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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





Form 10-K


FOR ANNUAL AND TRANSITION REPORTS 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, 2004                                                 
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number: 000-50767





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)                      

Registrants telephone number, including area code:


(781) 402-5700





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


None.


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


Common Stock, $0.001 par value per share


(Title of Class)





þ o


o


o þ






DOCUMENTS INCORPORATED BY REFERENCE












---










CRITICAL THERAPEUTICS, INC.


ANNUAL REPORT


ON FORM 10-K


INDEX


|                                                     |  |                                                                                                                      |    |      |    | 
|---------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                     |  |                                                                                                                      |    | Page |   
|                                                     |  |                                                                                                                      |    |      |   
|PART I                                              
|Item 1.                                              |  | Business                                                                                                             |    |      | 1  | 
|Item 2.                                              |  | Properties                                                                                                           |    |      | 44 | 
|Item 3.                                              |  | Legal Proceedings                                                                                                    |    |      | 44 | 
|Item 4.                                              |  | Submission of Matters to a Vote of Security
    Holders                                                              |    |      | 44 | 
|EXECUTIVE OFFICERS OF THE REGISTRANT                 |  |                                                                                                                      | 45 |     
|                                                    
|PART II                                             
|Item 5.                                              |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |    |      | 46 | 
|Item 6.                                              |  | Selected Consolidated Financial Data                                                                                 |    |      | 47 | 
|Item 7.                                              |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |    |      | 49 | 
|Item 7A.                                             |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |    |      | 62 | 
|Item 8.                                              |  | Financial Statements and Supplementary
    Data                                                                      |    |      | 63 | 
|Item 9.                                              |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |    |      | 88 | 
|Item 9A.                                             |  | Controls and Procedures                                                                                              |    |      | 88 | 
|Item 9B.                                             |  | Other Information                                                                                                    |    |      | 88 | 
|                                                    
|PART III                                            
|Item 10.                                             |  | Directors and Executive Officers of the
    Registrant                                                               |    |      | 89 | 
|Item 11.                                             |  | Executive Compensation                                                                                               |    |      | 90 | 
|Item 12.                                             |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |    |      | 90 | 
|Item 13.                                             |  | Certain Relationships and Related
    Transactions                                                                   |    |      | 90 | 
|Item 14.                                             |  | Principal Accountant Fees and Services                                                                               |    |      | 90 | 
|                                                    
|PART IV                                             
|Item 15.                                             |  | Exhibits and Financial Statement
    Schedules                                                                       |    |      | 91 | 
|SIGNATURES                                           |  |                                                                                                                      | 92 |     
|Ex-10.25 Feasibility Study Agreement                
|Ex-10.26 Form of Incentive Stock Option Agreement   
|Ex-10.27 Form of Nonstatutory Stock Option Agreement
|Ex-10.28 Form of Restricted Stock Agreement         
|Ex-10.29 Form of Nonstatutory Stock Option Agreement
|Ex-10.41 Agreement for Manufacturing and Supply     
|Ex-10.42 2005 Company Goals                         
|Ex-21.1 Subsidiaries of the Registrant              
|Ex-23.1 Consent of Deloitte & Touche LLP            
|Ex-31.1 Section 302 Certification of CEO            
|Ex-31.2 Section 302 Certification of CFO            
|Ex-32.1 Section 906 Certification of CEO            
|Ex-32.2 Section 906 Certification of CFO            





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PART I


Cautionary Statement Regarding Forward-Looking Statements









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

Overview








| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | CTI-01. We are developing a small molecule product
    candidate, CTI-01, that we believe may be effective in
    regulating the inflammatory response. Results from preclinical
    studies suggest that CTI-01

1



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | inhibits the release of protein molecules called cytokines that
    are responsible for communication between cells in the body and
    are associated with conditions such as post-operative ileus,
    which is the loss of normal intestine movement following
    surgery, and the damage to vital organs that can occur in
    patients after cardiopulmonary bypass, a procedure commonly
    performed during heart surgery.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | HMGB1. We believe that a cytokine called HMGB1, or high
    mobility group box protein 1, may be an important target
    for the development of products to treat inflammation-mediated
    diseases because of the timing and the duration of its release
    from cells into the bloodstream. We are currently collaborating
    with MedImmune, Inc. on preclinical development of our
    monoclonal antibodies directed towards HMGB1 in a number of
    animal models. In addition, we are currently collaborating with
    Beckman Coulter, Inc. on development of a diagnostic directed
    towards HMGB1.                                                                                                                                                                                                                                                             
|
| |  | Cholinergic Anti-inflammatory Program. We are developing
    small molecules designed to inhibit the bodys inflammatory
    response by acting on the nicotinic α-7 cholinergic
    target, which is a cell receptor associated with the production
    of the cytokines that play a fundamental role in the
    inflammatory response. We believe that successful development of
    a product candidate targeting the nicotinic α-7
    cholinergic receptor could lead to an oral anti-cytokine therapy
    for acute and chronic diseases. We are also exploring the
    development of a medical device, similar to those already
    marketed for the treatment of epileptic seizures, to stimulate
    the vagus nerve, a nerve that links the brain with the major
    organs of the body, and induce an anti-inflammatory response by
    acting on the α-7 receptor.



Our Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maximize the commercial potential of ZYFLO. We are
    focused on successfully launching ZYFLO in the United States in
    the second half of 2005. We plan to build a marketing and sales
    infrastructure to promote ZYFLO and the controlled-release
    formulation of zileuton that we are developing for the treatment
    of asthma upon regulatory approval from the FDA. We believe that
    by targeting specialists rather than primary care physicians, we
    can successfully promote ZYFLO with an initial sales force of
    fewer than 100 sales representatives in the United States.
|
| |  | Expand the potential applications of zileuton. We believe
    that zileuton has potential therapeutic benefits in a range of
    diseases and conditions, such as acne, chronic obstructive
    pulmonary disease, or COPD, nasal polyposis and acute asthma
    exacerbations. We intend to expand the potential applications of
    zileuton through development of additional formulations,
    including controlled-release, intranasal and intravenous
    formulations.                                                                                                                            
|
| |  | Advance and expand our portfolio of product candidates.
    We intend to focus on developing products that address large
    unmet medical needs in the critical care market. We believe that
    our understanding of the cytokine cascade and its role in
    critical care diseases will enable us to continue                                                                                                                                                                                                                                                                                        

2



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | to develop and discover drug candidates with novel mechanisms of
    action that may address some of the unmet medical needs in
    critical care medicine. We believe our focus on diseases
    associated with the severe inflammatory response will allow us
    to pursue drug development and discovery programs across a
    number of therapeutic areas in an efficient manner.                                                                                                                                                                                        
|
| |  | Maximize the economic value of our product portfolio. We
    believe we can maximize the potential economic benefit to us of
    our product candidates by retaining sole or shared ownership of
    our product development opportunities. We intend to undertake
    selected strategic collaborations, such as our collaborations
    with MedImmune and Beckman Coulter, to develop projects that may
    be beyond our internal resources, while seeking to retain
    co-promotion or commercial rights in any such collaborations.                                     
|
| |  | Strategically in-license or acquire attractive development
    candidates or approved products. We intend to enhance our
    product pipeline and leverage the marketing and sales
    infrastructure that we are building through strategically
    in-licensing or acquiring product candidates or approved
    products for the critical care market. We believe our focus on
    critical care medicine and our targeted sales force will make us
    an attractive partner for companies seeking to out-license
    products or product candidates in our areas of focus.

Our Product Pipeline







Zileuton




3



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









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



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



4



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| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | 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 two hours after the first dose.                                                                    











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



5



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The three-month pivotal efficacy trial, in which
    409 patients received either the controlled-release
    formulation of zileuton or placebo, generated similar efficacy
    results to those seen in the ZYFLO pivotal trials. The trial
    demonstrated statistically significant improvements over
    placebo, in objective measures of asthma control, such as mean
    forced expiratory volume. The trial also showed a reduced need
    for bronchodilatory drugs as a rescue medication to alleviate
    uncontrolled symptoms;                                                     
|
| |  | The efficacy component of the six-month trial included
    757 patients and generated similar efficacy results to
    those seen in the ZYFLO pivotal trials. The trial demonstrated
    statistically significant improvements over a combination of
    placebo and the patients normal asthma therapies, in
    objective measures of asthma control, such as mean forced
    expiratory volume. In the trial, the controlled-release
    formulation of zileuton also showed a reduced need for
    bronchodilatory drugs as a rescue medication to alleviate
    uncontrolled symptoms; and
|
| |  | The safety data generated in a total of 1,335 patients from
    these two trials was comparable to safety data seen in the ZYFLO
    pivotal trials. The incidence of ALT levels greater than three
    times the level normally seen in the bloodstream in patients
    receiving zileuton was 2.1% and in all cases ALT levels resolved
    or returned towards normal in both the patients who continued
    and those who discontinued the therapy.                                                                                                                                          





| |                                    
| | -----------------------------------
| | Intravenous Formulation of Zileuton





6



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













Critical Care: The Inflammatory Response






| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | acute diseases and conditions that lead to admission to the ICU,
    such as sepsis, septic shock, post surgical ileus, the damage to
    vital organs resulting from cardiopulmonary bypass during
    surgery, trauma and burns; and

7



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| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | acute exacerbations of chronic diseases that frequently lead to
    hospitalization, such as rheumatoid arthritis, Crohns
    disease, acute pancreatitis and ulcerative colitis.










| |   |                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a CTI-01 program directed towards the development of a small
    molecule product candidate that directly affects the release of
    cytokines through a number of different mechanisms;                                                                  
|
| |  | an HMGB1 program directed towards a newly-discovered
    pro-inflammatory cytokine, HMGB1; and                                                                                                                                                            
|
| |  | a cholinergic anti-inflammatory program directed towards a
    receptor that we believe regulates the release of the cytokines
    that play a fundamental role in the inflammatory response,
    including TNFα, in response to an inflammatory stimulus.

8



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| |               
| | --------------
| | CTI-01 Program



in vivo in vitro.




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





| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | damage to vital organs that can occur in patients after
    cardiopulmonary bypass, a procedure commonly performed during
    cardiothoracic surgery; and                                                                                                                    
|
| |  | post-operative ileus, which is the loss of normal contractile
    movement in the intestine due to inflammation of the muscle
    layers of the intestine after abdominal surgery, which is one of
    the major reasons why patients stay in the hospital after
    surgery.

9



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| |                
| | ---------------
| | Clinical Trials





| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | a reduction in the TNFα response to bacterial endotoxin
    challenge compared to placebo; and
|
| |  | a maximum tolerated dose of 160mg/kg infused over 12 hours.                                   







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









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





10



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

in vitro in
vivo.








| |                                      
| | -------------------------------------
| | Cholinergic Anti-inflammatory Program







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





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

Small Molecule.


11



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Electronic Vagal Stimulation.


Collaborations




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











12



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







Research and Development






Sales and Marketing






13



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Manufacturing








| |       
| | ------
| | Rhodia



14



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| |        
| | -------
| | Patheon





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





License and Royalty Agreements




15



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







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





| |            
| | -----------
| | North Shore



16



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| |                      
| | ---------------------
| | University of Florida





| |                         
| | ------------------------
| | University of Pittsburgh





| |        
| | -------
| | Xanthus





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



Proprietary Rights




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|                              |  |        |    |  |         |  |    |         |  |  |         |  |  |       |    |  |  |  |     | 
|----------------------------- |  | ------ | -- |  | ------- |  | -- | ------- |  |  | ------- |  |  | ----- | -- |  |  |  | --- | 
|                              |  | U.S.   |    |  | Foreign |  |    |        
|                              |  |        |    |  |         |  |    | Program | 
|                              |  | Issued |    |  | Pending |  |    | Issued  |  |  | Pending |  |  | Total |   
|                              |  |        |    |  |         |  |    |         |  |  |         |  |  |       |   
|Zileuton                      |  |        | 15 |  |         |  | 1  |         |  |  | 36      |  |  |       | 9  |  |  |  | 61  | 
|HMGB1                         |  |        | 3  |  |         |  | 13 |         |  |  |        |  |  |       | 27 |  |  |  | 43  | 
|CTI-01                        |  |        | 1  |  |         |  | 6  |         |  |  | 1       |  |  |       | 24 |  |  |  | 32  | 
|Cholinergic anti-inflammatory |  |        | 3  |  |         |  | 9  |         |  |  | 5       |  |  |       | 13 |  |  |  | 30  | 
|Total                         |  |        | 22 |  |         |  | 29 |         |  |  | 42      |  |  |       | 73 |  |  |  | 166 | 







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





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Regulatory Matters














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



23



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



Competition










24



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Employees




Available Information




25



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Factors That May Affect Future Results




| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the market is not receptive to ZYFLO or the
    controlled-release formulation of zileuton upon their commercial
    introduction, we will be unable to generate significant
    revenues.













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| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Our business will depend heavily on the commercial success
    of ZYFLO and the controlled-release formulation of
    zileuton.





| |                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not successfully recruit and train qualified
    sales and marketing personnel and build a marketing and sales
    infrastructure, our ability to independently launch and market
    our product candidates, including ZYFLO, will be impaired. We
    will be required to incur significant costs and devote
    significant efforts to establish a direct sales force.







| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | If the market is not receptive to our other 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 or other improvement over existing comparable
    products;                                                               

27



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| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | pricing and cost effectiveness;                                                 
|
| |  | the ability to be produced in commercial quantities at
    acceptable costs; 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
|
| |  | in-licensing or acquisition of product candidates or approved
    products for the critical care market.                               





| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the research methodology used may not be successful in
    identifying potential product candidates; or                                                                                  
|
| |  | potential product candidates may, on further study, be shown to
    have harmful side effects or other characteristics that indicate
    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; or                                
|
| |  | we may be unable to identify suitable products or product
    candidates within our areas of expertise.                                            





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



28



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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.                                                                                       





| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As we evolve from a company primarily involved in
    discovery and development to one also involved in
    commercialization activities, we may encounter difficulties in
    managing our growth and expanding our operations
    successfully.



29



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







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



30



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













| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are subject to unfavorable pricing regulations or
    third-party reimbursement practices, we might not be able to
    recover the development and other costs of our product
    candidates.



31



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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.





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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 ZYFLO, the controlled-release
    formation of zileuton or our other product candidates under
    development, our business will be unsuccessful.











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



33



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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 or adverse
    device effects experienced by participants in our clinical
    trials; 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 review.
    If we fail to comply with continuing U.S. and applicable foreign
    regulations, we could lose those approvals and the sale of our
    product candidates could be suspended.





| |                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we or our third-party manufacturers or service
    providers fail to comply with regulatory laws and regulations,
    we or they could be subject to enforcement actions, which could
    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;                         

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| |   |                              
| | - | -----------------------------
| |  | injunctions; and             
|
| |  | civil and criminal penalties.

Risks Relating to Our Dependence on Third Parties




| |                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on MedImmune and Beckman Coulter and expect to
    depend on additional collaborators in the future for a
    significant 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.







36



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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 have no manufacturing experience or resources and we
    must incur significant costs to develop this expertise or rely
    on third parties to manufacture our product candidates.







37



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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 or clearances for our product candidates; 
|
| |  | we may be required to cease distribution or recall some or all
    batches of our product candidates; and           
|
| |  | ultimately, we may not be able to meet commercial demands for
    our product candidates.                           



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





| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | 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.



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Risks Relating to Intellectual Property and Licenses




| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are not able to obtain and enforce patent and other
    intellectual property protection for our discoveries, 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.











| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Litigation regarding patents, patent applications and
    other proprietary rights is expensive and time consuming. If we
    are unsuccessful in litigation concerning patents or patent
    applications owned or co-owned by us or licensed to us, 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 inventions, including those relating to
    our products; and/or                                
|
| |  | the enforceability, validity or scope of protection offered by
    our patents, including those relating to our products.

39



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| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                 









| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 HMGB1
    products and some of our other product candidates.



40



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| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidentiality agreements with employees and others may
    not adequately prevent disclosure of trade secrets and other
    proprietary information.



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 costs and timing of the commercial launch of ZYFLO, if and
    when it is approved by regulatory authorities;                                                                                                         
|
| |  | the costs and timing of the development, regulatory submission
    and approval and the commercial launch of the controlled-release
    formulation of zileuton, if and when it is approved by
    regulatory authorities;
|
| |  | the scope and results of our clinical trials;                                                                                                                                                                             
|
| |  | advancements of other product candidates into development;                                                                                                                                                                
|
| |  | potential acquisition or in-licensing of other products or
    technologies;                                                                                                                                              
|
| |  | the time and costs involved in preparing, submitting and
    obtaining regulatory approvals;                                                                                                                              
|
| |  | the timing, receipt and amount of milestone and other payments,
    if any, from MedImmune or future collaborators;                                                                                                       
|
| |  | the timing, receipt and amount of sales and royalties, if any,
    from our potential products;                                                                                                                           

41



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| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | continued progress in our research and development programs, as
    well as the magnitude of these programs;
|
| |  | the cost of manufacturing, marketing and sales activities;                                                  
|
| |  | the costs involved in preparing, filing, prosecuting,
    maintaining and enforcing patent claims;          
|
| |  | the cost of obtaining and maintaining licenses to use patented
    technologies; and                        
|
| |  | our ability to establish and maintain additional collaborative
    arrangements.                            









| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in or interpretations of accounting rules and
    regulations, such as expensing of employee stock options, could
    result in unfavorable accounting charges or require us to change
    our compensation policies.



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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.





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





| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 agreements;
|
| |  | 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 approval of
    our product candidates; and                                                                                                                                            
|
| |  | general and industry-specific economic conditions that may
    affect our research and development expenditures.                                                                                                                         





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





| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | 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.          

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| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 and hinder efforts by a
    third party to acquire a controlling interest in us.












|        |           
|------- | ----------
|ITEM 2. | PROPERTIES








|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS








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



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EXECUTIVE OFFICERS OF THE REGISTRANT




|                        |  |     |    |  |          |                                                                                 
|----------------------- |  | --- | -- |  | -------- | --------------------------------------------------------------------------------
|Name                    |  | Age |    |  | Position
|                        |  |     |    |  |         
|Paul D. Rubin, M.D.     |  |     | 51 |  |          | President and Chief Executive Officer                                           
|Walter Newman, Ph.D.    |  |     | 59 |  |          | Senior Vice President of Research and Discovery and Chief
    Scientific Officer
|Trevor Phillips, Ph.D.  |  |     | 43 |  |          | Senior Vice President of Operations and Chief Operating Officer                 
|Frank E. Thomas         |  |     | 35 |  |          | Senior Vice President of Finance, Chief Financial Officer and
    Treasurer     
|Frederick Finnegan      |  |     | 45 |  |          | Senior Vice President of Sales and Marketing                                    
|Scott B. Townsend, J.D. |  |     | 38 |  |          | Vice President of Legal Affairs and Secretary                                   

Paul Rubin, M.D.


Walter Newman, Ph.D.


Trevor Phillips, Ph.D.


Frank E. Thomas


45



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Frederick Finnegan


Scott B. Townsend





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s
Common Stock and Related Stockholder Matters




|                                               |  |      |      |  |     |   |      | 
|---------------------------------------------- |  | ---- | ---- |  | --- | - | ---- | 
|Year Ended December 31, 2004                   |  | High |      |  | Low |  
|                                               |  |      |      |  |     |  
|Second Quarter (from May 27 to June 30)        |  | $    | 7.65 |  |     | $ | 6.71 | 
|Third Quarter (from July 1 to September 30)    |  | $    | 7.05 |  |     | $ | 4.74 | 
|Fourth Quarter (from October 1 to December 31) |  | $    | 8.49 |  |     | $ | 5.25 | 





Calculation of Aggregate Market Value of Non-Affiliate
Shares




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




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





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








|        |                                     
|------- | ------------------------------------
|ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA





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|                                                             |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |        |         |   |   |     |           |  
|------------------------------------------------------------ | ----------------------------------------------------- | ----------------------------------------------- | ------- | ------------- | ----------- | - | ------- | ------- | - | - | ------ | ------- | - | ----------------- | ------ | ------- | - | - | --- | --------- | -
|                                                             |                                                       |                                                 |         | July 14, 2000 |            
|                                                             |                                                       | Year Ended December 31,                         |         |               | (Inception) |  
|                                                             |                                                       |                                                 |         |               | Through     |  
|                                                             |                                                       | 2004                                            |         |               | 2003        |   |         | 2002    |   |   | 2001   |         |   | December 31, 2000 |       
|                                                             |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |       
|                                                             |                                                       | (In thousands, except share and per share data) |        
|Statements of Operations Data:                               |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |        |         |   |   |     |          
|Revenue under collaboration agreement                        |                                                       | $                                               | 4,436   |               |             | $ | 1,021   |         |   | $ |       |         |   | $                 |       |         |   | $ |    |          
|                                                             |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |       
|Research and development expenses                            |                                                       |                                                 | 25,578  |               |             |   | 17,458  |         |   |   | 3,284  |         |   |                   | 957    |         |   |   | 25  |          
|General and administrative expenses                          |                                                       |                                                 | 10,878  |               |             |   | 3,771   |         |   |   | 1,792  |         |   |                   | 605    |         |   |   | 41  |          
|                                                             |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |       
|Total operating expenses                                     |                                                       |                                                 | 36,456  |               |             |   | 21,229  |         |   |   | 5,076  |         |   |                   | 1,562  |         |   |   | 66  |          
|                                                             |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |       
|Loss from operations                                         |                                                       |                                                 | (32,020 | )             |             |   | (20,208 | )       |   |   | (5,076 | )       |   |                   | (1,562 | )       |   |   | (66 | )        
|                                                             |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |       
|Interest income                                              |                                                       |                                                 | 1,098   |               |             |   | 191     |         |   |   | 149    |         |   |                   | 119    |         |   |   |    |          
|Interest expense                                             |                                                       |                                                 | (172    | )             |             |   | (93     | )       |   |   | (8     | )       |   |                   | (5     | )       |   |   |    |          
|                                                             |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |       
|Net loss                                                     |                                                       |                                                 | (31,094 | )             |             |   | (20,110 | )       |   |   | (4,935 | )       |   |                   | (1,448 | )       |   |   | (66 | )        
|Accretion of dividends and offering costs on preferred stock |                                                       |                                                 | (2,209  | )             |             |   | (2,264  | )       |   |   | (1,032 | )       |   |                   | (432   | )       |   |   |    |          
|                                                             |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |       
|Net loss available to common stockholders                    |                                                       | $                                               | (33,303 | )             |             | $ | (22,374 | )       |   | $ | (5,967 | )       |   | $                 | (1,880 | )       |   | $ | (66 | )        
|                                                             |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |       
|Net loss per common share:                                   |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |        |         |   |   |     |          
|                                                             | Basic and diluted                                     |                                                 | $       | (2.28         | )           |   | $       | (33.99  | ) |   | $      | (23.74  | ) |                   | $      | (2.63   | ) |   | $   | (0.05     | )
|                                                             |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |       
|                                                             | Weighted-average basic and diluted shares outstanding |                                                 |         | 14,631,371    |             |   |         | 658,204 |   |   |        | 251,346 |   |                   |        | 714,820 |   |   |     | 1,226,664 |  
|                                                             |                                                       |                                                 |         |               |             |   |         |         |   |   |        |         |   |                   |       

|                                                  |  |                    |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |     |  
|------------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | --- | -
|                                                  |  | As of December 31, |        
|                                                  |  |                    |        
|                                                  |  | 2004               |         |   | 2003 |   |         | 2002 |  |   | 2001   |   |  | 2000 |       
|                                                  |  |                    |         |   |      |   |         |      |  |   |        |   |  |      |       
|                                                  |  | (In thousands)     |        
|Balance Sheet Data:                               |  |                    |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |     |  
|Cash, cash equivalents and short-term investments |  | $                  | 78,829  |   |      | $ | 40,078  |      |  | $ | 13,539 |   |  | $    | 8,580  |   |  | $ |    |  
|Working capital                                   |  |                    | 64,357  |   |      |   | 25,218  |      |  |   | 13,017 |   |  |      | 8,501  |   |  |   | (66 | )
|Total assets                                      |  |                    | 83,114  |   |      |   | 45,054  |      |  |   | 14,382 |   |  |      | 8,638  |   |  |   |    |  
|Long term debt, net of current portion            |  |                    | 1,367   |   |      |   | 720     |      |  |   | 202    |   |  |      |       |   |  |   |    |  
|Redeemable convertible preferred stock            |  |                    |        |   |      |   | 51,395  |      |  |   | 21,080 |   |  |      | 10,270 |   |  |   |    |  
|Accumulated deficit                               |  |                    | (58,527 | ) |      |   | (27,433 | )    |  |   | (7,323 | ) |  |      | (1,517 | ) |  |   | (69 | )
|Total stockholders equity (deficit)              |  |                    | 65,408  |   |      |   | (24,851 | )    |  |   | (7,554 | ) |  |      | (1,750 | ) |  |   | (66 | )

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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 accompanying notes appearing 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 under the caption Factors That May
Affect Future Results in this report.


Financial Operations Overview












Revenue.


Research and Development Expenses.


49



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General and Administrative Expenses.




Deferred Stock-Based Compensation Expense.




Critical Accounting Policies




50



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| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                         



Revenue Recognition.


Accrued Expenses.


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


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Accounting for Stock-Based
Compensation Accounting Principles Board Opinion, Accounting for Equity Instruments that Are
Issued to Other than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services,


Income Taxes.


Results of Operations




| |                                       
| | --------------------------------------
| | Years Ended December 31, 2004 and 2003

Revenue Under Collaboration Agreement.


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Research and Development Expenses.




|                                          |  |                |        |  |      |   |        | 
|----------------------------------------- |  | -------------- | ------ |  | ---- | - | ------ | 
|                                          |  | Year Ended     |       
|                                          |  | December 31,   |       
|                                          |  |                |       
|                                          |  | 2004           |        |  | 2003 |  
|                                          |  |                |        |  |      |  
|                                          |  | (In thousands) |       
|CTI-01                                    |  | $              | 3,329  |  |      | $ | 1,579  | 
|HMGB1                                     |  |                | 1,702  |  |      |   | 3,483  | 
|Cholinergic anti-inflammatory             |  |                | 1,533  |  |      |   | 630    | 
|Zileuton                                  |  |                | 12,369 |  |      |   | 3,269  | 
|General research and development expenses |  |                | 4,637  |  |      |   | 3,589  | 
|Stock-based compensation expense          |  |                | 2,008  |  |      |   | 4,908  | 
|                                          |  |                |        |  |      |  
|Total research and development expenses   |  | $              | 25,578 |  |      | $ | 17,458 | 
|                                          |  |                |        |  |      |  







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Zileuton. During the year ended December 31, 2004,
    we incurred substantial costs for the development and
    commercialization of both ZYFLO and the controlled-release
    formulation of zileuton, including costs associated with the
    technology transfer and scale-up of manufacturing of API and
    tablets for both formulations. Continuing throughout 2005, we
    expect our research and development expenses for zileuton will
    principally relate to the scale up and manufacture of
    registration batches of the controlled-release formulation of
    zileuton and the anticipated clinical

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | trials of the controlled-release and intravenous formulations of
    zileuton. We are also pursuing development of zileuton for
    additional indications, including acne. We initiated a
    Phase II clinical trial in moderate to severe inflammatory
    acne patients during 2004 and expect to incur additional costs
    in conducting further development of zileuton for this
    indication in 2005. We believe that the aggregate technology
    transfer and validation costs associated with the change of
    manufacturing sites for ZYFLO and the controlled-release
    formulation of zileuton will be approximately
    $10.5 million, of which $7.2 million had been incurred
    through December 31, 2004. However, the actual costs and
    timing for the development and commercialization of our zileuton
    products are highly uncertain, subject to risk and will change
    depending upon the clinical indication developed and the
    development strategy adopted. As a result, we are unable to
    estimate the costs or the timing of advancing our zileuton
    products through clinical development and commercialization.                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | CTI-01. Expenses for CTI-01 increased in the year ended
    December 31, 2004 primarily due to costs associated with
    the completion of the first Phase I clinical trial that we
    initiated in 2003 and completed in 2004 in the United Kingdom
    and the costs of our second Phase I clinical trial that we
    initiated and completed in 2004 in the United States. In
    addition, we incurred costs in 2004 related to manufacturing of
    clinical supplies of CTI-01 in preparation for our Phase II
    clinical trial, which we initiated in February 2005. We expect
    our costs for this program will continue to increase in 2005 as
    we conduct our Phase II clinical trial of CTI-01, including
    the 150-patient trial in patients which we initiated in February
    2005. These trials and the other development work required for
    this program will require significant expenditures before we can
    seek regulatory approval. We estimate that the total direct
    costs that we will need to incur to advance CTI-01 through
    clinical development will be at least $25.0 million.
    However, the actual costs and timing of clinical trials and
    associated activities to enable a regulatory submission are
    highly uncertain, subject to risk and will change depending upon
    the clinical indication developed and the development strategy
    adopted. As a result, we believe that these estimated direct
    costs may change significantly as the product advances through
    clinical development.
|
| |  | HMGB1. Expenses for the research and development of
    HMGB1-inhibiting products decreased significantly in the year
    ended December 31, 2004 primarily due to the collaboration
    agreement entered into with MedImmune in the second half of
    2003. As part of the agreement, MedImmune is funding a
    significant portion of the development costs including those
    incurred by us subject to certain annual limitations. We
    currently anticipate that most, if not all, research and
    development costs in 2005 will continue to be covered by
    MedImmune. However, we expect to undertake some internal
    research and preclinical testing, and we cannot be certain that
    the research payments received from MedImmune will fully cover
    the costs associated with these activities. Because our 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. As a result, we are not able
    to estimate the costs or the timing of advancing an
    HMGB1-inhibiting product or products through clinical
    development.                                                                                                                                                                                                                                          
|
| |  | Cholinergic anti-inflammatory. Expenses for our
    cholinergic anti-inflammatory program increased in the year
    ended December 31, 2004 primarily due to costs associated
    with our efforts to develop small molecules and a medical device
    to stimulate the vagus nerve. We anticipate that significant
    additional expenditures will be required to advance any product
    candidate or device through preclinical and clinical
    development. However, because these projects are 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 and the development strategy adopted. As a result, we
    are unable to estimate the costs or the timing of advancing a
    small molecule or device from our cholinergic anti-inflammatory
    program through clinical development.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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General and Administrative Expenses.




| |   |                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a $2.8 million increase in personnel costs primarily as a
    result of the increase in the number of employees performing
    general and administrative functions from nine employees at
    December 31, 2003 to thirty-two employees at
    December 31, 2004;
|
| |  | a $349,000 increase in fees for professional services associated
    with our licensing and other corporate activity;                                                                                                                                             
|
| |  | a $415,000 increase in directors and officers insurance costs as
    a result of an increase in premiums following our initial public
    offering;                                                                                                               
|
| |  | a $1.7 million increase in facility and equipment costs as
    a result of our move in April 2004 to a larger facility;                                                                                                                                           
|
| |  | a $419,000 increase in cancellation of employee loans and
    gross-up payments for state and federal taxes; and                                                                                                                                                  
|
| |  | a $1.4 million increase in stock-based compensation expense.                                                                                                                                                                                                      



Interest Income and Expense.


Accretion of Dividends and Offering Costs on Preferred
Stock.




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

Revenue Under Collaboration Agreement.


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Research and Development Expenses.




|                                          |  |                |        |  |      |   |       | 
|----------------------------------------- |  | -------------- | ------ |  | ---- | - | ----- | 
|                                          |  | Year Ended     |       
|                                          |  | December 31,   |       
|                                          |  |                |       
|                                          |  | 2003           |        |  | 2002 |  
|                                          |  |                |        |  |      |  
|                                          |  | (In thousands) |       
|CTI-01                                    |  | $              | 1,579  |  |      | $ | 1,793 | 
|HMGB1                                     |  |                | 3,483  |  |      |   | 428   | 
|Cholinergic anti-inflammatory             |  |                | 630    |  |      |   | 62    | 
|Zileuton                                  |  |                | 3,269  |  |      |   |      | 
|General research and development expenses |  |                | 3,589  |  |      |   | 881   | 
|Stock-based compensation expense          |  |                | 4,908  |  |      |   | 120   | 
|                                          |  |                |        |  |      |  
|Total research and development expenses   |  | $              | 17,458 |  |      | $ | 3,284 | 
|                                          |  |                |        |  |      |  









| |   |                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Zileuton. In 2003, we incurred costs with respect to the
    development of the controlled-release formulation of zileuton,
    including costs associated with the technology transfer relating
    to the manufacture of zileuton, including the API and the
    controlled-release tablets.
|
| |  | CTI-01. Expenses for CTI-01 increased in 2003 primarily
    due to costs associated with the Phase I clinical trial of
    CTI-01 that we conducted in 2003.                                                                                                                                  
|
| |  | HMGB1. Expenses for HMGB1 increased significantly in 2003
    primarily due to costs associated with the research and
    development of HMGB1-inhibiting products.                                                                                                                           
|
| |  | Cholinergic Anti-inflammatory. Expenses for our
    cholinergic anti-inflammatory program increased in 2003
    primarily due to costs associated with our efforts to develop
    small molecules and a medical device to stimulate the vagus
    nerve.                                      

General and Administrative Expenses.


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Interest Income and Expense.


Accretion of Dividends and Offering Costs on Preferred
Stock.


Liquidity and Capital Resources




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









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







58



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





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





| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the costs and timing of the commercial launch of ZYFLO, if and
    when it is approved by regulatory authorities;                                                                 
|
| |  | the costs and timing of the development and the commercial
    launch of the controlled-release formulation of zileuton, if and
    when it is approved by regulatory authorities;
|
| |  | the scope and results of our clinical trials;                                                                                                                                     
|
| |  | advancement of our other product candidates into development;                                                                                                                     
|
| |  | potential acquisition or in-licensing of other products or
    technologies;                                                                                                      
|
| |  | the time and costs involved in obtaining regulatory approvals;                                                                                                                    
|
| |  | 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;                                                                      
|
| |  | the cost of manufacturing, marketing and sales activities;                                                                                                                        
|
| |  | the costs involved in preparing, filing, prosecuting,
    maintaining and enforcing patent claims;                                                                                
|
| |  | the cost of obtaining and maintaining licenses to use patented
    technologies; and                                                                                              
|
| |  | our ability to establish and maintain additional collaborative
    arrangements.                                                                                                  





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



|                                            |  |                        |        |           |          |   |        |             |  |          |            |  |            |       |       |  |  |   |       | 
|------------------------------------------- |  | ---------------------- | ------ | --------- | -------- | - | ------ | ----------- |  | -------- | ---------- |  | ---------- | ----- | ----- |  |  | - | ----- | 
|                                            |  | Payments Due by Period |       
|                                            |  |                        |       
|                                            |  |                        |        | Less than |          |   | One to |             |  | Three to |            |  | After Five |      
|Contractual Obligations                     |  | Total                  |        |           | One Year |   |        | Three Years |  |          | Five Years |  |            | Years |      
|                                            |  |                        |        |           |          |   |        |             |  |          |            |  |            |       |      
|                                            |  | (In thousands)         |       
|Short and long term debt                    |  | $                      | 2,204  |           |          | $ | 837    |             |  | $        | 1,367      |  |            | $     |      |  |  | $ |      | 
|Research and license agreements             |  |                        | 7,995  |           |          |   | 695    |             |  |          | 256        |  |            |       | 234   |  |  |   | 6,810 | 
|Consulting agreements                       |  |                        | 760    |           |          |   | 413    |             |  |          | 347        |  |            |       |      |  |  |   |      | 
|Manufacturing and clinical trial agreements |  |                        | 7,317  |           |          |   | 6,443  |             |  |          | 874        |  |            |       |      |  |  |   |      | 
|Operating lease obligations                 |  |                        | 5,622  |           |          |   | 1,503  |             |  |          | 2,613      |  |            |       | 1,506 |  |  |   |      | 
|                                            |  |                        |        |           |          |   |        |             |  |          |            |  |            |       |      
|Total contractual cash obligations          |  | $                      | 23,898 |           |          | $ | 9,891  |             |  | $        | 5,457      |  |            | $     | 1,740 |  |  | $ | 6,810 | 
|                                            |  |                        |        |           |          |   |        |             |  |          |            |  |            |       |      









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Effects of Inflation




Recent Accounting Pronouncements


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


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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 |                                                                                                              |      | 64 |   
|CONSOLIDATED FINANCIAL STATEMENTS:                          |                                                                                                              |      |    |   
|                                                            | Consolidated Balance Sheets                                                                                  |      |    | 65 | 
|                                                            | Consolidated Statements of Operations                                                                        |      |    | 66 | 
|                                                            | Consolidated Statements of Redeemable
    Convertible Preferred Stock and Stockholders Equity
    (Deficit) |      |    | 67 | 
|                                                            | Consolidated Statements of Cash Flows                                                                        |      |    | 69 | 
|                                                            | Notes to Consolidated Financial
    Statements                                                               |      |    | 70 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY





CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |   |        |         |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------ | ------- | ------ | - | ------ | ------- | ------- | -
|                                                                                                                                                                                                        |                                                                                                                                                     | As of December 31,                   |       
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |       
|                                                                                                                                                                                                        |                                                                                                                                                     | 2004                                 |        |         | 2003   |  
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  
|                                                                                                                                                                                                        |                                                                                                                                                     | In thousands                         |       
|ASSETS                                                                                                                                                                                                 
|CURRENT ASSETS:                                                                                                                                                                                         |                                                                                                                                                     |                                      |        |         |        |   |        |        
|                                                                                                                                                                                                        | Cash and cash equivalents                                                                                                                           |                                      | $      | 11,980  |        |   | $      | 40,078  |        
|                                                                                                                                                                                                        | Amount due under collaboration agreement                                                                                                            |                                      |        | 16      |        |   |        | 2,500   |        
|                                                                                                                                                                                                        | Short-term investments                                                                                                                              |                                      |        | 66,849  |        |   |        |        |        
|                                                                                                                                                                                                        | Prepaid expenses and other                                                                                                                          |                                      |        | 1,851   |        |   |        | 430     |        
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  
|                                                                                                                                                                                                        |                                                                                                                                                     | Total current assets                 |        |         | 80,696 |   |        |         | 43,008  |  
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  
|FIXED ASSETS, NET                                                                                                                                                                                       |                                                                                                                                                     |                                      | 2,205  |         |        |   | 1,556  |        
|NOTE RECEIVABLE FROM OFFICER                                                                                                                                                                            |                                                                                                                                                     |                                      |       |         |        |   | 50     |        
|OTHER ASSETS                                                                                                                                                                                            |                                                                                                                                                     |                                      | 213    |         |        |   | 440    |        
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  
|TOTAL                                                                                                                                                                                                   |                                                                                                                                                     | $                                    | 83,114 |         |        | $ | 45,054 |        
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  
|                                                                                                                                                                                                       
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                         
|CURRENT LIABILITIES:                                                                                                                                                                                    |                                                                                                                                                     |                                      |        |         |        |   |        |        
|                                                                                                                                                                                                        | Current portion of long-term debt                                                                                                                   |                                      | $      | 837     |        |   | $      | 552     |        
|                                                                                                                                                                                                        | Accounts payable                                                                                                                                    |                                      |        | 4,218   |        |   |        | 323     |        
|                                                                                                                                                                                                        | Accrued license fees                                                                                                                                |                                      |        |        |        |   |        | 4,460   |        
|                                                                                                                                                                                                        | Accrued expenses                                                                                                                                    |                                      |        | 2,741   |        |   |        | 977     |        
|                                                                                                                                                                                                        | Revenue deferred under collaboration agreement                                                                                                      |                                      |        | 8,543   |        |   |        | 11,478  |        
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  
|                                                                                                                                                                                                        |                                                                                                                                                     | Total current liabilities            |        |         | 16,339 |   |        |         | 17,790  |  
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  
|COMMITMENTS (Note 12)                                                                                                                                                                                   |                                                                                                                                                     |                                      |        |         |        |   |        |        
|LONG-TERM DEBT, less current portion                                                                                                                                                                    |                                                                                                                                                     |                                      | 1,367  |         |        |   | 720    |        
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  
|REDEEMABLE CONVERTIBLE PREFERRED STOCK 
    par value $0.001; authorized 0 shares in 2004 and
    70,000,000 shares in 2003; issued and outstanding
    0 shares in 2004 and 40,355,167 shares in 2003 |                                                                                                                                                     |                                      |       |         |        |   | 51,395 |        
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  
|STOCKHOLDERS EQUITY (DEFICIT):                                                                                                                                                                         |                                                                                                                                                     |                                      |        |         |        |   |        |        
|                                                                                                                                                                                                        | Common stock, par value $0.001; authorized
    90,000,000 shares; issued and outstanding
    24,085,481 shares in 2004 and 1,565,353 shares in 2003 |                                      |        | 24      |        |   |        | 2       |        
|                                                                                                                                                                                                        | Preferred stock, par value $0.001; authorized
    5,000,000 shares in 2004; no shares issued and outstanding
    in 2004                            |                                      |        |        |        |   |        |        |        
|                                                                                                                                                                                                        | Additional paid-in capital                                                                                                                          |                                      |        | 130,374 |        |   |        | 11,156  |        
|                                                                                                                                                                                                        | Deferred stock-based compensation                                                                                                                   |                                      |        | (6,101  | )      |   |        | (8,536  | )      
|                                                                                                                                                                                                        | Due from stockholders                                                                                                                               |                                      |        |        |        |   |        | (40     | )      
|                                                                                                                                                                                                        | Accumulated deficit                                                                                                                                 |                                      |        | (58,527 | )      |   |        | (27,433 | )      
|                                                                                                                                                                                                        | Accumulated other comprehensive loss                                                                                                                |                                      |        | (362    | )      |   |        |        |        
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  
|                                                                                                                                                                                                        |                                                                                                                                                     | Total stockholders equity (deficit) |        |         | 65,408 |   |        |         | (24,851 | )
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  
|TOTAL                                                                                                                                                                                                   |                                                                                                                                                     | $                                    | 83,114 |         |        | $ | 45,054 |        
|                                                                                                                                                                                                        |                                                                                                                                                     |                                      |        |         |        |  



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                            |                            |                                |         |            |        |   |         |         |        |   |        |         |       | 
|--------------------------------------------------------------------------- | -------------------------- | ------------------------------ | ------- | ---------- | ------ | - | ------- | ------- | ------ | - | ------ | ------- | ----- | 
|                                                                            |                            | Year Ended December 31,        |        
|                                                                            |                            |                                |        
|                                                                            |                            | 2004                           |         |            | 2003   |   |         | 2002    |       
|                                                                            |                            |                                |         |            |        |   |         |         |       
|                                                                            |                            | In thousands, except share and |        
|                                                                            |                            | per share data                 |        
|REVENUE UNDER COLLABORATION AGREEMENT                                       |                            | $                              | 4,436   |            |        | $ | 1,021   |         |        | $ |       |        
|                                                                            |                            |                                |         |            |        |   |         |         |       
|OPERATING EXPENSES:                                                         |                            |                                |         |            |        |   |         |         |        |   |        |        
|                                                                            | Research and development   |                                |         | 25,578     |        |   |         | 17,458  |        |   |        | 3,284   |      
|                                                                            | General and administrative |                                |         | 10,878     |        |   |         | 3,771   |        |   |        | 1,792   |      
|                                                                            |                            |                                |         |            |        |   |         |         |       
|                                                                            |                            | Total operating expenses       |         |            | 36,456 |   |         |         | 21,229 |   |        |         | 5,076 | 
|                                                                            |                            |                                |         |            |        |   |         |         |       
|LOSS FROM OPERATIONS                                                        |                            |                                | (32,020 | )          |        |   | (20,208 | )       |        |   | (5,076 | )      
|INTEREST INCOME                                                             |                            |                                | 1,098   |            |        |   | 191     |         |        |   | 149    |        
|INTEREST EXPENSE                                                            |                            |                                | (172    | )          |        |   | (93     | )       |        |   | (8     | )      
|                                                                            |                            |                                |         |            |        |   |         |         |       
|NET LOSS                                                                    |                            |                                | (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                                   |                            | $                              | (33,303 | )          |        | $ | (22,374 | )       |        | $ | (5,967 | )      
|                                                                            |                            |                                |         |            |        |   |         |         |       
|NET LOSS AVAILABLE TO COMMON STOCKHOLDERS PER SHARE 
    Basic and diluted |                            | $                              | (2.28   | )          |        | $ | (33.99  | )       |        | $ | (23.74 | )      
|                                                                            |                            |                                |         |            |        |   |         |         |       
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                                 |                            |                                |         |            |        |   |         |         |        |   |        |        
|                                                                            | Basic and diluted          |                                |         | 14,631,371 |        |   |         | 658,204 |        |   |        | 251,346 |      
|                                                                            |                            |                                |         |            |        |   |         |         |       



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE


PREFERRED STOCK, STOCKHOLDERS EQUITY (DEFICIT) AND
COMPREHENSIVE LOSS


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004


|                                                                                                  |          |             |        |   |        |   |            |                                 |  |          |              |   |  |              |             |   |             |   |       |               |  |               |        |         |               |   |   |   |  |   |        |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------- | -------- | ----------- | ------ | - | ------ | - | ---------- | ------------------------------- |  | -------- | ------------ | - |  | ------------ | ----------- | - | ----------- | - | ----- | ------------- |  | ------------- | ------ | ------- | ------------- | - | - | - |  | - | ------ | ------- | - |  | - | ------- | -
|                                                                                                  |          | Redeemable  |        |   |        |   |            |                                 |  |          |              |   |  |              | Accumulated |   |             |   |      
|                                                                                                  |          | Convertible |        |   |        |   | Additional |                                 |  | Deferred |              |   |  |              |             |   | Other       |   | Total |               |  |              
|                                                                                                  |          | Preferred   |        |   | Common |   |            | Paid-In                         |  |          | Stock-Based  |   |  | Due from     |             |   | Accumulated |   |       | Comprehensive |  | Stockholders |        |         | Comprehensive |  
|                                                                                                  |          | Stock       |        |   | Stock  |   |            | Capital                         |  |          | Compensation |   |  | Stockholders |             |   | Deficit     |   |       | Loss          |  | Equity        |        |         | Loss          |  
|                                                                                                  |          |             |        |   |        |   |            |                                 |  |          |              |   |  |              |             |   |             |   |       |               |  |               |        |         |               |  
|                                                                                                  |          |             |        |   |        |   |            | In thousands, except share data |  |          |              |   |  |              |            
|BALANCE  January 1, 2002                                                                         |          | $           | 10,270 |   |        | $ | 1          |                                 |  | $        | 84           |   |  | $            | (317        | ) |             | $ | (1    | )             |  | $             | (1,517 | )       |               | $ |  |   |  | $ | (1,750 | )       |   |  |   |        
|Issuance of 10,150,000 shares of Series A preferred
    stock for cash and note receivable        |          |             | 9,778  |   |        |   |           |                                 |  |          |             |   |  |              |            |   |             |   |      |               |  |               |       |         |               |   |  |   |  |   |       |         |   |  |   |        
|Issuance of 43,998 shares of common stock to non- employees                                       |          |             |       |   |        |   |           |                                 |  |          | 16           |   |  |              |            |   |             |   |      |               |  |               |       |         |               |   |  |   |  |   | 16     |         |   |  |   |        
|Issuance of 172,344 shares of common stock to employees                                           |          |             |       |   |        |   |           |                                 |  |          | 65           |   |  |              |            |   |             |   | (40   | )             |  |               |       |         |               |   |  |   |  |   | 25     |         |   |  |   |        
|Accretion of preferred stock dividends and issuance costs                                         |          |             | 1,032  |   |        |   |           |                                 |  |          | (161         | ) |  |              |            |   |             |   |      |               |  |               | (871   | )       |               |   |  |   |  |   | (1,032 | )       |   |  |   |        
|Amortization of deferred stock-based compensation                                                 |          |             |       |   |        |   |           |                                 |  |          |             |   |  |              | 120         |   |             |   |      |               |  |               |       |         |               |   |  |   |  |   | 120    |         |   |  |   |        
|Payment from stockholder                                                                          |          |             |       |   |        |   |           |                                 |  |          |             |   |  |              |            |   |             |   | 1     |               |  |               |       |         |               |   |  |   |  |   | 1      |         |   |  |   |        
|                                                                                                  | Net loss |             |        |  |        |   |            |                                |  |          |              |  |  |              |             |  |             |   |       |              |  |               |        | (4,935  | )             |   |   |  |  |   |        | (4,935  | ) |  | $ | (4,935  | )
|                                                                                                  |          |             |        |   |        |   |            |                                 |  |          |              |   |  |              |             |   |             |   |       |               |  |               |        |         |               |   |  
|BALANCE  December 31, 2002                                                                       |          |             | 21,080 |   |        |   | 1          |                                 |  |          | 4            |   |  |              | (197        | ) |             |   | (40   | )             |  |               | (7,323 | )       |               |   |  |   |  |   | (7,555 | )       |   |  |   |        
|Issuance of 20,055,167 shares of Series B preferred
    stock for cash                            |          |             | 27,906 |   |        |   |           |                                 |  |          |             |   |  |              |            |   |             |   |      |               |  |               |       |         |               |   |  |   |  |   |       |         |   |  |   |        
|Issuance of 16,980 shares of common stock, upon exercise of
    options under stock purchase plan |          |             |       |   |        |   | 1          |                                 |  |          | 6            |   |  |              |            |   |             |   |      |               |  |               |       |         |               |   |  |   |  |   | 7      |         |   |  |   |        
|Repurchase of 3,221 shares of common stock                                                        |          |             |       |   |        |   |           |                                 |  |          | (8           | ) |  |              | 7           |   |             |   |      |               |  |               |       |         |               |   |  |   |  |   | (1     | )       |   |  |   |        
|Deferred stock- based compensation to employees                                                   |          |             |       |   |        |   |           |                                 |  |          | 6,673        |   |  |              | (6,672      | ) |             |   |      |               |  |               |       |         |               |   |  |   |  |   | 1      |         |   |  |   |        
|Deferred stock- based compensation to non-employees                                               |          |             |       |   |        |   |           |                                 |  |          | 6,745        |   |  |              | (6,745      | ) |             |   |      |               |  |               |       |         |               |   |  |   |  |   |       |         |   |  |   |        
|Accretion of preferred stock dividends and issuance costs                                         |          |             | 2,264  |   |        |   |           |                                 |  |          | (2,264       | ) |  |              |            |   |             |   |      |               |  |               |       |         |               |   |  |   |  |   | (2,264 | )       |   |  |   |        
|Amortization of deferred stock-based compensation                                                 |          |             |       |   |        |   |           |                                 |  |          |             |   |  |              | 5,071       |   |             |   |      |               |  |               |       |         |               |   |  |   |  |   | 5,071  |         |   |  |   |        
|Payment from stockholder                                                                          |          |             | 145    |   |        |   |           |                                 |  |          |             |   |  |              |            |   |             |   |      |               |  |               |       |         |               |   |  |   |  |   |       |         |   |  |   |        
|                                                                                                  | Net loss |             |        |  |        |   |            |                                |  |          |              |  |  |              |             |  |             |   |       |              |  |               |        | (20,110 | )             |   |   |  |  |   |        | (20,110 | ) |  | $ | (20,110 | )
|                                                                                                  |          |             |        |   |        |   |            |                                 |  |          |              |   |  |              |             |   |             |   |       |               |  |               |        |         |               |   |  



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE


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


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004


|                                                                                                                   |                                |             |         |   |        |   |            |                                |  |          |              |   |  |              |             |   |             |   |     |               |  |   |               |         |   |               |      |      |   |   |         |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------ | ------------------------------ | ----------- | ------- | - | ------ | - | ---------- | ------------------------------ |  | -------- | ------------ | - |  | ------------ | ----------- | - | ----------- | - | --- | ------------- |  | - | ------------- | ------- | - | ------------- | ---- | ---- | - | - | ------- | ------- | - |  | - | ------- | -
|                                                                                                                   |                                | Redeemable  |         |   |        |   |            |                                |  |          |              |   |  |              | Accumulated |   |             |   |     |              
|                                                                                                                   |                                | Convertible |         |   |        |   | Additional |                                |  | Deferred |              |   |  |              |             |   | Other       |   |     | Total         |  |   |              
|                                                                                                                   |                                | Preferred   |         |   | Common |   |            | Paid-In                        |  |          | Stock-Based  |   |  | Due from     |             |   | Accumulated |   |     | Comprehensive |  |   | Stockholders |         |   | Comprehensive |     
|                                                                                                                   |                                | Stock       |         |   | Stock  |   |            | Capital                        |  |          | Compensation |   |  | Stockholders |             |   | Deficit     |   |     | Loss          |  |   | Equity        |         |   | Loss          |     
|                                                                                                                   |                                |             |         |   |        |   |            |                                |  |          |              |   |  |              |             |   |             |   |     |               |  |   |               |         |   |               |     
|                                                                                                                   |                                |             |         |   |        |   |            | In thousands except share data |  |          |              |   |  |              |            
|BALANCE  December 31, 2003                                                                                        |                                | $           | 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 officer notes                                                                                       |                                |             | 145     |   |        |   |           |                                |  |          |             |   |  |              |            |   |             |   | 40  |               |  |   |              |         |   |               |     |      |   |   | 40      |         |   |  |   |        
|Issuance of 6,000,000 shares of common stock in initial
    public offering, net of $2.0 million in offering costs |                                |             |        |   |        |   | 6          |                                |  |          | 37,095       |   |  |              |            |   |             |   |    |               |  |   |              |         |   |               |     |      |   |   | 37,101  |         |   |  |   |        
|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 110,000 shares of common stock for
    underwriters over- allotment                                   |                                |             |        |   |        |   |           |                                |  |          | 716          |   |  |              |            |   |             |   |    |               |  |   |              |         |   |               |     |      |   |   | 716     |         |   |  |   |        
|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  |         |   |  |   |        
|                                                                                                                   |                                |             |         |   |        |   |            |                                |  |          |              |   |  |              |             |   |             |   |     |               |  |   |               |         |   |               |     



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |       |        |        |        |     |      |        |  
|-------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ---------------------------------- | ---------------------------------------------- | ----------------------------------------- | ----- | ------ | ------- | ------- | ----- | ------ | ------ | ------ | --- | ---- | ------ | -
|                                                                           |                                                                                  | Year Ended December 31,            |                                               
|                                                                           |                                                                                  |                                    |                                               
|                                                                           |                                                                                  | 2004                               |                                                |                                           | 2003  |        |         | 2002    |      
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|                                                                           |                                                                                  | In thousands                       |                                               
|CASH FLOWS USED FOR OPERATING ACTIVITIES:                                  |                                                                                  |                                    |                                                |                                           |       |        |         |         |       |        |        |       
|                                                                           | Net loss                                                                         |                                    | $                                              | (31,094                                   | )     |        | $       | (20,110 | )     |        | $      | (4,935 | )  
|                                                                           | Adjustments to reconcile net loss to net cash used for operating
    activities: |                                    |                                                |                                           |       |        |         |         |       |        |        |        |    
|                                                                           |                                                                                  | Depreciation and amortization      |                                                |                                           | 1,847 |        |         |         | 482   |        |        |        | 54  |     
|                                                                           |                                                                                  | Stock-based compensation expense   |                                                |                                           | 3,562 |        |         |         | 5,072 |        |        |        | 120 |     
|                                                                           |                                                                                  | Loss on disposal of fixed assets   |                                                |                                           | 278   |        |         |         |      |        |        |        |    |     
|                                                                           |                                                                                  | Loss on conversion of warrants     |                                                |                                           | 46    |        |         |         |      |        |        |        |    |     
|                                                                           |                                                                                  | Forgiveness of notes receivable    |                                                |                                           | 185   |        |         |         |      |        |        |        |    |     
|                                                                           |                                                                                  | Changes in assets and liabilities: |                                                |                                           |       |        |         |         |       |        |        |        |     |     
|                                                                           |                                                                                  |                                    | Amount due under collaboration agreement       |                                           |       | 2,484  |         |         |       | (2,500 | )      |        |     |     |       
|                                                                           |                                                                                  |                                    | Prepaid expenses and other                     |                                           |       | (1,421 | )       |         |       | (622   | )      |        |     | (259 | )     
|                                                                           |                                                                                  |                                    | Other assets                                   |                                           |       | 277    |         |         |       |       |        |        |     |     |       
|                                                                           |                                                                                  |                                    | Accounts payable                               |                                           |       | 3,895  |         |         |       | (94    | )      |        |     | 367  |       
|                                                                           |                                                                                  |                                    | Accrued license fees and other expenses        |                                           |       | (2,211 | )       |         |       | 5,267  |        |        |     | 103  |       
|                                                                           |                                                                                  |                                    | Revenue deferred under collaboration agreement |                                           |       | (2,935 | )       |         |       | 11,479 |        |        |     |     |       
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|                                                                           |                                                                                  |                                    |                                                | Net cash used for operating activities    |       |        | (25,087 | )       |       |        | (1,026 | )      |     |      | (4,550 | )
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|CASH FLOWS USED FOR INVESTING ACTIVITIES:                                  |                                                                                  |                                    |                                                |                                           |       |        |         |         |       |        |        |       
|                                                                           | Proceeds from sales and maturities of short-term investments                     |                                    |                                                | 52,900                                    |       |        |         |        |       |        |        |       |    
|                                                                           | Purchases of fixed assets                                                        |                                    |                                                | (2,019                                    | )     |        |         | (1,492  | )     |        |        | (581   | )  
|                                                                           | Purchases of short-term investments                                              |                                    |                                                | (120,866                                  | )     |        |         |        |       |        |        |       |    
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|                                                                           |                                                                                  |                                    |                                                | Net cash used for investing activities    |       |        | (69,985 | )       |       |        | (1,492 | )      |     |      | (581   | )
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|CASH FLOWS FROM FINANCING ACTIVITIES:                                      |                                                                                  |                                    |                                                |                                           |       |        |         |         |       |        |        |       
|                                                                           | Net proceeds from issuance of convertible preferred stock                        |                                    |                                                | 28,050                                    |       |        |         | 27,906  |       |        |        | 9,778  |    
|                                                                           | Net proceeds from the initial public offering of common stock                    |                                    |                                                | 37,817                                    |       |        |         |        |       |        |        |       |    
|                                                                           | Proceeds from issuance of common stock                                           |                                    |                                                | 175                                       |       |        |         | 6       |       |        |        | 42     |    
|                                                                           | Proceeds from notes receivable                                                   |                                    |                                                |                                          |       |        |         | 145     |       |        |        | 1      |    
|                                                                           | Repurchase of restricted common stock                                            |                                    |                                                |                                          |       |        |         | (1      | )     |        |        |       |    
|                                                                           | Proceeds from long-term debt                                                     |                                    |                                                | 1,623                                     |       |        |         | 1,388   |       |        |        | 293    |    
|                                                                           | Repayments of long-term debt                                                     |                                    |                                                | (691                                      | )     |        |         | (387    | )     |        |        | (24    | )  
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|                                                                           |                                                                                  |                                    |                                                | Net cash provided by financing activities |       |        | 66,974  |         |       |        | 29,057 |        |     |      | 10,090 |  
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                       |                                                                                  |                                    | (28,098                                        | )                                         |       |        | 26,539  |         |       |        | 4,959  |       
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                           |                                                                                  |                                    | 40,078                                         |                                           |       |        | 13,539  |         |       |        | 8,580  |       
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                 |                                                                                  | $                                  | 11,980                                         |                                           |       | $      | 40,078  |         |       | $      | 13,539 |       
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                          |                                                                                  |                                    |                                                |                                           |       |        |         |         |       |        |        |       
|                                                                           | Cash paid during the period for:                                                 |                                    |                                                |                                           |       |        |         |         |       |        |        |        |    
|                                                                           |                                                                                  | Interest                           |                                                | $                                         | 126   |        |         | $       | 94    |        |        | $      | 7   |     
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
    ACTIVITIES: |                                                                                  |                                    |                                                |                                           |       |        |         |         |       |        |        |       
|                                                                           | Conversion of redeemable convertible preferred stock into comon
    stock        |                                    | $                                              | 81,799                                    |       |        | $       |        |       |        | $      |       |    
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|                                                                           | Accretion of dividends and offering costs on preferred stock                     |                                    | $                                              | 2,209                                     |       |        | $       | 2,264   |       |        | $      | 1,032  |    
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|                                                                           | Stock issued for stockholder receivables                                         |                                    | $                                              |                                          |       |        | $       |        |       |        | $      | 330    |    
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|                                                                           | Dividends forfeited on preferred stock conversion into common
    stock          |                                    | $                                              | 5,713                                     |       |        | $       |        |       |        | $      |       |    
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|                                                                           | Adjustment to deferred stock-based compensation for services to
    be performed |                                    | $                                              | 1,127                                     |       |        | $       | 13,417  |       |        | $      |       |    
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|                                                                           | Settlement of accrued licensing fee with common stock                            |                                    | $                                              | 485                                       |       |        | $       |        |       |        | $      |       |    
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      
|                                                                           | Unrealized loss on investments                                                   |                                    | $                                              | 362                                       |       |        | $       |        |       |        | $      |       |    
|                                                                           |                                                                                  |                                    |                                                |                                           |       |        |         |         |      



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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





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





| |                                            
| | -------------------------------------------
| | 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, 2004   |       
|                                                     |                                       |                           |       
|                                                     |                                       | Amortized                 |        |        | Unrealized |   | Unrealized |   |   | Fair  |     
|                                                     |                                       | Cost                      |        |        | Gains      |   | Losses     |   |   | Value |     
|                                                     |                                       |                           |        |        |            |   |            |   |   |       |     
|Cash and cash equivalents:                           |                                       |                           |        |        |            |   |            |   |   |       |      |      |      |   |        |       
|                                                     | Cash                                  |                           | $      | 4,319  |            |   | $          |  |   |       | $    |     |      |   | $      | 4,319  |       
|                                                     | Commercial Paper                      |                           |        | 2,019  |            |   |            |  |   |       |      |     |      |   |        | 2,019  |       
|                                                     | Money market mutual funds             |                           |        | 5,642  |            |   |            |  |   |       |      |     |      |   |        | 5,642  |       
|                                                     |                                       |                           |        |        |            |   |            |   |   |       |      |     
|                                                     |                                       | Cash and cash equivalents |        |        | 11,980     |   |            |   |  |       |      |      |     |   |        |        | 11,980 | 
|                                                     |                                       |                           |        |        |            |   |            |   |   |       |      |     
|Short-term investments:                              |                                       |                           |        |        |            |   |            |   |   |       |      |      |      |   |        |       
|                                                     | U.S. government and agency securities |                           |        | 17,056 |            |   |            |  |   |       |      | (42  | )    |   |        | 17,014 |       
|                                                     | Corporate bonds                       |                           |        | 32,349 |            |   |            |  |   |       |      | (316 | )    |   |        | 32,033 |       
|                                                     | Municipal bonds                       |                           |        | 1,006  |            |   |            |  |   |       |      | (4   | )    |   |        | 1,002  |       
|                                                     | Auction rate securities               |                           |        | 16,800 |            |   |            |  |   |       |      |     |      |   |        | 16,800 |       
|                                                     |                                       |                           |        |        |            |   |            |   |   |       |      |     
|                                                     |                                       | Short-term investments    |        |        | 67,211     |   |            |   |  |       |      |      | (362 | ) |        |        | 66,849 | 
|                                                     |                                       |                           |        |        |            |   |            |   |   |       |      |     
|Cash and cash equivalents and short-term investments |                                       | $                         | 79,191 |        |            | $ |           |   |   | $     | (362 | )    |      | $ | 78,829 |       
|                                                     |                                       |                           |        |        |            |   |            |   |   |       |      |     



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





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



71



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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







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





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







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



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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







|                                                                                |             |                         |         |       |      |   |         |        |   |   |        |        |  
|------------------------------------------------------------------------------- | ----------- | ----------------------- | ------- | ----- | ---- | - | ------- | ------ | - | - | ------ | ------ | -
|                                                                                |             | Year Ended December 31, |        
|                                                                                |             |                         |        
|                                                                                |             | 2004                    |         |       | 2003 |   |         | 2002   |  
|                                                                                |             |                         |         |       |      |   |         |        |  
|Net loss available to common stockholders  as reported                         |             | $                       | (33,303 | )     |      | $ | (22,374 | )      |   | $ | (5,967 | )     
|Add: Stock-based compensation expense included in reported net
    loss         |             |                         | 1,784   |       |      |   | 165     |        |   |   |       |       
|Deduct: Stock-based compensation expense determined under fair
    value method |             |                         | (1,162  | )     |      |   | (201    | )      |   |   | (5     | )     
|                                                                                |             |                         |         |       |      |   |         |        |  
|Net loss available to common stockholders  pro forma                           |             | $                       | (32,681 | )     |      | $ | (22,410 | )      |   | $ | (5,972 | )     
|                                                                                |             |                         |         |       |      |   |         |        |  
|Net loss per share (basic and diluted):                                         |             |                         |         |       |      |   |         |        |   |   |        |       
|                                                                                | As reported |                         | $       | (2.28 | )    |   | $       | (33.99 | ) |   | $      | (23.74 | )
|                                                                                |             |                         |         |       |      |   |         |        |  
|                                                                                | Pro forma   |                         | $       | (2.23 | )    |   | $       | (34.05 | ) |   | $      | (23.76 | )
|                                                                                |             |                         |         |       |      |   |         |        |  



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                       |  |              |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                       |  | December 31, |        
|                                                                       |  |              |        
|                                                                       |  | 2004         |         |   | 2003 |   |         | 2002 | 
|                                                                       |  |              |         |   |      |   |         |      | 
|Risk free interest rate                                                |  |              | 3.3     | % |      |   | 2.4     | %    |  |   | 2.3     | %
|Expected dividend yield                                                |  |              | 0       | % |      |   | 0       | %    |  |   | 0       | %
|Expected lives                                                         |  |              | 4 years |   |      |   | 4 years |      |  |   | 4 years |  
|Expected volatility                                                    |  |              | 100     | % |      |   | 100     | %    |  |   | 100     | %
|Weighted-average fair value of options granted equal to fair
    value |  | $            | 4.38    |   |      | $ | 0.26    |      |  | $ | 0.26    |  
|Weighted-average fair value of options granted below fair value        |  | $            | 3.73    |   |      | $ | 6.26    |      |  | $ |        |  

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








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





|                                                             |  |                         |            |  |      |  |           |      |  |  |           | 
|------------------------------------------------------------ |  | ----------------------- | ---------- |  | ---- |  | --------- | ---- |  |  | --------- | 
|                                                             |  | Year Ended December 31, |           
|                                                             |  |                         |           
|                                                             |  | 2004                    |            |  | 2003 |  |           | 2002 | 
|                                                             |  |                         |            |  |      |  |           |      | 
|Weighted-average common shares outstanding                   |  |                         | 15,077,169 |  |      |  | 1,553,309 |      |  |  | 1,430,910 | 
|Less: weighted-average restricted common shares outstanding  |  |                         | 445,798    |  |      |  | 895,105   |      |  |  | 1,179,564 | 
|                                                             |  |                         |            |  |      |  |           |      | 
|Basic and diluted weighted-average common shares outstanding |  |                         | 14,631,371 |  |      |  | 658,204   |      |  |  | 251,346   | 
|                                                             |  |                         |            |  |      |  |           |      | 

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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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





| |                                           
| | ------------------------------------------
| | Disclosure About Segments of an Enterprise





|    |                        
|--- | -----------------------
|(3) | Collaboration Agreement







75



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |             
|--- | ------------
|(4) | Fixed Assets



|                                               |  |      |       |   |      |   |       |  
|---------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                               |  | 2004 |       |   | 2003 |  
|                                               |  |      |       |   |      |  
|Laboratory equipment                           |  | $    | 1,591 |   |      | $ | 967   |  
|Computer and office equipment                  |  |      | 580   |   |      |   | 207   |  
|Furniture and fixtures                         |  |      | 471   |   |      |   | 43    |  
|Leasehold improvements                         |  |      | 203   |   |      |   | 870   |  
|                                               |  |      |       |   |      |  
|Total                                          |  |      | 2,845 |   |      |   | 2,087 |  
|Less accumulated depreciation and amortization |  |      | (640  | ) |      |   | (531  | )
|                                               |  |      |       |   |      |  
|Fixed assets  net                             |  | $    | 2,205 |   |      | $ | 1,556 |  
|                                               |  |      |       |   |      |  





|    |               
|--- | --------------
|(5) | Long Term Debt







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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|     |  |   |       | 
|---- |  | - | ----- | 
|2005 |  | $ | 837   | 
|2006 |  |   | 698   | 
|2007 |  |   | 577   | 
|2008 |  |   | 92    | 
|     |  |   |      
|     |  | $ | 2,204 | 
|     |  |   |      



|    |                                                                              
|--- | -----------------------------------------------------------------------------
|(6) | Redeemable Convertible Preferred Stock and Stockholders
    Equity (Deficit)



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





| |                    
| | -------------------
| | Reverse Stock Split





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



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

















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





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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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





|    |                       
|--- | ----------------------
|(7) | Equity Incentive Plans



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







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





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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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







|                                |           |           |           |           |                  |   |      |      | 
|------------------------------- | --------- | --------- | --------- | --------- | ---------------- | - | ---- | ---- | 
|                                |           |           |           | Weighted- |                 
|                                |           | Number of |           |           | Average Exercise |  
|                                |           | Shares    |           |           | Price            |  
|                                |           |           |           |           |                  |  
|Outstanding  December 31, 2001 |           |           | 5,418     |           |                  | $ | 0.10 |     
|                                | Granted   |           |           | 441,755   |                  |   |      | 0.38 | 
|                                |           |           |           |           |                  |  
|Outstanding  December 31, 2002 |           |           | 447,173   |           |                  |   | 0.37 |     
|                                | Granted   |           |           | 1,433,436 |                  |   |      | 1.02 | 
|                                | Exercised |           |           | (16,980   | )                |   |      | 0.38 | 
|                                | Cancelled |           |           | (1,400    | )                |   |      | 0.38 | 
|                                |           |           |           |           |                  |  
|Outstanding  December 31, 2003 |           |           | 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 |     
|                                |           |           |           |           |                  |  
|Exercisable  December 31, 2002 |           |           | 24,506    |           |                  | $ | 0.30 |     
|                                |           |           |           |           |                  |  
|Exercisable  December 31, 2003 |           |           | 496,744   |           |                  | $ | 0.79 |     
|                                |           |           |           |           |                  |  
|Exercisable  December 31, 2004 |           |           | 717,176   |           |                  | $ | 1.10 |     
|                                |           |           |           |           |                  |  

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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|               |  |                   |           |                  |             |  |           |          |  |   |             |           |  |          |         |  |  |   |      | 
|-------------- |  | ----------------- | --------- | ---------------- | ----------- |  | --------- | -------- |  | - | ----------- | --------- |  | -------- | ------- |  |  | - | ---- | 
|               |  | 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    |        
|               |  |                   |           |                  |             |  |           |          |  |   |             |           |  |          |        
|$0.10          |  |                   | 2,724     |                  |             |  | 6.0       |          |  | $ | 0.10        |           |  |          | 2,724   |  |  | $ | 0.10 | 
|$0.38          |  |                   | 318,198   |                  |             |  | 7.6       |          |  | $ | 0.38        |           |  |          | 165,899 |  |  | $ | 0.38 | 
|$1.05          |  |                   | 1,319,259 |                  |             |  | 9.0       |          |  | $ | 1.05        |           |  |          | 519,024 |  |  | $ | 1.05 | 
|$1.88-$5.63    |  |                   | 565,089   |                  |             |  | 9.5       |          |  | $ | 5.24        |           |  |          | 22,001  |  |  | $ | 5.63 | 
|$5.99          |  |                   | 1,434,500 |                  |             |  | 9.7       |          |  | $ | 5.99        |           |  |          |        |  |  |   |     | 
|$6.00-$7.75    |  |                   | 793,000   |                  |             |  | 9.7       |          |  | $ | 6.86        |           |  |          | 8,056   |  |  | $ | 6.88 | 
|$7.78-$7.89    |  |                   | 55,000    |                  |             |  | 9.9       |          |  | $ | 7.88        |           |  |          |        |  |  |   |     | 
|$8.10          |  |                   | 12,500    |                  |             |  | 9.9       |          |  | $ | 8.10        |           |  |          |        |  |  |   |     | 
|               |  |                   |           |                  |             |  |           |          |  |   |             |           |  |          |        
|               |  |                   | 4,500,270 |                  |             |  | 9.2       |          |  | $ | 4.23        |           |  |          | 717,704 |  |  | $ | 1.10 | 
|               |  |                   |           |                  |             |  |           |          |  |   |             |           |  |          |        









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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                  
|--- | -----------------
|(8) | Loans to Officers









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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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



|                                                       |                                      |      |         |        |      |   |        |       | 
|------------------------------------------------------ | ------------------------------------ | ---- | ------- | ------ | ---- | - | ------ | ----- | 
|                                                       |                                      | 2004 |         |        | 2003 |  
|                                                       |                                      |      |         |        |      |  
|Deferred tax assets:                                   |                                      |      |         |        |      |   |        |      
|                                                       | Start-up expenses                    |      | $       | 113    |      |   | $      | 176   | 
|                                                       | Net operating loss carryforward      |      |         | 13,581 |      |   |        | 4,620 | 
|                                                       | Deferred revenue                     |      |         | 2,990  |      |   |        | 3,501 | 
|                                                       | Research and experimentation credits |      |         | 619    |      |   |        | 566   | 
|                                                       | Depreciation and amortization        |      |         | 151    |      |   |        |      | 
|                                                       | Other                                |      |         | 122    |      |   |        | 43    | 
|                                                       |                                      |      |         |        |      |  
|Total                                                  |                                      |      | 17,576  |        |      |   | 8,906  |      
|Deferred tax liability  depreciation and amortization |                                      |      |        |        |      |   | (96    | )    
|                                                       |                                      |      |         |        |      |  
|Net deferred tax asset                                 |                                      |      | 17,576  |        |      |   | 8,810  |      
|Less valuation allowance                               |                                      |      | (17,576 | )      |      |   | (8,810 | )    
|                                                       |                                      |      |         |        |      |  
|Total                                                  |                                      | $    |        |        |      | $ |       |      
|                                                       |                                      |      |         |        |      |  







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





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



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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





| |        
| | -------
| | Xanthus





| |            
| | -----------
| | North Shore



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                 
| | ----------------
| | Other Agreements





|     |                              
|---- | -----------------------------
|(12) | Commitments and Contingencies





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



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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|            |  |           |       | 
|----------- |  | --------- | ----- | 
|            |  | Operating |      
|Year Ending |  | Leases    |      
|            |  |           |      
|2005        |  | $         | 1,503 | 
|2006        |  |           | 1,310 | 
|2007        |  |           | 1,303 | 
|2008        |  |           | 1,291 | 
|2009        |  |           | 216   | 
|Thereafter  |  |           |      | 
|            |  |           |      
|Total       |  | $         | 5,623 | 
|            |  |           |      



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



|            |  |          |     | 
|----------- |  | -------- | --- | 
|Year Ending |  | Payments |    
|            |  |          |    
|2005        |  | $        | 313 | 
|2006        |  |          | 321 | 
|2007        |  |          | 26  | 
|            |  |          |    
|Total       |  | $        | 660 | 
|            |  |          |    



|     |                           
|---- | --------------------------
|(13) | Relocation of Headquarters





|                                                            |                                        |   |     |      |  
|----------------------------------------------------------- | -------------------------------------- | - | --- | ---- | -
|Remaining lease obligation from former headquarter facility |                                        | $ | 441 |     
|                                                            | Payments                               |   |     | (208 | )
|                                                            | Adjustment                             |   |     | (48  | )
|                                                            | Rental income under sublease agreement |   |     | 28   |  
|                                                            |                                        |   |    
|Balance  December 31, 2004                                 |                                        | $ | 213 |     
|                                                            |                                        |   |    

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CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |                                   
|---- | ----------------------------------
|(14) | Unaudited Quarterly Financial Data



|                              |                |               |   |       |          |  |              |              |   |             |       |         |   |  |   |        |  
|----------------------------- | -------------- | ------------- | - | ----- | -------- |  | ------------ | ------------ | - | ----------- | ----- | ------- | - |  | - | ------ | -
|                              |                |               |   |       |          |  |              | Basic and    |  
|                              |                | Revenue       |   |       |          |  | Net Loss     |              |   | Diluted Net |      
|                              |                | Under         |   |       |          |  | Available to |              |   | Loss Per    |      
|                              |                | Collaboration |   |       |          |  | Common       |              |   | Common      |      
|                              |                | Agreement     |   |       | Net Loss |  |              | Stockholders |   |             | Share |        
|                              |                |               |   |       |          |  |              |              |   |             |       |        
|Year Ended December 31, 2003: |                |               |   |       |          |  |              |              |   |             |       |         |   |  |   |       
|                              | First Quarter  |               | $ |      |          |  | $            | (2,858       | ) |             | $     | (3,279  | ) |  | $ | (6.37  | )
|                              | Second Quarter |               |   |      |          |  |              | (3,572       | ) |             |       | (3,998  | ) |  |   | (6.61  | )
|                              | Third Quarter  |               |   | 401   |          |  |              | (3,549       | ) |             |       | (3,980  | ) |  |   | (5.72  | )
|                              | Fourth Quarter |               |   | 620   |          |  |              | (10,130      | ) |             |       | (11,117 | ) |  |   | (13.63 | )
|Year Ended December 31, 2004: |                |               |   |       |          |  |              |              |   |             |       |         |   |  |   |       
|                              | First Quarter  |               | $ | 805   |          |  | $            | (6,385       | ) |             | $     | (7,546  | ) |  | $ | (6.85  | )
|                              | Second Quarter |               |   | 781   |          |  |              | (6,946       | ) |             |       | (7,994  | ) |  |   | (0.81  | )
|                              | Third Quarter  |               |   | 1,886 |          |  |              | (6,584       | ) |             |       | (6,584  | ) |  |   | (0.28  | )
|                              | Fourth Quarter |               |   | 964   |          |  |              | (11,179      | ) |             |       | (11,179 | ) |  |   | (0.47  | )



(15)     Subsequent Event






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








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










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

2004 Executive Compensation






| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | 27% of annual 2004 salary for Paul D. Rubin, M.D., our
    President and Chief Executive Officer; and
|
| |  | 18% of annual 2004 salary for each of our other executive
    officers.                              



|                       |  |            |        | 
|---------------------- |  | ---------- | ------ | 
|Executive Officer      |  | Cash Bonus |       
|                       |  |            |       
|Paul D. Rubin, M.D.    |  | $          | 90,000 | 
|Trevor Phillips, Ph.D. |  | $          | 41,400 | 
|Walter Newman, Ph.D.   |  | $          | 44,400 | 
|Frederick Finnegan     |  | $          | 40,200 | 
|Frank E. Thomas        |  | $          | 29,000 | 
|Scott B. Townsend      |  | $          | 15,000 | 



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|                       |  |         |         | 
|---------------------- |  | ------- | ------- | 
|Executive Officer      |  | Payment |        
|                       |  |         |        
|Paul D. Rubin, M.D.    |  | $       | 110,205 | 
|Trevor Phillips, Ph.D. |  | $       | 35,211  | 
|Walter Newman, Ph.D.   |  | $       | 29,110  | 

2005 Company Goals






| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | enhancing the commercial value of zileuton by making specified
    regulatory filings, launching ZYFLO and achieving specified
    business development goals;                                  
|
| |  | advancing our research and development pipeline by achieving
    specified pre-clinical and clinical development milestones and
    business development goals for our other product candidates;
|
| |  | maintaining our financial position by managing our cash
    balance; and                                                                                                                        
|
| |  | recruiting and retaining key employees to create an effective
    organization.                                                                                                                 




PART III







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers




Audit Committee




Audit Committee Financial Expert




Director Nominees




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##### Table of Contents



Section 16(a) Beneficial Ownership Reporting
Compliance




Code of Ethics









|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION








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








|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS








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



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PART IV







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

Financial Statements.




| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | For a list of the financial information included herein, see
    Index to Financial Statements on page 63.

Financial Statement Schedules.




| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | All schedules are omitted because they are not applicable or the
    required information is shown in the Financial Statements or
    Notes thereto.

List of Exhibits.




| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The list of Exhibits filed as a part of this annual report on
    Form 10-K are set forth on the Exhibit Index
    immediately preceding such Exhibits, and is incorporated herein
    by this reference.                                        
|
| | Critical Therapeutics®, Critical Therapeutics logo and
    ZYFLO® are trademarks or service marks of Critical
    Therapeutics, Inc. Other trademarks or service marks appearing
    in this report are the property of their respective holders.

91



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##### Table of Contents






SIGNATURES






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



| |     |                  
| | --- | -----------------
| | By: | /s/ Paul D. Rubin

| | 
| | 
| | 

| |  |                     
| |  | --------------------
| |  | Paul D. Rubin,  M.D.

| |                                      
| | -------------------------------------
| | President and Chief Executive Officer
|
| | Date: March 16, 2005                 



|                                                          |  |                                                                                                                              |  |                |  | 
|--------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                                 |  | Title                                                                                                                        |  | Date          
|                                                          |  |                                                                                                                              |  |               
|                                                         
|/s/ Paul D. RubinPaul
    D. Rubin, M.D.                  |  | President and Chief Executive Officer (Principal Executive
    Officer)                                                      |  | March 16, 2005
|                                                         
|/s/ Frank E. ThomasFrank
    E. Thomas                    |  | Senior Vice President of Finance, Chief Financial Officer and
    Treasurer (Principal Financial and
    Accounting Officer) |  | March 16, 2005
|                                                         
|/s/ Richard W. DuganRichard
    W. Dugan                  |  | Director                                                                                                                     |  | March 16, 2005
|                                                         
|/s/ Nicholas GalakatosNicholas
    Galakatos, Ph.D.       |  | Director                                                                                                                     |  | March 16, 2005
|                                                         
|/s/ Jean GeorgeJean
    George                            |  | Director                                                                                                                     |  | March 16, 2005
|                                                         
|/s/ Christopher MirabelliChristopher
    Mirabelli, Ph.D. |  | Director                                                                                                                     |  | March 16, 2005
|                                                         
|/s/ Christopher WalshChristopher
    Walsh, Ph.D.         |  | Director                                                                                                                     |  | March 16, 2005
|                                                         
|/s/ H. Shaw WarrenH.
    Shaw Warren, M.D.                |  | Director                                                                                                                     |  | March 16, 2005
|                                                         
|/s/ Robert H. ZeigerRobert
    H. Zeiger                  |  | Director                                                                                                                     |  | March 16, 2005

92



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##### Table of Contents



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          |  | Amended and Restated Bylaws of the Registrant (Incorporated by
    reference to Exhibit 3.2 to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended June 30, 2004
    (SEC File No. 000-50767))                                                                                                                                      
|           
|            | 10 | .1*         |  | 2000 Equity Incentive Plan, as amended (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 (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 (Incorporated by reference to
    Exhibit 10.3 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727))                                                                                                                                                                                           
|           
|            | 10 | .4          |  | Amended and Restated Investor Rights Agreement by and between
    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 | .5+         |  | License Agreement between the Registrant and 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 | .6+         |  | Sponsored Research and License Agreement between the Registrant
    and 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 | .7+         |  | Sponsored Research and License Agreement between the Registrant
    and 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 | .8+         |  | 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 | .9+         |  | Exclusive License Agreement between the Registrant and Xanthus
    Life Sciences, Inc. (formerly Phenome Sciences, Inc.) dated
    December 15, 2000 (Incorporated by reference to
    Exhibit 10.9 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727))                                                                
|            | 10 | .10+        |  | 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 | .11+        |  | License Agreement between the Registrant and Abbott Laboratories
    dated March 17, 2004 (Incorporated by reference to
    Exhibit 10.11 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727))                                                                                                                          
|            | 10 | .12+        |  | License Agreement between the Registrant and the University of
    Pittsburgh of the Commonwealth System of Higher Education dated
    November 15, 2002 (Incorporated by reference to
    Exhibit 10.12 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727))                                                           
|           
|            | 10 | .13+        |  | 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))                                                                                                                                         



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##### Table of Contents



|            |    |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | -- | ----- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |       | Description
|            |    |       |            
|           
|            | 10 | .14+  |             | Proposal by and between the Registrant and Rhodia Pharma
    Solutions for qualification of Zileuton dated August 14,
    2003 (Incorporated by reference to Exhibit 10.14 to the
    Registrants Registration Statement on Form S-1 (SEC
    File No. 333-113727))                                                                                                                                                                                                                                                 
|           
|            | 10 | .15   |             | Consulting Agreement by and between the Registrant and H. Shaw
    Warren, Jr., M.D. dated January 31, 2001, as
    amended on February 6, 2003 (Incorporated by reference to
    Exhibit 10.15 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727))                                                                                                                                                                                                                                
|           
|            | 10 | .16   |             | Consulting Agreement by and between the Registrant and Mitchell
    Fink, M.D. dated January 31, 2001, as amended on
    January 22, 2003 (Incorporated by reference to
    Exhibit 10.16 to the Registrants Registration
    Statement on Form S-1 (SEC File No. 333-113727))                                                                                                                                                                                                                                      
|           
|            | 10 | .17   |             | 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 | .18   |             | Assignment, Assumption and Amendment of Lease made as of
    April 10, 2002 among Central Plaza/ Wells Avenue LLC,
    TolerRx, Inc. and the Registrant for Lease dated
    October 25, 2000 (Incorporated by reference to
    Exhibit 10.19 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+  |             | 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 | .21   |             | Loan and Security Agreement by and between the Registrant and
    Silicon Valley Bank 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   |             | Sublease Termination Agreement dated as of May 21, 2004, by
    and between the Registrant and Elixir Pharmaceuticals, Inc.
    (successor-in-interest to Centagenetix, Inc. by merger), and
    related Warranty Bill of Sale (Incorporated by reference to
    Exhibit 10.3 to the Registrants Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2004 (SEC File No.
    000-50767))                                                                                                                
|           
|            | 10 | .23++ |             | Standard Exclusive License Agreement with Sublicense Terms
    between Registrant and the University of Florida Research
    Foundation, Inc. effective September 2, 2004 (Incorporated
    by reference to Exhibit 10.1 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2004 (SEC File No. 000-50767))                                                                                                                                                                
|           
|            | 10 | .24++ |             | Proposal Between Registrant and Patheon Pharmaceuticals, Inc.
    dated August 12, 2004 (Incorporated by reference to
    Exhibit 10.2 to the Registrants Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2004 (SEC
    File No. 000-50767))                                                                                                                                                                                                                                                  
|           
|            | 10 | .25++ |             | Feasibility Study Agreement between Baxter Healthcare
    Corporation and the Registrant effective June 9, 2004                                                                                                                                                                                                                                                                                                                                                                                                      
|           
|            | 10 | .26   |             | Form of Incentive Stock Option Agreement granted under 2004
    Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           
|            | 10 | .27   |             | Form of Nonstatutory Stock Option Agreement granted under 2004
    Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                              
|           
|            | 10 | .28   |             | Form of Restricted Stock Agreement granted under 2004 Stock
    Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           
|            | 10 | .29   |             | Form of Nonstatutory Stock Option Agreement for a Non-Employee
    Director granted under the 2004 Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                              



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##### Table of Contents



|            |    |       |             |                                                                                                                                                                                                                                                                                   
|----------- | -- | ----- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |       | Description
|            |    |       |            
|           
|            | 10 | .30*  |             | Incentive Stock Option Agreement between Registrant and Paul
    Rubin dated September 8, 2004 (Incorporated by reference to
    Exhibit 10.4 to the Registrants Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2004
    (SEC File No. 000-50767))        
|           
|            | 10 | .31*  |             | Incentive Stock Option Agreement between Registrant and Trevor
    Phillips dated September 8, 2004 (Incorporated by reference
    to Exhibit 10.5 to the Registrants Quarterly Report
    on Form 10-Q for the quarter ended September 30, 2004
    (SEC File No. 000-50767))   
|           
|            | 10 | .32*  |             | Incentive Stock Option Agreement between Registrant and Walter
    Newman dated September 8, 2004 (Incorporated by reference
    to Exhibit 10.6 to the Registrants Quarterly Report
    on Form 10-Q for the quarter ended September 30, 2004 (SEC
    File No. 000-50767))     
|           
|            | 10 | .33*  |             | Incentive Stock Option Agreement between Registrant and
    Frederick Finnegan dated September 8, 2004 (Incorporated by
    reference to Exhibit 10.7 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2004 (SEC File No. 000-50767))
|           
|            | 10 | .34*  |             | Incentive Stock Option Agreement between Registrant and Frank
    Thomas dated September 8, 2004 (Incorporated by reference
    to Exhibit 10.8 to the Registrants Quarterly Report
    on Form 10-Q for the quarter ended September 30, 2004
    (SEC File No. 000-50767))      
|           
|            | 10 | .35*  |             | Employment Agreement dated December 21, 2004 by and between
    the Registrant and Paul D. Rubin, M.D. (Incorporated by
    reference to Exhibit 99.1 to the Registrants Current
    Report on Form 8-K dated December 21, 2004 (SEC File No.
    000-50767))                    
|           
|            | 10 | .36*  |             | Employment Agreement dated December 21, 2004 by and between
    the Registrant and Walter Newman, Ph.D. (Incorporated by
    reference to Exhibit 99.2 to the Registrants Current
    Report on Form 8-K dated December 21, 2004 (SEC File No.
    000-50767))                   
|           
|            | 10 | .37*  |             | 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 | .38*  |             | Employment Agreement dated December 21, 2004 by and between
    the Registrant and Frederick Finnegan (Incorporated by reference
    to Exhibit 99.4 to the Registrants Current Report on
    Form 8-K dated December 21, 2004 (SEC File No. 000-50767))                         
|           
|            | 10 | .39*  |             | 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))                            
|           
|            | 10 | .40*  |             | 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 | .41++ |             | Agreement for Manufacturing and Supply of ZILEUTON by and
    between Rhodia Pharma Solutions Ltd. and the Registrant dated
    February 8, 2005                                                                                                                                  
|           
|            | 10 | .42*  |             | Critical Therapeutics, Inc. 2005 Company Goals                                                                                                                                                                                                                                    
|           
|            | 21 | .1    |             | Subsidiaries of the Registrant                                                                                                                                                                                                                                                    
|           
|            | 23 | .1    |             | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                  
|           
|            | 31 | .1    |             | Certification of the Chief Executive 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                                                                    
|           
|            | 31 | .2    |             | Certification of the Chief 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                                                                    



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##### Table of Contents



|            |    |    |             |                                                                                                                                                              
|----------- | -- | -- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |    | Description
|            |    |    |            
|           
|            | 32 | .1 |             | Certification of the Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002
|           
|            | 32 | .2 |             | Certification of the Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002






|  |                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Management contract or compensation plan or arrangement required
    to be filed as an exhibit pursuant to Item 15(c) of
    Form 10-K.                         
| 
|+ | 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.