  |  | 5 years   |  

The effects of applying SFAS 123 in this pro
forma disclosure are not indicative of future amounts. Pro forma
compensation related to stock option grants is expensed over
their respective vesting periods.

The Company accounts for options issued to
nonemployees under SFAS 123 and EITF Issue 96-18
Accounting for Equity Investments that are Issued to Other
than Employees for Acquiring or in Conjunction with Selling
Goods or Services (EITF 96-18). As such, the
value of such unvested options is periodically remeasured and
income or expense is recognized during their vesting terms.



| |                   
| | ------------------
| | Comprehensive Loss

The Company reports comprehensive loss in
accordance with SFAS No. 130, Reporting
Comprehensive Income (SFAS 130).
SFAS 130 establishes rules for the reporting and display of
comprehensive loss and its components. SFAS 130 requires
unrealized gains on available-for-sale securities to be included
in other comprehensive loss.

F-11



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |             
| | ------------
| | Income Taxes

The Company utilizes the asset and liability
method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets
and liabilities and are measured using enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. A valuation allowance is provided when it is more
likely than not that some portion or all of a deferred tax asset
will not be realized.



| |                   
| | ------------------
| | Net Loss Per Share

The Company computes net loss per share in
accordance with Statement of Financial Accounting Standards 128,
Earnings per Share
(SFAS No. 128). Under the provisions of
SFAS 128, basic net loss per common share (Basic
EPS) is computed by dividing net loss by the
weighted-average number of common shares outstanding. Diluted
net loss per common share (Diluted EPS) is computed
by dividing net loss by the weighted-average number of common
shares and dilutive common shares equivalents then outstanding.
Common equivalent shares consist of the incremental common
shares issuable upon the conversion of preferred stock, shares
issuable upon the exercise of stock options and the conversion
of preferred stock upon the exercise of warrants. Diluted EPS is
identical to Basic EPS since common equivalent shares are
excluded from the calculation, as their effect is anti-dilutive.



| |                                      
| | -------------------------------------
| | Pro Forma Information
    (Unaudited)

The pro forma balance sheet as of
December 31, 2003 reflects the automatic conversion of all
outstanding shares of the Companys convertible preferred
stock into an aggregate of 25,182,278 shares of common
stock upon completion of the Companys IPO. The pro forma
balance sheet as of December 31, 2003 does not include the
exercise of 4,031,414 outstanding warrants exercisable for
shares of the Companys redeemable convertible preferred
stock, which in turn automatically converted into shares of the
Companys common stock effective upon the closing of the
Companys IPO. The warrants were exercised by paying the
exercise price in cash or pursuant to a cashless exercise
feature based on the IPO price. Upon completion of the
Companys IPO, 469,360 warrants were exercised for cash and
1,867,124 were exercised under the cashless exercise provision
through the exchange of 861,597 warrants. The pro forma balance
sheet as of December 31, 2003 also does not include the
exercise of outstanding warrants to purchase 833,333 shares
of the Companys redeemable convertible preferred stock,
which became exercisable into the Companys common stock
effective upon the closing of the Companys IPO.

Pro forma basic and diluted net loss per share is
computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic
conversion of all outstanding convertible preferred stock into
shares of the Companys common stock effective upon the
closing of the Companys IPO, as if such conversion had
occurred at the date of the original issuance. Accordingly, pro
forma basic and diluted net loss per common share has been
calculated assuming the preferred stock was converted as of the
original date of issuance of the preferred stock. Pro forma
common shares outstanding of 28,094,165 is based on the weighted
average conversion of 24,143,684 shares of our convertible
preferred stock as of December 31, 2003.



| |                 
| | ----------------
| | Reclassification

Certain prior period amounts have been
reclassified to conform to current year presentation.



| |                                              
| | ---------------------------------------------
| | Recently Issued Accounting
    Pronouncements

During the year ended December 31, 2003, the
Financial Accounting Standards Board (FASB) issued
various accounting standards and interpretations, including FASB
Statement No. 150, Accounting for Certain

F-12



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Financial Instruments with Characteristics of
both Liabilities and Equity
(SFAS 150), Interpretation No. 46
(FIN 46), Consolidation of Variable
Interest Entities, an interpretation of ARB 51 and
Interpretation No. 46-R Consolidation of Variable
Interest Entities (FIN 46-R). Adoption of
these standards and interpretations has not had a material
effect on the Companys financial condition, results of
operations or liquidity.



|   |                               
|-- | ------------------------------
|3. | Available for Sale Investments

Available for sale investments consist primarily
of federal agency notes, asset backed securities, mortgage
backed securities, corporate debt, United States treasury notes
and municipal bonds at December 31, 2002 and 2003.

The following is a summary of available for sale
investments as of December 31, 2002 and 2003:

|                                      |                              |      |            |            |  |            |         |            |  |   |        |        |   |   |            |            | 
|------------------------------------- | ---------------------------- | ---- | ---------- | ---------- |  | ---------- | ------- | ---------- |  | - | ------ | ------ | - | - | ---------- | ---------- | 
|                                      |                              |      |            | Gross      |  | Gross      |         |           
|                                      |                              |      |            | Unrealized |  | Unrealized |         |           
|                                      |                              | Cost |            | Gains      |  | Losses     |         | Fair Value
|                                      |                              |      |            |            |  |            |         |           
|December 31, 2002                     |                              |      |            |            |  |            |         |            |  |   |        |        |   |   |            |           
|Maturities within one year:           |                              |      |            |            |  |            |         |            |  |   |        |        |   |   |            |           
|                                      | Corporate notes              |      | $          | 6,143,763  |  |            | $       | 25,819     |  |   | $      | (600   | ) |   | $          | 6,168,982  | 
|                                      | Federal agency notes         |      |            | 27,621,016 |  |            |         | 44,137     |  |   |        |       |   |   |            | 27,665,153 | 
|                                      | Mortgage backed securities   |      |            | 639,453    |  |            |         |           |  |   |        | (1,738 | ) |   |            | 637,715    | 
|                                      | Asset backed securities      |      |            | 11,953,435 |  |            |         | 51,860     |  |   |        | (37    | ) |   |            | 12,005,258 | 
|                                      |                              |      |            |            |  |            |         |            |  |   |        |        |   |   |            |           
|                                      |                              |      | 46,357,667 |            |  |            | 121,816 |            |  |   | (2,375 | )      |   |   | 46,477,108 |           
|                                      |                              |      |            |            |  |            |         |            |  |   |        |        |   |   |            |           
|Maturities between one to five years: |                              |      |            |            |  |            |         |            |  |   |        |        |   |   |            |           
|                                      | Federal agency notes         |      |            | 10,909,462 |  |            |         | 61,094     |  |   |        |       |   |   |            | 10,970,556 | 
|                                      | Mortgage backed securities   |      |            | 2,937,396  |  |            |         | 24,356     |  |   |        |       |   |   |            | 2,961,752  | 
|                                      | Asset backed securities      |      |            | 1,423,950  |  |            |         | 13,341     |  |   |        |       |   |   |            | 1,437,291  | 
|                                      | United States treasury notes |      |            | 1,497,865  |  |            |         | 14,556     |  |   |        |       |   |   |            | 1,512,421  | 
|                                      |                              |      |            |            |  |            |         |            |  |   |        |        |   |   |            |           
|                                      |                              |      | 16,768,673 |            |  |            | 113,347 |            |  |   |       |        |   |   | 16,882,020 |           
|                                      |                              |      |            |            |  |            |         |            |  |   |        |        |   |   |            |           
|Total                                 |                              | $    | 63,126,340 |            |  | $          | 235,163 |            |  | $ | (2,375 | )      |   | $ | 63,359,128 |           
|                                      |                              |      |            |            |  |            |         |            |  |   |        |        |   |   |            |           

F-13



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                      |                            |      |             |            |  |            |         |            |  |   |         |         |   |   |             |            | 
|------------------------------------- | -------------------------- | ---- | ----------- | ---------- |  | ---------- | ------- | ---------- |  | - | ------- | ------- | - | - | ----------- | ---------- | 
|                                      |                            |      |             | Gross      |  | Gross      |         |           
|                                      |                            |      |             | Unrealized |  | Unrealized |         |           
|                                      |                            | Cost |             | Gains      |  | Losses     |         | Fair Value
|                                      |                            |      |             |            |  |            |         |           
|December 31, 2003                     |                            |      |             |            |  |            |         |            |  |   |         |         |   |   |             |           
|Maturities within one year:           |                            |      |             |            |  |            |         |            |  |   |         |         |   |   |             |           
|                                      | Corporate notes            |      | $           | 24,386,443 |  |            | $       | 9,725      |  |   | $       | (7,720  | ) |   | $           | 24,388,448 | 
|                                      | Federal agency notes       |      |             | 23,951,489 |  |            |         | 10,670     |  |   |         | (1,695  | ) |   |             | 23,960,464 | 
|                                      | Mortgage backed securities |      |             |           |  |            |         |           |  |   |         |        |   |   |             |           | 
|                                      | Asset backed securities    |      |             | 32,023,764 |  |            |         | 100,669    |  |   |         | (2,463  | ) |   |             | 32,121,970 | 
|                                      |                            |      | 80,361,696  |            |  |            | 121,064 |            |  |   | (11,878 | )       |   |   | 80,470,882  |           
|                                      |                            |      |             |            |  |            |         |            |  |   |         |         |   |   |             |           
|Maturities between one to five years: |                            |      |             |            |  |            |         |            |  |   |         |         |   |   |             |           
|                                      | Corporate notes            |      |             | 16,316,113 |  |            |         | 12,833     |  |   |         | (3,658  | ) |   |             | 16,325,288 | 
|                                      | Federal agency notes       |      |             | 6,909,507  |  |            |         | 1,031      |  |   |         | (14,664 | ) |   |             | 6,895,874  | 
|                                      | Mortgage backed securities |      |             | 730,202    |  |            |         | 8,486      |  |   |         |        |   |   |             | 738,688    | 
|                                      | Asset backed securities    |      |             |           |  |            |         |           |  |   |         |        |   |   |             |           | 
|                                      | Municipal bonds            |      |             | 1,911,724  |  |            |         | 17,617     |  |   |         |        |   |   |             | 1,929,341  | 
|                                      |                            |      |             |            |  |            |         |            |  |   |         |         |   |   |             |           
|                                      |                            |      | 25,867,546  |            |  |            | 39,967  |            |  |   | (18,322 | )       |   |   | 25,889,191  |           
|                                      |                            |      |             |            |  |            |         |            |  |   |         |         |   |   |             |           
|Total                                 |                            | $    | 106,229,242 |            |  | $          | 161,031 |            |  | $ | (30,200 | )       |   | $ | 106,360,073 |           
|                                      |                            |      |             |            |  |            |         |            |  |   |         |         |   |   |             |           



|   |                       
|-- | ----------------------
|4. | Property and Equipment

Property and equipment consists of the following:

|                                          |  |              |           |      |  |   |            |  
|----------------------------------------- |  | ------------ | --------- | ---- |  | - | ---------- | -
|                                          |  |             
|                                          |  | December 31,
|                                          |  |             
|                                          |  | 2002         |           | 2003
|                                          |  |              |           |     
|Furniture and office equipment            |  | $            | 479,660   |      |  | $ | 562,826    |  
|Computer equipment                        |  |              | 688,877   |      |  |   | 1,728,918  |  
|Laboratory equipment                      |  |              | 1,828,771 |      |  |   | 4,348,071  |  
|Leasehold improvements                    |  |              | 454,857   |      |  |   | 559,108    |  
|                                          |  |              |           |      |  |   |            |  
|                                          |  |              | 3,452,165 |      |  |   | 7,198,923  |  
|Accumulated depreciation and amortization |  |              | (440,164  | )    |  |   | (1,331,341 | )
|                                          |  |              |           |      |  |   |            |  
|                                          |  | $            | 3,012,001 |      |  | $ | 5,867,582  |  
|                                          |  |              |           |      |  |   |            |  

Included in property and equipment are assets
recorded under capital leases with a cost of approximately
$2,355,686 at December 31, 2002 and December 31, 2003.
There were no assets under capital leases prior to 2002.
Amortization of the assets recorded under capital leases is
included with depreciation expense. The accumulated amortization
related to these assets under capital leases was approximately
$196,000 and $649,000 at December 31, 2002 and
December 31, 2003, respectively.

F-14



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                          
|-- | -----------------------------------------
|5. | Accounts Payable and Accrued
    Expenses

Accounts payable and accrued expenses consist of
the following:

|                              |  |              |           |      |  |   |            | 
|----------------------------- |  | ------------ | --------- | ---- |  | - | ---------- | 
|                              |  |             
|                              |  | December 31,
|                              |  |             
|                              |  | 2002         |           | 2003
|                              |  |              |           |     
|Clinical development expenses |  | $            | 3,418,016 |      |  | $ | 3,862,646  | 
|Manufacturing expenses        |  |              | 278,751   |      |  |   | 2,469,740  | 
|Payroll and related expenses  |  |              | 1,438,809 |      |  |   | 2,483,688  | 
|Professional fees             |  |              | 825,424   |      |  |   | 1,876,267  | 
|Collaboration payable         |  |              |          |      |  |   | 715,000    | 
|Other expenses                |  |              | 1,481,478 |      |  |   | 2,900,762  | 
|                              |  |              |           |      |  |   |            | 
|                              |  | $            | 7,442,478 |      |  | $ | 14,308,103 | 
|                              |  |              |           |      |  |   |            | 



|   |                                                                     
|-- | --------------------------------------------------------------------
|6. | Redeemable Convertible Preferred Stock and
    Stockholders Deficit



| |             
| | ------------
| | Common Stock

As of December 31, 2003, the Company is
authorized to issue 60,000,000 shares of common stock. Each
holder of common stock is entitled to one vote for each share of
common stock held of record on all matters on which stockholders
generally are entitled to vote.

As of December 31, 2003, the Company had
reserved shares of common stock for issuance as follows:

|                                                                           |  |  |            | 
|-------------------------------------------------------------------------- |  |  | ---------- | 
|Common stock options                                                       |  |  | 9,049,250  | 
|Conversion of Series A preferred stock                                     |  |  | 120,000    | 
|Conversion of Series B preferred stock                                     |  |  | 5,790,331  | 
|Conversion of Series C-1 and C-2 preferred
    stock                       |  |  | 16,524,694 | 
|Conversion of Series D preferred stock                                     |  |  | 2,747,253  | 
|Exercise of warrants to purchase Series B,
    C-1 and C-2 preferred stock |  |  | 4,031,414  | 
|                                                                           |  |  |            | 
|                                                                           |  |  | 38,262,942 | 
|                                                                           |  |  |            | 

On September 10, 2003, the Companys
Board of Directors approved a Restated Certificate of
Incorporation. The Restated Certificate of Incorporation, which
was approved by stockholders in December 2003 and became
effective upon the consummation of the Companys IPO in
February 2004, increased the Companys authorized common
stock to 125,000,000 shares and authorized
5,000,000 shares of preferred stock, issuable in one or
more series to be designated by the Companys Board of
Directors.

During 2001, employees and nonemployees exercised
options to purchase 1,152,000 shares of the Companys
common stock for total consideration of $691,200. Of this
amount, the Company loaned $600,000 to one of the purchasers of
the stock pursuant to a full recourse note (see Note 10).
Of those shares purchased, 1,075,000 were restricted, and
generally vest over a four-year period. In connection with the
termination of an executive, 500,000 shares vested
immediately and 500,000 shares were cancelled. At December
2003, 6,250 shares remain restricted. Unvested shares are
subject to the Companys repurchase at the options
exercise price. During 2002, one nonemployee exercised an option
to purchase 10,000 shares of the Companys common
stock in exchange for $6,000 in cash. During 2003 employees and
nonemployees exercised options to purchase 365,736 shares
of the Companys common stock in exchange for cash of
$250,000 and a full recourse note of $34,000. Included in these
purchases were 8,917 shares purchased by employees and
18,750 shares purchased by a nonemployee that had not yet
vested. At December 31, 2003, 8,292 shares purchased
by employees and 13,542 shares purchased by nonemployees
remain restricted.

F-15



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                            
| | ---------------------------
| | Convertible Preferred Stock

During March 2000, the Company sold
120,000 shares of Series A convertible preferred stock
(Series A) for $150,000. During April 2000, the
Company sold 5,766,332 shares of Series B redeemable
convertible preferred stock (Series B) and
warrants to purchase 1,142,902 shares of Series B for
approximately $34,473,000, net of issuance costs. The
Companys estimate of the fair value of the warrants was
determined to be $1,040,000. The warrants had an exercise price
of $6.00.

During January 2001, the Company sold
20,666 shares of Series B for $124,000.

During July and August 2001, the Company sold
7,964,229 shares of Series C-1 redeemable convertible
preferred stock (Series C-1) and warrants to
purchase 1,592,846 shares of Series C-1 for
approximately $53,461,000, net of issuance costs. The
Companys estimate of the fair value of the warrants was
determined to be approximately $2,134,000. The warrants had an
exercise price of $6.80.

Upon the completion of certain defined events,
the Company sold and issued to the purchasers of the
Series C-1, 7,521,777 shares of Series C-2
redeemable convertible preferred stock
(Series C-2) and warrants to purchase
1,504,354 shares of Series C-2 for approximately
$54,157,000, net of issuance costs, in August 2002. The
Companys estimate of the fair value of the warrants was
determined to be approximately $3,385,000. The warrants had an
exercise price of $7.20.

In 2002, the Company authorized the issuance of
2,747,253 shares of Series D convertible preferred
stock (Series D). Concurrent with the closing
in February 2003 of the agreements with Pfizer to jointly
develop and commercialize Macugen, the Company sold
2,747,253 shares of Series D to Pfizer for
$24,736,944, net of issuance costs.

In 2003, certain holders of warrants to purchase
Series B, Series C-1 and Series C-2 redeemable
convertible preferred stock exercised warrants to purchase
3,333, 531,825 and 506,863 shares of Series B,
Series C-1 and Series C-2 redeemable convertible
preferred stock, respectively. Proceeds from these exercises
were $7,286,000. In addition, through December 31, 2003 the
Company received notification of exercise, conditional upon
completion of the IPO, from warrant holders to purchase 16,667,
22,053 and 34,861 shares of Series B, Series C-1
and Series C-2 redeemable convertible preferred stock,
respectively. Proceeds of $501,000 have been received by the
Company and are classified as short-term liabilities at
December 31, 2003, pending completion of the IPO.

In connection with the Pfizer agreements, the
Company has also agreed to sell, and Pfizer has agreed to
purchase, up to $25,000,000 worth of additional capital stock
upon the completion of certain milestones at the then current
market price. Concurrent with the completion of the IPO, the
Company sold to Pfizer $10,000,000 worth of common stock.
Accordingly, after the IPO, Pfizers remaining commitment
to purchase capital stock has been reduced to $15,000,000.



| |                         
| | ------------------------
| | Preferred Stock Warrants

The Company issued warrants in connection with
the sale of Series B, Series C-1 and Series C-2
preferred stock. Concurrent with the completion of the IPO in
February 2004, warrant holders exercised warrants to purchase
129,566, 134,256 and 131,957 shares of Series B,
Series C-1 and Series C-2 stock, respectively.
Proceeds from these exercises aggregated $2,640,000. In
addition, other warrant holders exercised warrants, utilizing
the cashless exercise provisions of the warrant agreements, to
purchase 709,517, 611,746 and 545,861 shares of the
Series B, Series C-1 and Series C-2 stock,
respectively. These exercises resulted in the exchange of
283,819, 292,966 and 284,812 warrants as payment for the
purchase of Series B, Series C-1 and Series C-2
stock, respectively. The exchange price of the warrants was the
IPO price of $21.00 per share. At completion of the IPO,
833,333 warrants to purchase Series B redeemable convertible

F-16



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

preferred stock automatically converted into
warrants to purchase 833,333 shares of common stock. These
warrants remain outstanding after completion of the IPO.



| |       
| | ------
| | Voting

Preferred stockholders are entitled to the number
of votes equal to the number of shares of common stock into
which each share of preferred stock is convertible.



| |          
| | ---------
| | Dividends

The holders of Series A, Series B,
Series C-1, Series C-2 and Series D were entitled
to annual non-cumulative dividends when, and if, declared, prior
and in preference to any dividends payable on common stock, at a
rate of $0.10 per share, $0.48 per share,
$0.54 per share, $0.58 per share and $0.73 per
share, respectively. As of December 31, 2003, no dividends
had been declared. In connection with the conversion of
preferred stock into common stock upon the completion of the
IPO, all dividend rights ceased.



| |            
| | -----------
| | Liquidation

In the event of a defined liquidation event
(Liquidation Event), which includes a liquidation,
dissolution, winding up of the Company or a merger,
consolidation or reorganization of the Company that results in
the transfer of 50% or more of the outstanding voting power of
the Company or a sale of substantially all the assets of the
Company, the Series A, Series B, Series C-1,
Series C-2 and Series D preferred stockholders were
entitled to, prior and in preference to any other stockholders,
a liquidation preference distribution of the sum of 1.5 times
the original per share purchase price paid to the Company, plus
all declared and unpaid dividends, or if greater, the amount per
share as would have been payable had each share of preferred
stock been converted into the Companys common stock prior
to such Liquidation Event. The Series B, Series C-1,
Series C-2 and Series D preferred stockholders rank
senior in preference to the Series A preferred
stockholders, and share ratably on a pari passu basis in the
event of a liquidation. After payment of full preferential
amount to Series A, Series B, Series C-1,
Series C-2 and Series D preferred stockholders, the
remaining assets shall be distributed ratably among the holders
of common stock.

The following table summarizes convertible
preferred stock issued and outstanding (excluding preferred
stock warrants of 4,031,414), with liquidation preferences for
each series at December 31, 2003:

|           |  |                   |            |             |  |             |            |  |  |   |             | 
|---------- |  | ----------------- | ---------- | ----------- |  | ----------- | ---------- |  |  | - | ----------- | 
|           |  |                   |            | Issued and  |  | Liquidation
|           |  | Authorized Shares |            | Outstanding |  | Preference 
|           |  |                   |            |             |  |            
|Series A   |  |                   | 120,000    |             |  |             | 120,000    |  |  | $ | 225,000     | 
|Series B   |  |                   | 7,763,233  |             |  |             | 5,790,331  |  |  |   | 52,112,979  | 
|Series C-1 |  |                   | 9,557,077  |             |  |             | 8,496,054  |  |  |   | 86,659,751  | 
|Series C-2 |  |                   | 9,026,132  |             |  |             | 8,028,640  |  |  |   | 86,709,312  | 
|Series D   |  |                   | 2,747,253  |             |  |             | 2,747,253  |  |  |   | 37,500,003  | 
|           |  |                   |            |             |  |             |            |  |  |   |             | 
|           |  |                   | 29,213,695 |             |  |             | 25,182,278 |  |  | $ | 263,207,045 | 
|           |  |                   |            |             |  |             |            |  |  |   |             | 

In connection with the conversion of preferred
stock into common stock upon the completion of the IPO, all
liquidation rights ceased.



| |           
| | ----------
| | Conversion

Each holder of Series A, Series B,
Series C-1, Series C-2 and Series D had the
ability to convert at any time, at its option, shares of
preferred into common stock on a one-for-one basis subject to
certain adjustments

F-17



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

including dilutive issuances and splits, as
defined. All series of preferred stock were converted into
common shares at the completion of the IPO.



| |           
| | ----------
| | Redemption

At any time on or after July 20, 2010, at
the request of the holders of not less than 66 2/3% of the
then outstanding Series C-1, Series C-2 and a majority
of the Series D and Series B or upon a liquidation
event as defined above, the Company shall redeem for cash such
convertible preferred stock at the greater of the sum of 1.5
times the original series issue price plus declared but unpaid
dividends or the amount per share as would have been payable had
each share been converted into common stock. Accordingly, the
Company is recording and accreting the Series B,
Series C-1, Series C-2 and Series D to its
defined redemption value through July 20, 2010.
Series A is not redeemable at the option of the holder. In
connection with the conversion of preferred stock to common upon
completion of the IPO, all redemption rights ceased.



|   |              
|-- | -------------
|7. | Stock Options

The Company has reserved a maximum of
8,175,000 shares under the Companys 2001 Stock Option
Plan (the 2001 Plan) and 2,747,500 shares for
stock options granted prior to the adoption of the 2001 Plan.
Stock options may be granted to employees and consultants.
Granted stock options are immediately exercisable into
restricted shares and generally vest over a four-year period
with substantially all options vesting with respect to 25% of
the shares on the first anniversary of the grant date and
thereafter in thirty-six monthly installments. Options expire
ten years from date of grant. Additionally, options that are
exercised into restricted shares of common stock continue to
vest under the original terms of the related options.

The following table summarizes option activity
for the Company:

|                                 |           |              |           |                |   |   |      |      | 
|-------------------------------- | --------- | ------------ | --------- | -------------- | - | - | ---- | ---- | 
|                                 |           |              |           | Weighted-     
|                                 |           | Common Stock |           | Average       
|                                 |           | Options      |           | Exercise Price
|                                 |           |              |           |               
|Outstanding at January 1, 2001   |           |              | 1,147,500 |                |   | $ | 0.60 |     
|                                 | Granted   |              |           | 2,253,000      |   |   |      | 1.36 | 
|                                 | Exercised |              |           | (1,152,000     | ) |   |      | 0.60 | 
|                                 | Cancelled |              |           | (265,000       | ) |   |      | 6.94 | 
|                                 |           |              |           |                |   |   |      |     
|Outstanding at December 31, 2001 |           |              | 1,983,500 |                |   |   | 1.24 |     
|                                 | Granted   |              |           | 1,885,000      |   |   |      | 1.38 | 
|                                 | Exercised |              |           | (10,000        | ) |   |      | 0.60 | 
|                                 | Cancelled |              |           | (105,084       | ) |   |      | 0.89 | 
|                                 |           |              |           |                |   |   |      |     
|Outstanding at December 31, 2002 |           |              | 3,753,416 |                |   |   | 0.98 |     
|                                 | Granted   |              |           | 1,518,500      |   |   |      | 5.18 | 
|                                 | Exercised |              |           | (365,736       | ) |   |      | 0.78 | 
|                                 | Cancelled |              |           | (209,264       | ) |   |      | 2.33 | 
|                                 |           |              |           |                |   |   |      |     
|Outstanding at December 31, 2003 |           |              | 4,696,916 |                |   | $ | 2.30 |     
|                                 |           |              |           |                |   |   |      |     

The following table summarizes information about
vested stock options outstanding:

|                                |  |              |         |      |  |      |           |  |  |   |           | 
|------------------------------- |  | ------------ | ------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                |  |             
|                                |  | December 31,
|                                |  |             
|                                |  | 2001         |         | 2002 |  | 2003
|                                |  |              |         |      |  |     
|Vested stock options            |  |              | 581,250 |      |  |      | 1,210,891 |  |  |   | 1,844,793 | 
|Weighted average exercise price |  | $            | 0.60    |      |  | $    | 0.60      |  |  | $ | 0.87      | 

F-18



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information about
stock options outstanding at December 31, 2003:

|               |       |                 |           |                |         |                  |           |   |         |   |      |      |      | 
|-------------- | ----- | --------------- | --------- | -------------- | ------- | ---------------- | --------- | - | ------- | - | ---- | ---- | ---- | 
|               |       | Options         |           |                |         | Weighted-Average
|               |       | Outstanding and |           |                |         | Remaining       
|Exercise Price |       | Exercisable     |           | Options Vested |         | Contractual Life
|               |       |                 |           |                |         |                 
|$ 0.60         |       |                 | 1,482,500 |                |         |                  | 1,225,304 |   |         |   | 7.01 |     
|               |       | 1.00            |           |                | 60,000  |                  |           |   | 35,416  |   |      |      | 7.86 | 
|               |       | 1.36            |           |                | 926,916 |                  |           |   | 366,802 |   |      |      | 8.36 | 
|               |       | 1.44            |           |                | 746,500 |                  |           |   | 202,953 |   |      |      | 8.91 | 
|               |       | 2.91            |           |                | 264,500 |                  |           |   | 19,318  |   |      |      | 9.26 | 
|               |       | 3.50            |           |                | 890,500 |                  |           |   | (5,000  | ) |      |      | 9.54 | 
|               | 10.00 |                 |           | 228,500        |         |                  |           |  |         |   |      | 9.74 |     
|               | 14.00 |                 |           | 97,500         |         |                  |           |  |         |   |      | 9.87 |     
|               |       |                 |           |                |         |                  |           |   |         |   |      |     
|               |       |                 | 4,696,916 |                |         |                  | 1,844,793 |   |         |   | 8.39 |     
|               |       |                 |           |                |         |                  |           |   |         |   |      |     

In connection with the granting of employee stock
options in 2001, 2002 and 2003, the Company recorded deferred
compensation of approximately $321,000, $1,335,000 and
$15,001,000, respectively. Deferred compensation is being
amortized over the vesting period of the options resulting in
non-cash stock-based compensation expense of approximately
$118,000, $239,000 and $2,344,000 for the years ended
December 31, 2001, 2002 and 2003, respectively.

For the years ended December 31, 2001, 2002,
and 2003, the Company granted a total of 345,500, 137,500 and
5,000, respectively, in stock options to certain consultants and
Scientific Advisory Board members. The Company has accounted for
these options in accordance with EITF 96-18 and, accordingly,
recorded non-cash expense of $264,000, $1,049,000 and $2,397,000
for the years ended December 31, 2001, 2002, and 2003,
respectively. The Company will continue to remeasure the fair
value of unvested stock options to these consultants and
Scientific Advisory Board members until vesting is complete.

On September 10, 2003, the Companys
Board of Directors approved the Companys 2003 Stock
Incentive Plan (the 2003 Incentive Plan). The 2003
Incentive Plan, which was approved by stockholders in December
2003, became effective on February 4, 2004, the date that
the registration statement relating to the Companys IPO
was declared effective. Under the 2003 Incentive Plan,
4,400,000 shares of common stock are authorized for
issuance, subject to annual increases beginning in 2005 in
accordance with the terms of the 2003 Incentive Plan. Upon
effectiveness of the 2003 Incentive Plan, the Company will grant
no further stock options or other awards under the
Companys 2001 Plan.

On September 10, 2003, the Companys
Board of Directors approved the Companys 2003 Employee
Stock Purchase Plan (the 2003 Purchase Plan). The
2003 Purchase Plan, which was approved by stockholders in
December 2003, became effective on February 4, 2004, the
date that the registration statement relating to the
Companys IPO was declared effective. Under the 2003
Purchase Plan, 500,000 shares of common stock are reserved
for sale to participating employees at an amount equal to 85% of
the lower of the closing price of our common stock on the first
day or the last day of the offering period.

F-19



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |               
|-- | --------------
|8. | Loss Per Share

The following table sets forth the computation of
basic and diluted net loss attributable to common stockholders
per share.

|                                                                                                                                                        |                                                                                                                             |                         |             |             |   |      |             |             |   |   |             |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ----------- | ----------- | - | ---- | ----------- | ----------- | - | - | ----------- | ----------- | -
|                                                                                                                                                        |                                                                                                                             |                        
|                                                                                                                                                        |                                                                                                                             | Year Ended December 31,
|                                                                                                                                                        |                                                                                                                             |                        
|                                                                                                                                                        |                                                                                                                             | 2001                    |             | 2002        |   | 2003
|                                                                                                                                                        |                                                                                                                             |                         |             |             |   |     
|Numerator:                                                                                                                                              |                                                                                                                             |                         |             |             |   |      |             |             |   |   |             |            
|                                                                                                                                                        | Net Loss                                                                                                                    |                         | $           | (24,679,930 | ) |      | $           | (43,173,462 | ) |   | $           | (40,699,245 | )
|                                                                                                                                                        | Preferred stock accretion                                                                                                   |                         |             | (2,494,312  | ) |      |             | (5,096,282  | ) |   |             | (9,160,382  | )
|                                                                                                                                                        |                                                                                                                             |                         |             |             |   |      |             |             |   |   |             |            
|Numerator for basic and diluted net loss
    attributable to common stockholders per share  net
    loss attributable for common stockholders          |                                                                                                                             | $                       | (27,174,242 | )           |   | $    | (48,269,744 | )           |   | $ | (49,859,627 | )          
|                                                                                                                                                        |                                                                                                                             |                         |             |             |   |      |             |             |   |   |             |            
|Denominator:                                                                                                                                            |                                                                                                                             |                         |             |             |   |      |             |             |   |   |             |            
|                                                                                                                                                        | Denominator for basic and dilutive net loss
    attributable to common stockholders per share 
    weighted average shares |                         |             | 3,659,422   |   |      |             | 3,697,192   |   |   |             | 3,950,481   |  
|                                                                                                                                                        |                                                                                                                             |                         |             |             |   |      |             |             |   |   |             |            
|                                                                                                                                                        | Basic and diluted net loss attributable to common
    stockholders per share                                                |                         | $           | (7.43       | ) |      | $           | (13.06      | ) |   | $           | (12.62      | )
|                                                                                                                                                        |                                                                                                                             |                         |             |             |   |      |             |             |   |   |             |            
|Denominator for unaudited pro forma basic and
    diluted net loss attributable to common stockholders per
    share  weighted average shares (Note 2) |                                                                                                                             |                         |             |             |   |      |             |             |   |   | 28,094,165  |            
|                                                                                                                                                        |                                                                                                                             |                         |             |             |   |      |             |             |   |   |             |            
|Unaudited pro forma basic and diluted net loss
    attributable to common stockholders per share (Note 2)                                               |                                                                                                                             |                         |             |             |   |      |             |             |   | $ | (1.77       | )          
|                                                                                                                                                        |                                                                                                                             |                         |             |             |   |      |             |             |   |   |             |            

The following table shows dilutive common share
equivalents outstanding, which are not included in the above
historical calculations, as the effect of their inclusion is
anti-dilutive during each period:

|                |  |                         |            |      |  |      |            |  |  |  |            | 
|--------------- |  | ----------------------- | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- | 
|                |  |                        
|                |  | Year Ended December 31,
|                |  |                        
|                |  | 2001                    |            | 2002 |  | 2003
|                |  |                         |            |      |  |     
|Preferred stock |  |                         | 13,871,227 |      |  |      | 21,393,004 |  |  |  | 25,182,278 | 
|Options         |  |                         | 1,983,500  |      |  |      | 3,753,416  |  |  |  | 4,696,916  | 
|Warrants        |  |                         | 3,569,081  |      |  |      | 5,073,435  |  |  |  | 4,031,414  | 
|                |  |                         |            |      |  |      |            |  |  |  |            | 
|                |  |                         | 19,423,808 |      |  |      | 30,219,855 |  |  |  | 33,910,608 | 
|                |  |                         |            |      |  |      |            |  |  |  |            | 



|   |             
|-- | ------------
|9. | Income Taxes

At December 31, 2003, the Company has a net
operating loss for federal income tax purposes of approximately
$43,315,000, which begins to expire in 2020.

The Company has research and development tax
credit carry forwards at December 31, 2003 of approximately
$1,027,000, which will expire in 2022. The Company also has
alternative minimum tax credit carry forwards at
December 31, 2003 of approximately $833,000, which are
available for use against the Companys regular tax
liability in the future. If an ownership change, as defined
under Internal Revenue Code Section 382, occurs, the use of
these carry forwards may be subject to limitation.

F-20



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Provision for income tax at December 31,
2003 consists of:

|                                        |  |   |           | 
|--------------------------------------- |  | - | --------- | 
|Current Federal alternative minimum tax |  | $ | 833,000   | 
|Current State taxes                     |  | $ | 855,000   | 
|                                        |  |   |           | 
|                                        |  | $ | 1,688,000 | 
|                                        |  |   |           | 

Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Companys deferred tax
assets relate primarily to net operating loss carryforwards and
deferred license fee revenue. For the year ended
December 31, 2003 the change in valuation allowance was
approximately $17,703,000. At December 31, 2002 and 2003, a
valuation allowance was recorded to fully offset the net
deferred tax asset. Significant components of the Companys
deferred tax assets are as follows:

|                                     |                                     |                          |             |            |   |   |             |            |  
|------------------------------------ | ----------------------------------- | ------------------------ | ----------- | ---------- | - | - | ----------- | ---------- | -
|                                     |                                     |                         
|                                     |                                     | Year Ending December 31,
|                                     |                                     |                         
|                                     |                                     | 2002                     |             | 2003      
|                                     |                                     |                          |             |           
|Deferred tax assets:                 |                                     |                          |             |            |   |   |             |           
|                                     | Net operating loss carryforwards    |                          | $           | 29,864,000 |   |   | $           | 17,326,000 |  
|                                     | Accrued bonus                       |                          |             | 505,000    |   |   |             |           |  
|                                     | Stock-based compensation            |                          |             | 707,000    |   |   |             | 2,286,000  |  
|                                     | Start-up costs, net of amortization |                          |             | 236,000    |   |   |             | 122,000    |  
|                                     | Deferred license fee revenue        |                          |             |           |   |   |             | 28,167,000 |  
|                                     | Alternative minimum tax credit      |                          |             |           |   |   |             | 833,000    |  
|                                     | Research and development tax credit |                          |             |           |   |   |             | 1,027,000  |  
|                                     | Other                               |                          |             | 62,000     |   |   |             | 197,000    |  
|                                     |                                     |                          |             |            |   |   |             |           
|Total gross deferred tax assets      |                                     |                          | 31,374,000  |            |   |   | 49,958,000  |           
|                                     |                                     |                          |             |            |   |   |             |           
|Deferred tax liabilities:            |                                     |                          |             |            |   |   |             |           
|                                     | Depreciation                        |                          |             | (112,000   | ) |   |             | (993,000   | )
|                                     |                                     |                          |             |            |   |   |             |           
|Total gross deferred tax liabilities |                                     |                          | (112,000    | )          |   |   | (993,000    | )         
|                                     |                                     |                          |             |            |   |   |             |           
|Valuation allowance                  |                                     |                          | (31,262,000 | )          |   |   | (48,965,000 | )         
|                                     |                                     |                          |             |            |   |   |             |           
|Net deferred tax assets              |                                     | $                        |            |            |   | $ |            |           
|                                     |                                     |                          |             |            |   |   |             |           

A reconciliation of the statutory tax rates and
the effective tax rates for the years ended December 31,
2002 and 2003 is as follows:

|                                                              |  |                         |     |      |  |      |     |    |  |  |     |   
|------------------------------------------------------------- |  | ----------------------- | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                                              |  |                        
|                                                              |  | Year Ended December 31,
|                                                              |  |                        
|                                                              |  | 2001                    |     | 2002 |  | 2003
|                                                              |  |                         |     |      |  |     
|Statutory rate                                                |  |                         | (34 | )%   |  |      | (34 | )% |  |  | (34 | )%
|State and local income taxes (net of federal tax
    benefit) |  |                         | (6  | )    |  |      | (6  | )  |  |  | (4  | ) 
|Tax credits                                                   |  |                         |    |      |  |      |    |    |  |  | (3  | ) 
|Change in valuation allowance                                 |  |                         | 40  |      |  |      | 40  |    |  |  | 45  |   
|                                                              |  |                         |     |      |  |      |     |    |  |  |     |   
|                                                              |  |                         | 0   | %    |  |      | 0   | %  |  |  | 4   | % 
|                                                              |  |                         |     |      |  |      |     |    |  |  |     |   



|    |                      
|--- | ---------------------
|10. | Loans to Stockholders

On January 15, 2001, the Company hired a new
President and Chief Operating Officer (the
Executive). The employment agreement with the
Executive provided for a $600,000 loan the proceeds of which

F-21



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

was used to exercise 1,000,000 stock options at a
per share exercise price of $0.60. The 1,000,000 restricted
common shares were to vest over a four-year period. The loan was
a full-recourse note and was non-interest bearing. Additionally,
the Company loaned the Executive an additional $500,000. This
loan was also non-interest bearing.

On November 8, 2001, the Company and the
Executive mutually agreed to terminate the employment of the
Executive. In connection with the termination agreement, 500,000
of the 1,000,000 restricted common shares were immediately
vested, and the Company exercised its right to repurchase the
remaining 500,000 unvested shares at the original exercise price
of $0.60 or $300,000, which was credited to the $600,000 loan
principal due from the Executive. The Executive repaid $5,000 of
the loan principal during 2002. The remaining loan balance of
$295,000 is due in January 2007 and is collateralized by 500,000
restricted common shares. Additionally, the Company forgave
$250,000 of the $500,000 loan principal which was included as
additional expense. The remaining $250,000 of the loan principal
was repaid during 2002.



|    |                         
|--- | ------------------------
|11. | Collaboration Agreements

In March 2000, the Company licensed the rights to
certain technology from a corporate licensor in exchange for an
up-front license fee of $7,000,000 and a warrant to purchase
833,333 shares of Series B Convertible Preferred Stock
at an exercise price of $6.00 per share. The warrant is
exercisable at any time through March 30, 2005. In
addition, the Company may be required to make additional
payments aggregating up to $25,000,000 upon the achievement of
development and commercial launch milestones specified in the
licensing agreement.

In December 2001, the Company signed a license
agreement for the nonexclusive rights to certain technology from
a corporate licensor in exchange for an initial irrevocable and
nonrefundable license fee of $2,000,000, which was paid in 2002.
Additionally, the Company may be required to make additional
payments aggregating up to $4,000,000 upon the achievement of
specified regulatory milestones with respect to the use of
Macugen for the treatment of AMD and aggregating up to
$2,750,000 upon the achievement of specified regulatory
milestones with respect to the use of Macugen for other
therapeutic indications. For the year ended December 31,
2001, the Company recorded the $2,000,000 license fee as a
research and development expense.

In February 2002, the Company entered into a
license, manufacturing and supply agreement for the use of
certain technology rights to certain patents of a component of
Macugen. The contract calls for specified pricing based on
quantities purchased. The Company paid an up-front license fee
of $1,500,000 and may be required to make additional payments
aggregating up to $4,500,000 upon the achievement of specified
development milestones with respect to Macugen. The Company may
credit a portion of its future milestones payments against a
portion of the royalty payments that it may be required to make
under this agreement. For the year ended December 31, 2002,
the Company recorded the $1,500,000 license fee as a research
and development expense.

In December 2002, Pfizer and the Company entered
into several concurrent agreements to jointly develop and
commercialize Macugen. Under the terms of the agreement, which
became effective February 3, 2003 when government approval
was obtained, Pfizer made initial payments of $100,000,000 which
included the purchase of 2,747,253 shares of the
Companys Series D preferred stock for $24,736,944,
net of issuance costs and a $75,000,000 initial license fee
which is being amortized over the expected term of the agreement
(estimated at 15 years). In addition, the Company has
agreed to sell to Pfizer and Pfizer has agreed to purchase from
the Company, up to an additional $25,000,000 of the
Companys capital stock at the then current market price
upon the completion of certain events, including $10,000,000 of
the Companys common stock at the IPO price concurrently
with the successful completion of an IPO. Concurrent with the
IPO, Pfizer purchased 476,190 shares of common stock at
$21.00 per share.

F-22



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Based on the achievement of certain specified
worldwide regulatory submission and approvals, the Company would
be eligible to receive up to an additional $195,500,000 in
milestone payments. The Company also has the potential to
receive up to an additional $450,000,000 in milestone payments,
which are contingent upon successful commercialization of
Macugen and which are based on attainment of agreed-upon sales
levels. Pfizer may terminate the collaboration relationship upon
six to twelve months prior notice, depending on when such
notice is given.

If approved, Macugen will be co-promoted by the
Company and Pfizer in the United States where Eyetech will have
an ophthalmology sales force, maintain the inventory and book
all United States product sales. The Company and Pfizer will
share in profits and losses from the sale of Macugen products in
the United States. Outside the United States, Pfizer will market
the product exclusively under a license, for which the Company
will receive royalty income. As part of the agreement, the
Company will begin to assemble a sales force prior to commercial
launch of Macugen, which also allows for the detailing
Pfizers Xalatan® ophthalmologic treatment in exchange
for specified royalties.

Under the terms of the agreement, both parties
will expend funds related to the co-promotion and development of
Macugen. Pfizer will generally fund a majority of the ongoing
development costs incurred pursuant to an agreed upon
development plan covering the development of Macugen for AMD,
DME, retinal vein occlusion and other agreed upon ophthalmic
indications. In certain instances, the Company will reimburse
Pfizer for the Companys share of costs that Pfizer incurs.
This funding resulted in the recognition by the Company of
$36,835,829 in revenue and $3,305,552 in research and
development and marketing expenses during 2003. Through
December 31, 2003, Pfizer has made payments to the Company
of $31,683,277. Accordingly, at December 31, 2003, the
Company has recorded a collaboration receivable for the net
amount of $2,562,000 and a collaboration payable of $715,000. In
addition, the Company recognized $4,583,337 in connection with
the amortization of the $75,000,000 initial license fee paid by
Pfizer.



|    |               
|--- | --------------
|12. | Capital Leases

The Company leases laboratory equipment and other
equipment under capital leases that bear interest from 9.6% to
10.1% and expire in 2006. The following is a schedule of the
future minimum lease payments under these capital leases as of
December 31, 2003:

|                                                  |  |   |           | 
|------------------------------------------------- |  | - | --------- | 
|2004                                              |  | $ | 756,000   | 
|2005                                              |  |   | 694,000   | 
|2006                                              |  |   | 438,000   | 
|                                                  |  |   |           | 
|Total                                             |  |   | 1,888,000 | 
|Less amount representing interest                 |  |   | 232,000   | 
|                                                  |  |   |           | 
|Present value of the minimum lease payments       |  |   | 1,656,000 | 
|Less current portion of capital lease obligations |  |   | 618,000   | 
|                                                  |  |   |           | 
|                                                  |  | $ | 1,038,000 | 
|                                                  |  |   |           | 



|    |            
|--- | -----------
|13. | Commitments

The Company leases office and laboratory space in
New York, New York, Cedar Knolls, New Jersey and
Woburn, Massachusetts. During 2002, the Company leased certain
office space in New York, New York, which expires on
July 31, 2007. Under existing lease agreements, the Company
has secured bank letters of credit totaling approximately
$2,624,000, which are fully cash collateralized and the cash is
categorized as restricted cash in the balance sheet.
Additionally, the Company has obtained a $3,000,000 secured bank
letter

F-23



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of credit in anticipation of entering into a
leasing commitment for operational and administrative
facilities. (Note 16)

Rent expense for the years ended
December 31, 2001, 2002 and December 31, 2003 was
approximately $482,000, $1,380,000 and $1,316,000, respectively.
Future minimum lease commitments, net of sublease income, are as
follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2004       |  | $ | 1,556,000 | 
|2005       |  |   | 1,564,000 | 
|2006       |  |   | 1,577,000 | 
|2007       |  |   | 1,237,000 | 
|2008       |  |   | 876,000   | 
|Thereafter |  |   | 1,504,000 | 
|           |  |   |           | 
|           |  | $ | 8,314,000 | 
|           |  |   |           | 

Under certain of the Companys collaborative
agreements it is obligated to make specified payments upon
achieving specified milestones relating to the development and
regulatory approval of Macugen. These contingent payment
obligations are not included in the above table.



|    |            
|--- | -----------
|14. | 401(k) Plan

The Company maintains a defined contribution
401(k) plan available to eligible employees. Employee
contributions are voluntary and are determined on an individual
basis, limited by the maximum amounts allowable under federal
tax regulations. The Company has discretion to make
contributions to the plan. However, to date no contributions
have been made.

F-24



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##### Table of Contents



EYETECH PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                  
|--- | -------------------------------------------------
|15. | Selected Quarterly Financial Data
    (Unaudited)

|                                               |  |               |            |         |  |              |             |             |  |   |             |   |  |   |             |  
|---------------------------------------------- |  | ------------- | ---------- | ------- |  | ------------ | ----------- | ----------- |  | - | ----------- | - |  | - | ----------- | -
|                                               |  |              
|                                               |  | Quarter Ended
|                                               |  |              
|                                               |  | March 31      |            | June 30 |  | September 30 |             | December 31
|                                               |  |               |            |         |  |              |             |            
|2001                                           |  |               |            |         |  |              |             |             |  |   |             |   |  |   |             |  
|Net loss                                       |  | $             | (4,581,212 | )       |  | $            | (6,041,233  | )           |  | $ | (4,816,970  | ) |  | $ | (9,240,515  | )
|Net loss attributable to common stockholders   |  |               | (4,958,852 | )       |  |              | (6,419,327  | )           |  |   | (5,588,020  | ) |  |   | (10,208,043 | )
|Basic and diluted net (loss) per common share* |  | $             | (1.65      | )       |  | $            | (1.74       | )           |  | $ | (1.36       | ) |  | $ | (2.68       | )
|2002                                           |  |               |            |         |  |              |             |             |  |   |             |   |  |   |             |  
|Net loss                                       |  | $             | (8,747,753 | )       |  | $            | (9,631,821  | )           |  | $ | (10,697,851 | ) |  | $ | (14,096,037 | )
|Net loss attributable to common stockholders   |  |               | (9,833,552 | )       |  |              | (10,717,620 | )           |  |   | (11,971,922 | ) |  |   | (15,746,650 | )
|Basic and diluted net (loss) per common share* |  | $             | (2.69      | )       |  | $            | (2.93       | )           |  | $ | (3.20       | ) |  | $ | (4.22       | )
|2003 (Restated)**                              |  |               |            |         |  |              |             |             |  |   |             |   |  |   |             |  
|License fees                                   |  | $             | 833,334    |         |  | $            | 1,250,001   |             |  | $ | 1,250,001   |   |  | $ | 1,250,001   |  
|Reimbursement of development costs             |  |               | 6,475,830  |         |  |              | 9,948,756   |             |  |   | 11,143,313  |   |  |   | 9,267,930   |  
|Net loss                                       |  |               | (5,422,172 | )       |  |              | (9,071,789  | )           |  |   | (14,308,255 | ) |  |   | (11,897,029 | )
|Net loss attributable to common stockholders   |  |               | (7,681,135 | )       |  |              | (11,330,753 | )           |  |   | (16,583,830 | ) |  |   | (14,263,909 | )
|Basic and diluted net (loss) per common share* |  | $             | (2.04      | )       |  | $            | (2.88       | )           |  | $ | (4.12       | ) |  | $ | (3.50       | )



---



| |   |                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Per common share amounts for the quarters and
    full years have been calculated separately. Accordingly,
    quarterly amounts do not add to the annual amount because of
    differences in the weighted average common shares outstanding
    during each period principally due to the effect of the
    Companys issuing shares of its common stock during the
    year.

Diluted EPS is identical to Basic EPS since
common equivalent shares are excluded from the calculation, as
their effect is anti-dilutive.



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | The quarterly results for the reimbursement of
    development costs for the quarters ended March 31, 2003,
    June 30, 2003 and September 30, 2003 have been
    restated due to certain reclassifications of reimbursable costs
    that were made to quarterly billings in connection with the
    Companys collaboration with Pfizer. These restatements do
    not alter the full year results or amounts receivable under the
    collaboration at December 31, 2003.



|    |                  
|--- | -----------------
|16. | Subsequent Events



| |                                               
| | ----------------------------------------------
| | Lease for New Corporate Headquarters
    Space

In January 2004, the Company entered into a
sub-sublease arrangement for additional office space in
New York, NY to be used as new corporate operational and
administrative space. Under the terms of the sub-sublease, the
Company will lease 62,000 square feet of space through 2020
at an initial rate of $45 per square foot, subject to
periodic rate increases. As security for the sublease, we have
named the sub-landlord as beneficiary under a secured bank
letter of credit in the amount of $3,000,000. (Note 13)

F-25



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##### Table of Contents



EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                     
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Amended and Restated Certificate of Incorporation
    of the Registrant                                                                                                             
|        | 3  | .3          |  | Amended and Restated Bylaws of the Registrant                                                                                                                                       
|        | 4  | .1(1)       |  | Specimen Certificate evidencing shares of common
    stock                                                                                                                          
|        | 4  | .2(2)       |  | Warrant Agreement, dated as of March 31,
    2000, by and between the Registrant and Gilead
    Sciences, Inc.                                                                      
|        | 4  | .3(2)       |  | Warrant Agreement Amendment, dated as of
    September 4, 2003, by and among the Registrant, Gilead
    Sciences, Inc. and University License Equity
    Holdings, Inc.             
|        | 4  | .4(3)      |  | Series D Preferred Stock Purchase Agreement,
    dated as of December 17, 2002, by and between the
    Registrant, Pfizer Ireland Pharmaceuticals and Pfizer Inc.                   
|        | 4  | .5(2)       |  | Amended and Restated Investors Rights
    Agreement, dated as of February 7, 2003, by and among the
    Registrant and the parties listed therein                                  
|        | 10 | .1(2)       |  | 2001 Stock Plan, as amended                                                                                                                                                         
|        | 10 | .2          |  | 2003 Stock Incentive Plan                                                                                                                                                           
|        | 10 | .3          |  | 2003 Employee Stock Purchase Plan                                                                                                                                                   
|        | 10 | .4(3)      |  | License Agreement, dated as of December 17,
    2002, by and between Pfizer Inc. and the Registrant                                                                                 
|        | 10 | .5(3)      |  | Collaboration Agreement, dated as of
    December 17, 2002, by and between Pfizer Inc. and the
    Registrant                                                                       
|        | 10 | .6(3)      |  | License, Manufacturing and Supply Agreement,
    dated February 5, 2002, by and between Shearwater
    Corporation and the Registrant                                               
|        | 10 | .7(3)      |  | Licensing Agreement, dated as of March 30,
    2000 and amended on May 9, 2000, December 4, 2001 and
    April 12, 2002, by and between Gilead Sciences, Inc.
    and the Registrant
|        | 10 | .8(3)      |  | License Agreement, dated as of December 31,
    2001, by and between Isis Pharmaceuticals, Inc. and the
    Registrant                                                              
|        | 10 | .9(2)       |  | Consulting Agreement, dated as of
    October 30, 2001, by and between the Registrant and Samir
    Patel                                                                           
|        | 10 | .10(2)      |  | Executive Employment Agreement, dated as of
    April 12, 2000, by and between the Registrant and David R.
    Guyer                                                                
|        | 10 | .11(2)      |  | Amendment to Executive Employment Agreement,
    dated as of August 25, 2003, by and between the Registrant
    and David R. Guyer                                                  
|        | 10 | .12(2)      |  | Employment Agreement, dated as of August 25,
    2003, by and between Paul Chaney and the Registrant                                                                                
|        | 10 | .13(2)      |  | Employment Agreement, dated as of
    February 1, 2002, by and between the Registrant and Glenn
    Sblendorio                                                                      
|        | 10 | .14(1)      |  | Amendment to Employment Agreement, dated as of
    October 17, 2003, by and between the Registrant and Glenn
    Sblendorio                                                         
|        | 10 | .15(2)      |  | Employment Agreement, dated as of April 12,
    2002, by and between the Registrant and Anthony P. Adamis                                                                           
|        | 10 | .16(1)      |  | Amendment to Employment Agreement, dated as of
    October 20, 2003, by and between the Registrant and Anthony
    P. Adamis                                                        
|        | 10 | .17(2)      |  | Employment Agreement, dated as of August 25,
    2003, by and between Douglas H. Altschuler and the Registrant                                                                      
|        | 10 | .18(2)      |  | Restricted Stock Purchase Promissory Note, dated
    July 1, 2002, issued by Anthony P. Adamis to the Registrant                                                                    



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                     
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .19(2)      |  | Stock Pledge Agreement, dated July 1, 2002,
    by and between Anthony P. Adamis and the Registrant                                                                                                                 
|        | 10 | .20(2)      |  | Sublease Agreement, dated as of December 19,
    2001 and amended as of February 22, 2002, by and between
    AnswerThink, Inc., successor in interest to AnswerThink
    Consulting Group, Inc., and the Registrant
|        | 10 | .21(2)      |  | Lease Agreement, dated March 14, 2002, by
    and between First Industrial, L.P. and the Registrant                                                                                                                 
|        | 10 | .22(2)      |  | Commercial Lease, dated March 27, 2002, by
    and between Cummings Properties, LLC and the Registrant                                                                                                              
|        | 10 | .23(3)     |  | Manufacturing and Supply Agreement, dated as of
    November 11, 2003, by and between Raylo
    Chemicals, Inc. and the Registrant                                                                                  
|        | 10 | .24(4)     |  | Letter of Understanding, effective as of
    September 1, 2003, by and between the Registrant and Raylo
    Chemicals, Inc., as amended                                                                             
|        | 10 | .25(4)     |  | Manufacturing and Supply Agreement, dated as of
    November 26, 2003 by and between the Registrant and Gilead
    Sciences, Inc.                                                                                   
|        | 10 | .26(5)      |  | Sub-Sublease Agreement, dated December 19,
    2003, by and between Instinet Global Holdings, Inc. and the
    Registrant                                                                                           
|        | 21 | .1          |  | List of Subsidiaries                                                                                                                                                                                                
|        | 23 | .1          |  | Consent of Ernst & Young LLP                                                                                                                                                                                        
|        | 31 | .1          |  | Rule 13a-14(a)/15d-14(a) Certification of
    Principal Executive Officer                                                                                                                                           
|        | 31 | .2          |  | Rule 13a-14(a)/15d-14(a) Certification of
    Principal Financial Officer                                                                                                                                           
|        | 32 | .1          |  | Section 1350 Certification of Chief
    Executive Officer                                                                                                                                                           
|        | 32 | .2          |  | Section 1350 Certification of Chief
    Financial Officer                                                                                                                                                           



---



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (SEC File
    No. 333-108781) filed on October 21, 2003  
|   
|(2) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (SEC File
    No. 333-108781) filed on September 12, 2003
|   
|(3) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (SEC File
    No. 333-108781) filed on January 22, 2004  
|   
|(4) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (SEC File
    No. 333-108781) filed on December 18, 2003 
|   
|(5) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (SEC File
    No. 333-108781) filed on January 27, 2004  



|  |                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment granted as to certain
    portions, which portions have been omitted and filed separately
    with the Securities and Exchange Commission.