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UNITED STATES





FORM 10-K

(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,
    2002, 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. x

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

The
aggregate market value of the voting stock of the registrant
held by non-affiliates of the registrant as of June 28,
2002, computed by reference to the closing price on The Nasdaq
National Market® on such date, was approximately
$151,512,467.

The
number of outstanding shares of the registrants common
stock, as of March 1, 2003, was 29,401,966.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Proxy Statement for the 2003 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                                           
|                                                  | Item 1. Business                                                                                                                                                                                                   
|PART II                                          
|                                                  | Item 6. Selected Consolidated Financial Data                                                                                                                                                                       
|                                                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                      
|                                                  | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                                                                                                                                
|                                                  | Item 8. Financial Statements and Supplementary Data                                                                                                                                                                
|INDEX TO FINANCIAL STATEMENTS                    
|REPORT OF INDEPENDENT ACCOUNTANTS                
|CONSOLIDATED BALANCE SHEETS                      
|CONSOLIDATED STATEMENTS OF OPERATIONS            
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY  
|CONSOLIDATED STATEMENTS OF CASH FLOWS            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       
|                                                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                                                                                       
|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
|                                                  | Item 14. Controls and Procedures                                                                                                                                                                                   
|PART IV                                          
|                                                  | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                                                                                                                                           
|SIGNATURES                                       
|INDEX TO EXHIBITS                                
|Second Amendment to Commercial Sublease Agreement
|Lease Extension - Third Renewal Term             
|Employment Arrangement Between Roger S. Newton   
|Employment Arrangement Bet. Timothy M. Mayleben  
|Employement Arrangement Between Brian R. Krause  
|Employment Arrangment Between Jean-Louis Dasseux 
|Employment Arrangement Between Frank Thomas      
|Subsidiaries                                     
|Consent of PricewaterhouseCoopers LLP            
|Certification Pursuant to Section 906            
|Certification Pursuant to Section 906            



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ESPERION THERAPEUTICS, INC.

FORM 10-K

TABLE OF CONTENTS


|           |  |                                                                                               |    |      |    | 
|---------- |  | --------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                               |    | Page |   
|           |  |                                                                                               |    |      |   
|           |  | PART I                                                                                        |    |      |    | 
|Item 1.    |  | Business                                                                                      |    |      | 1  | 
|Item 2.    |  | Properties                                                                                    |    |      | 26 | 
|Item 3.    |  | Legal Proceedings                                                                             |    |      | 27 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                       |    |      | 27 | 
|           |  | PART II                                                                                       |    |      |    | 
|Item 5.    |  | Market for Registrants Common Equity and
    Related Stockholder Matters                     |    |      | 28 | 
|Item 6.    |  | Selected Consolidated Financial Data                                                          |    |      | 29 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of
    Operations |    |      | 31 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures about
    Market Risk                                |    |      | 38 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                                   |    |      | 39 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure      |    |      | 63 | 
|           |  | PART III                                                                                      |    |      |    | 
|Item 10.   |  | Directors and Executive Officers of the Registrant                                            |    |      | 63 | 
|Item 11.   |  | Executive Compensation                                                                        |    |      | 63 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management                            |    |      | 63 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                                |    |      | 63 | 
|Item 14.   |  | Controls and Procedures                                                                       |    |      | 63 | 
|           |  | PART IV                                                                                       |    |      |    | 
|Item 15.   |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                           |    |      | 64 | 
|SIGNATURES |  |                                                                                               | 69 |     



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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. We caution readers
that forward-looking statements speak only as of the date of
this filing, reflect managements current expectations,
estimations and projections and involve certain factors, such as
risks and uncertainties, that may cause our actual results,
performance or achievements to be far different from those
suggested by our forward-looking statements. These factors
include, but are not limited to, risks associated with: our
ability to successfully execute our business strategies,
including entering into any strategic partnerships or other
transactions; the progress and cost of development of our
product candidates; the extent and timing of market acceptance
of new products developed by us or by our 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; clinical trials;
manufacturing; dependence on patents and proprietary rights;
procurement, maintenance, enforcement and defense of our patents
and proprietary rights; competitive conditions in the industry;
business cycles affecting the markets in which any of our future
products may be sold; extraordinary events and transactions;
seeking and consummating business acquisitions, including the
diversion of management attention to the assimilation of the
operations and personnel of any acquired business; the timing
and extent of our financing needs and our access to funding,
including through the equity market; 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 other than as required under the
federal securities laws.




PART I




Item 1. Business

Overview

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

We are currently developing four product
candidates, including three biopharmaceuticals: ETC-588, or LUV;
ETC-216, or AIM; and ETC-642, or RLT Peptide; and one oral small
molecule, now designated ETC-1001 (previously designated
ESP 31015). The biopharmaceuticals are currently being
developed for the acute treatment of high-risk atherosclerosis,
such as acute coronary syndromes, while the small molecule will
target chronic treatment of risk factors associated with
cardiovascular disease. 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 artery walls and other tissues. The current development
status of our three biopharmaceutical product candidates, which
are in the clinical phase of development, and our small molecule
product candidate is as follows:



| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ETC-588
    (Phase II):We continue to enroll
    patients in two Phase II clinical trials for ETC-588. These
    two trials were initiated in 2002: one trial in patients with
    carotid atherosclerosis and the other trial in patients with
    acute coronary syndromes.

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| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ETC-216
    (Phase II):We completed
    enrollment in March 2003 for a Phase II clinical trial for
    ETC-216. This study was initiated in late 2001 in patients with
    acute coronary syndromes.                                                                                       
|
| |  | ETC-642
    (Phase I):A Phase I
    clinical trial was completed for ETC-642 in 2002 in patients
    with stable cardiovascular disease. A second Phase I
    clinical trial for ETC-642 was initiated in 2002 in patients
    with stable cardiovascular disease.                         
|
| |  | ETC-1001
    (Pre-clinical):We plan to initiate
    our first clinical trial for ETC-1001 in the second quarter of
    2003, pending United States Food and Drug Administration, or
    FDA, acceptance of an Investigational New Drug, or IND,
    application for this product candidate.

We expect to continue clinical testing of the
three biopharmaceutical product candidates throughout 2003.

Our product development to date has used in vitro
assays, testing procedures performed outside the body, animal
models and human clinical testing. Clinical and pre-clinical
studies suggest that our product candidates increase
HDL-cholesterol, or HDL-C, or its function, and enhance the
removal of excess cholesterol and other lipids from artery walls
and other tissues. Preliminary results in early clinical trials
indicate that ETC-588, ETC-642 and ETC-216 increase the
mobilization of cholesterol, or the removal of cholesterol from
arteries and other tissues and delivery of cholesterol to the
liver, as evidenced by measurements of the amount of cholesterol
in the blood both before and after administration. Third-party
published reports of preliminary human clinical studies of
compounds that are similar in function and composition 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 therapies that we are developing could
enhance the naturally occurring processes in the body for the
removal of excess cholesterol and other lipids from artery
walls. We believe that this removal of excess cholesterol from
the body will lead to improvements in vascular structure by
stabilizing vulnerable plaque, which could ultimately lead to a
reduction in clinical events resulting from cardiovascular
disease, including atherosclerosis. Our clinical development
plans are focused on planning and conducting clinical trials to
assess the benefit of treatment with our product candidates.

We are also pursuing the discovery and
development of orally active organic small molecules designed to
increase HDL-C levels and/or enhance the function of HDL to
stimulate the RLT pathway, as well as decrease LDL cholesterol,
or LDL-C, and triglycerides, another type of lipid, or fat. We
believe that some of these small molecules may also possess
anti-diabetic and anti-obesity properties. We have implemented
several strategies to develop potential small molecule 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 the discovery and development of
therapies for a broad range of cardiovascular diseases,
including treatments for coronary heart disease, peripheral
arterial disease (atherosclerosis occurring in arteries near the
bodys extremities) and stroke.

We were incorporated in Delaware and commenced
operations in July 1998. We became a public company in August
2000 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, our
telephone number is (734) 332-0506 and our website is
www.esperion.com.

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 type of lipid, or fat, called
cholesterol within artery walls in vulnerable plaque.

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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 to the liver for elimination from the body.


The RLT pathway consists of a four-step process
responsible for removing excess cholesterol and other lipids
from artery walls and other tissues and transporting them to the
liver for elimination from the body. The first step is the
removal of cholesterol from artery walls and other tissues 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 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-C, and a low level of
HDL-C, the imbalance results in more cholesterol being deposited
in artery 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 artery
walls, especially those 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. The plaque can also accumulate in artery walls leaving
them vulnerable to rupture, which could also lead to a heart
attack.

Cardiovascular
Disease

According to the American Heart Association,
cardiovascular disease is the number one killer of American men
and women. It is estimated that in 2003, the direct and indirect
annual cost of cardiovascular disease will be $350 billion,
of which an estimated $37 billion will be spent on drug
therapy. The most prominent form of cardiovascular disease is
atherosclerosis, a systemic disease that includes the buildup of
plaque in artery walls limiting blood flow to the heart, brain,
other vital organs and extremities. Atherosclerosis can result
in heart attacks, chest pain 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 independent risk factors for cardiovascular disease.
In addition, high HDL-C levels generally are associated with
reduced risk 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 a low
    HDL-C level is an independent 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.                                                        

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 artery 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 artery bypass surgery.                                                                                                                                                                                                              

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

Current Treatments for Cardiovascular
Disease

Treatments are either short-term solutions,
termed acute, 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 treatments
are used to prevent cardiovascular disease from worsening 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 clinical benefit 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 that achieve
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 coronary artery bypass
surgery, or CABG, and percutaneous coronary intervention (PCI)
(i.e., balloon angioplasty, with or without stents). In bypass
surgery, a cardiovascular surgeon opens the patients chest
cavity to expose the heart and redirects blood flow around the
blocked arteries by grafting a healthy vessel removed from
another location in the patient. In PCI, a cardiovascular
surgeon inserts a long, thin flexible tube with an inflatable
balloon at its end through a leg artery and advances the tube to
the heart to position it in the artery at the point of blockage.
The balloon is then inflated and this pushes aside the plaque
that caused the blockage, usually 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. More recently, drug-coated stents have
been introduced to prevent restenosis (re-closure of the
artery). In addition, patients with acute coronary syndromes may
be prescribed agents, as recommended in the American College of
Cardiology and American Heart Association guidelines for the
treatment of acute coronary syndromes, including aspirin,
clopidogrel, heparin, nitrates, gpIIb/IIIa inhibitors,
beta-blockers, fibrinolytic therapy, statins and ACE inhibitors.
Despite these many treatments and/or procedures, a short-term
risk for recurrent clinical events still exists.

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 invasive procedures, by their nature,
    involve a risk of complications, including death.                                                                                                                                                                                                                                                                                                                                               
|
| |  | There is significant recovery time after coronary
    artery bypass surgery.                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | These invasive procedures are very costly.
    According to the American Heart Association, it is estimated
    that in 2000, 519,000 coronary artery bypass surgeries were
    performed on 314,000 patients in the United States with an
    average cost of about $45,000. In 2000, approximately
    561,000 PCI procedures were performed in the United States.
    The average cost of a PCI is $20,000 and more when a stent is
    used.

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| |   |                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Many patients are not eligible for these invasive
    procedures due to their medical and/or treatment history and
    physical condition.                                                                                                                                  
|
| |  | These invasive procedures are localized and treat
    only one segment of a diseased artery at a time, and, since
    atherosclerosis affects the entire cardiovascular system, many
    additional vulnerable arteries are left untreated after using
    these procedures.

Chronic
Treatments

The initial recommendation for a patient with
elevated LDL-C, a well-known risk factor for cardiovascular
disease, 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 the
patients 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 that lowers the
level of LDL-C in the blood by inhibiting cholesterol production
in the liver. Statins can also modestly lower triglycerides,
another type of lipid, and have the ability to slightly raise
HDL-C. Recent studies have shown that statins reduce the risk of
illness or death from cardiovascular disease by approximately
30%. In clinical studies, statins have been shown to 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

The key elements of our business strategy are as
follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Develop a portfolio of novel drug candidates
    focused on enhancing reverse lipid transport
    (RLT) utilizing the beneficial properties of
    HDL.Based on our understanding of the
    RLT pathway, we are developing a portfolio of product candidates
    that we believe could provide a broad spectrum of treatment
    options for patients with cardiovascular disease. These product
    candidates are focused on improving HDL function in the RLT
    pathway and removing excess cholesterol from artery walls and
    other tissues. Our portfolio currently consists of three
    distinct types of HDL therapies: HDL mimetics (ETC-216 and
    ETC-642), cholesterol sponges (ETC-588) and oral
    small molecules that stimulate the RLT pathway (ETC-1001). Each
    of these therapies is described in more detail in the section
    below entitled Our Products in Development.                                                                                                                       
|
| |  | Leverage experienced scientific, drug
    discovery and drug development
    expertise.We are managed by an
    experienced group of scientists with significant expertise in
    drug discovery. 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®). In 2002, sales of Lipitor
    exceeded $7.9 billion and approximately 44 million
    prescriptions were written for atorvastatin worldwide. Other
    members of our management team have participated in the
    discovery, clinical development and/or commercialization of many
    other high profile therapies, including Lopid®,
    Pravachol®, Glucophage® and Plavix®. We employ
    inventors of two of our product candidates currently in clinical
    development (ETC-588 and ETC-642). In addition, since our
    inception, we have discovered HDL elevating/lipid regulating
    agents.
|
| |  | Optimize clinical and regulatory strategies.We believe that by initially focusing
    on the development of biopharmaceutical product candidates for
    acute treatments, we can 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 are
    performing clinical trials with our biopharmaceutical product
    candidates to 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 statins
    and other chronic treatments.                                                                                                                                                                                                                                          

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Retain co-development and co-promotion rights
    to our product candidates.Our goal is
    to retain a portion of the development and marketing rights to
    our product candidates. By completing the pre-clinical and early
    clinical development work independently and with contract
    research organizations, we hope to negotiate favorable terms
    with prospective partners. We intend to enter into strategic
    collaborations with established pharmaceutical companies on one
    or more individual product candidates to enhance the value of
    each program by broadening the commercial potential for each
    product candidate and by utilizing additional clinical and
    regulatory resources to maximize each product candidates
    potential.

Our Products in Development

Our initial product development efforts are
focused on developing novel classes of drugs designed to treat
both acute and chronic cardiovascular 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 and 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 2003, and are preparing to
bring an additional product candidate, ETC-1001, into clinical
development during 2003.

Our human clinical trials may not commence or
proceed as anticipated and we may not be able to demonstrate the
same levels of safety, efficacy or other results in clinical
trials that have been suggested in our pre-clinical or early
clinical trials, or in studies by third parties with material
similar to ours.

ETC-588
(LUV)

We are developing ETC-588 (large unilamellar
vesicles, or LUV), currently as a treatment for acute coronary
syndromes. LUV are spherical particles composed of a naturally
occurring phospholipid that upon infusion into humans would
remain in the circulation to serve as a sponge for
cholesterol. We believe the interaction between LUV and HDL
already in the body results in the enhanced removal of
cholesterol from atherosclerotic lesions. We believe that LUV
have a high capacity to transport cholesterol to the liver for
elimination from the body.

Two third party pre-clinical animal studies were
published involving the administration of material similar to
ETC-588. These studies showed the removal of cholesterol from
arteries and the regression of atherosclerosis, thereby helping
arteries regain their flexibility and function. None of the
studies were conducted by us or on our behalf.

In 2000, Phase I single and multiple dose
tolerance studies of ETC-588 in healthy volunteers were
completed. Analysis of data from those studies indicates
dose-dependent cholesterol mobilization.

The first Phase II study of ETC-588 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 36 patients with stable
cardiovascular disease and HDL-C less than or equal to
45 milligrams per deciliter (indicating a low level of
HDL-C). Patients were administered one of three dose strengths
(50, 100 or 200 milligrams per kilogram) or placebo every
four or seven days. Patients in the 100 and 200 mg/kg dose
groups each received seven doses, while the 50 mg/kg dose
groups received fourteen doses. The results of this study
indicated that ETC-588 was safe and well-tolerated at all dose
levels and dose regimens. Based on the data from 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, as
measured by the amount of cholesterol in the blood before and
after treatment.

In addition, we conducted a sub-study in a small
group of patients in this Phase II trial using magnetic
resonance imaging (MRI) technology to assess its
feasibility as an appropriate imaging modality. Based on the
information gathered from this sub-study, this technology is
being utilized in a second Phase II study of ETC-588 to
assess a primary endpoint of changes in plaque volume. This
second Phase II trial began enrolling in the second quarter
of 2002 to, among other things, use MRI technology to assess the
changes in plaque

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volume within the carotid arteries. Patients are
given eight weekly doses of ETC-588, or placebo, in this study
utilizing a dose of 200 mg/kg for treated patients. Each
patient will have MRIs taken prior to treatment, after four
weeks of treatment, after eight weeks of treatment and three
months following treatment. These serial MRI readings should
allow us to examine how ETC-588 is impacting the plaque, if at
all, as well as how well the benefits of therapy might persist
three months after treatment. Additional efficacy endpoints are
also being studied. Enrollment in this trial is continuing.


In the fourth quarter of 2002, we initiated a
third Phase II study, in which enrollment is continuing.
The objective of this third Phase II study is to evaluate
the safety and tolerability of ETC-588 in 150 patients with
acute coronary syndromes, one of the patient populations we
intend to target in our Phase III clinical trials. Patients
in this trial are treated with eight weekly doses of ETC-588.
The trial is a double-blind, randomized, placebo-controlled
study with three groups of 50 patients each. The patients
will receive either a fixed weekly dose of eight grams, a fixed
weekly dose of fifteen grams or placebo.



| |              
| | -------------
| | ETC-216 (AIM)

We are developing ETC-216 (apolipoprotein A-I
Milano/phospholipid complex, or AIM), for the treatment of
patients with acute coronary syndromes. The clinical use of
ETC-216 as a human recombinant protein complexed to phospholipid
is to mimic naturally-occurring HDL and/or enhance its function.
AIM is a variant form of apolipoprotein A-I, the major protein
component of HDL. AIM is naturally present in a small group of
Northern Italians with paradoxically low rates of cardiovascular
disease despite low HDL-C levels, who tend to show a lower risk
of cardiovascular disease, presumably due to enhanced reverse
lipid transport.

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, material
similar to ETC-216 reduced atherosclerotic lesions and their
lipid content and prevented inflammation and clotting. A 1999
report of in vitrotests showed that material similar to
ETC-216 increased cholesterol removal. The 2001 report
demonstrated rapid removal of lipid and decreased macrophage
immunoreactive staining in atherosclerotic lesions within or at
48 hours after treatment. Also, published third party
reports in 1994 and 1995 showed that material similar to ETC-216
inhibited restenosis following balloon angioplasty in two animal
models. None of these studies were conducted for us or on our
behalf.

We completed and reported data from a
Phase I single-dose clinical trial of ETC-216 conducted in
Europe in the first quarter of 2001. Consistent with our
pre-clinical studies, an infusion of ETC-216 in participants in
this study resulted in increased cholesterol mobilization. This
study also demonstrated ETC-216 was safe at all doses, there
were no serious adverse events observed, and that it was well
tolerated. 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
(15 mg/ kg and 45 mg/ kg) of intravenous infusions,
compared to placebo, administered every seventh day with a
maximum of five doses. The study will evaluate up to 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 a coronary artery to directly image
atherosclerotic plaques. In this trial, an IVUS image is taken
before the first dose is administered and within one week of the
final dose. Enrollment was completed in March 2003 and we expect
to present initial results in mid-2003.

We acquired exclusive worldwide rights for AIM
from Pharmacia in July 1998. Under our 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, upon our pursuing a co-development and
co-promotion arrangement in the United States and Canada,
Pharmacia has the right of first negotiation.

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

We are developing ETC-642 (RLT Peptide) currently
for the treatment of patients with acute coronary syndromes. The
peptide component of ETC-642 is a 22-amino acid peptide that
mimics the biological properties of apolipoprotein A-I to
promote cholesterol removal from artery walls and other tissues
and enhance reverse lipid transport. ETC-642 is a complex of
peptide and phospholipids that mimics the functions of HDL. In
our pre-clinical studies, we have shown that ETC-642 increases
HDL-C and enhances cholesterol mobilization. Because of these
properties, we believe that administration of ETC-642 may
enhance reverse lipid transport.

The patent applications that were filed in 1997
for the technology relating to series of RLT peptides describe
experiments of the compounds in vitro and in vivo, including in
human blood samples. These experiments showed that RLT peptides
similar to ETC-642 interact with and activate important enzymes
in the RLT pathway and stimulate cholesterol removal. The
results of a pre-clinical animal model study described in the
patents showed that the administration of an RLT peptide
complexed to phospholipids similar to ETC-642 increased HDL-C
levels in the blood. This study was not conducted for us or on
our behalf. We exclusively license from the inventors the
patents and patent applications covering the technology relating
to these RLT peptides and our RLT Peptide.

Our goal is to establish that intravenous
infusions of ETC-642 are safe and result in the removal of
cholesterol from the walls of arteries, thus stabilizing
vulnerable atherosclerotic plaques and preventing cardiovascular
events, such as heart attacks, in clinical trials.

During 2001, we initiated a Phase I clinical
study of ETC-642 in patients with existing cardiovascular
disease. The Phase I clinical trial was a single-dose study
in patients with stable atherosclerosis designed to determine
the safety, tolerability, pharmacokinetic and cholesterol
mobilization properties of ETC-642. We completed this
Phase I study in the first half of 2002 and results
indicate that ETC-642 was safe and well-tolerated at all dose
levels tested. In addition, results were consistent with
pre-clinical studies in showing evidence of rapid cholesterol
mobilization, as well as evidence of increases in
HDL-cholesterol levels. We initiated an additional single-dose,
Phase I study in the second half of 2002 in the same
patient population studied in the earlier trial to determine the
maximum tolerated dose. Following the completion of this
additional Phase I trial and review of the combined data
from these two trials, we expect to conduct a multiple-dose
study in patients beginning in the second half of 2003 to
examine dosing regimens and certain efficacy parameters.



| |                                                      
| | -----------------------------------------------------
| | ETC-1001 (HDL Elevating/ Lipid Regulating
    Agents)

We are pursuing the discovery and development of
oral small organic molecules that increase HDL-C levels and/or
enhance the RLT pathway, as well as decrease LDL-C and
triglycerides. Pre-clinical models suggest that some of these
molecules may also possess anti-diabetic and anti-obesity
properties. We have implemented several strategies to develop
these product candidates. One strategy has led to the discovery
of several classes of active molecules.

Our pre-clinical studies demonstrated that
several classes of molecules elevate HDL-C in animal models. In
these studies we have observed that these molecules can also
regulate lipid production in liver cells of rats, hamsters and
humans, and inhibit diet-induced atherosclerosis progression in
an animal model. Our goal is to develop orally active molecules
for the treatment of patients with lipid disorders.

We have identified a lead orally active small
molecule product candidate that we have now designated ETC-1001
because we have chosen to submit it for clinical development (it
was formerly designated ESP 31015). Upon completion of
certain pre-clinical and toxicology studies, we intend to file
an Investigational New Drug application, or IND, in 2003, and
begin Phase I clinical testing on ETC-1001 in the first
half of 2003. We are conducting additional testing and
pre-clinical research on other small molecule candidates for
potential clinical development in the future.

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

We have suspended development of ETC-276
(ProApolipoprotein A-I, or ProApoA-I), as an acute treatment for
the improved blood flow to the arteries of the heart, brain and
body. The decision to suspend development of this compound was
made in the first half of 2002 and was based on the limited
scope of the intellectual property position on this compound,
the limited patent life remaining and complexities involved in
developing a commercially viable manufacturing process for this
compound.

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 disease. Our research and development
expenses were $22.0 million, $21.5 million,
$22.6 million, and $94.0 million in 2002, 2001, 2000
and the period from inception to December 31, 2002,
respectively. Research and development expenses include both
external and internal costs related to the research and
development activities for our existing product candidates as
well as discovery efforts on potential new product candidates.
External costs include costs related to manufacturing, process
development, 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 that we incur.

We have implemented strategies in discovery,
research and development that we believe will generate a
pipeline of new drugs for the treatment of lipid disorders and
related complications. These strategies include an intensive
effort to identify orally active small molecules.

Small molecule discovery efforts, focused on
lipid disorders, are aimed at identifying drugs that increase
HDL-C levels and/or enhance their function to stimulate the RLT
pathway. We have implemented approaches to identify drugs that
stimulate pathways, which we believe will result in the
synthesis of more HDL or the rapid replenishment of HDL
components.

Clinical Testing

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase I.Demonstrate the safety and
    tolerability of our product candidates in healthy volunteers or
    stable patients. 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 increased cholesterol mobilization in humans.
    Mobilization can be measured easily using various clinical
    chemistry tests such as the level of cholesterol in the blood
    both before and after treatment. By showing increased
    cholesterol mobilization in the blood, we can speculate that our
    drug candidates are effectively pulling excess cholesterol from
    artery walls and other tissues.                                                                                                                                                 
|
| |  | Phase II.Continue
    to monitor safety and tolerability of our product candidates in
    different patient populations. We will attempt to identify the
    optimal dose and dosing regimen including the number of
    treatments and length of time between treatments. Finally, we
    will examine efficacy parameters including changes in vascular
    structure and function. This can be accomplished through the use
    of various imaging techniques such as MRI or IVUS to examine
    changes in plaque volume and/or composition. These measurements
    can provide evidence as to whether our product candidates are
    having an impact on reducing the plaque in the walls of the
    arteries. These imaging techniques are used to take measurements
    both pre- and post-treatment to determine if and how much of the
    plaque is being removed or stabilized.
|
| |  | 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, strokes,
    hospitalizations, revascularizations and other clinical events.
    By comparing clinical events in patients receiving our product
    candidates versus                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |  |                                                                                                                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | patients who do not receive our product
    candidates, we can determine if there is clinical benefit from
    our therapies above the current standard of care. Because we are
    targeting acute treatments with our biopharmaceuticals, we need
    to show an impact on clinical events in a relatively short
    period of time following treatment.

For our small molecules, the clinical development
will focus more on improving the lipid profile of patients by
increasing HDL-C and improving HDL function as well as having
secondary effects of reducing LDL-C and triglycerides. Since the
small molecules are designed for chronic treatment and as a
possible complement to statin drugs, which currently account for
approximately 90% of the lipid regulation market, we expect that
these trials would follow a much more traditional lipid
regulation clinical development path, including well-established
endpoints.

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
may 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 senior member of our
management team working to develop commercialization strategies
and conduct market research for our product candidates.

Inex Pharmaceuticals Corporation, the licensor
and/or owner of some of the ETC-588 technology, and the group of
inventors who are the licensors of the ETC-642 technology have
granted us exclusive rights to market ETC-588 and ETC-642. We
acquired exclusive worldwide rights for ETC-216, our other
in-licensed product candidate, 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, upon pursuing a
co-development and co-promotion arrangement in the United States
and Canada, Pharmacia has the right of first negotiation.

We are currently pursuing corporate
collaborations for our biopharmaceuticals and we believe the
preferred partnering deal would consist of a co-development and
co-promotion relationship in North America with one or more
companies that have established distribution systems and direct
sales forces. In international markets, we intend initially to
seek strategic relationships pursuant to which the partner would
develop, market, sell and distribute our product candidates. We
have also recently initiated discussions with potential partners
for our oral small molecule program. In that case, we are
pursuing a research and development collaboration.

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 pre-clinical 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,
bulk chemical materials and active pharmaceutical ingredients.

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 is limited. In addition, the
process for producing protein for ETC-216 will need to be
enhanced to meet late-stage clinical trials supply and
large-scale commercial production requirements for ETC-216. We
believe, however, that if ETC-216 is shown to be efficacious in
the current Phase II trial, we would focus on partnering
opportunities that would leverage a prospective partners
manufacturing expertise in helping us to develop a more
efficient manufacturing process for this product candidate.
Other partnering objectives may include

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pursuing partners with expertise in alternative
delivery regimes for ETC-216. In this regard, pre-clinical data
suggests that certain alternative delivery regimes for ETC-216
could have potential clinical benefit using significantly less
ETC-216. Furthermore, the contract manufacturers that we have
identified and worked with to date only have limited experience
at manufacturing, formulating, analyzing, 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 significant capital
investment and must comply with regulatory specifications.


We do not have any direct or indirect experience
in the commercial-scale manufacturing of ETC-588, ETC-216,
ETC-642 or ETC-1001. Each of these product candidates has a
unique manufacturing process and will require engineering and
manufacturing expertise to scale up our current batch production
methods to commercial scale manufacturing. 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 outside the United States. It takes a substantial
period of time to produce proteins, peptides, and certain small
molecules in compliance with such regulations. For example, the
process for manufacturing proteins and formulating them into
protein/lipid complexes is complicated. 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 issued 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, in the future.
At the present time, it is uncertain as to whether we will be
required to make any of these additional payments.

ETC-588
(LUV)

With respect to our LUV technology, we have a
patent estate currently comprised of 10 issued
U.S. patents, 1 European patent validated in
13 European countries, 6 pending U.S. patent
applications and 2 international patent applications that
are the basis of 10 pending foreign patent applications.
Some of these patents and patent applications are licensed
and/or sublicensed to us by Inex Pharmaceuticals Corp., or Inex,
which either owns them or licenses them from the University of
British Columbia. The other patents and patent applications are
owned by us, some of which were acquired when we acquired
Talaria Therapeutics, Inc., or Talaria, in September 2000.
Collectively, the patents and pending applications claim the use
of unilamellar liposomes for the treatment of atherosclerosis, a
dosage form containing liposomes, methods and compositions for
use in the treatment of disease, including atherosclerosis and
other disorders such as angina, using those liposomes, methods
of producing liposomes and methods of treating diseases with
liposomes using specific dosing regimens. The U.S. patents
expire no earlier than 2014 and the European patents expire in
2011.

We paid Inex $250,000 at the time we entered into
the license agreement with Inex for certain LUV technology 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 any products that are
covered by the licensed patents or developed using the licensed
technology. The first milestone payment of $100,000 was paid

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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. Under
our license agreement with Inex, as amended, we are also
required to pay Inex royalties on sales of products that are
covered by the LUV technology that we acquired from Talaria.
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.


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 in North America of LUV products. 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. Of the initial 813,008 shares of common stock that
were issued under the merger agreement, 10,127 shares were
retired in 2001 in satisfaction of an indemnity obligation of
the former Talaria stockholders under the merger agreement and
related documents. Of the total shares of common stock paid to
Talaria, 11,622 shares remain escrowed until no later than
November 21, 2004 in order to satisfy maximum potential
indemnity obligations by the former Talaria stockholders to us.

ETC-216
(AIM)

In June 1998, we acquired exclusive, worldwide
rights to AIM from Pharmacia Corporation, subject to
Pharmacias exclusive right of election to co-develop and
exclusive right to market AIM in countries other than the United
States and Canada upon our completion of Phase II clinical
trials. In addition, upon our pursuing 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 either
party in accordance with the terms of the license. Under our
license agreement with Pharmacia, we acquired what is now seven
issued U.S. patents, one allowed U.S. patent application, one
pending U.S. patent application, two European patents and other
related corresponding foreign patents and patent applications,
covering various aspects of AIM, 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. 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. The issued U.S. patents expire no earlier
than 2015, the corresponding foreign patents expire no earlier
than 2012 and the two European patents expire in 2007 and 2010
We also own one pending U.S. patent application and have joint
ownership with Cedars Sinai Medical Center of one additional
pending U.S. patent application, both of which claim additional
uses for AIM.

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 2003). 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. In this
case, we will be entitled to royalties on sales of AIM outside
the United States and Canada, and Pharmacia would be entitled to
royalties on sales within the United States and Canada. 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

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when we enroll the first patient in the first
Phase III clinical trial for an AIM product in the United
States as well as royalties on sales of AIM worldwide. If the
milestone payments are greater than 10% of our cash reserves at
the time payment is required, we may make these payments to
Pharmacia by issuing a promissory note in lieu of cash.


ETC-642
(RLT Peptide)

Under an agreement entered into in September
1999, we exclusively licensed RLT Peptide technology from the
group of its inventors. This now includes nine issued U.S.
patents,, two allowed U.S. patent applications, nine pending
U.S. patent applications and corresponding foreign patents
and 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 and corresponding
foreign patents expire in 2017. The U.S. and foreign patents and
patent applications and are directed to peptides having ApoA-I
activity, pharmaceutical compositions thereof, methods for their
use, drug forms containing the peptides, pharmaceutical dosage
forms of the peptides, methods for preparing the dosage forms
and nucleotide sequences encoding the peptides.

We paid the inventors of our RLT Peptide
technology 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 any 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 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-1001 (formerly designated ESP 31015)
    and other HDL Elevating/ Lipid Regulating Agents

We are also researching and developing small
organic molecules that increase HDL-C levels and/or enhance the
RLT pathway, as well as decrease LDL-C and triglycerides. These
molecules may also possess anti-diabetic and anti-obesity
properties. We have three issued U.S. patents, 11 pending U.S.
patent applications and corresponding pending foreign
applications directed to classes of compounds and specific
compounds that increase HDL-C levels and/or enhance the RLT
pathway, compositions comprising these compounds, methods of the
preparation of these compounds and methods for the use of these
compounds. We are also pursuing, and will continue to pursue,
patent protection for other classes of compounds that increase
HDL-C levels and/or enhance the RLT pathway, which have been or
will be identified in our laboratories. We had identified a lead
candidate from this class of compounds in 2001  now
designated ETC-1001  for which we intend to file an
IND and begin Phase I clinical testing in 2003.

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 pre-clinical 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 pre-clinical and clinical
testing and other requirements of the Federal Food, Drug, and
Cosmetic Act, or FDC Act, and Public Health Service Act, or
PHSA, implemented by the FDA, as set forth in the Code of
Federal Regulations, 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 or delay by us or our suppliers,
CROs, collaborators, licensors or licensees in obtaining
regulatory approvals or in complying with other requirements
could adversely affect the commercialization of our product
candidates and our ability to receive any product or royalty
revenues.

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



| |   |                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | conducting appropriate pre-clinical laboratory
    evaluations of the product candidates chemistry,
    formulation and stability, and pre-clinical 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;                                                  
|
| |  | initiating clinical trials under the IND after
    the IND becomes effective;                                                                                                                                                                
|
| |  | 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,
    distribution, metabolism and excretion;                                                                                                                                                                                                                                                                                                                                  
|
| | Phase II:The
    product candidate is studied in patients to identify possible
    adverse effects and safety risks, to establish the dose response
    relationship in the target population, to determine dosage
    tolerance and the optimal dosage, and to collect initial
    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; agreement is reached
    with the FDA, in advance, on the clinical development program,
    including patient numbers and clinical endpoints required for
    marketing approval. Proposed label claims are also discussed
    with the FDA in advance of NDA submission;



| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | submitting the results of preliminary research,
    pre-clinical 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,
through September 30, 2003 the user fee for an application
requiring clinical data, such as a full NDA or BLA, is $533,400.
The FDA adjusts the PDUFA user fees on an annual basis. PDUFA
also imposes an annual product fee for prescription drugs and
biologics (currently $32,400), and an annual establishment fee
(currently $202,900) on facilities used to manufacture
prescription drugs and biologics. We are not at the stage of
development with our product candidates where we would have a
Drug Registration Number and, therefore, we are not yet subject
to these fees.

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
filed, accepted or approved. The results of pre-clinical 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.

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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 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 recently enacted
Best Pharmaceuticals for Children Act 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 any modifications to a product are
proposed, 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, such as fines. 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.

Any 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 vary 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.

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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.

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 fully-integrated pharmaceutical companies,
biopharmaceutical companies, biotechnology companies,
universities and public and private research institutions that
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 are competitive with our
own programs and efforts. Almost all of these entities have
substantially greater research and development capabilities
and/or 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
technologies for the acute treatment of cardiovascular disease,
such as atherosclerosis, that may compete with our product
candidates for acute treatments. However, these technologies are
dealing with a local treatment of cardiovascular disease rather
than a systemic therapy such as with our biopharmaceuticals.
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
disease that may compete with our oral small molecule program
for HDL elevation and lipid regulation. Other companies with
substantially greater research and development resources are
developing products that are competitive with our product
candidates and will seek approval for drugs in later stages of
development that have similar effects as our product candidates.
Some examples of these lipid regulating therapies include
cholesterol absorption inhibitors (one was recently approved by
the FDA), ACAT inhibitors (Phase III development), CETP
inhibitors and vaccines (Phase II development), and nuclear
receptor agonists, or PPARs (Phase II/ III development).

If regulatory approvals for our product
candidates are received, any such products may compete with
several classes of existing drugs for the treatment of
cardiovascular disease, some of which are available in generic
form. For example, drugs currently available for the treatment
of cardiovascular disease 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 our
biopharmaceuticals. There are also surgical treatments such as
coronary artery 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

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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 competitive
position in the future. However, we think that the principal
competitive factors in the markets for ETC-588, ETC-216,
ETC-642, and ETC-1001 are among the following:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | safety and efficacy profile;                                  
|
| |  | product price and degree of reimbursement;                    
|
| |  | ease of administration;                                       
|
| |  | rapidity of effect;                                           
|
| |  | duration and frequency of treatment;                          
|
| |  | product supply;                                               
|
| |  | 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, 2002, we had 65 full-time
employees. Of these employees, 41 were engaged in research,
pre-clinical and clinical development, regulatory affairs and/or
manufacturing activities and 24 were engaged in general and
administrative activities.

Company Information Available on the
Internet

Our website address is www.esperion.com.
Through the investor relations page on our website,
www.esperion.com/investorrelations, we make available
free of charge our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and
any amendments to those reports as soon as reasonably
practicable after we file such reports with the U.S. Securities
and Exchange Commission, or the SEC.

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 July 1998 to the
research and development of product candidates for
cardiovascular disease. We have incurred substantial losses
since we began our operations. As of December 31, 2002, we
had a cumulative net loss of approximately $94.0 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
our 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

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relating to our product candidates will continue
to increase. Manufacturing, sales and marketing costs will
increase as we prepare for the commercialization of our product
candidates.


All of our current 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, three of our product candidates were in-licensed from
third parties. We have limited in-house experience with these
product candidates as well as with product candidates discovered
and owned by us. 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 disease by exploiting 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 are unable to
cost effectively manufacture a product candidate, if we decide
to concentrate our resources on more promising product
candidates, or for any other reason. Decisions regarding the
selection of product candidates for development and the timing
of the development of our product candidates may accelerate the
pre-clinical 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 additional pre-clinical testing involving
animals and clinical trials involving humans, before we can file
applications for product approval.

Many of the product candidates in the
pharmaceutical and biopharmaceutical industries do not
successfully complete pre-clinical testing and clinical trials.
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 pre-clinical 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 regulations, 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
international 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. Even if we believe the clinical trials demonstrate
safety and efficacy of a product, the FDA and international
regulatory authorities may not accept our assessment of the
results and may require us to conduct additional advanced
clinical trials. Approval of a product by comparable regulatory
authorities is 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.

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 safe and effective, or physicians think that the
drug is not safe or effective; patients experience severe and/or
unexpected 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.

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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; the number of
trials utilizing the same patient population; delays in
enrolling patients; 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 any of our future 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.

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 next several years 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.

Our freedom to operate our business or profit
fully from any sales of our future products may be limited if we
enter into collaborative agreements. The inability to establish
one or more collaborative arrangements could adversely affect
our ability to develop and commercialize products.

We are seeking to collaborate with pharmaceutical
companies to gain access to their research, drug development,
regulatory, manufacturing, marketing, sales and financial
resources. However, we may not be able to negotiate arrangements
with any collaborative partners on favorable terms, if at all,
or enter into collaborations that will be commercially
successful. Any collaborative relationships that we enter into
may include restrictions on our freedom to operate our business
or may limit any sales of our future products. If a
collaborative arrangement is established, the collaborative
partner may discontinue funding any particular program or may,
either alone or with others, pursue alternative technologies or
indications or develop alternative product candidates for the
diseases we are targeting. Competing products, developed by a
collaborative partner or to which a collaborative partner has
rights, may result in the collaborative partner withdrawing
support as to all or a portion of our technology.

Without collaborative arrangements, we must fund
our own research, development, manufacturing, marketing and
sales activities that would accelerate the depletion of our cash
and require us to raise substantial additional cash to enable us
to develop our own development, regulatory, manufacturing,
marketing and sales capabilities. Therefore, if we are unable to
establish and maintain satisfactory collaborative arrangements
and if other sources of cash are not available, we could
experience a material adverse effect on our ability to develop
products and, if developed and approved, to manufacture, market
and sell them successfully.

We expect our quarterly and annual results to
fluctuate significantly.

During the next several years, we expect our
quarterly and annual operating results to fluctuate
significantly, depending primarily on the following factors:



| |   |                                                        
| | - | -------------------------------------------------------
| |  | timing of pre-clinical studies and clinical
    trials;

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| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interruptions or delays in the supply of our
    product candidates or components;                                                               
|
| |  | timing of payments to licensors and other third
    parties;                                                                                     
|
| |  | whether we enter into collaboration agreements
    and the timing and accounting treatment of payments, if any, to
    us under those agreements;
|
| |  | timing of patent prosecution and maintenance fees
    and costs;                                                                                 
|
| |  | timing of investments in new technologies; and                                                                                                   
|
| |  | other costs, which may be unexpected.                                                                                                            

If the third-party clinical research
organizations that we rely on to conduct our clinical trials do
not perform in an acceptable and timely manner, or if we are not
able to manage or administer multiple clinical trials
simultaneously, our clinical trials could be delayed or
unsuccessful.

We do not currently have the ability to
independently conduct clinical trials and obtain regulatory
approvals for all of our product candidates, and we currently
rely and intend to continue to rely on third party clinical
investigators and 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.

To date, we have not managed multiple late stage
clinical trials simultaneously. During 2003, we will expect to
have four trials in progress and expect to initiate two
additional clinical trials. It may be difficult or we may be
unable to retain individuals qualified to administer these and
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.

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 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. We are currently exploring ways to
improve the manufacturing process for our ETC-216 product
candidate, as the yield from the current process will need to be
enhanced in order to meet late-stage clinical trial supply and
commercial-scale requirements. If we are unable to improve the
current manufacturing process, we may be unable to complete
future clinical trials for, or to cost-effectively
commercialize, this product candidate. 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, or failures to achieve, scale-up to
    commercial quantities, or changes to current raw material
    suppliers or product manufacturers (whether the change is
    attributable to us or the vendor) 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;                                                                                                                                                           

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | manufacturing and validation of manufacturing
    processes and materials are complicated and time-consuming and
    may not provide yields adequate to meet clinical trial supply or
    commercial scale-up requirements;                                                                                                                                                                                     
|
| |  | because many of our current third-party
    manufacturers are located outside of the United States, there
    may be difficulties in importing our product candidates and/or
    their components into the United States as a result of, among
    other things, FDA import inspections, increased customs security
    measures, 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.                                                                                

If any manufacturer of our product candidates
fails to comply with applicable FDA or other regulatory
requirements including manufacturing, quality control, labeling,
safety surveillance, promoting and reporting, such failure may
result in our criminal prosecution, levy of civil penalties
against us, recall or seizure of any of our future products,
total or partial suspension of production or an injunction, as
well as other regulatory actions against our manufacturers, our
potential products or us. Discovery of previously unknown
problems with a product, supplier, manufacturer or facility may
result in restrictions on the sale of a future product,
including a withdrawal of the product from the market.

The technology underlying our product
candidates is uncertain and unproven.

All of our current product development efforts
are based on unproven technologies and therapeutic approaches
that have not been widely tested or used or approved for
marketing in any country. To date, no products that use our
technology have been commercialized. Our product candidates have
not been proven to be safe and effective in humans, and the
technology on which they are based has been used only in
pre-clinical tests and early clinical trials. Application of our
technology to cardiovascular disease is in early research
stages. Clinical trials of our product candidates may be viewed
as a test of our entire approach to developing therapies for
cardiovascular disease. If our product candidates do not work as
intended, or if the data from our clinical trials indicate that
our product candidates are not safe and effective, the
applicability of our technology for treating cardiovascular
disease will be highly uncertain. As a result, there is a
significant risk that our therapeutic approaches will not prove
to be successful, and there can be no guarantee that our drug
discovery technologies will result in any commercially
successful products.

If one of our biopharmaceutical product
candidates does not show safety and efficacy in early clinical
trials, it could impact the development path for our other
biopharmaceutical product candidates.

The development of each of our biopharmaceutical
product candidates (ETC-588, ETC-216 and ETC-642) is based on
our knowledge and understanding of HDL and how HDL particles
contribute to reverse lipid transport. Until clinical efficacy
can be shown, the success of our biopharmaceutical product
candidates is unknown. While there are important differences in
each of the product candidates in terms of their composition and
properties, each product candidate is focused on affecting
different stages of the RLT pathway. In addition, the three
biopharmaceutical product candidates are infused, rather than
orally administered, and are currently being targeted for the
treatment of patients with acute coronary syndromes.

As a result of these similarities, our product
candidates may be perceived to have overlapping utility in the
treatment of cardiovascular disease. Since we are developing
these product candidates in parallel, we expect to learn from
the results of each trial and apply some of our findings to the
development of the other product candidates. If one of the
product candidates has negative clinical trial results or is
shown to be ineffective, it could impact the development path
and/or future development of the other biopharmaceutical product
candidates. If we find that one of the biopharmaceutical product
candidates is shown to be unsafe, we may be unable to raise
sufficient capital to fund the development of the other
biopharmaceutical product candidates due to any resultant
negative perceptions about HDL as an infused, acute treatment
for cardiovascular disease.

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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 and biopharmaceutical
industries place 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 United States 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.

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

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 or issued patents, 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 forfeit our patents or applications involved
in the interference, cease using the technology or license
rights from prevailing third parties. We could also be subject
to allegations of trade secret violations and other claims
relating to the intellectual property rights of third parties.

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

Our business exposes us to product liability
risks that are inherent in the clinical testing, manufacturing,
marketing and sale of pharmaceutical and biopharmaceutical
products. We may not be able to avoid product liability claims.
Product liability insurance for the pharmaceutical and
biopharmaceutical industries is generally expensive, if
available at all. We have clinical trial liability insurance for
our product candidates in clinical trials; however, there can be
no assurance that such insurance coverage is or will continue to
be

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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
us 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 competitors develop and commercialize
products faster than we do or commercialize products that are
superior to our product candidates, our commercial opportunities
will be reduced or eliminated.

The extent to which any of our product candidates
achieve market acceptance will depend on competitive factors,
many of which are beyond our control. Competition in the
pharmaceutical and biopharmaceutical industries is intense and
has been accentuated by the rapid pace of technology
development. Our competitors include large fully-integrated
pharmaceutical companies, biopharmaceutical companies,
biotechnology companies, universities and public and private
research institutions. 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. These organizations also compete with us to:



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | attract parties for acquisitions, joint ventures
    or other collaborations;  
|
| |  | license the proprietary technology that is
    competitive with our technology;
|
| |  | attract funding; and                                                           
|
| |  | attract and hire scientific talent.                                            

Our competitors may succeed in developing and
commercializing products earlier, and obtaining regulatory
approvals from the FDA more rapidly, than we do. Our competitors
may also develop products or technologies that are superior to
those we are developing, and render our product candidates or
technologies obsolete or non-competitive. If we cannot
successfully compete with new or existing products, our
marketing and sales will suffer and we may not ever be
profitable.

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 any of our future products. We also expect
that most of our product candidates will be considered
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 any of our product
candidates 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 and thereby hinder the sales of
such product.

Our failure to obtain an adequate level of
reimbursement or acceptable prices for any of our future
products could diminish any revenues we may be able to
generate.

Our ability to commercialize any future products
successfully, alone or with collaborators, will depend in part
on the extent to which reimbursement for the products will be
available from:



| |   |                                                  
| | - | -------------------------------------------------
| |  | government and health administration authorities;
|
| |  | private health insurers; and                     
|
| |  | other third-party payors.                        

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Government and other third-party payors
increasingly are attempting to contain healthcare costs by
limiting both coverage and the level of reimbursement for new
drugs. Third party private health insurance coverage may not be
available to patients for any of our future products.

The continuing efforts of government and other
third-party payors to contain or reduce the costs of healthcare
through various means may limit our commercial opportunity and
reduce any associated revenue and profits. We expect proposals
to implement similar government control to continue. In
addition, increasing emphasis on managed care will continue to
put pressure on the pricing of pharmaceutical and
biopharmaceutical products. Cost control initiatives could
decrease the price that we or any potential collaborators could
receive for any of our future products and could adversely
affect our profitability. In addition, in some countries other
than the United States, pricing and profitability of
prescription pharmaceuticals and biopharmaceuticals are subject
to government control.

Even if we obtain regulatory approval of any
of our product candidates, we will not be able to successfully
commercialize such product candidates if we are unable to create
sales, marketing and 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
have no experience in developing, training or managing a sales
force and will incur substantial additional expenses in doing
so. The cost of establishing and maintaining a sales force may
exceed its cost effectiveness. In addition, we will compete with
many companies that currently have extensive and well-funded
marketing and sales operations. Our marketing and sales efforts
may be unable to compete successfully against these companies.

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 President and 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 and international 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.

Notice Regarding Arthur Andersen LLP

Arthur Andersen LLP audited our consolidated
financial statements for the two years in the period ended
December 31, 2001, and the period from our inception in May
1998 to December 31, 2001 and issued a report thereon dated
January 18, 2002. Arthur Andersen LLP has not reissued
their report and has not consented either to the inclusion of
their report on our financial statements in this report or the
incorporation by reference of their report into any of our
registration statements filed with the SEC, and we have relied
on Rule 437a under the Securities Act of 1933, as amended,
in filing this report without such a consent. On June 15,
2002, Arthur Andersen LLP was convicted of obstruction of
justice by a federal jury in Houston, Texas in connection with
Arthur Andersen LLPs work for Enron Corp. On
September 15, 2002, a federal judge upheld this conviction.
Arthur Andersen LLP ceased its audit practice before the
Commission on August 31, 2002. Effective April 18,
2002, we terminated the engagement of Arthur Andersen LLP as our
independent accountants and engaged PricewaterhouseCoopers LLP
to serve as our independent accountants

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for the fiscal year ending December 31,
2002. Because Arthur Andersen LLP has not consented to the
inclusion of their report in this report and because of the
circumstances affecting Arthur Andersen LLP, as a practical
matter, Arthur Andersen LLP may not be able to satisfy any
claims arising from the provision of auditing services to us,
including claims you may have that are available to security
holders under federal and state securities laws.


Executive Officers of Registrant

The following table presents information about
our executive officers.

|                             |  |     |    |  |          |                                                              
|---------------------------- |  | --- | -- |  | -------- | -------------------------------------------------------------
|Name                         |  | Age |    |  | Position
|                             |  |     |    |  |         
|Roger S. Newton, Ph.D.       |  |     | 52 |  |          | President, Chief Executive Officer                           
|Timothy M. Mayleben          |  |     | 42 |  |          | Chief Operating Officer and Chief Financial
    Officer      
|Brian R. Krause, Ph.D.       |  |     | 53 |  |          | Senior Vice President, Preclinical Research and
    Discovery
|Jean-Louis H. Dasseux, Ph.D. |  |     | 44 |  |          | Vice President, Chemistry and Technologies                   
|Frank E. Thomas              |  |     | 33 |  |          | Vice President, Finance and Investor Relations               
|William F. Brinkerhoff       |  |     | 37 |  |          | Vice President, Business Development                         

Dr. Newtonhas
served as our President and Chief Executive Officer and as a
director since July 1998. From August 1981 until May 1998,
Dr. Newton was employed at Parke-Davis Pharmaceutical
Research, Warner-Lambert Company, a publicly-held company,
including as a Distinguished Research Fellow in Vascular and
Cardiac Diseases, and where he was also the co-discoverer,
chairman of the discovery team and a member of the 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.
Dr. Newton 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. Since 2001, Dr. Newton has been a member of 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 was formerly the Executive
Director of the Great Lakes Venture Quest.

Mr. Maylebenhas served as our Chief Financial
Officer since January 1999 and our Chief Operating Officer since
April 2002. Mr. Mayleben served as Senior Vice President,
Operations and Finance from January 2002 until April 2002, after
serving as Vice President, Finance from January 1999 until
January 2002. Mr. Mayleben has more than 16 years
experience working with high-growth technology companies. Prior
to joining Esperion, Mr. Mayleben served as a Director of
Business Development for 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,
including 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 was formerly a member of the Board of
Directors of Computer Challenge Inc., a non-profit corporation.

Dr. Krausehas
served as our Senior Vice President, Preclinical Research and
Discovery since February 2003, after serving as Senior Vice
President, Preclinical Research and Development since January
2002 and as 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, a publicly-held company, 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, a publicly-held company,

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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, Thrombosis and
Vascular Biology.


Dr. Dasseuxhas
served as our Vice President, Chemistry and Technologies since
August 2000, after serving as our Senior Director of Chemistry
since January 1999. Dr. Dasseux has more than 15 years
of experience in the pharmaceutical industry focusing on
chemistry, lipoprotein metabolism and atherosclerosis.
Dr. Dasseux has more than 22 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 Vice President, Finance and Investor Relations in
April 2002 after serving as our Senior Director, Finance and
Investor Relations since January 2002. Prior to that,
Mr. Thomas served as our Director of Finance and Controller
from March 2000 to January 2002. 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, including
as an audit manager in the Detroit office. Mr. Thomas
received a B.B.A. from the University of Michigan in 1992.

Mr. Brinkerhoffwas appointed Vice President, Business
Development in May 2002. Mr. Brinkerhoff has more than
13 years of experience in the pharmaceutical and
biotechnology industries. From January 1999 to May 2002,
Mr. Brinkerhoff was employed by Sankyo Pharma Inc., the
U.S. subsidiary of the Tokyo-based pharmaceutical company Sankyo
Co., Ltd., as Director of Business Development. From November
1996 to December 1998, he served as Director of Market Planning
& Sales Operations at Sankyo Pharma Inc., after serving as
Manager of Market Research for Sankyo USA Corporation from June
1995 to November 1996, during which time he was a member of the
senior negotiating team that formed the Sankyo/ Parke-Davis
joint venture. Prior to that, Mr. Brinkerhoff worked as an
account manager for the pharmaceutical industry group at Oracle
Corporation, a publicly-held company, from 1994 to 1995, and
worked in various sales, marketing and manufacturing management
positions for the Lederle Laboratories division of American
Cyanamid, a publicly-held company, from 1989 to 1994.
Mr. Brinkerhoff received B.S. and M.S. degrees in
Industrial and Operations Engineering and an M.B.A. from the
University of Michigan. Mr. Brinkerhoff has been a member
of the Licensing Executives Society since 1999.

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 December 2003. The lease for the
remaining space also 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 oral small molecule program. The lease
expires in April 2003, but includes an option to extend for
three additional six-month terms. Outside of the United States,
we lease office space in Bromma, Sweden, which currently
occupies approximately 4,600 square feet. This lease expires in
June 2004. 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.

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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, 2002.

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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 are as follows:

|                              |                                           |               |   |       |     |  |   |       | 
|----------------------------- | ----------------------------------------- | ------------- | - | ----- | --- |  | - | ----- | 
|                              |                                           |              
|                              |                                           | Market Prices |  
|                              |                                           |               |  
|                              |                                           | High          |   |       | Low | 
|                              |                                           |               |   |       |     | 
|Year ended December 31, 2002: |                                           |               |   |       |     |  |   |      
|                              | Fourth quarter                            |               | $ | 7.20  |     |  | $ | 5.14  | 
|                              | Third quarter                             |               |   | 6.34  |     |  |   | 4.15  | 
|                              | Second quarter                            |               |   | 6.63  |     |  |   | 4.03  | 
|                              | First quarter                             |               |   | 7.43  |     |  |   | 4.50  | 
|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, 2002, there were
approximately 307 stockholders of record of our common
stock. This may not be an accurate indication of the total
number of beneficial owners of our common stock as of
December 31, 2002, since many shares are held by nominees
in street name for 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

Not applicable.

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|        |                                     
|------- | ------------------------------------
|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 31, the consolidated financial statements and notes
beginning on page 39. The selected consolidated financial
data for the years ended December 31, 2002, 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, |        
|                                                                               |                                                  | 2002                    |            |        | 2001         |   |            | 2000         |         |   | 1999       |         |         | 1998 |           |       | 2002    |  
|                                                                               |                                                  |                         |            |        |              |   |            |              |         |   |            |         |         |      |           |       |         |  
|Operating expenses:                                                            |                                                  |                         |            |        |              |   |            |              |         |   |            |         |         |      |           |       |         |   |           |       |        |   |          |        
|                                                                               | Research and development                         |                         | $          | 21,991 |              |   | $          | 21,454       |         |   | $          | 22,596  |         |      | $         | 8,484 |         |   | $         | 1,923 |        |   | $        | 76,448  |        
|                                                                               | General and administrative                       |                         |            | 5,955  |              |   |            | 5,023        |         |   |            | 3,156   |         |      |           | 2,518 |         |   |           | 464   |        |   |          | 17,116  |        
|                                                                               | Goodwill amortization                            |                         |            |       |              |   |            | 839          |         |   |            | 250     |         |      |           |      |         |   |           |      |        |   |          | 1,089   |        
|                                                                               | Purchased in-process research and development(1) |                         |            |       |              |   |            |             |         |   |            | 4,000   |         |      |           |      |         |   |           |      |        |   |          | 4,000   |        
|                                                                               |                                                  |                         |            |        |              |   |            |              |         |   |            |         |         |      |           |       |         |  
|                                                                               |                                                  | Operating loss          |            |        | (27,946      | ) |            |              | (27,316 | ) |            |         | (30,002 | )    |           |       | (11,002 | ) |           |       | (2,387 | ) |          |         | (98,653 | )
|Other income (expense), net                                                    |                                                  |                         | (780       | )      |              |   | 2,385      |              |         |   | 2,426      |         |         |      | 332       |       |         |   | 244       |       |        |   | 4,607    |        
|                                                                               |                                                  |                         |            |        |              |   |            |              |         |   |            |         |         |      |           |       |         |  
|Net loss                                                                       |                                                  |                         | (28,726    | )      |              |   | (24,931    | )            |         |   | (27,576    | )       |         |      | (10,670   | )     |         |   | (2,143    | )     |        |   | (94,046  | )      
|                                                                               | Beneficial conversion feature(2)                 |                         |            |       |              |   |            |             |         |   |            | (22,870 | )       |      |           |      |         |   |           |      |        |   |          | (22,870 | )      
|                                                                               |                                                  |                         |            |        |              |   |            |              |         |   |            |         |         |      |           |       |         |  
|Net loss attributable to common stockholders                                   |                                                  | $                       | (28,726    | )      |              | $ | (24,931    | )            |         | $ | (50,446    | )       |         | $    | (10,670   | )     |         | $ | (2,143    | )     |        | $ | (116,916 | )      
|                                                                               |                                                  |                         |            |        |              |   |            |              |         |   |            |         |         |      |           |       |         |  
|Basic and diluted net loss per share                                           |                                                  | $                       | (0.98      | )      |              | $ | (0.91      | )            |         | $ | (4.50      | )       |         | $    | (5.91     | )     |         | $ | (1.46     | )     |        |   |          |        
|                                                                               |                                                  |                         |            |        |              |   |            |              |         |   |            |         |         |      |           |       |         |  
|Shares used in computing basic and diluted net
    loss per share(3)           |                                                  |                         | 29,260,930 |        |              |   | 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(3) |                                                  |                         |            |        |              |   |            |              |         |   | 20,603,313 |         |         |      | 9,392,499 |       |         |   |           |       |        |   |          |        
|                                                                               |                                                  |                         |            |        |              |   |            |              |         |   |            |         |         |      |           |       |         |  

Consolidated Balance Sheet Data (in
thousands):

|                                                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------ | -
|                                                  |  | 2002 |         |   | 2001 |   |         | 2000 |  |   | 1999    |   |  | 1998 |        
|                                                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Cash, cash equivalents and short-term investments |  | $    | 44,853  |   |      | $ | 70,286  |      |  | $ | 70,228  |   |  | $    | 5,904   |   |  | $ | 12,541 |  
|Working capital                                   |  |      | 40,330  |   |      |   | 64,926  |      |  |   | 64,181  |   |  |      | 3,143   |   |  |   | 12,390 |  
|Total assets                                      |  |      | 51,407  |   |      |   | 78,340  |      |  |   | 77,877  |   |  |      | 7,999   |   |  |   | 13,414 |  
|Long-term debt, less current portion              |  |      | 7,731   |   |      |   | 5,482   |      |  |   | 3,027   |   |  |      | 2,284   |   |  |   |       |  
|Convertible preferred stock                       |  |      |        |   |      |   |        |      |  |   |        |   |  |      | 105     |   |  |   | 105    |  
|Deficit accumulated during the development stage  |  |      | (94,046 | ) |      |   | (65,320 | )    |  |   | (40,389 | ) |  |      | (12,813 | ) |  |   | (2,143 | )
|Total stockholders equity                        |  |      | 38,743  |   |      |   | 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.

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.            
|   
|(3) | 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.

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 the treatment of cardiovascular disease. We are a
development stage biopharmaceutical company and have not
generated any revenues from any source, including from product
sales. We have incurred a cumulative net loss of approximately
$94.0 million from inception (May 18, 1998) through
December 31, 2002. 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 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 be incurred and will increase in
preparation for the commercialization of our product candidates.
Until we generate positive cash flow, we will rely on financing
our operations with our existing cash balance, additional equity
or debt offerings and/or payments from potential strategic
relationships with partners that we may enter into in the future.

Results of Operations

Operating
Expenses

|                           |            |                         |        |      |          |  |        |      |  |   |          |      |   |      |        |    |  |   |        |      |  
|-------------------------- | ---------- | ----------------------- | ------ | ---- | -------- |  | ------ | ---- |  | - | -------- | ---- | - | ---- | ------ | -- |  | - | ------ | ---- | -
|                           |            |                        
|                           |            | Year Ended December 31, |       
|                           |            |                         |       
|In thousands               |            | 2002                    |        |      | % Change |  |        | 2001 |  |   | % Change |      |   | 2000 |       
|                          
|                           |           
|Research and development   |            | $                       | 21,991 |      |          |  | 2.5    | %    |  | $ | 21,454   |      |   |      | -5.0   | %  |  | $ | 22,596 |     
|                           | % of total |                         |        | 78.7 | %        |  |        |      |  |   |          | 78.6 | % |      |        |    |  |   |        | 75.3 | %
|General and administrative |            | $                       | 5,955  |      |          |  | 18.6   | %    |  | $ | 5,023    |      |   |      | 59.2   | %  |  | $ | 3,156  |     
|                           | % of total |                         |        | 21.3 | %        |  |        |      |  |   |          | 18.4 | % |      |        |    |  |   |        | 10.5 | %
|Goodwill amortization      |            | $                       | 0      |      |          |  | (100.0 | )%   |  | $ | 839      |      |   |      | 235.6  | %  |  | $ | 250    |     
|                           | % of total |                         |        | 0.0  | %        |  |        |      |  |   |          | 3.0  | % |      |        |    |  |   |        | 0.8  | %
|Purchased in-process R&D   |            | $                       | 0      |      |          |  |       |      |  | $ | 0        |      |   |      | (100.0 | )% |  | $ | 4,000  |     
|                           | % of total |                         |        | 0.0  | %        |  |        |      |  |   |          | 0.0  | % |      |        |    |  |   |        | 13.4 | %

Year
Ended December 31, 2002.

Research and Development Expenses.Research and development expenses
include both internal and external costs related to the research
and development activities for our existing product candidates,
as well as discovery efforts on potential new product
candidates. External costs include costs related to
manufacturing, process development, clinical trials, toxicology
or pharmacology studies performed by third parties, milestone
payments under certain license and other 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. Research and
development expenses increased to approximately
$22.0 million for the year ended December 31, 2002
compared to approximately $21.5 million for the year ended
December 31, 2001. This 2.5% increase is primarily due to
the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Higher clinical trial costs for our product
    candidates.During 2002, patients were
    being enrolled in the following four clinical trials, the costs
    of which were higher than for clinical trials in 2001, partly
    because the clinical trials in 2002 were more costly per subject
    enrolled: Phase II trials of our ETC-216 (AIM)
    and ETC-588 (LUV) product candidates and two
    Phase I trials of our ETC-642 (RLT Peptide)
    product candidate. The ETC-216-002 trial began in November 2001
    and represents the first Phase II clinical trial for this
    product candidate. The study will evaluate up to 50 patients
    with acute coronary syndromes and evaluate the changes in plaque
    volume in each patients coronary arteries between pre- and
    post-treatment with ETC-216. The ETC-588-004 trial began in June
    2002 and the ETC-588-005 trial began in December 2002,
    representing the second and third Phase II clinical trials
    for this product candidate. The ETC-588-004 trial is expected to
    evaluate 32 patients with carotid

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | atherosclerosis and evaluate changes in plaque
    volume in each patients carotid arteries using magnetic
    resonance imaging after administration of ETC-588. The
    ETC-588-005 trial will evaluate 150 patients who have been
    hospitalized for acute coronary syndrome to determine the safety
    and tolerability of ETC-588. Also during 2002, the ETC-642-001
    trial was completed and the ETC-642-002 trial began (September
    2002). These two studies examine an escalating, single-dose of
    ETC-642 to examine the safety and tolerability of the product
    candidate in patients with stable atherosclerosis. During 2001,
    the Company incurred costs related to four clinical trials: the
    completion of the ETC-216-001 Phase I trial, the initiation
    of the ETC-216-002 Phase II trial, ongoing enrollment in
    the ETC-588-003 Phase II trial and initiation of the
    ETC-642-001 Phase I trial.
|
| |  | Higher pre-clinical costs in development of
    oral small molecule lead candidate.During 2002, we prepared for an Investigational New Drug
    application (IND) for our lead oral small molecule product
    candidate, ETC-1001 (formerly designated ESP 31015). This
    resulted in higher costs related to process development and
    pharmacology and toxicology studies for this product candidate
    during 2002 as compared to 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Product candidate supply
    costs.In preparation for current and
    future pre-clinical and clinical studies, we incur costs related
    to process development, scale-up and production for each product
    candidate. During 2002, the costs related to these activities
    were higher than in 2001 due to the increased material supply
    needed to support the future and current clinical trials, as
    well as an increase in patient numbers and dosage regimens being
    tested.                                                                                                                                                                                                                                                                                                                                                                                                                                                 

The magnitude of our operating expenses,
particularly research and development expense, is largely
dependent upon the progress, number, timing, nature and size of
clinical trials. As our product candidates progress through
development, clinical trial costs will continue to increase due
to the need for more advanced clinical trials that require more
patients.

General and Administrative Expenses.General and administrative expenses
included the cost of salaries, employee benefits, and other
costs associated with our finance, accounting, human resources,
legal, administrative and executive management functions, as
well as an allocation of overhead expenses. General and
administrative expenses increased to approximately
$6.0 million for the year ended December 31, 2002
compared to approximately $5.0 million for the year ended
December 31, 2001. This 18.6% increase primarily relates to
$605,000 of one time charges during the year ended
December 31, 2002 that were classified as general and
administrative expenses in the accompanying statements of
operations. The charges represented approximately 2% of our
annual operating expenses and included the following:



| |   |                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The write-down of assets no longer being used in
    the Companys development programs totaling approximately
    $410,000;                                                                                                                                                                                          
|
| |  | Employee severance and benefits of approximately
    $168,000 resulting from actions announced in March 2002 to
    curtail or significantly reduce spending on certain pre-clinical
    research and other activities that lie outside of the
    Companys primary areas of focus in cardiovascular disease;
    and
|
| |  | The remaining obligations of $27,000 under an
    operating lease for a laboratory facility in Sweden that is no
    longer being used.                                                                                                                                                                               

In addition, the increase resulted from a greater
number of general and administrative personnel, as well as
increased overhead and related costs.

Goodwill Amortization.We adopted SFAS No. 142,
effective January 1, 2002, under which goodwill and certain
indefinite lived intangible assets are no longer amortized, but
are reviewed at least annually for impairment. In connection
with the adoption of SFAS No. 142, we have completed the
transitional goodwill impairment test, which requires us to
compare its fair value to the carrying value of its net assets.
Based on this analysis, we have concluded that no impairment
existed at the time of adoption, and, accordingly, we have not
recognized any transitional impairment loss.

Goodwill amortization reflects the amortization
amount of the excess of the purchase price over net assets in
our September 2000 acquisition of Talaria Therapeutics, Inc.
(Talaria) and the milestone payments

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made to date under the related merger agreement.
Goodwill amortization expense was $0 and $839,000 for the years
ended December 31, 2002 and 2001, respectively. Net
goodwill included in our Consolidated Balance Sheets was
$3.1 million at December 31, 2002 and
December 31, 2001.


Other Income (Expense).Other income (expense) consists of
interest income, interest expense, foreign currency transaction
gain (loss), and other non-operating income and expenses.
Interest income decreased to approximately $1.1 million for
the year ended December 31, 2002, compared to approximately
$2.8 million for the year ended December 31, 2001. The
decrease is primarily attributable to lower cash levels combined
with lower yields on our invested assets in 2002 compared to
2001, as well as the use of more conservative investment
instruments in 2002 as compared to 2001. Interest expense for
the years ended December 31, 2002 and December 31,
2001 was approximately $1.1 million and $766,000,
respectively, and represents interest incurred on equipment
financing facilities and a special project loan. The increase in
interest expense resulted from higher outstanding borrowings in
2002 as compared to the same period in 2001.

During the year ended December 31, 2002, we
recorded approximately $703,000 of unrealized foreign currency
transaction losses compared to approximately $400,000 of
unrealized foreign currency transaction gains for the year ended
December 31, 2001. These transaction gains (losses) result
from liabilities denominated in foreign currencies, primarily
the Swedish Kronor and the Euro. As the exchange rate between
the U.S. Dollar and these currencies fluctuates, we record a
gain (loss) on these transactions. During the year ended
December 31, 2002, the U.S. Dollar has generally weakened
against these foreign currencies causing these unrealized
losses, whereas the opposite was true during the year ended
December 31, 2001.

Net Loss.Our net
loss was approximately $28.7 million for the year ended
December 31, 2002, compared to approximately
$24.9 million for the year ended December 31, 2001.
The increase in net loss resulted primarily from the decrease in
interest income of approximately $1.8 million, the increase
in unrealized foreign currency transaction losses of
approximately $1.1 million, and the increases in general
and administrative expenses of approximately $932,000, offset in
part by the decrease in goodwill amortization of approximately
$839,000.



| |                              
| | -----------------------------
| | Year Ended December 31, 2001.

Research and Development Expenses.Research and development expenses
included both external and internal costs related to the
research and development activities for our existing product
candidates as well as discovery efforts on potential new product
candidates. External costs include costs related to
manufacturing, process development, 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. 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 conducting more trials and because the types
of clinical trials in 2001 were more costly per subject
enrolled. The magnitude of our operating expenses, particularly
research and development expenses, is largely dependent upon the
timing and size of the clinical trials and manufacturing
material used in those clinical trials.

General and Administrative Expenses.General and administrative expenses
included the cost of salaries, employee benefits, and other
costs associated with our finance, accounting, human resources,
legal, administrative and executive management functions, as
well as an allocation of overhead expenses. 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 our 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

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expenses in 2001 are costs associated with a
market research study performed by a third party to provide us
with some preliminary assessments about product positioning,
product acceptance and market potential of certain product
candidates. In addition, we incurred higher costs in 2001
related to our first full 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 our September 2000 acquisition of 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 was
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. We
had 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.

Other Income (Expense).Other 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 yields on our invested assets in 2001, as compared to
2000. Interest expense for the same periods was approximately
$766,000 and $408,000, respectively, and represented 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, was primarily
attributable to the non-cash $4.0 million purchased
in-process research and development write-off in 2000 related to
our acquisition of Talaria.

Liquidity and Capital Resources

As of December 31, 2002 and 2001, we had
cash, cash equivalents and short-term investments of
approximately $45.0 million and $70.3 million,
respectively. 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, will be sufficient to fund our operations as currently
planned, capital expenditures and debt service until at least
the second half of 2004.

During the years ended December 31, 2002,
2001 and 2000, net cash used in operating activities was
approximately $26.6 million, $22.8 million and
$18.0 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, 2002, 2001 and 2000 was
$5.5 million, $2.1 million and $2.0 million,
respectively, primarily the result of net purchases of
short-term investments in 2002 of approximately
$4.4 million, and 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
$1.4 million, $25.0 million and $84.1 million for
the years ended December 31, 2002, 2001 and 2000,
respectively. The net cash proceeds from financing activities
for the year ended December 31, 2002 resulted from
$2.1 million of additional borrowings on a special project
loan and certain equipment term loans and $384,000 raised
through the issuance of common stock to employees as part of our
equity compensation plans. The proceeds were partially offset by
$1.1 million of cash used to repay borrowings under certain
equipment term loans. The net cash proceeds from financing
activities for the year ended December 31, 2001 resulted
primarily from $22.3 million raised in our July 2001 private

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placement of 3,183,335 shares of common stock 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 our 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 continue to evaluate opportunities to issue
additional equity, obtain credit from lenders, enter into
strategic relationships, or to otherwise strengthen our
financial position. The issuance of additional equity, whether
publicly or privately, could result in dilution to our current
stockholders. From time to time, we may consider the acquisition
of or investment in complementary businesses, products or
technologies that might affect our liquidity requirements or
position or cause us to issue additional securities. There can
be no assurance that financing will be available to us in
amounts or on terms acceptable to us, if at all.

In 2003, we plan to enter into a corporate
collaboration with respect to one or more of our product
candidates. We are seeking to collaborate with one or more
established pharmaceutical companies that can provide
substantial and complementary drug development, regulatory,
manufacturing, promotional and financial skills and resources.
The goals of any such collaboration will be to retain a portion
of the development and marketing rights with respect to the
product candidates while broadening the commercial potential for
each product candidate.

We believe that, for our biopharmaceuticals, the
preferred collaboration will include co-development and
co-promotion rights in North America. Internationally, we will
seek a collaboration with a partner who would develop, market,
sell and distribute our product candidates outside of North
America. We have also recently initiated discussions with
potential partners for our oral small molecule program. In that
case, we are pursuing a research and development collaboration.

As of December 31, 2002, we had the
following credit facilities and outstanding borrowings:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A $2.0 million credit facility with a U.S.
    bank that may be used to finance purchases of equipment that is
    pledged as collateral: Borrowings under this facility bear
    interest at the banks prime rate (4.25% at
    December 31, 2002). Borrowings outstanding under this
    facility as of December 31, 2002 amounted to approximately
    $1.1 million and must be repaid by May 2006. No additional
    borrowings are allowed. In connection with the agreement, the
    Company has to maintain a minimum tangible net worth of
    $9.0 million and invest a minimum of $10.0 million
    with the U.S. bank. The Companys investment with the U.S.
    bank was below the required threshold at December 31, 2002.
    However, the Company obtained a waiver from the U.S. bank and
    has corrected the non-compliance.                                                                                                                                                                                                                                                          
|
| |  | An additional credit facility with a U.S. lending
    institution to finance purchases of equipment that is pledged as
    collateral: This facility allowed for borrowings of up to
    $2.5 million. Approximately $1.2 million was
    outstanding under this facility at a weighted average interest
    rate of 12% as of December 31, 2002. Outstanding amounts
    under this facility must be repaid by November 2004 and no
    additional borrowings are allowed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | A credit facility with a Swedish entity totaling
    a principal amount of 50 million Swedish Kronor
    ($5.8 million as of December 31, 2002): The proceeds
    from this facility may only be used to fund the development of
    our ETC-216 (AIM) product candidate. If results
    achieved by the AIM project are not capable of being used
    commercially, our obligation to repay the loan plus a portion of
    accrued interest 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 of 7.5 million Swedish kronor ($859,000), amounted
    to 52.5 million Swedish Kronor ($6.1 million) as of
    December 31, 2002. We are in discussions with the Swedish
    entity regarding the principal amount of 5 million Swedish
    Kronor remaining under the facility, disbursement of which is
    related to completion

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | of the final milestone under the facility. The
    milestone may be achieved in the future; however, the funds may
    be unavailable to us due to the ramp down of our operations in
    Sweden during 2002. A condition under the credit facility is
    that the project be principally carried out in Sweden.                                                                                                      
|
| |  | An agreement with a Michigan non-profit
    corporation whereby we can borrow up to $447,000 for equipment
    purchases, pledged as collateral, at an interest rate of 4%: As
    of December 31, 2002, outstanding borrowings under this
    arrangement totaled $447,000 and must be repaid by November
    2008. As required by the agreement, the Company will begin
    making principal payments in August 2004.

We anticipate that our capital expenditures for
the next twelve months will be approximately $700,000. We expect
that these expenditures will primarily relate to lab and
computer equipment.

Our fixed material external commitments based on
contractual obligations are as follows (in thousands):

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|------------------------------ |  | ----- | ----- |  | ---- | - | ----- | ---- |  | - | ----- |  |  | -------- | ----- |  | ---- | - | ----- | ------ |  | - | ----- |  |  | - | ----- | 
|                               |  |       |       |  |      |   |       |      |  |   |       |  |  | 2008 and |      
|                               |  | Total |       |  | 2003 |   |       | 2004 |  |   | 2005  |  |  | 2006     |       |  | 2007 |   |       | Beyond | 
|                               |  |       |       |  |      |   |       |      |  |   |       |  |  |          |       |  |      |   |       |        | 
|Current and long term debt(1)  |  | $     | 8,792 |  |      | $ | 1,061 |      |  | $ | 2,161 |  |  | $        | 1,513 |  |      | $ | 1,275 |        |  | $ | 1,520 |  |  | $ | 1,262 | 
|Operating lease commitments(2) |  |       | 758   |  |      |   | 723   |      |  |   | 35    |  |  |          |      |  |      |   |      |        |  |   |      |  |  |   |      | 
|Capital expenditure(2)(3)      |  |       | 400   |  |      |   | 400   |      |  |   |      |  |  |          |      |  |      |   |      |        |  |   |      |  |  |   |      | 
|                               |  |       |       |  |      |   |       |      |  |   |       |  |  |          |       |  |      |   |       |        | 
|                               |  | $     | 9,950 |  |      | $ | 2,184 |      |  | $ | 2,196 |  |  | $        | 1,513 |  |      | $ | 1,275 |        |  | $ | 1,520 |  |  | $ | 1,262 | 
|                               |  |       |       |  |      |   |       |      |  |   |       |  |  |          |       |  |      |   |       |        | 






|    |                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We have various credit facilities and outstanding
    borrowings as described above.                                                                                                                                                                                                                          
|   
|(2) | We lease our corporate and research and
    development facilities under operating leases expiring at
    various times through June 2004. Under certain arrangements,
    including our headquarters facility arrangement, we may extend
    these leases for one or more additional periods.                
|   
|(3) | We entered into an agreement with a scientific
    instrument manufacturer to purchase a specialized piece of
    equipment for $1,000,000, $600,000 of which has been paid. We
    are obligated to pay the remaining $400,000 upon approval by us
    of the instrument meeting the original specifications.

We also have material external commitments that
total approximately $35.2 million that may change as
certain factors change. We enter into various agreements with
third parties related to the research and development activities
of our existing product candidates as well as discovery efforts
on potential new product candidates. These agreements include
costs related to manufacturing, clinical trials and toxicology
or pharmacology studies performed by third parties. We estimate
that the remaining amount to be incurred under these agreements
total approximately $5.0 million as of December 31,
2002. The amount and timing of these commitments may change, as
they are largely dependent on the enrollment and timing of the
clinical trials. We also have entered into license and other
agreements with certain third parties, which require us to make
payments upon any achievement of the milestones set forth in the
agreements. The remaining payments that we could be obligated to
make under those agreements could over time amount to up to
$30.2 million. Some of these payments may be fulfilled
through the issuance of common stock, at our option. If we sell
products using technology licensed or owned under the
agreements, we would be obligated to make royalty payments to
the third parties 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, 2002 and 2001, we had
operating loss carryforwards of approximately $63.9 million
and $41.1 million, respectively. These net operating loss
carryforwards expire beginning in 2013. Additionally,

36



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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, 2002, we had 65 full-time
employees. Of these employees, 41 were engaged in research,
pre-clinical and clinical development, regulatory affairs and/or
manufacturing activities and 24 were engaged in general and
administrative activities.

Critical Accounting Policies

Managements discussion and analysis of the
Companys financial condition and results of operations are
based upon the Companys Consolidated Financial Statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States of America.
The preparation of these financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
any contingent assets and liabilities as of the date of the
financial statements and reported amounts of revenues and
expenses during the reporting period. Management regularly
reviews its estimates and assumptions, which are based on
historical experience and on various other factors and judgments
about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ
from these estimates and assumptions.

Management believes that the following critical
accounting policy is affected by significant judgments and
estimates used in the preparation of its consolidated financial
statements:

We record estimated expenses under the contracts
with third parties on a percentage of completion basis. These
contracts cover ongoing clinical trials, manufacturing and
supply agreements, and third party toxicology or pharmacology
studies. These contracts generally have terms ranging from a
couple of months to approximately two years. The expenses are
recorded as the work under the contract is completed and we may
record an accrued liability or prepaid expense on our
Consolidated Balance Sheet, depending on the payment terms under
each contract. As of December 31, 2002, we had total
potential obligations of approximately $10.2 million under
contracts accounted for on the percentage of completion basis.
Management estimates that approximately $5.2 million of the
contract obligations had been incurred through December 31,
2002 and approximately $1.0 million is included in accrued
liabilities in the accompanying balance sheet, for expenses
under contracts on the percentage of completion basis.

New Accounting Pronouncements

In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure (SFAS 148). SFAS 148
amends SFAS No. 123 Accounting for Stock-Based
Compensation (SFAS 123) to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure
provisions of SFAS 123 to require prominent disclosure
about the effects on reported net income of an entitys
accounting policy decisions with respect to stock-based employee
compensation. SFAS 148 also amends APB Opinion No. 28,
Interim Financial Reporting, to require disclosure
about the effects of SFAS 148 in interim financial
information. This statement is effective for fiscal years ending
after December 15, 2002. We intend to continue to use the
intrinsic value method to account for stock based employee
compensation.

In July 2002, the Financial Accounting Standards
Board issued SFAS No. 146, Accounting for
Restructuring Costs, (SFAS 146) which
applies to costs associated with an exit activity, including
restructuring, or with a disposal of long-lived assets.
SFAS 146 requires that a liability be recorded for costs
associated with exit or disposal activity when the liability is
incurred and can be measured at fair value, rather than at the
date of commitment to an exit activity. SFAS 146 also
requires disclosures about exit and disposal activities, the
related costs, and changes in those costs in the notes to the
financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the
activity is completed. SFAS 146 is effective prospectively
for exit or disposal activities initiated after
December 31, 2002, although

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earlier adoption is encouraged. We do not expect
the adoption of SFAS 146 to have a material effect on our
financial statements.


In November 2002, the FASB released FASB
Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others: an interpretation
of FASB Statements No. 5, 57 and 107 and recission of FASB
Interpretation No. 34. FIN 45 establishes new
disclosure and liability-recognition requirements for direct and
indirect debt guarantees with specified characteristics. The
initial measurement and recognition requirements of FIN 45
are effective prospectively for guarantees issued or modified
after December 31, 2002. However, the disclosure
requirements are effective for interim and annual
financial-statement periods ending after December 15, 2002.
We have adopted the disclosure provisions and we do not expect
the full adoption of FIN 45 to have a material impact on
our results of operations or financial position.






|         |                                                               
|-------- | --------------------------------------------------------------
|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 that we can earn on our investment
portfolio and on the increase or decrease in the amount of
interest expense that 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 funds by limiting default risks,
market risk and reinvestment risk. We mitigate default risk by
investing in investment grade securities and limiting our
exposure to any one security. 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,
2002. Declines in interest rates reduce our interest income as
described on page 33 in Managements Discussion and
Analysis, under the subcaption Year Ended
December 31, 2002, Other Income (Expense), while
increases in interest rates increase our interest expense.

The functional currency for our foreign operation
is the Swedish Kronor. As such, changes in exchange rates
between the Swedish Kronor and the U.S. Dollar could adversely
affect our future net income (loss). Given the level of activity
we currently have with our foreign operations, we consider this
exposure to be minimal. A 10% change in exchange rates would not
have a significant impact on our future net income (loss).
Additionally, at December 31, 2002, we had approximately
$6.0 million in inter-company advances denominated in
Swedish Kronor for which changes in the exchange rate will
result in foreign currency transaction gains or losses that are
charged to Other income (expense) in the accompanying Statements
of Operations.

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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 |   
|                                                    |  |      |   
|Reports of Independent Accountants                  |  |      | 40 | 
|Consolidated Balance Sheets                         |  |      | 42 | 
|Consolidated Statements of Operations               |  |      | 43 | 
|Consolidated Statements of Stockholders
    Equity |  |      | 44 | 
|Consolidated Statements of Cash Flows               |  |      | 46 | 
|Notes to Consolidated Financial Statements          |  |      | 47 | 

39



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##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated
balance sheet as of December 31, 2002 and the related
consolidated statements of operations, of stockholders
equity and of cash flows present fairly, in all material
respects, the financial position of Esperion Therapeutics, Inc.
and its subsidiaries (a development stage enterprise) at
December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America. 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 audit. We
did not audit the cumulative totals of the company for the
period from May 18, 1998 (date of inception) to
December 31, 2001, which totals reflect a deficit of
$65,320,000 accumulated during the development stage. Those
cumulative totals were audited by other independent accountants
who have ceased operations and whose report dated
January 18, 2002, expressed an unqualified opinion on the
cumulative amounts. We conducted our audit of these statements
in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion. The financial statements of Esperion
Therapeutics, Inc. as of December 31, 2001, and for each of
the two years in the period ended December 31, 2001, prior
to the revisions described in Note 2 to the financial
statements, were audited by other independent accountants who
have ceased operations. Those independent accountants expressed
an unqualified opinion on those financial statements in their
report dated January 18, 2002.

Effective in 2002, and as discussed in
Note 2, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets.

As discussed above, the consolidated financial
statements of Esperion Therapeutics, Inc. and subsidiaries as of
December 31, 2001, and for each of the two years in the
period ended December 31, 2001, were audited by other
independent accountants who have ceased operations. As described
in Note 2, these financial statements have been revised to
include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, which was adopted by the Company
as of January 1, 2002. We audited the transitional
disclosures described in Note 2. In our opinion, the
transitional disclosures for 2001 and 2000 in Note 2 are
appropriate. However, we were not engaged to audit, review, or
apply any procedures to the 2001 or 2000 financial statements of
the Company other than with respect to such disclosures and,
accordingly, we do not express an opinion or any other form of
assurance on the 2001 or 2000 financial statements taken as a
whole.



| |                           
| | --------------------------
| | PRICEWATERHOUSECOOPERS LLP

Detroit, Michigan

January 21,
2003


40



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##### Table of Contents



THE FOLLOWING IS A COPY OF A REPORT PREVIOUSLY
ISSUED BY ARTHUR ANDERSEN LLP (ANDERSEN). THIS
REPORT HAS NOT BEEN REISSUED BY ANDERSEN AND ANDERSEN DID NOT
CONSENT TO THE INCORPORATION BY REFERENCE OF THIS REPORT (AS
INCLUDED IN THIS FORM 10-K) INTO ANY OF THE COMPANYS
REGISTRATION STATEMENTS.

AS DISCUSSED IN THE GOODWILL AND OTHER
INTANGIBLES NOTE, THE COMPANY HAS REVISED ITS FINANCIAL
STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 TO
INCLUDE THE TRANSITIONAL DISCLOSURES REQUIRED BY STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS. THE ANDERSEN REPORT DOES NOT
EXTEND TO THESE CHANGES. THE REVISIONS TO THE 2001 AND 2000
FINANCIAL STATEMENTS RELATED TO THESE TRANSITIONAL DISCLOSURES
WERE REPORTED ON BY PRICEWATERHOUSECOOPERS LLP, AS STATED IN
THEIR REPORT APPEARING HEREIN.

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, |  
|                                                                                                                                |                                                                                                                                                                                                              | 2002                       |        |         | 2001         |  
|In thousands, except share data                                                                                                 |                                                                                                                                                                                                              |                            |        |         |              |  
|ASSETS                                                                                                                          |                                                                                                                                                                                                              |                            |        |         |              |   |        |        
|Current Assets:                                                                                                                 |                                                                                                                                                                                                              |                            |        |         |              |   |        |        
|                                                                                                                                | Cash and cash equivalents                                                                                                                                                                                    |                            | $      | 40,499  |              |   | $      | 70,286  |       
|                                                                                                                                | Short-term investments                                                                                                                                                                                       |                            |        | 4,354   |              |   |        |        |       
|                                                                                                                                | Prepaid expenses and other                                                                                                                                                                                   |                            |        | 410     |              |   |        | 1,000   |       
|                                                                                                                                |                                                                                                                                                                                                              |                            |        |         |              |  
|                                                                                                                                |                                                                                                                                                                                                              | Total current assets       |        |         | 45,263       |   |        |         | 71,286 | 
|Furniture and equipment, less accumulated
    depreciation of $3,690 and $2,415 at December 31, 2002 and
    2001, respectively |                                                                                                                                                                                                              |                            | 3,001  |         |              |   | 3,313  |        
|Goodwill, less accumulated amortization of $1,089
    at December 31, 2001                                                      |                                                                                                                                                                                                              |                            | 3,108  |         |              |   | 3,108  |        
|Deposits and other assets                                                                                                       |                                                                                                                                                                                                              |                            | 35     |         |              |   | 633    |        
|                                                                                                                                |                                                                                                                                                                                                              |                            |        |         |              |  
|                                                                                                                                |                                                                                                                                                                                                              | $                          | 51,407 |         |              | $ | 78,340 |        
|                                                                                                                                |                                                                                                                                                                                                              |                            |        |         |              |  
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                        |                                                                                                                                                                                                              |                            |        |         |              |   |        |        
|Current Liabilities:                                                                                                            |                                                                                                                                                                                                              |                            |        |         |              |   |        |        
|                                                                                                                                | Current portion of long-term debt                                                                                                                                                                            |                            | $      | 1,061   |              |   | $      | 863     |       
|                                                                                                                                | Accounts payable                                                                                                                                                                                             |                            |        | 1,687   |              |   |        | 2,925   |       
|                                                                                                                                | Accrued liabilities                                                                                                                                                                                          |                            |        | 2,185   |              |   |        | 2,572   |       
|                                                                                                                                |                                                                                                                                                                                                              |                            |        |         |              |  
|                                                                                                                                |                                                                                                                                                                                                              | Total current liabilities  |        |         | 4,933        |   |        |         | 6,360  | 
|                                                                                                                                |                                                                                                                                                                                                              |                            |        |         |              |  
|Long-term debt, less current portion above                                                                                      |                                                                                                                                                                                                              |                            | 7,731  |         |              |   | 5,482  |        
|                                                                                                                                |                                                                                                                                                                                                              |                            |        |         |              |  
|Commitments and Contingencies (Note 7)                                                                                          |                                                                                                                                                                                                              |                            |        |         |              |   |        |        
|Stockholders Equity:                                                                                                           |                                                                                                                                                                                                              |                            |        |         |              |   |        |        
|                                                                                                                                | Preferred stock, $0.01 par value;
    5,000,000 shares authorized including 500,000 shares
    authorized as Series A, Junior Participating Preferred
    stock, $0.01 par value; none issued or outstanding |                            |        |        |              |   |        |        |       
|                                                                                                                                | Common stock, $0.001 par value;
    50,000,000 shares authorized; 29,368,808 and
    29,191,526 shares issued and outstanding at
    December 31, 2002 and 2001, respectively                                |                            |        | 29      |              |   |        | 29      |       
|                                                                                                                                | Additional paid-in capital                                                                                                                                                                                   |                            |        | 133,411 |              |   |        | 133,143 |       
|                                                                                                                                | Notes receivable                                                                                                                                                                                             |                            |        | (3      | )            |   |        | (15     | )     
|                                                                                                                                | Accumulated deficit during the development stage                                                                                                                                                             |                            |        | (94,046 | )            |   |        | (65,320 | )     
|                                                                                                                                | Deferred stock compensation                                                                                                                                                                                  |                            |        | (589    | )            |   |        | (1,476  | )     
|                                                                                                                                | Accumulated other comprehensive income (loss)                                                                                                                                                                |                            |        | (59     | )            |   |        | 137     |       
|                                                                                                                                |                                                                                                                                                                                                              |                            |        |         |              |  
|                                                                                                                                |                                                                                                                                                                                                              | Total stockholders equity |        |         | 38,743       |   |        |         | 66,498 | 
|                                                                                                                                |                                                                                                                                                                                                              |                            |        |         |              |  
|                                                                                                                                |                                                                                                                                                                                                              | $                          | 51,407 |         |              | $ | 78,340 |        
|                                                                                                                                |                                                                                                                                                                                                              |                            |        |         |              |  

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

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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, |       
|                                                                                             |                                               | 2002                         |            |        | 2001         |   |            | 2000         |         |   | 2002         |       
|In thousands, except share and per share data                                                |                                               |                              |            |        |              |   |            |              |         |   |              |       
|Operating expenses:                                                                          |                                               |                              |            |        |              |   |            |              |         |   |              |        |         |   |          |       
|                                                                                             | Research and development                      |                              | $          | 21,991 |              |   | $          | 21,454       |         |   | $            | 22,596 |         |   | $        | 76,448 |        
|                                                                                             | General and administrative                    |                              |            | 5,955  |              |   |            | 5,023        |         |   |              | 3,156  |         |   |          | 17,116 |        
|                                                                                             | Goodwill amortization                         |                              |            |       |              |   |            | 839          |         |   |              | 250    |         |   |          | 1,089  |        
|                                                                                             | Purchased in-process research and development |                              |            |       |              |   |            |             |         |   |              | 4,000  |         |   |          | 4,000  |        
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       
|                                                                                             |                                               | Total operating expenses     |            |        | 27,946       |   |            |              | 27,316  |   |              |        | 30,002  |   |          |        | 98,653  |  
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       
|                                                                                             |                                               | Loss from operations         |            |        | (27,946      | ) |            |              | (27,316 | ) |              |        | (30,002 | ) |          |        | (98,653 | )
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       
|Other income (expense):                                                                      |                                               |                              |            |        |              |   |            |              |         |   |              |        |         |   |          |       
|                                                                                             | Interest income                               |                              |            | 1,070  |              |   |            | 2,824        |         |   |              | 2,633  |         |   |          | 7,197  |        
|                                                                                             | Interest expense                              |                              |            | (1,119 | )            |   |            | (766         | )       |   |              | (408   | )       |   |          | (2,385 | )      
|                                                                                             | Other, net                                    |                              |            | (731   | )            |   |            | 327          |         |   |              | 201    |         |   |          | (205   | )      
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       
|                                                                                             |                                               | Total other income (expense) |            |        | (780         | ) |            |              | 2,385   |   |              |        | 2,426   |   |          |        | 4,607   |  
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       
|Net loss before taxes                                                                        |                                               |                              | (28,726    | )      |              |   | (24,931    | )            |         |   | (27,576      | )      |         |   | (94,046  | )     
|Provision for income taxes                                                                   |                                               |                              |           |        |              |   |           |              |         |   |             |        |         |   |         |       
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       
|Net loss                                                                                     |                                               |                              | (28,726    | )      |              |   | (24,931    | )            |         |   | (27,576      | )      |         |   | (94,046  | )     
|Beneficial conversion feature upon issuance of
    preferred stock                           |                                               |                              |           |        |              |   |           |              |         |   | (22,870      | )      |         |   | (22,870  | )     
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       
|Net loss attributable to common stockholders                                                 |                                               | $                            | (28,726    | )      |              | $ | (24,931    | )            |         | $ | (50,446      | )      |         | $ | (116,916 | )     
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       
|Basic and diluted net loss per share                                                         |                                               | $                            | (0.98      | )      |              | $ | (0.91      | )            |         | $ | (4.50        | )      |         |   |          |       
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       
|Weighted average shares used in computing basic
    and diluted net loss per share           |                                               |                              | 29,260,930 |        |              |   | 27,309,502 |              |         |   | 11,222,319   |        |         |   |          |       
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       
|Pro forma basic and diluted net loss per share                                               |                                               |                              |            |        |              |   |            |              |         | $ | (2.45        | )      |         |   |          |       
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       
|Weighted average shares used in computing pro
    forma basic and diluted net loss per share |                                               |                              |            |        |              |   |            |              |         |   | 20,603,313   |        |         |   |          |       
|                                                                                             |                                               |                              |            |        |              |   |            |              |         |   |              |       

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

43



---



##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES

(A Company in the Development Stage)







CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


|                                                                                                                          |                                         |                         |               |             |           |   |      |        |            |   |         |   |        |   |        |   | 
|------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ----------------------- | ------------- | ----------- | --------- | - | ---- | ------ | ---------- | - | ------- | - | ------ | - | ------ | - | 
|                                                                                                                          |                                         |                         |               | Convertible |           |   |      |        | Additional |  
|In thousands,                                                                                                             |                                         | Date of                 |               |             | Preferred |   |      | Common |            |   | Paid-In |  
|except share                                                                                                              |                                         | Transaction             |               |             | Stock     |   |      | Stock  |            |   | Capital |  
|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 |               |    |    
|In thousands,                                                                                                             |                                         | Notes      |      |             | Development |   |          | Stock        |             |       | Comprehensive |   |       | Stockholders |    |     | Comprehensive |  
|except share                                                                                                              |                                         | Receivable |      |             | Stage       |   |          | Compensation |             |       | Income/(Loss) |   |       | Equity        |    |     | Loss          |  
|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 | )
|                                                                                                                          |                                         |            |      |             |             |   |          |              |             |       |               |   |       |               |    |     |               |  

44



---



##### 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 exercise of options and under stock purchase plan              |                                         | January 5-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 10,127 shares of common stock
    related to indemnification agreement with Talaria Therapeutics,
    Inc. |                                         |                        | 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 |  
|Issuance of 177,282 shares of common stock, net,
    upon exercise of options and under stock purchase plan              |                                         | January 28-December 31 |             |             |          |   |        |            |  |         |    |   | 383 |  
|Expense related to 8,000 stock options granted to
    non-employees                                                      |                                         |                        | August 21   |             |           |   |       |            |   |         |   |   |     |   | 21      |  
|Deferred stock compensation adjustment                                                                                   |                                         |                        |             |             |           |   |       |            |   |         |   |   |     |   | (136    | )
|Amortization of deferred stock compensation                                                                              |                                         |                        |             |             |           |   |       |            |   |         |   |   |     |   |        |  
|Decrease in notes receivable                                                                                             |                                         |                        |             |             |           |   |       |            |   |         |   |   |     |   |        |  
|                                                                                                                         | Net loss                                |                        |             |             |           |   |        |           |   |         |    |  |     |   |         |  | 
|                                                                                                                         | Foreign currency translation adjustment |                        |             |             |           |   |        |           |   |         |    |  |     |   |         |  | 
|                                                                                                                         | Unrealized gain on investments          |                        |             |             |           |   |        |           |   |         |    |  |     |   |         |  | 
|                                                                                                                         |                                         |                        |             |             |           |   |        |            |   |         |    |  
|                                                                                                                         | Comprehensive loss                      |                        |             |             |           |   |        |            |   |         |    |   |     |   |         |   | 
|Balance  December 31,
    2002                                                                                          |                                         |                        |             |             |           | $ |       |            |   | $       | 29 |   |     | $ | 133,411 |  
|                                                                                                                         |                                         |                        |             |             |           |   |        |            |   |         |    |  

[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 10,127 shares of common stock
    related to indemnification agreement with Talaria Therapeutics,
    Inc. |                                         |            |    |             |             |   |         |              |             |       |              |   |       |               |    |      |               |   | (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 |         |   |  |   |        
|Issuance of 177,282 shares of common stock, net,
    upon exercise of options and under stock purchase plan              |                                         |            |    |             |             |   |         |              |             |       |              |   |       |               |    |      |               |   | 383    |         |   |  |   |        
|Expense related to 8,000 stock options granted to
    non-employees                                                      |                                         |            |    |             |             |   |         |              |             |       |              |   |       |               |    |      |               |   | 21     |         |   |  |   |        
|Deferred stock compensation adjustment                                                                                   |                                         |            |    |             |             |   |         |              |             |       | 136           |   |       |               |    |      |               |   |       |         |   |  |   |        
|Amortization of deferred stock compensation                                                                              |                                         |            |    |             |             |   |         |              |             |       | 751           |   |       |               |    |      |               |   | 751    |         |   |  |   |        
|Decrease in notes receivable                                                                                             |                                         |            | 12  |             |             |   |         |              |             |       |              |   |       |               |    |      |               |   | 12     |         |   |  |   |        
|                                                                                                                         | Net loss                                |            |     |            |             |   |          | (28,726      | )           |       |               |  |       |               |     |     |               |   |        | (28,726 | ) |  | $ | (28,726 | )
|                                                                                                                         | Foreign currency translation adjustment |            |     |            |             |   |          |             |             |       |               |  |       |               |     | (200 | )             |   |        | (200    | ) |  |   | (200    | )
|                                                                                                                         | Unrealized gain on investments          |            |     |            |             |   |          |             |             |       |               |  |       |               |     | 4    |               |   |        | 4       |   |  |   | 4       |  
|                                                                                                                         |                                         |            |     |             |             |   |          |              |             |       |               |   |       |               |     |      |               |  
|                                                                                                                         | Comprehensive loss                      |            |     |             |             |   |          |              |             |       |               |   |       |               |     |      |               |   |        |         |   |  | $ | (28,922 | )
|                                                                                                                         |                                         |            |     |             |             |   |          |              |             |       |               |   |       |               |     |      |               |  
|Balance  December 31,
    2002                                                                                          |                                         | $          | (3  | )           |             | $ | (94,046  | )            |             | $     | (589          | ) |       | $             | (59 | )    |               | $ | 38,743 |         |   |  |   |        
|                                                                                                                         |                                         |            |     |             |             |   |          |              |             |       |               |   |       |               |     |      |               |  

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

45



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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, |        
|                                                    |                                                                                  | 2002                                          |                                           |         | 2001         |         |        | 2000         |       |         | 2002         |        
|In thousands                                        |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |        
|Cash Flows from Operating Activities:               |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |         |        |         |        |        
|                                                    | Net loss                                                                         |                                               | $                                         | (28,726 | )            |         | $      | (24,931      | )     |         | $            | (27,576 | )      |         | $      | (94,046 | )     
|                                                    | 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                 |                                           |         | 1,291        |         |        |              | 2,014 |         |              |         | 1,036  |         |        |         | 4,813  |        
|                                                    |                                                                                  | Stock-based compensation expense              |                                           |         | 771          |         |        |              | 898   |         |              |         | 1,427  |         |        |         | 3,650  |        
|                                                    |                                                                                  | Decrease in notes receivable                  |                                           |         | 12           |         |        |              | 52    |         |              |         | 39     |         |        |         | 123    |        
|                                                    |                                                                                  | Loss on sale of furniture and equipment       |                                           |         | 169          |         |        |              | 22    |         |              |         |       |         |        |         | 191    |        
|                                                    |                                                                                  | Non-cash interest included in long-term debt  |                                           |         | 384          |         |        |              | 243   |         |              |         | 145    |         |        |         | 787    |        
|                                                    | Increase (decrease) in cash resulting from
    changes in                       |                                               |                                           |         |              |         |        |              |       |         |              |         |        |         |        |         |       
|                                                    |                                                                                  | Prepaid expenses and other                    |                                           |         | 596          |         |        |              | (440  | )       |              |         | (1,256 | )       |        |         | (1,238 | )      
|                                                    |                                                                                  | Other assets                                  |                                           |         | 599          |         |        |              | 6     |         |              |         | (85    | )       |        |         | 520    |        
|                                                    |                                                                                  | Accounts payable                              |                                           |         | (1,242       | )       |        |              | (816  | )       |              |         | 2,619  |         |        |         | 1,956  |        
|                                                    |                                                                                  | Accrued liabilities                           |                                           |         | (418         | )       |        |              | 185   |         |              |         | 1,697  |         |        |         | 2,182  |        
|                                                    |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |        
|                                                    |                                                                                  |                                               | Net cash used in operating activities     |         |              | (26,564 | )      |              |       | (22,767 | )            |         |        | (17,954 | )      |         |        | (77,062 | )
|                                                    |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |        
|Cash Flows from Investing Activities:               |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |         |        |         |        |        
|                                                    | Purchases of furniture and equipment                                             |                                               |                                           | (1,155  | )            |         |        | (2,023       | )     |         |              | (1,341  | )      |         |        | (6,946  | )     
|                                                    | Deposit on equipment                                                             |                                               |                                           |        |              |         |        | (107         | )     |         |              | (450    | )      |         |        | (557    | )     
|                                                    | Acquisition of Talaria Therapeutics, Inc.                                        |                                               |                                           |        |              |         |        |             |       |         |              | (233    | )      |         |        | (233    | )     
|                                                    | Proceeds from sale of furniture and equipment                                    |                                               |                                           | 30      |              |         |        | 2            |       |         |              |        |        |         |        | 32      |       
|                                                    | Purchases of short-term investments                                              |                                               |                                           | (37,215 | )            |         |        |             |       |         |              |        |        |         |        | (37,215 | )     
|                                                    | Maturities of short-term investments                                             |                                               |                                           | 32,861  |              |         |        |             |       |         |              |        |        |         |        | 32,861  |       
|                                                    |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |        
|                                                    |                                                                                  |                                               | Net cash used in investing activities     |         |              | (5,479  | )      |              |       | (2,128  | )            |         |        | (2,024  | )      |         |        | (12,058 | )
|                                                    |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |        
|Cash Flows from Financing Activities:               |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |         |        |         |        |        
|                                                    | Proceeds from issuance of convertible preferred
    stock                        |                                               |                                           |        |              |         |        |             |       |         |              | 26,871  |        |         |        | 42,200  |       
|                                                    | Proceeds from issuance of common stock                                           |                                               |                                           | 384     |              |         |        | 22,449       |       |         |              | 56,276  |        |         |        | 79,111  |       
|                                                    | Proceeds from long-term debt                                                     |                                               |                                           | 2,132   |              |         |        | 3,523        |       |         |              | 1,489   |        |         |        | 10,171  |       
|                                                    | Repayments of long-term debt                                                     |                                               |                                           | (1,075  | )            |         |        | (956         | )     |         |              | (518    | )      |         |        | (2,797  | )     
|                                                    |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |        
|                                                    |                                                                                  |                                               | Net cash provided by financing activities |         |              | 1,441   |        |              |       | 25,016  |              |         |        | 84,118  |        |         |        | 128,685 |  
|                                                    |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |        
|Effect of Exchange Rate Changes on Cash             |                                                                                  |                                               | 815                                       |         |              |         | (63    | )            |       |         | 184          |         |        |         | 934    |        
|                                                    |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |        
|Increase (Decrease) in Cash and Cash Equivalents    |                                                                                  |                                               | (29,787                                   | )       |              |         | 58     |              |       |         | 64,324       |         |        |         | 40,499 |        
|Cash and Cash Equivalents  Beginning
    of Period |                                                                                  |                                               | 70,286                                    |         |              |         | 70,228 |              |       |         | 5,904        |         |        |         |       |        
|                                                    |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |        
|Cash and Cash Equivalents  End of
    Period       |                                                                                  | $                                             | 40,499                                    |         |              | $       | 70,286 |              |       | $       | 70,228       |         |        | $       | 40,499 |        
|                                                    |                                                                                  |                                               |                                           |         |              |         |        |              |       |         |              |        

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

46



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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 disease.

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 $94.0 million through December 31, 2002.
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/losses totaled approximately a loss of $703,000, a gain of
$400,000, a gain of $201,000 and a loss of $102,000 for the
years ended December 31, 2002, 2001, 2000, and for the
period from inception to December 31, 2002, respectively,
and are included in other income in the statements 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 and pharmacology studies performed by third
parties, milestone payments under certain license and other
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.

The Company records estimated research and
development expenses under contracts with third parties on a
percentage of completion basis. These contracts cover ongoing
clinical trials, manufacturing and supply agreements and
third-party toxicology or pharmacology studies. The expenses are
recorded as the work under the contract is completed and the
Company may record an accrued liability or prepaid expense on
the accompanying balance sheets, depending on the payment terms
under each contract.

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)

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.

Cash
and Cash Equivalents

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

Short-term
Investments

The Company considers all financial instruments
purchased with initial maturities of greater than three months
and less than one year to be short-term investments. Investments
under this classification are recorded at fair market value and
unrealized gains and losses are recorded as a separate component
of stockholders equity. Short-term investments at
December 31, 2002 consist of government agency notes and
municipal bonds with a weighted average maturity of
approximately ten months. Investments are maintained with high
quality institutions, and management regularly monitors the
composition and maturities of investments. Generally, these
securities are traded in a highly liquid market, may be redeemed
upon demand and bear minimal risk. By policy, the Company limits
the amount of credit exposure to any one financial institution
or commercial issuer. The Company has not experienced any
material losses on its investments.

Furniture
and Equipment

Furniture and equipment is stated at cost and
depreciated over the estimated useful lives of the related
assets using the straight-line method. Office furniture and
equipment is depreciated over a seven-year period, laboratory
equipment is depreciated over a five-year period and computer
equipment is depreciated over a three-year period. The Company
recorded depreciation expense of $1.3 million,
$1.2 million and $786,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. Furniture
and equipment consist of the following (in thousands):

|                               |  |              |        |   |      |   |        |  
|------------------------------ |  | ------------ | ------ | - | ---- | - | ------ | -
|                               |  |             
|                               |  | Year Ended   |       
|                               |  | December 31, |       
|                               |  |              |       
|                               |  | 2002         |        |   | 2001 |  
|                              
|                               | 
|Laboratory equipment           |  | $            | 3,894  |   |      | $ | 2,957  |  
|Computer equipment             |  |              | 2,217  |   |      |   | 2,110  |  
|Office furniture and equipment |  |              | 580    |   |      |   | 661    |  
|                               |  |              |        |   |      |  
|                               |  |              | 6,691  |   |      |   | 5,728  |  
|Less accumulated depreciation  |  |              | (3,690 | ) |      |   | (2,415 | )
|                               |  |              |        |   |      |  
|                               |  | $            | 3,001  |   |      | $ | 3,313  |  
|                               |  |              |        |   |      |  

Goodwill

The Company adopted Statement of Financial
Accounting Standard No. 142, Goodwill and Other
Intangible Assets (SFAS 142), effective
January 1, 2002. Under SFAS 142, goodwill and certain
indefinite lived intangible assets are no longer amortized but
are reviewed at least annually for impairment. In connection
with the adoption of SFAS 142, the Company has completed
the transitional goodwill impairment test, which requires the
Company to compare its fair value to the carrying value of its
net assets. Based on this

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)

analysis, the Company has concluded that no
impairment existed at the time of adoption, and, accordingly,
the Company has not recognized any transitional impairment loss.

Goodwill reflects 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 under the related merger
agreement. The gross carrying amount of goodwill is
approximately $3.1 million as of December 31, 2002 and
$4.2 million, with accumulated amortization of
approximately $1.1 million, as of December 31, 2001.
The assets acquired from Talaria relate to one of the
Companys ongoing development projects, ETC-588. This
product candidate is currently in Phase II clinical
development for the treatment of cardiovascular disease.

As required by SFAS 142, the results of
operations for periods prior to its adoption have not been
restated. Had SFAS 142 been adopted prior to
January 1, 2002, the pro forma loss for the periods ended
December 31, 2001 and December 31, 2000 and for the
period from inception to December 31, 2001 would have been
as follows (in thousands, except per share data):

|                                                |                                                                       |                         |   |              |              |  |   |            |   |  |   |         |  
|----------------------------------------------- | --------------------------------------------------------------------- | ----------------------- | - | ------------ | ------------ |  | - | ---------- | - |  | - | ------- | -
|                                                |                                                                       |                         |   | Inception to |             
|                                                |                                                                       | Year Ended December 31, |   |              | December 31, | 
|                                                |                                                                       |                         |   |              |              | 
|                                                |                                                                       | 2001                    |   |              | 2000         |  |   | 2001       |  
|                                                |                                                                       |                        
|                                                |                                                                       |                         |  
|Net loss:                                       |                                                                       |                         |   |              |              |  |   |            |   |  |   |        
|                                                | Net loss                                                              |                         | $ | (24,931      | )            |  | $ | (27,576    | ) |  | $ | (65,320 | )
|                                                | Beneficial conversion feature upon issuance of
    preferred stock    |                         |   |             |              |  |   | (22,870    | ) |  |   | (22,870 | )
|                                                |                                                                       |                         |   |              |              |  |   |            |  
|                                                | Net loss attributable to common stockholders                          |                         |   | (24,931      | )            |  |   | (50,446    | ) |  |   | (88,190 | )
|                                                | Goodwill amortization                                                 |                         |   | 839          |              |  |   | 250        |   |  |   | 1,089   |  
|                                                |                                                                       |                         |   |              |              |  |   |            |  
|                                                | Adjusted net loss attributable to common
    stockholders             |                         | $ | (24,092      | )            |  | $ | (50,196    | ) |  | $ | (87,101 | )
|                                                |                                                                       |                         |   |              |              |  |   |            |  
|Basic and diluted net loss per share:           |                                                                       |                         |   |              |              |  |   |            |   |  |   |        
|                                                | Reported basic and diluted net loss per share                         |                         | $ | (0.91        | )            |  | $ | (4.50      | ) |  |   |         |  
|                                                | Goodwill amortization                                                 |                         |   | 0.03         |              |  |   | 0.03       |   |  |   |         |  
|                                                |                                                                       |                         |   |              |              |  |   |            |  
|                                                | Adjusted basic and diluted net loss per share                         |                         | $ | (0.88        | )            |  | $ | (4.47      | ) |  |   |         |  
|                                                |                                                                       |                         |   |              |              |  |   |            |  
|Pro forma basic and diluted net loss per share: |                                                                       |                         |   |              |              |  |   |            |   |  |   |        
|                                                | Pro forma basic and diluted net loss per share                        |                         |   |              |              |  | $ | (2.45      | ) |  |   |         |  
|                                                | Goodwill amortization                                                 |                         |   |              |              |  |   | 0.02       |   |  |   |         |  
|                                                |                                                                       |                         |   |              |              |  |   |            |  
|                                                | Adjusted pro forma and diluted net loss per share                     |                         |   |              |              |  | $ | (2.43      | ) |  |   |         |  
|                                                |                                                                       |                         |   |              |              |  |   |            |  
|                                                | Shares used in computing basic and diluted net
    loss per share     |                         |   | 27,309,502   |              |  |   | 11,222,319 |   |  |   |         |  
|                                                |                                                                       |                         |   |              |              |  |   |            |  
|                                                | Shares used in computing pro forma and diluted
    net loss per share |                         |   |              |              |  |   | 20,603,313 |   |  |   |         |  
|                                                |                                                                       |                         |   |              |              |  |   |            |  

Impairment of
Long-Lived Assets

SFAS No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets
(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

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)

previously defined in that Opinion).
SFAS 144 retains the previous cash flow test for impairment
and broadens the presentation of discontinued operations.
SFAS 144 was effective for the Companys fiscal year
beginning January 1, 2002 and did not have a material
impact upon effectiveness. The Companys long-lived assets
consist primarily of computer and lab equipment that are
depreciated over short useful lives to prevent impairment issues.

Accrued
Liabilities

Accrued liabilities consist of the following (in
thousands):

|                          |  |              |       |  |      |   |       | 
|------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                          |  |             
|                          |  | Year Ended   |      
|                          |  | December 31, |      
|                          |  |              |      
|                          |  | 2002         |       |  | 2001 |  
|                         
|                          | 
|Accrued external costs    |  | $            | 1,257 |  |      | $ | 1,511 | 
|Accrued compensation      |  |              | 560   |  |      |   | 649   | 
|Accrued professional fees |  |              | 198   |  |      |   | 226   | 
|Accrued other             |  |              | 170   |  |      |   | 186   | 
|                          |  |              |       |  |      |  
|                          |  | $            | 2,185 |  |      | $ | 2,572 | 
|                          |  |              |       |  |      |  

Accrued external costs relate primarily to work
that is outsourced to third parties related to research and/or
development of the Companys product candidates. These
contracts are accounted for under the percentage of completion
basis, resulting in accrued liabilities for work completed, but
not yet billed to the Company as of the balance sheet date.

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.

SFAS 148 amends SFAS 123 to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure
provisions of SFAS 123 to require prominent disclosure
about the effects on reported net income of an entitys
accounting policy decisions with respect to stock-based employee
compensation. SFAS 148 also amends APB Opinion No. 28,
Interim Financial Reporting, to require disclosure
about the effects of SFAS 148 in interim financial
information. This statement is effective for fiscal years ending
after December 15, 2002.

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 123,

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)

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, except per
share data):

|                                  |             |              |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------- | ----------- | ------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                  |             |             
|                                  |             | December 31, |  
|                                  |             |              |  
|                                  |             | 2002         |   |         | 2001 |  |   | 2000    |  
|                                  |             |             
|                                  |             |              |  
|Net loss:                         |             |              |   |         |      |  |   |         |   |  |   |        
|                                  | As Reported |              | $ | (28,726 | )    |  | $ | (24,931 | ) |  | $ | (50,446 | )
|                                  | Pro Forma   |              | $ | (31,502 | )    |  | $ | (27,010 | ) |  | $ | (51,267 | )
|Basic and diluted loss per share: |             |              |   |         |      |  |   |         |   |  |   |        
|                                  | As Reported |              | $ | (0.98   | )    |  | $ | (0.91   | ) |  | $ | (4.50   | )
|                                  | Pro Forma   |              | $ | (1.08   | )    |  | $ | (0.99   | ) |  | $ | (4.57   | )

The fair value of options was estimated at the
date of grant using the Black Scholes Single Option valuation
method under SFAS 123 with the following assumptions as of
December 31, 2002, 2001 and 2000,
respectively:  weighted average risk free interest
rate of 2.82%, 4.27% and 4.98%; dividend yield of 0%; volatility
of 51.71%, 110.67% and 130.22%; and expected life of options of
five years. The weighted-average fair values of options granted
during 2002, 2001 and 2000 were $2.75, $5.60 and $5.08 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.

Supplemental
Disclosures of Cash Flow Information

The Company paid cash for interest of
approximately $701,000, $526,000, $282,000, and $1,575,000 in
2002, 2001, 2000 and the period from inception to
December 31, 2002, 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 (in thousands,
except share and per share data):

|                                                                                                                |  |              |            |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | -
|                                                                                                                |  | December 31, |           
|                                                                                                                |  | 2000         |           
|                                                                                                               
|                                                                                                                | 
|Net loss attributable to common stockholders                                                                    |  | $            | (50,446    | )
|Weighted average shares used in computing basic
    and diluted net loss per share                              |  |              | 11,222,319 |  
|Pro forma adjustment to reflect assumed
    conversion of Series A and Series B convertible
    preferred stock |  |              | 4,614,965  |  
|Pro forma adjustment to reflect assumed
    conversion of Series C and Series D convertible
    preferred stock |  |              | 4,766,029  |  
|                                                                                                                |  |              |           
|Weighted average shares used in computing pro
    forma basic and diluted net loss per share                    |  |              | 20,603,313 |  
|                                                                                                                |  |              |           
|Pro forma basic and diluted net loss per share                                                                  |  | $            | (2.45      | )
|                                                                                                                |  |              |           

In 2002, 2001 and 2000, 318,808, 502,516 and
898,736 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. The Company has
entered into certain agreements that can be settled by issuing
shares of the Companys common stock. The effect of these
settlements has not been included in the calculation of diluted
loss per share as doing so would have been anti-dilutive.

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)

Comprehensive
Loss

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 and an unrealized gain on
short-term investments for the period ended December 31,
2002, and the foreign currency translation adjustment for the
period ended December 31, 2001 and 2000.

New Accounting
Pronouncements

SFAS 146 Accounting for Restructuring
Costs, (SFAS 146), applies to costs
associated with an exit activity, including a restructuring, or
with a disposal of long-lived assets. SFAS 146 requires that a
liability be recorded for costs associated with exit or disposal
activity when the liability is incurred and can be measured at
fair value, rather than at the date of commitment to an exit
activity. SFAS 146 also requires disclosures about exit and
disposal activities, the related costs, and changes in those
costs in the notes to the financial statements that include the
period in which an exit activity is initiated and in any
subsequent period until the activity is completed. SFAS 146
is effective prospectively for exit or disposal activities
initiated after December 31, 2002, and is not expected to
have a material impact to the Companys financial
statements upon effectiveness.

In November 2002, the FASB released FASB
Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others: an interpretation
of FASB Statements No, 5, 57 and 107 and rescission of FASB
Interpretation No. 34. FIN 45 establishes new
disclosure and liability-recognition requirements for direct and
indirect debt guarantees with specified characteristics. The
initial measurement and recognition requirements of FIN 45 are
effective prospectively for guarantees issued or modified after
December 31, 2002. However, the disclosure requirements are
effective for interim and annual financial-statement periods
ending after December 15, 2002. The Company has adopted the
disclosure provisions and the full adoption of FIN 45 is
not expected to have a material impact on the Companys
results of operations or financial position.

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.

(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 number
of authorized shares of common stock to 50,000,000, and
(ii) a reduction in the number of 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.

Reverse Stock
Split

The Company effected a 0.7225-for-1 reverse stock
split of all outstanding shares of 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.

52



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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 the 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
shares of preferred stock were 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.

Series A Junior Participating Preferred Stock

On April 18, 2002, the Companys Board
of Directors approved a stockholder rights plan as set forth in
the Rights Agreement dated April 18, 2002 between the
Company and StockTrans, Inc., as rights agent (the Rights
Agreement). In connection with the approval of the Rights
Agreement, the Board of Directors declared a distribution of one
Right for each outstanding share of the Companys common
stock, par value $.001 per share, to stockholders of record at
the close of business on April 18, 2002. Each Right, if and
when exercisable, will entitle the holder to purchase from the
Company one one-hundredth ( 1/100) of a share of the
Series A Junior Participating Preferred Shares, par value
$.01 per share, or a combination of securities and assets of
equivalent value, at a per unit, adjustable Purchase Price of
$50.00. The rights will not be exercisable until the earlier of
(i) ten business days following the first public
announcement that a person or group of persons together with all
affiliates and associates has acquired beneficial ownership of
15% or more of the then-outstanding Common Stock, or
(ii) ten business days following the commencement of a
tender offer or exchange offer, that if consummated, would
result in a person or group of persons together with all
affiliates and associates beneficially owning 15% or more of the
then-outstanding Common Stock. The Rights will expire at the
close of business on April 18, 2012, unless earlier
redeemed or terminated by the Company.

On November 26, 2002, the Board of Directors
approved an amendment (Amendment No. 1) to the
Rights Agreement. Amendment No. 1 revises the definition of
Acquiring Person to exclude the Sacane Group (as
defined in Amendment No. 1) unless and until the earlier of
such time as the Sacane Group, together with all affiliates and
associates, directly or indirectly, becomes the beneficial owner
of 25% or more of the shares of Common Stock then outstanding or
ceases to hold any of the Common Stock of which it is the
beneficial owner without any intention of changing or
influencing control of the Company.

53



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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Series C and Series D Preferred Stock

In January and February 2000, the Company issued
shares of Series C and Series D preferred stock. 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 offering, 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 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,
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 the 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.

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.



|    |            
|--- | -----------
|(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. No milestones were
achieved under this agreement during 2002. 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 $4.0 million non-cash
charge to operations in 2000 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 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 the 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.

54



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ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 year
ended December 31, 2000, set forth below, report results as
if the Company and Talaria had been combined as of the beginning
of the 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 the results which would
have occurred if the business combination had been in effect for
the period presented below, or which may result in the future
(in thousands, except share and per share data).

|                                                                  |  |              |            |  
|----------------------------------------------------------------- |  | ------------ | ---------- | -
|                                                                  |  | Pro forma    |           
|                                                                  |  | Year ended   |           
|                                                                  |  | December 31, |           
|                                                                  |  | 2000         |           
|                                                                 
|                                                                  | 
|Operating expenses                                                |  | $            | 27,941     |  
|                                                                  |  |              |           
|Net loss                                                          |  |              | (29,682    | )
|                                                                  |  |              |           
|Basic and diluted net loss per share                              |  | $            | (2.51      | )
|                                                                  |  |              |           
|Shares used in computing basic and diluted net
    loss per share |  |              | 11,809,492 |  
|                                                                  |  |              |           



|    |                          
|--- | -------------------------
|(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
3,069,000 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 of the board of
directors, 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.

55



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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of stock option activity under the 2000
Plan for the years ended December 31, 2002, 2001 and 2000
is 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  |      
|                                 | Options granted   |           |           | 1,887,000 |          |   | $     | 5.77  | 
|                                 | Options cancelled |           |           | (541,181  | )        |   | $     | 7.16  | 
|                                 | Options exercised |           |           | (531      | )        |   | $     | 5.00  | 
|                                 |                   |           |           |           |          |  
|Outstanding at December 31, 2002 |                   |           | 2,089,413 |           |          | $ | 6.19  |      
|                                 |                   |           |           |           |          |  

As of December 31, 2002, there were 979,056
shares of common stock available for issuance under the 2000
Plan.

During 2002, the Company issued 8,000 options to
purchase common stock to consultants under the 2000 plan. The
options were issued at fair value on the date of the grant. The
Company recorded an expense of approximately $21,000 in the
accompanying consolidated statements of operations that
represents the fair value at the date of grant using the Black
Scholes Single Options valuation method, with assumptions as
described under Note 2 to Consolidated Financial Statements.

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, 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.

56



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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of stock option activity under the 1998
Plan for the years ended December 31, 2002, 2001 and 2000
is as follows:

|                                 |                   |           |           |          |          |   |      |      | 
|-------------------------------- | ----------------- | --------- | --------- | -------- | -------- | - | ---- | ---- | 
|                                 |                   |           |           | Weighted |         
|                                 |                   |           |           | Average  |         
|                                 |                   | Number of |           |          | Exercise |  
|                                 |                   | Shares    |           |          | Price    |  
|                                 |                   |           |           |          |          |  
|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 |     
|                                 | Options granted   |           |           | 36,500   |          |   | $    | 6.26 | 
|                                 | Options cancelled |           |           | (139,515 | )        |   | $    | 7.53 | 
|                                 | Options exercised |           |           | (161,244 | )        |   | $    | 1.90 | 
|                                 |                   |           |           |          |          |  
|Outstanding at December 31, 2002 |                   |           | 915,991   |          |          | $ | 4.34 |     
|                                 |                   |           |           |          |          |  

As of December 31, 2002, there were
150,843 shares of common stock available for issuance under
the 1998 Plan.

The options outstanding and exercisable at
December 31, 2002 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-$4.19   |  |             |          | 508,820   |          |             | $ | 2.05      |  |  |             | 6.1 |  |          |  | 357,265   |  |  | $ | 1.77  | 
|          | $4.33-$4.80   |  |             |          | 332,033   |          |             | $ | 4.61      |  |  |             | 7.1 |  |          |  | 177,646   |  |  | $ | 4.58  | 
|          | $5.00         |  |             |          | 545,500   |          |             | $ | 5.00      |  |  |             | 9.4 |  |          |  | 68,190    |  |  | $ | 5.00  | 
|          | $5.19-$6.18   |  |             |          | 194,833   |          |             | $ | 5.51      |  |  |             | 9.0 |  |          |  | 45,574    |  |  | $ | 5.58  | 
|          | $6.26         |  |             |          | 872,000   |          |             | $ | 6.26      |  |  |             | 9.0 |  |          |  | 163,512   |  |  | $ | 6.26  | 
|          | $6.27-$9.94   |  |             |          | 470,361   |          |             | $ | 8.17      |  |  |             | 7.9 |  |          |  | 185,453   |  |  | $ | 8.52  | 
|          | $11.50-$18.88 |  |             |          | 81,857    |          |             | $ | 15.20     |  |  |             | 6.7 |  |          |  | 45,189    |  |  | $ | 15.38 | 
|          |               |  |             |          |           |          |             |   |           |  |  |             |     |  |          | 
|          |               |  |             |          | 3,005,404 |          |             | $ | 5.63      |  |  |             | 8.1 |  |          |  | 1,042,829 |  |  | $ | 5.12  | 
|          |               |  |             |          |           |          |             |   |           |  |  |             |     |  |          | 

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, 2002, 2001 and 2000, the Company recorded
deferred stock compensation amortization of approximately
$751,000, $898,000 and $1 million, respectively, which is
included in operating expenses.

57



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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
15,507, 22,291 and 6,042 shares of common stock in 2002,
2001 and 2000, respectively, to various employees. These shares
were issued with a weighted average price per share of $4.82,
$5.96 and $9.14 as of December 31, 2002, 2001 and 2000,
respectively. At December 31, 2002, there were
456,160 shares of common stock remaining to be issued under
the Purchase Plan.



|    |             
|--- | ------------
|(6) | Income Taxes

As of December 31, 2002 and 2001, the
Company had net operating loss carryforwards of approximately
$63.9 million and $41.5 million, respectively. These
net operating loss carryforwards begin to expire in 2013 through
2022. 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. The Companys income tax provision
(benefit) consisted of the following:

|                              |  |      |        |   |      |   |        |      |  |   |        |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                              |  | 2002 |        |   | 2001 |   |        | 2000 | 
|                              |  |      |        |   |      |   |        |      | 
|Current                       |  | $    |       |   |      | $ |       |      |  | $ |       |  
|Deferred                      |  |      | (9,744 | ) |      |   | (7,283 | )    |  |   | (8,477 | )
|Change in valuation allowance |  |      | 9,744  |   |      |   | 7,283  |      |  |   | 8,477  |  
|                              |  | $    |       |   |      | $ |       |      |  | $ |       |  
|                              |  |      |        |   |      |   |        |      | 

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, |        
|                                |  |              |        
|                                |  | 2002         |         |   | 2001 |   |         | 2000 | 
|                                |  |              |         |   |      |   |         |      | 
|Start-up costs                  |  | $            | 6,997   |   |      | $ | 5,081   |      |  | $ | 3,230   |  
|Net operating loss carryforward |  |              | 21,732  |   |      |   | 13,964  |      |  |   | 8,555   |  
|Asset basis differences         |  |              | 133     |   |      |   | 73      |      |  |   | 50      |  
|Less  Valuation allowance      |  |              | (28,862 | ) |      |   | (19,118 | )    |  |   | (11,835 | )
|                                |  |              |         |   |      |   |         |      | 
|                                |  | $            |        |   |      | $ |        |      |  | $ |        |  
|                                |  |              |         |   |      |   |         |      | 



|    |                              
|--- | -----------------------------
|(7) | Commitments and Contingencies

Lease Commitments

The Company leases its office space under
operating leases that expire at various dates through June 2004.
Total rent expense under all leases was approximately $797,000,
$540,000 and $505,000 in 2002, 2001

58



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ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and 2000, respectively. Future minimum payments
under noncancellable operating leases at December 31, 2002
are as follows (in thousands):

|     |  |   |     | 
|---- |  | - | --- | 
|2003 |  | $ | 723 | 
|2004 |  |   | 35  | 
|     |  |   |    
|     |  | $ | 758 | 
|     |  |   |    

Capital Expenditures

The Company entered into an agreement with a
scientific instrument manufacturer to purchase a specialized
piece of equipment. The Company is obligated to pay a total of
$1,000,000 for the equipment. As of December 31, 2002, the
Company has paid $600,000 for the equipment. This portion is
classified in Furniture and Equipment in the accompanying
Balance Sheets. The additional $400,000 is due upon receipt and
approval of an upgrade that is expected to occur during 2003. No
liability or expense was recorded in 2002 related to this
remaining $400,000 purchase commitment.

Committed
Research and Development

The Company enters into various agreements with
third parties related to the research and development activities
of its existing product candidates as well as discovery efforts
on potential new product candidates. These agreements include
costs related to manufacturing, clinical trials and toxicology
or pharmacology studies performed by third parties. The
estimated remaining amount to be incurred under these agreements
totals approximately $5.0 million as of December 31,
2002. The amount and timing of these commitments may change, as
they are largely dependent on the enrollment and timing of the
clinical trials.



| |                   
| | ------------------
| | 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 1998
Agreement). The Company paid initial license fees of
$750,000 under the 1998 Agreement and may be obligated to make
additional payments 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 (the 1999
Agreement). During 2001, the Company paid $100,000 upon
obtaining the first milestone under the 1999 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 an aggregate
of $905,000. The Company may also be obligated make payments of
up to $995,000 in the aggregate upon reaching certain milestones.

59



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ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 milestone and license
maintenance payments, as defined in the respective license and
other agreements relating to the Companys proprietary
rights, up to an aggregate remaining amount of
$30.2 million. Some of these payments may be fulfilled
through the issuance of the Companys common stock, at the
Companys option. Upon reaching certain milestones, the
payments are charged to research and development expenses in the
accompanying consolidated statements of operations. There were
no such milestones achieved or payments made during 2002. At the
present time, the Company can give no assurances that any such
milestones will be achieved. In addition to the milestone and
license maintenance payments, the Company may be obligated to
make royalty payments on future sales pursuant to formulas in
the agreements.



| |                      
| | ---------------------
| | 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. During 2002, the Company recorded approximately
$125,000 related to matching contributions. These contributions
will be paid in 2003 in the form of shares of Common Stock.



|    |               
|--- | --------------
|(8) | Long-Term Debt

As of December 31, 2002, the Company has the
following credit facilities and outstanding borrowings:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A $2.0 million credit facility with a U.S.
    bank that may be used to finance purchases of equipment that is
    pledged as collateral: Borrowings under this facility bear
    interest at the banks prime rate (4.25% at
    December 31, 2002). Borrowings outstanding under this
    facility as of December 31, 2002 amounted to approximately
    $1.1 million and must be repaid by May 2006. No additional
    borrowings are allowed. In connection with the agreement, the
    Company has to maintain a minimum tangible net worth of
    $9.0 million and invest a minimum of $10.0 million
    with the U.S. bank. The Companys investment with the U.S.
    bank was below the required threshold at December 31, 2002.
    However, the Company obtained a waiver from the U.S. bank and
    has corrected the non-compliance.                                                                                                                                                                                                                                    
|
| |  | An additional credit facility with a U.S. lending
    institution to finance purchases of equipment that is pledged as
    collateral: This facility allowed for borrowings of up to
    $2.5 million. Approximately $1.2 million was
    outstanding under this facility at a weighted average interest
    rate of 12% as of December 31, 2002. Outstanding amounts
    under this facility must be repaid by November 2004 and no
    additional borrowings are allowed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | A credit facility with a Swedish entity totaling
    a principal amount of 50 million Swedish Kronor
    ($5.8 million as of December 31, 2002): The proceeds
    from this facility may only be used to fund the development of
    our ETC-216 (AIM) product candidate. If results achieved by
    the AIM project are not capable of being used commercially, the
    Companys obligation to repay the loan plus a portion of
    accrued interest 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 of 7.5 million Swedish kronor ($859,000), amounted
    to 52.5 million Swedish Kronor ($6.1 million) as of
    December 31, 2002. The Company is in discussions with the
    Swedish entity regarding the principal amount of 5 million
    Swedish Kronor remaining under the facility, disbursement

60



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ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | of which is related to completion of a final
    milestone under the facility. The milestone may be achieved in
    the future; however, the funds may be unavailable to the Company
    due to the ramp down of operations in Sweden during 2002. A
    condition under the credit facility is that the project be
    principally carried out in Sweden.                                                                      
|
| |  | An agreement with a Michigan non-profit
    corporation whereby the Company can borrow up to $447,000 for
    equipment purchases, pledged as collateral, at an interest rate
    of 4%: As of December 31, 2002, outstanding borrowings
    under this arrangement totaled $447,000 and must be repaid by
    November 2008. As required by the agreement, the Company will
    begin making principal payments in August 2004.

As of December 31, 2002, maturities of
long-term debt are as follows (in thousands):

|                       |  |   |        |  
|---------------------- |  | - | ------ | -
|2003.                  |  | $ | 1,061  |  
|2004                   |  |   | 2,161  |  
|2005                   |  |   | 1,513  |  
|2006                   |  |   | 1,275  |  
|2007                   |  |   | 1,520  |  
|Thereafter             |  |   | 1,262  |  
|                       |  |   |       
|                       |  |   | 8,792  |  
|Less  current portion |  |   | (1,061 | )
|                       |  |   |       
|                       |  | $ | 7,731  |  
|                       |  |   |       

(9) Related Party Transactions

Certain stockholders have provided consulting and
other professional services to the Company. Total expense for
these services was $177,000 in 2002, $367,000 in 2001 and
$305,000 in 2000. At December 31, 2002 and 2001, amounts
due to related parties totaled $20,000 and $80,000,
respectively, and are classified as accounts payable or accrued
liabilities in the accompanying consolidated balance sheets.

The Company had a consulting agreement with one
former member, and continues to have a consulting agreement with
one current member, of the Board of Directors. Total fees and
expenses for these services were approximately $126,000,
$128,000 and $119,000 for 2002, 2001 and 2000, respectively. At
December 31, 2002 and 2001, amounts due under the
agreements totaled $0 and $33,000, respectively, and are
classified as accounts payable or accrued liabilities in the
accompanying consolidated balance sheets.

The Company incurred expenses for fees to the
Board of Directors for their services. Total fees and expenses
for these services were approximately $46,000, $14,000 and $0
for 2002, 2001 and 2000, respectively. At December 31, 2002
and 2001, amounts due to board members for board services
totaled approximately $16,000 and $12,000, respectively, and are
classified as accounts payable or accrued liabilities in the
accompanying consolidated balance sheets.

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##### Table of Contents



ESPERION THERAPEUTICS, INC. AND
SUBSIDIARIES


(A Company in the Development Stage)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(10) Quarterly Results of Operations
(Unaudited)

The following table summarizes selected unaudited
quarterly financial information for 2002 and 2001. 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, |       
|                                            |  | 2002               |        |   | 2002       |   |        | 2002          |  |   | 2002         |   |  | 2002         |       
|                                            |  |                    |        |   |            |   |        |               |  |   |              |   |  |              |       
|Operating expense                           |  | $                  | 7,350  |   |            | $ | 7,306  |               |  | $ | 7,093        |   |  | $            | 6,197  |   |  | $ | 27,946  |  
|Operating loss                              |  |                    | (7,350 | ) |            |   | (7,306 | )             |  |   | (7,093       | ) |  |              | (6,197 | ) |  |   | (27,946 | )
|Net loss                                    |  |                    | (7,303 | ) |            |   | (7,824 | )             |  |   | (6,980       | ) |  |              | (6,619 | ) |  |   | (28,726 | )
|Basic and diluted net loss per common share |  | $                  | (0.25  | ) |            | $ | (0.27  | )             |  | $ | (0.24        | ) |  | $            | (0.23  | ) |  | $ | (0.98   | )

|                                            |  |                    |        |   |            |   |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|------------------------------------------- |  | ------------------ | ------ | - | ---------- | - | ------ | ------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------- | -
|                                            |  |                    |        |  
|                                            |  | 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   | )

Because of the method used in calculating per
share data, the quarterly per share data will not necessarily
add to the per share data as computed for the year.

62



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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 2003 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.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

An evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of
March 1, 2003 was carried out by the Company under the
supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures have been
designed and are being operated in a manner that provides
reasonable assurance that the information required to be
disclosed by the Company in reports filed under the Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. A controls
system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the controls system
are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if
any, within a company have been detected. Subsequent to the date
of the most recent evaluation of our internal controls, there
were no significant changes in our internal controls or in other
factors that could significantly affect the internal controls,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

63



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##### Table of Contents






PART IV




Item 15. Exhibits, Financial
Statement Schedules and Reports on Form 8-K

(a) Financial Statements

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

2. No financial statement schedules are
required.

Notice
Regarding Arthur Andersen LLP

Arthur Andersen LLP audited our consolidated
financial statements for the two years in the period ended
December 31, 2001, and the period from our inception in May
1998 to December 31, 2001 and issued a report thereon dated
January 18, 2002. Arthur Andersen LLP has not reissued
their report and has not consented either to the inclusion of
their report on our financial statements in this report or the
incorporation by reference of their report into any of our
registration statements filed with the SEC, and we have relied
on Rule 437a of the Securities Act of 1933, as amended, in
filing this report without such a consent. On June 15,
2002, Arthur Andersen LLP was convicted of obstruction of
justice by a federal jury in Houston, Texas in connection with
Arthur Andersen LLPs work for Enron Corp. On
September 15, 2002, a federal judge upheld this conviction.
Arthur Andersen LLP ceased its audit practice before the
Commission on August 31, 2002. Effective April 18,
2002, we terminated the engagement of Arthur Andersen LLP as our
independent accountants and engaged PricewaterhouseCoopers LLP
to serve as our independent accountants for the fiscal year
ending December 31, 2002. Because Arthur Andersen LLP has
not consented to the inclusion of their report in this report
and because of the circumstances affecting Arthur Andersen LLP,
as a practical matter, Arthur Andersen LLP may not be able to
satisfy any claims arising from the provision of auditing
services to us, including claims you may have that are available
to security holders under federal and state securities laws.

(b) Reports on Form 8-K

A report on Form 8-K was filed on
November 26, 2002 under Item 5, Other Events.

(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.                                                                                                                                                                                               

64



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|       |        |  |         |                                                                                                                                                                                                                                                                                                                                                          
|------ | ------ |  | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        |  | Exhibit
|       |        |  |        
|       | 3.5    |  |         | Certificate of Designations, Preferences, Related
    Rights, Qualifications, Limitations and Restrictions Of
    Series A Junior Participating Preferred Shares of Esperion
    Therapeutics, Inc. Incorporated by reference to Exhibit 3.1
    to the Companys Current Report on Form 8-K filed
    April 23, 2002.                                   
|       | 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.                                                                                                                           
|       | 4.2    |  |         | Rights Agreement between Esperion Therapeutics,
    Inc. and StockTrans, Inc., as Rights Agent, dated as of
    April 18, 2002. Incorporated by reference to
    Exhibit 4.2 to the Companys Current Report on
    Form 8-K filed April 23, 2002.                                                                                                       
|       | 4.3    |  |         | Amendment No. 1. to Rights Agreement between
    Esperion Therapeutics, Inc. and StockTrans, Inc., as Rights
    Agent, dated November 26, 2002. Incorporated by reference
    to Exhibit 4.3 to the Companys Current Report on
    Form 8-K filed November 26, 2002.                                                                                   
|       | 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.                                                        
|       | 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* |  |         | Esperion Therapeutics, Inc. 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.                                                                  

65



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|       |        |  |         |                                                                                                                                                                                                                                                                                                                                                 
|------ | ------ |  | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        |  | Exhibit
|       |        |  |        
|       | 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. [delete?]
|       | 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.                                                                                                                    
|       | 10.27  |  |         | 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.            
|       | 10.37  |  |         | Memorandum of Understanding between SWMF Holdings
    Corporation and Esperion Therapeutics, Inc. dated July 11,
    2001. Incorporated by reference to Exhibit 10.37 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2001.                                                                          

66



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|       |        |  |         |                                                                                                                                                                                                                                                                                                                       
|------ | ------ |  | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        |  | Exhibit
|       |        |  |        
|       | 10.38  |  |         | Loan and Security Agreement between Silicon
    Valley Bank and Esperion Therapeutics, Inc. dated
    October 31, 2001. Incorporated by reference to
    Exhibit 10.38 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 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.
    Incorporated by reference to Exhibit 10.39 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2001.
|       | 10.40  |  |         | Confirmation of Sublease Terms between Southwest
    Michigan Holdings Corporation and Esperion Therapeutics, Inc.
    dated effective October 15, 2001. Incorporated by reference
    to Exhibit 10.40 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001.                  
|       | 10.41  |  |         | Amendment of Sublease Terms between SWMF Holdings
    Corporation and Esperion Therapeutics, Inc. dated effective
    February 1, 2002. Incorporated by reference to
    Exhibit 10.41 to the Companys Quarterly Report on
    Form 10-Q for the fiscal quarter ended March 31, 2002.                                
|       | 10.42* |  |         | Esperion Therapeutics, Inc. 1998 Stock Option
    Plan (Amended, effective April 18, 2002). Incorporated by
    reference to Exhibit 10.42 to the Companys Quarterly
    Report on Form 10-Q for the fiscal quarter ended
    June 30, 2002.                                                                         
|       | 10.43* |  |         | Esperion Therapeutics, Inc. 2000 Equity
    Compensation Plan (Amended and Restated, effective
    April 18, 2002). Incorporated by reference to
    Exhibit 10.43 to the Companys Quarterly Report on
    Form 10-Q for the fiscal quarter ended June 30, 2002.                                                     
|       | 10.44* |  |         | Employment arrangement between William F.
    Brinkerhoff and Esperion Therapeutics, Inc. dated April 19,
    2002. Incorporated by reference to Exhibit 10.44 to the
    Companys Quarterly Report on Form 10-Q for the fiscal
    quarter ended June 30, 2002.                                                     
|       | 10.46  |  |         | Master Lease Agreement between Southwest Michigan
    Innovation Center, Inc. and Esperion Therapeutics, Inc.
    effective as of July 12, 2001. Incorporated by reference to
    Exhibit 10.46 to the Companys Quarterly Report on
    Form 10-Q for the fiscal quarter ended September 30,
    2002.               
|       | 10.47  |  |         | Second Amendment to Commercial Sublease Agreement
    between Southwest Michigan Innovation Center, Inc. (formerly
    known as SWMF Holdings Corporation) and Esperion Therapeutics,
    Inc. dated September 10, 2002.                                                                                              
|       | 10.48  |  |         | Lease Extension  Third Renewal Term
    between Maxey, LLC and Esperion Therapeutics, Inc. dated
    September 21, 2002.                                                                                                                                                                                             
|       | 10.49* |  |         | Employment arrangement between Roger S. Newton
    and Esperion Therapeutics, Inc. dated July 6, 1998.                                                                                                                                                                                                                
|       | 10.50* |  |         | Employment arrangement between Timothy M.
    Mayleben and Esperion Therapeutics, Inc. dated November 25,
    1998.                                                                                                                                                                                                   
|       | 10.51* |  |         | Employment arrangement between Brian R. Krause
    and Esperion Therapeutics, Inc. dated February 20, 2001.                                                                                                                                                                                                           
|       | 10.52* |  |         | Employment arrangement between Jean-Louis Dasseux
    and Esperion Therapeutics, Inc. dated December 9, 1998.                                                                                                                                                                                                         
|       | 10.53* |  |         | Employment arrangement between Frank Thomas and
    Esperion Therapeutics, Inc. dated February 26, 2000.                                                                                                                                                                                                              
|       | 21.1   |  |         | Subsidiaries of Esperion Therapeutics, Inc.                                                                                                                                                                                                                                                                           
|       | 23.1   |  |         | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                

67



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|       |      |  |         |                                                                                                                                
|------ | ---- |  | ------- | -------------------------------------------------------------------------------------------------------------------------------
|Number |      |  | Exhibit
|       |      |  |        
|       | 99.1 |  |         | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.
|       | 99.2 |  |         | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.



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



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

68



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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

Date: March 26, 2003

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Annual Report on Form 10-K has
been signed by the following persons in the capacities indicated
on the 26th day of March, 2003.

|                                               |  |                                                                                       |  |      
|---------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | -----
|                                               |  | Signature                                                                             |  | Title
|                                               |  |                                                                                       |  |      
|/s/ ROGER S. NEWTONRoger S. Newton             |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)    
|                                              
|/s/ TIMOTHY M. MAYLEBENTimothy M. Mayleben     |  | Chief Operating Officer and Chief Financial
    Officer (Principal Financial Officer)
|                                              
|/s/ FRANK E. THOMASFrank E. Thomas             |  | Vice President, Finance and Investor Relations
    (Principal Accounting Officer)    
|                                              
|/s/ DAVID I. SCHEERDavid I. Scheer             |  | Chairman                                                                             
|                                              
|/s/ SUSAN B. BAYHSusan B. Bayh                 |  | Director                                                                             
|                                              
|/s/ HENRY E. BLAIRHenry E. Blair               |  | Director                                                                             
|                                              
|/s/ RONALD M. CRESSWELLRonald M. Cresswell     |  | Director                                                                             
|                                              
|/s/ ANTONIO M. GOTTO, JR.Antonio M. Gotto, Jr. |  | Director                                                                             
|                                              
|/s/ EILEEN M. MOREEileen M. More               |  | Director                                                                             

69



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CERTIFICATIONS

I, Roger S. Newton, certify that:

1.     I have reviewed
this annual report on Form 10-K of Esperion Therapeutics,
Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6.     The
registrants other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.



| |                        
| | -----------------------
| | /s/ ROGER S. NEWTON    
| |                        
| | Roger S. Newton        
| | Chief Executive Officer

Date: March 26, 2003

70



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##### Table of Contents



I, Timothy M. Mayleben, certify that:

1.     I have reviewed
this annual report on Form 10-K of Esperion Therapeutics,
Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6.     The
registrants other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.



| |                        
| | -----------------------
| | /s/ TIMOTHY M. MAYLEBEN
| |                        
| | Timothy M. Mayleben    
| | Chief Financial Officer

Date: March 26, 2003

71



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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.                                                                                                                                                                                               
|       | 3.5   |  |         | Certificate of Designations, Preferences, Related
    Rights, Qualifications, Limitations and Restrictions Of
    Series A Junior Participating Preferred Shares of Esperion
    Therapeutics, Inc. Incorporated by reference to Exhibit 3.1
    to the Companys Current Report on Form 8-K filed
    April 23, 2002.                                                                    
|       | 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.                                                                                                                                                            
|       | 4.2   |  |         | Rights Agreement between Esperion Therapeutics,
    Inc. and StockTrans, Inc., as Rights Agent, dated as of
    April 18, 2002. Incorporated by reference to
    Exhibit 4.2 to the Companys Current Report on
    Form 8-K filed April 23, 2002.                                                                                                                                        
|       | 4.3   |  |         | Amendment No. 1. to Rights Agreement between
    Esperion Therapeutics, Inc. and StockTrans, Inc., as Rights
    Agent, dated November 26, 2002. Incorporated by reference
    to Exhibit 4.3 to the Companys Current Report on
    Form 8-K filed November 26, 2002.                                                                                                                    
|       | 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.                                                                      

72



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##### Table of Contents



|       |        |  |         |                                                                                                                                                                                                                                                                                                                                         
|------ | ------ |  | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        |  | Exhibit
|       |        |  |        
|       | 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* |  |         | Esperion Therapeutics, Inc. 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.                                                 
|       | 10.17  |  |         | 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.                                                                                                            
|       | 10.27  |  |         | 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.                            

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##### Table of Contents



|       |        |  |         |                                                                                                                                                                                                                                                                                                                                     
|------ | ------ |  | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        |  | Exhibit
|       |        |  |        
|       | 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.
|       | 10.37  |  |         | Memorandum of Understanding between SWMF Holdings
    Corporation and Esperion Therapeutics, Inc. dated July 11,
    2001. Incorporated by reference to Exhibit 10.37 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2001.                                                              
|       | 10.38  |  |         | Loan and Security Agreement between Silicon
    Valley Bank and Esperion Therapeutics, Inc. dated
    October 31, 2001. Incorporated by reference to
    Exhibit 10.38 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 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.
    Incorporated by reference to Exhibit 10.39 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2001.              
|       | 10.40  |  |         | Confirmation of Sublease Terms between Southwest
    Michigan Holdings Corporation and Esperion Therapeutics, Inc.
    dated effective October 15, 2001. Incorporated by reference
    to Exhibit 10.40 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001.                                
|       | 10.41  |  |         | Amendment of Sublease Terms between SWMF Holdings
    Corporation and Esperion Therapeutics, Inc. dated effective
    February 1, 2002. Incorporated by reference to
    Exhibit 10.41 to the Companys Quarterly Report on
    Form 10-Q for the fiscal quarter ended March 31, 2002.                                              
|       | 10.42* |  |         | Esperion Therapeutics, Inc. 1998 Stock Option
    Plan (Amended, effective April 18, 2002). Incorporated by
    reference to Exhibit 10.42 to the Companys Quarterly
    Report on Form 10-Q for the fiscal quarter ended
    June 30, 2002.                                                                                       
|       | 10.43* |  |         | Esperion Therapeutics, Inc. 2000 Equity
    Compensation Plan (Amended and Restated, effective
    April 18, 2002). Incorporated by reference to
    Exhibit 10.43 to the Companys Quarterly Report on
    Form 10-Q for the fiscal quarter ended June 30, 2002.                                                                   
|       | 10.44* |  |         | Employment arrangement between William F.
    Brinkerhoff and Esperion Therapeutics, Inc. dated April 19,
    2002. Incorporated by reference to Exhibit 10.44 to the
    Companys Quarterly Report on Form 10-Q for the fiscal
    quarter ended June 30, 2002.                                                                   
|       | 10.46  |  |         | Master Lease Agreement between Southwest Michigan
    Innovation Center, Inc. and Esperion Therapeutics, Inc.
    effective as of July 12, 2001. Incorporated by reference to
    Exhibit 10.46 to the Companys Quarterly Report on
    Form 10-Q for the fiscal quarter ended September 30,
    2002.                             
|       | 10.47  |  |         | Second Amendment to Commercial Sublease Agreement
    between Southwest Michigan Innovation Center, Inc. (formerly
    known as SWMF Holdings Corporation) and Esperion Therapeutics,
    Inc. dated September 10, 2002.                                                                                                            
|       | 10.48  |  |         | Lease Extension  Third Renewal Term
    between Maxey, LLC and Esperion Therapeutics, Inc. dated
    September 21, 2002.                                                                                                                                                                                                           

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##### Table of Contents



|       |        |  |         |                                                                                                                                
|------ | ------ |  | ------- | -------------------------------------------------------------------------------------------------------------------------------
|Number |        |  | Exhibit
|       |        |  |        
|       | 10.49* |  |         | Employment arrangement between Roger S. Newton
    and Esperion Therapeutics, Inc. dated July 6, 1998.                         
|       | 10.50* |  |         | Employment arrangement between Timothy M.
    Mayleben and Esperion Therapeutics, Inc. dated November 25,
    1998.            
|       | 10.51* |  |         | Employment arrangement between Brian R. Krause
    and Esperion Therapeutics, Inc. dated February 20, 2001.                    
|       | 10.52* |  |         | Employment arrangement between Jean-Louis Dasseux
    and Esperion Therapeutics, Inc. dated December 9, 1998.                  
|       | 10.53* |  |         | Employment arrangement between Frank Thomas and
    Esperion Therapeutics, Inc. dated February 26, 2000.                       
|       | 21.1   |  |         | Subsidiaries of Esperion Therapeutics, Inc.                                                                                    
|       | 23.1   |  |         | Consent of PricewaterhouseCoopers LLP.                                                                                         
|       | 99.1   |  |         | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.
|       | 99.2   |  |         | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.



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



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

75