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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





Form 10-K


ANNUAL REPORT


PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2006                                                 
|          
|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: 000-50767





CRITICAL THERAPEUTICS, INC.


(Exact Name of Registrant as Specified in Its Charter)


|                                                                                         |  |                                      
|---------------------------------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                                                 |  | 04-3523569                           
|(State or Other Jurisdiction of
     Incorporation or Organization)                      |  | (IRS Employer
    Identification No.)
|                                                                                        
|60 Westview Street, Lexington,
    Massachusetts(Address of Principal Executive Offices) |  | 02421(Zip Code)                      



(781) 402-5700







|                                         |  |                                          
|---------------------------------------- |  | -----------------------------------------
|Title of Each Class                      |  | Name of Each Exchange on Which Registered
|                                         |  |                                          
|Common Stock, $0.001 par value per share |  | The NASDAQ Stock Market LLC              



None.





o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2


o þ o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE












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##### 










CRITICAL THERAPEUTICS, INC.


ANNUAL REPORT


ON FORM 10-K


INDEX


|                                                                                                            |  |                                                                                                                      |     |      |     | 
|----------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | --- | ---- | --- | 
|                                                                                                            |  |                                                                                                                      |     | Page |    
|                                                                                                            |  |                                                                                                                      |     |      |    
|PART I                                                                                                     
|Item 1.                                                                                                     |  | Business                                                                                                             |     |      | 1   | 
|Item 1A.                                                                                                    |  | Risk Factors                                                                                                         |     |      | 28  | 
|Item 1B.                                                                                                    |  | Unresolved Staff Comments                                                                                            |     |      | 52  | 
|Item 2.                                                                                                     |  | Properties                                                                                                           |     |      | 52  | 
|Item 3.                                                                                                     |  | Legal Proceedings                                                                                                    |     |      | 52  | 
|Item 4.                                                                                                     |  | Submission of Matters to a Vote of Security
    Holders                                                              |     |      | 52  | 
|EXECUTIVE OFFICERS OF THE REGISTRANT                                                                        |  |                                                                                                                      | 53  |     
|PART II                                                                                                    
|Item 5.                                                                                                     |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |     |      | 54  | 
|Item 6.                                                                                                     |  | Selected Financial Data                                                                                              |     |      | 56  | 
|Item 7.                                                                                                     |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |     |      | 58  | 
|Item 7A.                                                                                                    |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |     |      | 79  | 
|Item 8.                                                                                                     |  | Financial Statements and Supplementary
    Data                                                                      |     |      | 80  | 
|Item 9.                                                                                                     |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |     |      | 114 | 
|Item 9A.                                                                                                    |  | Controls and Procedures                                                                                              |     |      | 114 | 
|Item 9B.                                                                                                    |  | Other Information                                                                                                    |     |      | 116 | 
|                                                                                                           
|PART III                                                                                                   
|Item 10.                                                                                                    |  | Directors, Executive Officers and Corporate
    Governance                                                           |     |      | 117 | 
|Item 11.                                                                                                    |  | Executive Compensation                                                                                               |     |      | 117 | 
|Item 12.                                                                                                    |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |     |      | 118 | 
|Item 13.                                                                                                    |  | Certain Relationships and Related
    Transactions, and Director Independence                                        |     |      | 118 | 
|Item 14.                                                                                                    |  | Principal Accountant Fees and Services                                                                               |     |      | 118 | 
|                                                                                                           
|PART IV                                                                                                    
|Item 15.                                                                                                    |  | Exhibits and Financial Statement
    Schedules                                                                       |     |      | 118 | 
|SIGNATURES                                                                                                  |  |                                                                                                                      | 119 |     
|EXHIBIT INDEX                                                                                               |  |                                                                                                                      |     |     
|Ex-10.8 Amendment No. 2, dated January 8, 2007, to Sponsored Research License Agreement                    
|Ex-10.14 Amendment No. 1, dated April 13, 2005, to License Agreement                                       
|Ex-10.16 Amendment No. 1, dated September 15, 2004, to License Agreement                                   
|Ex-10.38 Non-Employee Director Compensation and Reimbursement Policy                                       
|Ex-10.42 2007 Company Goals                                                                                
|Ex-10.43 Cash Bonuses for Executive Officers                                                               
|Ex-10.44 2007 Salaries for Executive Officers                                                              
|Ex-10.45 Maximum Annual Cash Bonuses for Executive Officers                                                
|Ex-10.48 Amendment No. 2 to Consulting Agreement, Amendment No. 1 to Approval Agreement, and Mutual Release
|Ex-21.1 Subsidiaries of the Registrant                                                                     
|Ex-23.1 Consent of Deloitte & Touche LLP                                                                   
|Ex-31.1 Section 302 Certification of P.E.O. & P.F.O.                                                       
|Ex-32.1 Section 906 Certification of P.E.O. & P.F.O.                                                       





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##### Table of Contents






PART I


Cautionary Statement Regarding Forward-Looking Statements


10-K ® co-promotion,







|        |         
|------- | --------
|ITEM 1. | BUSINESS

Overview




1



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alpha-7 alpha-7 alpha-7 alpha-7






2



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Our Strategy








alpha-7 alpha-7 alpha-7


3



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Our Product Pipeline











| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Being developed with MedImmune under an exclusive license and
    collaboration agreement. Diagnostic assays directed towards
    HMGB1 are being developed with Beckman Coulter under a license
    agreement.

Zileuton


FDA-approved


5-lipoxygenase FDA-approved 5-lipoxygenase




| |                        
| | -----------------------
| | Therapeutic Opportunity





4



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® ® ® ®


®






| |                             
| | ----------------------------
| | Zileuton Product Development



| |                                          
| | -----------------------------------------
| | ZYFLO: The Tablet Formulation of Zileuton

5-lipoxygenase four-times-a


three-month six-month




| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | rapid and sustained improvement for patients over a
    six-month period in
    objective and subjective measures of asthma control;
|
| |  | reduction of exacerbations and need for either bronchodilatory
    or steroid rescue medications; and                               
|
| |  | acute bronchodilatory effect within two hours after the first
    dose.                                                             

six-fold






5



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| |                                           
| | ------------------------------------------
| | Controlled-Release Formulation of Zileuton





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In a three-month pivotal efficacy trial, in which
    397 patients received either zileuton CR or placebo,
    patients taking zileuton CR demonstrated statistically
    significant improvements over placebo in objective measures of
    asthma control, such as mean forced expiratory volume in one
    second, or
    FEV1.
    In the trial, patients taking zileuton CR showed a reduced need
    for bronchodilatory drugs as a rescue medication to alleviate
    uncontrolled symptoms. In this trial, 2.5% of the patients
    taking zileuton CR experienced ALT levels greater than or equal
    to three times the level normally seen in the bloodstream
    compared to 0.5% of the patients taking placebo.
|
| |  | In a six-month safety trial, in which 706 patients received
    either a combination of zileuton CR and their usual asthma
    medications or a combination of placebo and their usual asthma
    medications, 1.78% of the patients taking zileuton CR and their
    usual asthma medications experienced ALT levels greater than or
    equal to three times the level normally seen in the bloodstream
    compared to 0.65% of the patients taking placebo and their usual
    asthma medications.                                                                                                                                                                                                                        







6



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| |                                   
| | ----------------------------------
| | Injectable Formulation of Zileuton



1


1 1






| |                           
| | --------------------------
| | Commercialization Strategy



7



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| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | over 24 months of in-depth interaction between our team of
    medical science liaisons, or MSLs, and key opinion leaders in
    the treatment of respiratory diseases, including asthma;
|
| |  | more than a year of interaction between our sales force and
    respiratory specialists who treat asthma; and                                                                            
|
| |  | qualitative and quantitative market research that we have
    conducted since 2004.                                                                                                      





| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 79% of respondents indicated that ZYFLO is an effective add-on
    therapy for patients who are still symptomatic on moderate to
    high-dose inhaled steroids;
|
| |  | 84% of respondents indicated that ZYFLO and Mercks
    Singulair®
    work differently; and                                                                    
|
| |  | 90% of respondents indicated ZYFLO should be used in patients
    who are dependent on or non-responsive to oral steroids.                                      



8



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| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | conducting clinical studies to provide clinicians with clinical
    data to support zileuton CRs market position;                                                                                                                
|
| |  | implementing a publication strategy that includes the
    presentation of data from the pivotal studies of zileuton CR at
    major medical conferences and in various scientific and medical
    journals; and                   
|
| |  | initiating a clinical trial to evaluate a life-cycle extension
    strategy to enhance the intellectual property position of
    zileuton and provide for possible development opportunities in
    other inflammatory conditions.







| |                              
| | -----------------------------
| | Life-Cycle Extension Strategy

5-lipoxygenase 5-lipoxygenase


9



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Critical Care: The Inflammatory Response






| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | acute diseases and conditions that lead to admission to the ICU,
    such as sepsis, septic shock and post surgical ileus; and                       
|
| |  | acute exacerbations of chronic diseases that frequently lead to
    hospitalization, such as asthma, rheumatoid arthritis and acute
    pancreatitis.







| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an HMGB1 program directed towards a
    newly-discovered
    pro-inflammatory
    protein HMGB1; and                                                                                                                                                   
|
| |  | an alpha-7 receptor
    program directed towards a receptor that we believe regulates
    the release of the cytokines that play a fundamental role in the
    inflammatory response, including TNF alpha, in response to an
    inflammatory stimulus.





| |              
| | -------------
| | HMGB1 Program

interleukin-1






10



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| |                        
| | -----------------------
| | Therapeutic Opportunity









| |                  
| | -----------------
| | Clinical Strategy

in vitro in vivo.






| |                             
| | ----------------------------
| | Alpha-7 Receptor
    Program

alpha-7 alpha-7


alpha-7 alpha-7




| |                        
| | -----------------------
| | Therapeutic Opportunity

alpha-7 alpha-7 alpha-7 anti-TNF


11



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| |                     
| | --------------------
| | Development Strategy

alpha-7 alpha-7 knock-out alpha-7 scale-up alpha-7


Collaborations




| |                           
| | --------------------------
| | DEY Co-Promotion Agreement



out-of






12



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| |                                               
| | ----------------------------------------------
| | Binding Letter Agreement for COPD Co-Promotion





90-days




| |                        
| | -----------------------
| | MedImmune Collaboration

know-how


13



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product-by by-country know-how


full-time


HMGB1-inhibiting HMGB1-inhibiting co-promote


six-months




| |                              
| | -----------------------------
| | Beckman Coulter Collaboration





14



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90-days


Research and Development


in-licensed




Sales and Marketing










15



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Manufacturing








| |                        
| | -----------------------
| | Shasun Pharma Solutions

18-months 12-months out-of




| |                        
| | -----------------------
| | Patheon Pharmaceuticals

12-months 18-months 30-days


16



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| |           
| | ----------
| | SkyePharma





| |      
| | -----
| | Other

alpha-7


Distribution Network










License and Royalty Agreements




17



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| |       
| | ------
| | Abbott



®




| |       
| | ------
| | Baxter



18



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| |                        
| | -----------------------
| | The Feinstein Institute

Shore-Long






19



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| |           
| | ----------
| | SkyePharma





| |                      
| | ---------------------
| | Innovative Metabolics

alpha-7




| |   |                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make a one-time milestone payment to us of $1.0 million
    upon the achievement of all regulatory approvals from the FDA or
    any foreign counterpart agency required for the marketing and
    sale in the applicable country of any product or method covered
    by the licensed patent rights;
|
| |  | pay us royalties based on net sales of licensed products and
    methods by IMI and its affiliates until the expiration of the
    patent rights covering the licensed product or method in the
    country of actual or intended use; and                                                           

20



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| |   |                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pay us a percentage of any royalties, fees and payments actually
    received from third parties, with limited exceptions, in
    connection with sublicenses by IMI of its rights under the
    licensed patent rights and know-how.







| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | amounts payable to The Feinstein Institute in connection with
    the filing of any U.S. patent application or issuance of a
    U.S. patent relating to the field of cholinergic
    anti-inflammatory technology; and
|
| |  | minimum annual royalties payable to The Feinstein Institute
    beginning in the first year after termination of research
    activities under the sponsored research agreement.                                       

90-days


alpha-7


Proprietary Rights






|         |  |        |    |  |         |  |    |         |  |  |         |  |  |       |    |  |  |  |     | 
|-------- |  | ------ | -- |  | ------- |  | -- | ------- |  |  | ------- |  |  | ----- | -- |  |  |  | --- | 
|         |  | U.S.   |    |  | Foreign |  |    |        
|         |  |        |    |  |         |  |    | Program | 
|         |  | Issued |    |  | Pending |  |    | Issued  |  |  | Pending |  |  | Total |   
|         |  |        |    |  |         |  |    |         |  |  |         |  |  |       |   
|Zileuton |  |        | 2  |  |         |  | 3  |         |  |  | 37      |  |  |       | 6  |  |  |  | 48  | 
|HMGB1    |  |        | 6  |  |         |  | 15 |         |  |  | 17      |  |  |       | 53 |  |  |  | 91  | 
|CTI-01   |  |        | 0  |  |         |  | 2  |         |  |  | 5       |  |  |       | 9  |  |  |  | 16  | 
|Alpha-7  |  |        | 2  |  |         |  | 14 |         |  |  | 1       |  |  |       | 25 |  |  |  | 42  | 
|         |  |        |    |  |         |  |    |         |  |  |         |  |  |       |   
|Total    |  |        | 10 |  |         |  | 34 |         |  |  | 60      |  |  |       | 93 |  |  |  | 197 | 
|         |  |        |    |  |         |  |    |         |  |  |         |  |  |       |   

21



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| |                                                                
| | ---------------------------------------------------------------
| | Trademarks, Trade Secrets and Other Proprietary
    Information

®




Regulatory Matters






22



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30-day










23



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in-depth








24



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five-year 180-day


25



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







| |                    
| | -------------------
| | Hazardous Materials



Competition




26



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® ®


® ®


® neurokinin-3 neurokinin-4


®


® ® ®


27



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Employees




Available Information


10-K, 10-Q, 8-K





ITEM 1A.     RISK FACTORS


10-K


Risks Relating to Our Business




| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Our business depends heavily on obtaining approval for and
    the commercial success of zileuton CR.







| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not obtain the regulatory approvals or clearances
    required to market and sell zileuton CR, our business may
    be unsuccessful.



28



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| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If zileuton CR is not approved for sale or the market
    is not receptive to it, we may not be able to generate
    significant revenues unless we are able to successfully develop
    and commercialize other product candidates.







29



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| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our marketing and sales infrastructure and presence are
    not adequate or our collaborative marketing arrangements are not
    successful, our ability to market and sell our products will be
    impaired.









| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | A failure to maintain appropriate inventory levels could
    harm our reputation and subject us to financial losses.



30



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| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | If the market is not receptive to our product candidates,
    we will be unable to generate revenues from sales of these
    products.





| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing of our receipt of any marketing approvals, the terms
    of any approval and the countries in which approvals are
    obtained;                                                                                
|
| |  | the safety, efficacy and ease of administration;                                                                                                                                                                          
|
| |  | the therapeutic benefit or other improvement over existing
    comparable products;                                                                                                                                       
|
| |  | pricing and cost effectiveness;                                                                                                                                                                                           
|
| |  | the ability to be produced in commercial quantities at
    acceptable costs;                                                                                                                                              
|
| |  | the availability of reimbursement from third-party payors such
    as state and Federal governments, under programs such as
    Medicare and Medicaid, and private insurance plans and managed
    care organizations; and
|
| |  | the extent and success of our sales and marketing efforts.                                                                                                                                                                





| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | We may not be successful in our efforts to advance and
    expand our portfolio of product candidates.





| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | internal research programs;                                                                                                                                                                                                         
|
| |  | sponsored research programs with academic and other research
    institutions and individual doctors, chemists and
    researchers; and                                                                                             
|
| |  | collaborations with other pharmaceutical or biotechnology
    companies with complementary clinical development or
    commercialization capabilities or capital to assist in funding
    product development and commercialization.



31



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| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the research methodology used may not be successful in
    identifying potential product candidates;                                                                                       
|
| |  | the time, money and other resources that we devote to our
    research programs may not be adequate, including as a result of
    our May 2006 and October 2006 cost reduction programs; or
|
| |  | potential product candidates may, on further study, be shown to
    have harmful side effects or other characteristics that indicate
    that they are unlikely to be effective products.  





| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 as a competitor may be unwilling to
    assign or license their product rights to us;                                                                    
|
| |  | we may be unable to identify suitable products or product
    candidates within our areas of expertise; and                                                                         
|
| |  | we may have inadequate cash resources or may be unable to access
    public or private financing to obtain rights to suitable
    products or product candidates from third parties.





| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face substantial competition. If we are unable to
    compete effectively, ZYFLO, zileuton CR and our other
    product candidates may be rendered noncompetitive or
    obsolete.

® ® ® ® ® ®


32



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®


®


®


® ® ® ®






| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | significantly greater financial, technical and human resources
    than we have and may be better equipped to discover, develop,
    manufacture and commercialize products;                 
|
| |  | more extensive experience than we have in conducting preclinical
    studies and clinical trials, obtaining regulatory approvals and
    manufacturing and marketing pharmaceutical products;
|
| |  | competing products that have already received regulatory
    approval or are in late-stage development; and                                                                                  
|
| |  | collaborative arrangements in our target markets with leading
    companies and research institutions.                                                                                       





| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results may be harmed if our restructuring
    and cost reduction measures do not achieve the anticipated
    results or cause undesirable consequences.





33



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| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to retain key personnel and hire
    additional qualified management and scientific personnel, we may
    not be able to achieve our goals.









| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We will spend considerable time and money complying with
    Federal and state laws and regulations, and, if we are unable to
    fully comply with such laws and regulations, we could face
    substantial penalties.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Federal Medicare and Medicaid anti-kickback laws, which prohibit
    persons from knowingly and willfully soliciting, offering,
    receiving or providing remuneration, directly or indirectly, in
    cash or in kind, to induce either the referral of an individual,
    or furnishing or arranging for a good or service, for which
    payment may be made under Federal healthcare programs such as
    the Medicare and Medicaid programs;
|
| |  | other Medicare laws and regulations that establish the
    requirements for coverage and payment for our products,
    including the amount of such payments;                                                                                                                                                                                                                                                                                     
|
| |  | the Federal False Claims Act, which imposes civil and criminal
    liability on individuals and entities who submit, or cause to be
    submitted, false or fraudulent claims for payment to the
    government;                                                                                                                                                                                                                                  
|
| |  | the Federal Health Insurance Portability and Accountability Act
    of 1996, or HIPAA, which prohibits executing a scheme to defraud
    any healthcare benefit program, including private payors and,
    further, requires us to comply with standards regarding privacy
    and security of individually identifiable health information and
    conduct certain electronic transactions using standardized code
    sets;                     

34



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| |   |                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Federal False Statements statute, which prohibits knowingly
    and willfully falsifying, concealing or covering up a material
    fact or making any materially false statement in connection with
    the delivery of or payment for healthcare benefits, items or
    services;                              
|
| |  | the Federal Food, Drug and Cosmetic Act, which regulates
    development, manufacturing, labeling, marketing, distribution
    and sale of prescription drugs and medical devices;                                                                                                                                  
|
| |  | the Federal Prescription Drug Marketing Act of 1987, which
    regulates the distribution of drug samples to physicians and
    other prescribers who are authorized under state law to receive
    and dispense drug samples;                                                                                      
|
| |  | state and foreign law equivalents of the foregoing;                                                                                                                                                                                                                                                                 
|
| |  | state food and drug laws, pharmacy acts and state pharmacy board
    regulations, which govern sale, distribution, use,
    administration and prescribing of prescription drugs; and                                                                                                                               
|
| |  | state laws that prohibit practice of medicine by non-physicians
    and fee-splitting arrangements between physicians and
    non-physicians, as well as state law equivalents to the Federal
    Medicare and Medicaid anti-kickback laws, which may not be
    limited to government reimbursed items or services.







35



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| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | State pharmaceutical marketing and promotional compliance
    and reporting requirements may expose us to regulatory and legal
    action by state governments or other government
    authorities.

Code on Interactions with Healthcare Professionals Compliance Program Guidance for
Pharmaceutical Manufacturers.






| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our corporate compliance and corporate governance programs
    cannot guarantee that we are in compliance with all potentially
    applicable regulations.





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| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales depend on payment and reimbursement from
    third-party payors, and a reduction in payment rate or
    reimbursement could result in decreased use or sales of our
    products.







37



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| |                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business has a substantial risk of product liability
    claims. If we are unable to obtain appropriate levels of
    insurance, a product liability claim against us could interfere
    with the development and commercialization of our product
    candidates or subject us to unanticipated damages or settlement
    amounts.





| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We handle hazardous materials and must comply with laws
    and regulations, which can be expensive and restrict how we do
    business. If we are involved in a hazardous waste spill or other
    accident, we could be liable for damages, penalties or other
    forms of censure.







Risks Relating to Development, Clinical Testing and
Regulatory Approval of Our Product Candidates




| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not obtain the regulatory approvals or clearances
    required to market and sell our product candidates under
    development, our business may be unsuccessful.



38



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| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If clinical trials for our product candidates are not
    successful, we may not be able to develop, obtain regulatory
    approval for and commercialize these product candidates
    successfully.



CTI-01, CTI-01






39



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| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If clinical trials for our product candidates are delayed,
    we would be unable to commercialize our product candidates on a
    timely basis, which would require us to incur additional costs
    and delay the receipt of any revenues from product sales.







| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ongoing discussions with the FDA or comparable foreign
    authorities regarding the scope or design of our clinical trials;                                                                  
|
| |  | delays or the inability to obtain required approvals from
    institutional review boards or other governing entities at
    clinical sites selected for participation in our clinical trials;
|
| |  | delays in enrolling patients and volunteers into clinical trials;                                                                                                                             
|
| |  | lower than anticipated retention rates of patients and
    volunteers in clinical trials;                                                                                                     
|
| |  | the need to repeat clinical trials as a result of inconclusive
    or negative results or poorly executed testing;                                                                            
|
| |  | insufficient supply or deficient quality of product candidate
    materials or other materials necessary to conduct our clinical
    trials;                                                  
|
| |  | unfavorable FDA inspection and review of a clinical trial site
    or records of any clinical or preclinical investigation;                                                                   
|
| |  | serious and unexpected drug-related side effects experienced by
    participants in ongoing or past clinical trials for the same or
    a different indication;                               
|
| |  | serious and unexpected drug-related side effects observed during
    ongoing or past preclinical studies; or                                                                                  
|
| |  | the placement of a clinical hold on a trial.                                                                                                                                                  











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| |                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Even if we obtain regulatory approvals or clearances, our
    product candidates will be subject to ongoing regulatory
    requirements and review. If we fail to comply with continuing
    U.S. and applicable foreign regulations, we could lose
    permission to manufacture and distribute our products and the
    sale of our product candidates could be suspended.





| |                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we or our third-party manufacturers or service
    providers fail to comply with applicable laws and regulations,
    we or they could be subject to enforcement actions, which could
    adversely affect our ability to market and sell our product
    candidates and may harm our reputation.





| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | product seizures;                                                              
|
| |  | voluntary or mandatory recalls;                                                
|
| |  | suspension of review or refusal to approve pending applications;               
|
| |  | voluntary or mandatory patient or physician notification;                      
|
| |  | withdrawal of product approvals;                                               
|
| |  | restrictions on, or prohibitions against, marketing our product
    candidates;
|
| |  | restrictions on applying for or obtaining government bids;                     
|
| |  | fines;                                                                         
|
| |  | restrictions on importation of our product candidates;                         
|
| |  | injunctions; and                                                               
|
| |  | civil and criminal penalties.                                                  

Risks Relating to Our Dependence on Third Parties




| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We will depend on DEY to jointly promote and market ZYFLO
    and, if approved by the FDA, zileuton CR. This co-promotion
    arrangement may not be successful.





41



---



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| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on MedImmune and Beckman Coulter and expect to
    depend on additional collaborators in the future for a portion
    of our revenues and to develop, conduct clinical trials with,
    obtain regulatory approvals for, and manufacture, market and
    sell some of our product candidates. These collaborations may
    not be successful.





90-days


42



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| |   |                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our collaborators may be pursuing alternative technologies or
    developing alternative products, either on their own or in
    collaboration with others, that may be competitive with the
    product on which they are collaborating with us or that could
    affect our collaborators commitment to us;
|
| |  | reductions in marketing or sales efforts or a discontinuation of
    marketing or sales of our products by our collaborators would
    reduce our revenues, which we expect will be based on a
    percentage of net sales by collaborators;                                                                  
|
| |  | our collaborators may terminate their collaborations with us,
    which could make it difficult for us to attract new
    collaborators or adversely affect how we are perceived in the
    business and financial communities;                                                                               
|
| |  | our collaborators may not devote sufficient time and resources
    to any collaboration with us, which could prevent us from
    realizing the potential commercial benefits of that
    collaboration; and                                                                                                   
|
| |  | our collaborators may pursue higher priority programs or change
    the focus of their development programs, which could affect
    their commitments to us.                                                                                                                                                  



| |                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on third parties to manufacture and supply the
    zileuton API, ZYFLO and our product candidates. We expect to
    continue to rely on these sole source suppliers for these
    purposes and would incur significant costs to independently
    develop manufacturing facilities.



2-ABT 2-ABT 2-ABT






43



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| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | we may not be able to initiate or continue clinical trials of
    our product candidates that are under development;
|
| |  | we may be delayed in submitting applications for regulatory
    approvals for our product candidates;               
|
| |  | we may be required to cease distribution or issue
    recalls; and                                                  
|
| |  | we may not be able to meet commercial demands.                                                                      





| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any failure to manage and maintain our distribution
    network could compromise sales of ZYFLO and, if approved,
    zileuton CR and harm our business.



44



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| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to enter into additional collaboration
    agreements, we may not be able to continue development of our
    product candidates.

alpha-7 alpha-7




| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | we may be required to expend our own funds to advance the
    product candidate to commercialization;
|
| |  | revenue from product sales could be delayed; or                                                      
|
| |  | we may elect not to commercialize the product candidate.                                             



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We plan to rely significantly on third parties to market
    some product candidates, and these third parties may not
    successfully commercialize these product candidates.



45



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Risks Relating to Intellectual Property and Licenses




| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we or our licensors are not able to obtain and enforce
    patent and other intellectual property protection for our
    discoveries or discoveries we have in-licensed, our ability to
    prevent third parties from using our inventions and proprietary
    information will be limited and we may not be able to operate
    our business profitably.



non-publication










46



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Litigation regarding patents, patent applications and
    other proprietary rights is expensive and time consuming. If we
    are unsuccessful in litigation or other adversarial proceedings
    concerning patents or patent applications, we may not be able to
    protect our products from competition or we may be precluded
    from selling our products. If we are involved in such
    litigation, it could cause delays in, or prevent us from,
    bringing products to market and harm our ability to
    operate.





| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | the patentability of our applications, including those relating
    to our products; or                                  
|
| |  | the enforceability, validity or scope of protection offered by
    our patents, including those relating to our products.







| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | incur substantial monetary damages, potentially including treble
    damages, if we are found to have willfully infringed on such
    parties patent rights;
|
| |  | encounter significant delays in bringing our product candidates
    to market; or                                                                            
|
| |  | be precluded from participating in the manufacture, use or sale
    of our products or methods of treatment.                                                 







47



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| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We in-license a significant portion of our principal
    proprietary technologies, and if we fail to comply with our
    obligations under any of the related agreements, we could lose
    license rights that are necessary to develop and market our
    zileuton products, our HMGB1 products and some of our other
    product candidates.



Risks Relating to Our Financial Results and Need for
Additional Financing




| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have incurred losses since inception and we anticipate
    that we will continue to incur losses for the foreseeable
    future. If we do not generate significant revenues, we will not
    be able to achieve profitability.





| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We will require substantial additional capital to fund our
    operations. If additional capital is not available, we may need
    to delay, limit or eliminate our development and
    commercialization processes.





| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing and costs of the regulatory approval and the
    commercial launch of zileuton CR, if and when it is approved by
    regulatory authorities;                                     
|
| |  | the scope, costs and results of our clinical trials on zileuton
    CR and zileuton injection;                                                                                              
|
| |  | if approved, the amount and timing of sales of zileuton CR;                                                                                                                                 
|
| |  | the timing and amount of sales from ZYFLO;                                                                                                                                                  
|
| |  | the costs of ongoing sales, marketing and manufacturing
    activities for ZYFLO and, if approved, zileuton CR;                                                                             
|
| |  | the time and costs involved in preparing, submitting, obtaining
    and maintaining regulatory approvals for our other product
    candidates;                                              
|
| |  | the timing, receipt and amount of milestone and other payments,
    if any, from MedImmune, Beckman Coulter or future collaborators;                                                        
|
| |  | the timing, receipt and amount of sales and royalties, if any,
    from our potential products;                                                                                             
|
| |  | continued progress in our research and development programs, as
    well as the magnitude of these programs, including milestone
    payments to third parties under our license agreements;
|
| |  | the costs involved in preparing, filing, prosecuting,
    maintaining and enforcing patent claims;                                                                                          

48



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| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the cost of obtaining and maintaining licenses to use patented
    technologies;                                                                                   
|
| |  | potential acquisition or in-licensing of other products or
    technologies;                                                                                       
|
| |  | our ability to establish and maintain additional collaborative
    or co-promotion arrangements; and                                                               
|
| |  | the ongoing time and costs involved in certain corporate
    governance requirements, including work related to compliance
    with the Sarbanes-Oxley Act of 2002.









| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the estimates we make, or the assumptions on which we
    rely, in preparing our financial statements prove inaccurate,
    our actual results may vary from those reflected in our
    projections.



Risks Relating to Our Common Stock




| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | Our stock price is subject to fluctuation, which may cause
    an investment in our stock to suffer a decline in value.



49



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| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our quarterly results of operations fluctuate, this
    fluctuation may subject our stock price to volatility, which may
    cause an investment in our stock to suffer a decline in
    value.





| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the regulatory status of zileuton CR;                                                                                                                                                                                                   
|
| |  | if approved, the amount and timing of sales of zileuton CR;                                                                                                                                                                             
|
| |  | the amount and timing of sales of ZYFLO;                                                                                                                                                                                                
|
| |  | the timing of operating expenses, including selling and
    marketing expenses and the costs of maintaining a direct sales
    force;                                                                                                   
|
| |  | the availability and timely delivery of a sufficient supply of
    ZYFLO or, if approved, zileuton CR;                                                                                                                                  
|
| |  | the amount of rebates, discounts and chargebacks to wholesalers,
    Medicaid and managed care organizations related to ZYFLO or, if
    approved, zileuton CR;                                                                         
|
| |  | the amount and timing of product returns for ZYFLO or, if
    approved, zileuton CR;                                                                                                                                                    
|
| |  | achievement of, or the failure to achieve, milestones under our
    development agreement with MedImmune, our license agreement with
    Beckman Coulter and, to the extent applicable, other licensing
    and collaboration agreement;
|
| |  | the results of ongoing and planned clinical trials of our
    product candidates;                                                                                                                                                       
|
| |  | production problems occurring at our third party manufacturers;                                                                                                                                                                         
|
| |  | the results of regulatory reviews relating to the development or
    approval of our product candidates; and                                                                                                                            
|
| |  | general and industry-specific economic conditions that may
    affect our research and development expenditures.                                                                                                                        





| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If significant business or product announcements by us or
    our competitors cause fluctuations in our stock price, an
    investment in our stock may suffer a decline in value.





| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | the regulatory status of zileuton CR;                                        
|
| |  | if approved, the amount and timing of sales of zileuton CR;                  
|
| |  | our operating results, including the amount and timing of sales
    of ZYFLO;

50



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| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | our licensing and collaboration agreements and the products or
    product candidates that are the subject of those agreements;
|
| |  | the results of discovery, preclinical studies and clinical
    trials by us or our competitors;                                
|
| |  | the acquisition of technologies, product candidates or products
    by us or our competitors;                                  
|
| |  | the development of new technologies, product candidates or
    products by us or our competitors;                              
|
| |  | regulatory actions with respect to our product candidates or
    products or those of our competitors; and                     



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | significant acquisitions, strategic partnerships, joint ventures
    or capital commitments by us or our competitors.



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Insiders have substantial control over us and could delay
    or prevent a change in corporate control, including a
    transaction in which our stockholders could sell or exchange
    their shares for a premium.





| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | delaying, deferring or preventing a change in control of our
    company;                                                 
|
| |  | impeding a merger, consolidation, takeover or other business
    combination involving our company; or                    
|
| |  | discouraging a potential acquirer from making a tender offer or
    otherwise attempting to obtain control of our company.



| |                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Anti-takeover provisions in our charter documents and
    under Delaware law could prevent or frustrate attempts by our
    stockholders to change our management or our board and hinder
    efforts by a third party to acquire a controlling interest in
    us.







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ITEM 1B.     UNRESOLVED STAFF
COMMENTS







ITEM 2.     PROPERTIES







ITEM 3.     LEGAL
PROCEEDINGS







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




52



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EXECUTIVE OFFICERS OF THE REGISTRANT




|                        |  |     |    |  |          |                                                                            
|----------------------- |  | --- | -- |  | -------- | ---------------------------------------------------------------------------
|Name                    |  | Age |    |  | Position
|                        |  |     |    |  |         
|Frank E. Thomas         |  |     | 37 |  |          | President and Chief Executive Officer                                      
|Dana C. Hilt, M.D.      |  |     | 54 |  |          | Senior Vice President of Clinical Development and Chief Medical
    Officer
|Trevor Phillips, Ph.D.  |  |     | 45 |  |          | Chief Operating Officer and Senior Vice President of Operations            
|Scott B. Townsend, J.D. |  |     | 40 |  |          | Senior Vice President of Legal Affairs, General Counsel and
    Secretary  
|Jeffrey E. Young        |  |     | 34 |  |          | Vice President of Finance, Chief Accounting Officer and Treasurer          

Frank E. Thomas


Dana C. Hilt, M.D.


Trevor Phillips, Ph.D.


Scott B. Townsend, J.D.


53



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Jeffrey E. Young





PART II







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

Market Price of and Dividends on Critical Therapeutics
Common Stock and Related Stockholder Matters




|                                               |  |      |      |  |     |   |      | 
|---------------------------------------------- |  | ---- | ---- |  | --- | - | ---- | 
|Year Ended December 31, 2006                   |  | High |      |  | Low |  
|                                               |  |      |      |  |     |  
|First Quarter (from January 1 to March 31)     |  | $    | 7.20 |  |     | $ | 4.92 | 
|Second Quarter (from April 1 to June 30)       |  | $    | 5.43 |  |     | $ | 3.37 | 
|Third Quarter (from July 1 to September 30)    |  | $    | 4.14 |  |     | $ | 2.15 | 
|Fourth Quarter (from October 1 to December 31) |  | $    | 2.79 |  |     | $ | 1.52 | 

|                                               |  |      |      |  |     |   |      | 
|---------------------------------------------- |  | ---- | ---- |  | --- | - | ---- | 
|Year Ended December 31, 2005                   |  | High |      |  | Low |  
|                                               |  |      |      |  |     |  
|First Quarter (from January 1 to March 31)     |  | $    | 8.05 |  |     | $ | 6.27 | 
|Second Quarter (from April 1 to June 30)       |  | $    | 7.06 |  |     | $ | 5.00 | 
|Third Quarter (from July 1 to September 30)    |  | $    | 9.42 |  |     | $ | 5.51 | 
|Fourth Quarter (from October 1 to December 31) |  | $    | 9.18 |  |     | $ | 6.11 | 





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Recent Sales of Unregistered Securities; Uses of Proceeds
From Registered Securities




Stock Performance Graph









|                            |  |  |         |        |  |         |  |   |         |  |  |          |   |        |         |  |  |         |        |  |         |  |   |          |  |  |         |   |        |         |  |  |         |        |  |          |  |   |        |  |  |  |   |        |  |  |  |   |        |  |  |  |   |        |  |  |  |   |        |  | 
|--------------------------- |  |  | ------- | ------ |  | ------- |  | - | ------- |  |  | -------- | - | ------ | ------- |  |  | ------- | ------ |  | ------- |  | - | -------- |  |  | ------- | - | ------ | ------- |  |  | ------- | ------ |  | -------- |  | - | ------ |  |  |  | - | ------ |  |  |  | - | ------ |  |  |  | - | ------ |  |  |  | - | ------ |  | 
|                            |  |  |         |        |  |         |  |   |         |  |  |          |   |        |         |  |  |         |        |  |         |  |   |          |  |  |         |   |        |         |  |  |         |        |  |          |  |   |        |  |  |  |   |        |  |  |  |   |       
|                            |  |  | 5/27/04 |        |  | 6/30/04 |  |   | 9/30/04 |  |  | 12/31/04 |   |        | 3/31/05 |  |  | 6/30/05 |        |  | 9/30/05 |  |   | 12/31/05 |  |  | 3/31/06 |   |        | 6/30/06 |  |  | 9/30/06 |        |  | 12/31/06 | 
|                            |  |  |         |        |  |         |  |   |         |  |  |          |   |        |         |  |  |         |        |  |         |  |   |          |  |  |         |   |        |         |  |  |         |        |  |          |  |   |        |  |  |  |   |        |  |  |  |   |       
|Critical Therapeutics, Inc. |  |  | $       | 100.00 |  |         |  | $ | 98.59   |  |  |          | $ | 82.39  |         |  |  | $       | 112.68 |  |         |  | $ | 95.63    |  |  |         | $ | 98.87  |         |  |  | $       | 132.68 |  |          |  | $ | 101.13 |  |  |  | $ | 71.69  |  |  |  | $ | 50.70  |  |  |  | $ | 33.80  |  |  |  | $ | 28.73  |  | 
|                            |  |  |         |        |  |         |  |   |         |  |  |          |   |        |         |  |  |         |        |  |         |  |   |          |  |  |         |   |        |         |  |  |         |        |  |          |  |   |        |  |  |  |   |        |  |  |  |   |       
|NASDAQ Composite Index      |  |  | $       | 100.00 |  |         |  | $ | 103.30  |  |  |          | $ | 95.82  |         |  |  | $       | 110.06 |  |         |  | $ | 101.31   |  |  |         | $ | 104.42 |         |  |  | $       | 109.41 |  |          |  | $ | 112.40 |  |  |  | $ | 119.55 |  |  |  | $ | 111.18 |  |  |  | $ | 115.78 |  |  |  | $ | 124.06 |  | 
|                            |  |  |         |        |  |         |  |   |         |  |  |          |   |        |         |  |  |         |        |  |         |  |   |          |  |  |         |   |        |         |  |  |         |        |  |          |  |   |        |  |  |  |   |        |  |  |  |   |       
|NASDAQ Biotech Index        |  |  | $       | 100.00 |  |         |  | $ | 99.17   |  |  |          | $ | 93.34  |         |  |  | $       | 100.39 |  |         |  | $ | 84.99    |  |  |         | $ | 90.21  |         |  |  | $       | 102.56 |  |          |  | $ | 103.28 |  |  |  | $ | 109.94 |  |  |  | $ | 97.10  |  |  |  | $ | 98.61  |  |  |  | $ | 104.39 |  | 
|                            |  |  |         |        |  |         |  |   |         |  |  |          |   |        |         |  |  |         |        |  |         |  |   |          |  |  |         |   |        |         |  |  |         |        |  |          |  |   |        |  |  |  |   |        |  |  |  |   |       
|AMEX Biotech Index          |  |  | $       | 100.00 |  |         |  | $ | 101.39  |  |  |          | $ | 101.84 |         |  |  | $       | 105.72 |  |         |  | $ | 95.73    |  |  |         | $ | 109.64 |         |  |  | $       | 125.97 |  |          |  | $ | 132.26 |  |  |  | $ | 138.49 |  |  |  | $ | 128.96 |  |  |  | $ | 130.08 |  |  |  | $ | 146.51 |  | 
|                            |  |  |         |        |  |         |  |   |         |  |  |          |   |        |         |  |  |         |        |  |         |  |   |          |  |  |         |   |        |         |  |  |         |        |  |          |  |   |        |  |  |  |   |        |  |  |  |   |       



55



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ITEM 6.     SELECTED FINANCIAL
DATA


10-K






|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |         |         |   |   |        |         |  
|------------------------------------------------------------ | ----------------------------------------------------- | ----------------------------------------------- | ------- | ---------- | ---- | - | ------- | ---------- | - | - | ------- | ---------- | - | ---- | ------- | ------- | - | - | ------ | ------- | -
|                                                             |                                                       | Year Ended December 31,                         |        
|                                                             |                                                       |                                                 |        
|                                                             |                                                       | 2006                                            |         |            | 2005 |   |         | 2004       |   |   | 2003    |            |   | 2002 |        
|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |        
|                                                             |                                                       | (In thousands, except share and per share data) |        
|Statements of Operations Data:                               |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |         |         |   |   |        |        
|Net product sales                                            |                                                       | $                                               | 6,647   |            |      | $ | 387     |            |   | $ |        |            |   | $    |        |         |   | $ |       |        
|Revenue under collaboration agreements                       |                                                       |                                                 | 6,431   |            |      |   | 5,837   |            |   |   | 4,436   |            |   |      | 1,021   |         |   |   |       |        
|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |        
|                                                             | Total revenues                                        |                                                 |         | 13,078     |      |   |         | 6,224      |   |   |         | 4,436      |   |      |         | 1,021   |   |   |        |        |  
|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |        
|Cost of products sold                                        |                                                       |                                                 | 2,222   |            |      |   | 514     |            |   |   |        |            |   |      |        |         |   |   |       |        
|Research and development expenses                            |                                                       |                                                 | 26,912  |            |      |   | 29,959  |            |   |   | 25,578  |            |   |      | 17,458  |         |   |   | 3,284  |        
|Sales and marketing expenses                                 |                                                       |                                                 | 18,284  |            |      |   | 13,671  |            |   |   | 1,199   |            |   |      |        |         |   |   |       |        
|General and administrative expenses                          |                                                       |                                                 | 13,456  |            |      |   | 11,406  |            |   |   | 9,679   |            |   |      | 3,771   |         |   |   | 1,792  |        
|Restructuring charges                                        |                                                       |                                                 | 3,498   |            |      |   |        |            |   |   |        |            |   |      |        |         |   |   |       |        
|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |        
|                                                             | Total costs and expenses                              |                                                 |         | 64,372     |      |   |         | 55,550     |   |   |         | 36,456     |   |      |         | 21,229  |   |   |        | 5,076   |  
|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |        
|Loss from operations                                         |                                                       |                                                 | (51,294 | )          |      |   | (49,326 | )          |   |   | (32,020 | )          |   |      | (20,208 | )       |   |   | (5,076 | )      
|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |        
|                                                             | Interest income                                       |                                                 |         | 2,726      |      |   |         | 2,427      |   |   |         | 1,098      |   |      |         | 191     |   |   |        | 149     |  
|                                                             | Interest expense                                      |                                                 |         | (214       | )    |   |         | (191       | ) |   |         | (172       | ) |      |         | (93     | ) |   |        | (8      | )
|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |        
|Net loss                                                     |                                                       |                                                 | (48,782 | )          |      |   | (47,090 | )          |   |   | (31,094 | )          |   |      | (20,110 | )       |   |   | (4,935 | )      
|Accretion of dividends and offering costs on preferred stock |                                                       |                                                 |        |            |      |   |        |            |   |   | (2,209  | )          |   |      | (2,264  | )       |   |   | (1,032 | )      
|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |        
|Net loss available to common stockholders                    |                                                       | $                                               | (47,782 | )          |      | $ | (47,090 | )          |   | $ | (33,303 | )          |   | $    | (22,374 | )       |   | $ | (5,967 | )      
|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |        
|Net loss per common share:                                   |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |         |         |   |   |        |        
|                                                             | Basic and diluted                                     |                                                 | $       | (1.37      | )    |   | $       | (1.61      | ) |   | $       | (2.28      | ) |      | $       | (33.99  | ) |   | $      | (23.74  | )
|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |        
|                                                             | Weighted-average basic and diluted shares outstanding |                                                 |         | 35,529,048 |      |   |         | 29,276,243 |   |   |         | 14,631,371 |   |      |         | 658,204 |   |   |        | 251,346 |  
|                                                             |                                                       |                                                 |         |            |      |   |         |            |   |   |         |            |   |      |        

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|                                                  |  |                    |          |   |      |   |          |      |  |   |         |   |  |      |         |   |  |   |        |  
|------------------------------------------------- |  | ------------------ | -------- | - | ---- | - | -------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------ | -
|                                                  |  | As of December 31, |         
|                                                  |  |                    |         
|                                                  |  | 2006               |          |   | 2005 |   |          | 2004 |  |   | 2003    |   |  | 2002 |        
|                                                  |  |                    |          |   |      |   |          |      |  |   |         |   |  |      |        
|                                                  |  | (In thousands)     |         
|Balance Sheet Data:                               |  |                    |          |   |      |   |          |      |  |   |         |   |  |      |         |   |  |   |        |  
|Cash, cash equivalents and short-term investments |  | $                  | 49,038   |   |      | $ | 82,811   |      |  | $ | 78,829  |   |  | $    | 40,078  |   |  | $ | 13,539 |  
|Working capital                                   |  |                    | 47,738   |   |      |   | 70,005   |      |  |   | 64,357  |   |  |      | 25,218  |   |  |   | 13,017 |  
|Total assets                                      |  |                    | 58,182   |   |      |   | 91,819   |      |  |   | 83,114  |   |  |      | 45,054  |   |  |   | 14,382 |  
|Long term debt, net of current portion            |  |                    | 421      |   |      |   | 1,489    |      |  |   | 1,367   |   |  |      | 720     |   |  |   | 202    |  
|Redeemable convertible preferred stock            |  |                    |         |   |      |   |         |      |  |   |        |   |  |      | 51,395  |   |  |   | 21,080 |  
|Accumulated deficit                               |  |                    | (154,399 | ) |      |   | (105,617 | )    |  |   | (58,527 | ) |  |      | (27,433 | ) |  |   | (7,323 | )
|Total stockholders equity (deficit)              |  |                    | 49,906   |   |      |   | 72,247   |      |  |   | 65,408  |   |  |      | (24,851 | ) |  |   | (7,554 | )

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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
financial condition and results of operations together with the
Selected Consolidated Financial Data section of this
annual report on
Form 10-K and our
consolidated financial statements and the related notes included
in this report. In addition to historical information, the
following discussion contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results
could differ materially from those anticipated by the
forward-looking statements due to important factors including,
but not limited to, those set forth in the Risk
Factors section of this report.


Summary












alpha-7 alpha-7 alpha-7 alpha-7


58



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alpha-7










Recent Developments










59



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Financial Operations Overview


Revenues.


60



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Cost of Products Sold.


Research and Development Expenses. project-by alpha-7




Sales and Marketing.


General and Administrative Expenses.


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Critical Accounting Policies








| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the nature of the estimate or assumption is material due to the
    level of subjectivity and judgment necessary to account for
    highly uncertain matters or the susceptibility of such matters
    to change; and
|
| |  | the impact of the estimates and assumptions on financial
    condition or operating performance is material.                                                                                                         

10-K.


Revenue Recognition. Revenue
Recognition When Right of Return Exists,


one-time one-time


non-refundable


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Inventory. first-in, first-out, work-in


Accrued Expenses.




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Short-term Investments. available-for




Stock-Based Compensation. Accounting for Stock Issued to Employees, Accounting for
Stock-Based Compensation, Share-Based Payment,


non-employees


96-18 non-employees,


Income Taxes.


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Results of Operations




| |                                       
| | --------------------------------------
| | Years Ended December 31, 2006 and 2005

Revenues


Revenue from Product Sales. Revenue Recognition When Rights of Return Exists




Revenue under Collaboration Agreements.




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Costs
and Expenses


Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS 123(R), using the modified
prospective method, which requires us to recognize compensation
cost for granted after we became a public company, but unvested,
stock awards, new stock awards and stock awards modified,
repurchased, or cancelled after January 1, 2006. The
discussion below is impacted by the fact that 2005 amounts do
not include the impact of SFAS 123(R).


Cost of Products Sold.


Research and Development Expenses.


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|                                          |                                         |                |        |        |      |   |        |        | 
|----------------------------------------- | --------------------------------------- | -------------- | ------ | ------ | ---- | - | ------ | ------ | 
|                                          |                                         | Year Ended     |       
|                                          |                                         | December 31,   |       
|                                          |                                         |                |       
|                                          |                                         | 2006           |        |        | 2005 |  
|                                          |                                         |                |        |        |      |  
|                                          |                                         | (In thousands) |       
|Zileuton (ZYFLO and zileuton CR)          |                                         | $              | 11,975 |        |      | $ | 12,670 |       
|Zileuton injection                        |                                         |                | 2,336  |        |      |   | 1,656  |       
|CTI-01                                    |                                         |                | 2,960  |        |      |   | 3,045  |       
|Alpha-7                                   |                                         |                | 3,903  |        |      |   | 2,434  |       
|HMGB1                                     |                                         |                | 1,829  |        |      |   | 2,030  |       
|General research and development expenses |                                         |                | 2,600  |        |      |   | 7,260  |       
|Stock-based compensation expense          |                                         |                | 1,309  |        |      |   | 864    |       
|                                          |                                         |                |        |        |      |  
|                                          | Total research and development expenses |                | $      | 26,912 |      |   | $      | 29,959 | 
|                                          |                                         |                |        |        |      |  





| |                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Zileuton (ZYFLO and zileuton CR).During 2006, we
    incurred $12.0 million in expenses related to our
    orally-dosed zileuton programs, including ZYFLO and
    zileuton CR, as compared to $12.7 million during 2005,
    a 5% decrease. This decrease was primarily due to the following:



| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | lower manufacturing costs related to the product registration of
    ZYFLO, which was approved for commercial sale in September 2005;                                                        
|
| |  | reduced costs related to clinical trials of zileuton in 2006
    compared to 2005, when we conducted a Phase II clinical trial in
    patients with moderate to severe inflammatory acne; and





| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | completion of certain clinical trials related to the
    pharmacokinetic profile of zileuton CR in the bloodstream;
|
| |  | initiation of the development of our life cycle extension
    program for zileuton; and                            



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We anticipate that our research and development expenses of our
    orally-dosed zileuton programs in future periods will consist
    primarily of costs related to conducting Phase IIIb or Phase IV
    clinical trials. We expect that these clinical trials will be
    designed to examine the utility of zileuton in particular groups
    of asthma patients. In addition, we expect to continue to incur
    research and development expenses to maintain and operate our
    medical affairs, medical information and pharmacovigilance
    functions in support of ZYFLO and our zileuton CR.                                                                                                                                                                                     
|
| | Zileuton Injection.During 2006, we incurred
    $2.3 million in expenses related to our zileuton injection
    program, compared to $1.7 million during 2005, an 41%
    increase. This increase was primarily due to the completion of a
    Phase I/ II clinical trial of zileuton injection in 60 patients
    during 2006 as well as the costs to manufacture and supply drug
    in support of that clinical trial. During 2005, our zileuton
    injection program was still in preclinical stages of
    development. We expect that our costs associated with the
    development of zileuton injection will continue to increase as
    we progress into later stages of clinical development and
    continue the formulation development to be used in future
    clinical trials.
|
| | CTI-01.During 2006, we incurred $3.0 million in
    expenses related to our
    CTI-01 program, which
    was comparable to the expenses incurred in 2005. The costs
    incurred in both 2006 and 2005 related primarily to the
    enrollment and conduct of a Phase II clinical trial of
    CTI-01 in patients
    undergoing major cardiac surgery including the use of a
    cardiopulmonary bypass machine. This                                                                                                                                                                                                                                                                                                                                                                      

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | clinical trial was initiated in 2005 and completed during 2006.
    Effective February 2007, we terminated our license agreement
    with the University of Pittsburgh related to the development of
    CTI-01 and our license
    agreement with Xanthus Pharmaceuticals related to the
    development of CTI-01.
    We do not plan to pursue further development or incur additional
    costs related to CTI-01.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Alpha-7.During 2006, we incurred $3.9 million of
    expenses in connection with research and development of our
    alpha-7 program,
    compared to $2.4 million during 2005, a 60% increase. The
    increase was primarily due to an increase in laboratory supplies
    and improved methods of allocating our research and development
    overhead expenses to our various programs, including the costs
    related to facilities, such as our laboratory space, and the
    depreciation expense on our laboratory equipment. In 2005, most
    of these expenses were included in our general research and
    development expenses. The number of employees working on
    alpha-7 during 2006, as
    compared to 2005, was relatively consistent through most of the
    year leading up to our October 2006 restructuring. We anticipate
    that our research and development expenses for our
    alpha-7 program will
    not grow substantially in 2007 as we expect increased costs
    related to preclinical studies conducted by third parties to
    advance our lead molecule to be offset by the reduction in the
    number of employees working on the program following our October
    2006 restructuring. We anticipate that significant additional
    expenditures will be required to advance any product candidate
    through preclinical and clinical development. We plan to seek a
    collaborator for our
    alpha-7 program and do
    not currently expect to conduct clinical trials with the
    alpha-7 program without
    entering into such an arrangement. However, because this project
    is at a very early stage, the actual costs and timing of
    research, preclinical development, clinical trials and
    associated activities are highly uncertain, subject to risk, and
    will change depending upon the project we choose to develop, the
    clinical indication developed, the development strategy adopted,
    and the terms of a collaboration, if we are able to enter into
    one. As a result, we are unable to estimate the costs or the
    timing of advancing a small molecule from our
    alpha-7 program through
    clinical development.                                                                                                                                                    
|
| | HMGB1.During 2006, we incurred $1.8 million of
    expenses for our HMGB1 program, compared to $2.0 million
    during 2005, a 10% decrease. This decrease was primarily due to
    lower license fees, sponsored research and laboratory supplies
    for our continued testing under our collaboration agreement with
    MedImmune as well as lower personnel costs devoted to this
    program. The decreased expenses were partially offset by
    increases related to the allocation of our research and
    development overhead expenses to our various programs. These
    overhead expenses include the costs related to facilities,
    including our laboratory space, and the depreciation expense on
    our laboratory equipment. In 2005, most of these expenses were
    included in our general research and development expenses. In
    addition, we paid a $250,000 milestone payment in 2005 to the
    licensor of HMGB1 for establishing preclinical proof-of-concept.
    The collaboration revenue recognized by us in 2006 for this
    program totaled $6.4 million. We currently anticipate that
    research and development costs relating to HMGB1 in 2007 will be
    lower following our October 2006 restructuring. In addition, a
    larger portion of the expenses in our HMGB1 program will be
    assumed by our partner, MedImmune, as the program advances into
    later stages of preclinical development. We also anticipate that
    some of our expenses in the HMGB1 program will be covered by
    funding and potential milestone payments from MedImmune under
    our collaboration agreement. Because the HMGB1 program is still
    in preclinical development, the actual costs and timing of
    preclinical development, clinical trials and associated
    activities are highly uncertain, subject to risk and will change
    depending upon the clinical indication developed and the
    development strategy adopted. A significant amount of these
    clinical trial costs will be incurred by MedImmune. The expenses
    for HMGB1 are reflected in the accompanying statements of
    operations as part of research and development expenses, while
    the funding received from MedImmune and Beckman Coulter to fund
    our research efforts is included in revenue under collaboration
    agreements.



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Sales and Marketing Expenses.




| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | approximately $2.2 million in higher salary costs related
    to our specialty sales force and our sales and customer
    management team, the majority of whom we hired in August 2005;
|
| |  | $513,000 of additional stock-based compensation expense
    primarily related to our adoption of SFAS 123(R) and the
    increased number of employees during most of 2006;             
|
| |  | higher infrastructure costs to support the sales force including
    leased vehicle expense, computer and software costs;                                                               
|
| |  | severance costs of $302,000 and additional stock-based
    compensation expense of $525,000 related to the departure of our
    former Senior Vice President of Sales and Marketing; and
|
| |  | higher product samples, promotional materials and other costs
    associated with ZYFLO that we incurred to support our sales
    effort.                                               



General and Administrative Expenses.




| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | severance costs of $670,000 and additional stock-based
    compensation expense of $1.3 million related to the
    departure of our former President and Chief Executive Officer;
    and
|
| |  | $1.7 million of additional stock-based compensation expense
    primarily related to our adoption of SFAS 123(R).                                                                        



Restructuring Charges.


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| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | severance, benefit and related payments of approximately
    $2.1 million;                                                                                                                                                        
|
| |  | asset impairment charges of $501,000 related to computer and
    laboratory equipment with a net realizable value below its net
    book value;                                                                                   
|
| |  | stock-based compensation expense of $622,000 related to the
    acceleration of vesting stock options from the departure of our
    former Senior Vice President of Research and Development and
    Chief Scientific Officer; and
|
| |  | approximately $335,000 related to the termination of leases on
    vehicles used by our sales force and outplacement services.                                                                                                    



Other


Other Income.




| |                                       
| | --------------------------------------
| | Years Ended December 31, 2005 and 2004

Revenues


Revenue from Product Sales.


Revenue under Collaboration Agreements.


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Costs
and Expenses


Cost of Products Sold. write-offs.


Research and Development Expenses.




|                                          |                                         |                |        |        |      |   |        |        | 
|----------------------------------------- | --------------------------------------- | -------------- | ------ | ------ | ---- | - | ------ | ------ | 
|                                          |                                         | Year Ended     |       
|                                          |                                         | December 31,   |       
|                                          |                                         |                |       
|                                          |                                         | 2005           |        |        | 2004 |  
|                                          |                                         |                |        |        |      |  
|                                          |                                         | (In thousands) |       
|Zileuton                                  |                                         | $              | 14,326 |        |      | $ | 12,369 |       
|CTI-01                                    |                                         |                | 3,045  |        |      |   | 3,329  |       
|Alpha-7                                   |                                         |                | 2,434  |        |      |   | 1,533  |       
|HMGB1                                     |                                         |                | 2,030  |        |      |   | 1,702  |       
|General research and development expenses |                                         |                | 7,260  |        |      |   | 4,637  |       
|Stock-based compensation expense          |                                         |                | 864    |        |      |   | 2,008  |       
|                                          |                                         |                |        |        |      |  
|                                          | Total research and development expenses |                | $      | 29,959 |      |   | $      | 25,578 | 
|                                          |                                         |                |        |        |      |  





| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Zileuton.During 2005, we incurred $14.3 million in
    expenses related to our zileuton program as compared to
    $12.4 million during 2004, a 16% increase. This increase
    was primarily due to the following:



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | manufacturing costs related to the product registration of ZYFLO;                                             
|
| |  | our completed Phase II clinical trial of ZYFLO for moderate to
    severe inflammatory acne;                  
|
| |  | the initiation of the ZYFLO open-label study in patients with
    asthma or mastocytosis;                     
|
| |  | the development and manufacturing costs related to our
    injectable and controlled-release formulations; and
|
| |  | the payment of several milestones related to our license
    agreements with Abbott and SkyePharma.           

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | CTI-01.During 2005, we incurred $3.0 million in
    expenses related to our CTI-01 program as compared to
    $3.3 million during 2004, a 9% decrease. This decrease was
    primarily due to lower preclinical costs in 2005, partially
    offset by higher clinical and manufacturing costs.                                                                                                                                                                                                                                                                                                                                      
|
| | Alpha-7.During 2005, we incurred $2.4 million of
    expenses in connection with our
    alpha-7 program as
    compared to $1.5 million during 2004, a 59% increase. The
    increase was primarily due to an increase in the number of
    employees working on the
    alpha-7 program and
    higher contract research costs associated with our efforts to
    discover and develop small molecule product candidates.                                                                                                                                                                                                          
|
| | HMGB1.During 2005, we incurred $2.0 million of
    expenses for our HMGB1 program as compared to $1.7 million
    during 2004, a 19% increase. This increase was primarily due to
    higher license fees, sponsored research and laboratory supplies
    for our continued testing under our collaboration agreement with
    MedImmune offset in part by lower personnel costs devoted to
    this program. In 2005, we paid a $250,000 milestone to the
    licensor of HMGB1 for establishing preclinical
    proof-of-concept. The
    collaboration revenue recognized by us in 2005 for this program
    totaled $5.8 million.





Sales and Marketing Expenses.




| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | hiring and training our 80-person specialty sales force, the
    majority of whom we hired in August 2005;             
|
| |  | hiring our sales and customer management team;                                                                         
|
| |  | market research conducted in anticipation of the approval and
    launch of ZYFLO in October 2005; and                 
|
| |  | marketing, product samples, promotional materials and other
    costs associated with our October 2005 launch of ZYFLO.



General and Administrative Expenses.




| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | personnel costs increased $476,000, as a result of an increase
    in the number of employees performing general and administrative
    functions;

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| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | directors and officers liability insurance and general business
    insurance costs increased $291,000 due to an increase in
    premiums; and                                         
|
| |  | audit fees related to our Sarbanes-Oxley compliance and
    consulting increased by $724,000 as we prepared for the audit of
    our internal controls systems as of December 31, 2005.

Other


Other Income.


Liquidity and Capital Resources


Sources of Liquidity












Credit Agreement with Silicon Valley Bank.


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Cash Flows


Operating Activities.




| |   |                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | non-cash depreciation and amortization expense of $939,000;                                                                                                                                                                                  
|
| |  | non-cash restructuring charges of $1.1 million, consisting
    of an impairment charge on equipment and certain stock-based
    compensation;                                                                                                
|
| |  | non-cash stock-based compensation expense of $6.6 million
    unrelated to the restructurings; and                                                                                                                                           
|
| |  | approximately $11.4 million of cash used to fund working
    capital and other items, including $5.0 million related to
    the recognition of revenue under collaboration agreements in
    2006 from cash that had been paid prior to 2006.

Investing Activities.


Financing Activities.


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





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





| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing and costs of the regulatory approval and the
    commercial launch of zileuton CR, if and when it is
    approved by regulatory authorities;                                     
|
| |  | the scope, costs and results of our clinical trials on
    zileuton CR and zileuton injection;                                                                                              
|
| |  | if approved, the amount and timing of sales of zileuton CR;                                                                                                                                 
|
| |  | the timing and amount of sales from ZYFLO;                                                                                                                                                  
|
| |  | the costs of ongoing sales, marketing and manufacturing
    activities for ZYFLO and, if approved, zileuton CR;                                                                             
|
| |  | the time and costs involved in preparing, submitting, obtaining
    and maintaining regulatory approvals for our other product
    candidates;                                              
|
| |  | the timing, receipt and amount of milestone and other payments,
    if any, from MedImmune, Beckman Coulter or future collaborators;                                                        
|
| |  | the timing, receipt and amount of sales and royalties, if any,
    from our potential products;                                                                                             
|
| |  | continued progress in our research and development programs, as
    well as the magnitude of these programs, including milestone
    payments to third parties under our license agreements;
|
| |  | the costs involved in preparing, filing, prosecuting,
    maintaining and enforcing patent claims;                                                                                          
|
| |  | the cost of obtaining and maintaining licenses to use patented
    technologies;                                                                                                            
|
| |  | potential acquisition or in-licensing of other products or
    technologies;                                                                                                                
|
| |  | our ability to establish and maintain additional collaborative
    or co-promotion arrangements; and                                                                                        
|
| |  | the ongoing time and costs involved in certain corporate
    governance requirements, including work related to compliance
    with the Sarbanes-Oxley Act of 2002.                         

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| |                        
| | -----------------------
| | Contractual Obligations



|                                            |  |                        |        |           |          |   |        |             |  |          |            |  |           |            |     |  |  |   |       | 
|------------------------------------------- |  | ---------------------- | ------ | --------- | -------- | - | ------ | ----------- |  | -------- | ---------- |  | --------- | ---------- | --- |  |  | - | ----- | 
|                                            |  | Payments Due by Period |       
|                                            |  |                        |       
|                                            |  |                        |        | Less Than |          |   | One to |             |  | Three to |            |  | More than |           
|Contractual Obligations                     |  | Total                  |        |           | One Year |   |        | Three Years |  |          | Five Years |  |           | Five Years |    
|                                            |  |                        |        |           |          |   |        |             |  |          |            |  |           |            |    
|                                            |  | (In thousands)         |       
|Short- and long-term debt                   |  | $                      | 1,531  |           |          | $ | 1,094  |             |  | $        | 437        |  |           | $          |    |  |  | $ |      | 
|Research and license agreements             |  |                        | 6,602  |           |          |   | 170    |             |  |          | 534        |  |           |            | 644 |  |  |   | 5,254 | 
|Consulting agreements                       |  |                        | 37     |           |          |   | 37     |             |  |          |           |  |           |            |    |  |  |   |      | 
|Severance agreements                        |  |                        | 217    |           |          |   | 217    |             |  |          |           |  |           |            |    |  |  |   |      | 
|Manufacturing and clinical trial agreements |  |                        | 4,763  |           |          |   | 2,583  |             |  |          | 2,180      |  |           |            |    |  |  |   |      | 
|Lease obligations                           |  |                        | 3,219  |           |          |   | 1,562  |             |  |          | 1,657      |  |           |            |    |  |  |   |      | 
|                                            |  |                        |        |           |          |   |        |             |  |          |            |  |           |            |    
|Total contractual cash obligations          |  | $                      | 16,369 |           |          | $ | 5,663  |             |  | $        | 4,808      |  |           | $          | 644 |  |  | $ | 5,254 | 
|                                            |  |                        |        |           |          |   |        |             |  |          |            |  |           |            |    





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Effects of Inflation




Recent Accounting Pronouncements


Accounting for Uncertainty
in Income Taxes  an interpretation of FASB Statement
No. 109


Fair Value Measurements




The
Fair Value Option for Financial Assets and Financial
Liabilities, Including an amendment of SFAS 115


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|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK



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|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


TABLE OF CONTENTS


|                                                            |                                                                                      |      |    |    | 
|----------------------------------------------------------- | ------------------------------------------------------------------------------------ | ---- | -- | -- | 
|                                                            |                                                                                      | Page |   
|                                                            |                                                                                      |      |   
|REPORT OF INDEPENDENT REGISTERED PUBLIC
    ACCOUNTING FIRM |                                                                                      |      | 81 |   
|CONSOLIDATED FINANCIAL STATEMENTS                           |                                                                                      |      | 82 |   
|                                                            | Consolidated Balance Sheets                                                          |      |    | 82 | 
|                                                            | Consolidated Statements of Operations                                                |      |    | 83 | 
|                                                            | Consolidated Statements of
    Stockholders Equity (Deficit) and Comprehensive Loss |      |    | 84 | 
|                                                            | Consolidated Statements of Cash Flows                                                |      |    | 85 | 
|                                                            | Notes to Consolidated Financial
    Statements                                       |      |    | 86 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











Share-Based Payment.


Internal Control 
Integrated Framework







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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY





CONSOLIDATED BALANCE SHEETS


|                                                                       |                                                                                                                                                                               |                            |        |          |        |   |        |          |        | 
|---------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | -------- | ------ | - | ------ | -------- | ------ | 
|                                                                       |                                                                                                                                                                               | December 31,               |       
|                                                                       |                                                                                                                                                                               |                            |       
|                                                                       |                                                                                                                                                                               | 2006                       |        |          | 2005   |  
|                                                                       |                                                                                                                                                                               |                            |        |          |        |  
|                                                                       |                                                                                                                                                                               | (In thousands except share |       
|                                                                       |                                                                                                                                                                               | and per share data)        |       
|ASSETS:                                                               
|Current assets:                                                        |                                                                                                                                                                               |                            |        |          |        |   |        |         
|                                                                       | Cash and cash equivalents                                                                                                                                                     |                            | $      | 48,388   |        |   | $      | 57,257   |       
|                                                                       | Short-term investments                                                                                                                                                        |                            |        | 650      |        |   |        | 25,554   |       
|                                                                       | Accounts receivable, net                                                                                                                                                      |                            |        | 877      |        |   |        | 1,024    |       
|                                                                       | Amount due under collaboration agreements                                                                                                                                     |                            |        | 650      |        |   |        | 205      |       
|                                                                       | Inventory                                                                                                                                                                     |                            |        | 4,048    |        |   |        | 1,869    |       
|                                                                       | Prepaid expenses and other                                                                                                                                                    |                            |        | 980      |        |   |        | 2,179    |       
|                                                                       |                                                                                                                                                                               |                            |        |          |        |  
|                                                                       |                                                                                                                                                                               | Total current assets       |        |          | 55,593 |   |        |          | 88,088 | 
|                                                                       |                                                                                                                                                                               |                            |        |          |        |  
|Fixed assets, net                                                      |                                                                                                                                                                               |                            | 2,421  |          |        |   | 3,563  |         
|Other assets                                                           |                                                                                                                                                                               |                            | 168    |          |        |   | 168    |         
|                                                                       |                                                                                                                                                                               |                            |        |          |        |  
|Total assets                                                           |                                                                                                                                                                               | $                          | 58,182 |          |        | $ | 91,819 |         
|                                                                       |                                                                                                                                                                               |                            |        |          |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                 
|Current liabilities:                                                   |                                                                                                                                                                               |                            |        |          |        |   |        |         
|                                                                       | Current portion of long-term debt and capital lease obligations                                                                                                               |                            | $      | 1,012    |        |   | $      | 1,179    |       
|                                                                       | Accounts payable                                                                                                                                                              |                            |        | 1,049    |        |   |        | 4,615    |       
|                                                                       | Accrued compensation                                                                                                                                                          |                            |        | 1,865    |        |   |        | 1,836    |       
|                                                                       | Accrued expenses                                                                                                                                                              |                            |        | 2,076    |        |   |        | 3,040    |       
|                                                                       | Revenue deferred under collaboration agreements                                                                                                                               |                            |        | 675      |        |   |        | 5,706    |       
|                                                                       | Deferred product revenue                                                                                                                                                      |                            |        | 1,178    |        |   |        | 1,707    |       
|                                                                       |                                                                                                                                                                               |                            |        |          |        |  
|                                                                       |                                                                                                                                                                               | Total current liabilities  |        |          | 7,855  |   |        |          | 18,083 | 
|                                                                       |                                                                                                                                                                               |                            |        |          |        |  
|Long-term debt and capital lease obligations, less current
    portion |                                                                                                                                                                               |                            | 421    |          |        |   | 1,489  |         
|                                                                       |                                                                                                                                                                               |                            |        |          |        |  
|Commitments and contingencies (Note 12)                                |                                                                                                                                                                               |                            |        |          |        |   |        |         
|Stockholders equity:                                                  |                                                                                                                                                                               |                            |        |          |        |   |        |         
|                                                                       | Preferred stock, par value $0.001; authorized
    5,000,000 shares; no shares issued and outstanding                                                                          |                            |        |         |        |   |        |         |       
|                                                                       | Common stock, par value $0.001; authorized
    90,000,000 shares; issued and outstanding 42,902,142 and
    34,126,977 shares at December 31, 2006 and 2005,
    respectively |                            |        | 43       |        |   |        | 34       |       
|                                                                       | Additional paid-in capital                                                                                                                                                    |                            |        | 204,378  |        |   |        | 181,718  |       
|                                                                       | Deferred stock-based compensation                                                                                                                                             |                            |        | (99      | )      |   |        | (3,794   | )     
|                                                                       | Accumulated deficit                                                                                                                                                           |                            |        | (154,399 | )      |   |        | (105,617 | )     
|                                                                       | Accumulated other comprehensive loss                                                                                                                                          |                            |        | (17      | )      |   |        | (94      | )     
|                                                                       |                                                                                                                                                                               |                            |        |          |        |  
|                                                                       |                                                                                                                                                                               | Total stockholders equity |        |          | 49,906 |   |        |          | 72,247 | 
|                                                                       |                                                                                                                                                                               |                            |        |          |        |  
|Total liabilities and stockholders equity                             |                                                                                                                                                                               | $                          | 58,182 |          |        | $ | 91,819 |         
|                                                                       |                                                                                                                                                                               |                            |        |          |        |  



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                             |                                        |                                                |            |        |        |   |            |        |        |   |            |        |        | 
|------------------------------------------------------------ | -------------------------------------- | ---------------------------------------------- | ---------- | ------ | ------ | - | ---------- | ------ | ------ | - | ---------- | ------ | ------ | 
|                                                             |                                        | Year Ended December 31,                        |           
|                                                             |                                        |                                                |           
|                                                             |                                        | 2006                                           |            |        | 2005   |   |            | 2004   |       
|                                                             |                                        |                                                |            |        |        |   |            |        |       
|                                                             |                                        | (In thousands except share and per share data) |           
|Revenues:                                                    |                                        |                                                |            |        |        |   |            |        |        |   |            |       
|                                                             | Net product sales                      |                                                | $          | 6,647  |        |   | $          | 387    |        |   | $          |       |       
|                                                             | Revenue under collaboration agreements |                                                |            | 6,431  |        |   |            | 5,837  |        |   |            | 4,436  |       
|                                                             |                                        |                                                |            |        |        |   |            |        |       
|                                                             |                                        | Total revenues                                 |            |        | 13,078 |   |            |        | 6,224  |   |            |        | 4,436  | 
|                                                             |                                        |                                                |            |        |        |   |            |        |       
|Costs and expenses:                                          |                                        |                                                |            |        |        |   |            |        |        |   |            |       
|                                                             | Cost of products sold                  |                                                |            | 2,222  |        |   |            | 514    |        |   |            |       |       
|                                                             | Research and development               |                                                |            | 26,912 |        |   |            | 29,959 |        |   |            | 25,578 |       
|                                                             | Sales and marketing                    |                                                |            | 18,284 |        |   |            | 13,671 |        |   |            | 1,199  |       
|                                                             | General and administrative             |                                                |            | 13,456 |        |   |            | 11,406 |        |   |            | 9,679  |       
|                                                             | Restructuring charges                  |                                                |            | 3,498  |        |   |            |       |        |   |            |       |       
|                                                             |                                        |                                                |            |        |        |   |            |        |       
|                                                             |                                        | Total costs and expenses                       |            |        | 64,372 |   |            |        | 55,550 |   |            |        | 36,456 | 
|                                                             |                                        |                                                |            |        |        |   |            |        |       
|Operating loss                                               |                                        |                                                | (51,294    | )      |        |   | (49,326    | )      |        |   | (32,020    | )     
|Other income (expense):                                      |                                        |                                                |            |        |        |   |            |        |        |   |            |       
|                                                             | Interest income                        |                                                |            | 2,726  |        |   |            | 2,427  |        |   |            | 1,098  |       
|                                                             | Interest expense                       |                                                |            | (214   | )      |   |            | (191   | )      |   |            | (172   | )     
|                                                             |                                        |                                                |            |        |        |   |            |        |       
|                                                             |                                        | Total other income                             |            |        | 2,512  |   |            |        | 2,236  |   |            |        | 926    | 
|                                                             |                                        |                                                |            |        |        |   |            |        |       
|Net loss                                                     |                                        |                                                | (48,782    | )      |        |   | (47,090    | )      |        |   | (31,094    | )     
|Accretion of dividends and offering costs on preferred stock |                                        |                                                |           |        |        |   |           |        |        |   | (2,209     | )     
|                                                             |                                        |                                                |            |        |        |   |            |        |       
|Net loss available to common stockholders                    |                                        | $                                              | (48,782    | )      |        | $ | (47,090    | )      |        | $ | (33,303    | )     
|                                                             |                                        |                                                |            |        |        |   |            |        |       
|Net loss per share available to common stockholders          |                                        | $                                              | (1.37      | )      |        | $ | (1.61      | )      |        | $ | (2.28      | )     
|                                                             |                                        |                                                |            |        |        |   |            |        |       
|Basic and diluted weighted-average common shares outstanding |                                        |                                                | 35,529,048 |        |        |   | 29,276,243 |        |        |   | 14,631,371 |       
|                                                             |                                        |                                                |            |        |        |   |            |        |       



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF


STOCKHOLDERS EQUITY (DEFICIT) AND COMPREHENSIVE
LOSS


YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004


|                                                                                                                                                                           |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              |        |     |             |   |     |               |  |   |               |   |  |               |      |   |  |   |         |   |  |   |         |   | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | -------------------------------- | ------- | - | ------ | - | ---------- | ------- |  | -------- | ------------ | ---- | - | ------------ | ------ | --- | ----------- | - | --- | ------------- |  | - | ------------- | - |  | ------------- | ---- | - |  | - | ------- | - |  | - | ------- | - | 
|                                                                                                                                                                           |               |                                  |         |   |        |   |            |         |  |          |              |      |   | Accumulated  |        |     |             |   |    
|                                                                                                                                                                           |               | Redeemable                       |         |   |        |   | Additional |         |  | Deferred |              |      |   |              |        |     | Other       |   |     | Total         |  |   |              
|                                                                                                                                                                           |               | Convertible                      |         |   | Common |   |            | Paid-In |  |          | Stock-Based  |      |   | Due from     |        |     | Accumulated |   |     | Comprehensive |  |   | Stockholders |   |  | Comprehensive |     
|                                                                                                                                                                           |               | Preferred Stock                  |         |   | Stock  |   |            | Capital |  |          | Compensation |      |   | Stockholders |        |     | Deficit     |   |     | Loss          |  |   | Equity        |   |  | Loss          |     
|                                                                                                                                                                           |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              |        |     |             |   |     |               |  |   |               |   |  |               |     
|                                                                                                                                                                           |               | (In thousands except share data) |        
|BALANCE  January 1, 2004                                                                                                                                                  |               | $                                | 51,395  |   |        | $ | 2          |         |  | $        | 11,156       |      |   | $            | (8,536 | )   |             | $ | (40 | )             |  | $ | (27,433       | ) |  | $             |     |   |  | $ | (24,851 | ) |  |   |         |  
|Issuance of 20,055,160 shares of Series B preferred stock
    for cash                                                                                                     |               |                                  | 28,050  |   |        |   |           |         |  |          |             |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   |        |   |  |   |         |  
|Issuance of 221,902 shares of common stock, upon exercise of
    options under stock purchase plan                                                                         |               |                                  |        |   |        |   |           |         |  |          | 175          |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 175     |   |  |   |         |  
|Issuance of 66,666 shares of common stock in connection with
    license agreement                                                                                         |               |                                  |        |   |        |   |           |         |  |          | 485          |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 485     |   |  |   |         |  
|Deferred stock-based compensation to employees                                                                                                                             |               |                                  |        |   |        |   |           |         |  |          | 523          |      |   |              | (523   | )   |             |   |    |               |  |   |              |   |  |               |     |   |  |   |        |   |  |   |         |  
|Deferred stock-based compensation to non-employees                                                                                                                         |               |                                  |        |   |        |   |           |         |  |          | 348          |      |   |              | (348   | )   |             |   |    |               |  |   |              |   |  |               |     |   |  |   |        |   |  |   |         |  
|Accretion of preferred stock dividends and issuance costs                                                                                                                  |               |                                  | 2,209   |   |        |   |           |         |  |          | (2,209       | )    |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | (2,209  | ) |  |   |         |  
|Amortization of deferred stock-based compensation                                                                                                                          |               |                                  |        |   |        |   |           |         |  |          |             |      |   |              | 3,562  |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 3,562   |   |  |   |         |  
|Reversal of deferred stock based compensation                                                                                                                              |               |                                  |        |   |        |   |           |         |  |          | (21          | )    |   |              | 21     |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   |        |   |  |   |         |  
|Forgiveness of officers notes                                                                                                                                              |               |                                  | 145     |   |        |   |           |         |  |          |             |      |   |              |       |     |             |   | 40  |               |  |   |              |   |  |               |     |   |  |   | 40      |   |  |   |         |  
|Issuance of 6,110,000 shares of common stock in initial public
    offering, net of $2.0 million in offering costs                                                         |               |                                  |        |   |        |   | 6          |         |  |          | 37,811       |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 37,817  |   |  |   |         |  
|Conversion of 60,410,327 shares of preferred stock into
    16,109,403 shares of common stock                                                                              |               |                                  | (81,799 | ) |        |   | 16         |         |  |          | 81,783       |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 81,799  |   |  |   |         |  
|Issuance of 12,157 shares of common stock related to exercise of
    warrant                                                                                               |               |                                  |        |   |        |   |           |         |  |          | 46           |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 46      |   |  |   |         |  
|Grant of stock options to non-employees                                                                                                                                    |               |                                  |        |   |        |   |           |         |  |          | 277          |      |   |              | (277   | )   |             |   |    |               |  |   |              |   |  |               |     |   |  |   |        |   |  |   |         |  
|Net loss                                                                                                                                                                   |               |                                  |        |   |        |   |           |         |  |          |             |      |   |              |       |     |             |   |    |               |  |   | (31,094       | ) |  |               |     |   |  |   | (31,094 | ) |  | $ | (31,094 | )
|Unrealized loss on investments                                                                                                                                             |               |                                  |        |   |        |   |           |         |  |          |             |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               | (362 | ) |  |   | (362    | ) |  |   | (362    | )
|                                                                                                                                                                           |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              |        |     |             |   |     |               |  |   |               |   |  |               |     
|Comprehensive loss                                                                                                                                                         |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              |        |     |             |   |     |               |  |   |               |   |  |               |      |   |  |   |         |   |  | $ | (31,456 | )
|BALANCE  December 31, 2004                                                                                                                                                |               |                                  |        |   |        |   | 24         |         |  |          | 130,374      |      |   |              | (6,101 | )   |             |   |    |               |  |   | (58,527       | ) |  |               | (362 | ) |  |   | 65,408  |   |  |   |         |  
|Issuance of 96,235 shares of common stock, upon exercise of
    options under stock plan                                                                                   |               |                                  |        |   |        |   |           |         |  |          | 158          |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 158     |   |  |   |         |  
|Deferred stock-based compensation to non-employees                                                                                                                         |               |                                  |        |   |        |   |           |         |  |          | (458         | )    |   |              | 458    |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   |        |   |  |   |         |  
|Amortization of deferred stock-based compensation                                                                                                                          |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              | 2,141  |     |             |   |     |               |  |   |               |   |  |               |      |   |  |   | 2,141   |   |  |   |         |  
|Reversal of deferred stock based compensation                                                                                                                              |               |                                  |        |   |        |   |           |         |  |          | (221         | )    |   |              | 221    |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   |        |   |  |   |         |  
|Issuance of 9,945,261 shares of common stock and warrants to
    purchase 3,480,842 shares of common stock in private placement,
    net of $3.1 million in placement fees |               |                                  |        |   |        |   | 10         |         |  |          | 51,352       |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 51,362  |   |  |   |         |  
|Grant of stock options to non-employees                                                                                                                                    |               |                                  |        |   |        |   |           |         |  |          | 513          |      |   |              | (513   | )   |             |   |    |               |  |   |              |   |  |               |     |   |  |   |        |   |  |   |         |  
|Net loss                                                                                                                                                                   |               |                                  |        |   |        |   |           |         |  |          |             |      |   |              |       |     |             |   |    |               |  |   | (47,090       | ) |  |               |     |   |  |   | (47,090 | ) |  | $ | (47,090 | )
|Unrealized gain on investments                                                                                                                                             |               |                                  |        |   |        |   |           |         |  |          |             |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               | 268  |   |  |   | 268     |   |  |   | 268     |  
|                                                                                                                                                                           |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              |        |     |             |   |     |               |  |   |               |   |  |               |     
|Comprehensive loss                                                                                                                                                         |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              |        |     |             |   |     |               |  |   |               |   |  |               |      |   |  |   |         |   |  | $ | (46,822 | )
|                                                                                                                                                                           |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              |        |     |             |   |     |               |  |   |               |   |  |               |     
|BALANCE  December 31, 2005                                                                                                                                                |               |                                  |        |   |        |   | 34         |         |  |          | 181,718      |      |   |              | (3,794 | )   |             |   |    |               |  |   | (105,617      | ) |  |               | (94  | ) |  |   | 72,247  |   |  |   |         |  
|Issuance of 752,241 shares of common stock, upon exercise of
    options under stock plan                                                                                  |               |                                  |        |   |        |   | 1          |         |  |          | 613          |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 614     |   |  |   |         |  
|Issuance of common stock to employees under stock purchase plan                                                                                                            |               |                                  |        |   |        |   |           |         |  |          | 22           |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 22      |   |  |   |         |  
|Deferred stock-based compensation to                                                                                                                                       |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              |        |     |             |   |     |               |  |   |               |   |  |               |      |   |  |   |         |   |  |   |         |  
|                                                                                                                                                                           | non-employees |                                  |         |  |        |   |            |        |  |          |              | (904 | ) |              |        | 904 |             |   |     |              |  |   |               |  |  |               |      |  |  |   |         |  |  |   |         |   | 
|Amortization of deferred stock-based compensation                                                                                                                          |               |                                  |        |   |        |   |           |         |  |          |              |      |   |              | 105    |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 105     |   |  |   |         |  
|Reversal of deferred stock-based compensation in adopting
    SFAS No. 123(R)                                                                                              |               |                                  |        |   |        |   |           |         |  |          | (2,686       | )    |   |              | 2,686  |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   |        |   |  |   |         |  
|Issuance of 7,455,731 shares of common stock and warrants to
    purchase 3,727,865 of common stock in a registered offering, net
    of $1.5 million in issuance costs    |               |                                  |        |   |        |   | 7          |         |  |          | 18,479       |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 18,486  |   |  |   |         |  
|Restricted stock buyback                                                                                                                                                   |               |                                  |        |   |        |   |           |         |  |          | (1           | )    |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | (1      | ) |  |   |         |  
|Issuance of restricted stock                                                                                                                                               |               |                                  |        |   |        |   | 1          |         |  |          |             |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 1       |   |  |   |         |  
|Stock-based compensation to employees                                                                                                                                      |               |                                  |        |   |        |   |           |         |  |          | 7,137        |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               |     |   |  |   | 7,137   |   |  |   |         |  
|Net loss                                                                                                                                                                   |               |                                  |        |   |        |   |           |         |  |          |             |      |   |              |       |     |             |   |    |               |  |   | (48,782       | ) |  |               |      |   |  |   | (48,782 | ) |  | $ | (48,782 | )
|Unrealized gain on investments                                                                                                                                             |               |                                  |        |   |        |   |           |         |  |          |             |      |   |              |       |     |             |   |    |               |  |   |              |   |  |               | 77   |   |  |   | 77      |   |  |   | 77      |  
|                                                                                                                                                                           |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              |        |     |             |   |     |               |  |   |               |   |  |               |     
|Comprehensive loss                                                                                                                                                         |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              |        |     |             |   |     |               |  |   |               |   |  |               |      |   |  |   |         |   |  | $ | (48,705 | )
|BALANCE  December 31, 2006                                                                                                                                                |               | $                                |        |   |        | $ | 43         |         |  | $        | 204,378      |      |   | $            | (99    | )   |             | $ |    |               |  | $ | (154,399      | ) |  | $             | (17  | ) |  | $ | 49,906  |   |  |   |         |  
|                                                                                                                                                                           |               |                                  |         |   |        |   |            |         |  |          |              |      |   |              |        |     |             |   |     |               |  |   |               |   |  |               |     

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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |       |        |         |          |       |        |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------------- | --------------------------------------------------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | -------- | ----- | ------ | ------- | -
|                                                     |                                                                                 | Year Ended December 31,                                                        |                                                
|                                                     |                                                                                 |                                                                                |                                                
|                                                     |                                                                                 | 2006                                                                           |                                                 |                                                     | 2005  |        |         | 2004    |      
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|                                                     |                                                                                 | (In thousands)                                                                 |                                                
|Cash flows from operating activities:                |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |       |        |         |         
|                                                     | Net loss                                                                        |                                                                                | $                                               | (48,782                                             | )     |        | $       | (47,090 | )     |        | $       | (31,094  | )    
|                                                     | Adjustments to reconcile net loss to net cash used in operating
    activities: |                                                                                |                                                 |                                                     |       |        |         |         |       |        |         |          |      
|                                                     |                                                                                 | Depreciation and amortization expense                                          |                                                 |                                                     | 939   |        |         |         | 800   |        |         |          | 1,092 |       
|                                                     |                                                                                 | Amortization of premiums and discounts on short-term investments
    and other |                                                 |                                                     | (69   | )      |         |         | 903   |        |         |          | 755   |       
|                                                     |                                                                                 | Loss on disposal of fixed assets                                               |                                                 |                                                     | 86    |        |         |         | 149   |        |         |          | 278   |       
|                                                     |                                                                                 | Non-cash restructuring charge                                                  |                                                 |                                                     | 1,109 |        |         |         |      |        |         |          |      |       
|                                                     |                                                                                 | Stock-based compensation expense                                               |                                                 |                                                     | 6,620 |        |         |         | 2,141 |        |         |          | 3,562 |       
|                                                     |                                                                                 | Forgiveness of notes receivable and other                                      |                                                 |                                                     |      |        |         |         |      |        |         |          | 231   |       
|                                                     |                                                                                 | Changes in assets and liabilities:                                             |                                                 |                                                     |       |        |         |         |       |        |         |          |       |       
|                                                     |                                                                                 |                                                                                | Accounts receivable                             |                                                     |       | 140    |         |         |       | (1,024 | )       |          |       |       |        
|                                                     |                                                                                 |                                                                                | Amount due under collaboration agreement        |                                                     |       | (445   | )       |         |       | (189   | )       |          |       | 2,484  |        
|                                                     |                                                                                 |                                                                                | Inventory                                       |                                                     |       | (2,179 | )       |         |       | (1,869 | )       |          |       |       |        
|                                                     |                                                                                 |                                                                                | Prepaid expenses and other                      |                                                     |       | 1,199  |         |         |       | (283   | )       |          |       | (1,144 | )      
|                                                     |                                                                                 |                                                                                | Accounts payable                                |                                                     |       | (3,566 | )       |         |       | 397    |         |          |       | 3,895  |        
|                                                     |                                                                                 |                                                                                | Accrued expenses                                |                                                     |       | (935   | )       |         |       | 2,135  |         |          |       | (2,211 | )      
|                                                     |                                                                                 |                                                                                | Revenue deferred under collaboration agreements |                                                     |       | (5,031 | )       |         |       | (2,837 | )       |          |       | (2,935 | )      
|                                                     |                                                                                 |                                                                                | Deferred product revenue                        |                                                     |       | (529   | )       |         |       | 1,707  |         |          |       |       |        
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|                                                     |                                                                                 |                                                                                |                                                 | Net cash used in operating activities               |       |        | (51,443 | )       |       |        | (45,060 | )        |       |        | (25,087 | )
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|Cash flows from investing activities:                |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |       |        |         |         
|                                                     | Purchases of fixed assets                                                       |                                                                                |                                                 | (370                                                | )     |        |         | (2,182  | )     |        |         | (2,019   | )    
|                                                     | Proceeds from sales and maturities of short-term investments                    |                                                                                |                                                 | 36,859                                              |       |        |         | 72,915  |       |        |         | 52,900   |      
|                                                     | Purchases of short-term investments                                             |                                                                                |                                                 | (11,802                                             | )     |        |         | (32,255 | )     |        |         | (120,866 | )    
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|                                                     |                                                                                 |                                                                                |                                                 | Net cash provided by (used in) investing activities |       |        | 24,687  |         |       |        | 38,478  |          |       |        | (69,985 | )
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|Cash flows from financing activities:                |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |       |        |         |         
|                                                     | Net proceeds from private placement of common stock                             |                                                                                |                                                 | 18,486                                              |       |        |         | 51,362  |       |        |         |         |      
|                                                     | Proceeds from exercise of stock options and other                               |                                                                                |                                                 | 636                                                 |       |        |         | 158     |       |        |         | 175      |      
|                                                     | Net proceeds from the initial public offering of common stock                   |                                                                                |                                                 |                                                    |       |        |         |        |       |        |         | 37,817   |      
|                                                     | Net proceeds from issuance of convertible preferred stock                       |                                                                                |                                                 |                                                    |       |        |         |        |       |        |         | 28,050   |      
|                                                     | Proceeds from long-term debt and other                                          |                                                                                |                                                 |                                                    |       |        |         | 1,300   |       |        |         | 1,623    |      
|                                                     | Repayments of long-term debt and capital lease obligation                       |                                                                                |                                                 | (1,235                                              | )     |        |         | (961    | )     |        |         | (691     | )    
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|                                                     |                                                                                 |                                                                                |                                                 | Net cash provided by financing activities           |       |        | 17,887  |         |       |        | 51,859  |          |       |        | 66,974  |  
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|Net (decrease) increase in cash and cash equivalents |                                                                                 |                                                                                | (8,869                                          | )                                                   |       |        | 45,277  |         |       |        | (28,098 | )       
|Cash and cash equivalents at beginning of period     |                                                                                 |                                                                                | 57,257                                          |                                                     |       |        | 11,980  |         |       |        | 40,078  |         
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|Cash and cash equivalents at end of period           |                                                                                 | $                                                                              | 48,388                                          |                                                     |       | $      | 57,257  |         |       | $      | 11,980  |         
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|Supplemental disclosures of cash flow information:   |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |       |        |         |         
|                                                     | Cash paid during the period for:                                                |                                                                                |                                                 |                                                     |       |        |         |         |       |        |         |          |      
|                                                     |                                                                                 | Interest                                                                       |                                                 | $                                                   | 221   |        |         | $       | 172   |        |         | $        | 126   |       
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|Non-cash investing and financing activities:         |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |       |        |         |         
|                                                     | Fixed assets acquired under capital lease obligation                            |                                                                                | $                                               |                                                    |       |        | $       | 125     |       |        | $       |         |      
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|                                                     | Unrealized gain (loss) on investments                                           |                                                                                | $                                               | 77                                                  |       |        | $       | 268     |       |        | $       | (362     | )    
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|                                                     | Conversion of redeemable convertible preferred stock into common
    stock      |                                                                                | $                                               |                                                    |       |        | $       |        |       |        | $       | 81,799   |      
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|                                                     | Dividends forfeited on preferred stock conversion into common
    stock         |                                                                                | $                                               |                                                    |       |        | $       |        |       |        | $       | 5,713    |      
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|                                                     | Accretion of dividends and offering costs on preferred stock                    |                                                                                | $                                               |                                                    |       |        | $       |        |       |        | $       | 2,209    |      
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      
|                                                     | Settlement of accrued licensing fee with common stock                           |                                                                                | $                                               |                                                    |       |        | $       |        |       |        | $       | 485      |      
|                                                     |                                                                                 |                                                                                |                                                 |                                                     |       |        |         |         |      



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|    |                   
|--- | ------------------
|(1) | Nature of Business









|    |                                           
|--- | ------------------------------------------
|(2) | Summary of Significant Accounting Policies



| |                      
| | ---------------------
| | Basis of Presentation





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





| |                                            
| | -------------------------------------------
| | Cash Equivalents and Short-Term Investments





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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                     |                           |                           |        |        |            |   |   |            |   |   |       |     |     |   |        |        |        | 
|---------------------------------------------------- | ------------------------- | ------------------------- | ------ | ------ | ---------- | - | - | ---------- | - | - | ----- | --- | --- | - | ------ | ------ | ------ | 
|                                                     |                           | As of December 31, 2006   |       
|                                                     |                           |                           |       
|                                                     |                           | Amortized                 |        |        | Unrealized |   |   | Unrealized |   |   | Fair  |    
|                                                     |                           | Cost                      |        |        | Gains      |   |   | Losses     |   |   | Value |    
|                                                     |                           |                           |        |        |            |   |   |            |   |   |       |    
|                                                     |                           | (In thousands)            |       
|Cash and cash equivalents:                           |                           |                           |        |        |            |   |   |            |   |   |       |     |     |   |        |       
|                                                     | Cash                      |                           | $      | 12,840 |            |   | $ |           |   |   | $     |    |     |   | $      | 12,840 |       
|                                                     | Commercial paper          |                           |        | 32,678 |            |   |   | 1          |   |   |       | (18 | )   |   |        | 32,661 |       
|                                                     | Money market mutual funds |                           |        | 2,887  |            |   |   |           |   |   |       |    |     |   |        | 2,887  |       
|                                                     |                           |                           |        |        |            |   |   |            |   |   |       |    
|                                                     |                           | Cash and cash equivalents |        |        | 48,405     |   |   |            | 1 |   |       |     | (18 | ) |        |        | 48,388 | 
|                                                     |                           |                           |        |        |            |   |   |            |   |   |       |    
|Short-term investments:                              |                           |                           |        |        |            |   |   |            |   |   |       |     |     |   |        |       
|                                                     | Auction rate securities   |                           |        | 650    |            |   |   |           |   |   |       |    |     |   |        | 650    |       
|                                                     |                           |                           |        |        |            |   |   |            |   |   |       |    
|                                                     |                           | Short-term investments    |        |        | 650        |   |   |            |  |   |       |     |    |   |        |        | 650    | 
|                                                     |                           |                           |        |        |            |   |   |            |   |   |       |    
|Cash and cash equivalents and short-term investments |                           | $                         | 49,055 |        |            | $ | 1 |            |   | $ | (18   | )   |     | $ | 49,038 |       
|                                                     |                           |                           |        |        |            |   |   |            |   |   |       |    

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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                     |                                       |                           |        |        |            |   |   |            |   |   |       |     |     |   |        |        |        | 
|---------------------------------------------------- | ------------------------------------- | ------------------------- | ------ | ------ | ---------- | - | - | ---------- | - | - | ----- | --- | --- | - | ------ | ------ | ------ | 
|                                                     |                                       | As of December 31, 2005   |       
|                                                     |                                       |                           |       
|                                                     |                                       | Amortized                 |        |        | Unrealized |   |   | Unrealized |   |   | Fair  |    
|                                                     |                                       | Cost                      |        |        | Gains      |   |   | Losses     |   |   | Value |    
|                                                     |                                       |                           |        |        |            |   |   |            |   |   |       |    
|                                                     |                                       | (In thousands)            |       
|Cash and cash equivalents:                           |                                       |                           |        |        |            |   |   |            |   |   |       |     |     |   |        |       
|                                                     | Cash                                  |                           | $      | 490    |            |   | $ |           |   |   | $     |    |     |   | $      | 490    |       
|                                                     | Commercial paper                      |                           |        | 51,181 |            |   |   | 3          |   |   |       | (43 | )   |   |        | 51,141 |       
|                                                     | Money market mutual funds             |                           |        | 3,231  |            |   |   |           |   |   |       |    |     |   |        | 3,231  |       
|                                                     | U.S. government and agency securities |                           |        | 2,395  |            |   |   |           |   |   |       |    |     |   |        | 2,395  |       
|                                                     |                                       |                           |        |        |            |   |   |            |   |   |       |    
|                                                     |                                       | Cash and cash equivalents |        |        | 57,297     |   |   |            | 3 |   |       |     | (43 | ) |        |        | 57,257 | 
|                                                     |                                       |                           |        |        |            |   |   |            |   |   |       |    
|Short-term investments:                              |                                       |                           |        |        |            |   |   |            |   |   |       |     |     |   |        |       
|                                                     | U.S. government and agency securities |                           |        | 2,690  |            |   |   |           |   |   |       | (2  | )   |   |        | 2,688  |       
|                                                     | Corporate bonds                       |                           |        | 16,668 |            |   |   |           |   |   |       | (52 | )   |   |        | 16,616 |       
|                                                     | Auction rate securities               |                           |        | 6,250  |            |   |   |           |   |   |       |    |     |   |        | 6,250  |       
|                                                     |                                       |                           |        |        |            |   |   |            |   |   |       |    
|                                                     |                                       | Short-term investments    |        |        | 25,608     |   |   |            |  |   |       |     | (54 | ) |        |        | 25,554 | 
|                                                     |                                       |                           |        |        |            |   |   |            |   |   |       |    
|Cash and cash equivalents and short-term investments |                                       | $                         | 82,905 |        |            | $ | 3 |            |   | $ | (97   | )   |     | $ | 82,811 |       
|                                                     |                                       |                           |        |        |            |   |   |            |   |   |       |    



| |          
| | ---------
| | Inventory





| |             
| | ------------
| | Fixed Assets





|                               |  |                    
|------------------------------ |  | -------------------
|Asset Description              |  | Useful Life (Years)
|                               |  |                    
|Furniture and fixtures         |  | 7                  
|Office equipment               |  | 5                  
|Lab equipment                  |  | 5                  
|Computer hardware and software |  | 3                  





| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





| |                                         
| | ----------------------------------------
| | Revenue Recognition and Deferred Revenue

Revenue Recognition in Financial
Statements Revenue Recognition


Revenue Recognition When Right of Return Exists,


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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










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





| |                                                    
| | ---------------------------------------------------
| | Concentrations of Credit Risk and Limited Suppliers

Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk,






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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|          |  |                        |     |  |               |  |     | 
|--------- |  | ---------------------- | --- |  | ------------- |  | --- | 
|          |  | Year Ended December 31 |    
|          |  |                        |    
|          |  | 2006 Billings          |     |  | 2005 Billings | 
|          |  |                        |     |  |               | 
|Company A |  |                        | 18% |  |               |  | 30% | 
|Company B |  |                        | 37% |  |               |  | 29% | 
|Company C |  |                        | 40% |  |               |  | 26% | 
|          |  |                        |     |  |               | 
|Total     |  |                        | 95% |  |               |  | 85% | 
|          |  |                        |     |  |               | 

|          |  |               |     |  |               |  |     | 
|--------- |  | ------------- | --- |  | ------------- |  | --- | 
|          |  | December 31,  |    
|          |  |               |    
|          |  | 2006 Accounts |     |  | 2005 Accounts | 
|          |  | Receivable    |     |  | Receivable    | 
|          |  |               |     |  |               | 
|Company A |  |               | 42% |  |               |  |    | 
|Company B |  |               | 37% |  |               |  | 61% | 
|Company C |  |               | 19% |  |               |  |    | 
|Company D |  |               |    |  |               |  | 11% | 
|          |  |               |     |  |               | 
|Total     |  |               | 98% |  |               |  | 72% | 
|          |  |               |     |  |               | 



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





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

Accounting for
Stock Issued to Employees S-1 S-1),


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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Share-Based
Payments S-1






|                                        |                                                                                 |                            |         |        |      |   |         |        |  
|--------------------------------------- | ------------------------------------------------------------------------------- | -------------------------- | ------- | ------ | ---- | - | ------- | ------ | -
|                                        |                                                                                 | Year Ended December 31,    |        
|                                        |                                                                                 |                            |        
|                                        |                                                                                 | 2005                       |         |        | 2004 |  
|                                        |                                                                                 |                            |         |        |      |  
|                                        |                                                                                 | (in thousands, except loss |        
|                                        |                                                                                 | per share data)            |        
|Net loss  as reported                  |                                                                                 | $                          | (47,090 | )      |      | $ | (33,303 | )     
|                                        | Add: Stock-based compensation expense included in reported net
    loss         |                            |         | 1,757  |      |   |         | 1,784  |  
|                                        | Deduct: Stock-based compensation expense determined under fair
    value method |                            |         | (3,398 | )    |   |         | (1,162 | )
|                                        |                                                                                 |                            |         |        |      |  
|Net loss  pro forma                    |                                                                                 | $                          | (48,731 | )      |      | $ | (32,681 | )     
|                                        |                                                                                 |                            |         |        |      |  
|Net loss per share (basic and diluted): |                                                                                 |                            |         |        |      |   |         |       
|                                        | As reported                                                                     |                            | $       | (1.61  | )    |   | $       | (2.28  | )
|                                        | Pro forma                                                                       |                            | $       | (1.67  | )    |   | $       | (2.23  | )

Black-Scholes


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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                       |  |              |            |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                       |  | Year Ended   |           
|                                                                       |  | December 31, |           
|                                                                       |  |              |           
|                                                                       |  | 2006         |            |   | 2005 |   |         | 2004 | 
|                                                                       |  |              |            |   |      |   |         |      | 
|Risk free interest rate                                                |  |              | 4.8        | % |      |   | 4.1     | %    |  |   | 3.3     | %
|Expected dividend yield                                                |  |              | 0          | % |      |   | 0       | %    |  |   | 0       | %
|Expected forfeiture rate                                               |  |              | 10.2       | % |      |   | N/A     |      |  |   | N/A     |  
|Expected life                                                          |  |              | 6.25 years |   |      |   | 4 years |      |  |   | 4 years |  
|Expected volatility                                                    |  |              | 61         | % |      |   | 59      | %    |  |   | 100     | %
|Weighted-average fair value of options granted equal to fair
    value |  | $            | 2.58       |   |      | $ | 3.26    |      |  | $ | 4.38    |  
|Weighted-average fair value of options granted below to fair
    value |  |              | N/A        |   |      |   | N/A     |      |  | $ | 3.73    |  

96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, 96-18).






| |                                 
| | --------------------------------
| | Basic and Diluted Loss per Share



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                             |  |                         |            |  |      |  |            |      |  |  |            | 
|------------------------------------------------------------ |  | ----------------------- | ---------- |  | ---- |  | ---------- | ---- |  |  | ---------- | 
|                                                             |  | Year Ended December 31, |           
|                                                             |  |                         |           
|                                                             |  | 2006                    |            |  | 2005 |  |            | 2004 | 
|                                                             |  |                         |            |  |      |  |            |      | 
|Weighted-average common shares outstanding                   |  |                         | 35,598,531 |  |      |  | 29,405,045 |      |  |  | 15,077,169 | 
|Less: weighted-average restricted common shares outstanding  |  |                         | 69,483     |  |      |  | 128,802    |      |  |  | 445,798    | 
|                                                             |  |                         |            |  |      |  |            |      | 
|Basic and diluted weighted-average common shares outstanding |  |                         | 35,529,048 |  |      |  | 29,276,243 |      |  |  | 14,631,371 | 
|                                                             |  |                         |            |  |      |  |            |      | 



| |                                                                 
| | ----------------------------------------------------------------
| | Accretion of Dividends and Offering Costs on Preferred
    Stock





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





| |                                           
| | ------------------------------------------
| | Disclosure about Segments of an Enterprise

Disclosures about Segments of an Enterprise and Related
Information




| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109


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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Fair Value Measurements




The
Fair Value Option for Financial Assets and Financial
Liabilities, Including an amendment of SFAS 115


(3)     Collaboration Agreements




| |          
| | ---------
| | MedImmune





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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                
| | ---------------
| | Beckman Coulter





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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(4)     Inventory




|                |                |      |       |       |      |   |       |       | 
|--------------- | -------------- | ---- | ----- | ----- | ---- | - | ----- | ----- | 
|                |                | 2006 |       |       | 2005 |  
|                |                |      |       |       |      |  
|Raw material    |                | $    | 3,662 |       |      | $ | 1,425 |      
|Work in process |                |      | 83    |       |      |   | 332   |      
|Finished goods  |                |      | 422   |       |      |   | 392   |      
|                |                |      |       |       |      |  
|                | Total          |      |       | 4,167 |      |   |       | 2,149 | 
|Less reserve    |                |      | (119  | )     |      |   | (280  | )    
|                |                |      |       |       |      |  
|                | Inventory, net |      | $     | 4,048 |      |   | $     | 1,869 | 
|                |                |      |       |       |      |  



|    |             
|--- | ------------
|(5) | Fixed Assets



|                                               |                    |      |        |       |      |   |        |       | 
|---------------------------------------------- | ------------------ | ---- | ------ | ----- | ---- | - | ------ | ----- | 
|                                               |                    | 2006 |        |       | 2005 |  
|                                               |                    |      |        |       |      |  
|Laboratory equipment                           |                    | $    | 1,219  |       |      | $ | 2,087  |      
|Computer and office equipment                  |                    |      | 689    |       |      |   | 747    |      
|Equipment in process                           |                    |      | 686    |       |      |   | 599    |      
|Furniture and fixtures                         |                    |      | 488    |       |      |   | 550    |      
|Software                                       |                    |      | 484    |       |      |   | 443    |      
|Leasehold improvements                         |                    |      | 280    |       |      |   | 280    |      
|Assets held under capital lease                |                    |      | 32     |       |      |   | 125    |      
|                                               |                    |      |        |       |      |  
|                                               | Total              |      |        | 3,878 |      |   |        | 4,831 | 
|Less accumulated depreciation and amortization |                    |      | (1,457 | )     |      |   | (1,268 | )    
|                                               |                    |      |        |       |      |  
|                                               | Fixed assets  net |      | $      | 2,421 |      |   | $      | 3,563 | 
|                                               |                    |      |        |       |      |  





|    |               
|--- | --------------
|(6) | Long Term Debt



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|     |  |           |       |  |          |   |     |       |  |   |       | 
|---- |  | --------- | ----- |  | -------- | - | --- | ----- |  | - | ----- | 
|     |  | Principal |       |  | Interest |   |     | Total | 
|     |  |           |       |  |          |   |     |       | 
|2007 |  |           | 998   |  |          |   | 96  |       |  |   | 1,094 | 
|2008 |  |           | 420   |  |          |   | 17  |       |  |   | 437   | 
|     |  |           |       |  |          |   |     |       | 
|     |  | $         | 1,418 |  |          | $ | 113 |       |  | $ | 1,531 | 
|     |  |           |       |  |          |   |     |       | 



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



| |                         
| | ------------------------
| | 2006 Registered Offering







| |                       
| | ----------------------
| | 2005 Private Placement



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                                        
| | ---------------------------------------
| | Initial Public Offering of Common Stock





| |                                                
| | -----------------------------------------------
| | Conversion of Preferred Stock into Common Stock







| |                   
| | ------------------
| | Authorized Capital



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                   
| | --------------------------------------------------
| | Restricted Common Stock Issuances to Non-Employees











|    |                       
|--- | ----------------------
|(8) | Equity Incentive Plans



| |                         
| | ------------------------
| | 2006 Stock Purchase Plan









| |                          
| | -------------------------
| | 2004 Stock Incentive Plan



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












| |                          
| | -------------------------
| | 2003 Stock Incentive Plan







| |                           
| | --------------------------
| | 2000 Equity Incentive Plan





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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                               |           |           |           |            |          |   |      |      | 
|---------------------------------------------- | --------- | --------- | --------- | ---------- | -------- | - | ---- | ---- | 
|                                               |           |           |           | Weighted-  |         
|                                               |           |           |           | Average    |         
|                                               |           | Number of |           |            | Exercise |  
|                                               |           | Shares    |           |            | Price    |  
|                                               |           |           |           |            |          |  
|Outstanding  January 1, 2004                  |           |           | 1,862,229 |            |          | $ | 0.87 |     
|                                               | Granted   |           |           | 2,906,621  |          |   |      | 6.12 | 
|                                               | Exercised |           |           | (221,902   | )        |   |      | 0.80 | 
|                                               | Cancelled |           |           | (46,678    | )        |   |      | 4.39 | 
|                                               |           |           |           |            |          |  
|Outstanding  December 31, 2004                |           |           | 4,500,270 |            |          |   | 4.23 |     
|                                               | Granted   |           |           | 2,025,900  |          |   |      | 6.70 | 
|                                               | Exercised |           |           | (96,235    | )        |   |      | 1.64 | 
|                                               | Cancelled |           |           | (229,829   | )        |   |      | 5.54 | 
|                                               |           |           |           |            |          |  
|Outstanding  December 31, 2005                |           |           | 6,200,106 |            |          |   | 5.03 |     
|                                               | Granted   |           |           | 3,428,000  |          |   |      | 4.10 | 
|                                               | Exercised |           |           | (752,241   | )        |   |      | 0.82 | 
|                                               | Cancelled |           |           | (3,161,095 | )        |   |      | 5.81 | 
|                                               |           |           |           |            |          |  
|Outstanding  December 31, 2006                |           |           | 5,714,770 |            |          | $ | 4.60 |     
|                                               |           |           |           |            |          |  
|Vested or expected to vest  December 31, 2006 |           |           | 4,640,100 |            |          | $ | 4.69 |     
|                                               |           |           |           |            |          |  
|Exercisable  December 31, 2004                |           |           | 717,176   |            |          | $ | 1.10 |     
|                                               |           |           |           |            |          |  
|Exercisable  December 31, 2005                |           |           | 1,809,920 |            |          | $ | 3.42 |     
|                                               |           |           |           |            |          |  
|Exercisable  December 31, 2006                |           |           | 2,055,785 |            |          | $ | 4.92 |     
|                                               |           |           |           |            |          |  



|               |  |                   |           |                  |             |  |           |          |  |   |             |           |  |          |           |  |  |   |      | 
|-------------- |  | ----------------- | --------- | ---------------- | ----------- |  | --------- | -------- |  | - | ----------- | --------- |  | -------- | --------- |  |  | - | ---- | 
|               |  | Outstanding       |           |                  |            
|               |  |                   |           |                  | Exercisable | 
|               |  |                   |           | Weighted-        |             |  |           |          |  |  
|               |  |                   |           | Average          |             |  | Weighted- |          |  |   |             | Weighted- | 
|               |  |                   |           | Contractual Life |             |  | Average   |          |  |   |             | Average   | 
|               |  | Number of Options |           |                  | Outstanding |  |           | Exercise |  |   | Options     |           |  | Exercise |          
|Exercise Price |  | Outstanding       |           |                  | (In Years)  |  |           | Price    |  |   | Exercisable |           |  | Price    |          
|               |  |                   |           |                  |             |  |           |          |  |   |             |           |  |          |          
|$0.38-$1.05    |  |                   | 583,947   |                  |             |  | 6.9       |          |  | $ | 1.02        |           |  |          | 488,991   |  |  | $ | 1.02 | 
|$1.88          |  |                   | 677,660   |                  |             |  | 10.0      |          |  | $ | 1.88        |           |  |          | 10,730    |  |  | $ | 1.88 | 
|$2.05-$3.71    |  |                   | 308,000   |                  |             |  | 9.8       |          |  | $ | 2.69        |           |  |          | 13,333    |  |  | $ | 2.57 | 
|$3.80          |  |                   | 984,999   |                  |             |  | 9.5       |          |  | $ | 3.80        |           |  |          | 59,999    |  |  | $ | 3.80 | 
|$4.00-$5.63    |  |                   | 815,726   |                  |             |  | 8.2       |          |  | $ | 5.26        |           |  |          | 366,269   |  |  | $ | 5.42 | 
|$5.64-$5.78    |  |                   | 61,853    |                  |             |  | 8.3       |          |  | $ | 5.75        |           |  |          | 30,498    |  |  | $ | 5.75 | 
|$5.99          |  |                   | 712,839   |                  |             |  | 7.7       |          |  | $ | 5.99        |           |  |          | 421,768   |  |  | $ | 5.99 | 
|$6.00-$6.80    |  |                   | 598,294   |                  |             |  | 8.2       |          |  | $ | 6.46        |           |  |          | 297,658   |  |  | $ | 6.50 | 
|$6.83-$7.12    |  |                   | 687,808   |                  |             |  | 8.7       |          |  | $ | 7.01        |           |  |          | 196,429   |  |  | $ | 6.98 | 
|$7.25-$9.05    |  |                   | 283,644   |                  |             |  | 8.1       |          |  | $ | 7.83        |           |  |          | 170,110   |  |  | $ | 7.83 | 
|               |  |                   |           |                  |             |  |           |          |  |   |             |           |  |          |          
|               |  |                   | 5,714,770 |                  |             |  | 8.6       |          |  | $ | 4.60        |           |  |          | 2,055,785 |  |  | $ | 4.92 | 
|               |  |                   |           |                  |             |  |           |          |  |   |             |           |  |          |          





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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                               |  |           |         |           |           |   |      |           |           |  |           |   |  |           |      |  |           |  |         |   |  |   |      | 
|------------------------------ |  | --------- | ------- | --------- | --------- | - | ---- | --------- | --------- |  | --------- | - |  | --------- | ---- |  | --------- |  | ------- | - |  | - | ---- | 
|                               |  | 2006      |         |           | 2005      |   |      | 2004      |          
|                               |  |           |         |           |           |   |      |           |          
|                               |  |           |         | Weighted- |           |   |      |           | Weighted- |  |           |   |  | Weighted- |     
|                               |  |           |         | Average   |           |   |      |           | Average   |  |           |   |  | Average   |     
|                               |  |           |         | Grant-    |           |   |      |           | Grant-    |  |           |   |  | Grant-    |     
|                               |  | Number    |         |           | Date Fair |   |      | Number    |           |  | Date Fair |   |  | Number    |      |  | Date Fair | 
|                               |  | of Shares |         |           | Value     |   |      | of Shares |           |  | Value     |   |  | of Shares |      |  | Value     | 
|                               |  |           |         |           |           |   |      |           |           |  |           |   |  |           |      |  |           | 
|Nonvested at beginning of year |  |           | 40,803  |           |           | $ | 0.38 |           |           |  | 103,613   |   |  | $         | 0.38 |  |           |  | 173,009 |   |  | $ | 0.38 | 
|Granted                        |  |           | 556,100 |           |           |   | 2.00 |           |           |  |          |   |  |           |     |  |           |  |        |   |  |   |     | 
|Vested                         |  |           | (38,536 | )         |           |   | 0.38 |           |           |  | (62,810   | ) |  |           | 0.38 |  |           |  | (69,396 | ) |  |   | 0.38 | 
|Forfeited                      |  |           | (2,267  | )         |           |   | 0.38 |           |           |  |          |   |  |           |     |  |           |  |        |   |  |   |     | 
|                               |  |           |         |           |           |   |      |           |           |  |           |   |  |           |      |  |           | 
|Nonvested at end of year       |  |           | 556,100 |           |           | $ | 2.00 |           |           |  | 40,803    |   |  | $         | 0.38 |  |           |  | 103,613 |   |  | $ | 0.38 | 
|                               |  |           |         |           |           |   |      |           |           |  |           |   |  |           |      |  |           | 





|                                          |               |                                                   |        |   |       |   |        |      |       |   |        |   |       |  
|----------------------------------------- | ------------- | ------------------------------------------------- | ------ | - | ----- | - | ------ | ---- | ----- | - | ------ | - | ----- | -
|                                          |               | 2006                                              |        |   | 2005  |   |        | 2004 |      
|                                          |               |                                                   |        |   |       |   |        |      |      
|Deferred Compensation Balance  Beginning |               | $                                                 | (3,794 | ) |       | $ | (6,101 | )    |       | $ | (8,536 | )
|                                          | Employees     |                                                   |        |   |       |   |        |      |       |   |        |   |      
|                                          |               | Amortization of deferred stock-based compensation |        |   | 500   |   |        |      | 1,757 |   |        |   | 1,784 |  
|                                          |               | Deferred stock-based compensation                 |        |   |      |   |        |      |      |   |        |   | (523  | )
|                                          |               | Reversal of deferred stock-based compensation     |        |   | 2,686 |   |        |      | 221   |   |        |   |      |  
|                                          | Non-employees |                                                   |        |   |       |   |        |      |       |   |        |   |      
|                                          |               | Amortization of deferred stock-based compensation |        |   |      |   |        |      | 384   |   |        |   | 1,778 |  
|                                          |               | Deferred stock-based compensation                 |        |   | (395  | ) |        |      | (513  | ) |        |   | (625  | )
|                                          |               | Re-measure deferred stock-based compensation      |        |   | 904   |   |        |      | 458   |   |        |   | 21    |  
|                                          |               |                                                   |        |   |       |   |        |      |      
|Deferred Compensation Balance  Ending    |               | $                                                 | (99    | ) |       | $ | (3,794 | )    |       | $ | (6,101 | )
|                                          |               |                                                   |        |   |       |   |        |      |      



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                         |               |                                             |   |       |       |   |   |       |       |  |   |       |       | 
|------------------------ | ------------- | ------------------------------------------- | - | ----- | ----- | - | - | ----- | ----- |  | - | ----- | ----- | 
|                         |               | 2006                                        |   |       | 2005  |   |   | 2004  |      
|                         |               |                                             |   |       |       |   |   |       |      
|                         |               | (In thousands)                              |  
|Stock-based compensation |               |                                             |   |       |       |   |   |       |       |  |   |      
|                         | Employees     |                                             |   |       |       |   |   |       |       |  |   |       |      
|                         |               | Stock-based compensation  adoption of 123R |   | $     | 7,137 |   |   | $     |      |  |   | $     |      | 
|                         |               | Stock compensation  Intrinsic value awards |   |       | 500   |   |   |       | 1,757 |  |   |       | 1,784 | 
|                         | Non-employees |                                             |   |       |       |   |   |       |       |  |   |       |      
|                         |               | Stock-based compensation (reversals)        |   |       | (395  | ) |   |       | 384   |  |   |       | 1,778 | 
|                         |               |                                             |   |       |       |   |   |       |      
|                         | Total         |                                             | $ | 7,241 |       |   | $ | 2,141 |       |  | $ | 3,562 |      
|                         |               |                                             |   |       |       |   |   |       |      

non-employees 96-18.


S-1 S-1


104



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




change-of change-of change-of




|    |                      
|--- | ---------------------
|(9) | Employee Benefit Plan

tax-deferred




|     |             
|---- | ------------
|(10) | Income Taxes



|                         |                                      |      |         |        |      |  |         |        |  
|------------------------ | ------------------------------------ | ---- | ------- | ------ | ---- |  | ------- | ------ | -
|                         |                                      | 2006 |         |        | 2005 | 
|                         |                                      |      |         |        |      | 
|Deferred tax assets:     |                                      |      |         |        |      |  |         |       
|                         | Net operating loss carryforward      |      | $       | 52,396 |      |  | $       | 30,033 |  
|                         | Deferred revenue                     |      |         | 756    |      |  |         | 2,483  |  
|                         | Stock compensation                   |      |         | 822    |      |  |         |       |  
|                         | Research and experimentation credits |      |         | 2,110  |      |  |         | 1,245  |  
|                         | Start-up expenses                    |      |         |       |      |  |         | 98     |  
|                         | Depreciation and amortization        |      |         | 673    |      |  |         | 135    |  
|                         | Other                                |      |         | 385    |      |  |         | (90    | )
|                         |                                      |      |         |        |      | 
|                         | Total                                |      |         | 57,142 |      |  |         | 33,904 |  
|Less valuation allowance |                                      |      | (57,142 | )      |      |  | (33,904 | )     
|                         |                                      |      |         |        |      | 
|                         | Total                                |      | $       |       |      |  | $       |       |  
|                         |                                      |      |         |        |      | 



105



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|     |                                
|---- | -------------------------------
|(11) | Research and License Agreements





| |       
| | ------
| | Abbott

in-license






| |           
| | ----------
| | SkyePharma

in-license


106



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                        
| | -----------------------
| | The Feinstein Institute







alpha-7 anti-inflammatory




| |                             
| | ----------------------------
| | Patheon Pharmaceuticals Inc.



107



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




one-year 12-months 18-months




| |                             
| | ----------------------------
| | Shasun Pharma Solutions Ltd.



one-year 18-months






108



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(12)     Commitments and
Contingencies






| |                  
| | -----------------
| | Lease Obligations





|                                  |                                                |           |       |       |         |  |     |    | 
|--------------------------------- | ---------------------------------------------- | --------- | ----- | ----- | ------- |  | --- | -- | 
|                                  |                                                | Operating |       |       | Capital | 
|Year Ending                       |                                                | Leases    |       |       | Leases  | 
|                                  |                                                |           |       |       |         | 
|2007                              |                                                |           | 1,503 |       |         |  | 59  |   
|2008                              |                                                |           | 1,436 |       |         |  | 5   |   
|2009                              |                                                |           | 216   |       |         |  |    |   
|                                  |                                                |           |       |       |         | 
|                                  | Total minimum lease payments                   |           | $     | 3,155 |         |  | $   | 64 | 
|                                  |                                                |           |       |       |         | 
|Less Amount representing interest |                                                |           |       |       |         |  | (5  | ) 
|                                  |                                                |           |       |       |         | 
|                                  | Present value of future minimum lease payments |           |       |       |         |  |     | 59 | 
|Less current portion              |                                                |           |       |       |         |  | (54 | ) 
|                                  |                                                |           |       |       |         | 
|                                  | Long-term portion                              |           |       |       |         |  | $   | 5  | 
|                                  |                                                |           |       |       |         | 



| |                                
| | -------------------------------
| | Founders Consulting Agreements





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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                   
| | ----------------------------------
| | Consulting Agreement with Director



(13)     Restructurings Charges










110



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






(14)     Subsequent Events


IMI License Agreement








DEY Co-Promotion Agreement


controlled-release co-promotion


out-of-pocket third-parties. third-party


co-promotion


111



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


third-party co-promotion






Binding Letter Agreement for COPD Co-Promotion


co-promotion co-promote co-promotion co-promotion co-promotion


co-promotion co-promotion


(15)     Unaudited Quarterly
Financial Data




112



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |                                        |                                        |   |         |               |   |   |               |         |   |               |         |         |   |   |         |         |  
|---- | -------------------------------------- | -------------------------------------- | - | ------- | ------------- | - | - | ------------- | ------- | - | ------------- | ------- | ------- | - | - | ------- | ------- | -
|     |                                        | Quarter Ended                          |   |         | Quarter Ended |   |   | Quarter Ended |         |   | Quarter Ended |        
|     |                                        | December 31,                           |   |         | September 30, |   |   | June 30,      |         |   | March 31,     |        
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     |                                        | (Unaudited)                            |  
|     |                                        | (In thousands except per share data)   |  
|2006 |                                        |                                        |   |         |               |   |   |               |         |   |               |         |         |   |   |        
|     | Revenues:                              |                                        |   |         |               |   |   |               |         |   |               |         |         |   |   |         |        
|     |                                        | Net product sales                      |   | $       | 1,937         |   |   | $             | 1,879   |   |               | $       | 1,809   |   |   | $       | 1,022   |  
|     |                                        | Revenue under collaboration agreements |   |         | 985           |   |   |               | 2,499   |   |               |         | 1,696   |   |   |         | 1,251   |  
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     |                                        | Total revenues                         |   |         | 2,922         |   |   |               | 4,378   |   |               |         | 3,505   |   |   |         | 2,273   |  
|     |                                        | Cost of goods sold                     |   |         | (561          | ) |   |               | (267    | ) |               |         | (890    | ) |   |         | (504    | )
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     |                                        | Gross profit                           |   |         | 2,361         |   |   |               | 4,111   |   |               |         | 2,615   |   |   |         | 1,769   |  
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     |                                        | Total operating expenses               |   |         | (11,694       | ) |   |               | (13,549 | ) |               |         | (17,679 | ) |   |         | (19,228 | )
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     | Operating loss                         |                                        |   | (9,333  | )             |   |   | (9,438        | )       |   |               | (15,064 | )       |   |   | (17,459 | )      
|     | Other income, net                      |                                        |   | 581     |               |   |   | 558           |         |   |               | 661     |         |   |   | 712     |        
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     | Net loss                               |                                        | $ | (8,752  | )             |   | $ | (8,880        | )       |   | $             | (14,403 | )       |   | $ | (16,747 | )      
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     | Net loss per share  basic and diluted |                                        | $ | (0.22   | )             |   | $ | (0.26         | )       |   | $             | (0.42   | )       |   | $ | (0.49   | )      
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|2005 |                                        |                                        |   |         |               |   |   |               |         |   |               |         |         |   |   |        
|     | Revenues:                              |                                        |   |         |               |   |   |               |         |   |               |         |         |   |   |         |        
|     |                                        | Net product sales                      |   | $       | 387           |   |   | $             |        |   |               | $       |        |   |   | $       |        |  
|     |                                        | Revenue under collaboration agreements |   |         | 1,712         |   |   |               | 1,335   |   |               |         | 1,431   |   |   |         | 1,359   |  
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     |                                        | Total revenues                         |   |         | 2,099         |   |   |               | 1,335   |   |               |         | 1,431   |   |   |         | 1,359   |  
|     |                                        | Cost of goods sold                     |   |         | (514          | ) |   |               |        |   |               |         |        |   |   |         |        |  
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     |                                        | Gross profit                           |   |         | 1,585         |   |   |               | 1,335   |   |               |         | 1,431   |   |   |         | 1,359   |  
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     |                                        | Total operating expenses               |   |         | (17,030       | ) |   |               | (16,025 | ) |               |         | (11,148 | ) |   |         | (10,833 | )
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     | Operating loss                         |                                        |   | (15,445 | )             |   |   | (14,690       | )       |   |               | (9,717  | )       |   |   | (9,474  | )      
|     | Other income, net                      |                                        |   | 758     |               |   |   | 733           |         |   |               | 390     |         |   |   | 355     |        
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     | Net loss                               |                                        | $ | (14,687 | )             |   | $ | (13,957       | )       |   | $             | (9,327  | )       |   | $ | (9,119  | )      
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        
|     | Net loss per share  basic and diluted |                                        | $ | (0.43   | )             |   | $ | (0.41         | )       |   | $             | (0.37   | )       |   | $ | (0.38   | )      
|     |                                        |                                        |   |         |               |   |   |               |         |   |               |        



113



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








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures


13a-15(e)


Managements Report on Internal Control Over Financial
Reporting


13a-15(f)




Internal Control-Integrated
Framework.






114



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Internal Control  Integrated Framework








Internal
Control  Integrated Framework Internal Control  Integrated
Framework


Share-Based Payment


DELOITTE &
TOUCHE LLP






115



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##### Table of Contents



Changes in Internal Control Over Financial Reporting


13a-15(f)







|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION



116



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##### Table of Contents






PART III







|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
    GOVERNANCE

Directors and Executive Officers


10-K.


Compliance With Section 16(a) of the Exchange Act




Code of Ethics




Director Nominees




Audit Committee




Audit Committee Financial Expert


S-K





ITEM 11.     EXECUTIVE
COMPENSATION




10-K


117



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








|         |                                                                              
|-------- | -----------------------------------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
    DIRECTOR INDEPENDENCE








|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES






PART IV







|         |                                           
|-------- | ------------------------------------------
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements.


10-K.


Financial Statement Schedules.




Exhibits.


10-K


® ®


118



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SIGNATURES






| |                            
| | ---------------------------
| | CRITICAL THERAPEUTICS, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ FRANK E. THOMAS

| |                                      
| | -------------------------------------
| |                                      
| | Frank E. Thomas                      
| | President and Chief Executive Officer
| | Date: March 16, 2007                 





|                                                          |  |                                                                                                                      |  |                |  | 
|--------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                                 |  | Title                                                                                                                |  | Date          
|                                                          |  |                                                                                                                      |  |               
|                                                         
|/s/ FRANK E. THOMASFrank
    E. Thomas                    |  | President and Chief Executive Officer and Director (Principal
    Executive Officer and Principal Financial Officer) |  | March 16, 2007
|                                                         
|/s/ JEFFREY E. YOUNGJeffrey
    E. Young                  |  | Vice President of Finance, Chief Accounting Officer and
    Treasurer (Principal Accounting Officer)                 |  | March 16, 2007
|                                                         
|/s/ RICHARD W. DUGANRichard
    W. Dugan                  |  | Director                                                                                                             |  | March 16, 2007
|                                                         
|/s/ NICHOLAS GALAKATOSNicholas
    Galakatos, Ph.D.       |  | Director                                                                                                             |  | March 16, 2007
|                                                         
|/s/ JEAN GEORGEJean
    George                            |  | Director                                                                                                             |  | March 16, 2007
|                                                         
|/s/ CHRISTOPHER MIRABELLIChristopher
    Mirabelli, Ph.D. |  | Director                                                                                                             |  | March 16, 2007
|                                                         
|/s/ JAMES B. TANANBAUMJames
    B. Tananbaum, M.D.        |  | Director                                                                                                             |  | March 16, 2007

119



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|                                                  |  |          |  |                |  | 
|------------------------------------------------- |  | -------- |  | -------------- |  | 
|Signature                                         |  | Title    |  | Date          
|                                                  |  |          |  |               
|                                                 
|/s/ CHRISTOPHER WALSHChristopher
    Walsh, Ph.D. |  | Director |  | March 16, 2007
|                                                 
|/s/ ROBERT H. ZEIGERRobert
    H. Zeiger          |  | Director |  | March 16, 2007
|                                                 
|/s/ M. CORY ZWERLINGM.
    Cory Zwerling          |  | Director |  | March 16, 2007

120



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Exhibit Index


|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 3  | .1          |  | Amended and Restated Certificate of Incorporation of the
    Registrant (Incorporated by reference to Exhibit 3.1 to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2004 (SEC File No. 000-50767)).                                                                                                                                                                                         
|           
|            | 3  | .2          |  | Second Amended and Restated Bylaws of the Registrant dated
    October 22, 2006 (Incorporated by reference to
    Exhibit 3.1 to the Registrants Current Report on
    Form 8-K dated October 25, 2006 (SEC File
    No. 000-50767)).                                                                                                                                                                                             
|           
|            | 10 | .1*         |  | 2000 Equity Incentive Plan, as amended, of the Registrant
    (Incorporated by reference to Exhibit 10.1 to the
    Registrants Registration Statement on Form S-1 (SEC
    File No. 333-113727)).                                                                                                                                                                                                                                
|           
|            | 10 | .2*         |  | 2003 Stock Incentive Plan, as amended, of the Registrant
    (Incorporated by reference to Exhibit 10.2 to the
    Registrants Registration Statement on Form S-1 (SEC
    File No. 333-113727)).                                                                                                                                                                                                                                 
|           
|            | 10 | .3*         |  | 2004 Stock Incentive Plan of the Registrant (Incorporated by
    reference to Exhibit 10.3 to the Registrants
    Registration Statement on Form S-1 (SEC File
    No. 333-113727)).                                                                                                                                                                                                                                              
|           
|            | 10 | .4*         |  | Amendment No. 1 to the 2004 Stock Incentive Plan of the
    Registrant (Incorporated by reference to Exhibit 10.4 to
    the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2005 (SEC File No. 000-50767)).                                                                                                                                                                                           
|           
|            | 10 | .5*         |  | 2006 Employee Stock Purchase Plan (Incorporated by reference to
    Exhibit 99.1 to the Registrants Current Report on
    Form 8-K dated April 27, 2006 (SEC File No.
    000-50767)).                                                                                                                                                                                                                                            
|           
|            | 10 | .6          |  | Amended and Restated Investor Rights Agreement by and among the
    Registrant and the Investors named therein dated as of
    October 3, 2003 (Incorporated by reference to
    Exhibit 10.4 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727)).                                                                                                                                               
|           
|            | 10 | .7+         |  | License Agreement between the Registrant and The Feinstein
    Institute For Medical Research (formerly known as The North
    Shore-Long Island Jewish Research Institute) dated July 1,
    2001, as amended by the First Amendment Agreement dated
    May 15, 2003 (Incorporated by reference to
    Exhibit 10.5 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727)).                       
|           
|            | 10 | .8++        |  | Amendment No. 2, dated January 8, 2007, to Sponsored
    Research and License Agreement between the Registrant and The
    Feinstein Institute For Medical Research (formerly known as The
    North Shore-Long Island Jewish Research Institute) dated
    January 1, 2003.                                                                                                                                                       
|           
|            | 10 | .9+         |  | Sponsored Research and License Agreement between the Registrant
    and The Feinstein Institute for Medical Research (formerly known
    as The North Shore-Long Island Jewish Research Institute) dated
    July 1, 2001, as amended by the First Amendment Agreement
    dated July 1, 2003 (Incorporated by reference to
    Exhibit 10.6 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727)).
|           
|            | 10 | .10+        |  | Sponsored Research and License Agreement between the Registrant
    and The Feinstein Institute for Medical Research (formerly known
    as The North Shore-Long Island Jewish Research Institute) dated
    January 1, 2003 (Incorporated by reference to
    Exhibit 10.7 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727)).                                                                 
|           
|            | 10 | .11+        |  | Exclusive License and Collaboration Agreement between the
    Registrant and MedImmune, Inc. dated July 30, 2003
    (Incorporated by reference to Exhibit 10.8 to the
    Registrants Registration Statement on Form S-1 (SEC
    File No. 333-113727)).                                                                                                                                                                         
|           
|            | 10 | .12         |  | Amendment No. 1, dated December 7, 2005, to the
    Registrants Exclusive License and Collaboration Agreement
    with MedImmune, Inc. dated July 30, 2003 (Incorporated by
    reference to Exhibit 10.50 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2005 (SEC File No. 000-50767)).                                                                                                 
|           
|            | 10 | .13+        |  | License Agreement between the Registrant and Abbott Laboratories
    dated December 18, 2003 (Incorporated by reference to
    Exhibit 10.10 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727)).                                                                                                                                                                                                
|           
|            | 10 | .14         |  | Amendment No. 1, dated April 13, 2005, to License
    Agreement between the Registrant and Abbott Laboratories dated
    December 18, 2003.                                                                                                                                                                                                                                                                                        



---



##### Table of Contents



|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 10 | .15+        |  | License Agreement between the Registrant and Abbott Laboratories
    dated March 19, 2004 (Incorporated by reference to
    Exhibit 10.11 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727)).                                                                                                                                                                                                                             
|           
|            | 10 | .16         |  | Amendment No. 1, dated September 15, 2004, to License
    Agreement between the Registrant and Abbott Laboratories dated
    March 19, 2004.                                                                                                                                                                                                                                                                                                                 
|           
|            | 10 | .17+        |  | Agreement between the Registrant and Jagotec AG dated
    December 3, 2003 (Incorporated by reference to
    Exhibit 10.13 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727)).                                                                                                                                                                                                                                            
|           
|            | 10 | .18+        |  | Development and Scale-Up Agreement between the Registrant and
    Jagotec AG dated May 6, 2004 (Incorporated by reference to
    Exhibit 10.25 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727)).                                                                                                                                                                                                                        
|           
|            | 10 | .19         |  | Lease Agreement between ARE  60 Westview Street,
    LLC and the Registrant dated as of November 18, 2003
    (Incorporated by reference to Exhibit 10.21 to the
    Registrants Registration Statement on Form S-1 (SEC
    File No. 333-113727)).                                                                                                                                                                                                        
|           
|            | 10 | .20+        |  | Agreement for Manufacturing and Supply of ZILEUTON by and
    between Rhodia Pharma Solutions Ltd. and the Registrant dated
    February 8, 2005 (Incorporated by Reference to
    Exhibit 10.25 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2004 ((SEC
    File No. 000-50767)).                                                                                                                                     
|           
|            | 10 | .21         |  | Loan and Security Agreement dated June 28, 2002, as
    modified by the Loan Modification Agreement dated as of
    December 11, 2002, the Second Loan Modification Agreement
    dated as of April 10, 2003, and the Third Loan Modification
    Agreement dated as of June 30, 2004 (Incorporated by
    reference to Exhibit 10.1 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2004 (SEC File No. 000-50767)).
|           
|            | 10 | .22         |  | The Fourth Loan Modification Agreement dated as of
    January 6, 2006 to the Loan and Security Agreement by and
    between the Registrant and Silicon Valley Bank dated
    June 28, 2002 (Incorporated by reference to
    Exhibit 10.24 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2005 (SEC
    File No. 000-50767)).                                                                                           
|           
|            | 10 | .23+        |  | Feasibility Study Agreement between Baxter Healthcare
    Corporation and the Registrant effective June 9, 2004
    (Incorporated by Reference to Exhibit 10.25 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2004 ((SEC File No. 000-50767)).                                                                                                                                                                      
|           
|            | 10 | .24*        |  | Form of Incentive Stock Option Agreement granted under 2004
    Stock Incentive Plan (Incorporated by Reference to
    Exhibit 10.25 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2004 ((SEC
    File No. 000-50767)).                                                                                                                                                                                                 
|           
|            | 10 | .25*        |  | Form of Nonstatutory Stock Option Agreement granted under 2004
    Stock Incentive Plan (Incorporated by Reference to
    Exhibit 10.25 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2004 ((SEC
    File No. 000-50767)).                                                                                                                                                                                              
|           
|            | 10 | .26*        |  | Form of Restricted Stock Agreement granted under 2004 Stock
    Incentive Plan, as amended (Incorporated by Reference to
    Exhibit 99.1 to the Registrants Current Report on
    Form 8-K dated December 26, 2006 ((SEC File
    No. 000-50767)).                                                                                                                                                                                                         
|           
|            | 10 | .27*        |  | Form of Nonstatutory Stock Option Agreement for a Non-Employee
    Director granted under the 2004 Stock Incentive Plan
    (Incorporated by Reference to Exhibit 10.25 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2004 ((SEC File No. 000-50767)).                                                                                                                                                              
|           
|            | 10 | .28*        |  | Employment Agreement, dated April 26, 2006 by and between
    the Registrant and Dana Hilt, M.D. (Incorporated by
    reference to Exhibit 99.1 to the Registrants Current
    Report on Form 8-K dated May 1, 2006 (SEC File
    No. 000-50767)).                                                                                                                                                                                                          
|           
|            | 10 | .29*        |  | Employment Agreement dated June 26, 2006 by and between the
    Registrant and Jeffrey E. Young (Incorporated by reference to
    Exhibit 99.2 to the Registrants Current Report on
    Form 8-K dated June 27, 2006 (SEC File
    No. 000-50767)).                                                                                                                                                                                                         
|           
|            | 10 | .30*        |  | Employment Agreement dated December 21, 2004 by and between
    the Registrant and Trevor Phillips, Ph.D. (Incorporated by
    reference to Exhibit 99.3 to the Registrants Current
    Report on Form 8-K dated December 21, 2004 (SEC File
    No. 000-50767)).                                                                                                                                                                                           
|           
|            | 10 | .31*        |  | Employment Agreement dated December 21, 2004 by and between
    the Registrant and Frank E. Thomas (Incorporated by reference to
    Exhibit 99.5 to the Registrants Current Report on
    Form 8-K dated December 21, 2004 (SEC File
    No. 000-50767)).                                                                                                                                                                                                  



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##### Table of Contents



|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                          
|----------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 10 | .32*        |  | Employment Agreement dated December 21, 2004 by and between
    the Registrant and Scott B. Townsend (Incorporated by reference
    to Exhibit 99.6 to the Registrants Current Report on
    Form 8-K dated December 21, 2004 (SEC File
    No. 000-50767)).                                                                                                            
|           
|            | 10 | .33+        |  | License Agreement between the Registrant and Beckman Coulter,
    Inc. dated January 10, 2005 (Incorporated by Reference to
    Exhibit 10.1 to the Registrants Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2004 ((SEC
    File No. 000-50767)).                                                                                                  
|           
|            | 10 | .34         |  | Warrant Agreement between the Registrant and Mellon Investor
    Services LLC as Warrant Agent, dated June 20, 2005
    (Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K filed on
    June 23, 2005 (SEC File No. 000-50767)).                                                                                              
|           
|            | 10 | .35         |  | Form of Warrant (Included in Exhibit 10.34).                                                                                                                                                                                                                                                                                                                             
|           
|            | 10 | .36         |  | Form of Securities Purchase Agreement between the Registrant and
    certain Purchasers, dated June 6, 2005 (Incorporated by
    reference to Exhibit 99.1 to the Registrants Current
    Report on Form 8-K filed on June 7, 2005 (SEC File
    No. 000-50767)).                                                                                                       
|           
|            | 10 | .37++       |  | Manufacturing Services Agreement between Patheon Pharmaceuticals
    Inc. and the Registrant, dated June 28, 2005 (Incorporated
    by Reference to Exhibit 10.3 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2005 ((SEC File No. 000-50767)).                                                                               
|           
|            | 10 | .38*        |  | Critical Therapeutics, Inc. Non-Employee Director Compensation
    and Reimbursement Policy.                                                                                                                                                                                                                                                                             
|           
|            | 10 | .39++       |  | Exclusive License Agreement, dated as of January 29, 2007,
    between the Registrant and Innovative Metabolics, Inc.
    (Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K dated
    January 29, 2007 (SEC File No. 000-50767)).                                                                                            
|           
|            | 10 | .40         |  | Warrant Agreement dated October 31, 2006 by and between the
    Registrant and Mellon Investor Services (Incorporated by
    reference to Exhibit 10.2 to the Registrants
    Quarterly Report on Form 10-Q for the period ended
    September 30, 2006 (SEC File No. 000-50767)).                                                                                      
|           
|            | 10 | .41*        |  | Consulting Agreement by and between the Registrant and M. Cory
    Zwerling, dated as of October 25, 2006 (Incorporated by
    reference to Exhibit 10.1 to the Registrants Current
    Report on Form 8-K dated October 25, 2006 (SEC File
    No. 000-50767)).                                                                                                        
|           
|            | 10 | .42*        |  | Critical Therapeutics, Inc. 2007 Company Goals.                                                                                                                                                                                                                                                                                                                          
|           
|            | 10 | .43*        |  | Critical Therapeutics, Inc. 2006 Cash Bonuses for Executive
    Officers.                                                                                                                                                                                                                                                                                                
|           
|            | 10 | .44*        |  | Critical Therapeutics, Inc. 2007 Salaries for Executive Officers.                                                                                                                                                                                                                                                                                                        
|           
|            | 10 | .45*        |  | Critical Therapeutics, Inc. Maximum Annual Cash Bonuses for
    Executive Officers.                                                                                                                                                                                                                                                                                      
|           
|            | 10 | .46         |  | Consulting Agreement by and between the Registrant and Kevin J.
    Tracey, M.D. dated January 31, 2001, as amended on
    January 16, 2003 (Incorporated by reference to
    Exhibit 10.17 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727)).                                                                                       
|           
|            | 10 | .47         |  | Approval Agreement dated March 7, 2006 by and between the
    Registrant and Kevin J. Tracey, M.D. (Incorporated by
    reference to Exhibit 10.20 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2005 (SEC File No. 000-50767)).                                                                                                
|           
|            | 10 | .48         |  | Amendment No. 2 to Consulting Agreement, Amendment
    No. 1 to Approval Agreement, and Mutual Release dated
    January 29, 2007 to the Consulting Agreement dated
    January 31, 2001 between the Registrant and Kevin J.
    Tracey, M.D., as amended, and the Approval Agreement dated
    March 7, 2006 by and between the Registrant and
    Kevin J. Tracey, M.D.
|           
|            | 21 | .1          |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                          
|           
|            | 23 | .1          |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                        
|           
|            | 31 | .1          |  | Certification of Principal Executive Officer and Principal
    Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of
    the Securities Exchange Act of 1934, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                          
|           
|            | 32 | .1          |  | Certification of Principal Executive Officer and Principal
    Financial Officer pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.                                                                                                                                                                       



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##### Table of Contents








| |   |                                                         
| | - | --------------------------------------------------------
| | * | Management contract or compensation plan or arrangement.



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



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