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UNITED STATES





FORM 10-K/A

(AMENDMENT NO. 1)


(Mark One)



|  |  |                                                                                          
|- |  | -----------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
| 
|  |  | For the fiscal year ended: December 31,
	2001, OR                                        
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13
	OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the transition period
	from                to                                        

Commission file number: 001-16033

ESPERION THERAPEUTICS, INC.

(Exact name of registrant as specified in its
charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 38-3419139                          
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

3621 South State Street

695 KMS Place


Ann Arbor, Michigan 48108


(734) 332-0506


(Address of principal executive offices,
including zip code, and telephone number, including area code)


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

Title of each class:
None                    Name
of each exchange on which registered: None


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

Common Stock, $0.001 par value


(Title of class)


Indicate by check
mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

x Yes         o No


Indicate by check
mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o

The aggregate
market value of the voting stock of the registrant held by
non-affiliates of the registrant as of March 1, 2002,
computed by reference to the closing price on The Nasdaq
National Market® on such date, was approximately
$161,591,764.

The number of
outstanding shares of the registrants common stock, as of
March 1, 2002, was 29,198,816.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Proxy Statement for the 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III
and certain documents are incorporated by reference into
Part IV.



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TABLE OF CONTENTS



|                                                   |  |  |  |  |  |  |  | 
|-------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                            
|PART II                                           
|INDEX TO FINANCIAL STATEMENTS                     
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS          
|CONSOLIDATED BALANCE SHEETS                       
|CONSOLIDATED STATEMENTS OF OPERATIONS             
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY   
|CONSOLIDATED STATEMENTS OF CASH FLOWS             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|PART III                                          
|PART IV                                           
|SIGNATURES                                        
|INDEX TO EXHIBITS                                 
|EX-10.37 Memorandum of Understanding              
|EX-10.38 Loan and Security Agreement              
|EX-10.39 Loan Modification Agreement              
|EX-10.40 Confirmation of Sublease Terms           
|EX-21.1 Subsidiaries of Esperion Therapeutics Inc.
|EX-23.1 Consent of Arthur Andersen LLP            



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ESPERION THERAPEUTICS, INC.

FORM 10-K

TABLE OF CONTENTS


|           |  |                                                                                        |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                        |    | Page |   
|           |  |                                                                                        |    |      |   
|           |  | PART I                                                                                 |    |      |    | 
|Item 1.    |  | Business                                                                               |    |      | 1  | 
|Item 2.    |  | Properties                                                                             |    |      | 23 | 
|Item 3.    |  | Legal Proceedings                                                                      |    |      | 24 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
	Holders                                   |    |      | 24 | 
|           |  | PART II                                                                                |    |      |    | 
|Item 5.    |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |    |      | 25 | 
|Item 6.    |  | Selected Consolidated Financial Data                                                   |    |      | 26 | 
|Item 7.    |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |    |      | 27 | 
|Item 7A    |  | Quantitative and Qualitative Disclosures about
	Market Risk                            |    |      | 33 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                            |    |      | 34 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |    |      | 54 | 
|           |  | PART III                                                                               |    |      |    | 
|Item 10.   |  | Directors and Executive Officers of the Registrant                                     |    |      | 54 | 
|Item 11.   |  | Executive Compensation                                                                 |    |      | 54 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
	and Management                        |    |      | 54 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                         |    |      | 54 | 
|           |  | PART IV                                                                                |    |      |    | 
|Item 14.   |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |    |      | 55 | 
|SIGNATURES |  |                                                                                        | 59 |     



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Forward-Looking Information is Subject to Risk
and Uncertainty

The information contained in this report includes
forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as
amended, as enacted by the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are often
identified by words such as hope, may,
believe, anticipate, plan,
expect, require, intend,
assume and similar expressions. The Company cautions
readers that forward-looking statements, which speak only as of
the date of this filing, are based on managements current
expectations, estimations and projections and involve certain
factors, such as risks and uncertainties, which may cause our
actual results, performance or achievements to be far different
from that suggested by our forward-looking statements. These
factors include, but are not limited to, risks associated with:
the progress and cost of development of our product candidates;
risks associated with the extent and timing of market acceptance
of new products by the Company or its competitors; dependence on
third parties to conduct clinical trials for our product
candidates; the extent and timing of regulatory approval, as
desired or required, for our product candidates; dependence on
licensing arrangements and other strategic relationships with
third parties for the research, development, manufacturing and
commercialization of our products; risks related to clinical
trials and manufacturing; dependence on patents and proprietary
rights; procurement, maintenance, enforcement and defense of the
Companys patents and proprietary rights; competitive
conditions in the industry; business cycles affecting the
markets in which the Companys products may be sold;
extraordinary events, such as litigation; risks inherent in
seeking and consummating acquisitions, including the diversion
of management attention to the assimilation of the operations
and personnel of the acquired business; risks relating to the
timing and extent of the Companys financing needs;
fluctuations in foreign exchange rates; and economic conditions
generally or in various geographic areas. All of the foregoing
factors are difficult to forecast. These risks and uncertainties
are discussed below in the section entitled Factors Affecting
our Future Prospects. We do not intend to update any of these
factors or to publicly announce the results of any revisions to
any of these forward-looking statements.






PART I


Item 1. Business

Overview

Esperion Therapeutics, Inc. is a
biopharmaceutical company dedicated to the discovery and
development HDL-targeted therapies for the treatment of
cardiovascular and metabolic diseases. We have focused our
initial drug development and discovery activities on a novel
class of drugs to treat acute and chronic cardiovascular and
metabolic diseases. We intend to commercialize a novel class of
drugs that focuses on a new treatment approach we call HDL
Therapy, which is based upon our understanding of high
density lipoprotein, or HDL, function. Through HDL Therapy, we
intend to exploit the beneficial properties of HDL in
cardiovascular and metabolic diseases with a portfolio of
product candidates.

We are currently developing five product
candidates, including four biopharmaceuticals: ETC-588, or LUV;
ETC-216, or AIM; ETC-642, or RLT Peptide; and ETC-276, or
ProApoA-I; and one small molecule, ESP 31015. The
biopharmaceuticals are currently being developed for the
treatment of acute coronary syndromes, while the small molecule
will target chronic treatment of risk factors associated with
cardiovascular diseases. Each of these product candidates, as
explained in detail under Our Products in
Development, is designed to enhance the naturally
occurring processes in the body that remove excess cholesterol
from arterial walls. We currently have three product candidates
in the clinical phase of development. The first Phase II
clinical trial for ETC-588 in patients with stable
atherosclerosis was completed and an additional Phase II
trial will be initiated in 2002. We are currently enrolling
patients in the first Phase II clinical trial for ETC-216
in patients with acute coronary syndromes. Results from this
trial are expected in the second half of 2002. A Phase I
clinical trial was commenced for ETC-642 in patients with
existing cardiovascular disease and data from this trial are
expected in the second half of 2002. We expect to continue
clinical testing of these three product candidates during 2002,
and are preparing to bring additional product candidates into
clinical development.

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Our product development to date has used in vitro
assays, testing procedures performed outside the body, animal
models, which we believe are appropriate at this stage of
development and, in several cases, human clinical testing.
Clinical and preclinical studies suggest that our product
candidates increase HDL-cholesterol, or HDL-C, or its function,
and enhance the removal of excess cholesterol and lipids from
the walls of arteries. Preliminary results in early clinical
trials suggest that ETC-588 and ETC-216 increase the
mobilization of cholesterol, as evidenced by measurements of the
amount of cholesterol in the blood both before and after
administrations. Third-party published reports of preliminary
human clinical studies of products that are similar to some of
our product candidates suggest that these compounds may increase
elimination of cholesterol from the body by enhancing the
efficiency of the reverse lipid transport, or RLT, pathway. We
believe that the biopharmaceutical therapies that we are
developing could potentially enhance the naturally occurring
processes in the body for the removal of excess cholesterol and
other lipids from arterial walls. We believe that this removal
of excess cholesterol from the body will lead to improvements in
vascular structure and function, which will ultimately lead to a
reduction in clinical events resulting from cardiovascular
disease and atherosclerosis. Our clinical development plan is
focused on planning and conducting clinical trials to
demonstrate these benefits.

We are also pursuing the discovery and
development of orally active, organic small molecules designed
to increase HDL-C levels and/or enhance its function to
stimulate the RLT pathway. We believe that some of these small
molecules may also possess anti-diabetic, anti-obesity and/or
lipid management properties. We have implemented several
strategies to develop these potential product candidates based
on well-known mechanisms by which HDL is produced in the body.
One strategy has yielded several classes of active molecules. We
believe that our drug discovery technologies and scientific and
drug development expertise have potential applicability to a
broad range of cardiovascular and metabolic diseases, including
treatments for heart disease, diabetes and obesity.

We were incorporated in Delaware and commenced
operations in May 1998. We became a public company in August
2000 with the closing of our initial public offering and our
common stock trades on The Nasdaq National Market under the
symbol ESPR. Our executive offices and primary
research facility are located at 3621 South State Street,
695 KMS Place, Ann Arbor, Michigan 48108, and our telephone
number is (734) 332-0506.

Background

General

The cardiovascular system is comprised of the
heart and blood vessels and delivers oxygen and other nutrients
to the tissues and organs of the body, such as the brain,
kidneys and lungs; in addition, it is able to remove waste
products. The heart propels blood through a network of arteries
and veins. The kidneys regulate the blood volume, and the lungs
put oxygen in the blood and remove carbon dioxide. To accomplish
these tasks, the cardiovascular system must maintain adequate
blood flow, which can be dramatically reduced by the excessive
deposit of a fat called cholesterol within the
arterial walls. Cholesterol is essential for cells to function
normally. Our bodies obtain cholesterol both through the foods
we eat and by manufacturing cholesterol inside some of our cells
and organs. Cholesterol either remains within the cell or is
transported by the blood to various organs. The major carriers
for cholesterol in the blood are lipoproteins, which are
particles composed of fat and protein, including low density
lipoprotein, or LDL, and high density lipoprotein, or HDL. LDL
delivers cholesterol to organs where it can be used to produce
hormones, maintain healthy cells or be transformed into natural
products that assist in the digestion of other lipids. HDL
removes excess cholesterol from arteries and tissues and
transports it back to the liver for elimination.

The RLT pathway consists of a four-step process
responsible for removing excess cholesterol from arteries and
transporting it to the liver for elimination from the body. The
first step is the removal of cholesterol from arteries by HDL in
a process called cholesterol removal. In the second
step, cholesterol is converted to a new form that is more
tightly associated with HDL as it is carried in the blood; this
process is called cholesterol conversion. The third
step is the transport and delivery of that converted cholesterol
to the liver in a process known as cholesterol
transport. The final step is the transformation and
discarding of

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cholesterol by the liver in a process called
cholesterol elimination. We believe our product
candidates have the potential to enhance the effectiveness of
these four steps in the RLT pathway in humans.


In a healthy human body, there is a balance
between the delivery and removal of cholesterol. Over time,
however, an imbalance can occur in our bodies in which there is
too much cholesterol delivery by LDL and too little removal by
HDL. When people have a high level of LDL cholesterol, or LDL-C,
and a low level of HDL-C, the imbalance results in more
cholesterol being deposited in arterial walls than being
removed. This imbalance can also be exaggerated by, among other
factors, age, gender, high blood pressure, smoking, diabetes,
obesity, genetic factors, physical inactivity and consumption of
a high-fat diet. The excess cholesterol carried in the blood in
LDL particles can be deposited throughout the body, but
frequently ends up in arterial walls, especially those found in
the heart. As a consequence, repeated deposits of cholesterol,
called plaque, form and can narrow or block the arteries,
possibly leading to a heart attack or stroke.

Cardiovascular
Disease

According to the American Heart Association,
cardiovascular disease is the number one killer of American men
and women. In 2002, the direct and indirect annual cost of
cardiovascular disease was estimated to be $325 billion, of
which approximately $32 billion is spent annually on drug
therapy. The most prominent form of cardiovascular disease is
atherosclerosis, a systemic disease that includes the buildup of
plaque in arterial walls limiting blood flow to the heart,
brain, other vital organs and extremities. Atherosclerosis can
result in heart attacks, chest pain, known as angina, and a
variety of other complications, and is responsible for over half
of all deaths from cardiovascular disease.

Importance
of HDL in Cardiovascular Disease

Physicians recognize high LDL-C and low HDL-C
levels as risk factors for cardiovascular disease. In addition,
high HDL-C levels generally are associated with lower incidence
of cardiovascular disease. Clinical studies have suggested that:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Low levels of HDL-C are a risk factor for
	coronary heart disease.The first
	study suggesting that people with low HDL-C had increased risk
	of atherosclerotic cardiovascular disease was reported in 1951.
	Since that time, a number of studies have confirmed that low
	HDL-C levels are a risk factor for coronary heart disease.                                                                                                                                                       
|
| |  | Increasing HDL-C reduces risk of coronary
	heart disease.The Helsinki Heart
	Study, completed in 1987, suggested that increasing HDL-C levels
	reduced the risk of coronary heart disease in individuals at
	risk due to low HDL-C, high LDL-C, and high triglycerides,
	another type of lipid.                                                                                                                                                                                              
|
| |  | Increasing HDL-C levels reduces the risk of
	death from coronary artery disease, heart attack or
	stroke.The Veterans Affairs
	Cooperative Studies Program High Density Lipoprotein Cholesterol
	Intervention Trial, completed in 1999, suggested that men with
	coronary artery disease who took a lipid regulating drug for
	five years experienced on average a 6% increase in HDL-C,
	resulting in a 24% risk reduction in death due to coronary
	artery disease, heart attack or stroke.
|
| |  | Low levels of HDL-C translate to a low
	survival rate following coronary bypass
	surgery.A 20-year study completed by
	The Cleveland Clinic Foundation in 1999 suggested that people
	with low HDL-C levels have a lower survival rate following
	coronary bypass surgery. This study suggests the importance of
	HDL-C in minimizing the necessity of post-operative treatments.                                                                                                            

In addition, published pre-clinical studies by
third parties suggest other protective properties of HDL, such
as reducing inflammation in arteries.

Current Treatments for Cardiovascular
Disease

Treatments are either short-term solutions,
termed acute by physicians, or long-term solutions,
termed chronic. Acute treatments are reserved for
more life-threatening cardiovascular conditions, such as a heart
attack, a condition where there is a shortage of oxygen-rich
blood available to the heart. In contrast, chronic

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treatments are used to prevent cardiovascular
disease from growing worse and having to resort to acute
treatments. Current acute treatments may include costly invasive
procedures, while chronic treatments are usually in tablet or
pill form. Chronic treatments have focused more on
stable atherosclerosis and have been successful at
showing benefits over long periods of time (i.e., months or
years). We believe that current trends indicate a growing
interest in finding successful treatments for
unstable acute coronary syndromes and looking for
clinical benefits in short periods of time (i.e., days or weeks)
rather than months or years.


Acute
Treatments

Acute treatments are required when blood flow to
the heart is severely restricted and the patient is at immediate
risk for further complications. Two of the most common invasive
procedures used to restore blood flow are bypass surgery and
percutaneous coronary intervention (PCI) (i.e., balloon
angioplasty, with or without stents). In bypass surgery, a
cardiovascular surgeon redirects blood flow around the blocked
arteries by grafting a healthy vessel removed from another
location in the patient. In PCI, a thin flexible tube with an
inflatable balloon at its end is positioned in the artery at the
point of blockage. The balloon is then inflated and this pushes
aside the plaque that causes the blockage, resulting in a
reopening of the artery to allow greater blood flow. Frequently,
a cardiologist reinforces the newly opened artery with a
wire-mesh cylinder called a stent. In addition, these patients
with acute coronary syndromes may be prescribed aspirin,
clopidogrel, heparin, nitrates, IIb/ IIIa inhibitors,
beta-blockers, fibrinolytic therapy, statins and ACE inhibitors.
Despite these many treatments and/or procedures, there still
exists a short-term risk for recurrent clinical events.

The primary benefit of successful acute
treatments is the immediate restoration of oxygen-rich blood
flow to the heart. However, the major drawbacks are that:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | These procedures are invasive to the patient and
	involve opening up the chest cavity to expose the heart, as in
	coronary bypass surgery, or inserting a thin flexible tube
	through a leg artery and advancing it to the heart, as in PCI.
	Invasive procedures by their nature involve a risk of
	complications, including death. For example, up to 3.5% of
	coronary bypass patients die from post-operative complications.
|
| |  | There is significant recovery time after coronary
	bypass surgery.                                                                                                                                                                                                                                                                                                                                                              
|
| |  | These invasive procedures are very costly,
	averaging several tens of thousands of dollars each.                                                                                                                                                                                                                                                                                                                                
|
| |  | Many patients are not eligible for invasive
	surgical procedures due to their medical and/or treatment
	history and physical condition.                                                                                                                                                                                                                                                                                         
|
| |  | Atherosclerosis affects the entire cardiovascular
	system and since acute procedures are localized and treat only
	one segment of a diseased artery at a time, many diseased
	arteries are left untreated after using these localized invasive
	procedures.                                                                                                                                                                     

According to the American Heart Association, it
is estimated that in 1999, 557,000 coronary bypass surgeries
were performed on 355,000 patients in the United States with an
average cost of about $45,000. In 1999, approximately 601,000
PCI procedures were performed in the United States. The average
cost of a PCI is $20,000 and more when a stent is used.

Chronic
Treatments

The initial recommendation for a patient with
elevated LDL-C, a well-known risk factor, is frequently a change
in lifestyle involving exercise combined with a low-fat,
low-cholesterol diet. If a patients cholesterol level does
not improve, then a physician moves to the next step of
treatment to achieve acceptable levels of cholesterol in the
blood.

Chronic treatments for cardiovascular disease
have the goal of preventing or limiting progression of the
disease to reduce risk of heart disease, disability or death.
Physicians frequently will prescribe a statin drug that lowers
the level of LDL-C in the blood by inhibiting cholesterol
production in the body. These drugs can also lower
triglycerides, a type of lipid, and have the ability to slightly
raise HDL-C. Recent studies have shown that the statins reduce
the risk of illness or death from cardiovascular disease by
approximately 30%.

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These drugs reduce the rate of progression of
atherosclerosis in a majority of patients. However, statins have
not been consistent in demonstrating regression of
atherosclerotic disease.


Our Strategy

We are taking a product-focused approach towards
drug development. The key elements of our business strategy are
as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Develop several different drug candidates for
	HDL Therapy.Based on our
	understanding of the RLT pathway, we have identified a portfolio
	of product candidates that we believe could provide a broad
	spectrum of treatment options for cardiovascular and metabolic
	diseases. These product candidates are focused on improving HDL
	function in the RLT pathway and removing excess cholesterol from
	the walls of arteries. Our portfolio currently consists of three
	distinct types of HDL therapies: HDL mimetics, cholesterol
	sponges and small molecules that stimulate the RLT
	pathway. Each of these therapies is described in more detail in
	the section below entitled Our Products in Development.                                                                                                                
|
| |  | Leverage experienced scientific and drug
	development expertise.We are managed
	by an experienced group of drug developers with significant
	expertise in cardiovascular research and drug development. Roger
	S. Newton, Ph.D., President and Chief Executive Officer of
	Esperion, was the co-discoverer, chairman of the discovery team
	and a member of the development team for the drug atorvastatin
	(Lipitor®). Sales of Lipitor exceeded $6.4 billion in
	2001. Other members of our management team have participated in
	the discovery, clinical development and/or commercialization of
	many other high profile therapies, including Lipitor®,
	Lopid®, Pravachol®, Glucophage® and Plavix®.
	In addition, we have discovered HDL elevators and have
	successfully recruited the inventors of two of our drug
	candidates.
|
| |  | Optimize clinical and regulatory strategies.We believe that by initially focusing
	on acute treatments for our biopharmaceutical product
	candidates, we hope to achieve an abbreviated development time,
	as compared to what would be expected with chronic treatments.
	This may result in a faster time to market, which will benefit
	patients with cardiovascular disease. We intend to perform
	clinical trials on our biopharmaceutical product candidates to
	rapidly assess efficacy for well-defined cardiovascular
	endpoints in the treatment of acute coronary events.
	Concurrently, we are discovering and developing small molecules
	that we intend to use as a chronic therapy to complement the
	acute therapies of our biopharmaceuticals.                                                                        
|
| |  | Retain significant marketing rights to our
	product candidates.Our goal is to
	retain some or all of the marketing rights to our product
	candidates in order to maximize our financial return as well as
	to ensure that they will be successfully commercialized. By
	completing as much of the preclinical and clinical development
	work both independently and with contract research organizations
	as is feasible, we hope to be able to negotiate more favorable
	terms for any such partnering arrangements.                                                                                                                                                                                                                                                                                                                  

We anticipate that our most significant
expenditures will be for further clinical development of our
product candidates, payments under current licensing agreements,
ongoing research, discovery and development activities, the
manufacture of preclinical and clinical material, and general
corporate and working capital purposes.

Our Products in Development

Our initial product development efforts are
focused on developing a novel class of drugs designed to treat
both acute and chronic atherosclerotic disease using HDL
Therapy. Our product candidates are designed to enhance HDL
function and the four steps of the RLT pathway. Our product
development to date has used in vitro assays, testing procedures
performed outside the body, animal models which we believe are
appropriate at this stage of development and, in several cases,
human clinical testing. We currently have three product
candidates actively in the clinical phase of development. We
expect to continue clinical testing of these three product
candidates during 2002, and are preparing to bring additional
product candidates into clinical development. Our human clinical
trials may not commence or proceed as anticipated and we may not
be able

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to demonstrate the same levels of safety,
efficacy or other results in clinical trials that have been
suggested in our preclinical or early clinical trials, or in
studies by third parties with products similar to ours.


ETC-588
(LUV)

We are developing ETC-588 (large unilamellar
vesicles, or LUV), as an acute treatment for acute coronary
syndromes, or reduced blood flow to the heart, caused by
atherosclerosis. LUV are spherical particles made of naturally
occurring lipids that can remove cholesterol from cells,
including those in the arterial wall. In effect, these particles
act as cholesterol sponges and can cycle back
through arteries several times to remove more cholesterol. We
believe that this process will allow the body to significantly
increase the amount of cholesterol it is able to remove and
improve cardiovascular health and function. We believe that LUV
have a high capacity to transport cholesterol, the third step in
the RLT pathway, and deliver it to the liver for elimination
from the body.

Two third party preclinical animal studies were
published involving the administration of LUV. These studies
showed the removal of cholesterol from arteries and the
regression of atherosclerosis, thereby helping arteries regain
their flexibility and function. The material used in these
studies was similar to the LUV that we are developing. None of
the studies were conducted by us or on our behalf.

Phase I single and multiple dose tolerance
studies in healthy volunteers were completed in 2000. Analysis
of data from those studies suggests a dose-dependent cholesterol
mobilization. In November 2001, we reported preliminary
results from our Phase IIa clinical study and we expect to
report more complete data during the second quarter of 2002 at a
peer-reviewed scientific meeting. The preliminary findings from
this study indicate that ETC-588 met the studys primary
endpoint of demonstrating safety and tolerability in patients
with known vascular disease.

The Phase II a study was a double-blind,
randomized, placebo-controlled, multiple-dose study designed to
determine the optimal dose and dosing schedule and effect of
ETC-588 in thirty-four evaluable patients with stable known
vascular disease and HDL-C less than or equal to 45 milligrams
per deciliter. Patients were administered one of three dose
strengths (50, 100, 200 milligrams per kilogram) or placebo
every four or seven days. Patients administered the 100 and 200
mg/kg doses each received seven doses for either four or six
weeks, while the 50 mg/kg dose group received fourteen doses for
either eight or thirteen weeks. In this study, ETC-588 was safe
and well-tolerated at all dose levels and dose regimens. Based
on the results of this study, an optimal dosing schedule of
every seven days has been defined for future study of ETC-588.
Patients administered ETC-588 also showed evidence of
dose-related cholesterol mobilization.

In addition, we conducted a sub-study in this
Phase IIa trial using magnetic resonance imaging
(MRI) technology to assess its feasibility as an
appropriate imaging modality. The Company believes that the
findings from this study support the feasibility of utilizing
MRI to assess the vascular structure of the carotid arteries.
This technology will be utilized in future studies of ETC-588 to
assess a primary endpoint of rapid changes in plaque volume and
composition.

We will conduct a second Phase II clinical trial
in 2002 to, among other things, use MRI technology to assess the
amount and rapidity of changes in plaque volume. Additional
efficacy endpoints may also be studied. The second Phase II
study will be initiated in the first quarter of 2002.

ETC-216
(AIM)

We are developing ETC-216 (apolipoprotein A-I
Milano, or AIM), for the treatment of acute coronary diseases
caused by atherosclerosis. The clinical use of ETC-216 as a
human recombinant protein complexed to phospholipid is to mimic
HDL and/or enhance its function. AIM is a variant form of
apolipoprotein A-I, the major protein component of HDL, and is
present in a small population of Northern Italians with
paradoxically low HDL-C levels. Low HDL-C levels normally would
correlate with high risk for cardiovascular disease; however,
those people with the Milano variant of apolipoprotein A-I
tend to show a lower risk of cardiovascular disease, presumably
due to enhanced reverse lipid transport.

6



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We believe that infusion of ETC-216 in humans
will enhance the RLT pathway. Published third-party reports in
1998, 1999 and 2001 have shown that in animal models, AIM
reduced atherosclerotic lesions and their lipid content and
prevented inflammation and clotting. A 1999 report of in vitro
tests showed that AIM increased cholesterol removal. The 2001
report demonstrated stabilization of atherosclerotic lesions
within 48 hours. Also, published third-party reports in 1994 and
1995 showed that AIM inhibited restenosis following balloon
angioplasty in two animal models. The material used in these
studies is similar to ETC-216 that we are currently developing.
None of these studies were conducted for us or on our behalf.

We completed and reported positive data from a
Phase I single-dose clinical trial of ETC-216 in Europe in the
first quarter of 2001. We initiated a multiple-dose,
multi-center Phase II clinical study in patients with acute
coronary syndromes in the fourth quarter of 2001. The purpose of
this study is to provide evidence that ETC-216 is effective in
regressing coronary atherosclerosis by measuring changes in
plaque size utilizing intravascular ultrasound (IVUS). The trial
is a randomized, double-blind study that is evaluating the
efficacy and safety of ETC-216 at two different dose levels of
intravenous infusions, compared to placebo, administered every
seventh day with a maximum of five doses. The study will
evaluate fifty patients with acute coronary syndromes, who are
scheduled to undergo coronary angiography and/or angioplasty.
The primary endpoint is the effect of ETC-216 on plaque size of
one targeted coronary artery, which will be measured by atheroma
volume through the use of IVUS. In IVUS, a tiny ultrasound probe
is inserted into the coronary artery to directly image
atherosclerotic plaques.

We acquired exclusive worldwide rights for AIM
from Pharmacia in July 1998. Under the license agreement with
Pharmacia, at the completion of Phase II clinical trials,
Pharmacia has the exclusive right of election to co-develop and
the exclusive right to market products that include AIM as an
active ingredient in countries outside of the United States and
Canada. In addition, if we pursue a co-development and
co-promotion arrangement in the United States and Canada,
Pharmacia has the right of first negotiation.



| |                      
| | ---------------------
| | ETC-642 (RLT Peptide)

We are developing ETC-642 (RLT Peptide) for the
treatment of acute coronary diseases caused by atherosclerosis.
ETC-642 mimics the biological properties of apolipoprotein A-I,
to promote cholesterol removal from arterial walls and other
tissues and enhance reverse lipid transport. ETC-642 is a
complex of peptide and phospholipids that mimics the functions
of HDL. ETC-642 has been shown in our preclinical studies to
increase the HDL-C fraction and to enhance cholesterol
mobilization. Because of these properties, we believe that
administration of ETC-642 may stimulate cholesterol removal in
patients.

The patent applications that were filed in 1997
for the technology relating to series of RLT peptides describe
experiments of the compound in vitro and in vivo, including in
human blood samples. These experiments showed that RLT peptides
similar to the RLT Peptide that we are developing interact with
and activate important enzymes in the RLT pathway and stimulate
cholesterol removal. The results of a preclinical animal model
study described in the patents showed that the administration of
an RLT peptide complexed to phospholipids increased HDL-C levels
in the blood. The RLT peptide complex used in this study is
similar to the RLT Peptide that we are developing. This study
was not conducted for us or on our behalf.

Our goal is to establish in human clinical trials
that intravenous infusions of ETC-642 are safe and can remove
cholesterol from the walls of arteries, thus increasing blood
flow and reducing the death and disability associated with
atherosclerosis. During 2001, we initiated a Phase I
clinical study of ETC-642 in patients with existing
cardiovascular disease. The Phase I clinical trial is a
single-dose study in patients with stable atherosclerosis to
determine the safety, tolerability, pharmacokinetic and
cholesterol mobilization properties of ETC-642. We expect to
report results from this Phase I clinical trial in the
middle of 2002. Following the completion of this Phase I trial
and review of the data, the Company expects to conduct a
multiple-dose study in patients beginning in the second half of
2002 to examine dosing regimens and certain efficacy parameters.

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| |                    
| | -------------------
| | ETC-276 (ProApoA-I)

We are developing ETC-276 (ProapolipoproteinA-I,
or ProApoA-I), for the treatment of acute coronary diseases
caused by atherosclerosis. ProApoA-I is a naturally occurring
protein found in all humans that forms particles with lipids
similar to HDL.

In the blood, ProApoA-I is converted to ApoA-I,
which is responsible for all four steps of the RLT pathway. A
1995 published report of in vitro tests showed that ProApoA-I
had properties important for the removal of cholesterol from
cells. Results from animal studies in several species
demonstrated that ProApoA-I activated the RLT pathway. A
third-party published report showed that when ProApoA-I was
infused into people with high cholesterol levels ProApoA-I
increased elimination of cholesterol from the body by enhancing
the RLT pathway. The material used in these studies is similar
to the ProApoA-I that we are currently developing. None of the
studies noted were conducted for us or on our behalf.

Our goal is to show that intravenous infusions of
ETC-276 can help remove cholesterol from arteries, thus
increasing blood flow and reducing the symptoms associated with
atherosclerosis. The Companys patent coverage for ETC-276
only extends to 2008; therefore, we are looking at alternatives
to enhance the intellectual property protection for this product
candidate. In addition, during 2002, the Company will continue
pre-clinical development activities in the ProApoA-I program and
will be evaluating various strategies related to the production
of ProApoA-I. As these goals are achieved, we intend to continue
the clinical development of this product candidate as a second
generation to our other product candidates that mimic the
properties and function of HDL.



| |                          
| | -------------------------
| | ESP 31015 (HDL Elevators)

We are pursuing the discovery and development of
orally active, organic small molecules designed to increase
HDL-C levels and/or enhance their function to stimulate the RLT
pathway. We believe that some of these small molecules may also
possess anti-diabetic, anti-obesity and/or lipid management
properties. We have implemented several strategies to develop
these product candidates based on well-known mechanisms by which
HDL is produced in the body. One strategy has yielded several
classes of active molecules.

Our preclinical studies demonstrated that several
classes of molecules elevate HDL-C in animal models. These
molecules can also control lipid production and digestion in
cells from rats, rabbits, hamsters and humans, and inhibit the
progression of atherosclerosis in an animal model. We believe
that these classes of molecules may also possess anti-diabetic
and anti-obesity properties. Our goal is to establish in human
clinical trials that orally administered small molecules are a
safe chronic treatment to enhance the RLT pathway while
simultaneously treating conditions affecting the diabetic or
obese patient.

We have identified a lead candidate from our
small molecule discovery program, which we designate ESP 31015.
Upon completion of certain pre-clinical and toxicology studies,
the Company intends to file an Investigational New Drug
application, or IND, late in 2002 and begin Phase I
clinical testing on ESP 31015 in the first half of 2003. In
the meantime, other small molecule candidates are being
evaluated for potential development in the future.

Research and Development

We have devoted substantially all of our
resources since we began our operations in May 1998 to the
research and development of pharmaceutical product candidates
for cardiovascular and metabolic diseases. Our research and
development expenses were $21.5 million, $22.6 million
and $8.5 million in 2001, 2000 and 1999, respectively.
Research and development expenses include both external and
internal costs related to the research and development
activities of our existing product candidates as well as
discovery efforts on potential new product candidates. External
costs include costs related to manufacturing, clinical trials,
toxicology or pharmacology studies performed by third parties,
milestone payments under certain license agreements and other
related expenses. Internal costs include all payroll and related
costs attributable to research and development activities, as
well as an allocation of overhead expenses incurred by the
Company. Some of these

8



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research and development expenses funded research
to study the potential connection between the presence of low
HDL-C levels and the incidence of metabolic disorders such as
diabetes and obesity.


We have implemented strategies in research and
development, which we believe will generate a pipeline of new
drugs for the treatment of cardiovascular and metabolic diseases
including lipid disorders, diabetes, obesity, and related
complications. These strategies include an intensive effort to
identify both orally active small molecules and novel
biopharmaceuticals.

Small molecule discovery efforts, focused on
lipid disorders, are aimed to identify drugs that increase HDL-C
levels and/or enhance their function to stimulate the RLT
pathway. HDL or its lipid and protein components are synthesized
and replenished via three pathways in the body:



| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | digestion of triglycerides in
	triglyceride  rich lipoproteins;
|
| |  | synthesis of apolipoprotein A-I; and                            
|
| |  | effluxing of cell-derived cholesterol into
	pre-existing HDL.   

We have implemented approaches to identify drugs
that stimulate these pathways, which we believe will result in
the synthesis of more HDL or the rapid replenishment of HDL
components.

Small molecule discovery efforts focused on
diabetes and obesity are aimed to improve the insulin
sensitivity of resistant tissues and to enhance the breakdown of
fat from adipose tissue, the storage site for fat. We believe
that some pathways involved in HDL synthesis and replenishment
intersect with pathways affecting insulin resistance and the
breakdown of fat. We believe that identifying those points of
intersection will accomplish two goals:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | accelerate our discovery process by helping us
	define new chemical structures; and                                        
|
| |  | provide novel, validated molecular targets for
	in-house drug discovery efforts and/or assets for industry
	collaborations.

To identify those points of intersection, we
intend to capitalize on our knowledge of chemistry, drug action,
and biological models by integrating that knowledge with
genomics tools and techniques. We believe our product candidates
and active small molecules provide a proprietary platform, which
will help us to improve our prediction of clinical success with
drug candidates.

Clinical Testing

We do not have the ability to independently
conduct all aspects of our clinical studies and obtain
regulatory approvals for our product candidates. We rely on
third-party contract research organizations, or CROs, to perform
many of these functions.

We believe that the clinical development plan for
our product candidates can be achieved by the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase I.We need to
	prove the safety and tolerability of our product candidates. In
	addition, we begin to look at dose levels and dosing regimens;
	that is, how much drug should be administered and how often.
	Finally, in Phase I, we look for evidence of cholesterol
	mobilization in humans. Mobilization can be measured using
	various clinical chemistry tests such as the level of
	cholesterol in the blood both before and after treatment.                                                                                                                                                                               
|
| |  | Phase II.We will
	continue to monitor safety and tolerability in patient
	populations. We will identify optimal dose and dose regimens
	including the number of treatments and length between
	treatments. Finally, we will examine efficacy parameters
	including changes in vascular structure and function. We can
	look at plaque structure and volume changes using various
	imaging modalities such as MRI or IVUS and study vascular
	function using brachial artery ultrasound. These measurements
	will provide evidence as to whether our product candidates are
	having an impact on the plaque in the walls of the arteries.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase III.During
	Phase III, we believe that we will need to show evidence of
	clinical benefit and establish effectiveness of our product
	candidates through improvements in cardiovascular clinical
	outcomes such as morbidity, mortality, heart attacks,
	hospitalizations, revascularizations and other clinical events.
	Because we are targeting acute treatments with our
	biopharmaceuticals, we need to show an impact on these clinical
	events in a short period of time following treatment.

Marketing and Sales

We currently have no sales or distribution
capabilities. In order to successfully commercialize any of our
product candidates, we must either internally develop full
sales, marketing and distribution capabilities or make
arrangements with third parties to perform these services. We
intend to sell, market and distribute some products directly and
rely on relationships with third parties to sell, market and
distribute other products. To market any of our products
directly, we must develop a marketing and sales force with
technical expertise and with supporting distribution
capabilities. Since 2000, we have had a marketing director to
develop commercialization strategies for our product candidates
and to conduct market research on the target indications for our
product candidates.

Our licensors have granted us exclusive rights to
market our product candidates, except for ETC-216. We acquired
exclusive worldwide rights for AIM from Pharmacia in
July 1998. Under this agreement, at the completion of
Phase II clinical trials, Pharmacia has the exclusive right
of election to co-develop and the exclusive right to market
products that include AIM as an active ingredient in countries
outside of the United States and Canada. In addition, if we
pursue a co-development and co-promotion arrangement in the
United States and Canada, Pharmacia has the right of first
negotiation.

In the United States, we do not intend to enter
into co-development, co-promotion or out-licensing arrangements
for our biopharmaceutical product candidates until they are in
clinical development. We believe the preferred partnering deal
would occur after Phase I/ II and would consist of a
co-development and co-promotion relationship with one or more
companies that have established distribution systems and direct
sales forces. In international markets, we intend initially to
seek strategic relationships to market, sell and distribute our
product candidates, but we may eventually become involved in
direct sales and marketing activities internationally.

Manufacturing



| |                                   
| | ----------------------------------
| | Manufacturing and Materials Supply

We currently rely, and will continue to rely for
at least the next few years, on contract manufacturers to
produce sufficient quantities of our product candidates for use
in our preclinical and clinical trials and ultimately for
commercial purposes. We also rely, and intend to continue to
rely, on third parties to provide the components of these
product candidates, such as proteins, peptides, phospholipids
and bulk chemical materials.

There is currently a limited supply of some of
the components needed to manufacture our product candidates. In
particular, the production capacity available in the world for
the proteins contained in ETC-216 and ETC-276 is currently
limited. Furthermore, the contract manufacturers that we have
identified and worked with to date only have limited experience
at manufacturing, formulating, analyzing, and filling and
finishing our product candidates in quantities sufficient for
conducting clinical trials or for commercialization. There are
companies throughout the world that have begun to make
investments in additional capacity through the construction of
new facilities or renovation of existing facilities; however,
these facilities will take time to construct, require a
significant capital investment and must comply with regulatory
specifications.

The process for manufacturing proteins and
formulating them into protein/lipid complexes is complicated. We
do not have any experience in the commercial-scale manufacturing
of any of ETC-588, ETC-216, ETC-642, ETC-276 or ESP 31015.
Each of these product candidates has a unique manufacturing
process. Our product candidates will need to be manufactured in
facilities and using processes that comply with current Good
Manufacturing Practices, or cGMP requirements and other similar
regulations, including those from

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outside the United States. It takes a substantial
period of time to produce proteins, peptides, phospholipids and
certain small molecules in compliance with such regulations. If
we are unable to establish and maintain relationships with third
parties for manufacturing sufficient quantities of our product
candidates and their components that meet our planned time and
cost parameters, the development and timing of our clinical
trials and commercialization strategy may be adversely affected.


Intellectual Property and License
Agreements

Our ability to protect and use our intellectual
property rights in the development and commercialization of our
product candidates is crucial to our continued success. We will
be able to protect our proprietary rights from unauthorized use
by third parties only to the extent that our proprietary rights
are covered by valid and enforceable patents or are effectively
maintained as trade secrets, or other proprietary information or
know how. We currently rely on a combination of patents and
pending patent applications, some of which we license and some
of which have been assigned to us, proprietary information,
trade secrets and know how to protect our interests in
developing and commercializing our product candidates and
technologies.

In connection with the agreements described
below, we may be obligated to make various milestone payments
which could amount to $28.3 million and future royalty
payments, pursuant to formulas in the agreements, over the next
several years. At the present time, it is uncertain as to
whether we will be required to make any of these additional
payments.

ETC-588
(LUV)

In March 1999, we exclusively licensed certain
LUV technology from Inex Pharmaceuticals Corp., or Inex, on a
worldwide basis. Inex owns granted patents in 13 European
countries covering the LUV technology and exclusively licenses,
from the University of British Columbia, two issued U.S. patents
and one pending U.S. patent application. The European patents
claim methods for treatment of atherosclerosis using liposomes.
The U.S. patents and patent application claim liposome structure
and chemical makeup and methods for treatment of disease,
including atherosclerosis. The U.S. patents expire no earlier
than 2014. The European patents expire in 2011.

We paid Inex $250,000 at the time we entered into
the license agreement with Inex for LUV in March 1999. Our
license agreement with Inex, as amended, requires us to make
payments to Inex as milestones are achieved, and to pay Inex
royalties on sales of products that are covered by the licensed
patents or developed using the licensed technology. The first
milestone payment of $100,000 was paid to Inex in the first
quarter of 2001, based upon enrollment of our first patient in a
Phase II clinical trial. Additional milestone payments will
be paid to Inex if and when we achieve future development
milestones as defined in the agreement, up to an aggregate
amount of $6.2 million. This license continues until the later
of ten years from the first commercial sale of a product covered
by this license or the last expiration date of any patent rights
covered by this license, unless earlier terminated by a party in
accordance with the terms of the license.

In September 2000, we acquired Talaria
Therapeutics, Inc., or Talaria, through which we acquired
additional LUV technology, which now includes seven U.S.
patents, one allowed U.S. patent application, eight pending U.S.
patent applications and corresponding foreign pending patent
applications claiming methods and compositions for use in
treating atherosclerosis and other related disorders and angina.
The issued U.S. patents expire in 2016. Under our license
agreement with Inex, as amended, we are also required to pay
Inex royalties on sales of products that are covered by this LUV
technology.

Our merger agreement with Talaria required us to
issue 813,008 shares of common stock to former Talaria
stockholders and requires us to pay: (i) up to
$6.3 million in cash and/or common stock based on the
achievement of four development milestones; and
(ii) royalties in cash and/or common stock based on net
annual sales of LUV products in North America. The combined
milestone payments and royalties are subject to a maximum
aggregate ceiling of $20.0 million. The first milestone was
achieved in the first quarter of 2001 upon the enrollment of our
first patient in a Phase II clinical trial. This milestone
was paid in 2001 through the issuance of 58,626 shares of common
stock. 10,127 of the initial 813,008 shares of common stock that
were

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issued were retired in 2001 in satisfaction of an
indemnity obligation of the former Talaria stockholders under
the merger agreement and related documents.


ETC-216
(AIM)

In June 1998, we acquired exclusive, worldwide
rights to AIM from Pharmacia Corporation, subject to
Pharmacias exclusive right to co-develop and market AIM in
countries other than the United States and Canada. Under our
license agreement with Pharmacia, subject to Pharmacias
exclusive right to co-develop and market products that include
AIM as an active ingredient in countries other than the United
States and Canada, we acquired what is now four U.S. patents and
four pending U.S. patent applications, and other related foreign
patents and patent applications, covering various aspects of
AIM. These patents and patent applications claim methods and
materials for producing AIM in bacteria and yeast, methods for
purification and methods for treating atherosclerosis and other
forms of cardiovascular disease with AIM. Two of the issued U.S.
patents expire in 2015 and the other two issued U.S. patents
expire in 2016. Corresponding patents are in effect and patent
applications are pending in other countries where we believe the
market potential for ETC-216 is significant, including most of
the European countries and some Asian countries, including Japan.

We paid Pharmacia $750,000 at the time we entered
into our license agreement in June 1998. Our license agreement
with Pharmacia requires us to make payments to Pharmacia as
milestones are achieved, and to pay Pharmacia royalties on sales
of products that are covered by the Pharmacia patents or
developed using the Pharmacia technology. The first milestone
payment of $1.0 million will be paid in cash or by issuance of a
promissory note to Pharmacia if and when we have completed
clinical trials showing preliminary safety and initial
proof-of-concept (which may include the Phase II study that
we expect to report on in the second half of 2002). We believe
that this would mean clinical trials that show statistically
significant results in safety and efficacy, allowing us to
better define the details of any potential Phase III
pivotal trials.

If Pharmacia exercises its exclusive right to
co-develop and market AIM in countries other than the United
States and Canada, we will make additional milestone payments,
up to an aggregate of $2.5 million, to Pharmacia. If
Pharmacia does not exercise its right to co-develop and market
AIM in countries other than the United States and Canada, we
will make additional milestone payments, up to an aggregate of
$13.5 million, to Pharmacia starting if and when we enroll
the first patient in the first Phase III clinical trial for
an AIM product in the United States. Instead of paying
milestones in cash, if the milestone payments are greater than
10% of our cash reserves at the time of payment, we may instead
make these payments by issuing to Pharmacia a promissory note.

Under this license agreement, at the completion
of Phase II clinical trials, Pharmacia has the exclusive
right of election to co-develop and the exclusive right to
market AIM in countries outside of the United States and Canada.
In addition, if we pursue a co-development and co-promotion
arrangement in the United States and Canada with a third party,
Pharmacia has the right of first negotiation to co-develop and
co-promote in the United States and Canada. This license expires
on the latter of 2018 or upon the last of the Pharmacia patents
to expire, unless terminated earlier by a party in accordance
with the terms of the license.

ETC-642
(RLT Peptide)

Under the agreement entered into in
September 1999, we exclusively licensed from a group of
inventors the RLT Peptide technology, which now includes four
issued U.S. patents and eleven pending U.S. and corresponding
foreign, pending patent applications. The RLT Peptide technology
relates to peptides and proteins that have activity equal to or
greater than, ApoA-I. The issued U.S. patents expire in 2017 and
are directed to peptides having ApoA-I activity, pharmaceutical
compositions thereof and methods for their use. The pending
patent applications are directed to peptides, drug forms
containing the peptides, methods of using the peptides,
pharmaceutical dosage forms of the peptides, and methods for
preparing the dosage forms.

We paid the inventors of our RLT Peptide an
initial license fee of $50,000 in January 2000. Our license
agreement with the inventors requires us to make payments to
them as milestones are achieved, and to pay them royalties on
sales of products that are covered by the inventors
patents or developed using the inventors technology. The
first milestone payment of $50,000 was paid to the inventors in
2001. Additional milestone

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payments, up to an aggregate of $2.1 million,
will be paid to the inventors if and when we achieve future
development milestones as defined in the agreement with the
inventors. This license continues until ten years from the date
of license execution or the last to expire of any of the
inventors patents, unless terminated earlier by a party in
accordance with the terms of the license.


ETC-276
(ProApoA-I)

In February 2000, we entered into a license
agreement with Region Wallonne to obtain exclusive, worldwide
rights to its patents, proprietary information and know-how
concerning a precursor protein known as proapolipoprotein A-I,
or ProApoA-I. We have an exclusive license to a United States
patent relating to a gene sequence for ProApoA-I; expression
vectors, which are the DNA sequences for the purpose of
bacterial production; and a process for producing ProApoA-I.
This patent expires in 2008. The agreement continues until the
latter of December 2012 or the last to expire of the patents
covered by the license, unless terminated earlier by a party in
accordance with the terms of the license.

We paid Region Wallonne $25,000 at the time we
entered into this license agreement. We are further obligated to
pay Region Wallonne royalties on sales of products that are
covered by its patents. As part of this license, we agreed to
purchase supplies of ProApoA-I from a manufacturer in, and
entered into a research collaboration with investigators in,
Region Wallonne.

ESP
31015 and HDL Elevators

We are also in the process of researching and
developing small organic molecules that increase HDL-C levels
and also molecules that possess anti-diabetic and anti-obesity
and/or lipid management properties. We have filed eight United
States patent applications and five international applications
directed to classes of compounds having this activity, the use
of these compounds and compositions containing these compounds
and related to their preparation. We are also pursuing, and will
continue to pursue, patent protection for other classes of
compounds having this activity, which have been or will be
identified in our laboratories. During 2001, we identified a
lead candidate from this class of compounds 
ESP 31015.

Government Regulation

The U.S. Food and Drug Administration, or FDA,
and comparable regulatory agencies in state and local
jurisdictions and in countries outside of the United States
impose substantial requirements on the preclinical and clinical
development, manufacture and marketing of pharmaceutical product
candidates. These agencies and other federal, state and local
governmental entities regulate research and development
activities and the testing, manufacture, quality control,
safety, effectiveness, labeling, storage, record-keeping,
approval and promotion of our product candidates. All of our
product candidates will require regulatory approval before
commercialization. In particular, therapeutic product candidates
for human use are subject to rigorous preclinical and clinical
testing and other requirements of the Federal Food, Drug, and
Cosmetic Act, or FDC Act, implemented by the FDA, as well as
similar statutory and regulatory requirements of countries
outside the United States. Obtaining these marketing approvals
and subsequently complying with ongoing statutory and regulatory
requirements is costly and time-consuming. Any failure by us or
our collaborators, licensors or licensees to obtain, or any
delay in obtaining regulatory approvals or in complying with
other requirements could adversely affect the commercialization
of product candidates and our ability to receive product or
royalty revenues.

The steps required before a new drug product
candidate may be distributed commercially in the U.S. generally
include:



| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | conducting appropriate preclinical laboratory
	evaluations of the product candidates chemistry,
	formulation and stability, and preclinical studies to assess the
	potential safety and efficacy of the product candidate;
|
| |  | submitting the results of these evaluations and
	tests to the FDA, along with manufacturing information and
	analytical data, in an Investigational New Drug application, or
	IND;                                         

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| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | initiating clinical trials under the IND after
	the resolution of any safety or regulatory concerns of the FDA;                                                                                                                     
|
| |  | obtaining approval of Institutional Review
	Boards, or IRBs, to introduce the drug into humans in clinical
	studies;                                                                                                                
|
| |  | conducting adequate and well-controlled human
	clinical trials that establish the safety and efficacy of the
	product candidate for the intended use, typically in the
	following three sequential, or slightly overlapping, stages:



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Phase I:The
	product candidate is initially introduced into healthy human
	subjects or patients and tested for safety, dose tolerance,
	absorption, metabolism, distribution and excretion;                                                     
|
| | Phase II:The
	product candidate is studied in patients to identify possible
	adverse effects and safety risks, to determine dosage tolerance
	and the optimal dosage, and to collect efficacy data; and                                         
|
| | Phase III:The
	product candidate is studied in an expanded patient population
	at multiple clinical study sites, to confirm efficacy and safety
	at the optimized dose, by measuring a primary endpoint
	established at the outset of the study;



| |   |                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | submitting the results of preliminary research,
	preclinical studies, and clinical trials as well as chemistry,
	manufacturing and control information on the product candidate
	to the FDA in a New Drug Application, or NDA or Biologics
	Licensing Application BLA; and
|
| |  | obtaining FDA approval of the NDA or BLA and
	final product labeling prior to any commercial sale or shipment
	of the product candidate.                                                                                                                                    

Each NDA or BLA must be accompanied by a user
fee, pursuant to the requirements of the Prescription Drug User
Fee Act (PDUFA) and its amendments. According to the FDA, in
2002 the user fee for an application requiring clinical data,
such as a full NDA or BLA, is $313,320. The FDA adjusts the
PDUFA user fees on an annual basis. PDUFA is up for
reauthorization and will sunset on October 1, 2002, unless
reauthorized by Congress.

This process can take a number of years and
requires substantial financial resources. There are no
assurances that NDAs or BLAs for the product candidates will be
accepted or approved. The results of preclinical studies and
initial clinical trials are not necessarily predictive of the
results of these specific formulations or the results of
large-scale clinical trials, and clinical trials may be subject
to additional costs, delays or modifications due to a number of
factors, including the difficulty in obtaining enough patients,
clinical investigators, product candidate supply, or financial
support. The FDA may also require testing and surveillance
programs to monitor the effect of approved product candidates
that have been commercialized, and the FDA has the power to
prevent or limit further marketing of a product candidate based
on the results of these post-marketing programs. Upon approval,
a product candidate may be marketed only in those dosage forms
and for those indications approved in the NDA or BLA. However,
if approved by the FDA, drug marketers in some limited
circumstances may be permitted to distribute published
peer-reviewed scientific materials to physicians concerning
indications outside of the FDA labeling.

In addition to obtaining FDA approval for each
product candidate, the manufacturing establishments for each
product must register with the FDA, list products with the FDA,
comply with the applicable FDA cGMP regulations and permit and
pass manufacturing plant inspections by the FDA. Moreover, the
submission of applications for approval may be delayed because
of the need for additional time to complete the required
manufacturing stability studies. Companies from outside the
United States that manufacture products for distribution in the
United States also must list their products with the FDA and
comply with cGMPs. They are also subject to periodic inspection
by the FDA or by local authorities under agreement with the FDA.

Under the FDC Act and related statutes,
developers of new drugs are afforded certain limited protections
against competition from generic drug companies. Under the 1984
Drug Price Competition and Patent Term Restoration Act, drug
companies can have certain product patents extended to counter
balance, in part, the

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duration of the FDAs review of their
marketing applications. This Act also provides for marketing
exclusivity (i.e., protection from generic competition
regardless of any available patent protection) for products for
which clinical investigations are necessary to support FDA
approval of a marketing application. Also, the FDA Modernization
Act of 1997 permits under certain circumstances, an additional
six months of marketing exclusivity (pediatric
exclusivity) if the applicant files reports of
investigations studying use of the drugs in the pediatric
population. The pediatric exclusivity provision is scheduled to
sunset on October 1, 2007 and there are no assurances that
it will be reauthorized.


Any product candidates that we manufacture or
distribute pursuant to FDA approvals are subject to extensive
continuing regulation by the FDA, including record-keeping
requirements and reporting adverse experiences with the product
candidate. In addition to continued compliance with standard
regulatory requirements, the FDA may also require further
studies, including post-marketing studies and surveillance to
monitor the safety and efficacy of the marketed product
candidate. Results of post-marketing studies may limit or expand
the further marketing of the products. Product candidate
approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems concerning safety
or efficacy of the product candidate are discovered following
approval. In addition, if a manufacturer proposes any
modifications to a product, including changes in indication,
manufacturing process, manufacturing facility or labeling, a
supplement to its NDA may be required to be submitted to the FDA
and approved.

The FDC Act also mandates that product candidates
be manufactured consistent with cGMP. In complying with the
FDAs regulations on cGMP, manufacturers must continue to
spend time, money and effort in production, recordkeeping,
quality control, and auditing to ensure that the marketed
product candidate meets applicable specifications and other
requirements. The FDA periodically inspects manufacturing
facilities to ensure compliance with cGMP. Failure to comply
subjects the manufacturer to possible FDA action, such as
warning letters, suspension of manufacturing, seizure of the
product, voluntary recall of a product or injunctive action, as
well as possible civil penalties. We currently rely on, and
intend to continue to rely on, third parties to manufacture our
compounds and product candidates. These third parties are
required to comply with cGMP.

Many of our current third-party manufacturers are
located outside of the U.S., resulting in the possibility of
difficulties in importing our product candidates and/or their
components into the U.S., as a result of, among other things,
FDA import inspections, incomplete or inaccurate import
documentations, or defective packaging.

Products manufactured in the U.S. for
distribution abroad will be subject to FDA regulations regarding
export, as well as to the requirements of the country to which
they are shipped. These latter requirements are likely to cover
the conduct of clinical trials, the submission of marketing
applications, and all aspects of manufacturing and marketing.
Such requirements can vary significantly from country to
country. As part of our strategic relationships, our
collaborators may be responsible for the foreign regulatory
approval process for our product candidates, although we may be
legally liable for noncompliance.

We are also subject to various federal, state and
local laws, rules, regulations and policies relating to safe
working conditions, laboratory and manufacturing practices, the
experimental use of animals and the use and disposal of
hazardous or potentially hazardous substances used in connection
with our research work. Although we believe that our safety
procedures for handling and disposing of such materials comply
with current federal, state and local laws, rules, regulations
and policies, the risk of accidental injury or contamination
from these materials cannot be entirely eliminated.

The extent of government regulation that might
result from future legislation or administrative action cannot
be accurately predicted. In this regard, although the FDA
Modernization Act of 1997 modified and created requirements and
standards under the FDC Act with the intent of facilitating
product candidate development and marketing, the FDA is still in
the process of developing regulations implementing the FDA
Modernization Act of 1997. Consequently, the actual effect of
these developments on our business is uncertain and
unpredictable.

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The healthcare industry is changing rapidly as
the public, government, medical professionals and the
pharmaceutical industry examine ways to broaden medical coverage
while controlling health care costs. Potential approaches that
may affect us include managed care initiatives, pharmaceutical
buying groups, formulary requirements, various proposals to
offer an expanded Medicare prescription benefit, and efforts to
regulate the prices of pharmaceuticals, which would include
drugs for cardiovascular disease. We are unable to predict when
any proposed healthcare reforms will be implemented, if ever, or
the effect of any implemented reforms on our business.

Competition

The pharmaceutical and biopharmaceutical
industries are intensely competitive and are characterized by
rapid and significant technological progress. Our competitors
include large integrated pharmaceutical companies, biotechnology
companies, universities and public and private research
institutions which currently engage in, have engaged in or may
engage in efforts related to the discovery and development of
new pharmaceuticals and biopharmaceuticals, some of which may be
competitive. Almost all of these entities have substantially
greater research and development capabilities and financial,
scientific, manufacturing, marketing and sales resources than we
do, as well as more experience in research and development,
clinical trials, regulatory matters, manufacturing, marketing
and sales.

We are aware of companies that are developing
invasive procedures for the acute treatment of cardiovascular
disease, such as atherosclerosis, that may compete with our
product candidates for acute treatments. In addition, new
non-invasive medical procedures and technologies are also under
development for the acute treatment of cardiovascular disease.
Another organization is purifying ApoA-I from outdated human
blood, for the treatment of septic shock, which is a
complication of severe infection. Other companies with
substantially greater research and development resources may
attempt to develop products that are competitive with our
product candidates for the acute treatment of cardiovascular
disease or seek approval for drugs in later stages of
development that have similar effects on cardiovascular disease
as our acute treatments.

We are also aware of companies that are
developing products for the chronic treatment of cardiovascular
or metabolic diseases that may compete with our HDL elevators.
For example, several other companies have HDL elevators under
development, which could compete with our HDL elevators. Other
companies with substantially greater research and development
resources may attempt to develop products that are competitive
with our product candidates or seek approval for drugs in later
stages of development that have similar effects as our product
candidates.

If regulatory approvals are received, our
products may compete with several classes of existing drugs for
the treatment of atherosclerosis, some of which are available in
generic form. For example, drugs available for the treatment of
atherosclerosis include fibrates, statins and niacin, all of
which are available in pill or tablet, as compared to the
intravenous administration method we intend to use for most of
our product candidates. There are also surgical treatments such
as coronary bypass surgery and PCI that may be competitive with
our products. For those patients, however, who do not respond
adequately to existing therapies and remain symptomatic despite
treatment with existing drugs and who are not candidates for
these surgical procedures, there is no currently effective
treatment.

Our product candidates are still under
development, and it is not possible to predict our relative
competitive position in the future. However, we think that the
principal competitive factors in the markets for ETC-588,
ETC-216, ETC-642, ETC-276 and ESP 31015 are the following:



| |   |                                           
| | - | ------------------------------------------
| |  | safety and efficacy profile;              
|
| |  | product price and degree of reimbursement;
|
| |  | ease of administration;                   
|
| |  | duration of treatment;                    
|
| |  | product supply;                           

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| |   |                                                            
| | - | -----------------------------------------------------------
| |  | enforceability of patent and other proprietary
	rights; and
|
| |  | marketing and sales capability.                            

Our competitors also compete with us to:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | attract qualified personnel;                                                                      
|
| |  | attract parties for acquisitions, joint ventures
	or other collaborations;                        
|
| |  | license the proprietary technology that is
	competitive with the technology we are practicing; and
|
| |  | attract funding.                                                                                  

Employees

As of December 31, 2001, we had 79 full-time
employees. Of these employees, 59 were engaged in research,
preclinical and clinical development, regulatory affairs,
intellectual property activities, and/or manufacturing
activities and 20 were engaged in finance, legal and general
administrative activities.

Factors Affecting Our Future
Prospects

We are a developmental stage biopharmaceutical
company with a history of losses, and, even if our product
candidates are approved and commercialized, we may never be
profitable.

We have devoted substantially all of our
resources since we began our operations in May 1998 to the
research and development of product candidates for
cardiovascular and metabolic diseases. We have incurred
substantial losses since we began our operations. As of
December 31, 2001, we had a cumulative net loss of
approximately $65.3 million. These losses have resulted
principally from costs incurred in our research and development
programs, from our general and administrative expenses and from
acquisition-related costs from the Companys
September 2000 acquisition of Talaria Therapeutics, Inc. To
date, we have not generated revenue from product sales or
royalties, and we do not expect to achieve any revenue from
product sales or royalties until we receive regulatory approval
and begin commercialization of our product candidates. We are
not certain of when, if ever, that will occur. We expect to
incur significant additional operating losses for at least the
next several years and until we generate sufficient revenue to
offset expenses. Research and development costs relating to
product candidates will continue to increase. Manufacturing,
sales and marketing costs will increase as we prepare for the
commercialization of our products.

All of our product candidates are in early stages
of development, and we face the risks of failure inherent in
developing drugs based on new technologies. In addition, most of
our product candidates were in-licensed from third parties. As a
result, we have limited in-house experience with these product
candidates. Our product candidates are not expected to be
commercially available for several years, if at all.

All of our current product candidates are
designed to treat cardiovascular and/or metabolic disease by
manipulating the beneficial properties of HDL. We may defer or
cease development of one or more of our product candidates if a
product candidate does not show favorable clinical results, if
we decide to concentrate our resources on more promising product
candidates, or for any other reason. Decisions regarding the
selection of product candidates in development and the timing of
the development of our product candidates may accelerate the
preclinical or clinical testing of one or more product
candidates while delaying or ceasing progress of one or more
product candidates.

All of our product candidates must be tested
and submitted to the FDA and other regulatory agencies for
approval before we can sell them, and even if the FDA approves
our product candidates, that approval may be limited.

Our product candidates must satisfy rigorous
standards of safety and efficacy before they can be approved for
commercial use by the FDA, and international regulatory
authorities. We will need to conduct significant additional
research, including clinical testing involving animals and
humans, before we can file applications for product approval.

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Many of the product candidates in the
pharmaceutical industry do not successfully complete preclinical
testing and clinical trials. Also, satisfaction of regulatory
requirements typically takes many years, is dependent upon the
type, complexity, and novelty of the product and requires the
expenditure of substantial resources. Success in preclinical
testing and early clinical trials does not ensure that later
clinical trials will be successful. For example, a number of
companies in the pharmaceutical industry, including
biotechnology companies, have suffered significant setbacks in
advanced clinical trials, even after promising results in
earlier trials and in interim analyses. In addition, delays or
rejections may be encountered based upon additional government
regulation, including any changes in FDA policy, during the
process of product development, clinical trials and regulatory
approvals.

In order to receive FDA approval or approval from
foreign regulatory authorities to market a product, we must
demonstrate through human clinical trials that the product
candidate is safe and effective for the treatment of a specific
condition. We do not know whether planned clinical trials will
begin on time or will be completed on schedule or at all. If we
experience significant delays in testing or approvals, or if we
need to perform more or larger clinical trials than planned, our
product development costs will increase. Any of our future
clinical studies might be delayed or halted because the drug is
not effective, or physicians think that the drug is not
effective; patients experience severe side effects during
treatment; patients die during a clinical study because their
disease is too advanced or they experience medical problems that
are not related to the drug being studied; patients do not
enroll in the studies at the rate we expect; or drug supplies
are not sufficient to treat the patients in the studies.

Our clinical studies may also be limited by,
delayed or halted because of the nature of the clinical study;
the size of the potential patient population; the distance
between patients and the clinical trial sites; or the
eligibility and exclusion criteria for patients in the trial.

Any product approvals we receive from the FDA in
the future could also include significant restrictions on the
use or marketing of our products. Product approvals, if granted,
can be withdrawn for failure to comply with regulatory
requirements or upon the occurrence of adverse events following
commercial introduction of the products.

Foreign regulation of drug
compounds.

Approval of a product by comparable regulatory
authorities may be necessary in foreign countries prior to the
commencement of marketing of the product in those countries,
whether or not FDA approval has been obtained. The approval
procedure varies among countries and can involve additional
testing. The time required may differ from that required for FDA
approval. Although there are some procedures for unified filings
for some European countries with the sponsorship of the country
that first granted marketing approval, in general, each country
has its own procedures and requirements, many of which are time
consuming and expensive. Thus, there can be substantial delays
in obtaining required approvals from foreign regulatory
authorities after the relevant applications are filed.

Our product candidates may not be commercially
successful because physicians, patients, and government agencies
and other third-party payors may not accept them.

Even if regulatory authorities approve our
product candidates, they may not be commercially successful.
Third parties may develop superior products or less costly
alternative products, or have proprietary rights that preclude
us from marketing our products. We also expect that most of our
product candidates will be very expensive, if approved. Patient
acceptance of and demand for any product candidates for which we
obtain regulatory approval will also depend upon acceptance by
physicians of our products as safe and effective therapies and
the extent, if any, of reimbursement of drug and treatment costs
by government agencies and other third-party payors.

In addition, any of our product candidates could
cause adverse events, such as immunologic or allergic reactions.
These reactions may not be observed in clinical trials, but may
nonetheless occur after commercialization. If any of these
reactions occur, they may render any commercialized product
ineffective in some patients.

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If our current and future manufacturing and
supply strategies are unsuccessful, then we may be unable to
complete any future clinical trials and/or commercialize our
product candidates in a timely manner, if at all.

Completion of our future clinical trials and
commercialization of our product candidates will require access
to, or development of, facilities to manufacture a sufficient
supply of our product candidates. We do not have the resources,
facilities or experience to manufacture our product candidates
on our own and do not intend to develop or acquire facilities
for the manufacture of product candidates for clinical trials or
commercial purposes in the foreseeable future. We currently
rely, and will continue to rely for at least the next few years,
on contract manufacturers to produce sufficient quantities of
our product candidates. Most of our contract manufacturers have
limited experience at manufacturing, formulating, analyzing,
filling and finishing our particular product candidates. Our
manufacturing strategy presents the following risks:



| |   |                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may not be able to locate acceptable
	manufacturers or enter into favorable long-term agreements with
	them;                                                                                                                                                                                                                       
|
| |  | third parties may not be able to successfully
	manufacture our product candidates in a cost effective and/or
	timely manner or in quantities needed for clinical trials or
	commercial sales;                                                                                                                                         
|
| |  | delays in scale-up to commercial quantities could
	delay clinical studies, regulatory submissions and
	commercialization of our product candidates;                                                                                                                                                                                   
|
| |  | we may not have intellectual property rights, or
	may have to share intellectual property rights, to the
	manufacturing processes for our product candidates;                                                                                                                                                                         
|
| |  | manufacturing and validation of manufacturing
	processes and materials are complicated and time-consuming;                                                                                                                                                                                                                            
|
| |  | because many of our current third-party
	manufacturers are located outside of the U.S., there may be
	difficulties in importing our product candidates and/or their
	components into the U.S. as a result of, among other things, FDA
	import inspections, incomplete or inaccurate import
	documentation, or defective packaging; and
|
| |  | manufacturers of our product candidates are
	subject to the FDAs current Good Manufacturing Practices
	regulations, the FDAs current Good Laboratory Practices
	regulations and similar foreign standards and we do not have
	control over compliance with these regulations by our
	third-party manufacturers.                     

Even if we obtain regulatory approval of any
of our product candidates, if we are unable to create sales,
marketing and distribution capabilities or enter into agreements
with third parties to perform these functions, we will not be
able to successfully commercialize any of our product
candidates.

In order to successfully commercialize any of our
product candidates, we must either internally develop full
sales, marketing and distribution capabilities or make
arrangements with third parties to perform these services.

If the third-party clinical research
organizations we intend to rely on to conduct our future
clinical trials do not perform in an acceptable and timely
manner, our clinical trials could be delayed or
unsuccessful.

We do not have the ability to independently
conduct clinical trials and obtain regulatory approvals for our
product candidates, and we currently rely and intend to continue
to rely on clinical investigators and third-party contract
research organizations to perform these functions. If we cannot
locate acceptable contractors to run our clinical trials or
enter into favorable agreements with them, or if these third
parties do not successfully carry out their contractual duties
or meet expected deadlines, we will be unable to obtain required
approvals and will be unable to commercialize our product
candidates on a timely basis, if at all.

We expect our quarterly and annual results to
fluctuate significantly.

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In the near term, we expect our quarterly and
annual operating results to fluctuate significantly, depending
primarily on the following factors:



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | timing of preclinical and clinical trials;                                    
|
| |  | interruption or delays in the supply of our
	product candidates or components;
|
| |  | timing of payments to licensors, corporate
	partners and other third parties; 
|
| |  | timing of patent prosecution and maintenance fees
	and costs;                 
|
| |  | timing of investments in new technologies; and                                
|
| |  | other costs, which may be unexpected.                                         

If we fail to obtain the capital necessary to
fund our operations, we will be unable to successfully develop
our product candidates or retain rights to our product
candidates.

Significant additional capital will be required
in the future to fund our operations. We do not know whether
additional financing will be available on acceptable terms when
needed. We have used substantial cash resources to date and
expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure and
research and development activities. If adequate funds are
unavailable, we may be required to:



| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | delay, reduce the scope of, or eliminate one or
	more of our research or development programs;                                                                        
|
| |  | license rights to our technologies or product
	candidates on terms that are less favorable to us than might
	otherwise be available; or                               
|
| |  | obtain funds through arrangements that may
	require us to relinquish rights to product candidates that we
	would otherwise seek to develop or commercialize ourselves.

If we raise additional funds by issuing equity
securities, our existing stockholders will own a smaller
percentage of Esperion, and new investors may pay less on
average for their securities than, and could have rights
superior to, existing stockholders.

If product liability lawsuits are successfully
brought against us, we may incur substantial liabilities and may
be required to limit commercialization of our
products.

Our business exposes us to product liability
risks, that are inherent in the testing, manufacturing,
marketing and sale of pharmaceutical products. We may not be
able to avoid product liability claims. Product liability
insurance for the pharmaceutical industry is generally
expensive, if available at all. We have clinical trial liability
insurance for our drug candidates in clinical trials; however,
there can be no assurance that such insurance coverage is or
will continue to be adequate or available. We may not be able to
secure greater or broader product liability insurance coverage
on acceptable terms or at reasonable costs when needed. If we
are unable to obtain sufficient insurance coverage on reasonable
terms or to otherwise protect against potential product
liability claims, we may be unable to commercialize our product
candidates. A successful product liability claim brought against
for damages in an amount that exceeds our insurance coverage, if
any, may cause us to incur substantial liabilities and our
business may fail.

If our licensing arrangements with third
parties are breached or terminated, we may lose rights to
commercialize our product candidates.

Most of our product candidates have been
in-licensed from third parties. We depend, and will continue to
depend, on these and other licensing arrangements. If any of our
licenses with third parties are terminated or breached, we may
lose our rights to develop and commercialize our product
candidates or lose patent and/or trade secret protection for our
product candidates.

Disputes may arise with respect to our licensing
agreements and strategic relationships regarding ownership
rights to technology developed by or with other parties. Such
disputes could lead to delays in or

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termination of the research, development,
manufacture and commercialization of our product candidates, or
to litigation.


If we fail to secure and enforce patents and
other intellectual property rights underlying our product
candidates and technologies, we may be unable to develop our
product candidates or compete effectively.

The pharmaceutical industry places considerable
importance on obtaining patent and trade secret protection for
new technologies, products and processes. Our success will
depend, in part, on our ability, and the ability of our
licensors, to obtain and enforce our exclusive rights to our
product candidates and technologies under the patent laws of the
United States and other countries. Our success also will depend
on our ability to prevent others, including our employees, from
using our trade secrets, know how and other confidential
information. In addition, we must operate in a way that does not
infringe, or violate, the patent, trade secret, and other
intellectual property rights of other parties.

The standards that the U.S. Patent and Trademark
Office uses to grant patents, can change. Consequently, we may
be unable to determine the type and extent of patent claims that
will be issued to us or to our licensors in the future. Any
patents that do issue may not contain claims that will permit us
to stop competitors from using the same or similar technology.

Patent prosecution and maintenance is also very
costly and successful prosecution and defense may depend on the
patent strategies that are pursued.

The standards that courts use to interpret
patents can change, particularly as new technologies develop.
Consequently, we cannot know how much protection, if any, our
patents will provide. If we choose to seek a court order that
prohibits a third party from using the inventions claimed in our
patents, the third party may ask the court to rule that our
patents are invalid and unenforceable. This type of lawsuit is
expensive and time consuming and could be unsuccessful. There is
also the risk that, even if the validity of our patents is
upheld, the court will refuse to stop the third party on the
ground that its activities do not infringe the patent.

We may face significant expense and liability
as a result of litigation or other proceedings relating to
patents and other intellectual property rights of
others.

Should third parties file patent applications, or
be issued patents, claiming technology also claimed by us or our
licensors in pending applications, we may be required to
participate in interference proceedings in the United States
Patent and Trademark Office to determine priority of invention.
An adverse outcome in an interference proceeding could require
us to cease using the technology or to license rights from
prevailing third parties or to pay damages for patent
infringement. We could also be subject to allegations of trade
secret violations and other claims relating to the intellectual
property rights of third parties.

If we fail to recruit, retain and motivate
skilled personnel our product development programs and our
research and development efforts may be delayed.

Our success depends on our ability to recruit,
retain and motivate highly qualified management and scientific
personnel including skilled chemists and clinical development
personnel, for which competition is intense. Our loss of the
services of any of our key personnel, in particular,
Roger S. Newton, Ph.D., our Chief Executive Officer,
could significantly impede the achievement of our research and
development objectives and could delay our product development
programs and strategies.

If we use biological and hazardous materials
in a manner that causes injury, we may be liable for
damages.

Our research and development activities involve
the controlled use of potentially harmful biological materials
as well as hazardous materials, chemicals and various
radioactive compounds. We cannot completely eliminate the risk
of accidental contamination or injury from the use, storage,
handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for damages,
and such liability could exceed our resources. We are subject to
federal, state and local laws and regulations governing the use,
storage, handling and disposal of these materials and specified
waste products. The cost of compliance with these laws and
regulations could become significant.

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We may be unable to manage multiple late stage
clinical trials for a variety of product candidates
simultaneously.

We will not be able to commercialize any products
that we develop until we have acceptable clinical trial results
and regulatory approval from the FDA and/or foreign regulatory
authorities. The FDA and other regulatory authorities require
that the safety and efficacy of a drug be supported by results
from adequate and well-controlled clinical trials before
approval for commercial sale. If the results of Phase I and
Phase II clinical trials of our product candidates
currently in progress do not demonstrate that they are safe and
effective, we will not be able to initiate Phase III
clinical trials when we anticipate or at all and to submit to
the FDA a new drug application or other relevant applications
for pre-market approval. Further, the results of preclinical
testing and initial clinical trials do not necessarily predict
how safe and effective a product will be when it is evaluated in
large-scale Phase III clinical trials. It is possible that
unacceptable side effects may be discovered at any time. A
number of companies have suffered significant setbacks in
advanced clinical trials, despite promising results in earlier
trials.

Even if we believe the clinical trials
demonstrate safety and efficacy of a product, the FDA and
foreign regulatory authorities may not accept our assessment of
the results and may require us to conduct additional advanced
clinical trials.

To date, we have not managed multiple late stage
clinical trials simultaneously. During 2002, we expect to have
in progress multiple clinical trials. We may be unable to retain
individuals qualified to administer these and planned future
late stage clinical trials, due to the complexity of the
protocols and the size of the studies. We may be unable to
complete multiple late stage clinical trials concurrently as
effectively or as quickly as we currently anticipate, which
could have a material adverse effect on our business, financial
condition and results of operations.

Executive Officers of Registrant

The following table presents information about
our executive officers.

|                             |  |     |    |  |          |                                                                           
|---------------------------- |  | --- | -- |  | -------- | --------------------------------------------------------------------------
|Name                         |  | Age |    |  | Position
|                             |  |     |    |  |         
|Roger S. Newton, Ph.D.       |  |     | 51 |  |          | President, Chief Executive Officer                                        
|Timothy M. Mayleben          |  |     | 41 |  |          | Senior Vice President, Operations and Finance and
	Chief Financial Officer
|Brian R. Krause, Ph.D.       |  |     | 52 |  |          | Senior Vice President, Preclinical Research and
	Development              
|Michael E. Pape, Ph.D.       |  |     | 40 |  |          | Vice President, Discovery Research                                        
|Jean-Louis H. Dasseux, Ph.D. |  |     | 43 |  |          | Vice President, Chemistry and Technologies                                
|Frank E. Thomas              |  |     | 32 |  |          | Senior Director, Finance and Investor Relations                           

Dr. Newtonhas
served as our President and Chief Executive Officer and as a
director of Esperion since July 1998. From August 1981
until May 1998, Dr. Newton was employed at Parke-Davis
Pharmaceutical Research, Warner-Lambert Company, most recently
as a Distinguished Research Fellow in Vascular and Cardiac
Diseases, where he was the co-discoverer, chairman of the
discovery team and a member of the Phase I development team
for the drug atorvastatin (Lipitor®). Dr. Newton
received an A.B. in Biology from Lafayette College, an M.S. in
Nutritional Biochemistry from the University of Connecticut and
a Ph.D. in Nutrition from the University of California, Davis.
He also specialized in atherosclerosis research during a
post-doctoral fellowship at the University of California, San
Diego. He currently holds a faculty appointment in the
Department of Pharmacology at the University of Michigan Medical
School. During 2001, Dr. Newton was elected to the Board of
Directors of Rubicon Genomics, Inc., a privately-held company.
He is a member of the steering committee of the Michigan Life
Sciences Corridor and the Executive Director of the Great Lakes
Venture Quest.

Mr. Maylebenhas served as our Chief Financial
Officer since January 1999 and was appointed Senior Vice
President, Operations and Finance in January 2002, after serving
as Vice President, Finance since January 1999.
Mr. Mayleben has more than 15 years experience working
with high-growth technology companies. Prior to joining
Esperion, Mr. Mayleben served as a Director of Business
Development for

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Engineering Animation, Inc., a publicly-held
company, from September 1998 to December 1998. From
July 1997 to September 1998, Mr. Mayleben served
as Chief Operating Officer and Chief Financial Officer of
Transom Technologies, Inc., a privately-held company that was
acquired by Engineering Animation, Inc. From September 1990
to July 1997, Mr. Mayleben served in various
managerial positions, most recently as Director of Operations of
Applied Intelligent Systems, Inc., a privately-held company.
Prior to that, Mr. Mayleben was a manager with the
Enterprise Group of Arthur Andersen & Co. Mr. Mayleben
received a B.B.A. from the University of Michigan and an M.B.A.
from the Northwestern University Kellogg Graduate School of
Management. Mr. Mayleben is a member of the Board of
Directors of Computer Challenge Inc., a non-profit corporation.


Dr. Krausewas
appointed Senior Vice President, Preclinical Research and
Development in January 2002 after serving as our Vice
President, Development Pharmacology since March 2001. Prior
to joining Esperion, Dr. Krause was a Research Fellow
within the Cardiovascular Therapeutics Division of Pfizer Global
Research where he also served as Chair of the Dyslipidemia Team
and Group Leader of the Lipoprotein Metabolism Section. Prior to
the merger of Pfizer Inc. and Warner-Lambert Company in 2000,
Dr. Krause was a scientist at the Parke-Davis Research
Division of Warner-Lambert Company since 1982. Dr. Krause
received a B.S. in Biological Sciences from the University of
Illinois and a Ph.D. in Physiology from LSU Medical Center in
New Orleans. Dr. Krause was an NIH-sponsored post-doctorate
fellow with Paul Roheim, M.D., and is a member of the
American Heart Associations Council on Arteriosclerosis.

Dr. Papewas
appointed Vice President, Discovery Research in
January 2002. Prior to that, Dr. Pape served as Vice
President, Discovery Research from July 1998. Dr. Pape has
been involved in drug discovery related to atherosclerosis since
1989. From 1991 to 1998, he was a Research Associate in the
Department of Molecular Biology at Parke-Davis Pharmaceutical
Research, Warner-Lambert Company. During his tenure at
Parke-Davis, Dr. Pape served as co-chair of the HDL
Discovery Team from 1996 to 1998. From 1989 until 1991, he
worked at The Upjohn Company. Dr. Pape received a B.S. in
Microbiology from the University of Michigan and a Ph.D. in
Biochemistry from Purdue University. Dr. Papes
research has focused on the causes and cures for
atherosclerosis, diabetes and lipid abnormalities. He currently
holds a faculty appointment in the Department of Biological
Chemistry at the University of Michigan Medical School. He has
also been a member of the Board of Directors of Michigan
Biosciences Industry Association, a statewide organization that
promotes biosciences in Michigan, since January 2002 and
has been a member of the Board of Directors of Great Commission
Ministries since 1999.

Dr. Dasseuxhas
served as our Vice President, Chemistry and Technologies since
August 2000, and as our Senior Director of Chemistry from
January 1999 to August 2000. Dr. Dasseux has more
than 14 years of experience in the pharmaceutical industry
focusing on chemistry, lipoprotein metabolism and
atherosclerosis. Dr. Dasseux has more than 21 years
experience in physical chemistry and lipid-protein/peptide
interactions. From June 1987 until April 1998,
Dr. Dasseux was employed by Fournier Laboratories, France.
Dr. Dasseux created and managed the Fournier Pharma
Research Center in Heidelberg, Germany and held the position of
Director of Research from September 1988 to April 1998.
Dr. Dasseux received his M.S. in Biochemistry from the
University of Bordeaux II, France and his Ph.D. in Physical
Chemistry from the University of Bordeaux I, France. He was
a postdoctoral research scientist in the Department of Chemistry
at the University of Laval, Quebec, Canada; in the Department of
Physics, The University of Tennessee, Knoxville, Tennessee and
in the European Molecular Biology Laboratory, Heidelberg,
Germany.

Mr. Thomaswas
appointed Senior Director, Finance and Investor Relations in
January 2002. Prior to that, Mr. Thomas served as our
Director of Finance and Controller from March 2000. Prior
to joining Esperion, Mr. Thomas served as Director of
Finance and Controller for Mechanical Dynamics, Inc., a
publicly-held software company, from September 1997 to
March 2000. From July 1992 to September 1997,
Mr. Thomas worked for Arthur Andersen LLP, most recently as
an audit manager in the Detroit office. Mr. Thomas received
a B.B.A. from the University of Michigan in 1992.

Item 2. Properties

Our leased corporate and research facilities in
Ann Arbor, Michigan currently occupy approximately 30,000 square
feet. Approximately 5,000 square feet of that space is covered
by a lease that expires in

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December 2002, but includes an option to
request an extension for an additional one-year term. The lease
for the remaining square footage expires in December 2003,
but includes an option to extend for one additional three-year
term. We lease a lab facility in Kalamazoo, Michigan, which is
approximately 3,300 square feet and is used primarily for
medicinal chemistry activities for our small molecule program.
Outside of the United States, we lease research, lab and office
space in Bromma, Sweden, which currently occupies approximately
4,600 square feet. This lease expires in June 2004. We also
lease a lab facility in Strangnas, Sweden that occupies
approximately 1,300 square feet and expires in
December 2002. We believe that our existing facilities are
adequate for our current needs. Prior to the expiration of our
existing leases, we may look for additional or alternate space
for our operations and we believe that suitable additional or
alternative space will be available at such times on
commercially reasonable terms.


Item 3. Legal Proceedings

Not applicable.

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

No matters were submitted to a vote of
stockholders during the last quarter of the year ended
December 31, 2001.

24



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PART II


Item 5. Market for Registrants
Common Equity and Related Stockholder Matters

Markets

The Companys common stock trades on the
Nasdaq National Market under the symbol ESPR. The
range of high and low sale prices for the Companys common
stock on Nasdaqs automated quotation system for each of
the quarters since the Companys initial public offering on
August 10, 2000 is as follows:

|                              |                                           |               |   |       |     |  |   |       | 
|----------------------------- | ----------------------------------------- | ------------- | - | ----- | --- |  | - | ----- | 
|                              |                                           |              
|                              |                                           | Market Prices |  
|                              |                                           |               |  
|                              |                                           | High          |   |       | Low | 
|                              |                                           |               |   |       |     | 
|Year ended December 31, 2001: |                                           |               |   |       |     |  |   |      
|                              | Fourth quarter                            |               | $ | 8.35  |     |  | $ | 6.00  | 
|                              | Third quarter                             |               |   | 9.78  |     |  |   | 5.26  | 
|                              | Second quarter                            |               |   | 11.50 |     |  |   | 3.90  | 
|                              | First quarter                             |               |   | 12.00 |     |  |   | 4.00  | 
|Year ended December 31, 2000: |                                           |               |   |       |     |  |   |      
|                              | Fourth quarter                            |               | $ | 21.13 |     |  | $ | 10.38 | 
|                              | Third quarter (beginning August 10, 2000) |               |   | 19.38 |     |  |   | 9.38  | 

Holders

As of December 31, 2001, there were
approximately 391 stockholders of record of the Companys
common stock. This may not be an accurate indication of the
total stockholders of the Company as of December 31, 2001,
since many nominees hold the Companys shares in street
name for the beneficial owners.

Dividend Information

The Company has never declared or paid cash
dividends on its capital stock and anticipates that, for the
foreseeable future, it will continue to retain any earnings for
use in the operation of its business.

Recent Sales of Unregistered
Securities

During the year ended December 31, 2001, we
issued and sold 25,106 restricted shares of our common stock to
employees upon exercise of stock options held by them. For these
issuances and sales, we relied on the exemptions provided by
Section 4(2) and Rule 701 under the Securities Act of
1933, as amended.

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##### Table of Contents



Item 6. Selected Consolidated
Financial Data

The following historical and pro forma selected
consolidated financial data of Esperion should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations on
page 27, the consolidated financial statements and notes
beginning on page 34. The selected consolidated financial
data for the years ended December 31, 2001, 2000, 1999 and
the period from inception (May 18, 1998) through
December 31, 1998 are derived from our audited consolidated
financial statements.

Consolidated Statement of Operations Data (in
thousands, except share and per share data):

|                                                                         |                                                  |                |            |        |              |   |            |              |         |   |           |       |         |      |           |       |        |   |         |         |         |  
|------------------------------------------------------------------------ | ------------------------------------------------ | -------------- | ---------- | ------ | ------------ | - | ---------- | ------------ | ------- | - | --------- | ----- | ------- | ---- | --------- | ----- | ------ | - | ------- | ------- | ------- | -
|                                                                         |                                                  |                |            |        |              |  
|                                                                         |                                                  | Year Ended     |            |        |              |   |           
|                                                                         |                                                  | December 31,   |            |        | Inception to |   |            | Inception to |        
|                                                                         |                                                  |                |            |        | December 31, |   |            | December 31, |        
|                                                                         |                                                  | 2001           |            |        | 2000         |   |            | 1999         |         |   | 1998      |       |         | 2001 |          
|                                                                         |                                                  |                |            |        |              |   |            |              |         |   |           |       |         |      |          
|Operating expenses:                                                      |                                                  |                |            |        |              |   |            |              |         |   |           |       |         |      |           |       |        |   |         |        
|                                                                         | Research and development                         |                | $          | 21,454 |              |   | $          | 22,596       |         |   | $         | 8,484 |         |      | $         | 1,923 |        |   | $       | 54,457  |        
|                                                                         | General and administrative                       |                |            | 5,023  |              |   |            | 3,156        |         |   |           | 2,518 |         |      |           | 464   |        |   |         | 11,161  |        
|                                                                         | Goodwill amortization                            |                |            | 839    |              |   |            | 250          |         |   |           |      |         |      |           |      |        |   |         | 1,089   |        
|                                                                         | Purchased in-process research and development(1) |                |            |       |              |   |            | 4,000        |         |   |           |      |         |      |           |      |        |   |         | 4,000   |        
|                                                                         |                                                  |                |            |        |              |   |            |              |         |   |           |       |         |      |          
|                                                                         |                                                  | Operating loss |            |        | (27,316      | ) |            |              | (30,002 | ) |           |       | (11,002 | )    |           |       | (2,387 | ) |         |         | (70,707 | )
|Other income, net                                                        |                                                  |                | 2,385      |        |              |   | 2,426      |              |         |   | 332       |       |         |      | 244       |       |        |   | 5,387   |        
|                                                                         |                                                  |                |            |        |              |   |            |              |         |   |           |       |         |      |          
|Net loss                                                                 |                                                  |                | (24,931    | )      |              |   | (27,576    | )            |         |   | (10,670   | )     |         |      | (2,143    | )     |        |   | (65,320 | )      
|                                                                         | Beneficial conversion feature(2)                 |                |            |       |              |   |            | (22,870      | )       |   |           |      |         |      |           |      |        |   |         | (22,870 | )      
|                                                                         |                                                  |                |            |        |              |   |            |              |         |   |           |       |         |      |          
|Net loss attributable to common stockholders                             |                                                  | $              | (24,931    | )      |              | $ | (50,446    | )            |         | $ | (10,670   | )     |         | $    | (2,143    | )     |        | $ | (88,190 | )      
|                                                                         |                                                  |                |            |        |              |   |            |              |         |   |           |       |         |      |          
|Basic and diluted net loss per share                                     |                                                  | $              | (0.91      | )      |              | $ | (4.50      | )            |         | $ | (5.91     | )     |         | $    | (1.46     | )     |        |   |         |        
|                                                                         |                                                  |                |            |        |              |   |            |              |         |   |           |       |         |      |          
|Shares used in computing basic and diluted net
	loss per share           |                                                  |                | 27,309,502 |        |              |   | 11,222,319 |              |         |   | 1,806,255 |       |         |      | 1,466,615 |       |        |   |         |        
|                                                                         |                                                  |                |            |        |              |   |            |              |         |   |           |       |         |      |          
|Pro forma basic and diluted net loss per share                           |                                                  |                |            |        |              | $ | (2.45      | )            |         | $ | (1.14     | )     |         |      |           |       |        |   |         |        
|                                                                         |                                                  |                |            |        |              |   |            |              |         |   |           |       |         |      |          
|Shares used in computing pro forma basic and
	diluted net loss per share |                                                  |                |            |        |              |   | 20,603,313 |              |         |   | 9,392,499 |       |         |      |           |       |        |   |         |        
|                                                                         |                                                  |                |            |        |              |   |            |              |         |   |           |       |         |      |          

Consolidated Balance Sheet Data (in
thousands):

|                                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |   |        |  
|------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | - | ------ | -
|                                                 |  | 2001 |         |   | 2000 |   |         | 1999 |  |   | 1998    |  
|                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents                        |  | $    | 70,286  |   |      | $ | 70,228  |      |  | $ | 5,904   |   |  | $ | 12,541 |  
|Working capital                                  |  |      | 64,926  |   |      |   | 64,181  |      |  |   | 3,143   |   |  |   | 12,390 |  
|Total assets                                     |  |      | 78,340  |   |      |   | 77,877  |      |  |   | 7,999   |   |  |   | 13,414 |  
|Long-term debt, less current portion             |  |      | 5,482   |   |      |   | 3,027   |      |  |   | 2,284   |   |  |   |       |  
|Convertible preferred stock                      |  |      |        |   |      |   |        |      |  |   | 105     |   |  |   | 105    |  
|Deficit accumulated during the development stage |  |      | (65,320 | ) |      |   | (40,389 | )    |  |   | (12,813 | ) |  |   | (2,143 | )
|Total stockholders equity                       |  |      | 66,498  |   |      |   | 67,691  |      |  |   | 2,815   |   |  |   | 13,187 |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We recorded a $4.0 million charge to
	operations in 2000, for the write-off of purchased in-process
	research and development related to the acquisition of Talaria
	Therapeutics, Inc.                                                                                                                                                                                                                     
|   
|(2) | We recorded approximately $22.9 million
	relating to the beneficial conversion feature of the
	series C and series D preferred stock in the first
	quarter of fiscal 2000 through equal and offsetting adjustments
	to additional paid-in-capital with no net impact on
	stockholders equity. The beneficial conversion feature was
	considered in the determination of our loss per common share
	amounts.

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##### Table of Contents





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

Overview

Background

We have devoted substantially all of our
resources since we began our operations in May 1998 to the
research and development of pharmaceutical product candidates
for cardiovascular and metabolic diseases. We are a development
stage biopharmaceutical company and have not generated any
revenues from product sales. We have not been profitable and
have incurred a cumulative net loss of approximately
$65.3 million from inception (May 18, 1998) through
December 31, 2001 excluding the beneficial conversion
feature of preferred stock. These losses have resulted
principally from costs incurred in research and development
activities, and general and administrative expenses. We expect
to incur significant additional operating losses for at least
the next several years and until such time as we generate
sufficient revenue to offset expenses. Research and development
costs relating to product candidates will continue to increase.
Manufacturing, sales and marketing costs will increase as we
prepare for the commercialization of our products.

Results of Operations

Operating
Expenses

|                           |            |                         |        |      |          |  |       |      |  |   |          |      |   |      |       |   |  |   |       |      |  
|-------------------------- | ---------- | ----------------------- | ------ | ---- | -------- |  | ----- | ---- |  | - | -------- | ---- | - | ---- | ----- | - |  | - | ----- | ---- | -
|                           |            |                        
|                           |            | Year Ended December 31, |       
|                           |            |                         |       
|In thousands               |            | 2001                    |        |      | % Change |  |       | 2000 |  |   | % Change |      |   | 1999 |      
|                          
|                           |           
|Research and development   |            | $                       | 21,454 |      |          |  | -5.0  | %    |  | $ | 22,596   |      |   |      | 166.3 | % |  | $ | 8,484 |     
|                           | % of total |                         |        | 78.6 | %        |  |       |      |  |   |          | 75.3 | % |      |       |   |  |   |       | 77.1 | %
|General and administrative |            | $                       | 5,023  |      |          |  | 59.2  | %    |  | $ | 3,156    |      |   |      | 25.3  | % |  | $ | 2,518 |     
|                           | % of total |                         |        | 18.4 | %        |  |       |      |  |   |          | 10.5 | % |      |       |   |  |   |       | 22.9 | %
|Goodwill amortization      |            | $                       | 839    |      |          |  | 235.6 | %    |  | $ | 250      |      |   |      |      |   |  | $ | 0     |     
|                           | % of total |                         |        | 3.0  | %        |  |       |      |  |   |          | 0.8  | % |      |       |   |  |   |       | 0.0  | %
|Purchased in-process R&D   |            | $                       | 0      |      |          |  |      |      |  | $ | 4,000    |      |   |      |      |   |  | $ | 0     |     
|                           | % of total |                         |        | 0.0  | %        |  |       |      |  |   |          | 13.4 | % |      |       |   |  |   |       | 0.0  | %

Year
Ended December 31, 2001.

Research and Development Expenses.Research and development expenses
include both external and internal costs related to the research
and development activities of our existing product candidates as
well as discovery efforts on potential new product candidates.
External costs include costs related to manufacturing, clinical
trials, toxicology or pharmacology studies performed by third
parties, milestone payments under certain license agreements and
other related expenses. Internal costs include all payroll and
related costs attributable to research and development
activities, as well as an allocation of overhead expenses
incurred by the Company. Research and development expenses
decreased to approximately $21.5 million for the year ended
December 31, 2001 compared to approximately
$22.6 million for the year ended December 31, 2000.
This 5.0% decrease is primarily due to lower manufacturing costs
related to material used in our clinical trials, as well as
lower costs related to pre-clinical development of our
biopharmaceutical product candidates during 2001. These
decreases were partially offset by increased clinical trial
costs. Clinical trial costs increased in 2001 as compared to
2000 as a result of the Company conducting more trials and the
types of clinical trials in 2001 were more costly per subject
enrolled. The magnitude of the Companys operating
expenses, particularly research and development expense, is
largely dependent upon the timing and size of the clinical
trials and manufacturing material to be used in those clinical
trials. As 2002 progresses, the Company anticipates research and
development expenses will increase over current year levels.
This increase in 2002 will result from the Company conducting
more clinical trials on its product candidates than in 2001 as
well as higher manufacturing costs from the increased need for
material and continued process development and scale up costs.

General and Administrative Expenses.General and administrative expenses
include the cost of salaries, employee benefits, and other costs
associated with the Companys finance, accounting, human
resources, legal,

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##### Table of Contents



administrative and executive management
functions. General and administrative expenses increased to
approximately $5.0 million for the year ended
December 31, 2001 compared to approximately
$3.2 million for the year ended December 31, 2000.
This 59.2% increase resulted from higher payroll, overhead and
related costs in support of the Companys anticipated
growing research and development activities as compared to 2000.
The increased payroll resulted from an increase in general and
administrative personnel from 14 at the end of 2000 to 20 at the
end of 2001. Also included in the increased general and
administrative expenses in 2001, are costs associated with a
market research study performed by a third party to provide the
Company with some preliminary assessment about product
positioning and market potential of certain product candidates.
In addition, the Company incurred higher costs related to the
Companys first annual reporting cycle as a public company
including legal, accounting, printing and related services.


Goodwill Amortization.Goodwill amortization reflects the
amortization of the excess of the purchase price over net assets
in the Companys September 2000 acquisition of Talaria
Therapeutics, Inc. (Talaria) and the milestone
payments made to date. Total goodwill was $3.1 million and
$3.5 million at December 31, 2001 and 2000,
respectively. Goodwill amortization expense was $839,000 and
$250,000 for the years ended December 31, 2001 and 2000,
respectively. The increase in goodwill amortization expense is a
result of a full year of amortization in 2001 as well as
increased goodwill being amortized upon the achievement of
certain LUV clinical development milestones in early 2001. The
Company has been amortizing this goodwill over five years, which
represents the period estimated to be benefited from the
acquisition, after considering such factors as product
development timelines, revenue potential, competition and patent
life.

In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets (SFAS 142), which primarily
addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. The provisions of SFAS 142
will be effective for the Companys fiscal year beginning
January 1, 2002. This statement is summarized in
Note 2 of Notes to Consolidated Financial Statements. At
effectiveness, an evaluation of goodwill will be required, and
any impairment of goodwill at that time will be recognized as a
cumulative effect of adoption. As a result of the
non-amortization provisions of SFAS 142, the Company will
no longer amortize goodwill effective January 1, 2002. In
addition, based on managements current financial
projections, management does not believe that goodwill and other
intangibles are currently impaired. The Company will perform a
more detailed assessment in the first quarter of 2002 to
determine the effect of this new standard.

Other Income (Expense).Interest income increased to
approximately $2.8 million for the year ended
December 31, 2001, compared to approximately
$2.6 million for the year ended December 31, 2000. The
increase was attributable to higher levels of cash and cash
equivalents available for investment in 2001, partially offset
by lower interest rates in 2001, as compared to 2000. Interest
expense for the same periods was approximately $766,000 and
$408,000, respectively, and represents interest incurred on
equipment financing facilities and a special project loan. We
recorded approximately $400,000 and $201,000 for the year ended
December 31, 2001 and 2000, respectively, of foreign
currency transaction gains on transactions denominated in
various currencies of European countries, primarily the Swedish
kronor.

Net Loss.The net
loss was approximately $24.9 million for the year ended
December 31, 2001, compared to approximately
$27.6 million for the year ended December 31, 2000.
The decrease in 2001, as compared to 2000, is primarily
attributable to the non-cash $4.0 million purchased
in-process research and development write-off in 2000 related to
the acquisition of Talaria.

Year
Ended December 31, 2000.

Research and Development Expenses.Research and development expenses
include both external and internal costs related to the research
and development activities of our existing product candidates as
well as discovery efforts on potential new product candidates.
Research and development expenses increased to approximately
$22.6 million for the year ended December 31, 2000,
compared to approximately $8.5 million for the year ended
December 31, 1999. This 166.3% increase resulted from costs
associated with our ETC-216 clinical trial in 2000, increased
costs of manufacturing clinical material for our ETC-216,
ETC-588 and ETC-642 compounds, as well as other costs associated
with developing these three product candidates. In

28



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##### Table of Contents



addition, we experienced increased development
and discovery costs related to in-licensing a new product
candidate (ETC-276) and discovering new HDL Elevators over the
past year. Finally, the increase in 2000, as compared to 1999,
resulted from higher personnel and overhead costs in support of
these increased research and development activities.


General and Administrative Expenses.General and administrative expenses
included the cost of salaries, employee benefits, and other
payroll costs associated with the Companys finance,
accounting, human resources, legal, administrative and executive
management functions. General and administrative expenses also
included an allocation of overhead expenses incurred by the
Company. General and administrative expenses increased to
approximately $3.2 million for the year ended
December 31, 2000 compared to approximately
$2.5 million for the year ended December 31, 1999.
This 25.3% increase was primarily due to increased general and
administrative personnel and facility costs as well as certain
costs related to both the initial public offering and private
financings that were completed in 2000.

Goodwill Amortization.Goodwill amortization includes the
amortization of purchase price in excess of net assets on the
Companys September 2000 acquisition of Talaria. The
Company has been amortizing this goodwill over five years, which
represents the period estimated to be benefited from the
acquisition, after considering such factors as product
development timelines, revenue potential, competition and patent
life.

Purchased in-process research and development.On September 21, 2000, the
Company acquired all of the outstanding shares of stock of
Talaria for 813,008 shares of restricted Esperion common stock
valued at $9 per share. (10,127 of the 813,008 shares of common
stock were retired in 2001 in satisfaction of an indemnity
obligation of the former Talaria stockholders under the merger
agreement with Talaria and related documents.) The merger
agreement provides for additional consideration to former
Talaria stockholders including payments upon the achievement of
milestones and royalties upon the sale of any commercialized
products. Milestones are due upon the enrollment of the first
patient in certain clinical trials and upon each of the filing
and approval of a new drug application in the United States. The
first milestone was achieved in the first quarter of 2001. These
milestone payments increase the amount of the purchase price in
the period when the milestone is achieved, and the Company
includes these additional amounts in goodwill. As these
additional milestone payments are added to the Companys
goodwill balance, the Company will perform an annual assessment
as to realizability of this asset, as required under SFAS 142.
The royalty payments will be included in cost of sales in the
period when the respective sales are recognized. The combined
milestone payments and royalties are subject to a maximum
aggregate ceiling of $20.0 million. At the acquisition
date, Talaria was conducting development and testing activities
related to LUV. The Company believes that LUV could provide
advantages over current available therapies.

The acquisition was accounted for under the
purchase method of accounting. The purchase price for amounts
due at closing was allocated to both tangible and intangible
assets. In connection with this allocation, the Company recorded
a one-time charge to operations in the third quarter of 2000 to
write-off $4.0 million associated with the in-process
research and development acquired in the transaction that had
not reached technological feasibility. The allocation of the
purchase price was based on an independent appraisal of the fair
values on the closing date using risk-adjusted cash flows
related to the incomplete research and development project. The
Company recorded approximately $3.75 million as goodwill
that represents the excess of the purchase price over the fair
value of net assets acquired. This amount included $265,000 of
acquisition-related costs. The goodwill is being amortized on a
straight-line basis over a period of five years.

The $4.0 million allocation to purchased
in-process research and development is based on the assumption
that Talarias research and development activities of its
LUV product candidate had not yet reached technological
feasibility, and that no alternative future uses have been
identified. At the acquisition date, the product candidate had
exhibited satisfactory safety and efficacy results in
preliminary testing; however, significant further investment is
required to complete the development of the acquired technology,
including completion of clinical trials, manufacturing scale-up
and successful regulatory approvals. Talaria had spent
approximately $4.9 million on the development of the
in-process project since its inception in 1998 and the patent
holders had spent additional amounts on scientific research
prior to 1998. At the time of acquisition, we expected to spend
an additional $24.0 million in third-party development
costs over all phases of the project

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prior to commercialization. Of these remaining
costs, approximately $20.0 million would relate to a
Phase III clinical trial which is expected to commence
after the Phase II clinical trials are completed, but not
sooner than 2002.


In making the purchase price allocation,
management considered present value calculations of income, an
analysis of project accomplishments and remaining outstanding
items, as well as project risks. The value assigned to purchased
in-process technology was determined by estimating the costs to
develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present
value. The revenue projection used to value the in-process
research and development was based on estimates of relevant
market sizes, penetration rates, therapy costs, and the nature
and expected timing of new product introductions by the Company
and its competitors. The resulting net cash flows from such
projects are based on managements estimates of milestone
and royalty payments the acquired projects would command, as
well as operating expenses and income taxes related to such
projects.

The rate utilized to discount the net cash flows
to their present value was based on an estimated cost of capital
calculation. Due to the nature of the forecast and the risks
associated with the projected growth and profitability of the
developmental project, a discount rate of 35% was considered
appropriate for the in-process research and development. This
discount rate was commensurate with Talarias stage of
development and the uncertainties in the economic estimates
described above. If this project is not successfully developed,
the sales and profitability of the combined company may be
adversely affected in future periods. Costs associated with the
completion of the project have been and are expected to be
consistent with the assumptions used in the valuation.

Other Income (Expense).Interest income increased to
approximately $2.6 million for the year ended December 31,
2000, compared to approximately $424,000 for the year ended
December 31, 1999. The increase was attributable to higher
levels of cash and cash equivalents available for investment in
2000 due to the Companys private financings and initial
public offering. Interest expense for the same periods was
approximately $408,000 and $92,000, respectively, and represents
interest incurred on equipment financing facilities and a
special project loan. During 2000, we recorded approximately
$201,000 of foreign currency transaction gains on transactions
denominated in various currencies of European countries,
primarily the Swedish kronor.

Net Loss.The net
loss was approximately $27.6 million for the year ended
December 31, 2000, compared to approximately
$10.7 million for the year ended December 31, 1999.
The increase reflects increases in research and development and
general and administrative expenses in addition to the non-cash
$4.0 million purchased in-process research and development
write-off, offset, in part, by the increase in interest income.

Net Loss Attributable to Common Stockholders.The net loss attributable to common
stockholders for the year ended December 31, 2000 includes
a non-cash $22.9 million charge related to the beneficial
conversion feature on the Series C and D Convertible Preferred
Stock. The total of the non-cash beneficial conversion feature
was reflected through equal and offsetting adjustments to
additional paid-in-capital with no net impact on
stockholders equity. The beneficial conversion feature was
considered in the determination of the Companys loss per
common share amounts in 2000.

Liquidity and Capital Resources

As of December 31, 2001 and 2000, the
Company had cash and cash equivalents of approximately
$70.3 million and $70.2 million, respectively. Cash
proceeds in 2001 resulted primarily from a private placement of
common stock by which we raised net proceeds of approximately
$22.3 million, offset by approximately $22.8 million
in cash used to fund operations. Our investment policy
emphasizes liquidity and preservation of principal over other
portfolio considerations. We select investments that maximize
interest income to the extent possible by investing cash in
securities with different maturities to match projected cash
needs and limit risk by diversifying our investments. We believe
that our current cash position, along with

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available borrowings under our credit facilities
will be sufficient to fund our operations as currently planned,
capital expenditures and debt service until at least the end of
2003.


During the years ended December 31, 2001,
2000 and 1999, net cash used in operating activities was
approximately $22.8 million, $18.0 million and
$7.9 million, respectively. This cash was used to fund our
net losses for the periods, adjusted for non-cash expenses and
changes in operating assets and liabilities.

Net cash used in investing activities for the
years ended December 31, 2001, 2000 and 1999 was
$2.1 million, $2.0 million and $1.6 million,
respectively, primarily the result of the acquisition of
laboratory equipment, furniture, fixtures and office equipment.
In addition, the Company used approximately $233,000 in cash in
connection with the acquisition of Talaria in 2000.

Net cash proceeds from financing activities were
$25.0 million, $84.1 million and $2.8 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
The net cash proceeds from financing activities for the year
ended December 31, 2001 resulted primarily from
$22.3 million raised in the July 2001 private
placement and $3.5 million in additional borrowings on a
special project loan and certain equipment term loans. The
proceeds were partially offset by $956,000 of cash used to repay
borrowings under certain equipment term loans. The net cash
proceeds from financing activities for the year ended
December 31, 2000 resulted primarily from
$56.2 million raised in the initial public offering of
common stock, $26.9 million raised in preferred stock
financings prior to the initial public offering,
$1.5 million in additional borrowings on a special project
loan and certain equipment term loans, and $123,000 raised from
the issuance of common stock to employees as part of the
Companys equity compensation plans. The proceeds in 2000
were partially offset by $518,000 of cash used to repay
borrowings under certain equipment term loans.

We continually evaluate opportunities to sell
additional equity, obtain credit from lenders, enter into
strategic relationships, or to otherwise further strengthen our
financial position. The sale of additional equity, whether
publicly or privately, could result in dilution to our
stockholders. In addition, from time to time, we may consider
the acquisition of or investment in complementary businesses,
products or technology that might affect our liquidity
requirements or position or cause us to issue additional
securities. There can be no assurance that financing or
financing opportunities will be available to us in amounts or on
terms acceptable to us, if at all.

As of December 31, 2001, the Company has the
following credit facilities and outstanding borrowings:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have a credit facility with a U.S. bank that
	was used to finance purchases of equipment. Borrowings under
	this facility bear interest at the banks prime rate plus
	1.0%. The original facility allowed for borrowings of up to
	$1.5 million. We have approximately $248,000 outstanding
	under this facility as of December 31, 2001 and no
	additional borrowings are allowed.                                                                                                                                                                                                                                                                                                                                                                
|
| |  | We have an additional credit facility with a U.S.
	lending institution to finance purchases of equipment. This
	facility allowed for borrowings of up to $2.5 million. We
	have approximately $1.8 million outstanding under this
	facility at a weighted average interest rate of 12% as of
	December 31, 2001 and no additional borrowings are allowed.                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | We also have a credit facility with a Swedish
	entity totaling 50 million Swedish kronor ($4.8 million as
	of December 31, 2001). The proceeds from this facility may
	only be used to finance the development of our ETC-216 product
	candidate. If a related product is not developed or does not
	succeed in the market, our obligation to repay the loan may be
	forgiven. Borrowings under the loan facility bear interest at
	17.0% of which 9.5% is payable quarterly. The remaining 7.5% of
	interest together with principal is payable in five equal annual
	installments starting in December 2004. The outstanding
	borrowings, including accrued interest, amounted to
	37 million Swedish kronor ($3.9 million) as of
	December 31, 2001.
|
| |  | We have a memorandum of understanding with an
	economic development group in Michigan whereby we can borrow up
	to $500,000 for equipment purchases at an interest rate of 4%.
	As of December 31, 2001, outstanding borrowings under this
	arrangement totaled $382,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |   |                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have a $2.0 million credit facility with
	a U.S. bank that may be used to finance purchases of equipment.
	Borrowings under this facility bear interest at the banks
	prime rate. There were no borrowings outstanding under this
	facility as of December 31, 2001. The facility expires in
	May 2002.

We anticipate that our capital expenditures for
the next twelve months will be approximately $2.8 million.
We expect that these expenditures will primarily include lab and
computer equipment.

We lease our corporate and research and
development facilities under operating leases expiring at
various times through December 2003. Under certain
arrangements, including our headquarters facility, we may extend
these leases for additional periods. Total minimum future
payments under these leases are approximately $1.3 million
as of December 31, 2001, including $761,000 in 2002.

We have entered into license and other agreements
with certain third parties, which require us to make payments
upon achievement of the milestones set forth in the agreements,
which contingent payments could amount to $30.2 million,
and, if we sell products using technology licensed under the
agreements, to make royalty payments to the licensor pursuant to
formulas in the agreements. There can be no assurance that we
will meet any or all of the milestones in, or sell any products
requiring royalty payments under, our license agreements.

We expect that our operating expenses and capital
expenditures will increase in future periods. We intend to hire
additional research and development, clinical and administrative
staff. Our capital expenditure requirements will depend on
numerous factors, including the progress of our research and
development programs, the time required to file and process
regulatory approval applications, the development of commercial
manufacturing capability, the ability to obtain additional
licensing arrangements, and the demand for our product
candidates, if and when approved by the FDA or other regulatory
authorities.

Income Taxes

As of December 31, 2001, we had operating
loss carryforwards of approximately $41.1 million. These
net operating loss carryforwards expire beginning in 2013.
Additionally, utilization of net operating loss carryforwards
may be limited under Section 382 of the Internal Revenue
Code. These and other deferred income tax assets are fully
reserved by a valuation allowance due to historical losses.

Employees

As of December 31, 2001, we had 79 full-time
employees. Of these employees, 59 were engaged in research,
preclinical and clinical development, regulatory affairs,
intellectual property activities, and/or manufacturing
activities and 20 were engaged in finance, legal and general
administrative activities.

New Accounting Pronouncements

In July 2001, the Financial Accounting
Standards Board issued Statements of Financial Accounting
Standards No. 141, Business Combinations
(SFAS 141) and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). In
August 2001, the Financial Accounting Standards Board issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144).

SFAS 141 supersedes Accounting Principles Board
Opinion No. 16, Business Combinations. The most
significant changes made by SFAS 141 are (1) requiring
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001,
(2) establishing specific criteria for the recognition of
intangible assets separately from goodwill, and
(3) requiring unallocated negative goodwill to be written
off immediately as an extraordinary gain (rather than being
deferred and amortized).

SFAS 142 supersedes Accounting Principles
Board Opinion No. 17, Intangible Assets, and
primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The most significant
changes made by SFAS 142 are that: (1) goodwill and
indefinite lived intangible assets will no longer be amortized,
(2) goodwill will be tested for impairment at least
annually at the reporting level, (3) intangible assets
deemed to have an indefinite life will be tested for impairment
at least annually, and (4) the amortization of intangible
assets with finite lives will no longer be limited to forty
years. SFAS 142

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also specifies that certain intangible assets
that were previously identified as separate from goodwill (i.e.,
assembled workforce) are not considered separately identifiable
for purposes of this standard and should be included as part of
goodwill and subject to the non-amortization provisions for
SFAS 142.


The provisions for SFAS 142 will be effective for
the Companys fiscal year beginning January 1, 2002.
At effectiveness, an evaluation of goodwill will be required,
and any impairment of goodwill at that time will be recognized
as a cumulative effect of adoption. Total goodwill included in
the Companys Consolidated Financial Statements was
$3.1 million at December 31, 2001 and
$3.5 million at December 31, 2000. Goodwill
amortization expense was $839,000 and $250,000 for the years
ended December 31, 2001 and 2000, respectively. As a result
of the non-amortization provisions of SFAS 142, goodwill
amortization expense will be eliminated effective
January 1, 2002. In addition, based on managements
current financial projections, management does not believe that
goodwill and other intangibles are currently impaired. The
Company will perform a more detailed assessment to determine the
effect of this new standard in 2002.

SFAS 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of and the accounting and
reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions for the
disposal of a segment of a business (as previously defined in
that Opinion). SFAS 144 is effective for the Companys
fiscal year beginning January 1, 2002 and is not expected
to have a material impact on us upon effectiveness.

Item 7A. Quantitative and
Qualitative Disclosures about Market Risk

Our exposure to market risk for changes in
interest rates relates primarily to the increase or decrease in
the amount of interest income we can earn on our investment
portfolio and on the increase or decrease in the amount of
interest expense we must pay with respect to our various
outstanding debt instruments. Under our current policies, we do
not use interest rate derivative instruments to manage our
exposure to interest rate changes. We ensure the safety and
preservation of our invested principal funds by limiting default
risks, market risk and reinvestment risk. We mitigate default
risk by investing in investment grade securities. A hypothetical
100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair
value of our interest sensitive financial instruments at
December 31, 2001. Declines in interest rates over time
will, however, reduce our interest income while increases in
interest rates over time will increase our interest expense.

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##### Table of Contents



Item 8. Financial Statements and
Supplementary Data






INDEX TO FINANCIAL STATEMENTS


ESPERION THERAPEUTICS, INC.

(A Company in the Development Stage)


|                                                 |  |      |    | 
|------------------------------------------------ |  | ---- | -- | 
|                                                 |  | Page |   
|                                                 |  |      |   
|Report of Independent Public Accountants         |  |      | 35 | 
|Consolidated Balance Sheets                      |  |      | 36 | 
|Consolidated Statements of Operations            |  |      | 37 | 
|Consolidated Statements of Stockholders
	Equity |  |      | 38 | 
|Consolidated Statements of Cash Flows            |  |      | 40 | 
|Notes to Consolidated Financial Statements       |  |      | 41 | 

34



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##### Table of Contents








REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS


To the Board of Directors and Shareholders of
Esperion Therapeutics, Inc.:

We have audited the accompanying consolidated
balance sheets of Esperion Therapeutics, Inc. (a Delaware
corporation in the development stage) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
December 31, 2001, and the period from inception to
December 31, 2001. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Esperion Therapeutics, Inc. and subsidiaries as of
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001, and the period from
inception to December 31, 2001, in conformity with
accounting principles generally accepted in the United States.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Ann Arbor, Michigan,

January 18, 2002.


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ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES

(A Company in the Development Stage)







CONSOLIDATED BALANCE SHEETS


|                                                                                                                          |                                                                                                                                                                     |                            |        |         |              |   |        |         |        | 
|------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------- | ------------ | - | ------ | ------- | ------ | 
|                                                                                                                          |                                                                                                                                                                     | December 31,               |        |         | December 31, |  
|                                                                                                                          |                                                                                                                                                                     | 2001                       |        |         | 2000         |  
|In thousands, except share data                                                                                           |                                                                                                                                                                     |                            |        |         |              |  
|ASSETS                                                                                                                    |                                                                                                                                                                     |                            |        |         |              |   |        |        
|Current Assets:                                                                                                           |                                                                                                                                                                     |                            |        |         |              |   |        |        
|                                                                                                                          | Cash and cash equivalents                                                                                                                                           |                            | $      | 70,286  |              |   | $      | 70,228  |       
|                                                                                                                          | Prepaid expenses and other                                                                                                                                          |                            |        | 1,000   |              |   |        | 1,112   |       
|                                                                                                                          |                                                                                                                                                                     |                            |        |         |              |  
|                                                                                                                          |                                                                                                                                                                     | Total current assets       |        |         | 71,286       |   |        |         | 71,340 | 
|Furniture and equipment, less accumulated
	depreciation of $2,415 and $1,256 at December 31, 2001 and 2000,
	respectively |                                                                                                                                                                     |                            | 3,313  |         |              |   | 2,503  |        
|Goodwill, less accumulated amortization of $1,089
	and $250 at December 31, 2001 and 2000, respectively                   |                                                                                                                                                                     |                            | 3,108  |         |              |   | 3,500  |        
|Deposits and other assets                                                                                                 |                                                                                                                                                                     |                            | 633    |         |              |   | 534    |        
|                                                                                                                          |                                                                                                                                                                     |                            |        |         |              |  
|                                                                                                                          |                                                                                                                                                                     | $                          | 78,340 |         |              | $ | 77,877 |        
|                                                                                                                          |                                                                                                                                                                     |                            |        |         |              |  
|LIABILITIES AND STOCKHOLDERS
	EQUITY                                                                                     |                                                                                                                                                                     |                            |        |         |              |   |        |        
|Current Liabilities:                                                                                                      |                                                                                                                                                                     |                            |        |         |              |   |        |        
|                                                                                                                          | Current portion of long-term debt                                                                                                                                   |                            | $      | 863     |              |   | $      | 697     |       
|                                                                                                                          | Accounts payable                                                                                                                                                    |                            |        | 2,925   |              |   |        | 3,936   |       
|                                                                                                                          | Accrued liabilities                                                                                                                                                 |                            |        | 2,572   |              |   |        | 2,526   |       
|                                                                                                                          |                                                                                                                                                                     |                            |        |         |              |  
|                                                                                                                          |                                                                                                                                                                     | Total current liabilities  |        |         | 6,360        |   |        |         | 7,159  | 
|                                                                                                                          |                                                                                                                                                                     |                            |        |         |              |  
|Long-term debt, less current portion above                                                                                |                                                                                                                                                                     |                            | 5,482  |         |              |   | 3,027  |        
|                                                                                                                          |                                                                                                                                                                     |                            |        |         |              |  
|Commitments and Contingencies (Note 7)                                                                                    |                                                                                                                                                                     |                            |        |         |              |   |        |        
|Stockholders Equity:                                                                                                     |                                                                                                                                                                     |                            |        |         |              |   |        |        
|                                                                                                                          | Preferred stock, $0.01 par value; 5,000,000
	shares authorized; none issued or outstanding                                                                          |                            |        |        |              |   |        |        |       
|                                                                                                                          | Common stock, $0.001 par value; 50,000,000 shares
	authorized; 29,191,526 and 25,774,485 shares issued and
	outstanding at December 31, 2001 and 2000, respectively |                            |        | 29      |              |   |        | 26      |       
|                                                                                                                          | Additional paid-in capital                                                                                                                                          |                            |        | 133,143 |              |   |        | 110,650 |       
|                                                                                                                          | Notes receivable                                                                                                                                                    |                            |        | (15     | )            |   |        | (67     | )     
|                                                                                                                          | Accumulated deficit during the development stage                                                                                                                    |                            |        | (65,320 | )            |   |        | (40,389 | )     
|                                                                                                                          | Deferred stock compensation                                                                                                                                         |                            |        | (1,476  | )            |   |        | (2,774  | )     
|                                                                                                                          | Accumulated other comprehensive income                                                                                                                              |                            |        | 137     |              |   |        | 245     |       
|                                                                                                                          |                                                                                                                                                                     |                            |        |         |              |  
|                                                                                                                          |                                                                                                                                                                     | Total stockholders equity |        |         | 66,498       |   |        |         | 67,691 | 
|                                                                                                                          |                                                                                                                                                                     |                            |        |         |              |  
|                                                                                                                          |                                                                                                                                                                     | $                          | 78,340 |         |              | $ | 77,877 |        
|                                                                                                                          |                                                                                                                                                                     |                            |        |         |              |  

The accompanying notes are an integral part of
these consolidated balance sheets.

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ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES

(A Company in the Development Stage)







CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |       |         |   |         |        |         |  
|------------------------------------------------------------------------ | --------------------------------------------- | ------------------------ | ---------- | ------ | ------------ | - | ---------- | ------------ | ------- | - | ------------ | ----- | ------- | - | ------- | ------ | ------- | -
|                                                                         |                                               | Year Ended               |            |        | Year Ended   |   |            | Year Ended   |         |   | Inception to |      
|                                                                         |                                               | December 31,             |            |        | December 31, |   |            | December 31, |         |   | December 31, |      
|                                                                         |                                               | 2001                     |            |        | 2000         |   |            | 1999         |         |   | 2001         |      
|In thousands, except share and per share data                            |                                               |                          |            |        |              |   |            |              |         |   |              |      
|Operating expenses:                                                      |                                               |                          |            |        |              |   |            |              |         |   |              |       |         |   |         |       
|                                                                         | Research and development                      |                          | $          | 21,454 |              |   | $          | 22,596       |         |   | $            | 8,484 |         |   | $       | 54,457 |        
|                                                                         | General and administrative                    |                          |            | 5,023  |              |   |            | 3,156        |         |   |              | 2,518 |         |   |         | 11,161 |        
|                                                                         | Goodwill amortization                         |                          |            | 839    |              |   |            | 250          |         |   |              |      |         |   |         | 1,089  |        
|                                                                         | Purchased in-process research and development |                          |            |       |              |   |            | 4,000        |         |   |              |      |         |   |         | 4,000  |        
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      
|                                                                         |                                               | Total operating expenses |            |        | 27,316       |   |            |              | 30,002  |   |              |       | 11,002  |   |         |        | 70,707  |  
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      
|                                                                         |                                               | Loss from operations     |            |        | (27,316      | ) |            |              | (30,002 | ) |              |       | (11,002 | ) |         |        | (70,707 | )
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      
|Other income (expense):                                                  |                                               |                          |            |        |              |   |            |              |         |   |              |       |         |   |         |       
|                                                                         | Interest income                               |                          |            | 2,824  |              |   |            | 2,633        |         |   |              | 424   |         |   |         | 6,127  |        
|                                                                         | Interest expense                              |                          |            | (766   | )            |   |            | (408         | )       |   |              | (92   | )       |   |         | (1,266 | )      
|                                                                         | Other, net                                    |                          |            | 327    |              |   |            | 201          |         |   |              |      |         |   |         | 526    |        
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      
|                                                                         |                                               | Total other income       |            |        | 2,385        |   |            |              | 2,426   |   |              |       | 332     |   |         |        | 5,387   |  
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      
|Net loss before taxes                                                    |                                               |                          | (24,931    | )      |              |   | (27,576    | )            |         |   | (10,670      | )     |         |   | (65,320 | )     
|Provision for income taxes                                               |                                               |                          |           |        |              |   |           |              |         |   |             |       |         |   |        |       
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      
|Net loss                                                                 |                                               |                          | (24,931    | )      |              |   | (27,576    | )            |         |   | (10,670      | )     |         |   | (65,320 | )     
|Beneficial conversion feature upon issuance of
	preferred stock          |                                               |                          |           |        |              |   | (22,870    | )            |         |   |             |       |         |   | (22,870 | )     
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      
|Net loss attributable to common stockholders                             |                                               | $                        | (24,931    | )      |              | $ | (50,446    | )            |         | $ | (10,670      | )     |         | $ | (88,190 | )     
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      
|Basic and diluted net loss per share                                     |                                               | $                        | (0.91      | )      |              | $ | (4.50      | )            |         | $ | (5.91        | )     |         |   |         |       
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      
|Shares used in computing basic and diluted net
	loss per share           |                                               |                          | 27,309,502 |        |              |   | 11,222,319 |              |         |   | 1,806,255    |       |         |   |         |       
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      
|Pro forma basic and diluted net loss per share                           |                                               |                          |            |        |              | $ | (2.45      | )            |         | $ | (1.14        | )     |         |   |         |       
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      
|Shares used in computing pro forma basic and
	diluted net loss per share |                                               |                          |            |        |              |   | 20,603,313 |              |         |   | 9,392,499    |       |         |   |         |       
|                                                                         |                                               |                          |            |        |              |   |            |              |         |   |              |      

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

37



---



##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES

(A Company in the Development Stage)







CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


|                                                                                                                    |                                         |                         |                  |             |           |   |      |        |            |   |         |   |     |   |        |   | 
|------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ----------------------- | ---------------- | ----------- | --------- | - | ---- | ------ | ---------- | - | ------- | - | --- | - | ------ | - | 
|                                                                                                                    |                                         |                         |                  | Convertible |           |   |      |        | Additional |  
|                                                                                                                    |                                         | Date of                 |                  |             | Preferred |   |      | Common |            |   | Paid-In |  
|                                                                                                                    |                                         | Transaction             |                  |             | Stock     |   |      | Stock  |            |   | Capital |  
|In thousands, except share data                                                                                     |                                         |                         |                  |             |           |   |      |        |            |   |         |  
|Balance  Inception (May 18,
	1998)                                                                                 |                                         |                         |                  |             |           | $ |     |        |            | $ |        |   |     | $ |       |  
|Issuance of 1,329,399 shares of common stock for
	cash                                                              |                                         |                         | July 6           |             |           |   |     |        |            |   | 2       |   |     |   |        |  
|Issuance of 10,500,000 shares of Series A
	and B preferred stock for cash                                           |                                         |                         | July 6-August 11 |             |           |   | 105  |        |            |   |        |   |     |   | 15,224 |  
|Issuance of 375,700 shares of common stock for
	notes                                                               |                                         | September 1-December 11 |                  |             |          |   |      |        |           |   |         |   | 78  |  
|                                                                                                                    | Net loss                                |                         |                  |             |           |   |      |       |            |   |         |  |     |   |        |  | 
|                                                                                                                    | Foreign currency translation adjustment |                         |                  |             |           |   |      |       |            |   |         |  |     |   |        |  | 
|                                                                                                                    |                                         |                         |                  |             |           |   |      |        |            |   |         |  
|                                                                                                                    | Comprehensive loss                      |                         |                  |             |           |   |      |        |            |   |         |   |     |   |        |   | 
|Balance  December 31,
	1998                                                                                        |                                         |                         |                  |             |           | $ | 105  |        |            | $ | 2       |   |     | $ | 15,302 |  
|Issuance of 231,200 shares of common stock for
	notes                                                               |                                         |                         | June 4-July 1    |             |           |   |     |        |            |   |        |   |     |   | 48     |  
|Decrease in notes receivables                                                                                       |                                         |                         |                  |             |           |   |     |        |            |   |        |   |     |   |       |  
|Deferred stock compensation related to stock
	options                                                               |                                         |                         |                  |             |           |   |     |        |            |   |        |   |     |   | 1,117  |  
|Amortization of deferred stock compensation                                                                         |                                         |                         |                  |             |           |   |     |        |            |   |        |   |     |   |       |  
|                                                                                                                    | Net loss                                |                         |                  |             |           |   |      |       |            |   |         |  |     |   |        |  | 
|                                                                                                                    | Foreign currency translation adjustment |                         |                  |             |           |   |      |       |            |   |         |  |     |   |        |  | 
|                                                                                                                    |                                         |                         |                  |             |           |   |      |        |            |   |         |  
|                                                                                                                    | Comprehensive loss                      |                         |                  |             |           |   |      |        |            |   |         |   |     |   |        |   | 
|Balance  December 31,
	1999                                                                                        |                                         |                         |                  |             |           |   | 105  |        |            |   | 2       |   |     |   | 16,467 |  
|Issuance of 310,217 shares of common stock, net,
	upon exercise of stock options and under stock purchase plan      |                                         | March 1- December 31    |                  |             |          |   |      |        |           |   |         |   | 123 |  
|Issuance of 10,252,879 shares of Series C
	preferred stock for cash and services                                    |                                         |                         | January 7        |             |           |   | 102  |        |            |   |        |   |     |   | 22,457 |  
|Issuance of 1,136,363 shares of Series D
	preferred stock for
	cash                                                 |                                         |                         | February 22      |             |           |   | 11   |        |            |   |        |   |     |   | 4,989  |  
|Conversion of preferred stock                                                                                       |                                         |                         | August 9         |             |           |   | (218 | )      |            |   | 16      |   |     |   | 202    |  
|Issuance of 6,000,000 shares of common stock for
	initial public offering net of $1.6 million in offering
	expenses |                                         |                         | August 10        |             |           |   |     |        |            |   | 6       |   |     |   | 48,614 |  
|Issuance of 900,000 shares of common stock for
	underwriters over-allotment                                        |                                         |                         | September 5      |             |           |   |     |        |            |   | 1       |   |     |   | 7,532  |  
|Issuance of 813,008 shares of common stock for
	acquisition of Talaria Therapeutics, Inc.                           |                                         |                         | September 21     |             |           |   |     |        |            |   | 1       |   |     |   | 7,316  |  
|Deferred stock compensation related to stock
	options                                                               |                                         |                         |                  |             |           |   |     |        |            |   |        |   |     |   | 2,950  |  
|Amortization of deferred stock compensation                                                                         |                                         |                         |                  |             |           |   |     |        |            |   |        |   |     |   |        |  
|Decrease in notes receivable                                                                                        |                                         |                         |                  |             |           |   |     |        |            |   |         |   |     |   |       |  
|                                                                                                                    | Net loss                                |                         |                  |             |           |   |      |       |            |   |         |  |     |   |        |  | 
|                                                                                                                    | Foreign currency translation adjustment |                         |                  |             |           |   |      |       |            |   |         |  |     |   |        |  | 
|                                                                                                                    |                                         |                         |                  |             |           |   |      |        |            |   |         |  
|                                                                                                                    | Comprehensive loss                      |                         |                  |             |           |   |      |        |            |   |         |   |     |   |        |   | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                                    |                                         |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |   |        |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ---------- | ---- | ----------- | ----------- | - | -------- | ------------ | ----------- | ----- | ------------- | - | ----- | ------------- | -- | --- | ------------- | - | ------ | ------- | - |  | - | ------- | -
|                                                                                                                    |                                         |            |      | Accumulated |             |   |          |              |             |       |               |   |      
|                                                                                                                    |                                         |            |      | Deficit     |             |   |          |              | Accumulated |       |               |   |       |              
|                                                                                                                    |                                         |            |      | During the  |             |   | Deferred |              |             | Other |               |   | Total |               |    |    
|                                                                                                                    |                                         | Notes      |      |             | Development |   |          | Stock        |             |       | Comprehensive |   |       | Stockholders |    |     | Comprehensive |  
|                                                                                                                    |                                         | Receivable |      |             | Stage       |   |          | Compensation |             |       | Income/(Loss) |   |       | Equity        |    |     | Loss          |  
|In thousands, except share data                                                                                     |                                         |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |  
|Balance  Inception (May 18,
	1998)                                                                                 |                                         | $          |     |             |             | $ |         |              |             | $     |              |   |       | $             |   |     |               | $ |       |         |   |  |   |        
|Issuance of 1,329,399 shares of common stock for
	cash                                                              |                                         |            |     |             |             |   |         |              |             |       |              |   |       |               |   |     |               |   | 2      |         |   |  |   |        
|Issuance of 10,500,000 shares of Series A
	and B preferred stock for cash                                           |                                         |            |     |             |             |   |         |              |             |       |              |   |       |               |   |     |               |   | 15,329 |         |   |  |   |        
|Issuance of 375,700 shares of common stock for
	notes                                                               |                                         |            | (78  | )           |             |   |         |              |             |       |              |   |       |               |   |     |               |   |       |         |   |  |   |        
|                                                                                                                    | Net loss                                |            |      |            |             |   |          | (2,143       | )           |       |               |  |       |               |    |    |               |   |        | (2,143  | ) |  | $ | (2,143  | )
|                                                                                                                    | Foreign currency translation adjustment |            |      |            |             |   |          |             |             |       |               |  |       |               |    | (1  | )             |   |        | (1      | ) |  |   | (1      | )
|                                                                                                                    |                                         |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |  
|                                                                                                                    | Comprehensive loss                      |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |   |        |         |   |  | $ | (2,144  | )
|                                                                                                                    |                                         |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |  
|Balance  December 31,
	1998                                                                                        |                                         | $          | (78  | )           |             | $ | (2,143   | )            |             | $     |              |   |       | $             | (1 | )   |               | $ | 13,187 |         |   |  |   |        
|Issuance of 231,200 shares of common stock for
	notes                                                               |                                         |            | (48  | )           |             |   |         |              |             |       |              |   |       |               |   |     |               |   |       |         |   |  |   |        
|Decrease in notes receivables                                                                                       |                                         |            | 20   |             |             |   |         |              |             |       |              |   |       |               |   |     |               |   | 20     |         |   |  |   |        
|Deferred stock compensation related to stock
	options                                                               |                                         |            |     |             |             |   |         |              |             |       | (1,117        | ) |       |               |   |     |               |   |       |         |   |  |   |        
|Amortization of deferred stock compensation                                                                         |                                         |            |     |             |             |   |         |              |             |       | 279           |   |       |               |   |     |               |   | 279    |         |   |  |   |        
|                                                                                                                    | Net loss                                |            |      |            |             |   |          | (10,670      | )           |       |               |  |       |               |    |    |               |   |        | (10,670 | ) |  | $ | (10,670 | )
|                                                                                                                    | Foreign currency translation adjustment |            |      |            |             |   |          |             |             |       |               |  |       |               |    | (1  | )             |   |        | (1      | ) |  |   | (1      | )
|                                                                                                                    |                                         |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |  
|                                                                                                                    | Comprehensive loss                      |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |   |        |         |   |  | $ | (10,671 | )
|                                                                                                                    |                                         |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |  
|Balance  December 31,
	1999                                                                                        |                                         |            | (106 | )           |             |   | (12,813  | )            |             |       | (838          | ) |       |               | (2 | )   |               |   | 2,815  |         |   |  |   |        
|Issuance of 310,217 shares of common stock, net,
	upon exercise of stock options and under stock purchase plan      |                                         |            |     |             |             |   |         |              |             |       |              |   |       |               |   |     |               |   | 123    |         |   |  |   |        
|Issuance of 10,252,879 shares of Series C
	preferred stock for cash and services                                    |                                         |            |     |             |             |   |         |              |             |       |              |   |       |               |   |     |               |   | 22,559 |         |   |  |   |        
|Issuance of 1,136,363 shares of Series D
	preferred stock for
	cash                                                 |                                         |            |     |             |             |   |         |              |             |       |              |   |       |               |   |     |               |   | 5,000  |         |   |  |   |        
|Conversion of preferred stock                                                                                       |                                         |            |     |             |             |   |         |              |             |       |              |   |       |               |   |     |               |   |       |         |   |  |   |        
|Issuance of 6,000,000 shares of common stock for
	initial public offering net of $1.6 million in offering
	expenses |                                         |            |     |             |             |   |         |              |             |       |              |   |       |               |   |     |               |   | 48,620 |         |   |  |   |        
|Issuance of 900,000 shares of common stock for
	underwriters over-allotment                                        |                                         |            |     |             |             |   |         |              |             |       |              |   |       |               |   |     |               |   | 7,533  |         |   |  |   |        
|Issuance of 813,008 shares of common stock for
	acquisition of Talaria Therapeutics, Inc.                           |                                         |            |     |             |             |   |         |              |             |       |              |   |       |               |   |     |               |   | 7,317  |         |   |  |   |        
|Deferred stock compensation related to stock
	options                                                               |                                         |            |     |             |             |   |         |              |             |       | (2,950        | ) |       |               |    |     |               |   |       |         |   |  |   |        
|Amortization of deferred stock compensation                                                                         |                                         |            |     |             |             |   |         |              |             |       | 1,014         |   |       |               |   |     |               |   | 1,014  |         |   |  |   |        
|Decrease in notes receivable                                                                                        |                                         |            | 39   |             |             |   |         |              |             |       |              |   |       |               |   |     |               |   | 39     |         |   |  |   |        
|                                                                                                                    | Net loss                                |            |      |            |             |   |          | (27,576      | )           |       |               |  |       |               |    |    |               |   |        | (27,576 | ) |  | $ | (27,576 | )
|                                                                                                                    | Foreign currency translation adjustment |            |      |            |             |   |          |             |             |       |               |  |       |               |    | 247 |               |   |        | 247     |   |  |   | 247     |  
|                                                                                                                    |                                         |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |  
|                                                                                                                    | Comprehensive loss                      |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |   |        |         |   |  | $ | (27,329 | )
|                                                                                                                    |                                         |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |  

38



---



##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES

(A Company in the Development Stage)


CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY  (Continued)

|                                                                                                             |                                                   |                                         |             |             |           |   |        |            |   |         |    |   |   |   |         |     |   | 
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------- | --------------------------------------- | ----------- | ----------- | --------- | - | ------ | ---------- | - | ------- | -- | - | - | - | ------- | --- | - | 
|                                                                                                             |                                                   |                                         |             | Convertible |           |   |        | Additional |  
|                                                                                                             |                                                   | Date of                                 |             |             | Preferred |   | Common |            |   | Paid-In |   
|                                                                                                             |                                                   | Transaction                             |             |             | Stock     |   | Stock  |            |   | Capital |   
|In thousands, except share data                                                                              |                                                   |                                         |             |             |           |   |        |            |   |         |   
|Balance  December 31,
	2000                                                                                 |                                                   |                                         |             |             |           |   |       |            |   |         | 26 |   |   |   | 110,650 |    
|Issuance of 185,216 shares of common stock, net,
	upon                                                       |                                                   |                                         | January 5-  |             |           |   |        |            |   |         |    |   |   |   |         |    
|                                                                                                             | exercise of options and under stock purchase plan |                                         |             | December 31 |           |   |        |           |   |         |    |  |   |   |         | 198 |  
|Issuance of 58,626 shares of common stock for
	milestone payment to Talaria Therapeutics, Inc.               |                                                   |                                         | January 8   |             |           |   |       |            |   |         |   |   |   |   | 447     |    
|Issuance of 3,183,335 shares of common stock for
	private placement net of $1.5 million in offering expenses |                                                   |                                         | July 27     |             |           |   |       |            |   |         | 3  |   |   |   | 22,339  |    
|Forgiveness of notes receivable                                                                              |                                                   |                                         |             |             |           |   |       |            |   |         |   |   |   |   |        |    
|Retirement of Talaria Indemnity Shares                                                                       |                                                   |                                         | November 15 |             |           |   |       |            |   |         |   |   |   |   | (91     | )  
|Deferred stock compensation adjustment                                                                       |                                                   |                                         | December 1  |             |           |   |       |            |   |         |   |   |   |   | (400    | )  
|Amortization of deferred stock compensation                                                                  |                                                   |                                         |             |             |           |   |       |            |   |         |   |   |   |   |        |    
|Decrease in notes receivable                                                                                 |                                                   |                                         |             |             |           |   |       |            |   |         |   |   |   |   |        |    
|                                                                                                             |                                                   | Net loss                                |             |             |           |   |        |            |  |         |    |   |  |   |         |     |  | 
|                                                                                                             |                                                   | Foreign currency translation adjustment |             |             |           |   |        |            |  |         |    |   |  |   |         |     |  | 
|                                                                                                             |                                                   |                                         |             |             |           |   |        |            |   |         |    |  
|                                                                                                             |                                                   | Comprehensive loss                      |             |             |           |   |        |            |   |         |    |   |   |   |         |     |   | 
|Balance  December 31,
	2001                                                                                 |                                                   |                                         |             |             |           | $ |       |            |   | $       | 29 |   |   | $ | 133,143 |    
|                                                                                                             |                                                   |                                         |             |             |           |   |        |            |   |         |    |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                             |                                                   |                                         |     |             |             |   |          |              |             |       |               |   |       |               |     |   |               |   |        |     |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------- | --------------------------------------- | --- | ----------- | ----------- | - | -------- | ------------ | ----------- | ----- | ------------- | - | ----- | ------------- | --- | - | ------------- | - | ------ | --- | ------- | - |  | - | ------- | -
|                                                                                                             |                                                   |                                         |     | Accumulated |             |   |          |              |             |       |               |   |      
|                                                                                                             |                                                   |                                         |     | Deficit     |             |   |          |              | Accumulated |       |               |   |       |              
|                                                                                                             |                                                   |                                         |     | During the  |             |   | Deferred |              |             | Other |               |   | Total |               |     |  
|                                                                                                             |                                                   | Notes                                   |     |             | Development |   |          | Stock        |             |       | Comprehensive |   |       | Stockholders |     |   | Comprehensive |  
|                                                                                                             |                                                   | Receivable                              |     |             | Stage       |   |          | Compensation |             |       | Income/(Loss) |   |       | Equity        |     |   | Loss          |  
|In thousands, except share data                                                                              |                                                   |                                         |     |             |             |   |          |              |             |       |               |   |       |               |     |   |               |  
|Balance  December 31,
	2000                                                                                 |                                                   |                                         | (67 | )           |             |   | (40,389  | )            |             |       | (2,774        | ) |       |               | 245 |   |               |   | 67,691 |     |         |   |  |  
|Issuance of 185,216 shares of common stock, net,
	upon                                                       |                                                   |                                         |     |             |             |   |          |              |             |       |               |   |       |               |     |   |               |   |        |     |         |   |  |  
|                                                                                                             | exercise of options and under stock purchase plan |                                         |     |            |             |   |          |             |             |       |               |  |       |               |     |  |               |   |        | 198 |         |   |  |   |        
|Issuance of 58,626 shares of common stock for
	milestone payment to Talaria Therapeutics, Inc.               |                                                   |                                         |    |             |             |   |         |              |             |       |              |   |       |               |    |   |               |   | 447    |     |         |   |  |  
|Issuance of 3,183,335 shares of common stock for
	private placement net of $1.5 million in offering expenses |                                                   |                                         |    |             |             |   |         |              |             |       |              |   |       |               |    |   |               |   | 22,342 |     |         |   |  |  
|Forgiveness of notes receivable                                                                              |                                                   |                                         | 38  |             |             |   |         |              |             |       |              |   |       |               |    |   |               |   | 38     |     |         |   |  |  
|Retirement of Talaria Indemnity Shares                                                                       |                                                   |                                         |    |             |             |   |         |              |             |       |              |   |       |               |    |   |               |   | (91    | )   |         |   |  |  
|Deferred stock compensation adjustment                                                                       |                                                   |                                         |    |             |             |   |         |              |             |       | 400           |   |       |               |    |   |               |   |       |     |         |   |  |  
|Amortization of deferred stock compensation                                                                  |                                                   |                                         |    |             |             |   |         |              |             |       | 898           |   |       |               |    |   |               |   | 898    |     |         |   |  |  
|Decrease in notes receivable                                                                                 |                                                   |                                         | 14  |             |             |   |         |              |             |       |              |   |       |               |    |   |               |   | 14     |     |         |   |  |  
|                                                                                                             |                                                   | Net loss                                |     |             |            |   |          |              | (24,931     | )     |               |   |      |               |     |   |              |   |        |     | (24,931 | ) |  | $ | (24,931 | )
|                                                                                                             |                                                   | Foreign currency translation adjustment |     |             |            |   |          |              |            |       |               |   |      |               |     |   | (108          | ) |        |     | (108    | ) |  |   | (108    | )
|                                                                                                             |                                                   |                                         |     |             |             |   |          |              |             |       |               |   |       |               |     |   |               |  
|                                                                                                             |                                                   | Comprehensive loss                      |     |             |             |   |          |              |             |       |               |   |       |               |     |   |               |   |        |     |         |   |  | $ | (25,039 | )
|                                                                                                             |                                                   |                                         |     |             |             |   |          |              |             |       |               |   |       |               |     |   |               |  
|Balance  December 31,
	2001                                                                                 |                                                   | $                                       | (15 | )           |             | $ | (65,320  | )            |             | $     | (1,476        | ) |       | $             | 137 |   |               | $ | 66,498 |     |         |   |  |  
|                                                                                                             |                                                   |                                         |     |             |             |   |          |              |             |       |               |   |       |               |     |   |               |  

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

39



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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES

(A Company in the Development Stage)







CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                 |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |         |       |        |        |         |        |         |  
|------------------------------------------------ | ----------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------- | ------- | ------------ | ------- | ------ | ------------ | ------ | ------- | ------------ | ------- | ----- | ------ | ------ | ------- | ------ | ------- | -
|                                                 |                                                                               | Year Ended                                    |                                           |         | Year Ended   |         |        | Year Ended   |        |         | Inception to |        
|                                                 |                                                                               | December 31,                                  |                                           |         | December 31, |         |        | December 31, |        |         | December 31, |        
|                                                 |                                                                               | 2001                                          |                                           |         | 2000         |         |        | 1999         |        |         | 2001         |        
|In thousands                                     |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |        
|Cash Flows from Operating Activities:            |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |         |       |        |        |        
|                                                 | Net loss                                                                      |                                               | $                                         | (24,931 | )            |         | $      | (27,576      | )      |         | $            | (10,670 | )     |        | $      | (65,320 | )     
|                                                 | Adjustments to reconcile net loss to net cash
	used in operating activities  |                                               |                                           |         |              |         |        |              |        |         |              |         |       |        |        |         |       
|                                                 |                                                                               | Purchased in-process research and development |                                           |         |             |         |        |              | 4,000  |         |              |         |      |        |        |         | 4,000  |        
|                                                 |                                                                               | Depreciation and amortization                 |                                           |         | 2,014        |         |        |              | 1,036  |         |              |         | 404   |        |        |         | 3,522  |        
|                                                 |                                                                               | Stock-based compensation expense              |                                           |         | 898          |         |        |              | 1,427  |         |              |         | 554   |        |        |         | 2,879  |        
|                                                 |                                                                               | Decrease in notes receivable                  |                                           |         | 52           |         |        |              | 39     |         |              |         | 20    |        |        |         | 111    |        
|                                                 |                                                                               | Loss on sale of furniture and equipment       |                                           |         | 22           |         |        |              |       |         |              |         |      |        |        |         | 22     |        
|                                                 |                                                                               | Non-cash interest included in long-term debt  |                                           |         | 243          |         |        |              | 145    |         |              |         | 15    |        |        |         | 403    |        
|                                                 | Increase (decrease) in cash resulting from
	changes in                       |                                               |                                           |         |              |         |        |              |        |         |              |         |       |        |        |         |       
|                                                 |                                                                               | Prepaid expenses and other                    |                                           |         | (440         | )       |        |              | (1,256 | )       |              |         | (63   | )      |        |         | (1,834 | )      
|                                                 |                                                                               | Other assets                                  |                                           |         | 6            |         |        |              | (85    | )       |              |         |      |        |        |         | (79    | )      
|                                                 |                                                                               | Accounts payable                              |                                           |         | (816         | )       |        |              | 2,619  |         |              |         | 1,317 |        |        |         | 3,198  |        
|                                                 |                                                                               | Accrued liabilities                           |                                           |         | 185          |         |        |              | 1,697  |         |              |         | 571   |        |        |         | 2,600  |        
|                                                 |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |        
|                                                 |                                                                               |                                               | Net cash used in operating activities     |         |              | (22,767 | )      |              |        | (17,954 | )            |         |       | (7,852 | )      |         |        | (50,498 | )
|                                                 |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |        
|Cash Flows from Investing Activities:            |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |         |       |        |        |        
|                                                 | Purchases of furniture and equipment                                          |                                               |                                           | (2,023  | )            |         |        | (1,341       | )      |         |              | (1,563  | )     |        |        | (5,791  | )     
|                                                 | Deposit on equipment                                                          |                                               |                                           | (107    | )            |         |        | (450         | )      |         |              |        |       |        |        | (557    | )     
|                                                 | Acquisition of Talaria Therapeutics,
	Inc.                                    |                                               |                                           |        |              |         |        | (233         | )      |         |              |        |       |        |        | (233    | )     
|                                                 | Proceeds from sale of furniture and equipment                                 |                                               |                                           | 2       |              |         |        |             |        |         |              |        |       |        |        | 2       |       
|                                                 |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |        
|                                                 |                                                                               |                                               | Net cash used in investing activities     |         |              | (2,128  | )      |              |        | (2,024  | )            |         |       | (1,563 | )      |         |        | (6,579  | )
|                                                 |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |        
|Cash Flows from Financing Activities:            |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |         |       |        |        |        
|                                                 | Net proceeds from issuance of convertible
	preferred stock                    |                                               |                                           |        |              |         |        | 26,871       |        |         |              |        |       |        |        | 42,200  |       
|                                                 | Proceeds from issuance of common stock                                        |                                               |                                           | 22,449  |              |         |        | 56,276       |        |         |              |        |       |        |        | 78,727  |       
|                                                 | Proceeds from long-term debt                                                  |                                               |                                           | 3,523   |              |         |        | 1,489        |        |         |              | 3,027   |       |        |        | 8,039   |       
|                                                 | Repayments of long-term debt                                                  |                                               |                                           | (956    | )            |         |        | (518         | )      |         |              | (248    | )     |        |        | (1,722  | )     
|                                                 |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |        
|                                                 |                                                                               |                                               | Net cash provided by financing activities |         |              | 25,016  |        |              |        | 84,118  |              |         |       | 2,779  |        |         |        | 127,244 |  
|                                                 |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |        
|Effect of Exchange Rate Changes on Cash          |                                                                               |                                               | (63                                       | )       |              |         | 184    |              |        |         | (1           | )       |       |        | 119    |        
|                                                 |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |        
|Increase (Decrease) in Cash and Cash Equivalents |                                                                               |                                               | 58                                        |         |              |         | 64,324 |              |        |         | (6,637       | )       |       |        | 70,286 |        
|Cash and Cash Equivalents  Beginning
	of Period |                                                                               |                                               | 70,228                                    |         |              |         | 5,904  |              |        |         | 12,541       |         |       |        |       |        
|                                                 |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |        
|Cash and Cash Equivalents  End of
	Period       |                                                                               | $                                             | 70,286                                    |         |              | $       | 70,228 |              |        | $       | 5,904        |         |       | $      | 70,286 |        
|                                                 |                                                                               |                                               |                                           |         |              |         |        |              |        |         |              |        

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

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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES

(A Company in the Development Stage)







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(1) Description of the Business

Esperion Therapeutics, Inc. (formerly Metapharma,
Inc.) was incorporated on May 18, 1998. Esperion
Therapeutics, Inc. and its subsidiaries, Esperion AB and
Esperion LUV Development, Inc. (collectively referred to as
the Company), are devoting substantially all of
their efforts towards conducting drug discovery and development,
initiating and overseeing clinical trials, pursuing regulatory
approval for products under development, recruiting personnel,
raising capital, and building infrastructure. The Companys
main focus is the research and development of pharmaceutical
product candidates for cardiovascular and metabolic diseases.

In the course of such activities, the Company has
sustained significant operating losses and expects such losses,
which will likely increase as the Company expands its research
and development activities, to continue for at least the next
several years. The Company has not generated any revenues or
product sales and has not achieved profitable operations or
positive cash flows from operations. The Companys
accumulated deficit during the development stage totaled
approximately $65.3 million through December 31, 2001.
The Company plans to finance its operations with a combination
of stock issuances, license payments, and payments from
strategic research and development arrangements and, if its
product candidates are commercialized, with revenues from
product sales. There are no assurances that the Company will be
successful in obtaining an adequate level of financing needed
for the long-term development and commercialization of its
planned products.

(2) Significant Accounting
Policies

Principles
of Consolidation and Translation

The accompanying consolidated financial
statements include the accounts of Esperion Therapeutics, Inc.,
Esperion AB (Sweden) and Esperion LUV
Development, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.

The financial statements of Sweden are translated
using exchange rates in effect at the end of the period for
assets and liabilities and at average rates during the period
for results of operations. The resulting foreign currency
translation adjustment is reflected as a separate component of
stockholders equity. Other foreign currency transaction
gains totaled approximately $400,000, $201,000 and $0 for the
year ended December 31, 2001, 2000 and 1999, respectively,
and are included in other income in the statement of operations.

Research
and Development

Research and development expenses include both
external and internal costs related to the research and
development activities of our existing product candidates as
well as discovery efforts on potential new product candidates.
External costs include costs related to manufacturing, clinical
trials, toxicology or pharmacology studies performed by third
parties, milestone payments under certain license agreements and
other related expenses. Internal costs include all payroll and
related costs attributable to research and development
activities, as well as an allocation of overhead expenses
incurred by the Company.

Licensed
Technology and Patents

Costs incurred in obtaining the license rights to
certain technology and patents in the development stage are
expensed as incurred due to the uncertainty regarding potential
alternative future uses and the uncertainty regarding future
operating cash flows expected to be derived from the licensed
technology and patents.

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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Cash
and Cash Equivalents

The Company considers all financial instruments
purchased with initial maturities of three months or less to be
cash equivalents.

Furniture
and Equipment

Additions to furniture and equipment are recorded
at cost. Depreciation is provided using the straight-line method
over the estimated useful lives of the respective assets ranging
from three to seven years.

Goodwill

Goodwill represents the unamortized cost in
excess of fair value of net assets acquired. In July 2001,
the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142), which
primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The provisions for
SFAS 142 will be effective for the Companys fiscal
year beginning January 1, 2002. This statement is
summarized in New Accounting Pronouncements below.

Impairment
of Long-Lived Assets

In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, if indicators of
impairment exist, the Company assesses the recoverability of the
affected long-lived assets by determining whether the carrying
value of such assets can be recovered through undiscounted
future operating cash flows. If impairment is indicated, the
Company measures the amount of such impairment by comparing the
carrying value of the assets to the present value of the
expected future cash flows associated with the use of the asset.
The Companys long-lived assets consist primarily of
goodwill and computer and lab equipment that are amortized or
depreciated over short useful lives to prevent impairment
issues. The Company has not recognized any impairment losses
through December 31, 2001.

Accrued
Liabilities

Accrued liabilities consist of the following (in
thousands):

|                          |  |              |       |  |      |   |       | 
|------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                          |  |             
|                          |  | Year Ended   |      
|                          |  | December 31, |      
|                          |  |              |      
|                          |  | 2001         |       |  | 2000 |  
|                         
|                          | 
|Accrued external costs    |  | $            | 1,511 |  |      | $ | 1,211 | 
|Accrued professional fees |  |              | 226   |  |      |   | 828   | 
|Accrued compensation      |  |              | 649   |  |      |   | 406   | 
|Accrued other             |  |              | 186   |  |      |   | 81    | 
|                          |  |              |       |  |      |  
|                          |  | $            | 2,572 |  |      | $ | 2,526 | 
|                          |  |              |       |  |      |  

Stock-Based
Compensation

The Company accounts for stock-based compensation
to employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issued to
Employees, and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess,
if any, of the fair value of the Companys common stock as
of the date of the grant over the amount the employee must pay
to acquire the stock. As supplemental information, the Company
has provided pro forma

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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

disclosures of stock options in Note 5, in
accordance with the requirements of SFAS No. 123,
Accounting for Stock-Based Compensation.

Supplemental
Disclosures of Cash Flow Information

The Company paid cash for interest of
approximately $526,000, $282,000, $66,000, and $874,000 in 2001,
2000, 1999 and the period from inception to December 31,
2001, respectively.

Basic,
Diluted and Pro Forma Net Loss per Share

Basic and diluted net loss per share amounts have
been calculated using the weighted average number of shares of
common stock outstanding during the respective periods. Pro
forma basic and diluted net loss per share amounts include the
shares used in computing basic and diluted net loss per share
and the assumed conversion of all outstanding shares of
preferred stock from the original date of issuance.

The following table presents the calculation of
pro forma basic and diluted net loss per share:

|                                                                                                          |  |              |            |   |      |   |           |  
|--------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | --------- | -
|                                                                                                          |  |             
|                                                                                                          |  | December 31, |           
|                                                                                                          |  |              |           
|In thousands, except share and per share data                                                             |  | 2000         |            |   | 1999 |  
|                                                                                                         
|                                                                                                          | 
|Net loss attributable to common stockholders                                                              |  | $            | (50,446    | ) |      | $ | (10,670   | )
|                                                                                                          |  |              |            |   |      |  
|Shares used in computing basic and diluted net
	loss per share                                            |  |              | 11,222,319 |   |      |   | 1,806,255 |  
|Pro forma adjustment to reflect assumed
	conversion of Series A and Series B convertible
	preferred stock |  |              | 4,614,965  |   |      |   | 7,586,244 |  
|Pro forma adjustment to reflect assumed
	conversion of Series C and Series D convertible
	preferred stock |  |              | 4,766,029  |   |      |   |          |  
|                                                                                                          |  |              |            |   |      |  
|Shares used in computing pro forma basic and
	diluted net loss per share                                  |  |              | 20,603,313 |   |      |   | 9,392,499 |  
|                                                                                                          |  |              |            |   |      |  
|Pro forma basic and diluted net loss per share                                                            |  | $            | (2.45      | ) |      | $ | (1.14     | )
|                                                                                                          |  |              |            |   |      |  

In 2001, 2000 and 1999, 502,516, 898,736, and
0 options, respectively, for the purchase of common stock
were not included in the calculation of diluted loss per share
as doing so would have been anti-dilutive.

Comprehensive
Loss

Effective in 1998, the Company adopted SFAS
No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements.
Comprehensive loss is the total of net loss and all other
non-owner changes in equity. The difference between net loss, as
reported in the accompanying consolidated statements of
operations, and comprehensive loss is the foreign currency
translation adjustment for the respective periods. Accumulated
other comprehensive loss consists solely of the cumulative
translation adjustment as presented in the accompanying
consolidated balance sheets.

New
Accounting Pronouncements

SFAS 141 supersedes Accounting Principles
Board Opinion No. 16, Business Combinations.
The most significant changes made by SFAS 141 are
(1) requiring that the purchase method of accounting be
used for all business combinations initiated after June 30,
2001, (2) establishing specific criteria for the
recognition of intangible assets separately from goodwill, and
(3) requiring unallocated negative goodwill to be written
off immediately as an extraordinary gain (rather than being
deferred and amortized).

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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

SFAS 142 supersedes Accounting Principles
Board Opinion No. 17, Intangible Assets, and
primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The most significant
changes made by SFAS 142 are that: (1) goodwill and
indefinite lived intangible assets will no longer be amortized,
(2) goodwill will be tested for impairment at least
annually at the reporting level, (3) intangible assets
deemed to have an indefinite life will be tested for impairment
at least annually, and (4) the amortization of intangible
assets with finite lives will no longer be limited to forty
years. SFAS 142 also specifies that certain intangible
assets that were previously identified as separate from goodwill
(i.e., assembled workforce) are not considered separately
identifiable for purposes of this standard and should be
included as part of goodwill and subject to the non-amortization
provisions for SFAS 142.

The provisions of SFAS 142 will be effective
for the Companys fiscal year beginning January 1,
2002. At effectiveness, an evaluation of goodwill will be
required, and any impairment of goodwill at that time will be
recognized as a cumulative effect of adoption. Total goodwill
included in the Companys Consolidated Financial Statements
was $3.1 million at December 31, 2001 and
$3.5 million at December 31, 2000. Goodwill
amortization expense was $839,000 and $250,000 for the years
ended December 31, 2001 and 2000, respectively. As a result
of the non-amortization provisions of SFAS 142, goodwill
amortization expense will be eliminated effective
January 1, 2002. In addition, based on managements
current financial projections, management does not believe that
goodwill and other intangibles are currently impaired. The
Company will perform a more detailed assessment in the first
quarter of 2002 to determine the effect of this new standard.

SFAS 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of and the accounting and
reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions for the
disposal of a segment of a business (as previously defined in
that Opinion). SFAS 144 is effective for the Companys
fiscal year beginning January 1, 2002 and is not expected
to have a material impact upon effectiveness.

Use
of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported
amounts of expenses during the reporting period. Actual results
could differ from those estimates.

Reclassifications

Certain amounts from the 2000 and 1999 financial
statements have been reclassified to conform to the 2001
presentation.

(3) Stockholders Equity

On March 24, 2000, the stockholders of the
Company approved an amendment and restatement to the
Companys certificate of incorporation that, as of
August 9, 2000, effected (i) an increase in the
authorized shares of common stock to 50,000,000, and (ii) a
reduction in the authorized shares of preferred stock from
15,000,000 to 5,000,000. All references in the consolidated
financial statements and accompanying notes have also been
adjusted to reflect the amendment and restatement of the
certificate of incorporation.

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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Reverse
Stock Split

The Company effected a 0.7225-for-1 reverse stock
split of all outstanding common stock and stock options as of
March 24, 2000. All references to the number of shares and
per share amounts have been retroactively restated to reflect
this reverse stock split.

Common
Stock

Holders of common stock are entitled to one vote
per share on all matters submitted to a vote of holders of
shares of common stock, and do not have any cumulative voting
rights. In the event of a liquidation, dissolution, or
winding-up of the Company, the holders of shares of common stock
are entitled to share equally and ratably in the assets of the
Company, if any, remaining after payment of debts and
liabilities of the Company, subject to prior liquidation rights
of any outstanding shares of preferred stock.

In July 2001, the Company completed a private
placement of its stock, which resulted in the issuance of
3,183,335 shares of common stock at $7.50 per share. The net
proceeds from the private placement were approximately
$22.3 million. In August 2001, the Company filed a
Registration Statement under the Securities Act of 1933, as
amended, to register the resale of these shares by the
purchasers of such shares. The Registration Statement was
declared effective by the Securities and Exchange Commission on
September 4, 2001.

In August 2000, the Company completed the initial
public offering of its common stock, which resulted in the
issuance of 6,000,000 shares of common stock at $9.00 per share.
In connection with the offering, all of the outstanding
preferred stock was converted to common stock. In September
2000, an additional 900,000 shares of common stock were sold by
the Company at $9.00 per share to cover the underwriters
over-allotment. As a result of those sales, the Company received
net proceeds of approximately $56.3 million.

Preferred
Stock

The Board of Directors is authorized to issue up
to 5,000,000 shares of preferred stock in one or more series.
Under each issuance of a series of preferred stock, the Board of
Directors is permitted to fix the designations, preferences,
powers and relative rights and restrictions thereof, including
without limitation, the dividend rate, conversion rights, voting
rights, redemption price, and liquidation preference.

Conversion
of Preferred Stock

In connection with the initial public offering,
each of the Companys outstanding shares of Series A,
Series B, Series C and Series D preferred stock
(Series A, Series B,
Series C and Series D,
respectively, together Preferred Stock) was
automatically converted into approximately 0.7225 shares of
common stock.

Series C
and Series D

In January and February 2000, the Company issued
shares of Series C and Series D. Total cash proceeds
to the Company were approximately $21.9 million and
$5.0 million relating to the issuance of 10,252,879 shares
of Series C and 1,136,363 shares of Series D,
respectively. As a part of the Series C, the Company issued
127,414 shares to the chief executive officer and another member
of the Board of Directors for services rendered to the Company
during 1999. The Company recorded the related expense of
$275,215 as an increase to compensation expense during 1999.

In accordance with EITF 98-5, the Company
recorded approximately $22.9 million relating to the
beneficial conversion feature of the Series C and
Series D in the first quarter of fiscal 2000 through equal
and

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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

offsetting adjustments to additional paid-in
capital with no net impact on stockholders equity, as the
preferred stock was convertible immediately on the date of
issuance. The beneficial conversion feature was considered in
the determination of the Companys loss per common share
amounts. The Company also recorded an additional $412,819
relating to the Series C shares issued to the chief
executive officer and a Board member in the first quarter of
fiscal 2000. This non-cash charge was reflected through entries
to compensation expense and additional paid-in-capital.

(4) Acquisition

On September 21, 2000, the Company acquired
all of the outstanding shares of stock of Talaria Therapeutics,
Inc. (Talaria) in exchange for the issuance of
813,008 shares of the Companys restricted common stock to
Talaria stockholders, valued at a price of $9.00 per share.
Additionally, the merger agreement provides for the following
additional consideration to Talaria stockholders:
(i) payment by the Company of up to $6.3 million in
cash and/or common stock based on the achievement of four
development milestones; and (ii) payment by the Company of
royalties in cash and/or common stock based on net annual sales
of large unilamellar vesicles, or LUV, in North America. The
milestones are due upon the enrollment of the first patient in
certain clinical trials and upon each of the filing and approval
of a new drug application in the United States. On
January 8, 2001, the Company achieved the first of the
milestones. This milestone payment was settled through the
issuance of 58,626 shares of restricted common stock with an
aggregate value of $447,000. This milestone payment was
accounted for as an increase in the purchase price and added to
goodwill during the first quarter of 2001. The royalty payments
will be included in cost of sales in the period when the
respective sales are recognized. The combined milestone payments
and royalties are subject to a maximum aggregate ceiling of
$20.0 million.

The acquisition was accounted for under the
purchase method of accounting. In connection with this
acquisition, the Company recorded a non-cash charge to
operations in 2000 of $4.0 million, associated with the
write-off of in-process research and development acquired in the
transaction that had not reached technological feasibility. The
allocation of the purchase price was based on an independent
appraisal of the fair values on the closing date. The Company
recorded approximately $3.75 million as goodwill,
representing the excess of the purchase price over the fair
value of net assets acquired. This amount included $265,000 of
acquisition-related costs. The operating results of Talaria have
been included in the consolidated results of operations from the
date of the merger.

The purchase price allocation based on the net
assets of Talaria at the closing date is as follows
(in thousands):

|                                    |                      |   |       |       | 
|----------------------------------- | -------------------- | - | ----- | ----- | 
|Net assets (liabilities)            |                      | $ | (168  | )    
|In-process research and development |                      |   | 4,000 |      
|Goodwill                            |                      |   | 3,750 |      
|                                    |                      |   |      
|                                    | Total purchase price |   | $     | 7,582 | 
|                                    |                      |   |      

The unaudited pro forma operations for the years
ended December 31, 2000 and 1999, set forth below, reports
results as if the Company and Talaria had been combined as of
the beginning of each year. The pro forma results include
estimates and assumptions which management believes are
reasonable. However, pro forma results do not include the
write-off of in-process research and development, any
anticipated cost savings or other effects of the planned
integration of the Company and Talaria, and are not necessarily
indicative of

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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the results which would have occurred if the
business combination had been in effect for the periods
presented below, or which may result in the future.

|                                                               |  |                         |            |   |      |   |           |  
|-------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | --------- | -
|                                                               |  |                        
|                                                               |  | Pro forma               |           
|                                                               |  | Year ended December 31, |           
|                                                               |  |                         |           
|In thousands, except per share data                            |  | 2000                    |            |   | 1999 |  
|                                                              
|                                                               | 
|Operating expenses                                             |  | $                       | 27,941     |   |      | $ | 13,834    |  
|                                                               |  |                         |            |   |      |  
|Net loss                                                       |  |                         | (29,682    | ) |      |   | (13,438   | )
|                                                               |  |                         |            |   |      |  
|Basic and diluted net loss per share                           |  | $                       | (2.51      | ) |      | $ | (5.13     | )
|                                                               |  |                         |            |   |      |  
|Shares used in computing basic and diluted net
	loss per share |  |                         | 11,809,492 |   |      |   | 2,619,263 |  
|                                                               |  |                         |            |   |      |  

(5) Equity Compensation Plans

2000
Equity Compensation Plan

In 2000, the Company established the 2000 Equity
Compensation Plan (as amended and restated, the
2000 Plan). The 2000 Plan provides for
grants of incentive stock options, nonqualified stock options,
stock awards and performance units to the Companys
employees, advisors, consultants and non-employee directors.

The 2000 Plan authorizes the issuance of up
to 1,700,000 shares of common stock. No stock awards or
performance units have been granted to date under the
2000 Plan. Grants may be made to any of the Companys
employees, members of our board of directors, and consultants
and advisors who perform services for us. The exercise price of
stock options will be determined by the compensation committee,
and may be equal to or greater than the fair market value of the
Companys common stock on the date the option is granted.

Options generally become exercisable over a
period of four years from the date of grant, and expire ten
years after the grant date. Activity related to stock options
under the 2000 Plan is summarized as follows:

|                                 |                   |           |         |          |          |   |       |       | 
|-------------------------------- | ----------------- | --------- | ------- | -------- | -------- | - | ----- | ----- | 
|                                 |                   |           |         | Weighted |         
|                                 |                   |           |         | Average  |         
|                                 |                   | Number of |         |          | Exercise |  
|                                 |                   | Shares    |         |          | Price    |  
|                                 |                   |           |         |          |          |  
|Outstanding at December 31, 1999 |                   |           |        |          |          |   |       |      
|                                 | Options granted   |           |         | 160,000  |          |   | $     | 11.53 | 
|                                 | Options cancelled |           |         |         |          |   |       |       | 
|                                 | Options exercised |           |         |         |          |   |       |       | 
|                                 |                   |           |         |          |          |  
|Outstanding at December 31, 2000 |                   |           | 160,000 |          |          | $ | 11.53 |      
|                                 | Options granted   |           |         | 609,125  |          |   | $     | 7.01  | 
|                                 | Options cancelled |           |         | (25,000  | )        |   | $     | 7.16  | 
|                                 | Options exercised |           |         |         |          |   |       |       | 
|                                 |                   |           |         |          |          |  
|Outstanding at December 31, 2001 |                   |           | 744,125 |          |          | $ | 7.98  |      
|                                 |                   |           |         |          |          |  

As of December 31, 2001, there were 955,875
shares of common stock available for issuance under the
2000 Plan.

1998
Stock Option Plan

In 1998, the Company established the 1998 Stock
Option Plan (the 1998 Plan) to increase its
ability to attract and retain key individuals. Options granted
under the 1998 Plan may be either incentive stock options,

47



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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

which are granted at the fair market value of the
common stock on the date of grant or higher (as determined under
the plan), or nonqualified stock options, which may be granted
at less than the fair market value of the common stock on the
date of grant. Options are granted at the discretion of the
Board of Directors. The maximum number of shares that may be
granted under the 1998 Plan is 1,784,575. Options granted
generally become exercisable over a period of four years from
the date of grant. Outstanding options generally expire nine
years after the date of grant.

Activity related to stock options under the 1998
Plan is summarized as follows:

|                                 |                   |           |           |          |          |   |      |      | 
|-------------------------------- | ----------------- | --------- | --------- | -------- | -------- | - | ---- | ---- | 
|                                 |                   |           |           | Weighted |         
|                                 |                   |           |           | Average  |         
|                                 |                   | Number of |           |          | Exercise |  
|                                 |                   | Shares    |           |          | Price    |  
|                                 |                   |           |           |          |          |  
|Outstanding at December 31, 1998 |                   |           | 324,763   |          |          | $ | 0.15 |     
|                                 | Options granted   |           |           | 542,867  |          |   | $    | 0.29 | 
|                                 | Options cancelled |           |           |         |          |   |      |      | 
|                                 | Options exercised |           |           |         |          |   |      |      | 
|                                 |                   |           |           |          |          |  
|Outstanding at December 31, 1999 |                   |           | 867,630   |          |          | $ | 0.24 |     
|                                 | Options granted   |           |           | 904,291  |          |   | $    | 4.86 | 
|                                 | Options cancelled |           |           | (5,104   | )        |   | $    | 5.40 | 
|                                 | Options exercised |           |           | (333,966 | )        |   | $    | 0.22 | 
|                                 |                   |           |           |          |          |  
|Outstanding at December 31, 2000 |                   |           | 1,432,851 |          |          | $ | 3.14 |     
|                                 |                   |           |           |          |          |  
|                                 | Options granted   |           |           | 116,846  |          |   | $    | 9.05 | 
|                                 | Options cancelled |           |           | (146,915 | )        |   | $    | 2.54 | 
|                                 | Options exercised |           |           | (222,532 | )        |   | $    | 0.35 | 
|                                 |                   |           |           |          |          |  
|Outstanding at December 31, 2001 |                   |           | 1,180,250 |          |          | $ | 4.33 |     
|                                 |                   |           |           |          |          |  

As of December 31, 2001, there were 47,827
shares of common stock available for issuance under the 1998
Plan.

The options outstanding and exercisable at
December 31, 2001 under both the 1998 and 2000 Plans are as
follows:

|          |              |  |             |          |           |          |             |   |           |  |  |             |     |  |          |  |         |  |  |   |       | 
|--------- | ------------ |  | ----------- | -------- | --------- | -------- | ----------- | - | --------- |  |  | ----------- | --- |  | -------- |  | ------- |  |  | - | ----- | 
|          |              |  |             |          |           | Weighted |             |   |           |  | 
|          |              |  |             | Weighted |           |          | Average     |   |           |  |  | Weighted    |    
|          |              |  |             | Average  |           |          | Contractual |   |           |  |  | Average     |    
|Price Per |              |  | Options     |          |           | Exercise |             |   | Remaining |  |  | Options     |     |  | Exercise | 
|Share     |              |  | Outstanding |          |           | Price    |             |   | Life      |  |  | Exercisable |     |  | Price    | 
|          |              |  |             |          |           |          |             |   |           |  |  |             |     |  |          | 
|          | $0.14-$0.21  |  |             |          | 199,282   |          |             | $ | 0.17      |  |  |             | 6.7 |  |          |  | 96,112  |  |  | $ | 0.16  | 
|          | $0.32-$2.22  |  |             |          | 344,913   |          |             | $ | 2.19      |  |  |             | 8.1 |  |          |  | 148,852 |  |  | $ | 2.19  | 
|          | $2.77-$4.50  |  |             |          | 108,654   |          |             | $ | 3.86      |  |  |             | 8.2 |  |          |  | 41,015  |  |  | $ | 3.38  | 
|          | $4.57        |  |             |          | 297,797   |          |             | $ | 4.57      |  |  |             | 8.2 |  |          |  | 128,941 |  |  | $ | 4.57  | 
|          | $4.75-$6.70  |  |             |          | 328,309   |          |             | $ | 6.09      |  |  |             | 9.5 |  |          |  | 20,703  |  |  | $ | 5.57  | 
|          | $6.75-$9.00  |  |             |          | 397,125   |          |             | $ | 8.48      |  |  |             | 9.0 |  |          |  | 90,184  |  |  | $ | 8.89  | 
|          | $9.94-$18.88 |  |             |          | 248,295   |          |             | $ | 12.52     |  |  |             | 8.1 |  |          |  | 63,811  |  |  | $ | 13.02 | 
|          |              |  |             |          |           |          |             |   |           |  |  |             |     |  |          | 
|          |              |  |             |          | 1,924,375 |          |             | $ | 5.74      |  |  |             | 8.4 |  |          |  | 598,618 |  |  | $ | 4.78  | 
|          |              |  |             |          |           |          |             |   |           |  |  |             |     |  |          | 

48



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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The options outstanding and exercisable at
December 31, 2000 under both the 1998 and 2000 Plans are as
follows:

|          |               |  |             |          |           |          |             |   |           |  |  |             |     |  |          |  |         |  |  |   |       | 
|--------- | ------------- |  | ----------- | -------- | --------- | -------- | ----------- | - | --------- |  |  | ----------- | --- |  | -------- |  | ------- |  |  | - | ----- | 
|          |               |  |             |          |           | Weighted |             |   |           |  | 
|          |               |  |             | Weighted |           |          | Average     |   |           |  |  | Weighted    |    
|          |               |  |             | Average  |           |          | Contractual |   |           |  |  | Average     |    
|Price Per |               |  | Options     |          |           | Exercise |             |   | Remaining |  |  | Options     |     |  | Exercise | 
|Share     |               |  | Outstanding |          |           | Price    |             |   | Life      |  |  | Exercisable |     |  | Price    | 
|          |               |  |             |          |           |          |             |   |           |  |  |             |     |  |          | 
|          | $0.14         |  |             |          | 151,727   |          |             | $ | 0.14      |  |  |             | 7.5 |  |          |  | 37,934  |  |  | $ | 0.14  | 
|          | $0.21         |  |             |          | 364,417   |          |             | $ | 0.21      |  |  |             | 8.3 |  |          |  | 84,648  |  |  | $ | 0.21  | 
|          | $0.32         |  |             |          | 5,418     |          |             | $ | 0.32      |  |  |             | 8.9 |  |          |  | 1,333   |  |  | $ | 0.32  | 
|          | $2.22         |  |             |          | 345,786   |          |             | $ | 2.22      |  |  |             | 9.1 |  |          |  | 61,825  |  |  | $ | 2.22  | 
|          | $2.77-$2.91   |  |             |          | 35,443    |          |             | $ | 2.90      |  |  |             | 5.7 |  |          |  | 32,803  |  |  | $ | 2.91  | 
|          | $4.57         |  |             |          | 299,519   |          |             | $ | 4.57      |  |  |             | 9.2 |  |          |  | 55,612  |  |  | $ | 4.57  | 
|          | $6.18-$9.00   |  |             |          | 304,204   |          |             | $ | 8.83      |  |  |             | 9.6 |  |          |  | 15,839  |  |  | $ | 8.64  | 
|          | $10.88-$18.88 |  |             |          | 86,337    |          |             | $ | 15.33     |  |  |             | 9.9 |  |          |  | 94      |  |  | $ | 10.88 | 
|          |               |  |             |          |           |          |             |   |           |  |  |             |     |  |          | 
|          |               |  |             |          | 1,592,851 |          |             | $ | 3.99      |  |  |             | 8.8 |  |          |  | 290,088 |  |  | $ | 2.23  | 
|          |               |  |             |          |           |          |             |   |           |  |  |             |     |  |          | 

Using the intrinsic value method under APB 25, no
compensation expense has been recognized in the accompanying
consolidated statements of operations for options granted to
employees at fair value. Had compensation expense been
determined based on the fair value at the date of grant
consistent with SFAS No. 123, the reported net loss would
have increased to the following pro forma amounts, which may not
be representative of that to be expected in future years (in
thousands):

|                                  |             |              |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------- | ----------- | ------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                  |             |             
|                                  |             | December 31, |  
|                                  |             |              |  
|                                  |             | 2001         |   |         | 2000 |  |   | 1999    |  
|                                  |             |              |   |         |      |  |   |         |  
|Net loss:                         |             |              |   |         |      |  |   |         |   |  |   |        
|                                  | As Reported |              | $ | (24,931 | )    |  | $ | (50,446 | ) |  | $ | (10,670 | )
|                                  | Pro Forma   |              | $ | (27,010 | )    |  | $ | (51,267 | ) |  | $ | (10,688 | )
|Basic and diluted loss per share: |             |              |   |         |      |  |   |         |   |  |   |        
|                                  | As Reported |              | $ | (0.91   | )    |  | $ | (4.50   | ) |  | $ | (5.91   | )
|                                  | Pro Forma   |              | $ | (0.99   | )    |  | $ | (4.57   | ) |  | $ | (5.92   | )

The fair value of options was estimated at the
date of grant using the Black Scholes Single Option valuation
method under SFAS No. 123 with the following assumptions as
of December 31, 2001, 2000 and 1999, respectively: weighted
average risk free interest rate of 4.27%, 4.98% and 5.32%;
dividend yield of 0%; volatility of 110.67%, 130.22% and 0%; and
expected life of options of five years. The weighted-average
fair values of options granted during 2001, 2000 and 1999 were
$5.60, $5.08 and $0.18 per share, respectively. Option valuation
models require the input of highly subjective assumptions.
Because changes in subjective input assumptions can materially
affect the fair value estimate, in managements opinion,
the existing model does not necessarily provide a reliable
single measure of the fair value of the Companys stock
options.

Deferred
Stock Compensation

The Company recorded approximately
$4.0 million of deferred stock compensation in 2000 and
1999 relating to stock options granted to employees at less than
the board of directors estimate of fair value. These
amounts are included as a reduction in stockholders equity
and are being amortized on a straight-line basis to expense over
the related vesting periods. For the years ended
December 31, 2001, 2000 and 1999, the Company recorded
deferred stock compensation amortization of approximately
$898,000, $1 million and $279,000, respectively, which is
included in operating expenses.

49



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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Employee
Stock Purchase Plan

The Companys Employee Stock Purchase Plan
(the Purchase Plan) was approved by the
Companys Board of Directors in 2000. A total of 500,000
shares of common stock have been reserved for issuance under the
Purchase Plan. The Purchase Plan provides that the Company will
sell shares to employees who elect to participate in the
Purchase Plan at a price equal to 85% of the lesser of the fair
market value of the common stock on the first trading day of an
offering period or the last trading day of such offering period.

Under the Purchase Plan, the Company issued
22,291 and 6,042 shares of common stock in 2001 and 2000,
respectively, to various employees. These shares were issued
with a weighted average price per share of $5.96 and $9.14 as of
December 31, 2001 and 2000, respectively. At
December 31, 2001, there were 471,667 shares of common
stock remaining to be issued under the Purchase Plan.

(6) Income Taxes

As of December 31, 2001 and 2000, the
Company had net operating loss carryforwards of approximately
$41.1 million and $25.2 million, respectively. These
net operating loss carryforwards begin to expire in 2013 through
2021. Additionally, utilization of net operating loss
carryforwards may be limited under Section 382 of the
Internal Revenue Code. These and other deferred income tax
assets are fully reserved by a valuation allowance due to
historical operating losses.

The Companys effective tax rate is 0%,
resulting from losses incurred in the development stage. This
effective rate differs from the statutory rate of 34% due to the
Company providing a valuation allowance against deferred tax
assets, which primarily consists of net operating loss
carryforwards.

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
for financial reporting and the amount used for income tax
purposes. Significant components of the Companys deferred
tax assets are as follows (in thousands):

|                                |  |              |         |   |      |   |         |      |  |   |        |  
|------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                |  |             
|                                |  | December 31, |        
|                                |  |              |        
|                                |  | 2001         |         |   | 2000 |   |         | 1999 | 
|                                |  |              |         |   |      |   |         |      | 
|Start-up costs                  |  | $            | 5,081   |   |      | $ | 3,230   |      |  | $ | 191    |  
|Net operating loss carryforward |  |              | 13,964  |   |      |   | 8,555   |      |  |   | 3,317  |  
|Asset basis differences         |  |              | 73      |   |      |   | 50      |      |  |   | (150   | )
|Less  Valuation allowance      |  |              | (19,118 | ) |      |   | (11,835 | )    |  |   | (3,358 | )
|                                |  |              |         |   |      |   |         |      | 
|                                |  | $            |        |   |      | $ |        |      |  | $ |       |  
|                                |  |              |         |   |      |   |         |      | 

(7) Commitments and
Contingencies



| |                  
| | -----------------
| | Lease Commitments

The Company leases its office space under
operating leases that expire at various dates through
December 2004. Total rent expense under all leases was
approximately $540,000, $505,000, and $386,000 in 2001, 2000 and
1999, respectively. Future minimum payments under noncancellable
operating leases at December 31, 2001, are as follows (in
thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2002 |  | $ | 761   | 
|2003 |  |   | 487   | 
|2004 |  |   | 27    | 
|     |  |   |      
|     |  | $ | 1,275 | 
|     |  |   |      

50



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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                   
| | ------------------
| | License Agreements

In June 1998, the Company entered into a
license agreement with a pharmaceutical company for one of the
Companys product candidates. The Company paid initial
license fees of $750,000 under the agreement and may be
obligated to make additional payments of up to
$14.5 million in the aggregate upon reaching certain
milestones.

In March 1999, the Company entered into a
license agreement with a pharmaceutical company for one of the
Companys product candidates. During 2001, the Company paid
$100,000 upon obtaining the first milestone under the agreement
and may be obligated to make additional payments of up to
$6.2 million in the aggregate upon reaching certain other
milestones.

In September 1999, the Company entered into
a license agreement with a group of inventors for one of the
Companys product candidates. The initial license fee of
$50,000 was paid in 2000. The Company paid $50,000 upon reaching
the first milestone in 2001 and may be obligated to make
additional payments of up to $2.1 million in the aggregate
upon reaching certain other milestones.

In February 2000, the Company entered into a
license agreement with a European entity for one of the
Companys product candidates. The Company made an initial
license payment of $25,000.

In September 2000, the Company acquired all
of the outstanding shares of stock of Talaria pursuant to a
merger agreement and related documents. The Company made the
first milestone payment under the merger agreement in 2001 and
may be obligated to make additional payments of up to
$5.5 million in the aggregate upon reaching certain other
milestones as discussed in Note 4.

In September 2001, the Company entered into
a license agreement with an educational institution for a
discovery project. The Company paid an initial combined license
and maintenance fee of $25,000 and is obligated to pay
additional annual license maintenance fees of up to $905,000 in
the aggregate. The Company may also be obligated make payments
of up to $995,000 in the aggregate upon reaching certain
milestones.

All of the payments were charged to research and
development expenses in the accompanying consolidated statements
of operations.

In connection with the above agreements, the
Company may be obligated to make various milestone and license
maintenance payments, as defined in the agreements, up to an
aggregate remaining amount of $30.2 million, and royalty
payments on future sales pursuant to formulas in the agreements.
At the present time, the Company can give no assurances as to
the likelihood that such future milestones will be achieved.

Employee
Benefit Plan

The Company maintains a 401(k) plan covering
substantially all of its employees in the United States. The
Board of Directors has authorized an amendment to the 401(k)
plan to allow, at the discretion of the Board of Directors, the
Company to make matching and/or discretionary contributions on
behalf of all participants who have elected to make deferrals to
the 401(k) plan. No matching or discretionary contributions have
been made since inception.

(8) Long-Term Debt

In December 2000, the Company entered into
an equipment loan facility with a bank whereby the Company may
borrow up to $2.5 million for equipment purchases.
Borrowings under the facility are collateralized by the related
equipment, are payable in equal monthly principal payments over
42 months. As of December 31, 2001, the Company had
outstanding borrowings under this facility of $1.8 million
at a weighted average interest rate of 12%.

51



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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In April 1999, the Company entered into an
equipment loan facility with a bank whereby the Company may
borrow up to $1.5 million for equipment purchases.
Borrowings under the facility are collateralized by the related
equipment, bear interest at the banks prime rate (5.0% and
9.5% at December 31, 2001 and 2000, respectively) plus 1%,
and are payable in equal monthly principal payments over
36 months. As of December 31, 2001 and 2000,
outstanding borrowings under this facility were $248,000 and
$743,000, respectively. The loan facility subjects the Company
to various financial covenants, which, among other restrictions,
requires the Company to maintain certain minimum levels of
tangible net worth and liquidity. Management has determined that
the Company is in compliance with these covenants at
December 31, 2001 and 2000.

The Company has a credit facility, totaling
50 million Swedish kronor (approximately $4.8 million
and $5.3 million at December 31, 2001 and 2000,
respectively), with a Swedish entity that may only be used to
finance the development of a certain product candidate. If a
related product is not developed or does not succeed in the
market, as defined under that credit facility, the
Companys obligation to repay the loan may be forgiven.
Borrowings under the loan agreement bear interest at 17.0% of
which 9.5% is payable quarterly. The remaining 7.5% of interest,
along with principal, are payable in five equal annual
installments starting December 30, 2004. The Company had
outstanding borrowings on the loan facility of 40.7 million
and 20.7 million Swedish kronor (approximately
$3.9 million and $2.2 million) at December 31,
2001 and 2000, respectively. This outstanding principal balance
has been classified as long-term debt. Management has determined
that the carrying value of the debt approximates fair value in
accordance with SFAS No. 107, Disclosures about Fair
Value of Financial Instruments. Managements estimate
of fair value is determined by reference to various market data
for comparable financial instruments, requires considerable
judgment by management, and is not necessarily indicative of the
amounts that could be realized in a current market exchange.

The Company has a memorandum of understanding
with respect to entering into an equipment loan with an economic
development group whereby we may borrow up to $500,000 for
equipment purchases. Outstanding borrowings under the term loan
bear interest at 4% per annum and total approximately $382,000
as of December 31, 2001.

In December 2001, the Company entered into
an equipment loan facility with a bank whereby the Company may
borrow up to $2.0 million for past and future purchases of
equipment. Borrowings under the facility will be collateralized
by the related equipment, bear interest at the banks prime
rate, and are payable in equal monthly principal payments over
42 months. As of December 31, 2001, the Company has no
outstanding borrowings under this facility.

As of December 31, 2001, maturities of
long-term debt are as follows (in thousands):

|                       |  |   |       |  
|---------------------- |  | - | ----- | -
|2002                   |  | $ | 863   |  
|2003                   |  |   | 691   |  
|2004                   |  |   | 1,298 |  
|2005                   |  |   | 818   |  
|2006                   |  |   | 820   |  
|Thereafter             |  |   | 1,855 |  
|                       |  |   |      
|                       |  |   | 6,345 |  
|Less  current portion |  |   | (863  | )
|                       |  |   |      
|                       |  | $ | 5,482 |  
|                       |  |   |      

(9) Related Party Transactions

Certain stockholders have provided consulting and
other professional services to the Company. Total expense for
these services was $509,000 in 2001, $423,000 in 2000, and
$236,000 in 1999. At December 31,

52



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ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2001 and 2000, amounts due to related parties
totaled $125,000 and $151,000, respectively, and are classified
as accounts payable or accrued liabilities in the accompanying
consolidated balance sheets.

(10) Quarterly Results of Operations
(Unaudited)

The following table summarizes selected unaudited
quarterly financial information for 2001 and 2000. The Company
believes that all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation, have
been included in the selected quarterly information (in
thousands, except per share data).

|                                            |  |                    |        |   |            |   |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|------------------------------------------- |  | ------------------ | ------ | - | ---------- | - | ------ | ------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------- | -
|                                            |  |                    |        |  
|                                            |  | Three Months Ended |        |   | Year Ended |  
|                                            |  |                    |        |   |            |  
|                                            |  | March 31,          |        |   | June 30,   |   |        | September 30, |  |   | December 31, |   |  | December 31, |       
|                                            |  | 2001               |        |   | 2001       |   |        | 2001          |  |   | 2001         |   |  | 2001         |       
|                                            |  |                    |        |   |            |   |        |               |  |   |              |   |  |              |       
|Operating expense                           |  | $                  | 7,168  |   |            | $ | 6,990  |               |  | $ | 6,507        |   |  | $            | 6,651  |   |  | $ | 27,316  |  
|Operating loss                              |  |                    | (7,168 | ) |            |   | (6,990 | )             |  |   | (6,507       | ) |  |              | (6,651 | ) |  |   | (27,316 | )
|Net loss                                    |  |                    | (5,981 | ) |            |   | (6,325 | )             |  |   | (6,281       | ) |  |              | (6,344 | ) |  |   | (24,931 | )
|Basic and diluted net loss per common share |  | $                  | (0.23  | ) |            | $ | (0.24  | )             |  | $ | (0.22        | ) |  | $            | (0.22  | ) |  | $ | (0.91   | )

|                                            |  |                    |        |   |            |   |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|------------------------------------------- |  | ------------------ | ------ | - | ---------- | - | ------ | ------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------- | -
|                                            |  |                    |        |  
|                                            |  | Three Months Ended |        |   | Year Ended |  
|                                            |  |                    |        |   |            |  
|                                            |  | March 31,          |        |   | June 30,   |   |        | September 30, |  |   | December 31, |   |  | December 31, |       
|                                            |  | 2000               |        |   | 2000       |   |        | 2000          |  |   | 2000         |   |  | 2000         |       
|                                            |  |                    |        |   |            |   |        |               |  |   |              |   |  |              |       
|Operating expense                           |  | $                  | 5,069  |   |            | $ | 6,823  |               |  | $ | 11,375       |   |  | $            | 6,735  |   |  | $ | 30,002  |  
|Operating loss                              |  |                    | (5,069 | ) |            |   | (6,823 | )             |  |   | (11,375      | ) |  |              | (6,735 | ) |  |   | (30,002 | )
|Net loss                                    |  |                    | (4,693 | ) |            |   | (6,514 | )             |  |   | (10,804      | ) |  |              | (5,565 | ) |  |   | (27,576 | )
|Basic and diluted net loss per common share |  | $                  | (13.91 | ) |            | $ | (2.95  | )             |  | $ | (0.74        | ) |  | $            | (0.22  | ) |  | $ | (4.50   | )

53



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

None.






PART III


Items 10, 11, 12 and 13. Directors and
Executive Officers of the Registrant; Executive Compensation;
Security Ownership of Certain Beneficial Owners and Management;
Certain Relationships and Related Transactions

The information called for by Part III
(Items 10, 11, 12 and 13) is incorporated by reference from
the Companys definitive Proxy Statement to be filed in
connection with its 2002 Annual Meeting of Stockholders, except
that the information regarding the Companys executive
officers called for by Item 401(b) of Regulation S-K
pursuant to Item 10 has been included in Part I of
this report and the information called for by Items 402(k)
and 402(l) of Regulation S-K pursuant to Item 11 is
not incorporated by reference.

54



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PART IV


Item 14. Exhibits, Financial
Statement Schedules and Reports on Form 10-K

(a) Financial Statements

1. These financial statements are set forth
in Item 8.

2. No financial statement schedules are
required.

(b) Reports on Form 8-K

None.

(c) Exhibits

|       |       |  |         |                                                                                                                                                                                                                                                                                                                                                                         
|------ | ----- |  | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |       |  | Exhibit
|       |       |  |        
|       | 2.1  |  |         | Agreement and Plan of Merger and Reorganization
	by and among Esperion Therapeutics, Inc., Esperion Mergerco,
	Inc. and Talaria Therapeutics, Inc. dated as of
	September 21, 2000. Incorporated by reference to
	Exhibit 2.1 to the Companys Current Report on
	Form 8-K filed October 6, 2000.                                                                       
|       | 2.2  |  |         | Indemnification, Escrow and Participation
	Agreement by and among Esperion Therapeutics, Inc., the
	stockholders of Talaria Therapeutics, Inc., Rock Hill Ventures,
	Inc. and Sills Cummis Radin Tischman Epstein & Gross
	dated as of September 21, 2000. Incorporated by reference
	to Exhibit 2.2 to the Companys Current Report on
	Form 8-K filed October 6, 2000.
|       | 2.3   |  |         | Non-Competition Agreement by and among Esperion
	Therapeutics, Inc. Esperion Mergerco, Inc. and certain Talaria
	Parties dated as of September 21, 2000. Incorporated by
	reference to Exhibit 2.3 to the Companys Current
	Report on Form 8-K filed October 6, 2000.                                                                                                  
|       | 3.3   |  |         | Fifth Amended and Restated Certificate of
	Incorporation of the Company. Incorporated by reference to
	Exhibit 3.3 to the Companys Quarterly Report on
	Form 10-Q for the fiscal quarter ended June 30, 2000.                                                                                                                                                          
|       | 3.4   |  |         | Amended and Restated Bylaws of the Company.
	Incorporated by reference to Exhibit 3.4 to the
	Companys Quarterly Report on Form 10-Q for the fiscal
	quarter ended June 30, 2000.                                                                                                                                                                                      
|       | 4.1   |  |         | Form of Common Stock Certificate of the Company.
	Incorporated by reference to Exhibit 4.1 to Amendment
	No. 2 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on August 4,
	2000.                                                                                                                                                      
|       | 10.1* |  |         | Esperion Therapeutics, Inc. 1998 Stock Option
	Plan. Incorporated by reference to Exhibit 10.1 to
	Amendment No. 1 to the Companys Registration
	Statement on Form S-1 (Reg. No. 333-31032) filed on
	July 10, 2000.                                                                                                                                                   
|       | 10.2 |  |         | Collaboration and License Agreement between
	Esperion Therapeutics, Inc. and Pharmacia &
	Upjohn AB dated June 24, 1998. Incorporated by
	reference to Exhibit 10.2 to Amendment No. 3 to the
	Companys Registration Statement non Form S-1 (Reg.
	No. 333-31032) filed on August 9, 2000.                                                                             
|       | 10.3 |  |         | License Agreement among Esperion Therapeutics,
	Inc., Jean-Louis Dasseux as the Inventors Representative
	and the Inventors named therein dated September 15, 1999.
	Incorporated by reference to Exhibit 10.3 to Amendment
	No. 3 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on August 9,
	2000.                                 
|       | 10.4 |  |         | License Agreement between Inex Pharmaceuticals
	Corporation and Esperion Therapeutics, Inc. dated March 16,
	1999. Incorporated by reference to Exhibit 10.4 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on February 24, 2000.                                                                                                     

55



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|       |        |  |         |                                                                                                                                                                                                                                                                                                                          
|------ | ------ |  | ------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        |  | Exhibit
|       |        |  |        
|       | 10.5   |  |         | Letter Agreement among Esperion Therapeutics,
	Inc., Inex Pharmaceuticals Corporation and the University of
	British Columbia dated March 12, 1999. Incorporated by
	reference to Exhibit 10.5 to the Companys
	Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on February 24, 2000.                    
|       | 10.6   |  |         | License Agreement between Esperion Therapeutics,
	Inc. and Region Wallonne dated February 17, 2000.
	Incorporated by reference to Exhibit 10.6 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on February 24, 2000.                                                                    
|       | 10.7   |  |         | Lease between Esperion Therapeutics, Inc. and
	State-94 Limited Partnership dated November 30, 1998, as
	amended. Incorporated by reference to Exhibit 10.7 to
	Amendment No. 1 to the Companys Registration
	Statement on Form S-1 (Reg. No. 333-31032) filed on
	July 10, 2000.                                       
|       | 10.8   |  |         | Lease between Esperion Therapeutics, Inc. and
	Maxey, LLC dated January 4, 1999. Incorporated by reference
	to Exhibit 10.8 to Amendment No. 1 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                                                        
|       | 10.9   |  |         | Loan and Security Agreement between Silicon
	Valley Bank, doing business as Silicon Valley East, and Esperion
	Therapeutics, Inc., dated March 31, 1999. Incorporated by
	reference to Exhibit 10.9 to Amendment No. 1 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.
|       | 10.11* |  |         | Employee Stock Purchase Plan. Incorporated by
	reference to Exhibit 10.11 to Amendment No. 1 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                                                                                                          
|       | 10.12  |  |         | Loan Agreement between Stiftelson Industrifonden
	and Esperion Therapeutics, Inc. dated May 19, 1999.
	Incorporated by reference to Exhibit 10.12 to Amendment
	No. 1 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on July 10,
	2000.                                                 
|       | 10.13  |  |         | Investors Rights Agreement among Esperion
	Therapeutics, Inc. and the parties set forth therein dated
	July 6, 1998. Incorporated by reference to
	Exhibit 10.13 to Amendment No. 1 to the Companys
	Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                  
|       | 10.14  |  |         | Amendment No. 1 to the Investors
	Rights Agreement among Esperion Therapeutics, Inc. and the
	parties set forth therein dated August 11, 1998.
	Incorporated by reference to Exhibit 10.14 to Amendment
	No. 1 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on July 10,
	2000.       
|       | 10.15  |  |         | Amendment No. 2 to the Investors
	Rights Agreement among Esperion Therapeutics, Inc. and the
	parties set forth therein dated January 7, 2000.
	Incorporated by reference to Exhibit 10.15 to Amendment
	No. 1 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on July 10,
	2000.       
|       | 10.16  |  |         | Amendment No. 3 to the Investors
	Rights Agreement among Esperion Therapeutics, Inc. and the
	parties set forth therein dated February 22, 2000.
	Incorporated by reference to Exhibit 10.16 to Amendment
	No. 1 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on July 10,
	2000.     
|       | 10.17  |  |         | Restricted Stock Purchase Agreement between
	Esperion Therapeutics, Inc. and Roger S. Newton dated
	July 6, 1998. Incorporated by reference to
	Exhibit 10.17 to Amendment No. 1 to the Companys
	Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                      
|       | 10.18  |  |         | Advisory Relationship letter between
	Scheer & Company, Inc. and Esperion Therapeutics, Inc.
	dated March 31, 1999. Incorporated by reference to
	Exhibit 10.18 to Amendment No. 1 to the Companys
	Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                    

56



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|       |        |  |         |                                                                                                                                                                                                                                                                                                                      
|------ | ------ |  | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        |  | Exhibit
|       |        |  |        
|       | 10.23  |  |         | Form of Restricted Stock Purchase Agreement.
	Incorporated by reference to Exhibit 10.23 to Amendment
	No. 2 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on August 4,
	2000.                                                                                                     
|       | 10.24  |  |         | Form of Promissory Note. Incorporated by
	reference to Exhibit 10.24 to Amendment No. 2 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on August 4, 2000.                                                                                                                          
|       | 10.25  |  |         | Form of Stock Pledge Agreement. Incorporated by
	reference to Exhibit 10.25 to Amendment No. 1 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                                                                                                    
|       | 10.27  |  |         | Third Amendment to Lease between Esperion
	Therapeutics, Inc. and State-94 Limited Partnership dated
	December 20, 2000. Incorporated by reference to
	Exhibit 10.29 to the Companys Annual Report on
	Form 10-K for the year ended December 31, 2000.                                                              
|       | 10.28  |  |         | Lease Extension between Esperion Therapeutics,
	Inc. and Maxey, LLC dated December 20, 2000. Incorporated
	by reference to Exhibit 10.29 to the Companys Annual
	Report on Form 10-K for the year ended December 31,
	2000.                                                                                         
|       | 10.29 |  |         | Amendment to License Agreement between Esperion
	Therapeutics, Inc. and Inex Pharmaceuticals Corp. dated
	October 23, 2000. Incorporated by reference to
	Exhibit 10.29 to the Companys Annual Report on
	Form 10-K for the year ended December 31, 2000.                                                           
|       | 10.30  |  |         | Fourth Amendment to Lease between Esperion
	Therapeutics, Inc. and Kosmos Associates, LLC, successor to
	State 94 Limited Partnership, dated February 15, 2001.
	Incorporated by reference to Exhibit 10.30 to the
	Companys Quarterly Report on Form 10-Q for the fiscal
	quarter ended March 31, 2001.            
|       | 10.31  |  |         | Master Loan and Security Agreement between
	Transamerica Business Credit Corporation and Esperion
	Therapeutics, Inc. dated as of December 27, 2000.
	Incorporated by reference to Exhibit 10.31 to the
	Companys Quarterly Report on Form 10-Q for the fiscal
	quarter ended June 30, 2001.                        
|       | 10.32  |  |         | Form of Amendment to Restricted Stock Purchase
	Agreement. Incorporated by reference to Exhibit 10.32 to
	the Companys Quarterly Report on Form 10-Q for the
	fiscal quarter ended June 30, 2001.                                                                                                                   
|       | 10.33  |  |         | Commercial Sublease between SWMF Holdings
	Corporation and Esperion Therapeutics, Inc. dated as of
	June 22, 2001. Incorporated by reference to
	Exhibit 10.33 to the Companys Quarterly Report on
	Form 10-Q for the fiscal quarter ended September 30,
	2001.                                                     
|       | 10.34  |  |         | Lease Extension  Second Renewal Term
	between Maxey LLC and Esperion Therapeutics, Inc. dated
	September 21, 2001. Incorporated by reference to
	Exhibit 10.34 to the Companys Quarterly Report on
	Form 10-Q for the fiscal quarter ended September 30,
	2001.                                                    
|       | 10.35@ |  |         | License Agreement Michigan File 1855
	Technology between the Regents of the University of Michigan and
	Esperion Therapeutics, Inc. dated effective September 18,
	2001. Incorporated by reference to Exhibit 10.35 to the
	Companys Quarterly Report on Form 10-Q for the fiscal
	quarter ended September 30, 2001.
|       | 10.36* |  |         | Esperion Therapeutics, Inc. 2000 Equity
	Compensation Plan (Amended and Restated, Effective May 22,
	2001). Incorporated by reference to the Companys Proxy
	Statement for the 2001 Annual Meeting of Stockholders.                                                                                                 
|       | 10.37  |  |         | Memorandum of Understanding between
	SWMF Holdings Corporation and Esperion Therapeutics, Inc.
	dated July 11, 2001.                                                                                                                                                                                                 
|       | 10.38  |  |         | Loan and Security Agreement between Silicon
	Valley Bank and Esperion Therapeutics, Inc. dated
	October 31, 2001.                                                                                                                                                                                                    
|       | 10.39  |  |         | Loan Modification Agreement between Silicon
	Valley Bank and Esperion Therapeutics, Inc. entered into as of
	December 7, 2001, effective as of October 31, 2001.                                                                                                                                                     

57



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|       |       |  |         |                                                                                                                                                   
|------ | ----- |  | ------- | --------------------------------------------------------------------------------------------------------------------------------------------------
|Number |       |  | Exhibit
|       |       |  |        
|       | 10.40 |  |         | Confirmation of Sublease Terms between Southwest
	Michigan Holdings Corporation and Esperion Therapeutics, Inc.
	dated effective October 15, 2001.
|       | 21.1  |  |         | Subsidiaries of Esperion Therapeutics, Inc.                                                                                                       
|       | 23.1  |  |         | Consent of Arthur Andersen LLP.                                                                                                                   



|  |                                                                          
|- | -------------------------------------------------------------------------
| | Confidential treatment granted with respect to
	portions of this Exhibit.



|  |                                                                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|@ | Confidential treatment requested with respect to
	portions of the Agreement indicated with brackets and asterisks
	[***]. A complete copy of this Agreement, including the redacted
	portions, has been separately filed with the Securities and
	Exchange Commission.
| 
|* | Compensation plans or arrangements in which
	directors and/or executive officers are eligible to participate.                                                                                                                                                         

58



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##### Table of Contents








SIGNATURES


Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                            
| | ---------------------------
| | ESPERION THERAPEUTICS, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ ROGER S. NEWTON

| |                                      
| | -------------------------------------
| |                                      
| | Roger S. Newton                      
| | President and Chief Executive Officer

Dated: March 19, 2002

59



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##### Table of Contents








INDEX TO EXHIBITS


|       |       |  |         |                                                                                                                                                                                                                                                                                                                                                                         
|------ | ----- |  | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |       |  | Exhibit
|       |       |  |        
|       | 2.1  |  |         | Agreement and Plan of Merger and Reorganization
	by and among Esperion Therapeutics, Inc., Esperion Mergerco,
	Inc. and Talaria Therapeutics, Inc. dated as of
	September 21, 2000. Incorporated by reference to
	Exhibit 2.1 to the Companys Current Report on
	Form 8-K filed October 6, 2000.                                                                       
|       | 2.2  |  |         | Indemnification, Escrow and Participation
	Agreement by and among Esperion Therapeutics, Inc., the
	stockholders of Talaria Therapeutics, Inc., Rock Hill Ventures,
	Inc. and Sills Cummis Radin Tischman Epstein & Gross
	dated as of September 21, 2000. Incorporated by reference
	to Exhibit 2.2 to the Companys Current Report on
	Form 8-K filed October 6, 2000.
|       | 2.3   |  |         | Non-Competition Agreement by and among Esperion
	Therapeutics, Inc. Esperion Mergerco, Inc. and certain Talaria
	Parties dated as of September 21, 2000. Incorporated by
	reference to Exhibit 2.3 to the Companys Current
	Report on Form 8-K filed October 6, 2000.                                                                                                  
|       | 3.3   |  |         | Fifth Amended and Restated Certificate of
	Incorporation of the Company. Incorporated by reference to
	Exhibit 3.3 to the Companys Quarterly Report on
	Form 10-Q for the fiscal quarter ended June 30, 2000.                                                                                                                                                          
|       | 3.4   |  |         | Amended and Restated Bylaws of the Company.
	Incorporated by reference to Exhibit 3.4 to the
	Companys Quarterly Report on Form 10-Q for the fiscal
	quarter ended June 30, 2000.                                                                                                                                                                                      
|       | 4.1   |  |         | Form of Common Stock Certificate of the Company.
	Incorporated by reference to Exhibit 4.1 to Amendment
	No. 2 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on August 4,
	2000.                                                                                                                                                      
|       | 10.1* |  |         | Esperion Therapeutics, Inc. 1998 Stock Option
	Plan. Incorporated by reference to Exhibit 10.1 to
	Amendment No. 1 to the Companys Registration
	Statement on Form S-1 (Reg. No. 333-31032) filed on
	July 10, 2000.                                                                                                                                                   
|       | 10.2 |  |         | Collaboration and License Agreement between
	Esperion Therapeutics, Inc. and Pharmacia &
	Upjohn AB dated June 24, 1998. Incorporated by
	reference to Exhibit 10.2 to Amendment No. 3 to the
	Companys Registration Statement non Form S-1 (Reg.
	No. 333-31032) filed on August 9, 2000.                                                                             
|       | 10.3 |  |         | License Agreement among Esperion Therapeutics,
	Inc., Jean-Louis Dasseux as the Inventors Representative
	and the Inventors named therein dated September 15, 1999.
	Incorporated by reference to Exhibit 10.3 to Amendment
	No. 3 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on August 9,
	2000.                                 
|       | 10.4 |  |         | License Agreement between Inex Pharmaceuticals
	Corporation and Esperion Therapeutics, Inc. dated March 16,
	1999. Incorporated by reference to Exhibit 10.4 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on February 24, 2000.                                                                                                     
|       | 10.5  |  |         | Letter Agreement among Esperion Therapeutics,
	Inc., Inex Pharmaceuticals Corporation and the University of
	British Columbia dated March 12, 1999. Incorporated by
	reference to Exhibit 10.5 to the Companys
	Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on February 24, 2000.                                                                   
|       | 10.6  |  |         | License Agreement between Esperion Therapeutics,
	Inc. and Region Wallonne dated February 17, 2000.
	Incorporated by reference to Exhibit 10.6 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on February 24, 2000.                                                                                                                   
|       | 10.7  |  |         | Lease between Esperion Therapeutics, Inc. and
	State-94 Limited Partnership dated November 30, 1998, as
	amended. Incorporated by reference to Exhibit 10.7 to
	Amendment No. 1 to the Companys Registration
	Statement on Form S-1 (Reg. No. 333-31032) filed on
	July 10, 2000.                                                                                      

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|       |        |  |         |                                                                                                                                                                                                                                                                                                                          
|------ | ------ |  | ------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        |  | Exhibit
|       |        |  |        
|       | 10.8   |  |         | Lease between Esperion Therapeutics, Inc. and
	Maxey, LLC dated January 4, 1999. Incorporated by reference
	to Exhibit 10.8 to Amendment No. 1 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                                                        
|       | 10.9   |  |         | Loan and Security Agreement between Silicon
	Valley Bank, doing business as Silicon Valley East, and Esperion
	Therapeutics, Inc., dated March 31, 1999. Incorporated by
	reference to Exhibit 10.9 to Amendment No. 1 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.
|       | 10.11* |  |         | Employee Stock Purchase Plan. Incorporated by
	reference to Exhibit 10.11 to Amendment No. 1 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                                                                                                          
|       | 10.12  |  |         | Loan Agreement between Stiftelson Industrifonden
	and Esperion Therapeutics, Inc. dated May 19, 1999.
	Incorporated by reference to Exhibit 10.12 to Amendment
	No. 1 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on July 10,
	2000.                                                 
|       | 10.13  |  |         | Investors Rights Agreement among Esperion
	Therapeutics, Inc. and the parties set forth therein dated
	July 6, 1998. Incorporated by reference to
	Exhibit 10.13 to Amendment No. 1 to the Companys
	Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                  
|       | 10.14  |  |         | Amendment No. 1 to the Investors
	Rights Agreement among Esperion Therapeutics, Inc. and the
	parties set forth therein dated August 11, 1998.
	Incorporated by reference to Exhibit 10.14 to Amendment
	No. 1 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on July 10,
	2000.       
|       | 10.15  |  |         | Amendment No. 2 to the Investors
	Rights Agreement among Esperion Therapeutics, Inc. and the
	parties set forth therein dated January 7, 2000.
	Incorporated by reference to Exhibit 10.15 to Amendment
	No. 1 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on July 10,
	2000.       
|       | 10.16  |  |         | Amendment No. 3 to the Investors
	Rights Agreement among Esperion Therapeutics, Inc. and the
	parties set forth therein dated February 22, 2000.
	Incorporated by reference to Exhibit 10.16 to Amendment
	No. 1 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on July 10,
	2000.     
|       | 10.17  |  |         | Restricted Stock Purchase Agreement between
	Esperion Therapeutics, Inc. and Roger S. Newton dated
	July 6, 1998. Incorporated by reference to
	Exhibit 10.17 to Amendment No. 1 to the Companys
	Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                      
|       | 10.18  |  |         | Advisory Relationship letter between
	Scheer & Company, Inc. and Esperion Therapeutics, Inc.
	dated March 31, 1999. Incorporated by reference to
	Exhibit 10.18 to Amendment No. 1 to the Companys
	Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                    
|       | 10.23  |  |         | Form of Restricted Stock Purchase Agreement.
	Incorporated by reference to Exhibit 10.23 to Amendment
	No. 2 to the Companys Registration Statement on
	Form S-1 (Reg. No. 333-31032) filed on August 4,
	2000.                                                                                                         
|       | 10.24  |  |         | Form of Promissory Note. Incorporated by
	reference to Exhibit 10.24 to Amendment No. 2 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on August 4, 2000.                                                                                                                              
|       | 10.25  |  |         | Form of Stock Pledge Agreement. Incorporated by
	reference to Exhibit 10.25 to Amendment No. 1 to the
	Companys Registration Statement on Form S-1 (Reg.
	No. 333-31032) filed on July 10, 2000.                                                                                                                        
|       | 10.27  |  |         | Third Amendment to Lease between Esperion
	Therapeutics, Inc. and State-94 Limited Partnership dated
	December 20, 2000. Incorporated by reference to
	Exhibit 10.29 to the Companys Annual Report on
	Form 10-K for the year ended December 31, 2000.                                                                  

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##### Table of Contents



|       |        |  |         |                                                                                                                                                                                                                                                                                                                      
|------ | ------ |  | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        |  | Exhibit
|       |        |  |        
|       | 10.28  |  |         | Lease Extension between Esperion Therapeutics,
	Inc. and Maxey, LLC dated December 20, 2000. Incorporated
	by reference to Exhibit 10.29 to the Companys Annual
	Report on Form 10-K for the year ended December 31,
	2000.                                                                                         
|       | 10.29 |  |         | Amendment to License Agreement between Esperion
	Therapeutics, Inc. and Inex Pharmaceuticals Corp. dated
	October 23, 2000. Incorporated by reference to
	Exhibit 10.29 to the Companys Annual Report on
	Form 10-K for the year ended December 31, 2000.                                                           
|       | 10.30  |  |         | Fourth Amendment to Lease between Esperion
	Therapeutics, Inc. and Kosmos Associates, LLC, successor to
	State 94 Limited Partnership, dated February 15, 2001.
	Incorporated by reference to Exhibit 10.30 to the
	Companys Quarterly Report on Form 10-Q for the fiscal
	quarter ended March 31, 2001.            
|       | 10.31  |  |         | Master Loan and Security Agreement between
	Transamerica Business Credit Corporation and Esperion
	Therapeutics, Inc. dated as of December 27, 2000.
	Incorporated by reference to Exhibit 10.31 to the
	Companys Quarterly Report on Form 10-Q for the fiscal
	quarter ended June 30, 2001.                        
|       | 10.32  |  |         | Form of Amendment to Restricted Stock Purchase
	Agreement. Incorporated by reference to Exhibit 10.32 to
	the Companys Quarterly Report on Form 10-Q for the
	fiscal quarter ended June 30, 2001.                                                                                                                   
|       | 10.33  |  |         | Commercial Sublease between SWMF Holdings
	Corporation and Esperion Therapeutics, Inc. dated as of
	June 22, 2001. Incorporated by reference to
	Exhibit 10.33 to the Companys Quarterly Report on
	Form 10-Q for the fiscal quarter ended September 30,
	2001.                                                     
|       | 10.34  |  |         | Lease Extension  Second Renewal Term
	between Maxey LLC and Esperion Therapeutics, Inc. dated
	September 21, 2001. Incorporated by reference to
	Exhibit 10.34 to the Companys Quarterly Report on
	Form 10-Q for the fiscal quarter ended September 30,
	2001.                                                    
|       | 10.35@ |  |         | License Agreement Michigan File 1855
	Technology between the Regents of the University of Michigan and
	Esperion Therapeutics, Inc. dated effective September 18,
	2001. Incorporated by reference to Exhibit 10.35 to the
	Companys Quarterly Report on Form 10-Q for the fiscal
	quarter ended September 30, 2001.
|       | 10.36* |  |         | Esperion Therapeutics, Inc. 2000 Equity
	Compensation Plan (Amended and Restated, Effective May 22,
	2001). Incorporated by reference to the Companys Proxy
	Statement for the 2001 Annual Meeting of Stockholders.                                                                                                 
|       | 10.37  |  |         | Memorandum of Understanding between
	SWMF Holdings Corporation and Esperion Therapeutics, Inc.
	dated July 11, 2001.                                                                                                                                                                                                 
|       | 10.38  |  |         | Loan and Security Agreement between Silicon
	Valley Bank and Esperion Therapeutics, Inc. dated
	October 31, 2001.                                                                                                                                                                                                    
|       | 10.39  |  |         | Loan Modification Agreement between Silicon
	Valley Bank and Esperion Therapeutics, Inc. entered into as of
	December 7, 2001, effective as of October 31, 2001.                                                                                                                                                     
|       | 10.40  |  |         | Confirmation of Sublease Terms between Southwest
	Michigan Holdings Corporation and Esperion Therapeutics, Inc.
	dated effective October 15, 2001.                                                                                                                                                                   
|       | 21.1   |  |         | Subsidiaries of Esperion Therapeutics, Inc.                                                                                                                                                                                                                                                                          
|       | 23.1   |  |         | Consent of Arthur Andersen LLP.                                                                                                                                                                                                                                                                                      



|  |                                                                          
|- | -------------------------------------------------------------------------
| | Confidential treatment granted with respect to
	portions of this Exhibit.



|  |                                                                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|@ | Confidential treatment requested with respect to
	portions of the Agreement indicated with brackets and asterisks
	[***]. A complete copy of this Agreement, including the redacted
	portions, has been separately filed with the Securities and
	Exchange Commission.



|  |                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------
|* | Compensation plans or arrangements in which
	directors and/or executive officers are eligible to participate.

62