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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2005,



or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
|- | -------------------------------------------------------------------------------



Commission File No. 0-18728



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INDEVUS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its
charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 04-3047911                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                          |  |           
|----------------------------------------- |  | ----------
|33 Hayden Avenue Lexington, Massachusetts |  | 02421-7971
|(Address of principal executive offices)  |  | (Zip Code)



Registrants
telephone number, including area code: (781) 861-8444



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



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



Indicate the number of shares
outstanding of each of the issuers class of common stock, as of the latest practicable date.



|                             |  |                              
|---------------------------- |  | -----------------------------
|Class:                       |  | Outstanding at August 8, 2005
|Common Stock $.001 par value |  | 47,006,192 shares            



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##### Table of Contents

INDEVUS PHARMACEUTICALS, INC.

INDEX TO FORM 10-Q



|                              |  |                                                                                                  |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------ |  | ----
|                              |  |                                                                                                  |  | PAGE
|PART I.
FINANCIAL INFORMATION |  |                                                                                                 
|                              |  |                                                                                                 
|Item 1.                       |  | Financial Statements                                                                             |  |     
|                              |  |                                                                                                 
|                              |  | Consolidated Balance Sheets as of June 30, 2005 and September 30, 2004                           |  | 3   
|                              |  |                                                                                                 
|                              |  | Consolidated Statements of Operations for the Three and Nine Months ended June 30, 2005 and 2004 |  | 4   
|                              |  |                                                                                                 
|                              |  | Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2005 and 2004           |  | 5   
|                              |  |                                                                                                 
|                              |  | Notes to Unaudited Consolidated Financial Statements                                             |  | 6   
|                              |  |                                                                                                 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations            |  | 13  
|                              |  |                                                                                                 
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                       |  | 21  
|                              |  |                                                                                                 
|Item 4.                       |  | Controls and Procedures                                                                          |  | 21  
|                              | 
|PART II.
OTHER INFORMATION    |  |                                                                                                 
|                              |  |                                                                                                 
|Item 1.                       |  | Legal Proceedings                                                                                |  | 22  
|                              |  |                                                                                                 
|Item 5.                       |  | Other Information                                                                                |  | 23  
|                              |  |                                                                                                 
|Item 6.                       |  | Exhibits                                                                                         |  | 23  
|                              | 
|SIGNATURES                    |  | 24                                                                                              



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements



INDEVUS PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in thousands
except share data)



|                                                                                                                              |  |               |          |   |                    |   |          |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ------------------ | - | -------- | -
|                                                                                                                              |  | June 30, 2005 |          |   | September 30, 2004 |  
|ASSETS                                                                                                                        | 
|                                                                                                                              |  |              
|Current assets:                                                                                                               |  |               |          |   |                    |   |          |  
|Cash and cash equivalents                                                                                                     |  | $             | 105,853  |   |                    | $ | 127,099  |  
|Marketable securities                                                                                                         |  |               | 2,741    |   |                    |   | 26,423   |  
|Accounts receivable                                                                                                           |  |               | 2,111    |   |                    |   | 7,042    |  
|Inventories                                                                                                                   |  |               |         |   |                    |   | 1,160    |  
|Prepaids and other current assets                                                                                             |  |               | 2,333    |   |                    |   | 3,082    |  
|                                                                                                                              |  |               |          |   |                    |   |          |  
|Total current assets                                                                                                          |  |               | 113,038  |   |                    |   | 164,806  |  
|                                                                                                                              |  |              
|Marketable securities                                                                                                         |  |               |         |   |                    |   | 3,486    |  
|Property and equipment, net                                                                                                   |  |               | 1,252    |   |                    |   | 546      |  
|Insurance claim receivable                                                                                                    |  |               | 1,258    |   |                    |   | 1,258    |  
|Prepaid debt issuance costs                                                                                                   |  |               | 2,008    |   |                    |   | 2,503    |  
|Other assets                                                                                                                  |  |               | 1,108    |   |                    |   | 1,239    |  
|                                                                                                                              |  |               |          |   |                    |   |          |  
|Total assets                                                                                                                  |  | $             | 118,664  |   |                    | $ | 173,838  |  
|                                                                                                                              |  |               |          |   |                    |   |          |  
|LIABILITIES                                                                                                                   | 
|                                                                                                                              |  |              
|Current liabilities:                                                                                                          |  |               |          |   |                    |   |          |  
|Accounts payable                                                                                                              |  | $             | 2,125    |   |                    | $ | 6,361    |  
|Accrued expenses                                                                                                              |  |               | 10,571   |   |                    |   | 13,707   |  
|Accrued interest                                                                                                              |  |               | 2,075    |   |                    |   | 950      |  
|Deferred revenue                                                                                                              |  |               | 12,500   |   |                    |   | 12,500   |  
|                                                                                                                              |  |               |          |   |                    |   |          |  
|Total current liabilities                                                                                                     |  |               | 27,271   |   |                    |   | 33,518   |  
|                                                                                                                              |  |              
|Convertible notes                                                                                                             |  |               | 72,000   |   |                    |   | 72,000   |  
|Deferred revenue                                                                                                              |  |               | 121,875  |   |                    |   | 131,250  |  
|Other                                                                                                                         |  |               | 451      |   |                    |   | 100      |  
|Minority interest                                                                                                             |  |               | 6        |   |                    |   | 8        |  
|                                                                                                                             
|STOCKHOLDERS DEFICIT                                                                                                         | 
|                                                                                                                              |  |              
|Preferred stock, $.001 par value, 5,000,000 shares authorized;                                                                |  |               |          |   |                    |   |          |  
|Series B, 239,425 shares issued and outstanding (liquidation preference at June 30, 2005 $3,048)                              |  |               | 3,000    |   |                    |   | 3,000    |  
|Series C, 5,000 shares issued and outstanding (liquidation preference at June 30, 2005 $507)                                  |  |               | 500      |   |                    |   | 500      |  
|Common Stock, $.001 par value, 80,000,000 shares authorized; 47,825,896 shares issued at June 30, 2005 and September 30, 2004 |  |               | 48       |   |                    |   | 48       |  
|Additional paid-in capital                                                                                                    |  |               | 308,136  |   |                    |   | 309,050  |  
|Accumulated deficit                                                                                                           |  |               | (409,561 | ) |                    |   | (368,903 | )
|Accumulated other comprehensive loss                                                                                          |  |               | (10      | ) |                    |   | (131     | )
|Treasury stock, at cost, 820,954 and 1,057,125 shares at June 30, 2005 and September 30, 2004, respectively                   |  |               | (5,052   | ) |                    |   | (6,602   | )
|                                                                                                                              |  |               |          |   |                    |   |          |  
|Total stockholders deficit                                                                                                   |  |               | (102,939 | ) |                    |   | (63,038  | )
|                                                                                                                              |  |               |          |   |                    |   |          |  
|Total liabilities and stockholders deficit                                                                                   |  | $             | 118,664  |   |                    | $ | 173,838  |  
|                                                                                                                              |  |               |          |   |                    |   |          |  



The accompanying notes
are an integral part of these unaudited financial statements.



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INDEVUS PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended June 30, 2005 and 2004

(Unaudited)

(Amounts in thousands except per share data)



|                                             |  |                             |        |   |                            |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                             |  | Three months ended June 30, |        |   | Nine months ended June 30, |  
|                                             |  | 2005                        |        |   | 2004                       |   |         | 2005 |  |   | 2004    |  
|Revenues:                                    |  |                             |        |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Product revenue                              |  | $                           | 3,143  |   |                            | $ | 479     |      |  | $ | 10,848  |   |  | $ | 2,118   |  
|Contract and license fees                    |  |                             | 5,050  |   |                            |   | 3,982   |      |  |   | 12,385  |   |  |   | 4,146   |  
|                                             |  |                             |        |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Total revenues                               |  |                             | 8,193  |   |                            |   | 4,461   |      |  |   | 23,233  |   |  |   | 6,264   |  
|                                             |  |                             |        |  
|Costs and expenses:                          |  |                             |        |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Cost of product revenue                      |  |                             | 1,874  |   |                            |   | 98      |      |  |   | 7,729   |   |  |   | 459     |  
|Research and development                     |  |                             | 5,559  |   |                            |   | 5,777   |      |  |   | 17,448  |   |  |   | 18,636  |  
|Marketing, general and administrative        |  |                             | 9,045  |   |                            |   | 14,572  |      |  |   | 34,713  |   |  |   | 24,370  |  
|                                             |  |                             |        |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Total costs and expenses                     |  |                             | 16,478 |   |                            |   | 20,447  |      |  |   | 59,890  |   |  |   | 43,465  |  
|                                             |  |                             |        |  
|Loss from operations                         |  |                             | (8,285 | ) |                            |   | (15,986 | )    |  |   | (36,657 | ) |  |   | (37,201 | )
|Investment income                            |  |                             | 798    |   |                            |   | 315     |      |  |   | 2,210   |   |  |   | 717     |  
|Interest expense                             |  |                             | (1,293 | ) |                            |   | (1,293  | )    |  |   | (3,878  | ) |  |   | (3,878  | )
|Other                                        |  |                             | (9     | ) |                            |   | 1       |      |  |   | (183    | ) |  |   | 5       |  
|                                             |  |                             |        |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Loss before income taxes                     |  |                             | (8,789 | ) |                            |   | (16,963 | )    |  |   | (38,508 | ) |  |   | (40,357 | )
|Provision for income taxes                   |  |                             | (1,000 | ) |                            |   |        |      |  |   | (2,150  | ) |  |   |        |  
|                                             |  |                             |        |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                     |  | $                           | (9,789 | ) |                            | $ | (16,963 | )    |  | $ | (40,658 | ) |  | $ | (40,357 | )
|                                             |  |                             |        |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Net loss per common share, basic and diluted |  | $                           | (0.21  | ) |                            | $ | (0.36   | )    |  | $ | (0.87   | ) |  | $ | (0.85   | )
|                                             |  |                             |        |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Weighted average common shares outstanding:  |  |                             |        |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted                            |  |                             | 46,999 |   |                            |   | 47,729  |      |  |   | 46,964  |   |  |   | 47,445  |  



The accompanying notes
are an intergal part of these unaudited financial statements.



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INDEVUS PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended June 30, 2005 and 2004

(Unaudited)

(Amounts in thousands)



|                                                                                          |  |                                   |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                          |  | For the nine months ended June 30 |        
|                                                                                          |  | 2005                              |         |   | 2004 |  
|Cash flows from operating activities:                                                     |  |                                   |         |   |      |   |         |  
|Net loss                                                                                  |  | $                                 | (40,658 | ) |      | $ | (40,357 | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |                                   |         |   |      |   |         |  
|Depreciation and amortization                                                             |  |                                   | 279     |   |      |   | 52      |  
|Amortization of convertible note issuance costs                                           |  |                                   | 495     |   |      |   | 495     |  
|Impairment and loss on equity securities                                                  |  |                                   | 185     |   |      |   |        |  
|Noncash compensation                                                                      |  |                                   | 75      |   |      |   |        |  
|Lease abandonment                                                                         |  |                                   | 1,310   |   |      |   |        |  
|Changes in assets and liabilities:                                                        |  |                                   |         |   |      |   |         |  
|Accounts receivable                                                                       |  |                                   | 4,931   |   |      |   | (775    | )
|Inventories                                                                               |  |                                   | 1,160   |   |      |   |        |  
|Prepaid and other assets                                                                  |  |                                   | 813     |   |      |   | (5,658  | )
|Accounts payable                                                                          |  |                                   | (4,236  | ) |      |   | 257     |  
|Deferred revenue                                                                          |  |                                   | (9,375  | ) |      |   | 146,875 |  
|Accrued expenses and other liabilities                                                    |  |                                   | (3,003  | ) |      |   | 6,239   |  
|                                                                                          |  |                                   |         |   |      |   |         |  
|Net cash (used in) provided by operating activities                                       |  |                                   | (48,024 | ) |      |   | 107,128 |  
|                                                                                          |  |                                   |         |   |      |   |         |  
|Cash flows from investing activities:                                                     |  |                                   |         |   |      |   |         |  
|                                                                                          |  |                                  
|Purchases of property and equipment                                                       |  |                                   | (983    | ) |      |   | (545    | )
|Purchase of marketable securities                                                         |  |                                   |        |   |      |   | (31,927 | )
|Proceeds from maturities and sales of marketable securities                               |  |                                   | 27,152  |   |      |   | 24,324  |  
|Proceeds from sale of investment in Aeolus                                                |  |                                   | 22      |   |      |   |        |  
|                                                                                          |  |                                   |         |   |      |   |         |  
|Net cash (used in) provided by investing activities                                       |  |                                   | 26,191  |   |      |   | (8,148  | )
|                                                                                          |  |                                   |         |   |      |   |         |  
|Cash flows from financing activities:                                                     |  |                                   |         |   |      |   |         |  
|Net proceeds form issuance of common stock and treasury stock                             |  |                                   | 587     |   |      |   | 1,947   |  
|                                                                                          |  |                                   |         |   |      |   |         |  
|Net cash provided by financing activities                                                 |  |                                   | 587     |   |      |   | 1,947   |  
|                                                                                          |  |                                   |         |   |      |   |         |  
|Net change in cash and cash equivalents                                                   |  |                                   | (21,246 | ) |      |   | 100,927 |  
|                                                                                          |  |                                  
|Cash and cash equivalents at beginning of period                                          |  |                                   | 127,099 |   |      |   | 57,717  |  
|                                                                                          |  |                                   |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                |  | $                                 | 105,853 |   |      | $ | 158,644 |  
|                                                                                          |  |                                   |         |   |      |   |         |  



The accompanying notes
are an integral part of these unaudited consolidated financial statements.



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INDEVUS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



A. Basis of Presentation



The consolidated
interim financial statements included herein have been prepared by Indevus Pharmaceuticals, Inc. (Indevus or the Company) without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission
(SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to
such rules and regulations. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial
position, results of operations and cash flows of the Company. The unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the
Companys Form 10-K for the fiscal year ended September 30, 2004.



Certain prior year amounts have been reclassified to conform to fiscal 2005 classifications.



Indevus is a biopharmaceutical company engaged in the development and commercialization of a diversified portfolio of product candidates, including
SANCTURA® (trospium chloride), approved by the U.S.
Food and Drug Administration for the treatment of overactive bladder (OAB), and multiple compounds in clinical development.



B. Revenue Recognition:



Product revenue consists of revenues from sales of products, commissions, royalties and reimbursements from Odyssey Pharmaceuticals, Inc., a
specialty-branded subsidiary of PLIVA d.d. (PLIVA), in accordance with our co-promotion and licensing agreement with PLIVA (the PLIVA Agreement), for royalties owed by the Company to Madaus A.G. (Madaus). Contract
and license fee revenue consists of revenue stemming from contractual initial and milestone payments received from customers, including amortization of deferred revenue from contractual payments, reimbursements from PLIVA for their share of SANCTURA
promotion and advertising costs incurred by the Company less an amount owed by the Company to PLIVA for the Companys share of SANCTURA promotion and advertising costs incurred by PLIVA, sales force subsidies from PLIVA, and grants from
agencies supporting research and development activities.



The
Company records sales of product as product revenue upon the later of shipment or as title passes to its customer.



Royalty revenue consists of payments received from licensees for a portion of sales proceeds from products that utilize the Companys licensed
technologies and are generally reported to the Company in a royalty report on a specified periodic basis. Royalty revenue is recognized in the period in which the sales of the product or technology occurred on which the royalties are based unless
the royalty report for such period is received subsequent to the time the Company is required to report its results on Form 10-Q or Form 10-K and the amount of the royalties earned is not estimable, in which case the Company recognizes such royalty
revenue in the subsequent accounting period when it receives the royalty report and when the amount of and basis for such royalty payments are reported to the Company in accurate and appropriate form and in accordance with the related license
agreement.



The Companys business strategy includes
entering into collaborative license and development or co-promotion agreements with strategic partners for the development and commercialization of the Companys products or product candidates. The terms of the agreements typically include
non-refundable license fees, funding of research and development, payments based upon achievement of certain milestones and royalties on net product sales. Non-refundable license fees are recognized as revenue when the Company has a contractual
right to receive such payment, the contract price is fixed or determinable, the collection of the resulting receivable is reasonably assured and the Company has no further performance obligations under the license agreement. In multiple element
arrangements where the Company has continuing performance obligations, license fees are recognized together with any up-front payment over the term of the arrangement as the Company completes its performance obligations, unless the delivered
technology has stand alone value to the customer and there is objective and reliable evidence of fair value of the undelivered elements in the arrangement. The Company records such revenue as contract and license fee revenue.



Revenues from milestone payments related to arrangements under which the
Company has continuing performance obligations are recognized as revenue upon achievement of the milestone only if all of the following conditions are met: the milestone payments are non-refundable; achievement of the milestone was not reasonably
assured at the inception of the arrangement; substantive effort is involved in achieving the milestone; and the amount of the milestone is reasonable in



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INDEVUS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



B. Revenue Recognition (continued):



relation to the effort expended or the risk associated with achievement of the milestone. Determination as to whether a milestone meets the aforementioned conditions
involves managements judgment. If any of these conditions are not met, the milestone payments are deferred and recognized as revenue over the term of the arrangement as the Company completes its performance obligations. Revenues from milestone
payments related to arrangements under which the Company has no continuing performance obligations are recognized upon achievement of the related milestone. The Company records such revenue as contract and license fee revenue. Contractual subsidies
of ongoing expenses are recorded as contract and license fee revenue.



Under the PLIVA and Esprit Agreements (see Note G.), the initial and subsequent milestone payments, once earned, are recognized as contract and license fee revenue using the contingency-adjusted performance model. Under this model, when a
milestone is earned, revenue is immediately recognized on a pro-rata basis in the period the Company achieves the milestone based on the time elapsed from inception of the PLIVA Agreement to the time the milestone is earned over the estimated
duration of the PLIVA and Esprit Agreements. Thereafter, the remaining portion of the milestone payment is recognized on a straight-line basis over the remaining estimated duration of the PLIVA and Esprit Agreements.



Multiple element arrangements are evaluated pursuant to EITF 00-21,
Accounting Revenue Arrangements with Multiple Deliverables (EITF 00-21). Pursuant to EITF 00-21, in multiple element arrangements where we have continuing performance obligations, contract, milestone and license fees are
recognized together with any up-front payments over the term of the arrangement as we complete our performance obligation, unless the delivered technology has stand alone value to the customer and there is objective, reliable evidence of fair value
of the undelivered element in the arrangement. In the case of an arrangement where it is determined there is a single unit of accounting, all cash flows from the arrangement are considered in the determination of all revenue to be recognized.
Additionally, pursuant to the guidance of Securities and Exchange Commission Staff Accounting Bulletin 104 (SAB 104), unless evidence suggests otherwise, revenue from consideration received is recognized on a straight-line basis over the
expected term of the arrangements. In particular relating to the PLIVA Agreement, the Company and PLIVA were contractually bound to share certain promotion and advertising costs relating to SANCTURA. For promotion and advertising costs incurred by
the Company, reimbursements from PLIVA for PLIVAs share are reflected in contract and license fee revenue. For promotion and advertising costs incurred by PLIVA, reimbursements to PLIVA for the Companys share were reflected as a
reduction of contract and license fee revenue.



Cash received
in advance of revenue recognition is recorded as deferred revenue.



C.
Inventories



Inventories are stated at the lower of cost
or market with cost determined under the first-in, first-out (FIFO) method.



The components of inventory are as follows:



|               |  |               |   |                    |   |          
|-------------- |  | ------------- | - | ------------------ | - | ---------
|               |  | June 30, 2005 |   | September 30, 2004
|Raw materials  |  | $             |  |                    | $ | 488,000  
|Finished goods |  |               |  |                    |   | 672,000  
|               |  |               |   |                    |   |          
|               |  | $             |  |                    | $ | 1,160,000
|               |  |               |   |                    |   |          



Inventories consist
solely of SANCTURA. Raw materials consist of tablets of SANCTURA in bulk form purchased from the Companys supplier, Madaus. Finished goods consist of SANCTURA tablets packaged in bottles for resale and blister packages for distribution as
samples.



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##### Table of Contents

INDEVUS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



D. Basic and Diluted Loss per Common Share



During the three month period ended June 30, 2005, securities not included in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) the notes convertible into 10,817,000 shares of Common Stock at a conversion price of $6.656 per share and which are convertible through July 15, 2008 and (ii) options to
purchase 8,297,000 shares of Common Stock at prices ranging from $2.92 to $20.13 with expiration dates ranging up to April 19, 2015. Additionally, during the three month period ended June 30, 2005, potentially dilutive securities not included in the
computation of diluted earnings per share, because they would have an antidilutive effect due to the net loss for the period, were as follows: (i) options to purchase 3,239,000 shares of Common Stock at prices ranging from $1.22 to $2.87 with
expiration dates ranging up to June 13, 2015; (ii) Series B and C preferred stock convertible into 622,222 shares of Common Stock and (iii) warrants to purchase 10,000 shares of Common Stock with an exercise price of $6.19 and an expiration date of
July 17, 2006.



During the three month period ended June 30,
2004, securities not included in the computation of diluted earnings per share, because their exercise price exceeded the average market price during the period were as follows: (i) the notes convertible into 10,817,000 shares of Common Stock at a
conversion price of $6.656 per share and which are convertible through July 15, 2008 and (ii) options to purchase 501,000 shares of Common Stock at prices ranging from $7.37 to $20.13 with expiration dates ranging up to June 8, 2014. Additionally,
during the three month period ended June 30, 2004 potentially dilutive securities not included in the computation of diluted earnings per share, because they would have an antidilutive effect due to the net loss for the period, were as follows: (i)
options to purchase 9,629,000 shares of Common Stock at prices ranging from $1.22 to $7.10 with expiration dates ranging up to May 18, 2014; (ii) Series B and C preferred stock convertible into 622,222 shares of Common Stock and (iii) warrants to
purchase 55,000 shares of Common Stock with exercise prices ranging from $5.00 to $6.19 and with expiration dates ranging up to July 17, 2006.



During the nine month period ended June 30, 2005, securities not included in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) the notes convertible into 10,817,000 shares of Common Stock at a conversion price of $6.656 per share and which are convertible through July 15, 2008 and (ii) options to
purchase 5,076,000 shares of Common Stock at prices ranging from $5.24 to $20.13 with expiration dates ranging up to January 24, 2015. Additionally, during the nine month period ended June 30, 2005, potentially dilutive securities not included in
the computation of diluted earnings per share, because they would have an antidilutive effect due to the net loss for the period, were as follows: (i) options to purchase 6,077,000 shares of Common Stock at prices ranging from $1.22 to $4.63 with
expiration dates ranging up to January 24, 2015; (ii) Series B and C preferred stock convertible into 622,222 shares of Common Stock and (iii) warrants to purchase 10,000 shares of Common Stock with an exercise price of $6.19 and an expiration date
of July 17, 2006.



During the nine month period ended June 30,
2004, securities not included in the computation of diluted earnings per share, because their exercise price exceeded the average market price during the period were as follows: (i) the notes convertible into 10,817,000 shares of Common Stock at a
conversion price of $6.656 per share and which are convertible through July 15, 2008; (ii) options to purchase 569,000 shares of Common Stock at prices ranging from $6.68 to $20.13 with expiration dates ranging up to June 8, 2014. Additionally,
during the nine month period ended June 30, 2004 potentially dilutive securities not included in the computation of diluted earnings per share, because they would have an antidilutive effect due to the net loss for the period, were as follows: (i)
options to purchase 9,548,000 shares of Common Stock at prices ranging from $1.22 to $6.25 with expiration dates ranging up to March 10, 2014; (ii) Series B and C preferred stock convertible into 622,222 shares of Common Stock and (iii) warrants to
purchase 55,000 shares of Common Stock with exercise prices ranging from $5.00 to $6.19 and with expiration dates ranging up to July 17, 2006.



Certain of the above securities contain anti-dilution provisions which may result in a change in the exercise price or number of shares issuable upon
exercise or conversion of such securities.





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##### Table of Contents

INDEVUS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



E. Pro Forma Net Loss Information



The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for
its employee stock-based compensation plans. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123 (SFAS No. 148). Had compensation expense for the Companys employee stock option plans been determined based on the fair value at the grant date for awards under these plans using a Black-Scholes option pricing
model consistent with the methodology prescribed under SFAS No. 148, the Companys net loss and net loss per share would have approximated the pro forma amounts indicated below:



|                                                                                       |  |                             |             |   |                            |   |             |      |  |   |             |   |  |   |             |  
|-------------------------------------------------------------------------------------- |  | --------------------------- | ----------- | - | -------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                       |  | Three months ended June 30, |             |   | Nine months ended June 30, |  
|                                                                                       |  | 2005                        |             |   | 2004                       |   |             | 2005 |  |   | 2004        |  
|As reported net loss                                                                   |  | $                           | (9,789,000  | ) |                            | $ | (16,963,000 | )    |  | $ | (40,658,000 | ) |  | $ | (40,357,000 | )
|Noncash compensation expense included in reported net income, net of tax               |  | $                           |            |   |                            | $ |            |      |  | $ | 75,000      |   |  | $ |            |  
|Compensation expense determined under the fair-value method for all awards, net of tax |  | $                           | (705,000    | ) |                            | $ | (940,000    | )    |  | $ | (2,387,000  | ) |  | $ | (1,547,000  | )
|Pro forma net loss                                                                     |  | $                           | (10,494,000 | ) |                            | $ | (17,903,000 | )    |  | $ | (42,970,000 | ) |  | $ | (41,904,000 | )
|As reported net loss per common share:                                                 |  |                             |             |   |                            |   |             |      |  |   |             |   |  |   |             |  
|Basic                                                                                  |  | $                           | (0.21       | ) |                            | $ | (0.36       | )    |  | $ | (0.87       | ) |  | $ | (0.85       | )
|Diluted                                                                                |  | $                           | (0.21       | ) |                            | $ | (0.36       | )    |  | $ | (0.87       | ) |  | $ | (0.85       | )
|Pro forma net loss per common share:                                                   |  |                             |             |   |                            |   |             |      |  |   |             |   |  |   |             |  
|Basic                                                                                  |  | $                           | (0.22       | ) |                            | $ | (0.38       | )    |  | $ | (0.91       | ) |  | $ | (0.88       | )
|Diluted                                                                                |  | $                           | (0.22       | ) |                            | $ | (0.38       | )    |  | $ | (0.91       | ) |  | $ | (0.88       | )



F. Comprehensive Loss



Comprehensive loss for the three and nine month periods ended
June 30, 2005 and 2004, respectively, is as follows:



|                                                       |  |                             |            |   |                            |   |             |      |  |   |             |   |  |   |             |  
|------------------------------------------------------ |  | --------------------------- | ---------- | - | -------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                       |  | Three months ended June 30, |            |   | Nine months ended June 30, |  
|                                                       |  | 2005                        |            |   | 2004                       |   |             | 2005 |  |   | 2004        |  
|Net loss                                               |  | $                           | (9,789,000 | ) |                            | $ | (16,963,000 | )    |  | $ | (40,658,000 | ) |  | $ | (40,357,000 | )
|Change in unrealized net gain or (loss) on investments |  |                             | 37,000     |   |                            |   | (112,000    | )    |  |   | (16,000     | ) |  |   | (72,000     | )
|                                                       |  |                             |            |   |                            |   |             |      |  |   |             |   |  |   |             |  
|Comprehensive loss                                     |  | $                           | (9,752,000 | ) |                            | $ | (17,075,000 | )    |  | $ | (40,674,000 | ) |  | $ | (40,429,000 | )
|                                                       |  |                             |            |   |                            |   |             |      |  |   |             |   |  |   |             |  



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##### Table of Contents

INDEVUS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



G. SANCTURA



In April 2004, we entered into the PLIVA Agreement for the U.S. commercialization of SANCTURA (trospium chloride), which was launched in August 2004.
Pursuant to the PLIVA Agreement, on September 27, 2004, the Company made formal notification to PLIVA with respect to the termination of the co-promotion period of the PLIVA Agreement, thereby converting the PLIVA Agreement into a royalty-bearing
structure (the Conversion). The Conversion became effective on November 29, 2004 as of which date approximately 200 of the Companys primary care sales representatives became PLIVA employees. Under this royalty-bearing structure,
the Company received royalties from PLIVA based on net sales of SANCTURA, and PLIVA was responsible for promotional and advertising costs. Additionally, for the three years commencing November 29, 2004, PLIVA began subsidizing, at an annual rate of
approximately $7.7 million, the Companys specialty sales force which is continuing to promote SANCTURA to urology specialists, obstetricians and gynecologists, and other high prescribers. The PLIVA Agreement was amended on April 30, 2005 and
May 14, 2005 as described below.



On April 30, 2005, the
Company and PLIVA clarified and amended certain provisions of the PLIVA Agreement relating to royalties payable on sales of SANCTURA. This amendment provided for Indevus to receive royalty payments based on a revised calculation methodology up to a
defined amount in exchange for our simultaneous contribution of a portion of these payments toward Phase IV clinical studies planned or being conducted by PLIVA. The aggregate increase in royalties under the revised methodology, net of the
Companys contribution to PLIVAs Phase IV clinical studies and royalties due to Madaus, was approximately $450,000, and was fully-recognized as product revenue in the three and nine month periods ended June 30, 2005.



On May 14, 2005, the Company, PLIVA and Esprit Pharma Holding Company
(previously Saturn Pharmaceuticals, Inc.) (Esprit) entered into an Amendment and Consent Agreement (the Amendment and Consent Agreement), whereby the Company consented to the acquisition by Esprit of the rights to market
SANCTURA in the U.S. from PLIVA and the assumption by Esprit of PLIVAs obligations under the PLIVA Agreement except for the minimum detail and sales force requirements which were waived. The Amendment and Consent Agreement amended certain
economic provisions of the PLIVA Agreement. Esprit agreed to pay Indevus royalties on net sales of SANCTURA based upon increased effective royalty rates and subject to an annual minimum royalties of $5,625,000, $7,875,000, and $10,500,000 for the
first three years of the Amendment and Consent Agreement, respectively. Additionally, the annual sales force subsidy was increased to $8,750,000 through December 31, 2007 and extended for one additional year at an annual rate of $4,375,000. Also,
Esprit has granted Indevus the right to co-promote one of Esprits future products on terms to be negotiated. The PLIVA Agreement as amended by the April 30, 2005 amendment and the Amendment and Consent Agreement will hereafter be referred to
as the Esprit Agreement.



Pursuant to the closing of the
Amendment and Consent Agreement, on July 1, 2005 the Company received a payment of $5,849,000 for the following: (i) $1,184,000 related to accounts receivable as of June 30, 2005; (ii) $2,417,000 for manufactured bottles of SANCTURA ordered by PLIVA
and expected to be shipped during the three month period ending September 30, 2005; (iii) $1,250,000 of royalties, including third party royalties, on certain shipments of SANCTURA and (iv) $998,000 of reimbursement from PLIVA for a portion of
certain SANCTURA- related development conducted by the Company. The Company expects to recognize revenue in future periods for the $2,417,000 of bottles to be shipped to Esprit, $1,250,000 related to the royalties and $998,000 related to the
reimbursed development costs.



Product revenue related to
SANCTURA for the three month period ended June 30, 2005, consisted of $762,000 from sales of bottles of SANCTURA to PLIVA, $1,180,000 of commissions and royalties from PLIVA on sales of SANCTURA, and $789,000 of royalties due to Madaus for which
PLIVA is contractually obligated to reimburse the Company. Product revenues related to SANCTURA for the nine month period ended June 30, 2005, consisted of $5,839,000 from sales of bottles and samples of SANCTURA to PLIVA, $2,571,000 of commissions
and royalties from PLIVA on sales of SANCTURA, and $1,137,000 of royalties due to Madaus for which PLIVA is contractually obligated to reimburse the Company.



Contract and license fee revenue related to SANCTURA in the three month period ended June 30, 2005 consisted of $3,125,000 from amortization of the
deferred revenue and $1,920,000 for the sales force subsidy from PLIVA. Contract and license fee revenue related to SANCTURA in the nine month period ended June 30, 2005 consisted of $9,375,000 from amortization of the deferred revenue and
$4,480,000 for the sales force subsidy from PLIVA, less $1,489,000 net reimbursement due to PLIVA comprised of $2,683,000 of PLIVAs share of SANCTURA promotion and advertising costs incurred by Indevus, less $4,172,000 owed by the Company to
PLIVA for our share of SANCTURA promotion and advertising costs incurred by PLIVA.



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##### Table of Contents

INDEVUS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



H. Withdrawal of Redux, Legal Proceedings, Insurance Claims, and Related Contingencies



In May 2001, the Company entered into the AHP Indemnity and Release Agreement pursuant to which Wyeth agreed to indemnify
the Company against certain classes of product liability cases filed against the Company related to Redux(dexfenfluramine), a prescription anti-obesity compound withdrawn from the market in September 1997. This indemnification covers plaintiffs who initially opted out of Wyeths national class action settlement of diet drug claims
and claimants alleging primary pulmonary hypertension. In addition, Wyeth has agreed to fund all future legal costs related to the Companys defense of Redux-related product liability cases. Also, pursuant to the agreement, Wyeth has funded
additional insurance coverage to supplement the Companys existing product liability insurance. The Company believes this total insurance coverage is sufficient to address its potential remaining Redux product liability exposure. However, there
can be no assurance that uninsured or insufficiently insured Redux-related claims or Redux-related claims for which the Company is not otherwise indemnified or covered under the AHP Indemnity and Release Agreement will not have a material adverse
effect on the Companys future business, results of operations or financial condition or that the potential of any such claims would not adversely affect the Companys ability to obtain sufficient financing to fund operations. Up to the
date of the AHP Indemnity and Release Agreement, the Companys defense costs were paid by, or subject to reimbursement to the Company from, the Companys product liability insurers. To date, there have been no Redux-related product
liability settlements or judgments paid by the Company or its insurers. In exchange for the indemnification, defense costs, and insurance coverage provided to Indevus by Wyeth, the Company agreed to dismiss its suit against Wyeth filed in January
2000, its appeal from the order approving Wyeths national class action settlement of diet drug claims, and its cross-claims against Wyeth related to Redux product liability legal actions.



As of June 30, 2005, the Company had an outstanding insurance claim of
$3,735,000, consisting of payments made by the Company to the group of law firms defending the Company in the Redux-related product liability litigation, for services rendered by such law firms through May 30, 2001. The full amount of the
Companys current outstanding insurance claim is made pursuant to the Companys product liability policy issued to the Company by Reliance Insurance Company (Reliance). In October 2001, the Commonwealth Court of Pennsylvania
granted an Order of Liquidation to the Insurance Commissioner of Pennsylvania to begin liquidation proceedings against Reliance. Based upon discussions with its attorneys and other consultants regarding the amount and timing of potential collection
of its claims on Reliance, the Company has recorded a reserve against its outstanding and estimated claim receivable from Reliance to reduce the balance to the estimated net realizable value of $1,258,000 reflecting the Companys best estimate
given the available facts and circumstances. The amount the Company collects could differ from the $1,258,000 reflected as a noncurrent insurance claim receivable at June 30, 2005. It is uncertain when, if ever, the Company will collect any of its
$3,735,000 of estimated claims. If the Company incurs additional product liability defense and other costs subject to claims on the Reliance product liability policy up to the $5,000,000 limit of the policy, the Company will have to pay such costs
without expectation of reimbursement and will incur charges to operations for all or a portion of such payments.



At June 30, 2005, the Company has an accrued liability of approximately $600,000 for Redux-related expenses, including legal expenses. The amounts the
Company ultimately pays could differ from this amount. To the extent amounts paid differ from the amounts accrued, the Company will record a charge or credit to the statement of operations.



I. Income taxes



The provision for income taxes of $1,000,000 for the three month period ended June 30, 2005 and of $2,150,000 for the nine
month period ended June 30, 2005 relates to U.S. federal alternative minimum tax and state income tax. Tax recognition of the initial and milestone payments received from PLIVA in fiscal 2004 were deferred to fiscal 2005 when they were recognized in
full. Utilization of tax loss carryforwards is limited for use against the U.S. federal alternative tax and by certain states resulting in federal and state tax obligations in fiscal 2005.



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##### Table of Contents

INDEVUS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



J. Investment in Aeolus



In the three month period ended June 30, 2005 the Company recorded a loss on equity securities of $10,000 from the sale of its investment in Aeolus
Pharmaceuticals, Inc. (Aeolus). The loss on equity securities of $185,000 in the nine month period ended June 30, 2005 includes a charge recorded in the three month period ended March 31, 2005 for impairment of equity securities of
$175,000 to reflect a write down of the Companys investment in Aeolus to fair value as the decline in Aeolus stock was deemed other than temporary. These amounts are reflected in other income and expense in the three and nine month periods
ended June 30, 2005.



K. Facilities Lease



In June 2005, the Company occupied its new corporate headquarters. Pursuant
to the terms of the lease entered into by the Company in December 2004, the Company leases 45,000 square feet for an initial term of 66 months. The Company occupied its new facilities in June 2005 and ceased using its former facilities prior to the
April 2007 expiration of the lease period of its former facilities. As a result, the Company recorded a charge of approximately $1,310,000 in the three and nine month periods ended June 30, 2005 related to the nonutilization of its former
facilities. The charge represents the Companys best estimate of fair value of its ongoing liability determined by comparing future lease payment obligations, net of potential sub-lease rental, and related costs in accordance with Statement of
Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). The Company will review these estimates and assumptions, or at least a quarterly basis until the lease
terminates, and make modifications necessary to reflect changed circumstances when such circumstances become known.



L. Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued its Statement of Financial Accounting No. 123 (revised 2004),
Share-Based Payments (SFAS No. 123R), which revises Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation and requires companies to expense the fair value of employee stock
options and other forms of stock-based compensation. Under SFAS 123R, the most significant change in practice would be treating the fair value of stock-based payment awards that are within its scope as compensation expense in the income statement
beginning on the date that a company grants the awards to employees. In April 2005, the effective date for this accounting standard was deferred until the first annual period beginning after June 15, 2005. The Company will adopt SFAS No. 123R in the
reporting period starting October 1, 2005. The Company is currently assessing the impact that the adoption of this standard will have on its financial position and results of operations.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 is a
replacement of APB No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a
change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The
reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005. The Company will adopt this pronouncement beginning October 1, 2006.



M.
Subsequent Event



On July 29, 2005, the Company announced that
it has entered into a License Agreement with Schering AG, Germany (Schering) whereby it licensed exclusive U.S. rights from Schering to market NEBIDO®, a long-acting injectable testosterone preparation for the treatment of male hypogonadism (the Schering Agreement). Under
the terms of the Schering Agreement, Indevus will be responsible for the development and commercialization of NEBIDOin the United States. Schering will be responsible for manufacturing and supplying commercial product to Indevus. Indevus will pay to Schering up to $30 million in up-front, regulatory milestone, and commercialization milestone payments, including a
$7.5 million up-front payment and $5.0 million upon approval by the U.S. Food and Drug Administration (FDA) to market the product. Indevus also agreed pay to Schering 25% of net sales to cover both the cost of finished product and
royalties.



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Statements in this Form 10-Q that are not statements or descriptions of historical facts are forward looking statements under Section 21E of
the Securities Exchange Act of 1934, as amended (the Exchange Act), and the Private Securities Litigation Reform Act of 1995 and are subject to numerous risks and uncertainties. These and other forward-looking statements made by us in
reports that we file with the Securities and Exchange Commission, press releases, and public statements of our officers, corporate spokespersons or our representatives are based on a number of assumptions. The words believe,
expect, anticipate, intend, plan, estimate or other expressions which predict or indicate future events and trends and do not relate to historical matters identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-looking statements as they involve risks and uncertainties and such forward-looking statements may turn out to be wrong. Actual results could differ materially from those
currently anticipated due to a number of factors, including those set forth under Risk Factors and elsewhere in, or incorporated by reference into, the Companys Form 10-K for the fiscal year ended September 30, 2004. These factors
include, but are not limited to: dependence on the success of SANCTURA® and SANCTURA XR(once-a-day SANCTURA); the early stage of products under development; uncertainties relating to clinical trials, regulatory approval and commercialization of our products, particularly SANCTURA and SANCTURA XR; risks associated with
contractual agreements, particularly for the manufacture and co-promotion of SANCTURA and SANCTURA XR; dependence on third parties for manufacturing and marketing; competition; need for additional funds and corporate partners, including for the
development of our products; failure to acquire and develop additional product candidates; history of operating losses and expectation of future losses; product liability and insurance uncertainties; risks relating to the Redux related litigation;
limited patents and proprietary rights; dependence on market exclusivity; valuation of our common stock; risks related to repayment of debts; risks related to increased leverage; and other risks. The forward-looking statements represent our judgment
and expectations as of the date of this Form 10-Q. Except as may otherwise be required by applicable securities laws, we assume no obligation to update any such forward looking statements.



The following discussion should be read in conjunction with our unaudited
consolidated financial statements and notes thereto appearing elsewhere in this report and audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended September 30,
2004. Unless the context indicates otherwise, Indevus, the Company, we, our and us refer to Indevus Pharmaceuticals, Inc., and Common Stock refers to the common stock, $.001 par
value per share, of Indevus.



Description of the Company



Indevus Pharmaceuticals, Inc. is a biopharmaceutical company engaged in the
acquisition, development and commercialization of products targeting certain medical specialty areas, including urology and infectious diseases. We currently market SANCTURA, and are developing SANCTURA XR, a once-a-day formulation of SANCTURA, for
overactive bladder and have multiple compounds in clinical development, including PRO 2000 for the prevention of infection by HIV and other sexually transmitted pathogens, pagoclone for stuttering, aminocandin for systemic fungal infections, and IP
751 for pain and inflammatory disorders such as interstitial cystitis.



Recent Product Developments



SANCTURA



In April 2004, we entered into the PLIVA Agreement for the U.S.
commercialization of SANCTURA (trospium chloride), which was launched in August 2004. Pursuant to the PLIVA Agreement, on September 27, 2004, we made formal notification to PLIVA with respect to the termination of the co-promotion period of the
PLIVA Agreement, thereby converting the PLIVA Agreement into a royalty-bearing structure (the Conversion). The Conversion became effective on November 29, 2004 as of which date approximately 200 of our primary care sales representatives
became PLIVA employees. Under this royalty-bearing structure, we received royalties from PLIVA based on net sales of SANCTURA, and PLIVA was responsible for promotional and advertising costs. Additionally, for the three years commencing November 29,
2004, PLIVA began subsidizing, at an annual rate of approximately $7.7 million, our specialty sales force which is continuing to promote SANCTURA to urology specialists, obstetricians and gynecologists, and other high prescribers. The PLIVA
Agreement was amended on April 30, 2005 and May 14, 2005 as described below.



On April 30, 2005, we and PLIVA clarified and amended certain provisions of the PLIVA Agreement relating to royalties payable on sales of SANCTURA. This amendment provided for us to receive increased royalty payments
based on a revised calculation methodology up to a defined amount in exchange for our simultaneous contribution of a portion of these payments toward Phase IV clinical studies planned or being conducted by PLIVA. The aggregate increase in royalties
under the revised methodology, net of our contribution to PLIVAs Phase IV clinical studies and royalties due to Madaus, was approximately $450,000, and was fully-recognized as product revenue in the three and nine month periods ended June 30,
2005.



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##### Table of Contents

On May 14, 2005, we, PLIVA and Saturn Pharmaceuticals, Inc., later to become Esprit, entered into the
Amendment and Consent Agreement, whereby the Company consented to the acquisition by Esprit of the rights to market SANCTURA from PLIVA and the assumption by Esprit of PLIVAs obligations under the PLIVA Agreement except for the minimum detail
and sales force requirements of the PLIVA agreement which were waived. Esprit is a recently formed, privately-held pharmaceutical company whose CEO is John Spitznagel, former CEO of Roberts Pharmaceuticals and ESP Pharma. The executive management
team of Esprit also includes many of the former senior managers who worked with Mr. Spitznagel at both Roberts Pharmaceuticals and ESP Pharma. The lead investors in Esprit include New Enterprise Associates, Domain Associates and APAX partners.



The Amendment and Consent Agreement amended certain economic
provisions of the PLIVA Agreement. Esprit agreed to pay us, on a quarterly basis, increased royalties on net sales of SANCTURA at an annual minimum amount of $5,625,000, $7,875,000, and $10,500,000 for the first three years of the Amendment and
Consent Agreement, respectively. Additionally, the annual sales force subsidy, paid monthly, was increased to $8,750,000 through December 31, 2007 and will be paid for one additional year at an annual rate of $4,375,000. Also, Esprit has granted us
the right to co-promote one of Esprits future products on terms to be negotiated. The PLIVA Agreement and Esprits assumption thereof through the Amendment and Consent Agreement will be referred to as the Esprit Agreement.



Pursuant to the closing of the Amendment and Consent Agreement, on July 1,
2005 we received a payment of $5,849,000 for the following: (i) $1,184,000 related to accounts receivable as of June 30, 2005; (ii) $2,417,000 for manufactured bottles of SANCTURA ordered by PLIVA and expected to be shipped during the three month
period ending September 30, 2005; (iii) $1,250,000 of royalties, including third party royalties, on PLIVAs shipments of SANCTURA which were in excess of PLIVAs net sales and (iv) $998,000 of reimbursement from PLIVA for a portion of
certain SANCTURA-related development conducted by the Company. The Company expects to recognize revenue in future periods for the $2,417,000 of bottles shipped to Esprit, $1,250,000 related to the royalties and $998,000 related to the reimbursed
development costs.



In June 2005, we announced results from a
pilot Phase II study of SANCTURA XR. This was a two-week multi-center, placebo-controlled, double-blind study designed to evaluate the efficacy and safety of SANCTURA XR in 148 patients with overactive bladder. SANCTURA XR exhibited similar efficacy
to previous results of the currently marketed SANCTURA which is given twice a day. In addition, SANCTURA XR was very well tolerated.



Two Phase III trials for SANCTURA XR are scheduled to commence in the summer of 2005. Pursuant to the Esprit Agreement, we are due a $10,000,000 payment
upon the achievement of this milestone. We currently expect to file a New Drug Application (NDA) for SANCTURA XR in late calendar 2006.



NEBIDO



On July 29, 2005, the Company announced that it has entered into a License Agreement with Schering whereby it licensed exclusive U.S. rights from Schering to market NEBIDO®, a long-acting injectable testosterone
preparation for the treatment of male hypogonadism. Under the terms of the Schering Agreement, Indevus will be responsible for the development and commercialization of NEBIDO in the United States. Schering will be responsible for manufacturing and
supplying commercial product to Indevus. Indevus will pay to Schering up to $30 million in up-front, regulatory milestone, and commercialization milestone payments, including a $7.5 million up-front payment and $5.0 million upon approval by the FDA
to market the product. Indevus also agreed to pay to Schering 25% of net sales to cover both the cost of finished product and royalties. We currently intend to conduct additional studies in the U.S. for regulatory and marketing purposes. We
currently anticipate filing an NDA with the FDA in the second half of calendar 2006.



PRO 2000



A National Institutes of Health
(NIH)-sponsored Phase II/III clinical trial to assess the safety and effectiveness of PRO 2000 in blocking male to female HIV transmission began in February 2005 at sites in Africa and the U.S. The study involves approximately 3,200
HIV-uninfected women, most of whom are at risk for acquiring HIV by virtue of living in regions where the infection rate is high. The trial will also evaluate effectiveness against other sexually transmitted diseases.



A Phase III trial, sponsored by the Medical Research Council, is designed to
test the safety and effectiveness of PRO 2000 for preventing HIV infection and other sexually transmitted infections in women, is expected to begin in the summer of 2005 in four African countries. This study is expected to run for approximately 39
months and to include approximately 10,000 women.



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##### Table of Contents

In February 2005, findings from a study performed at the Mount Sinai School of Medicine were presented at
the 12thConference on Retroviruses and Opportunistic Infections. These data demonstrated that PRO 2000 retains
activity against the human immunodeficiency virus (HIV) and the herpes simplex virus (HSV) following intravaginal administration to HIV-infected women. The study, funded by the NIH, marks the first time that the anti-viral activity of a microbicide
has been demonstrated following human application.



Pagoclone



In July 2005, we initiated a Phase II trial of pagoclone in patients with
persistent developmental stuttering. The trial is being conducted in 120 adults at 16 investigational sites in the United States. We expect to have results from this study in early calendar 2006. In calendar 2005, we were granted a new U.S. patent
covering the use of pagoclone for the treatment of stuttering.



Aminocandin



Aminocandin is in development to treat systemic fungal
infections. In October 2004, we commenced a multi-dose Phase I trial of aminocandin. During dose escalation, we saw some local vein irritation as doses and concentrations increased causing us to interrupt the trial. We believe we have identified the
formulation issues that caused such vein irritation and we are currently working on reformulations of the intravenous dosage form and will be testing the new formulations in preclinical models. Overall, the product continues to have a favorable
systemic safety profile. We plan to resume Phase I testing in 2006.



IP 751



In March 2005, we announced the results of a study conducted
at the University of Pittsburgh that showed that administration of IP 751, a novel synthetic cannabinoid, significantly reduces the bladder overactivity observed in an animal model of interstitial cystitis. IP 751 suppressed the overactivity in a
dose dependent manner and at the highest dose completely reversed the excessive bladder contractility to normal function. In addition, IP 751 appeared to have no effect on the normal voiding mechanism of the bladder. We have now completed a second
study confirming these results.



Critical Accounting Policies and Estimates



The discussion and analysis of our financial condition
and results of operations is based upon our consolidated financial statements that have been prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make certain
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the
reported periods. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they
become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out
to be substantially accurate.



Expected Term of the Esprit
Agreement and Deferred Revenue



The initial $30 million
payment received from PLIVA and the $120 million payment received from PLIVA upon receipt of FDA approval to market SANCTURA are significant and we have recorded the initial and milestone payments received from PLIVA as deferred revenue and are
amortizing each of these components into revenue under the contingency adjusted method over the estimated duration of the Esprit Agreement commencing on the date earned. We believe our estimated twelve-year term of the Esprit Agreement is a
significant estimate which affects revenue recognized and the balance of deferred revenue on our balance sheet.



We amortized $3,125,000 of deferred revenue into contract and license fee revenue in the three months ended June 30, 2005 and $9,375,000 for the nine
months ended June 30, 2005. The balance of deferred revenue at June 30, 2005 is $134,375,000. We will reevaluate our estimate of the expected term of the Esprit Agreement when new information is known that could affect this estimate. If we change
our estimate of the duration of the Esprit Agreement in the future and extend or reduce our estimate of its duration, we would decrease or increase, respectively, the amount of periodic revenue to be recognized from the amortization of remaining
deferred revenue.



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Insurance Claim Receivable



As of June 30, 2005, we had an outstanding insurance claim of approximately $3,700,000, for services rendered through May
30, 2001 by the group of law firms defending us in the Redux-related product liability litigation. The full amount of our current outstanding insurance claim is made pursuant to our product liability policy issued to us by Reliance Insurance Company
(Reliance), which is in liquidation proceedings. Based upon discussions with our attorneys and other consultants regarding the amount and timing of potential collection of our claim on Reliance, we previously recorded a reserve against
our outstanding and estimated claim receivable from Reliance to reduce the balance to the estimated net realizable value of $1,258,000 reflecting our best estimate given the available facts and circumstances. We believe our reserve of approximately
$2,400,000 against the insurance claim on Reliance as of June 30, 2005 is a significant estimate reflecting managements judgment. To the extent we do not collect the insurance claim receivable of $1,258,000, we would be required to record
additional charges. Alternatively, if we collect amounts in excess of the current receivable balance, we would record a credit for the additional funds received in the statement of operations.



Redux-Related Liabilities



At June 30, 2005, we have an accrued liability of approximately $600,000 for
Redux-related expenses, including legal expenses. The amounts we ultimately pay could differ significantly from the amount currently accrued at June 30, 2005. To the extent the amounts paid differ from the amounts accrued, we will record a charge or
credit to the statement of operations.



Revenue Recognition Policy



Product revenue consists of revenues from sales of products, commissions, royalties and reimbursements from PLIVA or Esprit for royalties owed by the Company to Madaus. Contract and license fee revenue consists of revenue stemming from
contractual initial and milestone payments received from customers, including amortization of deferred revenue from contractual payments, reimbursements from PLIVA for their share of SANCTURA promotion and advertising costs incurred by the Company
less an amount owed by the Company to PLIVA for the Companys share of SANCTURA promotion and advertising costs incurred by PLIVA, sales force subsidies from PLIVA, and grants from agencies supporting research and development activities.



We record sales of product as product revenue upon the later
of shipment or as title passes to its customer. In fiscal 2004, we commenced selling SANCTURA to PLIVA in bottles for resale and blister packs for distribution as samples.



Royalty revenue consists of payments received from licensees for a portion of sales proceeds from products that utilize our
licensed technologies and are generally reported to us in a royalty report on a specified periodic basis. Royalty revenue is recognized in the period in which the sales of the product or technology occurred on which the royalties are based unless
the royalty report for such period is received subsequent to the time we are required to report our results on Form 10-Q or Form 10-K and the amount of the royalties earned is not estimable, in which case we recognize such royalty revenue in the
subsequent accounting period when we receive the royalty report and when the amount of and basis for such royalty payments are reported to us in accurate and appropriate form and in accordance with the related license agreement.



Our business strategy includes entering into collaborative license and
development or co-promotion agreements with strategic partners for the development and commercialization of our products or product candidates. The terms of the agreements typically include non-refundable license fees, funding of research and
development, payments based upon achievement of certain milestones and royalties on net product sales. Non-refundable license fees are recognized as revenue when we have a contractual right to receive such payment, the contract price is fixed or
determinable, the collection of the resulting receivable is reasonably assured and we have no further performance obligations under the license agreement. In multiple element arrangements where we have continuing performance obligations, license
fees are recognized together with any up-front payment over the term of the arrangement as we complete our performance obligations, unless the delivered technology has stand alone value to the customer and there is objective and reliable evidence of
fair value of the undelivered elements in the arrangement. We record such revenue as contract and license fee revenue.



Revenues from milestone payments related to arrangements under which we have continuing performance obligations are recognized as revenue upon achievement
of the milestone only if all of the following conditions are met: the milestone payments are non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved in achieving the
milestone; and the amount of the milestone is reasonable in relation to the effort expended or the risk associated with achievement of the milestone. Determination as to whether a milestone meets the aforementioned conditions involves
managements judgment. If any of these conditions are not met, the milestone payments are deferred and recognized as revenue over the term of the arrangement as we complete our performance obligations. Revenues from milestone payments related
to arrangements under which we have no continuing performance obligations are recognized upon achievement of the related milestone. We record such revenue as contract and license fee revenue. Contractual subsidies of ongoing expenses are recorded as
contract and license fee revenue.



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Under the PLIVA and Esprit Agreements, the initial and subsequent milestone payments, once earned, are
recognized as contract and license fee revenue using the contingency-adjusted performance model. Under this model, when a milestone is earned, revenue is immediately recognized on a pro-rata basis in the period we achieve the milestone based on the
time elapsed from inception of the PLIVA Agreement to the time the milestone is earned over the estimated duration of the PLIVA and Esprit Agreements. Thereafter, the remaining portion of the milestone payment is recognized on a straight-line basis
over the remaining estimated duration of the PLIVA and Esprit Agreements.



Multiple element arrangements are evaluated pursuant to EITF 00-21, Accounting Revenue Arrangements with Multiple Deliverables (EITF 00-21). Pursuant to EITF 00-21, in multiple element
arrangements where we have continuing performance obligations, contract, milestone and license fees are recognized together with any up-front payments over the term of the arrangement as we complete our performance obligation, unless the delivered
technology has stand alone value to the customer and there is objective, reliable evidence of fair value of the undelivered element in the arrangement. In the case of an arrangement where it is determined there is a single unit of accounting, all
cash flows from the arrangement are considered in the determination of all revenue to be recognized. Additionally, pursuant to the guidance of Securities and Exchange Commission Staff Accounting Bulletin 104 (SAB 104), unless evidence
suggests otherwise, revenue from consideration received is recognized on a straight-line basis over the expected term of the arrangements. In particular relating to the PLIVA Agreement, the Company and PLIVA were contractually bound to share certain
promotion and advertising costs relating to SANCTURA. For promotion and advertising costs incurred by us, reimbursements from PLIVA for PLIVAs share were reflected in contract and license fee revenue. For promotion and advertising costs
incurred by PLIVA, reimbursements to PLIVA for our share were reflected as a reduction of contract and license fee revenue.



Cash in advance of revenue recognition is recorded as deferred revenue.



Results of Operations



Our net loss decreased $7,174,000 to $(9,789,000), or $(0.21) per share, basic, in the three month period ended June 30, 2005 from $(16,963,000), or
$(0.36) per share, basic, in the three month period ended June 30, 2004 and was essentially unchanged at ($40,658,000), or $(0.87) per share, basic, in the nine month period ended June 30, 2005 compared to $(40,357,000), or $(0.85) per share in the
nine month period ended June 30, 2004. The decreased loss in the three month period is primarily due to increased revenue related to the PLIVA Agreement, partially offset by decreased marketing, general and administrative expenses as described
below. In the nine month period, increased revenue related to the PLIVA Agreement offset increased marketing activities related to SANCTURA, including costs related to our SANCTURA sales force.



Total revenues increased $3,732,000, or 84%, to $8,193,000 in the three month
period ended June 30, 2005 from $4,461,000 in the three month period ended June 30, 2004 and $16,969,000, or 271%, to $23,233,000 in the nine month period ended June 30, 2005 from $6,264,000 in the nine month period ended June 30, 2004, due to
increased SANCTURA-related revenues.



Product revenue increased
$2,664,000, or 556%, to $3,143,000 in the three month period ended June 30, 2005 from $479,000 in the three month period ended June 30, 2004 and $8,730,000, or 412%, to $10,848,000 in the nine month period ended June 30, 2005 from $2,118,000 in the
nine month period ended June 30, 2004. Product revenue in the three month period ended June 30, 2005 included $762,000 from sales of SANCTURA to PLIVA, $1,969,000 of royalties from PLIVA on sales of SANCTURA, including $789,000 of royalties due to
Madaus, and $412,000 of royalties from Eli Lilly & Company (Lilly) on sales of Sarafem. Product revenue in the three month period ended June 30, 2004 of $479,000 consisted of royalties from Lilly on sales of Sarafem. Product revenue
in the nine month period ended June 30, 2005 included $5,839,000 from sales of SANCTURA to PLIVA, $3,708,000 of royalties from PLIVA on sales of SANCTURA, including $1,137,000 of royalties due to Madaus, and $1,299,000 of royalties from Lilly on
sales of Sarafem. Product revenue in the nine month period ended June 30, 2004 of $2,118,000 consisted of royalties from Lilly on sales of Sarafem.



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Contract and license fee revenue of $5,050,000 and $12,385,000 in the three and nine month periods ended
June 30, 2005, respectively, relate almost entirely to the PLIVA Agreement. Contract and license fee revenue in the three month period ended June 30, 2005 include $3,125,000 from amortization of the deferred revenue and $1,920,000 for three months
of sales force subsidy from PLIVA. Contract and license fee revenue in the nine month period ended June 30, 2005 include $9,375,000 from amortization of the deferred revenue and $4,480,000 for seven months of sales force subsidy from PLIVA.
Offsetting these items is $1,489,000 net reimbursement due to PLIVA comprised of $2,683,000 of PLIVAs share of SANCTURA promotion and advertising costs incurred by Indevus, less $4,172,000 owed by us to PLIVA for our share of SANCTURA
promotion and advertising costs incurred by PLIVA.



Cost of
product revenue of $1,874,000 and $7,729,000 in the three and nine month periods ended June 30, 2005, respectively, relates primarily to sales of SANCTURA which we sell to PLIVA at our cost. Also included in cost of product revenue in the three and
nine month periods ended June 30, 2005 are $789,000 and $1,137,000, respectively, of royalties to Madaus. Cost of product revenue of $98,000 and $459,000 in the three and nine month periods ended June 30, 2004, respectively, primarily reflects
royalties due to the Massachusetts Institute of Technology for their portion of the Sarafem royalties.



Research and development expense decreased $218,000, or 4%, to $5,559,000 in the three month period ended June 30, 2005 from $5,777,000 in the three month
period ended June 30, 2004 and decreased $1,188,000, or 6%, to $17,448,000 in the nine month period ended June 30, 2005 from $18,636,000 in the nine month period ended June 30, 2004. The decrease in the three month period was primarily due to a
$1,250,000 milestone payment to Shire Laboratories, Inc. (Shire) related to the development of SANCTURA XR in the three month period ended June 30, 2004, offset by approximately $800,000 of increased external aminocandin development
costs. In the nine month period, external SANCTURA development costs decreased approximately $4,100,000 primarily due to a Phase III study and our QT study which ended in fiscal 2004. Additionally, the nine month period ended June 30, 2004 included
$1,750,000 of milestone payments to Shire related to the development of SANCTURA XR. Substantially offsetting these decreases are approximately $2,500,000 of increased external development costs related to aminocandin, a $750,000 development
milestone related to aminocandin and approximately $1,100,000 of increased staffing and related support costs. We expect to continue to incur substantial costs related to the continued development of SANCTURA, SANCTURA XR, and our other product
candidates.



Marketing, general and administrative expense
decreased $5,527,000, or 38%, to $9,045,000 in the three month period ended June 30, 2005 from $14,572,000 in the three month period ended June 30, 2004 and increased $10,343,000, or 42%, to $34,713,000 in the nine month period ended June 30, 2005
from $24,370,000 in the nine month period ended June 30, 2004.



Marketing expenses decreased $6,231,000, or 57%, to $4,782,000 in the three month period ended June 30, 2005 from $11,013,000 in the three month period ended June 30, 2004. This substantial decrease reflects reduced costs related to our
sales force and related infrastructure. In the three month period ended June 30, 2004 we were hiring and establishing an approximately 280  person sales force and in the three month period ended June 30, 2005 we had an approximately 85-person
sales force. Additionally, the three month period reflected substantially reduced promotion and advertising expenses related to SANCTURA because we had incurred such costs prior to the PLIVA Agreement and, subsequent to the Conversion, Odyssey was,
and Esprit is now, responsible for such costs.



Marketing
expenses increased $7,152,000, or 42%, to $24,105,000 in the nine month period ended June 30, 2005 from $16,953,000 in the nine month period ended June 30, 2004. This increase reflects increased costs related to our approximately 85  person
specialty sales force and related infrastructure which was in place for all nine months of fiscal 2005 and the approximately 200  person primary care sales force which was in place for the first two months of fiscal 2005 which exceeded the
costs incurred to hire and establish an approximately 280  person sales force in the three month period ended June 30, 2004. Also contributing to the increase were higher promotion and advertising expenses related to SANCTURA, a substantial
portion of which was incurred during the copromotion period prior to the Conversion.



General and administrative expenses increased $704,000, or 20%, to $4,263,000 in the three month period ended June 30, 2005 from $3,559,000 in the three month period ended June 30, 2004 and increased $3,191,000, or
43%, to $10,608,000 in the nine month period ended June 30, 2005 from $7,417,000 in the nine month period ended June 30, 2004. Increased costs in the three and nine month periods ended June 30, 2005 include a charge of approximately $1,300,000
related to the nonutilization of our former facilities. The three and nine month periods ended June 30, 2005 also include increased staffing and support costs of approximately $200,000 and $1,800,000, respectively. The nine month period ended June
30, 2005 includes approximately $800,000 of consulting, accounting and other professional fees related to our implementation of Sarbanes-Oxley-required accounting and reporting control systems and tax compliance and other costs related to our
expanded business activities. Partially offsetting the increases in the three and nine month periods is approximately $1,000,000 of expense in the three and nine month periods ended June 30, 2004 for a consultant which performed services related to
the PLIVA Agreement.



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Investment income increased $483,000, or 153%, to $798,000 in the three month period ended June 30, 2005
from $315,000 in the three month period ended June 30, 2004 and increased $1,493,000, or 208%, to $2,210,000 in the nine month period ended June 30, 2005 from $717,000 in the nine month period ended June 30, 2004. While average invested balances in
the three months ended June 30, 2005 were somewhat lower than the average invested balances in the three months ended June 30, 2004 and the average invested balances in the nine months ended June 30, 2005 were somewhat higher than the average
invested balances in the nine months ended June 30, 2004, these increases in investment income are primarily the result of higher interest rates.



Interest expense relates to our $72,000,000 of 6.25% Convertible Senior Notes due 2008 (the Notes). Annual interest expense is expected to be
approximately $5,200,000, which includes approximately $700,000 of amortization of debt issuance costs.



Included in other income and expense is impairment of equity securities of $10,000 and $185,000 in the three and nine month periods ended June 30, 2005
comprised of a loss of $10,000 in the three month period ended June 30, 2005 from the sale of our holdings of Aeolus and a $175,000 write down in the three month period ended March 31, 2005 of our investment in Aeolus to fair value as the decline in
Aeolus common stock was deemed other than temporary.



The
provision for income taxes of $1,000,000 and $2,150,000 in the three and nine month periods ended June 30, 2005, respectively, relates to U.S. federal alternative minimum tax and state income tax. Tax recognition of the initial and milestone
payments received from PLIVA in fiscal 2004 were deferred to fiscal 2005 when they were recognized in full. Utilization of tax loss carryforwards is limited for use against the U.S. federal alternative tax and by certain states resulting in federal
and state tax obligations in fiscal 2005.



We expect to report
losses from our current consolidated operations for fiscal 2005.



Liquidity
and Capital Resources



Cash, Cash Equivalents and Marketable Securities



At June 30, 2005 we had consolidated cash, cash equivalents
and marketable securities of $108,594,000 compared to $157,008,000 at September 30, 2004. This decrease of $48,414,000 was primarily the result of net cash used in operating activities of $48,024,000 (see Analysis of Cash Flows).



We are continuing to invest substantial amounts in the ongoing
development and sales activities related to SANCTURA. We are investing in the production of inventories of SANCTURA and are selling the final product to Esprit at cost. We believe the funds received from PLIVA under the PLIVA Agreement and from
Esprit under the Esprit Agreement will be sufficient to meet our obligations for the commercialization of SANCTURA. We believe we have sufficient cash for currently planned expenditures for at least the next twelve months.



We may require additional funds or corporate collaborations for the
development and commercialization of our other compounds in development, as well as any new businesses, products or technologies acquired or developed in the future. We have no commitments to obtain such funds. There can such be no assurance that,
if such funds are required, we will be able to obtain additional financing to satisfy future cash requirements on acceptable terms, or at all. If such additional funds are not obtained, we may be required to delay product development and business
development activities.



Product Development



We expect to continue to expend substantial additional amounts for the
development of our products. In particular, we are continuing to expend substantial funds for SANCTURA, SANCTURA XR, and other related development efforts. We could receive $45 million in future payments contingent upon the achievement of certain
milestones related to the development of SANCTURA XR. Additionally, after November 28, 2004 and pursuant to the Conversion, PLIVA had been, and Esprit is now, responsible for funding certain Phase IV studies that may be conducted. There can be no
assurance that results of any ongoing or future pre-clinical or clinical trials will be successful, that additional trials will not be required, that any drug or product under development will receive FDA approval in a timely manner or at all, or
that such drug or product could be successfully manufactured in accordance with U.S. current Good Manufacturing Practices (cGMP), or successfully marketed in a timely manner, or at all, or that we will have sufficient funds to develop or
commercialize any of our products.



We have entered into an
agreement with Madaus for the manufacture of SANCTURA. In order to manufacture SANCTURA for sale in the United States, Madaus manufacturing facility must comply with cGMP requirements. Failure to meet or maintain compliance with cGMP
requirements could cause a material disruption of, or cessation in, the commercialization of SANCTURA. We may seek a second source for SANCTURA if Madaus is unable to continue to meet all regulatory requirements or provide the necessary quantities
of SANCTURA in a timely manner; this alternate source would require FDA approval which may or may not be obtained.



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Total research and development expenses incurred by us through June 30, 2005 on the major compounds
currently being developed or marketed, including allocation of corporate general and administrative expenses, are approximately as follows: $93,200,000 for SANCTURA and SANCTURA XR, $22,200,000 for pagoclone, $14,200,000 for PRO 2000, $9,300,000 for
aminocandin and $3,900,000 for IP 751 . In June 2002, we re-acquired rights to pagoclone from Pfizer Inc. During the period Pfizer had rights to pagoclone, Pfizer conducted and funded all development activities for pagoclone. Estimating costs and
time to complete development of a compound is difficult due to the uncertainties of the development process and the requirements of the FDA which could necessitate additional and unexpected clinical trials or other development, testing and analysis.
Results of any testing could result in a decision to alter or terminate development of a compound, in which case estimated future costs could change substantially. Certain compounds could benefit from subsidies, grants or government or
agency-sponsored studies that could reduce our development costs. In the event we were to enter into a licensing or other collaborative agreement with a corporate partner involving sharing, funding or assumption by such corporate partner of
development costs, the estimated development costs to be incurred by us could be substantially less than the estimates below. Additionally, research and development costs are extremely difficult to estimate for early-stage compounds due to the fact
that there is generally less comprehensive data available for such compounds to determine the development activities that would be required prior to the filing of an NDA. Given these uncertainties and other risks, variables and considerations
related to each compound and regulatory uncertainties in general, we estimate remaining research and development costs, excluding allocation of corporate general and administrative expenses, from June 30, 2005 through the preparation of an NDA for
our major compounds currently being developed as follows: approximately $38,000,000 for SANCTURA XR, $16,000,000 for PRO 2000, approximately $93,000,000 for aminocandin, and approximately $51,000,000 for pagoclone. For IP751, we are unable at this
time to estimate the costs to completion of development. IP751 is in pre-clinical testing as an agent for interstitial cystitis. We are currently evaluating different dosage forms and different routes of administration for the compound. Once we have
made further decisions regarding the development for IP751, we expect to be able to estimate the costs for the compound through the preparation of an NDA. Actual costs to complete any of our products may differ significantly from the estimates. We
cannot reasonably estimate the date of completion for any compound that is not at least in Phase III clinical development due to uncertainty of the number, size, and duration of the trials which may be required to complete development.



Analysis of Cash Flows



Cash used in operating activities for the nine month period ended June 30, 2005 of $48,024,000 consisted primarily of the
net loss of $40,658,000 and $9,375,000 amortization of deferred revenue. Additionally, uses of cash resulted from a $4,236,000 reduction of accounts payable primarily due to reduced operating expenses from the cessation of SANCTURA-related promotion
and advertising activities pursuant to the Conversion and general timing of payments, and a $1,690,000 reduction of accrued expenses and other liabilities resulting primarily from reduced inventory due to a reduced rate of production of SANCTURA and
the cessation of promotion and advertising costs pursuant to the Conversion, partially offset by increased accruals related to research and development activities and other operating activities. A $4,931,000 source of cash related to a net reduction
of accounts receivable due to collections from PLIVA.



Net cash
provided by investing activities of $26,191,000 is primarily due to maturities and sales of marketable securities of $27,152,000 net of $983,000 of capital expenditures.



Net cash provided from financing activities of $587,000 resulted primarily from net proceeds from the issuance of treasury
stock upon the exercise of stock options. We cannot predict if or when stock options will be exercised in the future.



Commitments



Pursuant to the supply agreement with Madaus, we have committed to purchase from Madaus a certain minimum quantity of manufactured SANCTURA tablets in bulk form through the SANCTURA Launch Year which ends in August
2005. We expect to purchase two additional batches from Madaus prior to the end of the Launch Year for approximately $1,000,000. We do not expect meet our minimum purchase commitment to Madaus and have recorded at June 30, 2005 a liability to Madaus
for a minimum supply fee of approximately $122,000 for which we were reimbursed by Odyssey on July 1, 2005.



In December 2004, we entered into a lease agreement for new corporate headquarters in Lexington, MA. This lease for approximately 45,000 square feet
provides for an initial term of 66 months, commencing upon occupancy. Lease payments commence six months after occupancy and the aggregate minimum rental commitment is approximately $5,400,000 for the initial term. We occupied our new facilities in
June 2005, prior to the April 2007 expiration of the lease period of our prior facilities. As a result, the Company recorded a charge of approximately $1,310,000 in the three and nine month periods ended June 30, 2005 related to the nonutilization
of our prior facilities.



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We have entered into a lease agreement to lease approximately 90 automobiles for our field sales force.
The lease requires a minimum term of 12 months per automobile. We expect monthly lease expense related to this operating lease to be approximately $50,000. We are responsible for certain disposal costs in case of termination.



Pursuant to the Schering Agreement, we will pay Schering an up-front payment
of $7,500,000 within 30 days of July 28, 2005, the effective date of the Schering Agreement.



Other



In December
2004, the Financial Accounting Standards Board (FASB) issued its Statement of Financial Accounting No. 123 (revised 2004), Share-Based Payments (SFAS No. 123R), which revises Statement of Financial Accounting
Standard No. 123, Accounting for Stock-Based Compensation and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. Under SFAS 123R, the most significant change in practice
would be treating the fair value of stock-based payment awards that are within its scope as compensation expense in the income statement beginning on the date that a company grants the awards to employees. In April 2005, the effective date for this
accounting standard was deferred until the first annual period beginning after June 15, 2005. The Company will adopt SFAS No. 123R in the reporting period starting October 1, 2005. We are currently assessing the impact that the adoption of this
standard will have on our financial position and results of operations.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 is a replacement of APB No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in
accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS
No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt this pronouncement beginning October 1, 2006.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



We own financial instruments that are sensitive to market risks as part of our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations, including our research and development activities. None of these market-risk sensitive instruments are held for trading purposes. We do not own derivative financial instruments in our investment
portfolio.



Interest Rate Risk related to Cash, Cash Equivalents and Marketable
Securities



We invest our cash in a variety of financial
instruments, primarily in short-term bank deposits, money market funds, and domestic and foreign commercial paper and government securities. These investments are denominated in U.S. dollars and are subject to interest rate risk, and could decline
in value if interest rates fluctuate. Our investment portfolio includes only marketable securities with active secondary or resale markets to help ensure portfolio liquidity and we have implemented guidelines limiting the duration of investments.
Due to the conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk.



Risk related to the Notes



The fair value of our Notes is sensitive to fluctuations in interest rates and the price of our Common Stock into which the Notes are convertible. A
decrease in the price of our Common Stock could result in a decrease in the fair value of the Notes. For example on a very simplified basis, a decrease of 10% of the market value of our Common Stock could reduce the value of a $1000 Note by
approximately $20. An increase in market interest rates could result in a decrease in the fair value of the Notes. For example on a very simplified basis, an interest rate increase of 1% could reduce the value of a $1000 Note by approximately $20.
The two examples provided above are only hypothetical and actual changes in the value of the Notes due to fluctuations in market value of our Common Stock or interest rates could vary substantially from these examples.



Item 4. Controls and Procedures



As of June 30, 2005 we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of June 30, 2005. Based on this evaluation, our principal executive officer and principal financial officer



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concluded that our disclosure controls and procedures are effective. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.



In addition, we reviewed our internal control over financial
reporting and there was no significant change in our internal control over financial reporting during the fiscal quarter ended June 30, 2005 that has materially affected or is reasonably likely to materially affect our internal control over
financial reporting.



PART II. OTHER INFORMATION



Item 1. Legal Proceedings



Product Liability Litigation. On September 15, 1997, we announced a market withdrawal of our first prescription product, the weight loss medication Redux (dexfenfluramine hydrochloride capsules) C-IV, which had been launched by
Wyeth, our licensee, in June 1996. The withdrawal of Redux was based on a preliminary analysis by the FDA of potential abnormal echocardiogram findings associated with certain patients taking Redux or the combination of fenfluramine with
phentermine. These observations, presented to us in September 1997, indicated an incidence of abnormal echocardiogram findings in approximately 30% of such patients. Although these observations reflected a preliminary analysis of pooled information
and were difficult to evaluate because of the absence of matched controls and pretreatment baseline data for these patients, we believed it was prudent, in light of this information, to withdraw Redux from the market.



Since the withdrawal of Redux, we have been named, together with other
pharmaceutical companies, as a defendant in several thousand product liability legal actions, some of which purport to be class actions, in federal and state courts relating to the use of Redux and other weight loss drugs. To date, there have been
no judgments against us, nor have we paid any amounts in settlement of any of these claims. The actions generally have been brought by individuals in their own right or on behalf of putative classes of persons who claim to have suffered injury or
who claim that they may suffer injury in the future due to use of one or more weight loss drugs including Pondimin (fenfluramine), phentermine and Redux. Plaintiffs allegations of liability are based on various theories of recovery, including,
but not limited to, product liability, strict liability, negligence, various breaches of warranty, conspiracy, fraud, misrepresentation and deceit. These lawsuits typically allege that the short or long-term use of Pondimin and/or Redux,
independently or in combination (including the combination of Pondimin and phentermine, popularly known as fen-phen), causes, among other things, primary pulmonary hypertension, valvular heart disease and/or neurological dysfunction. In
addition, some lawsuits allege emotional distress caused by the purported increased risk of injury in the future. Plaintiffs typically seek relief in the form of monetary damages (including economic losses, medical care and monitoring expenses, loss
of earnings and earnings capacity, other compensatory damages and punitive damages), generally in unspecified amounts, on behalf of the individual or the class. In addition, some actions seeking class certification ask for certain types of
purportedly equitable relief, including, but not limited to, declaratory judgments and the establishment of a research program or medical surveillance fund. On December 10, 1997, the federal Judicial Panel on Multidistrict Litigation issued an Order
allowing for the transfer or potential transfer of the federal actions to the Eastern District of Pennsylvania for coordinated or consolidated pretrial proceedings.



On May 30, 2001, we entered into an indemnity and release agreement with Wyeth, formerly American Home Products Corporation,
pursuant to which Wyeth has agreed to indemnify us against certain classes of product liability cases filed against us related to Redux. Our indemnification covers plaintiffs who initially opted out of Wyeths national class action settlement
of diet drug claims and claimants alleging primary pulmonary hypertension. In addition, Wyeth has agreed to fund all future legal costs related to our defense of Redux-related product liability cases. The agreement also provides for Wyeth to fund
certain additional insurance coverage to supplement our existing product liability insurance. We believe this total insurance coverage is sufficient to address our potential remaining Redux product liability exposure. However, there can be no
assurance that uninsured or insufficiently insured Redux-related claims or Redux-related claims for which we are not otherwise indemnified or covered under the AHP indemnity and release agreement will not have a material adverse effect on our future
business, results of operations or financial condition or that the potential of any such claims would not adversely affect our ability to obtain sufficient financing to fund operations. Up to the date of the AHP indemnity and release agreement, our
defense costs were paid by, or subject to reimbursement to us from, our product liability insurers. To date, there have been no Redux-related product liability settlements or judgments paid by us or our insurers. In exchange for the indemnification,
defense costs, and insurance coverage provided to us by Wyeth, we agreed to dismiss our suit against Wyeth filed in January 2000, our appeal from the order approving Wyeths national class action settlement of diet drug claims and our
cross-claims against Wyeth related to Redux product liability legal actions.



Pursuant to agreements we have with Les Laboratories Servier, from whom we in-licensed rights to Redux, Boehringer Ingelheim Pharmaceuticals, Inc., the manufacturer of Redux, and other parties, we may be required to
indemnify such parties for Redux-related liabilities.



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General. Although we maintain certain product liability and director and officer liability
insurance and intend to defend these and similar actions vigorously, we have been required and may continue to be required to devote significant management time and resources to these legal actions. In the event of successful uninsured or
insufficiently insured claims, or in the event a successful indemnification claim were made against us and our officers and directors, our business, financial condition and results of operations could be materially adversely affected. The
uncertainties and costs associated with these legal actions have had, and may continue to have, an adverse effect on the market price of our common stock and on our ability to obtain corporate collaborations or additional financing to satisfy cash
requirements, to retain and attract qualified personnel, to develop and commercialize products on a timely and adequate basis, to acquire rights to additional products, or to obtain product liability insurance for other products at costs acceptable
to us, or at all, any or all of which may materially adversely affect our business, financial condition and results of operations.



Item 5. Other Information



On
December 20, 2004, we entered into a lease agreement with Boston Properties Limited Partnership for new corporate headquarters at 33 Hayden Avenue in Lexington, MA. This lease for approximately 45,000 square feet provides for an initial term of 66
months, commencing upon occupancy. We occupied our new facilities in June 2005.



Item 6. Exhibits



(a) Exhibits



|     |  |                                                                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 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 Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|     | 
|32.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Glenn L. Cooper, Chief Executive Officer                                   
|     | 
|32.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Michael W. Rogers, Chief Financial Officer                                 



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INDEVUS PHARMACEUTICALS, INC.



|                     |  |                              |  |                                                                                                                 
|-------------------- |  | ---------------------------- |  | ----------------------------------------------------------------------------------------------------------------
|                     |  | INDEVUS PHARMACEUTICALS, INC
|                     |  |                             
|Date: August 9, 2005 |  | By:                          |  | /s/ Glenn L. Cooper                                                                                             
|                     |  |                              |  | Glenn L. Cooper, M.D., Chairman, President, and Chief
Executive Officer (Principal Executive Officer)           
|                     |  |                             
|Date: August 9, 2005 |  | By:                          |  | /s/ Michael W. Rogers                                                                                           
|                     |  |                              |  | Michael W. Rogers, Executive Vice President, Chief
Financial Officer and Treasurer (Principal Financial Officer)
|                     |  |                             
|Date: August 9, 2005 |  | By:                          |  | /s/ Dale Ritter                                                                                                 
|                     |  |                              |  | Dale Ritter, Senior Vice President, Finance (Principal Accounting Officer)                                      



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