##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q





|           |  |                                                                                                
|---------- |  | -----------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES AND EXCHANGE ACT OF 1934
|          
|           |  | For the quarterly period ended March 31, 2005                                                  
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   
|          
|           |  | For the transition period
    from           to                                                

Commission File No. 0-50772





Inhibitex, Inc.


(Exact name of registrant as specified in its charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 74-2708737                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

8997 Westside Parkway


Suite 400


Alpharetta, Georgia 30004


(Address of
principal executive offices)


(678) 746-1100


(Registrants telephone number, including area code)


Not Applicable


(Former name, former address and former fiscal year,


if changed since last report)


þ o


o þ











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TABLE OF CONTENTS


|                                                                                                                                                                                                                                                |  |                                                                                                                                                                           |    |      |    | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                                                                                                                                                                                                                |  |                                                                                                                                                                           |    | Page |   
|                                                                                                                                                                                                                                                |  |                                                                                                                                                                           |    |      |   
|PART I  FINANCIAL
    INFORMATION                                                                                                                                                                                                             
|Item 1.                                                                                                                                                                                                                                         |  | Financial Statements                                                                                                                                                      |    |      |    | 
|                                                                                                                                                                                                                                                |  | Condensed Balance Sheets as of
    March 31, 2005 and December 31, 2004                                                                                                   |    |      | 2  | 
|                                                                                                                                                                                                                                                |  | Condensed Statements of Operations for the
    Three Months Ended March 31, 2005 and 2004 and for the
    Period from Inception (May 13, 1994) through March 31,
    2005 |    |      | 3  | 
|                                                                                                                                                                                                                                                |  | Condensed Statements of Cash Flows for the
    Three Months Ended March 31, 2005 and 2004 and for the
    Period from Inception (May 13, 1994) through March 31,
    2005 |    |      | 4  | 
|                                                                                                                                                                                                                                                |  | Notes to Condensed Financial Statements                                                                                                                                   |    |      | 5  | 
|Item 2.                                                                                                                                                                                                                                         |  | Managements Discussion and
    Analysis of Financial Condition and Results of Operations                                                                                 |    |      | 12 | 
|Item 3.                                                                                                                                                                                                                                         |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                                                                            |    |      | 21 | 
|Item 4.                                                                                                                                                                                                                                         |  | Controls and Procedures                                                                                                                                                   |    |      | 21 | 
|                                                                                                                                                                                                                                               
|PART II  OTHER
    INFORMATION                                                                                                                                                                                                                
|Item 5.                                                                                                                                                                                                                                         |  | Other Information                                                                                                                                                         |    |      | 23 | 
|Item 6.                                                                                                                                                                                                                                         |  | Exhibits                                                                                                                                                                  |    |      | 23 | 
|Signatures                                                                                                                                                                                                                                      |  |                                                                                                                                                                           | 24 |     
|Exhibit Index                                                                                                                                                                                                                                   |  |                                                                                                                                                                           |    |     
|Exhibit 31.1 Section 302
    Certification of the Chief 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
|Exhibit 31.2 Section 302
    Certification of the Chief 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
|Exhibit 32.1 Section 906
    Certifications of the Chief Executive Officer and the Chief
    Financial Officer Pursuant to 18 U.S.C. Section 1350,
    as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002                
|EX-31.1 SECTION 302, CERTIFICATION OF THE CEO                                                                                                                                                                                                  
|EX-31.2 SECTION 302, CERTIFICATION OF THE CFO                                                                                                                                                                                                  
|EX-32.1 SECTION 906, CERTIFICATION OF THE CEO & CFO                                                                                                                                                                                            



1



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##### Table of Contents






PART I


FINANCIAL INFORMATION





INHIBITEX, INC.


(A DEVELOPMENT STAGE COMPANY)


CONDENSED BALANCE SHEETS


(unaudited)


|                                     |                                                                                                                                                                                                                                |                                            |   |              |              |  |   |              |            | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | - | ------------ | ------------ |  | - | ------------ | ---------- | 
|                                     |                                                                                                                                                                                                                                | March 31,                                  |   |              | December 31, | 
|                                     |                                                                                                                                                                                                                                | 2005                                       |   |              | 2004         | 
|                                     |                                                                                                                                                                                                                                |                                            |   |              |              | 
|ASSETS                              
|Current assets:                      |                                                                                                                                                                                                                                |                                            |   |              |              |  |   |             
|                                     | Cash and cash equivalents                                                                                                                                                                                                      |                                            | $ | 38,429,386   |              |  | $ | 71,580,823   |           
|                                     | Short-term investments                                                                                                                                                                                                         |                                            |   | 39,932,666   |              |  |   | 15,623,887   |           
|                                     | Prepaid expenses and other current assets                                                                                                                                                                                      |                                            |   | 1,012,451    |              |  |   | 1,082,359    |           
|                                     | Accounts receivable                                                                                                                                                                                                            |                                            |   | 541,596      |              |  |   | 322,019      |           
|                                     |                                                                                                                                                                                                                                |                                            |   |              |              | 
|                                     |                                                                                                                                                                                                                                | Total current assets                       |   |              | 79,916,099   |  |   |              | 88,609,088 | 
|                                     | Property and equipment, net                                                                                                                                                                                                    |                                            |   | 4,929,448    |              |  |   | 2,629,987    |           
|                                     |                                                                                                                                                                                                                                |                                            |   |              |              | 
|                                     |                                                                                                                                                                                                                                | Total assets                               |   | $            | 84,845,547   |  |   | $            | 91,239,075 | 
|                                     |                                                                                                                                                                                                                                |                                            |   |              |              | 
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                                                                                |                                            |   |              |              |  |   |             
|                                     | Accounts payable                                                                                                                                                                                                               |                                            | $ | 3,349,833    |              |  | $ | 3,077,636    |           
|                                     | Accrued expenses                                                                                                                                                                                                               |                                            |   | 4,504,906    |              |  |   | 3,587,093    |           
|                                     | Current portion of notes payable                                                                                                                                                                                               |                                            |   | 1,458,333    |              |  |   | 877,239      |           
|                                     | Current portion of capital lease obligations                                                                                                                                                                                   |                                            |   | 376,836      |              |  |   | 315,043      |           
|                                     | Current portion of deferred revenue                                                                                                                                                                                            |                                            |   | 191,667      |              |  |   | 191,667      |           
|                                     | Other current liabilities                                                                                                                                                                                                      |                                            |   | 1,125,526    |              |  |   | 1,000,000    |           
|                                     |                                                                                                                                                                                                                                |                                            |   |              |              | 
|                                     |                                                                                                                                                                                                                                | Total current liabilities                  |   |              | 11,007,101   |  |   |              | 9,048,678  | 
|Long-term liabilities:               |                                                                                                                                                                                                                                |                                            |   |              |              |  |   |             
|                                     | Notes payable, net of current portion                                                                                                                                                                                          |                                            |   | 714,259      |              |  |   | 486,112      |           
|                                     | Capital lease obligations, net of current portion                                                                                                                                                                              |                                            |   | 509,625      |              |  |   | 321,190      |           
|                                     | Deferred revenue, net of current portion                                                                                                                                                                                       |                                            |   | 799,998      |              |  |   | 837,498      |           
|                                     | Other liabilities, net of current portion                                                                                                                                                                                      |                                            |   | 949,111      |              |  |   |             |           
|                                     |                                                                                                                                                                                                                                |                                            |   |              |              | 
|                                     |                                                                                                                                                                                                                                | Total long-term liabilities                |   |              | 2,972,993    |  |   |              | 1,644,800  | 
|Stockholders equity:                |                                                                                                                                                                                                                                |                                            |   |              |              |  |   |             
|                                     | Preferred stock, $.001 par value; 5,000,000 shares
    authorized at March 31, 2005 and December 31, 2004,
    respectively; none issued and outstanding                                                                       |                                            |   |             |              |  |   |             |           
|                                     | Common stock, $.001 par value; 75,000,000 shares
    authorized at March 31, 2005 and December 31, 2004;
    25,191,192 and 25,133,327 shares issued and outstanding at
    March 31, 2005 and December 31, 2004, respectively |                                            |   | 25,191       |              |  |   | 25,133       |           
|                                     | Common stock warrants                                                                                                                                                                                                          |                                            |   | 11,555,968   |              |  |   | 11,555,968   |           
|                                     | Additional paid-in capital                                                                                                                                                                                                     |                                            |   | 173,327,043  |              |  |   | 173,188,745  |           
|                                     | Deferred stock compensation                                                                                                                                                                                                    |                                            |   | (1,144,911   | )            |  |   | (1,269,099   | )         
|                                     | Deficit accumulated during the development stage                                                                                                                                                                               |                                            |   | (112,897,838 | )            |  |   | (102,955,150 | )         
|                                     |                                                                                                                                                                                                                                |                                            |   |              |              | 
|                                     |                                                                                                                                                                                                                                | Total stockholders equity                 |   |              | 70,865,453   |  |   |              | 80,545,597 | 
|                                     |                                                                                                                                                                                                                                |                                            |   |              |              | 
|                                     |                                                                                                                                                                                                                                | Total liabilities and stockholders equity |   | $            | 84,845,547   |  |   | $            | 91,239,075 | 
|                                     |                                                                                                                                                                                                                                |                                            |   |              |              | 



2



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##### Table of Contents






INHIBITEX, INC.


(A DEVELOPMENT STAGE COMPANY)


CONDENSED STATEMENTS OF OPERATIONS


(unaudited)


|                                                                                                                     |                                             |                              |             |           |                |             |            |                |  |   |              |            | 
|-------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------- | ----------- | --------- | -------------- | ----------- | ---------- | -------------- |  | - | ------------ | ---------- | 
|                                                                                                                     |                                             |                              |             |           |                | Period from |           
|                                                                                                                     |                                             |                              |             | Inception |               
|                                                                                                                     |                                             | Three Months Ended March 31, |             |           | (May 13, 1994) |            
|                                                                                                                     |                                             |                              |             |           | Through        |            
|                                                                                                                     |                                             | 2005                         |             |           | 2004           |             |            | March 31, 2005 | 
|                                                                                                                     |                                             |                              |             |           |                |             |            |                | 
|Revenue:                                                                                                             |                                             |                              |             |           |                |             |            |                |  |   |              |           
|                                                                                                                     | License fees and milestones                 |                              | $           | 37,500    |                |             | $          | 37,500         |  |   | $            | 1,050,000  | 
|                                                                                                                     | Collaborative research and development      |                              |             | 125,000   |                |             |            | 125,000        |  |   |              | 2,624,455  | 
|                                                                                                                     | Material transfer revenue                   |                              |             | 114,631   |                |             |            |               |  |   |              | 114,631    | 
|                                                                                                                     | Grant revenue                               |                              |             |          |                |             |            |               |  |   |              | 300,000    | 
|                                                                                                                     |                                             |                              |             |           |                |             |            |                | 
|Total revenue                                                                                                        |                                             |                              | 277,131     |           |                |             | 162,500    |                |  |   | 4,089,086    |           
|Operating expense:                                                                                                   |                                             |                              |             |           |                |             |            |                |  |   |              |           
|                                                                                                                     | Research and development                    |                              |             | 9,129,613 |                |             |            | 4,037,984      |  |   |              | 84,168,777 | 
|                                                                                                                     | General and administrative                  |                              |             | 1,408,415 |                |             |            | 842,511        |  |   |              | 17,710,993 | 
|                                                                                                                     | Amortization of deferred stock compensation |                              |             | 124,188   |                |             |            | 106,721        |  |   |              | 773,712    | 
|                                                                                                                     |                                             |                              |             |           |                |             |            |                | 
|Total operating expense                                                                                              |                                             |                              | 10,662,216  |           |                |             | 4,987,216  |                |  |   | 102,653,482  |           
|                                                                                                                     |                                             |                              |             |           |                |             |            |                | 
|Loss from operations                                                                                                 |                                             |                              | (10,385,085 | )         |                |             | (4,824,716 | )              |  |   | (98,564,396  | )         
|Other income, net                                                                                                    |                                             |                              |            |           |                |             |           |                |  |   | 703,042      |           
|Interest income, net                                                                                                 |                                             |                              | 442,397     |           |                |             | 3,148      |                |  |   | 1,345,579    |           
|                                                                                                                     |                                             |                              |             |           |                |             |            |                | 
|Net loss                                                                                                             |                                             |                              | (9,942,688  | )         |                |             | (4,821,568 | )              |  |   | (96,515,775  | )         
|Dividends and accretion to redemption value of redeemable
    preferred stock                                        |                                             |                              |            |           |                |             | (1,601,338 | )              |  |   | (16,382,063  | )         
|                                                                                                                     |                                             |                              |             |           |                |             |            |                | 
|Net loss attributable to common stockholders                                                                         |                                             | $                            | (9,942,688  | )         |                | $           | (6,422,906 | )              |  | $ | (112,897,838 | )         
|                                                                                                                     |                                             |                              |             |           |                |             |            |                | 
|Basic and diluted net loss attributable to common stockholders
    per share                                         |                                             | $                            | (0.40       | )         |                | $           | (10.74     | )              |  |   |              |           
|                                                                                                                     |                                             |                              |             |           |                |             |            |                | 
|Weighted average shares used to compute basic and diluted net
    loss attributable to common stockholders per share |                                             |                              | 25,147,579  |           |                |             | 597,949    |                |  |   |              |           
|                                                                                                                     |                                             |                              |             |           |                |             |            |                | 



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##### Table of Contents






INHIBITEX, INC.


(A DEVELOPMENT STAGE COMPANY)


CONDENSED STATEMENTS OF CASH FLOWS


(unaudited)


|                                                          |                                                                                    |                                                     |                                                |                                           |                |           |             |                |         |            |            |              |           |            |             |  
|--------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------- | ----------------------------------------- | -------------- | --------- | ----------- | -------------- | ------- | ---------- | ---------- | ------------ | --------- | ---------- | ----------- | -
|                                                          |                                                                                    |                                                     |                                                | Period from                               |               
|                                                          |                                                                                    | Three Months Ended                                  |                                                |                                           | Inception      |          
|                                                          |                                                                                    | March 31,                                           |                                                |                                           | (May 13, 1994) |          
|                                                          |                                                                                    |                                                     |                                                |                                           | Through        |          
|                                                          |                                                                                    | 2005                                                |                                                |                                           | 2004           |           |             | March 31, 2005 |        
|                                                          |                                                                                    |                                                     |                                                |                                           |                |           |             |                |        
|Cash flows from operating activities:                     |                                                                                    |                                                     |                                                |                                           |                |           |             |                |         |            |            |             
|                                                          | Net loss                                                                           |                                                     | $                                              | (9,942,688                                | )              |           | $           | (4,821,568     | )       |            | $          | (96,515,775  | )        
|                                                          | Adjustments to reconcile net loss to net cash used in operating
    activities:    |                                                     |                                                |                                           |                |           |             |                |         |            |            |              |          
|                                                          |                                                                                    | Depreciation and amortization                       |                                                |                                           | 225,514        |           |             |                | 196,980 |            |            |              | 3,690,568 |           
|                                                          |                                                                                    | Amortization of deferred stock compensation         |                                                |                                           | 124,188        |           |             |                | 106,721 |            |            |              | 773,712   |           
|                                                          |                                                                                    | Loss on sale of equipment                           |                                                |                                           |               |           |             |                |        |            |            |              | 48,134    |           
|                                                          |                                                                                    | Amortization of investment premium or discount      |                                                |                                           | (1,717         | )         |             |                | 40,995  |            |            |              | 198,944   |           
|                                                          |                                                                                    | Forgiveness of receivables from stockholders        |                                                |                                           |               |           |             |                |        |            |            |              | 28,695    |           
|                                                          |                                                                                    | Amortization of warrants and discount on debt       |                                                |                                           |               |           |             |                |        |            |            |              | 176,477   |           
|                                                          |                                                                                    | Stock issued for interest                           |                                                |                                           |               |           |             |                |        |            |            |              | 126,886   |           
|                                                          |                                                                                    | Cumulative effect of change in accounting principle |                                                |                                           |               |           |             |                |        |            |            |              | 99,500    |           
|                                                          |                                                                                    | Changes in operating assets and liabilities:        |                                                |                                           |                |           |             |                |         |            |            |              |           |           
|                                                          |                                                                                    |                                                     | Prepaid expenses and other assets              |                                           |                | 69,908    |             |                |         | (1,764,764 | )          |              |           | (1,012,451 | )          
|                                                          |                                                                                    |                                                     | Accounts receivable                            |                                           |                | (219,577  | )           |                |         | 286,844    |            |              |           | (541,596   | )          
|                                                          |                                                                                    |                                                     | Accounts payable and other current liabilities |                                           |                | 1,346,834 |             |                |         | (231,826   | )          |              |           | 5,424,470  |            
|                                                          |                                                                                    |                                                     | Accrued expenses                               |                                           |                | 917,813   |             |                |         | (47,200    | )          |              |           | 4,504,906  |            
|                                                          |                                                                                    |                                                     | Deferred revenue                               |                                           |                | (37,500   | )           |                |         | (37,500    | )          |              |           | 991,665    |            
|                                                          |                                                                                    |                                                     |                                                |                                           |                |           |             |                |        
|                                                          |                                                                                    |                                                     |                                                | Net cash used in operating activities     |                |           | (7,517,225  | )              |         |            | (6,271,318 | )            |           |            | (82,005,865 | )
|                                                          |                                                                                    |                                                     |                                                |                                           |                |           |             |                |        
|Cash flows from investing activities:                     |                                                                                    |                                                     |                                                |                                           |                |           |             |                |         |            |            |             
|                                                          | Purchases of property and equipment                                                |                                                     |                                                | (2,145,624                                | )              |           |             | (275,450       | )       |            |            | (6,330,960   | )        
|                                                          | Purchases of short-term investments                                                |                                                     |                                                | (56,001,384                               | )              |           |             | (4,931,843     | )       |            |            | (103,445,616 | )        
|                                                          | Proceeds from maturities of short-term investments                                 |                                                     |                                                | 31,664,319                                |                |           |             | 1,500,000      |         |            |            | 63,271,499   |          
|                                                          |                                                                                    |                                                     |                                                |                                           |                |           |             |                |        
|                                                          |                                                                                    |                                                     |                                                | Net cash used in investing activities     |                |           | (26,482,689 | )              |         |            | (3,707,293 | )            |           |            | (46,505,077 | )
|                                                          |                                                                                    |                                                     |                                                |                                           |                |           |             |                |        
|Cash flows from financing activities:                     |                                                                                    |                                                     |                                                |                                           |                |           |             |                |         |            |            |             
|                                                          | Proceeds from promissory notes, notes payable, and related
    warrants            |                                                     |                                                | 1,024,680                                 |                |           |             |               |         |            |            | 4,038,172    |          
|                                                          | Payments on promissory notes and capital leases                                    |                                                     |                                                | (344,562                                  | )              |           |             | (309,758       | )       |            |            | (3,316,309   | )        
|                                                          | Proceeds from bridge loan and related warrants                                     |                                                     |                                                |                                          |                |           |             |               |         |            |            | 2,220,000    |          
|                                                          | Net proceeds from the issuance of preferred stock and warrants                     |                                                     |                                                |                                          |                |           |             | 1,499,996      |         |            |            | 81,788,868   |          
|                                                          | Proceeds from the issuance of common stock, net of issuance costs                  |                                                     |                                                | 168,359                                   |                |           |             | 106,348        |         |            |            | 82,209,597   |          
|                                                          |                                                                                    |                                                     |                                                |                                           |                |           |             |                |        
|                                                          |                                                                                    |                                                     |                                                | Net cash provided by financing activities |                |           | 848,477     |                |         |            | 1,296,586  |              |           |            | 166,940,328 |  
|                                                          |                                                                                    |                                                     |                                                |                                           |                |           |             |                |        
|Decrease in cash and cash equivalents                     |                                                                                    |                                                     | (33,151,437                                    | )                                         |                |           | (8,682,025  | )              |         |            | 38,429,386 |             
|Cash and cash equivalents at beginning of period          |                                                                                    |                                                     | 71,580,823                                     |                                           |                |           | 26,649,150  |                |         |            |           |             
|                                                          |                                                                                    |                                                     |                                                |                                           |                |           |             |                |        
|Cash and cash equivalents at end of period                |                                                                                    | $                                                   | 38,429,386                                     |                                           |                | $         | 17,967,125  |                |         | $          | 38,429,386 |             
|                                                          |                                                                                    |                                                     |                                                |                                           |                |           |             |                |        
|Supplemental cash flow information:                       |                                                                                    |                                                     |                                                |                                           |                |           |             |                |         |            |            |             
|                                                          | Interest paid                                                                      |                                                     | $                                              | 232,318                                   |                |           | $           | 61,056         |         |            | $          | 1,013,659    |          
|Supplemental non-cash investing and financing activities: |                                                                                    |                                                     |                                                |                                           |                |           |             |                |         |            |            |             
|                                                          | Fixed assets capitalized using promissory notes and capital
    leases             |                                                     |                                                | 379,351                                   |                |           |             |               |         |            |            | 2,337,190    |          
|                                                          | Conversion of bridge loans and interest payable into
    Series C Preferred Stock  |                                                     |                                                |                                          |                |           |             |               |         |            |            | 2,124,576    |          
|                                                          | Preferred stock dividends and accretion of preferred stock to
    redemption value |                                                     |                                                |                                          |                |           |             | 1,601,338      |         |            |            | 16,382,063   |          
|                                                          | Unrealized loss on short-term investments                                          |                                                     |                                                | 44,089                                    |                |           |             | 5,735          |         |            |            | 44,089       |          



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##### Table of Contents






INHIBITEX, INC.


(A Development Stage Company)


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS




|   |           
|-- | ----------
|1. | Operations



Staphylococcus aureus
(S. aureus)




|   |                                           
|-- | ------------------------------------------
|2. | Summary of Significant Accounting Policies

Basis of Presentation


Use of Estimates.


Cash, Cash Equivalents and Short-Term Investments. Accounting for Certain
Investments in Debt and Equity Securities


5



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##### Table of Contents



INHIBITEX, INC.


(A Development Stage Company)


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS 
(Continued)






Property and Equipment, Net.


|                                |  |                                                 
|------------------------------- |  | ------------------------------------------------
|Asset                           |  | Estimated Life                                  
|                                |  |                                                 
|Computer software and equipment |  | 3 years                                         
|Furniture and fixtures          |  | 7 years                                         
|Laboratory equipment            |  | 5 years                                         
|Leasehold improvements          |  | Lesser of estimated useful life or life of lease

Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use


Revenue Recognition. Revenue Recognition in
Financial Statements Revenue Recognition, Revenue Arrangements with Multiple
Deliverables


Accrued Expenses.


6



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##### Table of Contents



INHIBITEX, INC.


(A Development Stage Company)


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS 
(Continued)




Prepaid Expenses and Other Current Assets.


Stock-based Compensation. Accounting for Stock Issued to Employees Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of
APB No. 25, and Related Interpretations Accounting for Stock-Based Compensation Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services. Accounting for Stock-Based
Compensation  Transition and Disclosure Interim Financial Reporting,








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##### Table of Contents



INHIBITEX, INC.


(A Development Stage Company)


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS 
(Continued)




|                                                                                        |             |                              |             |       |      |   |            |        |  
|--------------------------------------------------------------------------------------- | ----------- | ---------------------------- | ----------- | ----- | ---- | - | ---------- | ------ | -
|                                                                                        |             | Three Months Ended March 31, |            
|                                                                                        |             |                              |            
|                                                                                        |             | 2005                         |             |       | 2004 |  
|                                                                                        |             |                              |             |       |      |  
|Net loss attributable to common stockholders  as
    reported                          |             | $                            | (9,942,688  | )     |      | $ | (6,422,906 | )     
|Add: Amortization of deferred stock compensation included in net
    loss  as reported |             |                              | 124,188     |       |      |   | 106,721    |       
|Deduct: Stock compensation expense determined under fair value
    method               |             |                              | (480,111    | )     |      |   | (214,350   | )     
|                                                                                        |             |                              |             |       |      |  
|Net loss attributable to common stockholders  pro
    forma                            |             | $                            | (10,298,611 | )     |      | $ | (6,530,535 | )     
|                                                                                        |             |                              |             |       |      |  
|Net loss attributable to common stockholders per share (basic
    and diluted):         |             |                              |             |       |      |   |            |       
|                                                                                        | As reported |                              | $           | (0.40 | )    |   | $          | (10.74 | )
|                                                                                        |             |                              |             |       |      |  
|                                                                                        | Pro forma   |                              | $           | (0.41 | )    |   | $          | (10.92 | )
|                                                                                        |             |                              |             |       |      |  



|                                               |  |                 |      |   |      |   |      |  
|---------------------------------------------- |  | --------------- | ---- | - | ---- | - | ---- | -
|                                               |  | Three Months    |     
|                                               |  | Ended March 31, |     
|                                               |  |                 |     
|                                               |  | 2005            |      |   | 2004 |  
|                                               |  |                 |      |   |      |  
|Risk-free interest rate                        |  |                 | 3.71 | % |      |   | 3.05 | %
|Dividend yield                                 |  |                 |     |   |      |   |     |  
|Volatility factors                             |  |                 | .50  |   |      |   | .43  |  
|Expected life of options (years)               |  |                 | 4.0  |   |      |   | 4.0  |  
|Weighted average fair value of options granted |  | $               | 3.89 |   |      | $ | 2.03 |  



Fair Value of Financial Instruments.


Concentrations of Credit Risk and Limited Suppliers.




Research and Development Expense.


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##### Table of Contents



INHIBITEX, INC.


(A Development Stage Company)


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS 
(Continued)




Income Taxes. Accounting for Income Taxes


Comprehensive Loss. Comprehensive Income,


Reclassifications.


Lease Accounting. Accounting for Leases


Recent Accounting Pronouncements. Share-Based Payment Statement of Cash Flows




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##### Table of Contents



INHIBITEX, INC.


(A Development Stage Company)


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS 
(Continued)






|   |                   
|-- | ------------------
|3. | Net Loss Per Share

Earnings Per Share






|                                                                             |  |                              |            |   |      |   |            |  
|---------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                             |  | Three Months Ended March 31, |           
|                                                                             |  |                              |           
|                                                                             |  | 2005                         |            |   | 2004 |  
|                                                                             |  |                              |            |   |      |  
|Historical                                                                   |  |                              |            |   |      |   |            |  
|Numerator:                                                                   |  |                              |            |   |      |   |            |  
|Net loss attributable to common stockholders                                 |  | $                            | (9,942,688 | ) |      | $ | (6,422,906 | )
|                                                                             |  |                              |            |   |      |  
|Denominator:                                                                 |  |                              |            |   |      |   |            |  
|Weighted average common shares outstanding                                   |  |                              | 25,147,579 |   |      |   | 597,949    |  
|                                                                             |  |                              |            |   |      |  
|Basic and diluted net loss per share attributable to common
    stockholders |  | $                            | (0.40      | ) |      | $ | (10.74     | )
|                                                                             |  |                              |            |   |      |  

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##### Table of Contents



INHIBITEX, INC.


(A Development Stage Company)


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS 
(Continued)




|                                                             |  |           |           |  |      |  |            | 
|------------------------------------------------------------ |  | --------- | --------- |  | ---- |  | ---------- | 
|                                                             |  | March 31, |          
|                                                             |  |           |          
|                                                             |  | 2005      |           |  | 2004 | 
|                                                             |  |           |           |  |      | 
|Redeemable convertible preferred stock and related dividends |  |           |          |  |      |  | 11,737,674 | 
|Common stock options                                         |  |           | 2,057,999 |  |      |  | 1,376,854  | 
|Warrants                                                     |  |           | 3,800,143 |  |      |  | 1,838,118  | 
|Convertible preferred stock                                  |  |           |          |  |      |  | 90,758     | 
|                                                             |  |           |           |  |      | 
|Total                                                        |  |           | 5,858,142 |  |      |  | 15,043,404 | 
|                                                             |  |           |           |  |      | 




4.     Notes Payable




11



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##### Table of Contents








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

This Quarterly Report on Form 10-Q contains
forward-looking statements. These forward-looking statements
involve known and unknown risks, uncertainties and other factors
that may cause actual results, performance or achievements to be
materially different from any future results, performance or
achievements expressed or implied by the forward-looking
statements. In some cases, you can identify forward-looking
statements by terms such as may, will,
should, could, would,
expect, plan, intend,
anticipate, believe,
estimate, project, predict,
forecast, potential, likely
or possible, as well as the negative of such
expressions, and similar expressions intended to identify
forward-looking statements. These forward-looking statements
include, without limitation, statements relating to:




|  |                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | potential future revenue from collaborative research
    agreements;                                                                                                                           
| 
| | our ability to successfully commercialize our product
    candidates and generate product-related revenue in the
    future;                                                                   
| 
| | the potential volatility of our quarterly and annual
    operating results;                                                                                                                    
| 
| | the anticipated length of time to fully enroll and generate
    data from our Phase III Veronate trial;                                                                                        
| 
| | our intention to proceed to a larger Phase II clinical
    trial of Aurexis in patients with S. Aureus bloodstream
    infections and the timing, design and size of such clinical
    trial;  
| 
| | the anticipated time frame to generate data from our
    Phase I Aurexis clinical trials;                                                                                                      
| 
| | the number of patients we intend to enroll in a Phase II
    clinical trial of Aurexis in cystic fibrosis patients;                                                                            
| 
| | our plans to establish a specialized hospital-based sales
    force and commercialize our product candidates, particularly
    Veronate, in the United States;                                 
| 
| | expected increases in our research and development expenses,
    general and administrative expenses and operating losses in the
    future;                                                   
| 
| | our expected future amortization of deferred stock
    compensation;                                                                                                                           
| 
| | the amount, and when, we expect to borrow under a loan
    agreement with a local development authority;                                                                                       
| 
| | when we expect to adopt SFAS No. 123(R) and the
    potential impact that adoption of SFAS No. 123(R) may
    have on our future results of operations and reported cash
    flows;            
| 
| | our future financing requirements and how we plan to fund
    them;                                                                                                                            
| 
| | the number of months that our current cash, cash equivalents,
    short-term investments and our borrowing capacity under existing
    arrangements will allow us to operate;                  
| 
| | the timing of our occupancy into a new facility; and                                                                                                                                           
| 
| | anticipated financial results, including revenues, operating
    expenses and ending cash, cash equivalents and short-term
    investments for our fiscal year ending on December 31,
    2005.

These statements reflect our current views with respect to
future events and are based on assumptions and subject to risks
and uncertainties including, without limitation: that preceding
preclinical and clinical results related to our antibody-based
products, including Veronate and Aurexis, are not reflective of
future results; Wyeth terminating our license and collaborative
research agreement; the rate at which investigators recruit
patients into our various clinical trials; our ongoing or future
clinical trials not demonstrating the appropriate safety and
efficacy of our product candidates our ability to successfully
develop current and future product candidates either
independently or in collaboration with our business partners;
our ability to secure and our use of third-party clinical
research organizations, raw material suppliers and contract
manufacturers, who may not fulfill their contractual obligations
or otherwise perform satisfactorily in the future; manufacturing
and maintaining sufficient quantities of clinical trial material
on hand to complete


12



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##### Table of Contents



our clinical trials; our failure to obtain regulatory
approval to continue our clinical trials or to market our
product candidates; our ability to protect and maintain our
proprietary intellectual property rights from unauthorized use
by others; our collaborators do not fulfill their obligations
under our agreements with them in the future; the condition of
the financial equity and debt markets and our ability to raise
sufficient funding in such markets; our ability to manage our
current cash reserves as planned; changes in related
governmental laws and regulations; changes in general economic
business or competitive conditions; and other statements
contained elsewhere in this Quarterly Report on Form 10-Q
and risk factors described in or referred to in greater detail
in the Risk Factors section of our annual report
filed on Form 10-K with the Securities and Exchange
Commission on March 28, 2005.


There may be events in the future that we are unable to
predict accurately, or over which we have no control. You should
read this Form 10-Q and the documents that we reference
herein that have been filed or incorporated by reference as
exhibits completely and with the understanding that our actual
future results may be materially different from what we expect.
Our business and financial condition, results of operations, and
prospects may change. We may not update these forward-looking
statements, even though our situation may change in the future,
unless we have obligations under the federal securities laws to
update and disclose material developments related to previously
disclosed information. We qualify all of the information
presented in this Form 10-Q, and particularly our
forward-looking statements, by these cautionary statements.


The following discussion should be read in conjunction with
the condensed financial statements and the notes thereto
included in Item 1 of this Quarterly Report on
Form 10-Q.


Overview


Staphylococcus aureus, S. aureus,






13



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##### Table of Contents



Recent Developments




S. aureus S. aureus




S.
aureus. S. aureus


14



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##### Table of Contents



Critical Accounting Policies and Estimates




Use of Estimates.


Revenue Recognition. Revenue Recognition in Financial Statements, Revenue Recognition, Revenue
Arrangements with Multiple Deliverables.


Accrued Expenses.


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


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##### Table of Contents





Financial Operations Overview


Revenue.


Research and Development Expense.






|  |                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------
| | the scope, rate of progress and cost of our clinical trials and
    other research and development programs;
| 
| | future clinical trial results;                                                                              
| 
| | the terms and timing of any collaborative, licensing and other
    arrangements that we may establish;      
| 
| | the cost and timing of regulatory approvals;                                                                
| 
| | the cost of establishing clinical and commercial supplies of our
    product candidates; and                
| 
| | the effect of competing technological and market developments.                                              

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##### Table of Contents





General and Administrative Expense.


Deferred Stock Compensation.


Interest Income (Expense), net.


Other Income (Expense), net.


Results of Operations


Three Months Ended March 31, 2005 and 2004


Revenue.


Research and Development Expense.


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##### Table of Contents







|                                           |                                        |                 |       |       |      |   |       |       | 
|------------------------------------------ | -------------------------------------- | --------------- | ----- | ----- | ---- | - | ----- | ----- | 
|                                           |                                        | Three Months    |      
|                                           |                                        | Ended March 31, |      
|                                           |                                        |                 |      
|                                           |                                        | 2005            |       |       | 2004 |  
|                                           |                                        |                 |       |       |      |  
|                                           |                                        | (In thousands)  |      
|Clinical and manufacturing-related expense |                                        | $               | 6,338 |       |      | $ | 1,431 |      
|Personnel-related salaries and expenses    |                                        |                 | 1,726 |       |      |   | 1,449 |      
|License fees and other expense             |                                        |                 | 538   |       |      |   | 800   |      
|Depreciation and facility-related expense  |                                        |                 | 528   |       |      |   | 358   |      
|                                           |                                        |                 |       |       |      |  
|                                           | Total research and development expense |                 | $     | 9,130 |      |   | $     | 4,038 | 
|                                           |                                        |                 |       |       |      |  

General and Administrative Expense.


Amortization of Deferred Stock Compensation.


Interest Income, net.


Dividends and Accretion to Redemption Value of
Redeemable Preferred Stock.


18



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##### Table of Contents



Liquidity and Capital Resources


Sources of Liquidity








Cash Flows










19



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##### Table of Contents



Funding Requirements






2005 Financial Guidance






| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | Total revenue from existing agreements of approximately $700,000
    to $800,000;                                                
|
| |  | total operating expenses of approximately $47 to
    $49 million; and                                                            
|
| |  | cash, cash equivalents and short-term investments in the amount
    of approximately $35 to $37 million at December 31,
    2005.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures About Market
    Risk



20



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##### Table of Contents










|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures



Changes in Internal Control over Financial Reporting




21



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##### Table of Contents






PART II


OTHER INFORMATION







|        |                  
|------- | -----------------
|Item 5. | Other Information








|        |         
|------- | --------
|Item 6. | Exhibits



|            |      |             |  |                                                                                                                                                                                                                               
|----------- | ---- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |      | Description
|            |      |            
|            | 31.1 |             |  | Section 302 Certification of the Chief 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 |             |  | Section 302 Certification of the Chief 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 |             |  | Section 906 Certifications of the Chief Executive Officer
    and the Chief Financial Officer                                                                                                                                 

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SIGNATURES






| |                                            
| | -------------------------------------------
| | INHIBITEX, INC                             
|
| | /s/ Russell H. Plumb                       
| |                                            
| | Russell H. Plumb                           
| | Vice President, Finance and Administration,
| | Chief Financial Officer                    



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EXHIBIT INDEX


|            |      |             |  |                                                                                               
|----------- | ---- | ----------- |  | ----------------------------------------------------------------------------------------------
|Exhibit No. |      | Description
|            |      |            
|            | 31.1 |             |  | Section 302 Certification of the Chief Executive Officer                                      
|            | 31.2 |             |  | Section 302 Certification of the Chief Financial Officer                                      
|            | 32.1 |             |  | Section 1350 Certifications of the Chief Executive Officer
    and the Chief Financial Officer

24