**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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** **

**FORM 10-K**

 

**x**                              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

** **

**For TheFiscal Year Ended December 31, 2007**

 

**OR**

 

**o**                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**For thetransition period from                to               .**

 

**CommissionFile No. 0-19700**

 

**AMYLIN PHARMACEUTICALS, INC.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Delaware**                                                     | ** ** | **33-0266089**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
| ** **                                                       | ** ** | ** **                            |
| **9360  Towne Centre Drive  San Diego, California**              | ** ** | **92121**                             |
| ** **                                                       |
| (Address of  principal executive offices)                        |       | (Zip Code)                            |

 

Registrant’s telephone number, including area code:**(858) 552-2200**

 

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

 

| **Title of Each Class**       | ** ** | **Name of  Exchange on Which Registered** |
|-------------------------------|------------|-------------------------------------------|
| Common Stock, $.001 par value |       | The NASDAQ Stock Market, LLC              |

 

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

**NONE**

(Title of Class)

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

Yes  x   No  o

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

Yes  o   No  x

 

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

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (Section 229.405 of thischapter) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

Large acceleratedfiler  x       Accelerated filer  o       Non-acceleratedfiler  o       Smaller reportingcompany  o

 

                           (Donot check if a smaller reporting company)

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes  o   No  x

 

The aggregate market value ofthe common stock of the registrant as of June 30, 2007****heldby non-affiliates was $2,212,973,204.

 

The number of sharesoutstanding of the registrant’s common stock was 135,302,323 as of February 13,2008.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the registrant’sDefinitive Proxy Statement to be filed with the Securities and ExchangeCommission (the “Commission”) pursuant to Regulation 14A in connection with the2008 Annual Meeting of Stockholders to be held on May 30, 2008 areincorporated herein by reference into Part III of this Annual Report. SuchDefinitive Proxy Statement will be filed with the Commission not later than 120days after December 31, 2007.

 

 

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*You should read the following together with the more detailedinformation regarding our company, our common stock and our financialstatements and notes to those statements appearing elsewhere in this documentor incorporated by reference. The Securities and Exchange Commission, or SEC,allows us to “incorporate by reference” information that we file with the SEC,which means that we can disclose important information to you by referring youto those documents. The information incorporated by reference is considered tobe part of this annual report on Form 10-K.*

 

*Except for the historical information contained herein, this annual reporton Form 10-K and the information incorporated by reference containsforward-looking statements that involve risks and uncertainties. Thesestatements include projections about our accounting and finances, plans andobjectives for the future, future operating and economic performance and otherstatements regarding future performance. These statements are not guarantees offuture performance or events. Our actual results may differ materially fromthose discussed here. Factors that could cause or contribute to suchdifferences are described in Part I, Item 1A, entitled “Risk Factors,” aswell as those discussed in Part II, Item 7, entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andelsewhere throughout this annual report on Form 10-K and in any otherdocuments incorporated by reference into this annual report on Form 10-K.We disclaim any obligation to update any forward-looking statement.*

 

**PART I**

 

**Item 1. *Business***

 

We area biopharmaceutical company committed to improving the lives of people withdiabetes, obesity and other diseases through the discovery, development andcommercialization of innovative medicines. We are marketing two first-in-class medicines to treat diabetes, BYETTA®(exenatide) injection and SYMLIN® (pramlintide acetate) injection.Our near-term strategy is to drive BYETTA and SYMLIN sales growth whileinvesting in other development opportunities, such as a sustained-releaseformulation of exenatide which we refer to as exenatide once weekly (formerlyreferred to as exenatide LAR) and our obesity program, to drive mid-term andlong-term growth.

 

BYETTAis the first and only approved medicine in a new class of compounds calledincretin mimetics. ** **It is approved as an adjunctive therapyto improve glycemic control in patients with type 2 diabetes who have notachieved adequate glycemic control using metformin, a sulfonylurea and/or athiazolidinediene (TZD), three common oral therapies for type 2 diabetes.  Net product sales of BYETTA were $636.0million in 2007, $430.2 million in 2006 and $75.2 million in 2005.

 

Wehave an agreement with Eli Lilly and Company, or Lilly, for the globaldevelopment and commercialization of exenatide. This agreement includes BYETTAand other formulations of exenatide such as exenatide once weekly.  Under the terms of the agreement, operatingprofits from products sold in the United States are shared equally betweenLilly and us, and Lilly will pay us royalties for product sales outside of theUnited States.  Lilly has primaryresponsibility for developing and commercializing BYETTA outside of the UnitedStates including any sustained-release formulations of exenatide such asexenatide once weekly.  In late 2006,BYETTA was approved in the European Union, or EU, and, by the end of 2007, wascommercially launched in 23 countries worldwide.

 

SYMLINis the first and only approved medicine in a new class of compounds calledamylinomimetics.  It is approved as anadjunctive therapy to improve glycemic control in patients with either type 2or type 1 diabetes who are treated with mealtime insulin but who have notachieved adequate glycemic control.  Weown 100% of the global rights to SYMLIN. Net product sales of SYMLIN were $65.5 million in 2007, $43.8 million in2006 and $11.5 million in 2005.

 

Wehave a field force of approximately 600****peoplededicated to marketing BYETTA and SYMLIN in the United States.  In addition, Lilly co-promotes BYETTA in theUnited States.  Our field force includesour specialty and primary care sales forces, a managed care and governmentaffairs organization, a medical science organization and diabetes carespecialists.

 

Inaddition to our marketed products, we have ongoing programs in pharmaceuticaldiscovery and development, including a late-stage program to develop exenatideonce weekly, to enable once weekly administration of exenatide for thetreatment of type 2 diabetes.  We areworking with Lilly and Alkermes, Inc., or Alkermes, to develop exenatideonce weekly.  In October 2007, weannounced positive results of a 30-week pivotal comparator study that showed astatistically significant improvement in A1C, a standard measure of bloodglucose control, of approximately 1.9 percentage points from baseline forexenatide once weekly patients, with three out of four patients achieving anA1C of 7% or less.  We plan to completeour 

 

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manufacturing scale-upactivities in 2008 and to submit a new drug application, or NDA, to the U.S.Food and Drug Administration, or FDA, no later than the end of the first halfof 2009, although we are aggressively pursuing strategies which may allow anearlier submission.  In 2008 we also planto initiate three studies to demonstrate the superiority of exenatide onceweekly over insulin and several oral medications used in the treatment of type2 diabetes.

 

Ourlong-term growth strategy includes our Integrated Neurohormonal Treatment ofObesity, or INTO, strategy.  In November 2007,we announced that overweight or obese subjects in a 24-week proof-of-conceptstudy treated with a combination of pramlintide, an analog of human amylin andthe same active ingredient in SYMLIN, and metreleptin, an analog of humanleptin, lost an average of 25 pounds from baseline, resulting in reduced bodyweight on average of 12.7%.  In 2008 wewill focus on the development of a potential obesity medicine that is acombination of pramlintide and metreleptin.

 

Wealso have other early stage programs for diabetes, obesity and other therapeuticareas.  We maintain an active discoveryresearch program focused on novel peptide therapeutics and are actively seekingto in-license additional drug candidates. We have also entered into a number of strategic alliances and businessinitiatives that support our expansion into new therapeutic areas.

 

On March 1,2007 Ginger L. Graham stepped down as our chief executive officer and continuesto serve as a member of our board of directors. Daniel M. Bradbury, our former president and chief operating officer,became our president and chief executive officer effective March 1, 2007.

 

Ourprincipal executive offices are located at 9360 Towne Centre Drive, San Diego,CA 92121, and our telephone number is (858) 552-2200.  We were incorporated in Delaware in September 1987.  We maintain a website at *www.amylin.com*.  The reference to our worldwide web addressdoes not constitute incorporation by reference into this report of any of theinformation contained on our website.

 

Ourperiodic and current reports that we file with the SEC are available free ofcharge on our website at *www.amylin.com*as soon as reasonably practicable after we have electronically filed them with,or furnished them to, the SEC.

 

**Diabetes**

 

Diabetes is a major health problem both in the UnitedStates and worldwide and is the fifth leading cause of death by disease in theUnited States.  Diabetes is a complex,metabolic disorder of carbohydrate, fat and protein metabolism, primarilyresulting from the failure of pancreatic beta cells to produce sufficientinsulin to match the demands for insulin in the body.  Insulin is a hormone that plays a centralrole in helping the body process, convert and store energy from glucose.  In those with diabetes, the relative shortageof insulin impairs the ability of glucose to enter and fuel the body’s cellsand as a result, glucose builds up in the bloodstream causing hyperglycemia(high blood sugar).  Longstandingelevation of blood glucose may result in damage to the kidney, retina andnerves — and may lead to kidney failure, permanent nerve damage, blindness andamputation.  High glucose also increasesthe risk of cardiovascular disease. Conversely, too much insulin in thebloodstream can cause hypoglycemia (low blood sugar).  Individuals who manage their diabetes withinsulin or other oral antidiabetic medication are especially vulnerable toswings of high to low blood sugar level and the risk of very low blood sugarwhich, if left untreated, can be fatal.

 

It is estimated that nearly 200** **million people worldwide havediabetes.  Of that population, it isestimated that approximately 90-95% have type 2 diabetes, previously known asadult-onset diabetes, and the remainder have type 1 diabetes, previously knownas juvenile-onset diabetes.  In theUnited States alone, in 2005 there were approximately 20.8 million people, or7% of the population, with diabetes and there were approximately 20.6 millionover the age of 20, or 9.6% of all people in this age group, withdiabetes.  However, in 2005 only 14.6million people in the United States had been diagnosed with diabetes andapproximately 1.5 million new cases were diagnosed.  From 1997 through 2004, new cases ofdiagnosed diabetes among Americans aged 18-79 increased by 54%.  In addition, there are currently approximately54 million people in the United States with pre-diabetes, a condition thatraises the risk of developing type 2 diabetes, heart disease and stroke.  People with pre-diabetes have blood glucose levels higher than normalbut not high enough to establish a diagnosis of diabetes.

 

Long term control of blood glucose is known to limitthe risk of developing diabetes related retinal, renal and neurologiccomplications.  Glycated hemoglobin (A1C)is the most widely used measure of long-term blood glucose control.

 

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A1Clevel is a recognized indicator of an individual’s average blood glucoseconcentrations over the preceding three- to four-month period.  Lower A1C levels indicate better averageblood glucose control, with values in people without diabetes usually beingless than 6%.  The American DiabetesAssociation, or ADA, suggests that people with diabetes should aim for an A1Cvalue that is lower than 7%.  It isestimated that nearly half of Americans being treated for diabetes are failingto achieve recommended blood glucose levels and, according to research studiesconducted in the United States and abroad, these patients would significantlybenefit from improved glycemic control. In general, for every one-pointreduction in A1C, the risk of developing microvascular diabetic complications(eye, kidney and nerve disease) is reduced by up to 40%. Additionally,aggressive use of insulin and some oral medications to reduce glucose levelscan be associated with an increased risk of hypoglycemia and weight gain.  Consequently, there has long been a need todevelop new treatment strategies that safely improve glucose control, improvethe overall health profile of patients with diabetes and reduce the risk ofcomplications.

 

In people without diabetes, the beta cells of thepancreas produce two hormones, insulin and amylin.  Type 1 diabetes, which is most oftendiagnosed in children and young adults, results in a deficiency of both hormonesdue to a destruction of beta cells. Replacement of beta cells through islet transplant therapy can, in somecases, temporarily render patients insulin-independent; however, life-longdaily insulin therapy is usually required to sustain life for people with type1 diabetes.  The addition of SYMLINtherapy to insulin treatment reduces the characteristic rise in blood sugarsafter meals and further reduces A1C levels.

 

Type 2 diabetes results from the body’s inability toproduce sufficient insulin, or to properly use available insulin, or both.Secretion of the hormone amylin is also impaired in people with type 2diabetes.  Historically, type 2 diabetesoccurs later in life.  However, primarilyas a result of changes in diet and lifestyle, type 2 diabetes is now occurringmuch earlier in life for many people. Diet and exercise therapy, oral medications, BYETTA, insulin, andinsulin with SYMLIN are currently used to treat type 2 diabetes.

 

While insulin resistance – the inability of the body’scells to properly respond to the insulin signal – is felt to be a core defectin those with type 2 diabetes, as the disease progresses a reduction in thebeta cells’ ability to make and release insulin plays a key role.  Because of the progressive nature of thedisease (in great part the result of this decline in insulin release), nosingle therapy has been shown to consistently control blood glucose overtime.  A majority of individuals withtype 2 diabetes will eventually require additional medications, and even theseadditional treatments can become less effective in regulating blood glucoselevels over time.  Historically, insulintherapy is then initiated; however, given the progressive nature of the declinein the body’s production of insulin over time, insulin dosage and the number ofinsulin injections needed to maintain glucose control is also increased.  Even with additional insulin doses andinjections, many individuals are unable to control their blood glucose levels,or do so at the expense of significant weight gain and an increased risk of lowblood glucose or hypoglycemia.

 

In 2005, we introduced two new treatment options forthe management of diabetes, BYETTA and SYMLIN. BYETTA offers patients with inadequate glycemic control using oralmedications the opportunity to better control their blood glucose levels andlose weight. SYMLIN offers patients with inadequate glycemic control usingmealtime insulin a treatment option that can both improve glucose control andresult in weight loss.  These novelfirst-in-class medicines provide new options in disease management and glucosecontrol to millions of people suffering with diabetes.

 

For people suffering from diabetes, poor control ofblood glucose levels has been shown to result in severe long-termcomplications.  For instance, the UnitedStates Centers for Disease Control, or CDC, has stated that complications dueto diabetes include:

 

·                  heart disease and stroke;

 

·                  high blood pressure;

 

·                  blindness due to retinopathy, a conditionmanifested by damage to the retina;

 

·                  nephropathy, or kidney disease;

 

·                  neuropathy, a condition where there is damageto the nervous system;

 

·                  amputations due to peripheral vasculardisease; and

 

·                  periodontal disease.

 

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Obesity is common in patients with type 2 diabetesand weight control is a major problem for many patients with both type 1 andtype 2 diabetes.  Weight gain isparticularly common in those using insulin and certain oral medications as partof their treatment regimen.  In addition,patients with diabetes frequently have wide fluctuations in blood sugarfollowing meals.  These fluctuations inblood sugar can significantly affect a patient’s quality of life.  Blood glucose fluctuations, weight gain anddiabetes complications may each contribute to substantial disability, reducedquality of life, reduced productivity in the workplace, increased pain andsuffering and premature death.

 

**Marketed Products**

 

#### ***BYETTA® (exenatide) injection***

 

BYETTAis the first and only approved medicine in a new class of compounds calledincretin mimetics.  We began sellingBYETTA in the United States in June 2005 as an add-on therapy to improveglycemic control in patients with type 2 diabetes who have not achievedadequate gylcemic control and who are taking metformin and/or a sulfonylurea,two common oral therapies for type 2 diabetes. Lilly also co-promotes BYETTA in the United States.  In December 2006, the FDA approvedBYETTA as an add-on therapy to improve glycemic control in people with type 2diabetes who have not achieved adequate glycemic control by using a TZD.  We estimate the number of people in theUnited States currently using metformin, sulfonylurea and/or a TZD to beapproximately 8.2 million.  Approximatelyone half of all diabetes patients using oral medications are believed to havean A1C higher than the ADA’s recommendation of less than 7% and the vastmajority of these patients could be candidates for BYETTA.

 

BYETTAprovides self-regulating glucose control by augmenting the body’s naturalphysiologic processes, allowing the body to respond to blood glucose changes asthey occur.  BYETTA directly affects thebeta cells’ responses to elevated glucose by enhancing insulin secretion; thiseffect dissipates as glucose levels approach the normal range.  BYETTA also restores first-phase insulinresponse, an effect which is evident following the initial dose.  BYETTA is administered twice a day by using afixed dose injection, and requires no dose adjustments due to changes in mealsize or composition, exercise or other variables.  No additional glucose monitoring is requiredwith BYETTA therapy.

 

Themost common adverse effect of BYETTA is mild to moderate nausea, which tends todissipate with time.  Mild to moderatehypoglycemia has also been observed, primarily when used in conjunction with asulfonylurea, agents that are known to cause hypoglycemia.

 

By theend of 2007, our field force expanded to approximately 600 individuals and,together with the Lilly field organization, our goal is to provide education, throughboth one-on-one interactions and educational programs, to ensure thatphysicians understand BYETTA, including its mechanisms of action, potentialbenefits and important use considerations. In 2007 we saw a shift in prescribers of BYETTA.  Early adoption of BYETTA was primarily bydiabetes specialists, however in 2007 utilization in that segment declined and,we believe, has stabilized.  Importantly,we believe BYETTA is increasingly being prescribed by primary care physicians,a much larger prescribing segment that tends to adopt products later in theproduct life cycle.  Primary carephysicians write approximately 80% of diabetes prescriptions in the UnitedStates.  Beginning in 2007 and continuingthrough 2008, we are refining our marketing efforts to remind primary carephysicians of BYETTA’s unique benefits of glucose control with weightloss.  Additionally, as we begin 2008, wehave increased access to health care plan reimbursement for BYETTA toapproximately 85% coverage nationally on tier 2, which requires a relativelylow co-payment from patients who are covered under such plans.

 

We andLilly piloted a direct-to-customer advertising program in the fourth quarter of2007.  Although the program increasedpatient awareness of BYETTA, we now believe our efforts are best focused onsupporting physicians and patients starting BYETTA therapy.  In December 2007 we launched a patientsupport initiative to facilitate the successful initiation of therapy byprimary care physicians.  This effortincludes:  increased patient educationalmaterial for health care providers to distribute in their offices; a network ofapproximately 450 diabetes educators to work with physicians and their patientswithin their local communities; direct support to patients through the BYETTAeasy start line, which provides a toll-free number that allows patients tocontact trained medical professionals to better understand the benefits ofBYETTA therapy and to get assistance starting and using the BYETTA pen; apharmacy support component partnering with managed care plans designedspecifically to assist patient refills; and an enhanced BYETTA website.  We believe this support will prove helpful topatients who may be on their first injectable therapy and to primary careproviders who may be less accustomed to treating patients with an injectableproduct earlier in the disease cycle and who have fewer resources in theiroffices.

 

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In February 2007,we announced that the FDA approved more convenient patient storage instructionsfor BYETTA.  BYETTA pens can now be keptat room temperatures (below 77 degrees Fahrenheit) after first use.  Prior to first use, BYETTA pens shouldcontinue to be refrigerated at temperatures between 36 and 46 degreesFahrenheit.

 

Lillyhas primary responsibility for developing and commercializing BYETTA outsidethe United States, including any sustained-release formulations such asexenatide once weekly.  In late 2006, weannounced that the European Commission granted marketing authorization forBYETTA for the treatment of type 2 diabetes. Lilly commercially launched BYETTA in various EU member states and othercountries in 2007 and by the end of 2007, BYETTA was launched in 23 countriesworldwide.

 

*BYETTA Development Activities*

 

In June 2007, weannounced the results of a three-year, open-label study which showed treatmentwith BYETTA was associated with sustained blood sugar control and progressiveweight loss in people not achieving adequate blood sugar control on oralmedications alone.  Study participantstreated with BYETTA and oral medication(s) showed sustained reductions inA1C of approximately 1% and reduced fasting blood glucose levels.  After three years of BYETTA treatment, 46% ofstudy participants achieved an A1C of 7% or less and 30% of patients achievedan A1C of 6.5% or less.  Weight lossobserved in this study was progressive, with participants losing on averageapproximately 11 pounds from baseline. In addition, one in four patients lost an average of approximately 28pounds.  In this study, BYETTA treatmentwas also assessed for improvements in pancreatic beta-cell function in a subsetof 92 participants.  Homeostasis ModelAssessment, or HOMA-B, a measure of pancreatic beta-cell function, improved by17 % from baseline over three years.

 

In June 2007, weannounced results from a 16-week open-label study comparing treatment withBYETTA versus insulin glargine in people with type 2 diabetes who were alsotaking oral medications.  Study findingsshowed comparable A1C reductions of approximately 1.4% in patients using BYETTAor insulin glargine therapies, with weight loss and a lower incidence ofhypoglycemia associated with BYETTA therapy. BYETTA treatment with metformin resulted in a statistically significantlower risk of hypoglycemia than treatment with insulin glargine andmetformin.  There were seven episodes ofsevere hypoglycemia in three patients taking insulin glargine and no severeepisodes during treatment with BYETTA, reflecting a lower overall risk ofhypoglycemia.  BYETTA treatment was alsoassociated with a 4.3 pound weight loss from baseline, compared with a 0.8pound weight gain among individuals in the insulin glargine group.

 

In June 2007, wealso announced results from a study that showed treatment with BYETTA inpatients sustained improvements in A1C of approximately 0.8%, reduced fastingglucose and progressive weight loss of approximately 11 pounds through threeand a half years of therapy.  BYETTAtherapy was also associated with improvements in cardiovascular risk factors inpeople with type 2 diabetes, including improved triglyceride levels and lowersystolic and diastolic blood pressure. Results also showed an increase in HDL, or “good”, cholesterol levelsafter three and a half years and a decrease in LDL, or “bad”, cholesterollevels.

 

In April 2005,concurrently with BYETTA’s initial approval, the FDA issued an approvableletter for BYETTA when used as a monotherapy (stand-alone therapy) for peoplewith type 2 diabetes.  In December 2007,we announced the results of a 24-week BYETTA monotherapy study in drug-naïvepatients.  In this study participantstaking 5 micrograms, or mcg or 10 mcg of monotherapy BYETTA twice daily showedreductions in A1C by 0.7% and 0.9%, respectively, from an average baseline A1Cranging from 7.8% to 7.9%.  In addition,approximately 60% of study participants on either 5 mcg or 10 mcg ofmonotherapy BYETTA at the conclusion of the study had an A1C of 7% orless.  Weight loss from baseline was significantand similar to that observed in previous BYETTA studies.  There was a low incidence of nausea reportedin both treatment arms of the study of approximately 3% and 13% in the 5 mcgand 10 mcg arms, respectively.  Therewere no instances of severe hypoglycemia in this study.  Overall hypoglycemia was similar to that seenin studies where BYETTA was used in conjunction with metformin only.  We currently plan to file a regulatorysubmission to the FDA for BYETTA use as monotherapy in the first half of 2008.

 

***SYMLIN® (pramlintide acetate)injection***

 

SYMLINis the first and only approved medicine in a new class of compounds calledamylinomimetics.  We began selling SYMLINin the United States in April 2005 as adjunctive therapy to mealtimeinsulin to treat diabetes.  Other thaninsulin and insulin analogues, SYMLIN is the first FDA-approved medicationaddressing glucose control for patients with type 1 diabetes since thediscovery of insulin over 80 years ago. SYMLIN is intended to improve blood glucose control in people treatedwith insulin alone or, in the case of patients with type 2 diabetes, treatedwith insulin with or without one or more oral medications.

 

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SYMLINis indicated for use in adults with type 2 or type 1 diabetes to control bloodsugar.  SYMLIN works with insulin tosmooth out the peaks in blood glucose levels to give patients more stable bloodglucose levels after meals and throughout the day.  SYMLIN also lowers the A1C levels of most patientsbeyond what insulin alone can achieve. SYMLIN induces satiety, which leads to eating less and weight loss inmost patients.  In addition, becauseSYMLIN works with insulin to control blood sugar, patients often need lessinsulin to achieve desired blood sugar levels after meals.

 

SYMLINis used with insulin and has been associated with an increased risk ofinsulin-induced severe hypoglycemia.  Therisk can be reduced by appropriate patient selection, careful patientinstruction and insulin dose adjustments. Other adverse effects commonly observed are primarily gastrointestinal,including nausea, which decrease over time in most patients.

 

OurSYMLIN marketing is focused on a target physician population of approximately21,000, with a goal of educating these physicians on SYMLIN, including itsmechanisms of action, potential benefits, use considerations, and appropriatepatient selection for initiating SYMLIN therapy.  These physicians writeapproximately 40% of all insulin prescriptions in the United States.  In October 2007, we announced that theFDA approved the SymlinPen TM 120 and the SymlinPen TM 60 pen-injector devicesfor administering SYMLIN.  The newpre-filled pen-injector devices feature fixed dosing to improve mealtimeglucose control and are now available to patients.  The devices can be stored at room temperaturenot to exceed 86 degrees F (30 degrees C) after first use.  We are now educating physicians about theSYMLIN pen and believe the SYMLIN pen will not only enable patients to moreeasily deliver proper dosing than using a vial and syringe but will alsoimprove the convenience of administering SYMLIN.

 

*SYMLIN Development Activities*

 

Inlate 2006, we announced results from a 16-week study designed to evaluate theefficacy and safety of adding SYMLIN at mealtime to an established regimen ofonce-daily basal insulin.  Patientsreceiving SYMLIN on average had better overall A1C, reduced glucosefluctuations, used less insulin and experienced weight loss, compared to thoseusing basal insulin without SYMLIN.  In June 2007,we announced that additional analysis of data from this study demonstrated thatweight loss also was associated with a significant reduction in C-reactiveprotein levels, a marker for increased risk of cardiovascular disease.  The overall results of this study formed thebasis of an NDA submitted by us in the fourth quarter of 2006 seeking approvalfor the use of SYMLIN at mealtime in patients with type 2 diabetes treated withonce-daily basal insulin (without mealtime insulin).  In October 2007, we announced that theFDA issued a “Not Approvable” letter for SYMLIN use with basal insulin.  We are continuing our discussions with theFDA with respect to its response regarding the use of SYMLIN with basal insulinalone.

 

During2007, we continued an open-label observational study of SYMLIN. This study isdesigned to evaluate SYMLIN use in the marketplace.  Patients receive SYMLIN as part of theirroutine diabetes management and are followed in this real-world setting for aperiod of six months.  In addition, in2007 we completed a small pharmacokinetic study in pediatric patients (ages 12to 16) with type 1 diabetes requested by the FDA that was designed to provideinsight into dosing in a pediatric population.

 

**Research and Development**

 

***Product Pipeline Programs***

 

Wehave late-stage development****programsin the therapeutic areas of diabetes and obesity and multiple early-stageprograms in diabetes and obesity.  Ouryears of research in diabetes and deep understanding of peptide hormones —their physiology, functionality and impact on the disease — are being leveragedto develop potential treatments for obesity. The metabolic components of these diseases are linked in numerous ways,which are reflected in the impact each has on the other.

 

#### ***Diabetes***

####  

#### ***Exenatide Once Weekly***

####  

Exenatideonce weekly is our late stage development program in diabetes.  Exenatide is the active ingredient in BYETTAand is combined with proprietary technology developed by us and our partner,Alkermes, to provide a sustained

 

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release delivery ofexenatide.  The combination of potencyand the glucose-dependent mechanism of action inherent in exenatide makes itwell suited to development of a once weekly formulation.  We have an agreement with Alkermes to assistus in the development, manufacture and commercialization of exenatide onceweekly and this program is included in our collaboration agreement withLilly.  We are aggressively working withLilly and Alkermes to develop exenatide once weekly for the treatment of type 2diabetes.

 

In October 2007,we announced positive results of a 30-week pivotal comparator study comparingtreatment with exenatide once weekly to treatment with BYETTA.  The study enrolled 295 patients not achievingadequate glucose control with either diet and exercise or with use of oralglucose-lowering agents.  Exenatide onceweekly showed a statistically significant improvement in A1C of approximately1.9% from baseline, compared to an improvement of approximately 1.5% forBYETTA.  Approximately three out of foursubjects treated with exenatide once weekly achieved an A1C of 7% or less.

 

After 30 weeks oftreatment, both exenatide once weekly and BYETTA treatment resulted in anaverage weight loss of approximately eight pounds.  Nearly 90% of subjects in both groupscompleted the study.  There was no majoror severe hypoglycemia regardless of background therapy.  As expected, based on prior BYETTA studies,minor hypoglycemia with exenatide once weekly use was limited to subjects usingbackground sulfonylurea therapy. Exenatide once weekly was associated with approximately 30% less nauseathan twice-daily BYETTA.  Approximatelyone out of five subjects receiving exenatide once weekly reportedtreatment-related nausea during the 30-week study.  In both groups nausea was predominately mildand transient.

 

We arecurrently completing the building of a facility in West Chester, Ohio tomanufacture exenatide once weekly.  Weexpect to complete the commercial scale-up manufacturing process for exenatideonce weekly and the commissioning of the facility in the second half of2008.  We are also working aggressivelyto provide sufficient data to the FDA to demonstrate comparability betweenexenatide once weekly clinical trial material manufactured by our partner,Alkermes, in its facility and exenatide once weekly produced in our WestChester, Ohio facility.  We currentlyplan to submit an NDA to the FDA by not later than the end of the first half of2009, although we are actively pursuing strategies which may allow an earliersubmission.  To do that, we continue todialogue with the FDA and are taking multiple approaches to develop thenecessary data.  As our conversation withthe FDA continues and we provide additional data on comparability, we willfinalize the timing of our NDA submission.

 

We arein the process of initiating three additional superiority trials to support thecommercialization of exenatide once weekly. The first of these trials is underway and is a blinded controlled trialcomparing exenatide once weekly versus a TZD and a DPP-4 inhibitor in patientson metformin background therapy.  We alsoplan to undertake a superiority trial comparing exenatide once weekly withinsulin glargine in patients using oral medications.  Results of these two studies are expected inthe first half of 2009.  In the secondhalf of 2008, we intend to start a third superiority trial comparing exenatideonce weekly to either metformin, a TZD or a DPP-4 inhibitor as stand-alonetherapy.  We believe that this clinicalprogram may provide powerful data that will demonstrate the value of thispotential medicine to physicians, payors and patients.

 

***Nasal Exenatide***

 

In June 2006,we entered into an agreement with Nastech Pharmaceutical Company, or Nastech,to develop a nasal spray formulation of exenatide.  We and Nastech are jointly developing thenasal spray formulation using Nastech’s proprietary nasal deliverytechnology.  We have the responsibilityfor the development program including clinical, non-clinical and regulatoryactivities, while Nastech is focusing on drug delivery and chemistry, andmanufacturing and controls activities. In 2007, we completed a Phase 1 clinical trial with nasalexenatide.  We are evaluating our futureoptions for this program.

 

## ***Obesity***

 

Obesity is a chroniccondition that affects millions of people and is linked to increased healthrisk of several medical conditions including type 2 diabetes, high bloodpressure, heart disease, stroke, osteoarthritis, sleep disorders and severaltypes of cancers.  Obesity is alsorapidly becoming a major health problem in all industrialized nations and manydeveloping countries.  According to NAASO(The Obesity Society), obesity is the second leading cause of preventable deathin the United States.  It is estimatedthat 64% of the adult population in the United States are overweight and nearly60 million adult Americans are considered obese.  It is also estimated that the total directand indirect costs attributed to overweight and obesity health issues exceed$100 billion in the United States each year.

 

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Genetic, metabolic,psychological and environmental factors can all contribute to obesity. Obesityis measured by Body Mass Index, or BMI, a mathematical formula using a person’sheight and weight. BMI is calculated by dividing a person’s weight in kilogramsby the person’s height in meters squared. A person with a BMI between 25 and29.9 is considered overweight. A person with a BMI of 30 or more is consideredobese, and a person with a BMI of 40 or more is considered severely obese.Current treatments for obesity include diet, exercise, drug therapy andsurgery.

 

**The National Heart, Lung and Blood Institute and the WorldHealth Organization have issued evidence-based guidelines for theidentification, evaluation and treatment of obesity.  Non-pharmacological treatment modalities(dietary modifications, behavioral interventions, and increased physicalactivity) are considered the cornerstone of clinical obesity management.  If lifestyle changes do not promote weightloss after six months, pharmacotherapy is considered helpful for eligiblehigh-risk patients.  Only twopharmacological agents are currently approved for the long-term treatment ofobesity in the US.  Bariatric surgery isconsidered an option only for patients with severe obesity and seriousco-morbid conditions.**

** **

**The National Institutes of Health, Surgeon General and FDArecognize a large unmet medical need for safe and efficacious therapies toprevent the debilitating metabolic diseases and mortality associated withobesity.**

** **

***Integrated Neurohormonal Therapy for Obesity (INTO)***

 

In2006, we announced a new obesity clinical program strategy to assess the safetyand efficacy of multiple neurohormones used in combination to treatobesity.  We refer to this strategy asIntegrated Neurohormonal Therapy for Obesity, or INTO.  Integrated neurohormonal therapy is designedto restore the body’s metabolism to a reduced obese or non-obese state by usingneurohormones that work together to address the physiologic imbalances thatcause complex chronic diseases such as obesity. Our INTO strategy is based on combination therapies and as part of thisprogram we are studying combinations of peptide and protein hormones.

 

Threemolecular franchises are the primary focus of our INTO strategy:  amylin and in particular pramlintide, itssynthetic version (a first generation amylinomimetic); leptin and in particularmetreleptin, its recombinant version, a protein hormone produced from the fatcell that plays a fundamental role in metabolism via its communication to thebrain; and PYY 3-36 and in particular a more potent Y-family analog molecule,that is secreted by the gut and provides a satiety signal in the post-mealperiod.  We are also studying asecond-generation amylinomimetic, which is a compound that has been optimizedin preclinical models to reduce body weight.

 

**Pramlintide**

 

Pramlintideplays an important role in our current INTO strategy.  Pramlintide has been studied extensively in peoplewith and without diabetes and is the active ingredient in SYMLIN.  In February 2006, we reported resultsfrom a 16-week Phase 2 dose-ranging study with pramlintide in obesesubjects.  After completing 16 weeks oftreatment with pramlintide in addition to lifestyle intervention, subjects onaverage experienced an 8.4 to 13.4 pound weight loss from baseline, compared toa 6.2 pound weight loss with placebo plus lifestyle intervention.

 

Pramlintidewas well tolerated and showed progressive weight loss at doses up to 360mcg.  No new safety signals were observedin this study, which included higher doses than those previously studied inobese subjects.  There was clear evidenceof a dose response for the twice-daily regimens.  Consistent with previous observations, themost common adverse effect was mild nausea. Weight loss in subjects who did not experience nausea was similar tothat seen in the overall study population. In October 2006, we reported results from a continuation of thisstudy that demonstrated that patients completing 52 weeks of pramlintidetherapy experienced a 7-8% mean body weight reduction, depending upon the dosethey received, compared to a 1% reduction in patients receiving placebo.

 

Wehave conducted clinical studies using pramlintide in combination with leptinand with PYY 3-36.  The proof of conceptpramlintide and metreleptin study, which we discuss below, investigated thesynergy of pramlintide and metreleptin found in preclinical studies.

 

**Leptin**

 

Leptinis the second compound we are studying in connection with our INTOprogram.  Leptin is a naturally occurringprotein hormone secreted by fat cells. It plays a key role in metabolism through multiple metabolic actions andappears to act primarily at the level of the hypothalamus to regulate foodintake and energy expenditure.  Leptin’sroles in the

 

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treatment of obesity andlipodystrophy have been extensively studied, and the lead molecules have astrong safety profile. Humans suffering from lipodystrophy, a diseasecharacterized by loss of body fat and consequent metabolic disorders (insulinresistance, hyperglycemia, and dyslipidemia), are rendered incapable ofsecreting sufficient amounts of leptin due to the loss of fat cell mass.

 

Inearly 2006, we acquired the exclusive rights to the leptin molecular franchiseand program (including metreleptin, the recombinant synthetic form of humanleptin) from Amgen, Inc., or Amgen. Under the terms of the license agreement, we made an up-front payment,and in 2007 we made a milestone payment related to technology transfer and wemay make potential future payments related to development and regulatorymilestones and will pay royalties on any product sales.  Our license includes exclusive rights to theleptin intellectual property developed by Amgen as well as intellectualproperty Amgen originally licensed from Rockefeller University.

 

**PYY 3-36**

 

PYY3-36 is the third compound we are studying in connection with our INTOprogram.  We are developing more potentand efficacious Y-family mimetics as drug candidates, but have been utilizingthe native form of PYY 3-36 for the investigation of potential treatments ofobesity.  Independent researchers have reporteda reduction in food intake in humans using PYY 3-36.  In November 2007, we announced data froma 14-day safety and tolerability Phase 1 clinical trial showing that PYY 3-36when used in combination with pramlintide was well-tolerated.  We also announced that this combination waswell-tolerated with dose escalation.  Weintend to focus our future development of the second generation Y-familymimetic either alone or in combination with a second generation amylinomimetic.

 

**Pramlintide-MetreleptinCombination Product Candidate**

 

In November 2007, weannounced results from a 24-week proof-of-concept study with pramlintide andmetreleptin combination treatment in overweight or obese subjects.  At the end of the study, the combinationtreatment reduced body weight on average 12.7 %, significantly more thantreatment with pramlintide alone (8.4%). Subjects treated with pramlintide and metreleptin lost an average of 25pounds from the beginning of the study compared with an average of 17 poundsfor subjects treated with pramlintide alone. Subjects receiving pramlintide and metreleptin continued to lose weightthrough the end of the study compared to those treated with pramlintide alone,whose weight loss had stabilized towards the end of the study.  At the beginning of the study, the averageweight of study participants was approximately 205 pounds.

 

Consistent with previousclinical experience with pramlintide and metreleptin as single agents, the mostcommon side effects seen with combination treatment were injection site adverseevents and nausea, which were mostly mild to moderate and transient innature.  As a result of this study weintend to pursue a pramlintide-metreleptin combination product candidate.  In 2008, we plan to continue developing adelivery system that will provide both pramlintide and metreleptin in a singleinjection.  Further, we are initiating aPhase 2B study to evaluate different dosing combinations of pramlintide andmetreleptin.  We believe this six-month,multi-arm study will enroll approximately 600 patients and will takeapproximately one year to complete.

 

**SecondGeneration Amylinomimetic**

 

In2006, we submitted an IND application to the FDA for a second generationamylinomimetic.  The targeted productprofile for this second generation amylinomimetic includes once-weeklydelivery.

 

During2007, we completed three Phase 1 studies of a second generation amylinomimeticwe are developing and which we believe may have some potential advantages overpramlintide for weight loss as a single agent. These advantages may include greater efficacy, greater potency andimproved pharmaceutical properties, such as having prolonged duration of actionand being more amenable to drug delivery. These three studies included a single dose study, a twice-dailymulti-dose study and a once-daily multi-dose study.  In November 2007, we announced data fromthe twice-daily multi-dose study showing that at 3mcg/kg dosing, individualsexhibited a 996 kilocalorie reduction in intake over a 24-hour period,representing a 34% decrease in daily calories. We plan to continue developing this molecule in 2008.

 

### ***Research Activities***

###  

A key element of our strategy is to developfirst-in-class compounds for treating metabolic diseases.  To achieve this goal, we are exploring hormones with multiplemechanisms of action that will potentially lead to products that have utility in

 

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treatment of more thanone disease with the potential for many product forms.  To do so, we take anintegrated and biological, rather than a target-driven, approach toresearch.  Our research is centered onpeptide hormones that play an important metabolic role, and which we considermore likely to have an acceptable safety profile because these hormones existnaturally in the human body.  Ourdevelopment path begins with identifying a particular peptide and then determiningif it is a circulating hormone, a substance that travels through thebloodstream to affect bodily functions. We then attempt to understand the hormone’s functionality and potentialimpact on a disease.  Rather thanstarting with a known biology and targeting molecules to modify, enhance orblock it, our scientists are discovering the biology of previously unknownpeptides and uncovering utility that could potentially translate into a newhuman therapy.   The conventionaldevelopment process commonly used in the pharmaceutical industry emphasizesutilizing isolated cells or molecular targets to advance drug discovery.  Our approach to research calls for ourscientists to quickly move to *in vivo*testing using highly predictive animal models that allow us to designsubsequent information-rich clinical trials in humans.

 

Based on a premise that every peptide hormone has autility — and a potential therapeutic benefit — we have developed a proprietaryand continually growing peptide hormone library we call PHORMOLÔ. PHORMOLÔ encompasses anextensive panel of potentially valuable biologics that have been taken fromnature, including human peptides not previously described.  All of these have been synthesized to createa rich source of compounds for ongoing research in their functionality, utilityand potential value in treating a range of human diseases.

 

We arealso developing capabilities in delivery system research and development,focused on product presentations that enhance clinical outcomes and patientconvenience.  Delivery systems are selectedon the basis of technical feasibility, regulatory acceptance and marketpreference.  They include injectablesustained-release formulations such as salt complexes, lipids, biodegradablepolymer and gel systems, as well as non-injectable systems such as nasalsprays, inhalation, oral and transdermal systems.  We are also using ourresources to optimize pharmaceutical properties of peptide drugs to develop newpeptide hormone analogs that may be more amenable to alternative forms ofdelivery.

 

Wecurrently have approximately 700 full-time employees dedicated to our researchand development activities.  We also havemore than 200 employees with Ph.D., Pharm.D. or M.D. degrees.  Most of our physicians specialize indiabetes.  In the years ended December 31,2007, 2006 and 2005, we incurred research and development expense of $276.6million, $222.1 million and $132.1 million, respectively.

 

**Strategic Relationships**

 

In 2007, we establishedstrategic relationships with other companies and we continue to assessadditional opportunities for strategic relationships or in-licensingopportunities.  In January 2007, wepartnered with PsychoGenics, Inc., or PsychoGenics, to form PsylinNeurosciences, Inc., or Psylin, a new company that will focus on thediscovery and development of peptide hormones for treatment of psychiatricdisorders.  Under this joint venture,Psylin will have access to molecules in our PHORMOLTM proprietary polypeptidehormone library, and to PsychoGenics’ proprietary drug discoverytechnologies.  Psylin will have the rightto develop a number of drug candidates emerging from this collaboration.  If Psylin decides to out-license these drugcandidates, we have preferential rights to acquire such licenses.

 

In April 2007, weexpanded our contract research arrangement with Kelaroo, Inc., or Kelaroo,a developer of cheminformatics and bioinformatics applications and services fordrug discovery.  In connection with theexpansion of our collaboration, we made a strategic investment in Kelaroo foruse in advancing the commercialization of Kelaroo’s SeqR technology which weuse for peptide hormone identification and optimization.  This technology is a sequence-profilingapproach that combines machine learning methods and high-performance sequenceanalysis tailored for genome-scale data mining and sequence optimization.

 

In May 2007, weentered into a joint research collaboration agreement with BioSeek, Inc.,or BioSeek, that will focus on the discovery and development of novel peptidetherapeutics for inflammatory conditions. In connection with this collaboration, we made a strategic investment inBioSeek.  Under the collaboration,BioSeek will apply its BioMap® human biology screening systems to evaluate thepotential of peptide hormones in PHORMOLTM to treat a range of inflammatoryconditions.  In exchange for milestonepayments and royalties payable to us, BioSeek will have the right to select andexclusively license two peptides resulting from the screening program as thebasis for proprietary optimization and development programs for therapeuticindications outside of our core therapeutic focus.

 

In November 2007, weentered into a joint research collaboration agreement with Xenome Ltd., orXenome.  Our collaboration with Xenomewill focus on the discovery and development of novel peptide hormones for arange of metabolic

 

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and musculoskeletal diseases.  In connection with this collaboration, wemade a strategic investment in Xenome. Under the collaboration, we will apply our proprietary screeningtechnologies to evaluate the therapeutic potential of peptides from Xenome’sproprietary bioactive peptide library derived from natural sources.  We will have the right to select andexclusively license lead candidates resulting from the screening program inmetabolic and musculoskeletal disease for further development andcommercialization in exchange for milestone payments and royalties payable toXenome.

 

**Sales,Marketing and Distribution**

 

Wehave built a sales and marketing organization that focuses on healthcareproviders, managed healthcare organizations, wholesalers and pharmacies,government purchasers and other third-party payors.  We currently have a field force ofapproximately 600 people dedicated to marketing BYETTA and SYMLIN in the UnitedStates.  Lilly also co-promotes BYETTA inthe United States.  Our field forceincludes a primary care sales force as well as a specialty sales force of 74representatives who call on endocrinologists and other physicians who havelarge diabetes care practices and other healthcare professionals who supporttheir practices.  Our field organizationalso includes a managed care and government affairs organization and a medicalscience organization that support broad medical education programs for bothBYETTA and SYMLIN.  Members of our sales and marketing team haveextensive industry experience from a wide range of large and small companiesand have substantial experience in the field of diabetes, as well as inlaunching and marketing pharmaceutical products.

 

Weutilize common pharmaceutical company practices to market our products.  We call on individual physicians and otherhealthcare professionals and other organizations and individuals involved inthe prescribing, purchasing and/or distributing of human medicines.  We also provide professional symposia throughour extensive medical education programs. Our medical education events areconducted live, via satellite or telephone and through web-based, interactiveprograms.  We will continue to focus onmedical education efforts for both BYETTA and SYMLIN through thousands ofprograms across the United States organized by our medical affairs andprofessional education organizations.  Wetrain physicians and other healthcare professionals as speakers, so that theycan in turn teach their peers about how best to incorporate BYETTA or SYMLINinto their patients’ diabetes treatment regimens.

 

Weprovide customer service and other related programs for our products, such asdisease and product-specific websites, insurance research services, a customerservice call center and order, delivery and fulfillment services.  We have programs in the United States thatprovide qualified uninsured and underinsured patients with our products at nocharge.

 

Wesell BYETTA and SYMLIN to wholesale distributors who in turn sell to retailpharmacies and government entities. Decisions made by these wholesalers and their customers regarding thelevels of inventory they hold, and thus the amount of BYETTA and SYMLIN theypurchase, may affect the level of our product sales in any particular period.

 

**Manufacturing**

 

We have selected manufacturersthat we believe comply with current Good Manufacturing Practices, or cGMP, andother regulatory standards.  We haveestablished a quality control and quality assurance program, including a set ofstandard operating procedures, analytical methods and specifications, designedto ensure that our products and product candidates are manufactured inaccordance with applicable regulations. We require that our contract manufacturers adhere to cGMP, except forproducts and product candidates for toxicology and animal studies, which werequire to be manufactured in accordance with current Good LaboratoryPractices, or cGLP.

 

Althoughsome materials for our drug products are currently available from asingle-source or a limited number of qualified sources, we attempt to acquirean adequate inventory of such materials, establish alternative sources and/ornegotiate long-term supply arrangements. We believe we do not have any significant issues obtaining suppliers;however, we cannot be certain that we will continue to be able to obtainlong-term supplies of our manufacturing materials.

 

***BYETTA Manufacturing***

 

We obtain exenatide, theactive ingredient contained in BYETTA, from Bachem California, or Bachem, andMallinckrodt, Inc., or Mallinckrodt, pursuant to long-term agreements witheach company.  We have long-termagreements with Wockhardt UK (Holdings) Ltd., or Wockhardt, and BaxterPharmaceutical Solutions LLC, a subsidiary of Baxter, Inc.,

 

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or Baxter, to supply us the dosage form of exenatidein cartridges.  We have a long-termagreement with Lilly to supply pens for delivery of BYETTA in cartridges.

 

***SYMLIN Manufacturing***

 

We obtain pramlintideacetate, the active ingredient contained in SYMLIN, from Bachem and Lonza Ltd.,or Lonza, pursuant to long-term agreements with each company.  We have a long-term contract with Baxter forthe dosage form of SYMLIN in vials.  Wealso have an agreement with Wockhardt for the dosage form of SYMLIN incartridges.  We have a long-termagreement with Ypsomed AG to supply pen components for the delivery of SYMLINin cartridges.  We also have a long-termagreement with Hollister-Stier Laboratories LLC for the assembly of the SYMLINpen components and cartridges.

 

***Exenatide Once Weekly Manufacturing***

 

Under the terms of ourdevelopment and license agreement with Alkermes, we are responsible formanufacturing the once-weekly dosing formulation of exenatide once weekly forcommercial sale and will pay Alkermes milestone payments upon achievement ofdevelopment milestones and royalties on sales of exenatide once weekly.  Alkermes has transferred to us its technologyfor manufacturing exenatide once weekly and will supply us with the polymermaterials required for the commercial manufacture of exenatide onceweekly.  We obtain bulk exenatide, theactive ingredient in exenatide once weekly, from Lonza and we obtain pre-filleddiluent syringes for exenatide once weekly from Vetter Pharma-Fertigung GMB &Co. KG. pursuant to long-term agreements with both companies.

 

We are currently building afacility in West Chester, Ohio to manufacture exenatide once weekly.  We are working with Alkermesand Parsons Commercial Technology Group, Inc., or Parsons, a group withsignificant experience in the design and construction of pharmaceuticalmanufacturing facilities, to complete the design, construction and validationof this facility.  We expect to completethe commercial-scale manufacturing process for exenatide once weekly and thecommissioning of the facility in the second half of 2008.  We are also working aggressively toprovide sufficient data to the FDA to demonstrate comparability betweenexenatide once weekly clinical trial material manufactured by our partner,Alkermes, in its facility and exenatide once weekly produced in our WestChester, Ohio facility.

 

**Lilly Collaboration**

 

We entered into a collaboration agreement with Lillyin 2002 for the global development and commercialization of exenatide,including both the twice-daily version, BYETTA, and sustained-releaseformulations, such as exenatide once weekly. Under the terms of the agreement, Lilly made initial payments to us, andpurchased approximately 1.6 million shares of our common stock.  In addition, Lilly has made milestonepayments to us upon the achievement of development milestones for BYETTA andexenatide once weekly and commercial milestones for BYETTA.  In 2007 we received development milestones inthe amount of $30 million for exenatide once weekly and because the NDA filingfor exenatide once weekly did not occur by December 31, 2007, Lilly isentitled to and has elected to receive $30 million in our common stock.  In addition, Lilly is obligated to makeadditional future commercial milestone payments to us of up to $80 millioncontingent upon the commercial launch of exenatide, including BYETTA andexenatide once weekly, in selected territories throughout the world.  We share exenatide United States developmentand commercialization costs with Lilly equally and we pay Lilly 50% of theoperating profits from the sale of products in the United States.  Ourcollaboration agreement may be terminated by Lilly at any time on 60 days’notice.

 

Lilly will pay us tiered royalties based upon theannual gross margin for all exenatide product sales, including anysustained-release formulations, outside of the United States.  Royalty payments for exenatide product salesoutside the United States will commence after a one-time cumulative grossmargin threshold has been met.  Lilly isresponsible for 100% of the costs related to development of twice-daily BYETTAfor sale outside of the United States. Development costs related to all other exenatide products for saleoutside of the United States will continue to be allocated 80% to Lilly and 20%to us.  Lilly is responsible for 100% ofthe costs related to commercialization of all exenatide products for saleoutside the United States.  We record allUnited States BYETTA product revenues and Lilly will record all BYETTA productrevenues from outside the United States.

 

Under our co-promotion arrangement with Lilly, theparties use approximately equal efforts to co-promote BYETTA within the UnitedStates and have agreed to use approximately equal efforts to co-promotesustained-release formulations of exenatide within the United States. Lilly isresponsible for commercialization efforts outside the United States.  Inlate 2006, BYETTA was approved in the EU and, by the end of 2007, wascommercially launched in 23 countries worldwide.

 

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**Competition**

 

The biotechnology and pharmaceutical industry ishighly competitive.  There are manypharmaceutical companies, biotechnology companies, public and privateuniversities and research organizations actively engaged in the research anddevelopment of products that may be similar to the products in ourportfolio.  A number of our largestcompetitors, including AstraZeneca, Bristol-Myers Squibb Company,GlaxoSmithKline, Lilly, Merck & Co., Novartis AG, Novo Nordisk,Pfizer, Sanofi-Aventis and Takeda Pharmaceuticals, are pursuing the developmentof or are marketing pharmaceuticals that target the same diseases that we aretargeting, and it is probable that the number of companies seeking to developproducts and therapies for the treatment of diabetes, obesity and othermetabolic disorders will increase.  Manyof these and other existing or potential competitors have substantially greaterfinancial, technical and human resources than we do and may be better equippedto develop, manufacture and market products. These companies may develop and introduce products and processescompetitive with or superior to ours.  Inaddition, other technologies or products may be developed that have an entirelydifferent approach or means of accomplishing the intended purposes of ourproducts, which might render our technology and products noncompetitive orobsolete.  For example, all of ourcurrent drug products are injectable, and may have to compete with therapiesthat do not require injection.  We cannotbe certain that we will be able to compete successfully.

 

SYMLIN is the only non-insulin-based drug productapproved for improving blood glucose control in people with type 1diabetes.  Further, insulin and oralmedications are often insufficient for many people with type 2 diabetes toachieve satisfactory glucose and weight control. BYETTA or SYMLIN may becomplementary to, or competitive with, these other medications.

 

BYETTA and SYMLIN must compete with establishedtherapies for market share.  In addition,many companies are pursuing the development of novel pharmaceuticals thattarget diabetes.  These companies maydevelop and introduce products competitive with or superior to BYETTA orSYMLIN. Such competitive products and potential products include:

 

·      sulfonylureas;

 

·      metformin;

 

·      insulins(injectable and inhaled versions);

 

·      thiazolidinediones(TZDs);

 

·      glinides;

 

·      dipeptidylpeptidase type IV (DPP-IV) inhibitors;

 

·      incretin/GLP-1 agonists;

 

·      CB-1 antagonists;

 

·      insulin sensitizers including PPARs;

 

·      alpha-glucosidaseinhibitors; and

 

·      SGLT-2inhibitors.

 

There is substantialcompetition in the discovery and development of treatments for obesity, as wellas emerging prescription and over-the-counter treatments for this condition.  Current treatments for obesity includedietary therapy, physical activity, drug therapy and surgery.  Hoffmann-LaRoche and Abbott Laboratoriesalready market oral medicines for the treatment of obesity.  Glaxo Smith Kline now markets a former prescriptionproduct (orlistat-Alli) for treatment of obesity.  Sanofi-Aventis has a product candidate thathas received an approvable letter from the FDA and is approved in the EU, and anumber of other pharmaceutical companies are developing new potential therapeutics.

 

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### **Patents,Proprietary Rights, and Licenses**

 

We believe that patents and other proprietary rightsare important to our business.  Ourpolicy is to file patent applications to protect technology, inventions andimprovements that may be important to the development of our business. We alsorely upon trade secrets, know-how, continuing technological innovations andlicensing opportunities to develop and maintain our competitive position.  We plan to enforce our issued patents and ourrights to proprietary information and technology.  We review third-party patents and patentapplications, both to refine our own patent strategy and to identify usefullicensing opportunities.

 

We have a number of patents, patent applications andrights to patents related to our compounds, products and technology, but wecannot be certain that issued patents will be enforceable or provide adequateprotection or that pending patent applications will result in issued patents.  We have also filed foreign counterparts tomany of these issued patents and applications.

 

We may obtain patents for our compounds many yearsbefore we obtain marketing approval for them. Because patents have a limited life, which may begin to run prior to thecommercial sale of the related product, the commercial value of the patent maybe limited.  However, we may be able toapply for patent term extensions to compensate in part for delays in obtainingmarketing approval.  For example, in theUnited States a patent term extension of 1,586 days has been granted for SYMLINand a patent term extension of 1,287 days has been granted for BYETTA.  Similar patent term extensions may beavailable for other products that we are developing, but we cannot be certainwe will obtain them.

 

Included within our exenatide patent portfolio areissued patents for:

 

·                                          pharmaceutical compositionscontaining exenatide;

 

·                                          modulating gastric emptying;

 

·                                          inhibiting glucagonsecretion;

 

·                                          stimulating insulin release;and

 

·                                          reducing food intake.

 

Thesepatents expire between 2013 and 2020.  We do not have acomposition of matter patent for the exenatide molecule.

 

Included within our pramlintide patent portfolio areissued patents for:

 

·                                          pramlintide and other amylinagonist analogues invented by our researchers;

 

·                                          amylin agonist pharmaceuticalcompositions, including compositions containing pramlintide; and

 

·                                          methods for treating diabetesand related conditions using amylin agonists.

 

These patents expire between 2009 and 2018.

 

With respect to our drug candidates, we have patentsand patent applications pending, or have licensed patents and patentapplications, relevant to the development and commercialization of such drugcandidates.

 

Generally, our policy is to file foreign counterpartapplications in countries with significant pharmaceutical markets.

 

It is important that we do not infringe patents orproprietary rights of others and that we do not violate the agreements thatgrant proprietary rights to us.  If we doinfringe patents or violate these agreements, we could be prevented fromdeveloping or selling products or from using the processes covered by thosepatents or agreements, or we could be required to obtain a license from thethird party allowing us to use their technology.  We cannot be certain that, if required, we couldobtain a license to any third-party technology or that we could obtain one at areasonable cost.  If we were not able

 

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toobtain a required license, we could be adversely affected.  Because patent applications are confidentialfor at least some period of time, there may be pending patent applications fromwhich patents will eventually issue and prevent us from developing or sellingcertain products unless we can obtain a license to use the patented technology.

 

Patents relating to pharmaceutical, biopharmaceuticaland biotechnology products, compounds and processes such as those that coverour existing products, compounds and processes and those that we will likelyfile in the future do not always provide complete or adequate protection.  Future litigation or proceedings initiated bythe United States Patent and Trademark Office regarding the enforcement orvalidity of our existing patents or any future patents could invalidate ourpatents or substantially reduce their protection.  In addition, statutory or regulatory changesmay adversely affect our ability to obtain protection or enforce ourpatents.  Furthermore, our pending patentapplications andpatent applications filed by our collaborative partners may not result in theissuance of any patents or may result in patents that do not provide adequateprotection.  As a result, we may not beable to prevent third parties from developing the same compounds and productsthat we have developed or are developing. In addition, we do not have patent protection or we may not be able toenforce our patents in certain countries. As a result, manufacturers may be able to sell generic versions of ourproducts in those countries.

 

We also rely on unpatented trade secrets andimprovements, unpatented internal know-how and technological innovation.  We protect these rights mainly throughconfidentiality agreements with our corporate partners, employees, consultantsand vendors.  These agreements providethat all confidential information developed or made known to an individualduring the course of their relationship with us will be kept confidential andwill not be used or disclosed to third parties except in specifiedcircumstances.  In the case of employees,the agreements provide that all inventions made by the individual whileemployed by us will be our exclusive property. We cannot be certain that these parties will comply with theseconfidentiality agreements, that we have adequate remedies for any breach, orthat our trade secrets will not otherwise become known or be independentlydiscovered by our competitors.  Undersome of our research and development agreements, inventions discovered incertain cases become jointly owned by us and our corporate partner and in othercases become the exclusive property of one of us.  It can be difficult to determine who owns aparticular invention and disputes could arise regarding those inventions.

 

**Government Regulation**

 

Regulation by governmental authorities in the UnitedStates and foreign countries is a significant factor in the development,manufacture and marketing of pharmaceutical products.  All of our potential products will requireregulatory approval by governmental agencies prior to commercialization.  In particular, human therapeutic products aresubject to rigorous preclinical testing and clinical trials and otherpre-market approval requirements by the FDA and regulatory authorities inforeign countries.  Various federal,state and foreign statutes and regulations also govern or influence themanufacturing, safety, labeling, storage, record keeping and marketing of suchproducts.

 

The activities required before a pharmaceutical agentmay be marketed in the United States begin with preclinical testing.  Preclinical tests include laboratoryevaluation of product chemistry and animal studies to assess the potentialsafety and activity of the product candidate and its formulations.  The results of these studies must besubmitted to the FDA as part of an IND which must be reviewed by the FDA beforea proposed clinical trial can begin. Typically, clinical trials involve a three-phase process.  In Phase 1, clinical trials are conductedwith a small number of healthy volunteers to determine the early safety andtolerability profile and the pattern of drug distribution and metabolism.  In Phase 2, clinical trials are conductedwith groups of patients afflicted with a specified disease in order todetermine preliminary efficacy, dosing regimens and expanded evidence of safety.  In Phase 3, large-scale, multi-center,adequate and well-controlled comparative clinical trials are conducted withpatients afflicted with a target disease in order to provide enough data forthe statistical proof of efficacy and safety required by the FDA and others.  The results of the preclinical testing andclinical trials for a pharmaceutical product are then submitted to the FDA inthe form of an NDA for approval to commence commercial sales. In responding toan NDA, the FDA may grant marketing approval, request additional information, ordeny the application if it determines that the application does not satisfy itsregulatory approval criteria.  Once a drug is approved for marketing inthe US, the FDA requires ongoing safety monitoring to ascertain anyundiscovered issues related to “real-world” use of the drug.  The expanded patient exposure once a drug isintroduced to the marketplace can reveal new risks (as well as new benefits)that were not detectable during clinical testing.

 

Among the conditions for NDA approval is therequirement that the prospective manufacturer’s quality control andmanufacturing procedures conform to cGMP. In complying with cGMP, manufacturers must continue to expend time,money and effort in the area of production, quality control, and qualityassurance to ensure full technical compliance. Manufacturing facilities are subject to periodic inspections by the FDAto ensure compliance.

 

 

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We are also subject to various federal, state, andlocal laws, regulations and recommendations relating to safe workingconditions; laboratory and manufacturing practices; the experimental use ofanimals; and the use and disposal of hazardous or potentially hazardoussubstances, including radioactive compounds and infectious disease agents, usedin connection with our research.

 

The activities required before a pharmaceutical agentmay be marketed in the EU are dictated by the International Conference onHarmonization and are generally similar to those established in the United States.  Approval of new drugs across the EU relies oneither the mutual recognition process or the centralized approval process ofthe European Medicines Agency.  Under thecentralized procedure, the marketing application is referred for review to tworeview teams, each representing one of the member countries.  Each reviewer then forwards an earlyassessment to the Committee for Medicinal Products for Human Use, or CHMP, fordiscussion and preparation of an initial consolidated assessment report,including a list of questions requesting clarification as well as additionalinformation.  This step initiates aseries of dialogues, meetings and other communications among the CHMP, the tworeview teams and the applicant, leading in turn to clarification, education andrefinement of the original assessment reports. Ultimately, a decision is reached to either grant marketing approval ordeny the application if it is determined that the application does not satisfythe regulatory approval criteria.  Theclinical testing, manufacture and sale of pharmaceutical products outside ofthe United States and the EU are subject to regulatory approvals by otherjurisdictions which may be more or less rigorous than those required by theUnited States or the EU.

 

### **Employees**

 

As of December 31, 2007, we had approximately1,900 full-time employees.  A significantnumber of our management and professional employees have had experience withpharmaceutical, biotechnology or medical product companies.  We believe that we have been highlysuccessful in attracting skilled and experienced personnel.  None of our employees is covered bycollective bargaining agreements and we consider relations with our employeesto be good.

 

**Directors and Executive Officers**

** **

**The names of our directors and executive officers andcertain information about them as of February 15, 2008 are set forthbelow:**

 
| **Name**                             | ** ** | **Age** | ** ** | **Position**                                                             |
|--------------------------------------|------------|---------|------------|--------------------------------------------------------------------------|
| Daniel M. Bradbury (1)               |       | 46      |       | President, Chief Executive  Officer and Director                         |
| Joseph C. Cook, Jr. (1)         |       | 66      |       | Chairman of the Board                                                    |
| Adrian Adams (2)                     |       | 57      |       | Director                                                                 |
| Steven R. Altman (2)                 |       | 46      |       | Director                                                                 |
| Teresa Beck (3)                      |       | 53      |       | Director                                                                 |
| Karin Eastham (2)(3)                 |       | 58      |       | Director                                                                 |
| James R. Gavin III, M.D.,  Ph.D. (4) |       | 62      |       | Director                                                                 |
| Ginger L. Graham (1)                 |       | 52      |       | Director                                                                 |
| Howard E. Greene, Jr. (1)       |       | 65      |       | Director                                                                 |
| Jay S. Skyler, M.D., MACP(4)         |       | 61      |       | Director                                                                 |
| Joseph P. Sullivan  (1) (3)     |       | 65      |       | Director                                                                 |
| James N. Wilson (2) (4)         |       | 64      |       | Director                                                                 |
| Alain D. Baron, M.D.                 |       | 54      |       | Senior Vice President,  Research                                         |
| Craig A. Eberhard                    |       | 48      |       | Vice President, Sales                                                    |
| Mark G. Foletta                      |       | 47      |       | Senior Vice President, Finance  and Chief Financial Officer              |
| Mark J. Gergen                       |       | 45      |       | Senior Vice President,  Corporate Development                            |
| Orville G. Kolterman, M.D.           |       | 60      |       | Senior Vice President,  Clinical and Regulatory Affairs                  |
| Marcea Bland Lloyd                   |       | 59      |       | Senior Vice President, Legal  and Corporate Affairs, and General Counsel |
| Roger Marchetti                      |       | 49      |       | Senior Vice President, Human  Resources and Information Management       |
| Paul G. Marshall                     |       | 48      |       | Vice President, Operations                                               |
| Lloyd A. Rowland                     |       | 51      |       | Vice President, Governance and  Compliance, and Corporate Secretary      |
| Joe A. Young                         |       | 39      |       | Senior Vice President,  Marketing                                        |

 

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**(1)           Member of the Finance Committee.**

**(2)           Member of the Compensation and HumanResources Committee.**

**(3)**           Member of theAudit Committee.

**(4)**           Member of the CorporateGovernance Committee.

 

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** **

**Mr. Bradbury**has been our Chief Executive Officersince March 2007, serving as President since June 2006 and as ChiefOperating Officer since June 2003. He has served as a director since June 2006.  He previously served as Executive VicePresident from June 2000 until his promotion in June 2003.  He joined Amylin in 1994 and has heldofficer-level positions in Corporate Development and Marketing during thattime.  Prior to joining Amylin, Mr. Bradburyspent ten years at SmithKline Beecham Pharmaceuticals, where he held a numberof sales and marketing positions.  He isa member of the board of directors of Illumina, Inc. and Novacea, Inc.  He also serves as a board member for PhRMA,BIOCOM, the Keck Graduate Institute’s Board of Trustees and the San DiegoRegional Economic Development Corporation. Mr. Bradbury is a member of the Royal Pharmaceutical Society ofGreat Britain and serves on the UCSD Rady School of Management’s AdvisoryCouncil.  He received a Bachelor ofPharmacy from Nottingham University and a Diploma in Management Studies fromHarrow and Ealing Colleges of Higher Education.

 

**Mr. Cook** has been our Chairman of the Board since March 1998and serves on our Finance Committee.  Heserved as Chief Executive Officer from March 1998 until September 2003.  From 1994 to 1998, Mr. Cook served as amember of our Board and a consultant to us. Mr. Cook is a founder and serves as Chairman of the Board ofMicrobia, Inc., a privately held biotechnology company.  He also serves as a director of CorceptTherapeutics Incorporated.  Mr. Cookis a founder of Mountain Group Capital, LLC, Clinical Products, LLC, andMountain Ventures, Inc.  He serveson the Board of Mercy Ministries, Inc. and is past Chair of the AdvisoryBoard of the College of Engineering, University of Tennessee.  Mr. Cook retired as a Group VicePresident of Eli Lilly & Company in 1993 after more than 28 years ofservice. Mr. Cook received a B.S. in Engineering from the University ofTennessee.

 

**Mr. Adams** has served as a director since October 2007and serves on the Compensation and Human Resources Committee.  Mr. Adams is President and ChiefExecutive Officer of Sepracor, Inc., a position he has held since May 2007,and serves as a member of Sepracor’s board of directors.  Mr. Adams joined Sepracor in March 2007as President and Chief Operating Officer. Most recently, he was with Kos Pharmaceuticals, Inc., where heserved as President and Chief Operating Officer from April 2001, prior tobecoming President and Chief Executive Officer in January 2002.  Mr. Adams served as President and ChiefExecutive Officer of Novartis-UK from 1999 until his tenure began at Kos.  For the previous seven years, he was withSmithKline Beecham Pharmaceuticals, last serving as President and CEO of thecompany’s Canadian subsidiaries. Previous assignments at SmithKline Beecham included Vice President andDirector of Worldwide Marketing in the U.S., and Director and Vice President ofSales and Marketing in the United Kingdom. Mr. Adams began his career at ICI Pharmaceuticals, where he rosefrom research laboratory assistant to Director of Sales and Marketing.  Mr. Adams serves as a board member ofPhRMA.  He is a graduate of ManchesterUniversity in the United Kingdom with a Bachelor of Science degree.

 

**Mr. Altman** has served as a director since March 2006and serves on the Compensation and Human Resources Committee.  He currently serves as President of QUALCOMMIncorporated.  He joined QUALCOMM in 1989as Corporate Counsel responsible for licensing and acquisitions and wasappointed Vice President and General Counsel in 1992.  He became General Manager of QUALCOMMTechnology Licensing (QTL) at the formation of the group in 1995 and was namedSenior Vice President in 1996.  In 1998, Mr. Altmanwas named Executive Vice President of QTL and in 2002 he was named President, aposition he held until his appointment as President of QUALCOMM in 2005.  Mr. Altman serves on the Board ofTrustees of The Salk Institute.  He receivedhis law degree from the University of San Diego.

 

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**Ms. Beck**has served as a director since March 2007and serves on the Audit Committee.  From 1998 to 1999, Ms. Beckserved as President of American Stores Company, and previously served as itsChief Financial Officer from 1993 to 1998.  Prior to her appointment asChief Financial Officer, Ms. Beck served in various finance and accountingrelated positions with American Stores from 1982 to 1993.  Before joiningAmerican Stores, Ms. Beck was the controller of Steiner FinancialCorporation and she served as an audit manager for Ernst & Whinney(currently Ernst and Young LLP).  Ms. Beck currently serves as adirector for Questar Corporation and Lexmark International, Inc.  In addition, she serves as a member of theBoard of Trustees of Intermountain Healthcare, The Nature Conservancy and theNature Conservancy of Utah.  She is alsoVice-Chairman of the University of Utah National Advisory Council.  Ms. Beckreceived a B.S. and an M.B.A. from the University of Utah.

 

**Ms. Eastham** has served as a director since September 2005and serves as the chair of the Audit Committee. She has over 25 years experience in financial and operations management,primarily in life sciences companies. She currently serves as Executive Vice President and Chief OperatingOfficer, and as a member of the Board of Trustees of the Burnham Institute forMedical Research, a non-profit corporation engaged in basic biomedicalresearch.  From April 1999 to May 2004,Ms. Eastham served as Senior Vice President, Finance, Chief FinancialOfficer, and Secretary of Diversa Corporation. She previously held similarpositions with CombiChem, Inc., a computational chemistry company, andCytel Corporation, a biopharmaceutical company. Ms. Eastham also held several positions, including Vice President,Finance, at Boehringer Mannheim Corporation, from 1976 to 1988. Ms. Easthamalso serves as a director for Tercica, Inc., Illumina, Inc., and SGXPharmaceuticals, Inc.  Ms. Easthamreceived a B.S. and an M.B.A. from Indiana University and is a Certified PublicAccountant and a Certified Director.

 

**Dr. Gavin**has served as a director since December 2005 and serves as chair of theCorporate Governance Committee. Dr. Gavin is CEO & Chief MedicalOfficer, Healing Our Village, Inc. He also serves as Clinical Professor of Medicine, Emory UniversitySchool of Medicine and Clinical Professor of Medicine at the Indiana UniversitySchool of Medicine.  He was President ofthe Morehouse School of Medicine from 2002 to 2004. Dr. Gavin is a memberof the board of directors of Baxter International Inc., Anastasia MarieLaboratories, Inc., and Nuvelo, Inc. Dr. Gavin was Chairman of the board of directors of EquidyneCorporation from August 2001 to 2003. He was also a member of the board of directors of Taste for Living, Inc.from 1999 to 2002.  From 1991 to 2002, Dr. Gavinwas a Senior Scientific Officer of the Howard Hughes Medical Institute.  From 2002 until 2005, he served as NationalChairman of the National Diabetes Education Program.  He completed his B.S. in Chemistry atLivingstone College, a Ph.D. in Biochemistry at Emory University and his M.D.at Duke University Medical School.  Dr. Gavinhas received numerous civic and academic awards and honors.

 

**Ms. Graham** has served as a director since November 1995 andcurrently serves on the Finance Committee. Ms. Graham served as President and Chief Executive Officer from September 2003until June 2006, serving as Chief Executive Officer from June 2006until March 2007.  She previouslyserved on the Audit Committee and the Nominating and Governance Committee.  From February 2000 until June 2003,Ms. Graham held various positions with Guidant Corporation, notably asAdvisor to the President, Group Chairman; Office of the President; andPresident of the Vascular Intervention Group and Vice President.  Ms. Graham held various positions withEli Lilly and Company from 1979 to 1992 including sales, marketing andstrategic planning positions.  She serveson the board of directors of the American Diabetes Research Foundation Board,Proteus Biomedical Pharmaceutical Systems Division, ICAT Managers, the HarvardBusiness School Health Advisory Board, the Harvard Business School Dean’s AdvisoryBoard, the Advisory Board for the Kellogg Center for Executive Women, theAdvisory Board for the California Council on Science and Technology, and theUniversity of California, San Diego Health Sciences Advisory Board.  Ms. Graham received an M.B.A. fromHarvard University.

 

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**Mr. Greene**is our co-founder and has served as adirector since our inception in 1987.  Heserves on the Finance Committee.  Mr. Greeneis an entrepreneur who has participated in the founding and/or management ofeleven medical technology companies over two decades, including three companiesfor which he served as chief executive officer. From 1987 to 1996, Mr. Greeneserved as our Chief Executive Officer. From 1986 until 1993, Mr. Greene was a founding general partner ofBiovest Partners, a seed venture capital firm. He was Chief Executive Officer of Hybritech from 1979 until itsacquisition by Eli Lilly and Company in 1986, and he was co-inventor ofHybritech’s patented monoclonal antibody assay technology.  Prior to joining Hybritech, he was anexecutive with the medical diagnostics division of Baxter HealthcareCorporation from 1974 to 1979 and a consultant with McKinsey & Companyfrom 1967 to 1974.  Mr. Greenereceived an M.B.A. from Harvard University.

 

**Dr. Skyler****has served as a director since August 1999 andserves on the Corporate Governance Committee. He is Professor of Medicine, Pediatrics and Psychology, in the Divisionof Endocrinology Diabetes and Metabolism; and Associate Director for AcademicPrograms at the Diabetes Research Institute; all at the University of MiamiMiller School of Medicine in Florida, where he has been employed since1976.  He is also Study Chairman for the NationalInstitute of Diabetes & Digestive & Kidney Diseases of theType 1 Diabetes TrialNet clinical trial network, and serves on the board ofdirectors of DexCom, Inc., and various private companies.  Dr. Skyler has served as President ofthe American Diabetes Association and as Vice President of the InternationalDiabetes Federation.  Dr. Skylerserves on the editorial board of several diabetes and general medicine journalsand the advisory panel of several pharmaceutical companies.  He received his B.S. from The PennsylvaniaState University, his M.D. from Jefferson Medical College, and completedpostdoctoral studies at Duke University Medical Center.

 

**Mr. Sullivan** has served as a director since September 2003and serves on the Audit Committee and as chair of the Finance Committee.  Mr. Sullivan is currently Chairman ofthe Board of Advisors of RAND Health and Chairman of the Board of Advisors ofthe UCLA Medical Center.  From 2000 to2003, Mr. Sullivan served as Chairman, Chief Executive Officer and adirector of Protocare, Inc.  From1993 until November 1999, he served as Chairman, Chief Executive Officerand a director of American Health Properties, Inc.  For the previous twenty years, Mr. Sullivanwas an investment banker with Goldman Sachs. Mr. Sullivan also currently serves on the board of directors ofCymetrix Corporation, HCP, Inc. (a real estate investment trust) andAutoGenomics, Inc.  Mr. Sullivanreceived his M.B.A. from the Harvard Graduate School of Business Administrationand his J.D. from the University of Minnesota Law School.

 

**Mr. Wilson**has served as a director since March 2002and serves as the chair of the Compensation and Human Resources Committee andon the Corporate Governance Committee. He is a director and Chairman of the Board of both Corcept TherapeuticsInc. and NuGEN, Inc.  From 1996 to2001, Mr. Wilson was Chairman of the Board of Amira Medical, Inc.From 1990 to 1994, Mr. Wilson served as President and Chief OperatingOfficer of Syntex Corporation.  Prior to1990, he served in various senior management positions, including ChiefExecutive Officer for Neurex Corporation and LifeScan, Inc.  Mr. Wilson serves on the board ofdirectors of the Palo Alto Medical Foundation, and A Stepping Stone Foundation(pre-school education).  Mr. Wilsonreceived his B.A. and M.B.A. from the University of Arizona.

 

**Dr. Baron**has served as our Senior Vice President,Research since September 2004, and previously served as Senior VicePresident, Clinical Research since June 2002.  He previously served as Vice President,Clinical Research since December 1999. Dr. Baron has been clinical Professor of Medicine at the Universityof California, San Diego, and Clinical VA Staff Physician at the VA MedicalCenter, San Diego, since 2001.  From 1989to 2000, Dr. Baron worked for the Indiana University School of Medicine,where he served as Professor of Medicine and Director, Division ofEndocrinology and Metabolism. Earlier, Dr. Baron held academic andclinical positions in the Division of Endocrinology and Metabolism at theUniversity of California, San Diego, and the Veterans Administration MedicalCenter in San Diego.  He is the recipientof several prestigious awards for his research in diabetes and vasculardisease, including the 1996 Outstanding Clinical Investigator Award from theAmerican Federation for Medical Research, several awards from the AmericanDiabetes Association, and is a current National Institutes of Health MERITaward recipient.  He received an M.D.from the Medical College of Georgia, Augusta, and completed postdoctoralstudies at the University of California, San Diego.

 

**Mr. Eberhard** has served as Vice President, Salessince May 2003.  Prior to joiningus, Mr. Eberhard was Regional Vice President, Sales, at PharmaciaCorporation, for which he had worked for 21 years.  During his career with Pharmacia Corporationand its related pre-merger companies, he held positions in sales, salesmanagement, corporate training, sales operations, and managed care beforeassuming the Vice President, Sales position. Mr. Eberhard received a B.S. in Biology from California LutheranUniversity.

 

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**Mr. Foletta** has served as Senior Vice President,Finance and Chief Financial Officer since March 2006 and he previouslyserved as Vice President, Finance and Chief Financial Officer from March 2000to March 2006.  Mr. Folettapreviously served as a Principal of Triton Group Management, Inc. from1997 to 2000.  From 1986 to 1997, Mr. Folettaheld a number of management positions with Intermark, Inc. and TritonGroup Ltd., the most recent of which was Senior Vice President, Chief FinancialOfficer and Corporate Secretary.  From1982 to 1986, Mr. Foletta was with Ernst & Young, most recentlyserving as an Audit Manager.  He is adirector of Anadys Pharmaceuticals, Inc. Mr. Foletta received a B.A.in Business Economics from the University of California, Santa Barbara.  He is a Certified PublicAccountant and a member of the Financial Executives Institute.

 

**Mr. Gergen** has served as Senior Vice President,Corporate Development since August 2006 and previously served as VicePresident of Business Development from May 2005 to August 2006.  Prior to joining us, Mr. Gergen was anindependent consultant to biotech and medical technology companies forstrategy, financing and corporate development. From 2003 to 2005, Mr. Gergen was Executive Vice President atCardioNet, Inc. He held various positions at Advanced Tissue Sciences, Inc.from 2000 to 2003 most recently as Chief Restructuring Officer and ActingCEO.  He also served as Senior VicePresident, Chief Financial and Development Officer and Vice President,Development, General Counsel and Secretary. From 1999 to 2000, Mr. Gergen was employed at Premier, Inc.and from 1994 to 1999 he held various positions with Medtronic, Inc.  From 1990 to 1994 he held various corporatedevelopment positions at Jostens, Inc. and from 1986 to 1990, he practicedlaw at various law firms.  Mr. Gergenserves on the Board of Directors of a privately held company.  Mr. Gergen received a B.A. inAdministration from Minot State University and a J.D. from the University ofMinnesota Law School.

 

**Dr. Kolterman** has served as Senior Vice President,Clinical and Regulatory Affairs since August 2005.  He previously served as Senior VicePresident, Clinical Affairs from February 1997 to August 2005, VicePresident, Medical Affairs from 1993 to 1997, and Director, Medical Affairsfrom 1992 to 1993.  From 1983 to 1992, hewas Program Director of the General Clinical Research Center and MedicalDirector of the Diabetes Center, at the University of California, San DiegoMedical Center.  Since 1989, he has beenAdjunct Professor of Medicine at the University of California, San Diego. From1978 to 1983, he was Assistant Professor of Medicine in the Endocrinology andMetabolism Division at the University of Colorado School of Medicine,Denver.  He was a member of the DiabetesControl and Complications Trial Study Group and presently serves as a member ofthe Epidemiology of Diabetes Intervention and Complications Study.  He is also a past-president of the CaliforniaAffiliate of the American Diabetes Association. Dr. Kolterman received his M.D. from Stanford University School ofMedicine.

 

**Ms. Lloyd** has served as our Senior Vice President,Legal and Corporate Affairs, and General Counsel since February 2007.  Prior to joining us, Ms. Lloyd served asGroup Senior Vice President, Chief Administrative Officer, General Counsel andSecretary of VHA Inc. from November 2004 to February 2007.  Previously, she served as VHA’s GeneralCounsel and Secretary from May 1999 to November 2004.  From 1993 to April 1999, Ms. Lloydwas Vice President and Assistant General Counsel of Medtronic, Inc. andserved as Medtronic’s Assistant General Counsel from 1991 to 1993.  From 1978 to 1991, Ms. Lloyd heldvarious legal positions with Medtronic. Prior to joining Medtronic, Ms. Lloyd served as counsel toPillsbury Company and Montgomery Ward & Co. and she taught BusinessLaw at the University of Minnesota Business School.  Ms. Lloyd is Chairperson of theExecutive Leadership Foundation and an associate of the Women Business Leadersof the United States Health Care Industry Foundation.  She received a B.S./B.A. from Knox Collegeand a J.D. from Northwestern University.

 

**Mr. Marchetti** has served asour Senior Vice President, Human Resources and Information Management since July2007 and previously served as Senior Vice President, Human Resources andCorporate Services from November 2005 to July 2007. Prior to joining us, heserved as Vice President, Human Resources for Guidant Corporation from July 2002to October 2005.  Prior to thisrole, he served as Vice President, Finance and Information Systems, GuidantEurope, Middle East, Africa, and Canada, since the beginning of 2001.  From 1999 through 2000, he served as VicePresident, Human Resources for Guidant’s Vascular Intervention group, andserved as Guidant’s Corporate Controller and Chief Accounting Officer from 1994to 1999.  He joined Eli Lilly and Company’sMedical Devices and Diagnostics division in 1988.  In 1992, he became Financial Manager of Lilly’spharmaceutical manufacturing operations in Indianapolis.  From 1980 to 1986, he was with the auditstaff of Touche Ross & Co. (currently Deloitte).  He is a director of Emphasys Medical, aprivately-held medical device company. He received a B.A. from LaSalle University in Philadelphia and an MBAfrom the Ross School of Business at the University of Michigan.  He is a Certified Public Accountant.

 

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**Mr. Marshall** has served as Vice President, Operationssince December 2006.  Prior tojoining us, he was Vice President of Corporate Manufacturing at Amgen, Inc.  From 2002 to 2005, Mr. Marshall servedas President of Manufacturing at Recombinant Proteins at the BioscienceDivision of Baxter International.  From1999 to 2002, he was Site Head of the Baxter International Thousand Oaksfacility.  He joined CreativeBioMolecules in 1992, first as Head of Process Development and ClinicalManufacturing and then as Head of Operations. From 1988 to 1992, Mr. Marshall held various management positionswith Welgen Manufacturing Partnership (now Amgen, Rhode Island), RepligenCorporation and Damon Biotech.  He serveson the board of directors of Medicago, Inc. and is a member of ISPE andASCB.  Mr. Marshall received a B.S.and an M.S. in Biology from the University of Massachusetts at Dartmouth andcompleted three years of post-graduate work concentrating in hematology andcoagulation research at Brown University.

 

**Mr. Rowland** has served as our Vice President,Governance and Compliance, Secretary, and Chief Compliance Officer sinceFebruary 2007. He previously served as our Vice President, Legal, Secretary andGeneral Counsel from September 2001 to February 2007.  Prior to joining us, Mr. Rowland servedin various positions at Alliance Pharmaceutical Corp., including as VicePresident, General Counsel and Secretary, beginning in 1993.  Earlier, Mr. Rowland served as VicePresident and Senior Counsel, Finance and Securities, at Imperial SavingsAssociation for four years.  For theprevious eight years, he was engaged in the private practice of corporate lawwith the San Diego, California law firm of Gray, Cary, Ames & Fry, andthe Houston, Texas law firm of Bracewell & Patterson.  He received a J.D. from Emory University.

 

**Mr. Young** has served as Senior Vice President,Marketing since October 2006.  Priorto joining us, Mr. Young served as Vice President, Diabetes BrandMarketing at Novo Nordisk where he managed the marketing activities of NovoNordisk’s injectable insulin business. From 2000 to 2004, Mr. Young held global and U.S. commercialleadership roles at Aventis for a variety of metabolic/diabetes compounds.  Prior to working at Aventis, Mr. Youngheld product and sales management positions at Parke-Davis.  Mr. Young received a B.S. from TexasA&M University with a concentration in pre-medicine and business.

 

**Item 1A. *Risk Factors***

 

**CAUTIONARY FACTORS THAT MAY AFFECTFUTURE RESULTS**

 

*Except forthe historical information contained herein or incorporated by reference, thisannual report on Form 10-K and the information incorporated by referencecontains forward-looking statements that involve risks and uncertainties. Thesestatements include projections about our accounting and finances, plans andobjectives for the future, future operating and economic performance and otherstatements regarding future performance. These statements are not guarantees offuture performance or events. Our actual results may differ materially fromthose discussed here. Factors that could cause or contribute to differences inour actual results include those discussed in the following section, as well asthose discussed in Part II, Item 7 entitled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and elsewherethroughout this annual report on Form 10-K and in any other documentsincorporated by reference into this report. You should consider carefully thefollowing risk factors, together with all of the other information included orincorporated in this annual report on Form 10-K. Each of these riskfactors, either alone or taken together, could adversely affect our business,operating results and financial condition, as well as adversely affect thevalue of an investment in our common stock. There may be additional risks thatwe do not presently know of or that we currently believe are immaterial whichcould also impair our business and financial position.*

 

***We have a history of operating losses, anticipate futurelosses and may never become profitable.***

 

We have experiencedsignificant operating losses since our inception in 1987, including losses of$211.1 million in 2007, $218.9 million in 2006 and $206.8 million in 2005.  As of December 31, 2007, we had anaccumulated deficit of approximately $1.4 billion.  The extent of our future losses and thetiming of potential profitability are uncertain, and we may never achieveprofitable operations.  We have beenengaged in discovering and developing drugs since inception, which hasrequired, and will continue to require, significant research and developmentexpenditures.  We derived substantiallyall of our revenues prior to 2005 from development funding, fees and milestonepayments under collaborative agreements and from interest income.  BYETTA and SYMLIN may not be as commerciallysuccessful as we expect and we may not succeed in commercializing any of ourother drug candidates.  We may incursubstantial operating losses for at least the next few years as we continue toexpand our commercial function for BYETTA and SYMLIN and our research anddevelopment activities for the other drug candidates in our developmentpipeline.  These losses, among otherthings, have had and will have an adverse effect on our stockholders’ equityand working capital.  Even if we becomeprofitable, we may not remain profitable.

 

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***We began selling, marketing and distributing our firstproducts, BYETTA and SYMLIN, in 2005 and we will depend heavily on the successof those products in the marketplace.***

 

Prior to the launch ofBYETTA and SYMLIN in 2005, we had never sold or marketed our own products.  Our ability to generate product revenue forthe next few years will depend solely on the success of these products.  The ability of BYETTA and SYMLIN to generaterevenue at the levels we expect will depend on many factors, including thefollowing:

 

·                                          acceptance of these first-in-classmedicines by the medical community, patients receiving therapy and third partypayors;

 

·              asatisfactory efficacy and safety profile as demonstrated in a broad patientpopulation;

 

·              successfullyexpanding and sustaining manufacturing capacity to meet demand;

 

·              safetyconcerns in the marketplace for diabetes therapies;

 

·              thecompetitive landscape for approved and developing therapies that will competewith the products; and

 

·              ourability to expand the indications for which we can market the products.

 

***If we encounter safety issues with BYETTA or SYMLIN or anyother drugs we market or fail to comply with extensive continuing regulationsenforced by domestic and foreign regulatory authorities, it could cause us todiscontinue marketing those drugs, reduce our revenues and harm our ability togenerate future revenues, which would negatively impact our financial position.***

 

BYETTA and SYMLIN, inaddition to any other of our drug candidates that may be approved by the FDA,will be subject to continual review by the FDA, and we cannot assure you thatnewly discovered or developed safety issues will not arise.  With the use of any of our marketed drugs bya wide patient population, serious adverse events may occur from time to timethat initially do not appear to relate to the drug itself, and only if thespecific event occurs with some regularity over a period of time does the drugbecome suspect as having a causal relationship to the adverse event.  Any safety issues could cause us to suspendor cease marketing of our approved products, subject us to substantialliabilities, and adversely affect our revenues and financial condition.

 

Moreover, the marketingof our approved products will be subject to extensive regulatory requirementsadministered by the FDA and other regulatory bodies, including adverse eventreporting requirements and the FDA’s general prohibition against promotingproducts for unapproved uses.  Themanufacturing facilities for our approved products are also subject tocontinual review and periodic inspection and approval of manufacturingmodifications.  Manufacturing facilitiesthat manufacture drug products for the United States market, whether they arelocated inside or outside the United States, are subject to biennialinspections by the FDA and must comply with the FDA’s current goodmanufacturing practice, or cGMP, regulations. The FDA stringently applies regulatory standards for manufacturing.  Failure to comply with any of thesepost-approval requirements can, among other things, result in warning letters,product seizures, recalls, fines, injunctions, suspensions or revocations ofmarketing licenses, operating restrictions and criminal prosecutions.  Any of these enforcement actions, anyunanticipated changes in existing regulatory requirements or the adoption ofnew requirements, or any safety issues that arise with any approved products,could adversely affect our ability to market products and generate revenues andthus adversely affect our ability to continue our business.

 

The manufacturers of ourproducts and drug candidates also are subject to numerous federal, state, localand foreign laws relating to such matters as safe working conditions,manufacturing practices, environmental protection, fire hazard control andhazardous substance disposal.  In thefuture, our manufacturers may incur significant costs to comply with those lawsand regulations, which could increase our manufacturing costs and reduce ourability to operate profitably.

 

***We currently do not manufacture our own drug products ordrug candidates and may not be able to obtain adequate supplies, which couldcause delays, subject us to product shortages, or reduce product sales.***

 

The manufacturing ofsufficient quantities of newly-approved drug products and drug candidates is atime-consuming and complex process.  Wecurrently have no manufacturing capabilities. In order to successfully commercialize our products, including BYETTAand SYMLIN, and continue to develop our drug candidates, including exenatideonce weekly, we rely on various third parties to provide the necessarymanufacturing.

 

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There are a limitednumber of manufacturers that operate under the FDA’s cGMP regulations capableof manufacturing for us.  In addition,there are a limited number of bulk drug substance suppliers, cartridgemanufacturers and disposable pen manufacturers. If we are not able to arrange for and maintain third-party manufacturingon commercially reasonable terms, or we lose one of our sole source suppliersused for our existing products or for some components of our manufacturingprocesses for our products or drug candidates, we may not be able to market ourproducts or complete development of our drug candidates on a timely basis, ifat all.

 

Reliance on third-partysuppliers limits our ability to control certain aspects of the manufacturingprocess and therefore exposes us to a variety of significant risks, including,but not limited to, risks to our ability to commercialize our products orconduct clinical trials, risks of reliance on the third-party for regulatorycompliance and quality assurance, third-party refusal to supply on a long-termbasis, or at all, the possibility of breach of the manufacturing agreement bythe third-party and the possibility of termination or non-renewal of theagreement by the third-party, based on its business priorities, at a time thatis costly or inconvenient for us.  If anyof these risks occur, our product supply will be interrupted resulting in lostor delayed revenues and delayed clinical trials.  Our reliance on third-party manufacturers forthe production of our two commercial products is described in more detailbelow.

 

We rely on BachemCalifornia, or Bachem, and Mallinckrodt, Inc., or Mallinckrodt, tomanufacture our long-term commercial supply of bulk exenatide, the activeingredient in BYETTA.  In addition, werely on single-source manufacturers for some of our raw materials used byBachem and Mallinckrodt to produce bulk exenatide.  We also rely on Wockhardt UK (Holdings) Ltd.,or Wockhardt, and Baxter Pharmaceutical Solutions LLC, a subsidiary of Baxter, Inc.,or Baxter, to manufacture the dosage form of BYETTA in cartridges.  We are further dependent upon Lilly to supplypens for delivery of BYETTA in cartridges.

 

We rely on Bachem andLonza Ltd. to manufacture our commercial supply of bulk pramlintide acetate,the active ingredient contained in SYMLIN. In addition, we rely on Baxter to manufacture the dosage form of SYMLINin vials.  We recently received FDAapproval of a disposable pen for the delivery of SYMLIN in cartridges.  We rely on Wockhardt for the dosage form ofSYMLIN in cartridges and Ypsomed AG to manufacture the components for theSYMLIN disposable pen. We also rely on Hollister-Stier Laboratories LLC for theassembly of the SYMLIN pen.

 

If any of our existing orfuture manufacturers cease to manufacture or are otherwise unable to timelydeliver sufficient quantities of BYETTA or SYMLIN, in either bulk or dosageform, or other product components, including pens for the delivery of theseproducts, it could disrupt our ability to market our products, subject us toproduct shortages, reduce product sales and/or reduce our profit margins.  Any delay or disruption in the manufacturingof bulk product, the dosage form of our products or other product components,including pens for delivery of our products, could also harm our reputation inthe medical and patient communities.  Inaddition, we may need to engage additional manufacturers so that we will beable to continue our commercialization and development efforts for theseproducts or drug candidates.  The costand time to establish these new manufacturing facilities would be substantial.

 

Our manufacturers havenot produced BYETTA or SYMLIN for commercial use for a sustained period oftime.  As such, additional unforeseeablerisks may be encountered as we, together with our manufacturers, continue todevelop familiarity and experience with regard to manufacturing ourproducts.  Furthermore, we and the othermanufacturers used for our drug candidates may not be able to produce suppliesin commercial quantities if our drug candidates are approved.  While we believe that business relationsbetween us and our manufacturers are generally good, we cannot predict whetherany of the manufacturers that we may use will meet our requirements forquality, quantity or timeliness for the manufacture of bulk exenatide orpramlintide acetate, dosage form of BYETTA or SYMLIN, or pens.  Therefore, we may not be able to obtainnecessary supplies of products with acceptable quality, on acceptable terms orin sufficient quantities, if at all.  Ourdependence on third parties for the manufacture of products may also reduce ourgross profit margins and our ability to develop and deliver products in atimely manner.

 

In order to manufactureexenatide once weekly on a commercial scale, if it is approved by the FDA, wemust design, construct, and commission a new facility and validate themanufacturing process.  We are dependenton Alkermes and Parsons to assist us in the design, construction andcommissioning of the manufacturing facility. We have never established, validated, and operated a manufacturingfacility and cannot assure you that we will be able to successfully establishor 

 

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operate such a facility in a timely or economical manner, or atall.  In addition, we are dependent onAlkermes to successfully develop and transfer to us its technology formanufacturing exenatide once weekly and to supply us with commercial quantitiesof the polymer required to manufacture exenatide once weekly.  We also will need to obtain sufficientsupplies of diluents, solvents, devices, packaging and other componentsnecessary for commercial manufacture of exenatide once weekly.  Although we are working diligently tofinalize the commercial-scale manufacturing process at this facility, we cannotbe assured that we will be able to demonstrate comparability of productmanufactured at development scale and product manufactured at commercialscale.  If we are unable to demonstratecomparability of product, we may not be able to commercially launch exenatideonce weekly in a timely manner or at all.

 

***Our ability to generate revenues will be diminished if wefail to obtain acceptable prices or an adequate level of reimbursement for ourproducts from third-party payors.***

 

The continuing efforts ofgovernment, private health insurers and other third-party payors to contain orreduce the costs of health care through various means, including efforts toincrease the amount of patient co-pay obligations, may limit our commercialopportunity.  In the United States, weexpect that there will continue to be a number of federal and state proposalsto implement government control over the pricing of prescriptionpharmaceuticals.  In addition, increasingemphasis on managed care in the United States will continue to put pressure onthe rate of adoption and pricing of pharmaceutical products.

 

Significant uncertaintyexists as to the reimbursement status of health care products.  Third-party payors, including Medicare, arechallenging the prices charged for medical products and services.  Government and other third-party payorsincreasingly are attempting to contain health care costs by limiting bothcoverage and the level of reimbursement for new drugs and by refusing toprovide coverage for uses of approved products for disease indications forwhich the FDA has not granted labeling approval.  Third-party insurance coverage may not beavailable to patients for BYETTA and/or SYMLIN or any other products wediscover and develop.  If government andother third-party payors do not provide adequate coverage and reimbursement levelsfor our products, the market acceptance of these products may be reduced.

 

***Competition in the biotechnology and pharmaceuticalindustries may result in competing products, superior marketing of otherproducts and lower revenues or profits for us.***

 

There are many companiesthat are seeking to develop products and therapies for the treatment ofdiabetes and other metabolic disorders. Our competitors include multinational pharmaceutical and chemicalcompanies, specialized biotechnology firms and universities and other researchinstitutions.  A number of our largestcompetitors, including AstraZeneca, Bristol-Myers Squibb, GlaxoSmithKline,Lilly, Merck & Co., Novartis, Novo Nordisk, Pfizer, Sanofi-Aventis andTakeda Pharmaceuticals, are pursuing the development or marketing ofpharmaceuticals that target the same diseases that we are targeting, and it ispossible that the number of companies seeking to develop products and therapiesfor the treatment of diabetes, obesity and other metabolic disorders will increase.  Many of our competitors have substantiallygreater financial, technical, human and other resources than we do and may bebetter equipped to develop, manufacture and market technologically superiorproducts.  In addition, many of thesecompetitors have significantly greater experience than we do in undertakingpreclinical testing and human clinical studies of new pharmaceutical productsand in obtaining regulatory approvals of human therapeutic products.  Accordingly, our competitors may succeed inobtaining FDA approval for superior products. Furthermore, now that we have received FDA approval for BYETTA andSYMLIN, we may also be competing against other companies with respect to ourmanufacturing and product distribution efficiency and sales and marketingcapabilities, areas in which we have limited or no experience as anorganization.

 

Our target patientpopulation for BYETTA includes people with diabetes who have not achievedadequate glycemic control using metformin, sulfonylurea and/or a TZD, the threemost common oral therapies for type 2 diabetes. Our target population for SYMLIN is people with either type 2 or type 1diabetes whose therapy includes multiple mealtime insulin injections daily.  Other products are currently in developmentor exist in the market that may compete directly with the products that we aredeveloping or marketing.  Various otherproducts are available or in development to treat type 2 diabetes, including:

 

·              sulfonylureas;

 

·              metformin;

 

·              insulins,including injectable and inhaled versions;

 

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·              TZDs;

 

·              glinides;

 

·              DPP-IVinhibitors;

 

·              incretin/GLP-1agonists;

 

·              CB-1antagonists;

 

·              PPARs;and

 

·              alpha-glucosidaseinhibitors.

 

In addition, severalcompanies are developing various approaches to improve treatments for type 1and type 2 diabetes. We cannot predict whether our products will havesufficient advantages to cause health care professionals to adopt them overother products or that our products will offer an economically feasiblealternative to other products.  Ourproducts could become obsolete before we recover expenses incurred indeveloping these products.

 

***Delays in the conduct or completion of our clinical trials,the analysis of the data from our clinical trials or our manufacturing scale-upactivities may result in delays in our planned filings for regulatoryapprovals, and may adversely affect our ability to enter into new collaborativearrangements.***

 

We cannot predict whetherwe will encounter problems with any of our completed, ongoing or plannedclinical studies that will cause us to delay or suspend our ongoing and plannedclinical studies, delay the analysis of data from our completed or ongoingclinical studies or perform additional clinical studies prior to receivingnecessary regulatory approvals.  We alsocannot predict whether we will encounter delays or an inability to createmanufacturing processes for drug candidates that allow us to produce drug productin sufficient quantities to be economical, otherwise known as manufacturingscale-up.

 

If the results of ourongoing or planned clinical studies for our drug candidates are not availablewhen we expect or if we encounter any delay in the analysis of data from ourclinical studies or if we encounter delays in our ability to scale-up ourmanufacturing processes:

 

·                                          we may be unable to complete ourdevelopment programs for exenatide once weekly or our obesity clinical trials;

 

·              wemay have to delay or terminate our planned filings for regulatory approval;

 

·                                          we may not have the financial resourcesto continue research and development of any of our drug candidates; and

 

·              wemay not be able to enter into, if we chose to do so, any additionalcollaborative arrangements.

 

In addition, Lilly canterminate our collaboration for the development and commercialization of BYETTAand sustained-release formulations of exenatide at any time on 60 days’ notice.

 

Any of the followingcould delay the completion of our ongoing and planned clinical studies:

 

·                                          ongoing discussions with the FDA orcomparable foreign authorities regarding the scope or design of our clinicaltrials;

 

·              delaysin enrolling volunteers;

 

·              lowerthan anticipated retention rate of volunteers in a clinical trial;

 

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·              negativeresults of clinical studies;

 

·                                          insufficient supply or deficient qualityof drug candidate materials or other materials necessary for the performance ofclinical trials;

 

·                                          our inability to reach agreement withLilly regarding the scope, design, conduct or costs of clinical trials withrespect to BYETTA, exenatide once weekly or nasal exenatide; or

 

·              seriousside effects experienced by study participants relating to a drug candidate.

 

***We are substantially dependent on our collaboration withLilly for the development and commercialization of BYETTA and dependent onLilly and Alkermes for the development of exenatide once weekly.***

 

We have entered into acollaborative arrangement with Lilly, who currently markets diabetes therapiesand is developing additional diabetes drug candidates, to commercialize BYETTAand further develop sustained-release formulations of BYETTA, includingexenatide once weekly.  We entered intothis collaboration in order to:

 

·              fundsome of our research and development activities;

 

·              assistus in seeking and obtaining regulatory approvals; and

 

·              assistus in the successful commercialization of BYETTA and exenatide once weekly.

 

In general, we cannotcontrol the amount and timing of resources that Lilly may devote to ourcollaboration.  If Lilly fails to assistin the further development of exenatide once weekly or the commercialization ofBYETTA, or if Lilly’s efforts are not effective, our business may be negativelyaffected.  We are relying on Lilly toobtain regulatory approvals for and successfully commercialize BYETTA andexenatide once weekly outside the United States.  Our collaboration with Lilly may not continueor result in additional successfully commercialized drugs.  Lilly can terminate our collaboration at anytime upon 60 days’ notice.  If Lillyceased funding and/or developing and commercializing BYETTA or exenatide onceweekly, we would have to seek additional sources for funding and may have todelay, reduce or eliminate one or more of our commercialization and developmentprograms for these compounds.  We arealso dependent on Alkermes for the development of exenatide once weekly.  If Alkermes’ technology is not successfullydeveloped to effectively deliver exenatide in a sustained release formulation,or Alkermes does not devote sufficient resources to the collaboration, ourefforts to develop sustained release formulations of exenatide could be delayedor curtailed.

 

***If our patents are determined to beunenforceable or if we are unable to obtain new patents based on current patentapplications or for future inventions, we may not be able to prevent othersfrom using our intellectual property.  Ifwe are unable to obtain licenses to third party patent rights for requiredtechnologies, we could be adversely affected.***

 

We ownor hold exclusive rights to many issued United States patents and pendingUnited States patent applications related to the development andcommercialization of exenatide, including BYETTA and exenatide once weekly,SYMLIN and our other drug candidates. These patents and applications cover composition-of-matter, medicalindications, methods of use, formulations and other inventive results.  We have issued and pending applications forformulations of BYETTA and exenatide once weekly, but we do not have acomposition-of-matter patent covering exenatide.  We also own or hold exclusive rights tovarious foreign patent applications that correspond to issued United Statespatents or pending United States patent applications.

 

Oursuccess will depend in part on our ability to obtain patent protection for ourproducts and drug candidates and technologies both in the United States andother countries.  We cannot guaranteethat any patents will issue from any pending or future patent applicationsowned by or licensed to us. Alternatively, a third party may successfully challenge or circumventour patents.  Our rights under any issuedpatents may not provide us with sufficient protection against competitive productsor otherwise cover commercially valuable products or processes.  In addition, because patent applications inthe United States are maintained, in general, in secrecy for eighteen monthsafter the filing of the applications, and publication of discoveries in thescientific or patent literature often lag behind actual discoveries, we cannotbe sure that the inventors of subject matter covered by our patents and patentapplications were the first to invent or the first to file patent applicationsfor these inventions.  Third parties havefiled, and in the future are likely to file, patent applications on 

 

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inventions similar to ours.  Fromtime-to-time we have participated in, and in the future are likely toparticipate in, interference proceedings declared by the United States Patentand Trademark Office to determine priority of invention, which could result ina loss of our patent position.  We havealso participated in, and in the future are likely to participate in,opposition proceedings against our patents in other jurisdictions, such asEurope and Australia.  Furthermore, wemay not have identified all United States and foreign patents that pose a riskof infringement.

 

Wealso rely upon licensing opportunities for some of our technologies.  We cannot be certain that we will not loseour rights to certain patented technologies under existing licenses or that wewill be able to obtain a license to any required third-party technology.  If we lose our licensed technology rights orif we are not able to obtain a required license, we could be adverselyaffected.

 

***We may be unable to obtain regulatoryclearance to market our drug candidates in the United States or foreigncountries on a timely basis, or at all.***

 

Ourdrug candidates are subject to extensive government regulations related todevelopment, clinical trials, manufacturing and commercialization.  The process of obtaining FDA and otherregulatory approvals is costly, time-consuming, uncertain and subject tounanticipated delays.  Regulatoryauthorities may refuse to approve an application for approval of a drugcandidate if they believe that applicable regulatory criteria are notsatisfied.  Regulatory authorities mayalso require additional testing for safety and efficacy.  Moreover, if the FDA grants regulatoryapproval of a product, the approval may be limited to specific indications orlimited with respect to its distribution, and expanded or additional indicationsfor approved drugs may not be approved, which could limit our revenues.  Foreign regulatory authorities may applysimilar limitations or may refuse to grant any approval.  Unexpected changes to the FDA or foreignregulatory approval process could also delay or prevent the approval of ourdrug candidates.

 

The data collected fromour clinical trials may not be sufficient to support approval of our drugcandidates or additional or expanded indications by the FDA or any foreignregulatory authorities.  Biotechnologystock prices have declined significantly in certain instances where companieshave failed to meet expectations with respect to FDA approval or the timing forFDA approval.  If the FDA’s or anyforeign regulatory authority’s response is delayed or not favorable for any ofour drug candidates, our stock price could decline significantly.

 

Moreover, manufacturingfacilities operated by the third-party manufacturers with whom we may contractto manufacture our unapproved drug candidates may not pass an FDA or otherregulatory authority preapproval inspection. Any failure or delay in obtaining these approvals could prohibit ordelay us or any of our business partners from marketing these drug candidates.

 

Consequently, even if webelieve that preclinical and clinical data are sufficient to support regulatoryapproval for our drug candidates, the FDA and foreign regulatory authoritiesmay not ultimately approve our drug candidates for commercial sale in anyjurisdiction.  If our drug candidates arenot approved, our ability to generate revenues may be limited and our businesswill be adversely affected.

 

***Litigation regarding patents and other proprietary rightsmay be expensive, cause delays in bringing products to market and harm ourability to operate.***

 

Our success will depend in part on our ability tooperate without infringing the proprietary rights of third parties andpreventing others from infringing our patents. Challenges by pharmaceutical companies against the patents ofcompetitors are common.  Legal standardsrelating to the validity of patents covering pharmaceutical andbiotechnological inventions and the scope of claims made under these patentsare still developing.  As a result, ourability to obtain and enforce patents is uncertain and involves complex legaland factual questions.  Third parties maychallenge, in courts or through patent office proceedings, or infringe upon,existing or future patents.  In the eventthat a third party challenges a patent, a court or patent office may invalidatethe patent or determine that the patent is not enforceable.  Proceedings involving our patents or patentapplications or those of others could result in adverse decisions about:

 
| · |   | the  patentability of our inventions, products and drug candidates; and/or   |
|--------|--------|------------------------------------------------------------------------------|
|   |   |                                                                         |
| · |   | the  enforceability, validity or scope of protection offered by our patents. |

 

The manufacture, use or sale of any of our productsor drug candidates may infringe on the patent rights of others.  If we are unable to avoid infringement of thepatent rights of others, we may be required to seek a license, defend aninfringement action or challenge the validity of the patents in court. Patentlitigation is costly and time consuming. We may not have sufficient resources to bring these actions to asuccessful conclusion.  In addition, ifwe do not obtain a license, develop or obtain non-infringing technology, failto successfully defend an infringement action or have infringing patentsdeclared invalid, we may:

 

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| · |   | incur  substantial monetary damages;                                                                                                             |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                             |
| · |   | encounter  significant delays in bringing our drug candidates to market; and/or                                                                  |
|   |   |                                                                                                                                             |
| · |   | be precluded  from participating in the manufacture, use or sale of our products or drug  candidates or methods of treatment requiring licenses. |

 

***We are subject to “fraud and abuse” andsimilar laws and regulations, and a failure to comply with such regulations orprevail in any litigation related to noncompliance could harm our business.***

 

Upon approval of BYETTAand SYMLIN by the FDA, we became subject to various health care “fraud andabuse” laws, such as the Federal False Claims Act, the federal anti-kickbackstatute and other state and federal laws and regulations.  Pharmaceutical companies have faced lawsuitsand investigations pertaining to violations of these laws and regulations.  We cannot guarantee that measures that wehave taken to prevent such violations, including our corporate complianceprogram, will protect us from future violations, lawsuits orinvestigations.  If any such actions areinstituted against us, and we are not successful in defending ourselves orasserting our rights, those actions could have a significant impact on ourbusiness, including the imposition of significant fines or other sanctions.

 

***Our financial results will fluctuate, and these fluctuationsmay cause our stock price to fall.***

 

Forecasting futurerevenues is difficult, especially since we launched our first products in 2005and when the level of market acceptance of these products may changerapidly.  In addition, our customer baseis highly concentrated with four customers accounting for most of our netproduct sales.  Fluctuations in thebuying patterns of these customers, which may result from seasonality,wholesaler buying decisions or other factors outside of our control, couldsignificantly affect the level of our net sales on a period to periodbasis.  As a result, it is reasonablylikely that our financial results will fluctuate to an extent, that may notmeet with market expectations and that also may adversely affect our stockprice.  There are a number of otherfactors that could cause our financial results to fluctuate unexpectedly,including:

 
| · |   | product sales;                                                                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                |
| · |   | cost of product sales;                                                                                                                              |
|   |   |                                                                                                                                                |
| · |   | achievement and timing of research and development  milestones;                                                                                     |
|   |   |                                                                                                                                                |
| · |   | collaboration revenues;                                                                                                                             |
|   |   |                                                                                                                                                |
| · |   | cost and timing of clinical trials, regulatory  approvals and product launches;                                                                     |
|   |   |                                                                                                                                                |
| · |   | marketing and other expenses;                                                                                                                       |
|   |   |                                                                                                                                                |
| · |   | manufacturing or supply issues; and                                                                                                                 |
|   |   |                                                                                                                                                |
| · |   | potential acquisitions of businesses and  technologies and our ability to successfully integrate any such acquisitions  into our existing business. |

 

***We may require additional financing in the future, which maynot be available to us on favorable terms, or at all.***

 

We intend to use ouravailable cash for:

 
| · |   | Commercialization of BYETTA and SYMLIN;                                                        |
|--------|--------|------------------------------------------------------------------------------------------------|
|   |   |                                                                                           |
| · |   | Establishment of additional manufacturing sources,  including our Ohio manufacturing facility; |
|   |   |                                                                                           |
| · |   | Development of exenatide once weekly and other  pipeline candidates;                           |
|   |   |                                                                                           |
| · |   | Executing our INTO strategy;                                                                   |
|   |   |                                                                                           |
| · |   | Our other research and development activities;                                                 |

 

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| · |   | Other operating expenses;                                                               |
|--------|--------|-----------------------------------------------------------------------------------------|
|   |   |                                                                                    |
| · |   | Potential acquisitions or investments in  complementary technologies or businesses; and |
|   |   |                                                                                    |
| · |   | Other general corporate purposes.                                                       |

 

We may also be requiredto use our cash to pay principal and interest on outstanding debt, including a$125 million term loan due in 2010 and $775 million in outstanding principalamount of convertible senior notes, of which $200 million is due in 2011,referred to as the 2004 Notes, and $575 million is due in 2014, referred to asthe 2007 Notes.

 

***Our business has a substantial risk of product liabilityclaims, and insurance may not be adequate to cover these claims.***

 

Our business exposes usto potential product liability risks that are inherent in the testing,manufacturing and marketing of human therapeutic products.  Product liability claims could result in theimposition of substantial liability on us, a recall of products, or a change inthe indications for which they may be used. We currently have limited product liability insurance coverage.  We cannot assure you that our insurance willprovide adequate coverage against potential liabilities.

 

***Our ability to enter into and maintain third-partyrelationships is important to our successful development and commercializationof BYETTA, SYMLIN and our other drug candidates and to our potentialprofitability.***

 

With respect to sales,marketing and distribution outside the United States, we will be substantiallydependent on Lilly for activities relating to BYETTA and sustained-releaseformulations of BYETTA, including exenatide once weekly.  We believe that we will likely need to enterinto marketing and distribution arrangements with third parties for, or find acorporate partner who can provide support for, the development andcommercialization of SYMLIN or our other drug candidates outside the UnitedStates.  We may also enter intoarrangements with third parties for the commercialization of SYMLIN or any ofour other drug candidates within the United States.

 

With respect to BYETTAand, if approved, exenatide once weekly, Lilly is co-promoting within theUnited States.  If Lilly ceasedcommercializing BYETTA or, if approved, exenatide once weekly, for any reason,we would likely need to either enter into a marketing and distributionarrangement with a third party for those products or significantly increase ourinternal sales and commercialization infrastructure.

 

We may not be able toenter into marketing and distribution arrangements or find a corporate partnerfor SYMLIN or our other drug candidates as we deem necessary.  If we are not able to enter into a marketingor distribution arrangement or find a corporate partner who can provide supportfor commercialization of our drug candidates as we deem necessary, we may notbe able to successfully perform these marketing or distributionactivities.  Moreover, any new marketeror distributor or corporate partner for our drug candidates, including Lilly,with whom we choose to contract may not establish adequate sales anddistribution capabilities or gain market acceptance for our products, if any.

 

***We have a significant amount of indebtedness.  We may not be able to make payments on ourindebtedness, and we may incur additional indebtedness in the future, whichcould adversely affect our operations.***

 

In April 2004, we issued$200 million of the 2004 Notes and in June 2007, we issued $575 million ofthe 2007 Notes.  In December 2007,we entered into a $125 million term loan due in December 2010, or the TermLoan.  Our ability to make payments onour debt, including the 2004 and 2007 Notes and the Term Loan, will depend onour future operating performance and ability to generate cash and may alsodepend on our ability to obtain additional debt or equity financing. Duringeach of the last five years, our operating cash flows were negative andinsufficient to cover our fixed charges. We may need to use our cash to pay principal and interest on our debt,thereby reducing the funds available to fund our research and developmentprograms, strategic initiatives and working capital requirements.  Our ability to generate sufficient operatingcash flow to service our indebtedness, including the 2004 and 2007 Notes andthe Term Loan, and fund our operating requirements will depend on our ability,alone or with others, to successfully develop, manufacture, obtain requiredregulatory approvals for and market our drug candidates, as well as otherfactors, including general economic, financial, competitive, legislative andregulatory conditions, some of which are beyond our control.  Our debt service obligations increase ourvulnerabilities to competitive pressures, because many of our competitors areless leveraged than we are.  If we areunable to generate sufficient operating cash flow to service our indebtednessand fund our operating requirements, we 

 

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may be forced toreduce or defer our development programs, sell assets or seek additional debtor equity financing, which may not be available to us on satisfactory terms orat all.  Our level of indebtedness maymake us more vulnerable to economic or industry downturns.  If we incur new indebtedness, the risksrelating to our business and our ability to service our indebtedness willintensify.

 

***We may be required to redeem our convertible senior notesupon a designated event or repay the Term Loan upon an event of default.***

 

Holders of the 2004 and2007 Notes may require us to redeem all or any portion of their notes upon theoccurrence of certain designated events which generally involve a change incontrol of our company.  The lendersunder the Term Loan may require us to repay outstanding principal and accruedinterest due under the Term Loan upon the occurrence of an event of default,which could include, among other things, nonpayment of principle and interest,violation of covenants and a change in control. We may not have sufficient cash funds to redeem the notes upon adesignated event or repay the Term Loan upon an event of default.  We may elect, subject to certain conditions,to pay the redemption price for the 2004 Notes in our common stock or acombination of cash and our common stock. We may be unable to satisfy the requisite conditions to enable us to paysome or all of the redemption price for the 2004 Notes in our common stock.  In addition, although there are currently norestrictions on our ability to pay the redemption price under our existing debtagreements, future debt agreements may prohibit us from repaying the redemptionprice of either of the notes in either cash or common stock.  If we are prohibited from redeeming the 2004Notes or 2007 Notes, we could seek consent from our lenders to redeem thenotes.  If we are unable to obtain theirconsent, we could attempt to refinance the notes.  If we were unable to obtain a consent orrefinance, we would be prohibited from redeeming the notes.  If we were unable to redeem the notes upon adesignated event, it would result in an event of default under the indenturesgoverning the notes.  An event of defaultunder the indentures could result in a further event of default under our otherthen-existing debt including the Term Loan. In addition, the occurrence of a designated event may be an event ofdefault under our other debt.  Further,an event of default under the Term Loan could result in an event of defaultunder the indentures governing the notes.

 

***If our research and development programs fail to result inadditional drug candidates, the growth of our business could be impaired.***

 

Certain of our researchand development programs for drug candidates are at an early stage and willrequire significant research, development, preclinical and clinical testing,manufacturing scale-up activities, regulatory approval and/or commitments ofresources before commercialization.  Wecannot predict whether our research will lead to the discovery of anyadditional drug candidates that could generate additional revenues for us.

 

***Our future success depends on our chief executive officer,and other key executives and our ability to attract, retain and motivatequalified personnel.***

 

We are highly dependenton our chief executive officer, and the other principal members of ourexecutive and scientific teams.  Theunexpected loss of the services of any of these persons might impede theachievement of our research, development and commercialization objectives.  Recruiting and retaining qualified sales,marketing, regulatory, scientific and other personnel and consultants will alsobe critical to our success.  We may notbe able to attract and retain these personnel and consultants on acceptableterms given the competition between numerous pharmaceutical and biotechnologycompanies.  We do not maintain “keyperson” insurance on any of our employees.

 

***We may be unable to adequately prevent disclosure of tradesecrets and other proprietary information.***

 

In order to protect ourproprietary technology and processes, we rely in part on confidentialityagreements with our corporate partners, employees, consultants, manufacturers,outside scientific collaborators and sponsored researchers and otheradvisors.  These agreements may noteffectively prevent disclosure of confidential information and may not providean adequate remedy in the event of unauthorized disclosure of confidentialinformation.  In addition, others mayindependently discover our trade secrets and proprietary information.

 

Costly and time-consuminglitigation could be necessary to enforce and determine the scope of ourproprietary rights, and failure to obtain or maintain trade secret protectioncould adversely affect our competitive business position.

 

31

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***Our research and development activities and plannedmanufacturing activities involve the use of hazardous materials, which subjectus to regulation, related costs and delays and potential liabilities.***

 

Our research anddevelopment and our planned manufacturing activities involve the controlled useof hazardous materials, chemicals and various radioactive compounds.  Although we believe that our research anddevelopment safety procedures for handling and disposing of these materialscomply with the standards prescribed by state and federal regulations, the riskof accidental contamination or injury from these materials cannot beeliminated.  In addition, as part of thedevelopment of our planned manufacturing activities, we will need to developadditional safety procedures for the handling and disposing of hazardousmaterials.  If an accident occurs, wecould be held liable for resulting damages, which could be substantial.  We are also subject to numerousenvironmental, health and workplace safety laws and regulations, includingthose governing laboratory procedures, exposure to blood-borne pathogens andthe handling of biohazardous materials. Additional federal, state and local laws and regulations affecting ouroperations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines orpenalties if we violate, any of these laws or regulations.

 

***We are exposed to potential risks from recent legislationrequiring companies to evaluate internal control over financial reporting.***

 

The Sarbanes-Oxley Actrequires that we report annually on the effectiveness of our internal controlover financial reporting.  Among otherthings, we must perform systems and processes evaluation and testing.  We must also conduct an assessment of ourinternal control to allow management to report on, and our independentregistered public accounting firm to attest to, our internal control overfinancial reporting, as required by Section 404 of the Sarbanes-OxleyAct.  In connection with our Section 404compliance efforts, we have incurred or expended, and expect to continue toincur or expend, substantial accounting and other expenses and significantmanagement time and resources.  We haveimplemented certain remediation activities resulting from our ongoingassessment of internal control over financial reporting.  Our future assessment, or the futureassessments by our independent registered public accounting firm, may revealmaterial weaknesses in our internal control. If material weaknesses are identified in the future we would be requiredto conclude that our internal control over financial reporting are ineffectiveand we could be subject to sanctions or investigations by the SEC, the NASDAQStock Market or other regulatory authorities, which would require additionalfinancial and management resources and could adversely affect the market priceof our common stock.

 

***We have implemented anti-takeover provisions that coulddiscourage or prevent an acquisition of our company, even if the acquisition wouldbe beneficial to our stockholders, and as a result our management may becomeentrenched and hard to replace.***

 

Provisions in ourcertificate of incorporation and bylaws could make it more difficult for athird party to acquire us, even if doing so would benefit ourstockholders.  These provisions include:

 

·                                          allowing our board of directors to electa director to fill a vacancy created by the expansion of the board ofdirectors;

 

·                                          allowing our board of directors to issue,without stockholder approval, up to 5.5 million shares of preferred stock withterms set by the board of directors;

 

·                                          limiting the ability of holders of ouroutstanding common stock to call a special meeting of our stockholders; and

 

·                                          preventing stockholders from takingactions by written consent and requiring all stockholder actions to be taken ata meeting of our stockholders.

 

Each of these provisions,as well as selected provisions of Delaware law, could discourage potentialtakeover attempts, could adversely affect the trading price of our securitiesand could cause our management to become entrenched and hard to replace.  In addition to provisions in our charterdocuments and under Delaware law, an acquisition of our company could be mademore difficult by our employee benefits plans and our employee change incontrol plan, under which, in connection with a change in control, stockoptions held by our employees may become vested and our officers may receiveseverance benefits.  We also haveimplemented a stockholder rights plan, also called a poison pill, which couldmake it uneconomical for a third party to acquire us on a hostile basis.

 

32

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***Our executiveofficers, directors and major stockholders control approximately 55% of ourcommon stock.***

 

As of December 31, 2007, executive officers,directors and holders of 5% or more of our outstanding common stock, in theaggregate, owned or controlled approximately 55% of our outstanding commonstock.  As a result, these stockholdersare able to influence all matters requiring approval by our stockholders,including the election of directors and the approval of corporatetransactions.  This concentration ofownership may also delay, deter or prevent a change in control of our companyand may make some transactions more difficult or impossible to complete withoutthe support of these stockholders.

 

***Substantial futuresales of our common stock by us or our existing stockholders or the conversionof our convertible senior notes to common stock could cause the trading priceof our common stock to fall.***

 

Sales by existing stockholders of a large number ofshares of our common stock in the public market or the perception thatadditional sales could occur could cause the trading price of our common stockto drop.  Likewise, the issuance ofshares of common stock upon conversion of our convertible notes or redemptionof our convertible notes upon a designated event, or upon additionalconvertible debt or equity financings or other share issuances by us, includingshares issued in connection with potential future strategic alliances and theuncertain number of additional shares that we may be required to issue underour agreements with Lilly, could adversely affect the trading price of ourcommon stock.  Our convertible notes arecurrently convertible into a total of up to 15.2 million shares. In addition,the existence of these notes may encourage short selling of our common stock bymarket participants.

 

***Significantvolatility in the market price for our common stock could expose us tolitigation risk.***

 

The market prices for securities of biopharmaceuticaland biotechnology companies, including our common stock, have historically beenhighly volatile, and the market from time to time has experienced significantprice and volume fluctuations that are unrelated to the quarterly operatingperformance of these biopharmaceutical and biotechnology companies.  Since January 1, 2006, the high and lowsales price of our common stock varied significantly, as shown in the followingtable:

 
| ** **                                      | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
| **Year  ending December 31, 2008**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter  (through February 13, 2008) |       | $          | 37.38      |       | $          | 28.41 |   |
| **Year  ended December 31, 2007**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter                                  |       | $          | 51.10      |       | $          | 35.83 |   |
| Third Quarter                                   |       | $          | 53.25      |       | $          | 40.86 |   |
| Second Quarter                                  |       | $          | 46.93      |       | $          | 36.91 |   |
| First Quarter                                   |       | $          | 42.45      |       | $          | 35.55 |   |
| **Year  ended December 31, 2006**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter                                  |       | $          | 48.48      |       | $          | 35.74 |   |
| Third Quarter                                   |       | $          | 51.54      |       | $          | 40.76 |   |
| Second Quarter                                  |       | $          | 49.37      |       | $          | 38.16 |   |
| First Quarter                                   |       | $          | 49.08      |       | $          | 35.58 |   |

 

Given the uncertainty of our future funding, whetherBYETTA and SYMLIN will meet our expectations, and the regulatory approval ofour other drug candidates, we may continue to experience volatility in ourstock price for the foreseeable future. In addition, the following factors may significantly affect the marketprice of our common stock:

 
| · |   | our financial results and/or fluctuations in our  financial results;                                                            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                            |
| · |   | safety issues with BYETTA, SYMLIN or our product  candidates;                                                                   |
|   |   |                                                                                                                            |
| · |   | clinical study results;                                                                                                         |
|   |   |                                                                                                                            |
| · |   | determinations by regulatory authorities with  respect to our drug candidates;                                                  |
|   |   |                                                                                                                            |
| · |   | our ability to complete our Ohio manufacturing  facility and the commercial manufacturing process for exenatide once weekly;    |
|   |   |                                                                                                                            |
| · |   | developments in our relationships with current or  future collaborative partners;                                               |
|   |   |                                                                                                                            |
| · |   | our ability to successfully execute our  commercialization strategies;                                                          |
|   |   |                                                                                                                            |
| · |   | developments in our relationships with third-party  manufacturers of our products and other parties who provide services to us; |
|   |   |                                                                                                                            |
| · |   | technological innovations or new commercial  therapeutic products by us or our competitors;                                     |

 

33

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| · |   | developments in patent or other proprietary rights;  and                                 |
|--------|--------|------------------------------------------------------------------------------------------|
|   |   |                                                                                     |
| · |   | governmental policy or regulation, including with  respect to pricing and reimbursement. |

 

Broad market and industry factors also may materiallyadversely affect the market price of our common stock, regardless of our actualoperating performance.  Periods ofvolatility in the market price of our common stock expose us to securitiesclass-action litigation, and we may be the target of such litigation as aresult of market price volatility in the future.

 

**Item 1B. *Unresolved Staff Comments***

 

None.

 

**Item 2. *Properties***

 

Ourprimary administrative offices and research laboratories are located in SanDiego, California.  As of December 31,2007, we occupied approximately 508,000 square feet of office and laboratoryspace.  Our leases on a majority of theseproperties expire between 2015 and 2019. We have also entered into short-term leases and other agreements forsmall offices in Brentwood, Tennessee, Beachwood, Ohio, Washington, D.C. andGermany.

 

Ourwholly-owned subsidiary, Amylin Ohio LLC, owns two buildings and 44.4 acres ofland in West Chester, Ohio.   Thebuildings, once built out for the manufacture of exenatide once weekly willhave approximately 420,000 square feet of manufacturing and office space.

 

**Item 3. *Legal Proceedings***

 

None.

 

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

 

None.

 

**PART II**

** **

**Item 5. *Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities***

 

                Our common stock is traded onThe NASDAQ Global Market under the symbol “AMLN.”  The following table sets forth, for theperiods indicated, the reported high and low sales price per share of ourcommon stock on The NASDAQ 

 

GlobalMarket:

 
| ** **                            | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------|------------|----------|------------|---------|------------|
| **Year Ended December 31, 2007** |       |     |       |    |       |
| Fourth Quarter                        |       | $        | 51.10      |    | $          | 35.83 |   |
| Third Quarter                         |       | $        | 53.25      |    | $          | 40.86 |   |
| Second Quarter                        |       | $        | 46.93      |    | $          | 36.91 |   |
| First Quarter                         |       | $        | 42.45      |    | $          | 35.55 |   |
|                                  |       |     |       |    |       |
| **Year Ended December 31, 2006** |       |     |       |    |       |
| Fourth Quarter                        |       | $        | 48.48      |    | $          | 35.74 |   |
| Third Quarter                         |       | $        | 51.54      |    | $          | 40.76 |   |
| Second Quarter                        |       | $        | 49.37      |    | $          | 38.16 |   |
| First Quarter                         |       | $        | 49.08      |    | $          | 35.58 |   |

 

                The last reported sale price ofour common stock on The NASDAQ Global Market on February 13, 2008 was$29.25.  As of February 13, 2008,there were approximately 630 shareholders of record of our common stock.

 

                We have never declared or paid any cash dividends onour capital stock.  We currently intendto retain any future earnings for funding growth and, therefore, do notanticipate paying any cash dividends in the foreseeable future.

 

                For information concerning priorstockholder approval of and other matters relating to our equity incentiveplans, see “Equity Compensation Plan Information” under Item 12 in this annualreport on Form 10-K.

 

34

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**Item 6. *Selected Financial Data***

 

                Please read the followingselected financial data in conjunction with “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and the ConsolidatedFinancial Statements and related notes included elsewhere in this annual reporton Form 10-K.

 
| ** **                                                             | ** ** | **Years Ended December 31**                                     | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                             | ** ** | **(in thousands, except for per share amounts)** | ** ** |
| **Consolidated Statements of Operations Data:**                        | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net product sales                                                      |       | $                                                                              | 701,450    |   | $ | 474,038 |   | $ | 86,713 |   | $ | — |   | $ | — |   |
| Revenues under collaborative agreements                                |       | 79,547                                                                         |       | 36,837 |   | 53,761 |   | 34,268 |   | 85,652 |   |
| Total revenues                                                         |       | 780,997                                                                        |       | 510,875 |   | 140,474 |   | 34,268 |   | 85,652 |   |
|                                                                   |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Costs and expenses:                                                    |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Cost of goods sold                                                     |       | 65,457                                                                         |       | 50,073 |   | 14,784 |   | — |   | — |   |
| Selling, general and administrative                                    |       | 390,982                                                                        | (1)        | 281,950 | (1) | 171,520 |   | 66,958 |   | 56,761 |   |
| Research and development                                               |       | 276,600                                                                        | (2)        | 222,053 | (2) | 132,128 |   | 119,558 |   | 149,431 |   |
| Collaborative profit-sharing                                           |       | 290,934                                                                        |       | 194,191 |   | 31,359 |   | — |   | — |   |
| Acquired in-process research and development                           |       | —                                                                         |       | — |   | — |   | — |   | 3,300 |   |
| Total costs and expenses                                               |       | 1,023,973                                                                      |       | 748,267 |   | 349,791 |   | 186,516 |   | 209,492 |   |
| Make-whole payment on debt redemption                                  |       | —                                                                         |       | (7,875 | ) | — |   | — |   | — |   |
| Net interest and other income (expense)                                |       | 31,840                                                                         |       | 26,411 |   | 2,485 |   | (4,909 | ) | 1,032 |   |
| Net loss                                                               |       | (211,136                                                                       | )          | (218,856 | ) | (206,832 | ) | (157,157 | ) | (122,808 | ) |
| Net loss per share — basic and diluted                            |       | $                                                                              | (1.59      | ) | $ | (1.78 | ) | $ | (1.96 | ) | $ | (1.67 | ) | $ | (1.33 | ) |
| Shares used in calculating net loss per share — basic and diluted |       | 132,621                                                                        |       | 122,647 |   | 105,532 |   | 94,054 |   | 92,396 |   |
|                                                                   |       |                                                                           |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheets Data:**                                  | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash equivalents and short-term investments                      |       | $                                                                              | 1,130,415  |   | $ | 767,331 |   | $ | 443,423 |   | $ | 293,756 |   | $ | 269,776 |   |
| Working capital                                                        |       | $                                                                              | 1,049,024  |   | $ | 702,930 |   | $ | 415,134 |   | $ | 282,421 |   | $ | 243,144 |   |
| Total assets                                                           |       | $                                                                              | 1,774,211  |   | $ | 1,060,386 |   | $ | 566,962 |   | $ | 357,800 |   | $ | 311,045 |   |
| Long-term obligations, excluding current portion                       |       | $                                                                              | 934,109    |   | $ | 221,208 |   | $ | 399,112 |   | $ | 403,233 |   | $ | 202,425 |   |
| Accumulated deficit                                                    |       | $                                                                              | (1,434,320 | ) | $ | (1,223,184 | ) | $ | (1,004,328 | ) | $ | (797,496 | ) | $ | (640,339 | ) |
| Total stockholders’ equity (deficit)                              |       | $                                                                              | 552,818    |   | $ | 635,291 |   | $ | 69,264 |   | $ | (87,370 | ) | $ | 63,216 |   |
|                                                                        |            |                                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Selling, generaland administrative expenses for the years ended December 31, 2007 and 2006include approximately $35.4 million and $29.0 million, respectively, ofemployee stock-based compensation expense pursuant to the provisions ofStatement of Financial Accounting Standards No. 123R *“Share-BasedPayment”*which the Company adopted on January 1, 2006.

 

(2)          Research anddevelopment expenses for the year ended December 31, 2007 and 2006 includeapproximately $23.6 million and $22.9 million, respectively, of employeestock-based compensation expense pursuant to the provisions of Statement ofFinancial Accounting Standards No. 123R *“Share-BasedPayment”*which the Company adopted on January 1, 2006.

 

**Item 7. *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations***

 

# **Executive Summary**

#  

Amylin Pharmaceuticals, Inc.is a biopharmaceutical company committed to improving the lives of people withdiabetes, obesity and other diseases through the discovery, development andcommercialization of innovative medicines. We 

 

35

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have developed and gained approval for two first-in-class medicines totreat diabetes, BYETTA® (exenatide) injection and SYMLIN®(pramlintide acetate) injection, both of which were commercially launched inthe United States during the second quarter of 2005.  BYETTA has also been approved in the EuropeanUnion, or EU, and our collaboration partner, Eli Lilly and Company, or Lillylaunched BYETTA in 22 countries outside of the United States during 2007.  We expect Lilly to continue to launch BYETTAin additional EU member states and other countries in 2008.

 

BYETTA is the first andonly approved medicine in a new class of compounds called incretinmimetics.  We began selling BYETTA in theUnited States in June 2005.  BYETTAis approved in the United States for the treatment of patients with type 2diabetes who have not achieved adequate glycemic control and are usingmetformin, a sulfonylurea and/or a thiazolidinedone, or TZD, three common oraltherapies for type 2 diabetes.  Netproduct sales of BYETTA were $636.0 million, $430.2 million and $75.2 millionfor the years ended December 31, 2007, 2006 and 2005, respectively.

 

We have anagreement with Lilly for the global development and commercialization ofexenatide.  This agreement includesBYETTA and any sustained-release formulations of exenatide such as exenatideonce weekly (formerly referred to as exenatide LAR), our once weeklyformulation of exenatide for the treatment of type 2 diabetes.  Under the terms of the agreement, operatingprofits from products sold in the United States are shared equally betweenLilly and us.  The agreement provides fortiered royalties payable to us by Lilly based upon the annual gross margin forall exenatide product sales, including any long-acting release formulations,outside of the United States.  Royaltypayments for exenatide product sales outside of the United States will commenceafter a one-time cumulative gross margin threshold amount has been met.  We expect royalty payments to commence in2009.  Lilly is responsible for 100% ofthe costs related to development of twice-daily BYETTA for sale outside of theUnited States.  Development costs relatedto all other exenatide products for sale outside of the United States willcontinue to be allocated 80% to Lilly and 20% to us.  Lilly will continue to be responsible for100% of the costs related to commercialization of all exenatide products forsale outside of the United States.

 

SYMLIN is thefirst and only approved medicine in a new class of compounds calledamylinomimetics.  We began selling SYMLINin the United States in April 2005 for the treatment of patients witheither type 1 or type 2 diabetes who are treated with mealtime insulin but whohave not achieved adequate glycemic control. Net product sales of SYMLIN were $65.5 million, $43.8 million and $11.5million for the years ended December 31, 2007, 2006 and 2005 respectively.

 

We have a field force ofapproximately 600 people dedicated to marketing BYETTA and SYMLIN in the UnitedStates.   Our field force includes ourspecialty and primary care sales forces, a managed care and government affairsorganization, a medical science organization and diabetes carespecialists.  In addition, Lillyco-promotes BYETTA in the United States and has primary responsibility fordeveloping and commercializing BYETTA outside of the United States, and anysustained-release formulations of exenatide such as exenatide once weekly.

 

In addition to ourmarketed products, we are working with Lilly and Alkermes, Inc. to developexenatide once weekly.   We are alsoworking with Alkermes and Parsons, Inc. on the construction of amanufacturing facility for exenatide once weekly in Ohio.  We expect to complete the commercial scalemanufacturing process in this facility in the second half of 2008 and we arealso working aggressively to provide sufficient data to the United States Foodand Drug Administration, or FDA, to demonstrate comparability between exenatideonce weekly clinical trial material manufactured by our partner, Alkermes, inits facility and exenatide once weekly produced in our West Chester, Ohiofacility.

 

We also have other early stage programs for diabetes, obesity, and other therapeutic areas.  We have a number of compounds in development for the potential treatment of obesity which are part of a broader clinical strategy which we refer to as INTO: Integrated Neurohormonal Therapies for Obesity.  We also maintain an active discovery research program focused on novel peptide therapeutics.  We are actively seeking to in-license additional drug candidates.  We have partnered with PyschoGenics, Inc., to form Psylin Neurosciences, Inc., a company that will focus on the discovery and development of peptide hormones for treatment of psychiatric indications.  During the second quarter of 2007, we made a strategic equity investment in BioSeek, Inc., or BioSeek, a company that specializes in predictive human cell-based disease models, and contracted with BioSeek to assess the potential utility of Amylin’s peptide hormones in immune/inflammatory disorders.  During the fourth quarter of 2007, we made a strategic equity investment in Xenome Ltd., or Xenome, a company with largely venom-based peptide libraries, and contracted with Xenome to discover and develop novel peptide therapeutics for a range of metabolic and musculoskeletal diseases.

 

36

 

**Recent Developments**

 

***Diabetes***

 

·              Announced positive results from a 30-week comparatorstudy of exenatide once-weekly injection and BYETTA taken twice daily inpatients with type 2 diabetes.  Weanticipate a regulatory submission to the FDA by the end of the first half of2009.

 

·              Announced positive results from a 24-week study ofmonotherapy, or stand alone, BYETTA in drug naïve patients with Type 2diabetes.  We plan for a regulatorysubmission for a monotherapy indication to the FDA in the first half of 2008.

 

·              Received FDA approval of the SymlinPen(TM) 120 and theSymlinPen(TM) 60 pen-injector devices for administering SYMLIN.  These new pre-filled pen-injector devicesfeature simple, fixed dosing to improve mealtime glucose control. This newproduct presentation was commercially launched in the United States in January 2008.

 

·              Announced plans fora clinical program for exenatide once weekly consisting of three trialsdesigned to show superiority of exenatide once weekly for the treatment of type2 diabetes over common medications used in the treatment of type 2 diabetes,including TZDs, DPP-IV inhibitors and insulin glargine.  The first of these trials is underway.  Results from the first two studies areexpected during the first half of 2009 and results from the third study areexpected by early 2010.

 

·              Made continued progress and expanded the scope of theconstruction of our manufacturing facility for exenatide once weekly inOhio.  We remain on schedule to completethe commercial-scale manufacturing process at this facility in the second halfof 2008.

 

***Obesity***

 

·                  Positive results from a 24-weekproof-of-concept study with pramlintide, an analog of human amylin, andrecombinant human leptin (metreleptin) combination treatment in overweight orobese subjects, validating our novel INTO strategy.  We plan for additional development in 2008,including the initiation of a Phase 2B study and development work on aformulation that will provide both pramlintide and metreleptin in a singleinjection.

 

***Financialand Operational***

 

·                  In June 2007, we issued $575.0million in aggregate principal amount of 3.0% convertible senior notes due in2014, referred to as the 2007 Notes, generating net proceeds of approximately$558.7 million.

 

·                  In December 2007,we****entered into a $140.0 million credit agreement. The credit agreement provides for a $125.0 million term loan, which generatednet proceeds of approximately $123.5 million, and a $15.0 million revolvingcredit facility.

 

Since our inception in September 1987,we have devoted substantially all of our resources to our research anddevelopment programs and, more recently, to the commercialization of ourproducts and the ongoing construction ofour manufacturing facility for exenatide once weekly.  All of our revenues prior to the secondquarter of 2005 were derived from fees and expense reimbursements underour BYETTA collaboration agreement with Lilly, previous SYMLIN collaborativeagreements, and previous co-promotion agreements.  During the second quarter of 2005, we beganto derive revenues from product sales of BYETTA and SYMLIN.  Wehave been unprofitable since inception and may incur additional operatinglosses for at least the next few years. At December 31, 2007, our accumulated deficit was approximately$1.4 billion.

 

At December 31,2007, we had $1.1 billion in cash, cash equivalents and short-terminvestments.  We may not generatepositive operating cash flows for at least the next few years and accordingly, we may need to raiseadditional funds from outside sources.  Referto the discussions under the headings “*Liquidity and CapitalResources*” below and “*Cautionary Factors That May AffectFuture Results*” in Part I, Item 1A for further discussionregarding our anticipated future capital requirements.

 

# **Critical Accounting Policiesand Estimates**

#  

Our discussion and analysis of our financial condition and results ofoperations are based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States.  The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported 

 

37

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amounts of assets,liabilities, revenues, expenses and related disclosures of contingent assetsand liabilities.  On an ongoing basis, weevaluate our estimates, including those related to revenue recognition,stock-based compensation, inventory costs, research and development expensesand income taxes.  We base our estimateson historical experience and on various other assumptions that are believed tobe reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

We believe the following critical accounting policies affect thesignificant judgments and estimates used in the preparation of our consolidatedfinancial statements (see Note 1 to our consolidated financial statements on page F-7).

 

##### ***Revenue Recognition***

#####  

We recognizerevenue from the sale of our products, license fees and milestones earned andfor reimbursement of development costs based on contractual arrangements.

 

**NetProduct Sales**

 

We sell ourproducts primarily to wholesale distributors, who in turn, sell to retailpharmacies, pharmacy benefit managers and government entities.  Decisions made by these wholesalers and theircustomers regarding the level of inventories they hold, and thus the amount ofproduct they purchase, can materially affect the level of our product sales inany particular period.

 

We recognizerevenue from the sale of our products when delivery has occurred and title hastransferred to our wholesale customers, net of allowances for product returns,rebates and wholesaler chargebacks, wholesaler discounts and prescriptionvouchers.  We are required to makesignificant judgments and estimates in determining some of theseallowances.  If actual results differfrom our estimates, we will be required to make adjustments to these allowancesin the future.

 

***ProductReturns***

 

We do not offer ourwholesale customers a general right of return. However, we will accept returns of products that are damaged ordefective when received by the wholesale customer or for any unopened productduring the period beginning six months prior to and up to 12 months subsequentto its expiration date.  We estimateproduct returns based on our historical returns experience, and industry trendsfor other products with similar characteristics.  Additionally, we consider several otherfactors in our estimation process including our internal sales forecasts, theexpiration dates of product shipped and third party data to assist us inmonitoring estimated channel inventory levels and prescription trends.  Actual returns could exceed our historicalexperience and our estimates of expected future returns due to factors such aswholesaler and retailer stocking patterns and inventory levels and/orcompetitive changes.  To date actualreturns have not differed materially from our estimates.

 

***Rebatesand Wholesaler Chargebacks***

 

Allowances forrebates include mandated discounts under the Medicaid Drug Rebate Program andcontracted discounts with commercial payors. Rebates are amounts owed after the final dispensing of the product by apharmacy to a benefit plan participant and are based upon contractualagreements or legal requirements with private sector and public sector (e.g.Medicaid) benefit providers.  Theallowance for rebates is based on contractual discount rates, expectedutilization under each contract and our estimate of the amount of inventory inthe distribution channel that will become subject to such rebates.  Our estimates for expected utilization forrebates are based on historical rebate claims and to a lesser extent thirdparty market research data.  Rebates aregenerally invoiced and paid quarterly in arrears so that our accrual consistsof an estimate of the amount expected to be incurred for the current quarter’sactivity, plus an accrual for prior quarters’ unpaid rebates and an accrual forinventory in the distribution channel.

 

Wholesalerchargebacks are discounts that occur when contracted customers purchasedirectly from an intermediary wholesale purchaser. Contracted customers, whichcurrently consist primarily of Federal government entities purchasing off theFederal Supply Schedule, generally purchase the product at its contractedprice, plus a mark-up from the wholesaler. The wholesaler, in-turn, charges back to the Company the differencebetween the price initially paid by the wholesaler and the contracted pricepaid to the wholesaler by the customer. The allowance for wholesaler chargebacks is based on expected 

 

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utilization of these programs and reported wholesalerinventory levels.  Actual rebates andwholesaler chargebacks could exceed historical experience and our estimates offuture participation in these programs. To date, actual rebate claims and wholesaler chargebacks have notdiffered materially from our estimates.

 

***WholesalerDiscounts***

 

Wholesalerdiscounts consist of prompt payment discounts and distribution servicefees.  We offer all of our wholesalecustomers a 2% prompt-pay discount within the first 30 days after the date ofthe invoice.  Distribution service feesarise from contractual agreements with certain of our wholesale customers fordistribution services they provide to us and are generally a fixed percentageof their purchases of our products in a given period.  Prompt payment discounts and distributionservice fees are recorded as a reduction to gross sales in the period the salesoccur.  The allowance for wholesalerdiscounts is based upon actual data of product sales to wholesale customers andnot on estimates.

 

***PrescriptionVouchers***

 

Prescriptionvouchers result in amounts owed to pharmacies that have redeemed vouchers for afree prescription.  We provideprescription vouchers to physicians, who in turn distribute them topatients.  Patients may redeem a voucherat a pharmacy for a free prescription. We reimburse the pharmacy for the price it paid the wholesaler for themedicine and record this reimbursement as a reduction to gross sales.  The allowance for prescription vouchers isbased on the number of unredeemed vouchers in circulation, and the estimatedutilization rate.  The estimated utilizationrate is based on our historical utilization rates experience with prescriptionvouchers.  The allowance for prescriptionvouchers could exceed historical experience and our estimates of futureutilization rates.  To date, actualprescription voucher utilization has not differed materially from ourestimates.

 

**Revenuesunder collaborative agreements**

 

Amounts receivedfor upfront product and technology license fees under multiple-elementarrangements are deferred and recognized over the period of such services orperformance if such arrangements require on-going services or performance.  Non-refundable amounts received for substantivemilestones are recognized upon achievement of the milestone and the expirationof stock conversion rights, if any, associated with such payments.  Amounts received for equalization ofdevelopment expenses are recognized in the period in which the related expensesare incurred.  Any amounts received priorto satisfying our revenue recognition criteria are recorded as deferred revenuein the accompanying consolidated balance sheets.

 

***Valuation of Stock-Based Compensation***

 

We account forstock-based compensation to employees in accordance with Financial AccountingStandards Board, or FASB, Statement of Financial Accounting Standards (SFAS) No. 123R,“*Share-Based Payment.” *SFAS No. 123R requires us toexpense the estimated fair value of non-cash, stock-based payments toemployees.

 

We estimate thefair value of stock-based payments to employees using the Black-Scholesmodel.  This estimate is affected by ourstock price as well as assumptions regarding a number of inputs that require usto make significant estimates and judgments. These inputs include the expected volatility of our stock price, theexpected term of employee stock options, the risk-free interest rate andexpected dividends.

 

We estimate volatilitybased upon the historical volatility of our common stock for a periodcorresponding to the expected term of our employee stock options and theimplied volatility of market-traded options on our common stock with variousmaturities between six months and two years, consistent with the guidance inSFAS No. 123R and the Security and Exchange Commission’s, or SEC’s, StaffAccounting Bulletin, or SAB, No. 107. Prior to the adoption of SFAS No. 123R, we estimated volatilitybased on the historical volatility of our common stock for a periodcorresponding to the expected term of our employee stock options.  The determination to use implied volatilityin addition to historical volatility was based upon the availability of datarelated to actively traded options on our common stock and our assessment thatthe addition of implied volatility is more representative of future stock pricetrends than historical volatility alone.

 

The expected life of ouremployee stock options represents the weighted-average period of time thatoptions granted are expected to be outstanding in consideration of historicalexercise patterns and the assumption that all outstanding options will beexercised at the mid-point of the then current date and their maximumcontractual term.

 

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The risk-free interestrates are based on the yield curve of United States Treasury strip securities in effect at the time of grantfor periods corresponding with the expected life of our employee stock options.  We have never paid dividends and do notanticipate doing so for the foreseeable future. Accordingly, we have assumed no dividend yield for purposes ofestimating the fair value of our stock-based payments to employees.

 

If factorsunderlying the above assumptions change in future periods, the associatedestimated non-cash, stock-based compensation expense that we record may differsignificantly from what we have recorded in the current period.

 

***Inventories and Related Reserves***

 

Inventories consist of raw materials, work-in-process and finished goodsfor SYMLIN and BYETTA.  We maintain inventory reserves primarilyfor production failures and potential product expiration.  The manufacturing processes for our productsare complex.  Deviations in the manufacturingprocess may result in production failures and additional inventoryreserves.  Obsolete inventory due toexpiration may also result in additional inventory reserves.  In estimating inventory obsolescencereserves, we analyze the shelf life, expiration dates and internal salesforecasts, each on a product-by-product basis.

 

##### ***Researchand Development Expenses***

#####  

Research and development costs are expensed as incurredand include: salaries, benefits, bonus, stock-based compensation, license fees,milestones under license agreements, costs paid to third-party contractors toperform research, conduct clinical trials, and develop drug materials anddelivery devices; and associated overhead expenses and facilities costs.  Clinical trial costs are a significantcomponent of research and development expenses and include costs associatedwith third-party contractors.  Invoicingfrom third-party contractors for services performed can lag several months.  We accrue the costs of services rendered inconnection with third-party contractor activities based on our estimate ofmanagement fees, site management and monitoring costs and data managementcosts.  Differences between actualclinical trial costs from estimated clinical trial costs have historically notbeen material and are adjusted for in the period in which they become known.

 

##### ***Income Taxes***

#####  

Wehave net deferred tax assets relating primarily to net operating loss carryforwards and research and development tax credits.  Subject to certain limitations, these deferredtax assets may be used to offset taxable income in future periods.  Since we have been unprofitable sinceinception and the likelihood of future profitability is not assured, we havereserved for most of these deferred tax assets in our consolidated balancesheets at December 31, 2007 and 2006, respectively.  If we determine that we are able to realize a portion or allof these deferred tax assets in the future, we will record an adjustment toincrease their recorded value and a corresponding adjustment to increase incomein that same period.

 

We adopted the provisionsof FIN 48 and FSP FIN 48-1 effective January 1, 2007.  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with SFAS No. 109, “Accounting for Income Taxes,” andprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  We had no cumulative effect adjustmentrelated to the adoption due to a full valuation allowance against deferred taxassets.  We provide estimates forunrecognized tax benefits.  Theseunrecognized tax benefits relate primarily to issues common among corporationsin our industry.  We apply a variety ofmethodologies in making these estimates which include advice from industry andsubject experts, evaluation of public actions taken by the Internal RevenueService and other taxing authorities, as well as our own industryexperience.  If our estimates are notrepresentative of actual outcomes, our results could be materially impacted.

 

##### ***Recently Issued Accounting Pronouncements***

#####  

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “*BusinessCombinations*” and SFAS No. 160, “*Noncontrolling Interests in Consolidated FinancialStatements, an amendment of Accounting Research Bulletin No. 51.*”  SFAS No. 141R will change howbusiness acquisitions are accounted for and will impact financial statementsboth on the acquisition date and in subsequent periods.  SFAS No. 160 will change theaccounting and reporting for minority interests, 

 

40

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which will be recharacterized as noncontrolling interests andclassified as a component of equity. SFAS No. 141R and SFAS No. 160are effective for us beginning in the first quarter of fiscal 2009.  Early adoption is not permitted.  We are currently evaluating the impact thatSFAS No. 141R and SFAS No. 160 will have on ourconsolidated financial statements.

 

In June 2007, theFASB ratified the Emerging Issues Task Force, or “EITF” consensus on EITF IssueNo. 07-3, “*Accounting for Nonrefundable AdvancePayments for Goods or Services Received for Use in Future Research andDevelopment Activities*.”  EITFIssue No. 07-3 requires that nonrefundable advance payments for goods orservices that will be used or rendered for future research and developmentactivities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods aredelivered or the related services are performed.  Entities should continue to evaluate whetherthey expect the goods to be delivered or services to be rendered.  If an entity does not expect the goods to bedelivered or services to be rendered, the capitalized advance payment should becharged to expense.  The adoption of EITF Issue No. 07-3is not expected to have a material effect on our consolidated financialstatements.

 

In February 2007,the FASB issued SFAS No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities.*”  SFAS No. 159 gives us the irrevocableoption to carry many financial assets and liabilities at fair values, withchanges in fair value recognized in earnings. SFAS No. 159 is effectivefor us beginning January 1, 2008. We are currently evaluating the impact, if any, that adoption of SFAS No. 159will have on our consolidated financial statements.

 

In September 2006,the FASB issued SFAS No. 157, “*Fair Value Measurements*,”which defines fair value, establishes guidelines for measuring fair value andexpands disclosures regarding fair value measurements.  SFAS No. 157 does not require anynew fair value measurements but rather eliminates inconsistencies in guidancefound in various prior accounting pronouncements.  SFAS No. 157 is effective forfiscal years beginning after November 15, 2007.  The adoption of SFAS No. 157 is notexpected to have a material effect on our consolidated financial statements.

 

**Resultsof Operations**

 

***Net Product Sales***

 

Net product sales for theyears ended December 31, 2007, 2006 and 2005 were $701.5 million, $474.0million and $86.7 million, respectively, and consisted of sales of BYETTA andSYMLIN, less allowances for product returns, rebates and wholesalerchargebacks, wholesaler discounts, and prescription vouchers.  The following table provides informationregarding net product sales (in millions):

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| BYETTA     |       | $                                          | 636.0      |   | $ | 430.2 |   | $ | 75.2 |   |
| SYMLIN     |       | 65.5                                       |       | 43.8 |   | 11.5 |   |
|       |       | $                                          | 701.5      |   | $ | 474.0 |   | $ | 86.7 |   |

 

The increases in netproduct sales for BYETTA and SYMLIN for the year ended December 31, 2007as compared to the same period in 2006 and for the year ended December 31,2006 as compared to the same period in 2005, primarily reflects continuedgrowth in patient use.

 

##### ***Revenues underCollaborative Agreements***

#####  

The following table summarizes the components ofrevenues under collaborative agreements for the years ended December 31,2007, 2006 and 2005 (in millions):

 
| ** **                         | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Amortization of  up-front payments |       | $                                          | 4.3        |   | $ | 4.3 |   | $ | 4.3 |   |
| Recognition of  milestone payments |       | 15.0                                       |       | — |   | 35.0 |   |
| Cost-sharing  payments             |       | 60.2                                       |       | 32.5 |   | 14.5 |   |
|                               |       | $                                          | 79.5       |   | $ | 36.8 |   | $ | 53.8 |   |

 

Substantially all of the revenue recorded in theseperiods consists of amounts earned pursuant to our BYETTA collaborationagreement with Lilly and consists primarily of the continued amortization of up-front payments,milestone payments and cost-sharing payments to equalize development expensesfor BYETTA and exenatide once weekly.

 

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The $42.7 million increasein revenues under collaborative agreements in 2007, as compared to 2006,primarily reflects increases in milestone and cost-sharing payments related toour collaboration agreement with Lilly. Milestone payments in 2007 consisted of the recognition of milestonesearned primarily associated with Lilly’s launch of BYETTA in the EU.  The increase in cost-sharing payments in2007, as compared to 2006 primarily reflects Lilly’s reimbursement to us ofincreased development expenses incurred by us for exenatide once weekly.

 

The $17.0 milliondecrease in revenues under collaborative agreements in 2006, as compared to2005, primarily reflects a reduction in milestone payments, partially offset byan increase in cost-sharing payments. Milestone payments in 2005 consisted of the recognition of $35 millionof milestones earned in connection with the regulatory approval and commerciallaunch of BYETTA in the United States. The increase in cost-sharing payments in 2006, as compared to 2005primarily reflects increased development expenses for exenatide once weekly.

 

Infuture periods, revenues under collaborative agreements will consist of ongoingcost-sharing payments from Lilly to equalize development costs, possible futuremilestone payments and the continued amortization of the up-front payment.

 

# ***Cost of Goods Sold***

#  

Cost of goods sold was$65.5 million, representing a gross margin of 91%, $50.1 million, representinga gross margin of 89%, and $14.8 million, representing a gross margin of 83%,for the years ended December 31, 2007, 2006 and 2005, respectively.   Costs of goods sold is comprised primarilyof manufacturing costs associated with BYETTA and SYMLIN sales during theperiod.  The improvement in gross marginin 2007 as compared to 2006 and in 2006 as compared to 2005 primarily reflectsa higher average net sales price per unit for BYETTA and lower unit costs forBYETTA resulting from higher production volumes.  Quarterly fluctuations in gross margins maybe influenced by product mix and the level of sales allowances.

 

***Selling, Generaland Administrative Expenses***

 

Selling, generaland administrative expenses were $391.0 million, $282.0 million and $171.5million in the years ended December 31, 2007, 2006 and 2005, respectively.

 

The $109.0 millionincrease in 2007 as compared to 2006 reflects the full annual effect of theexpansion of our sales force during the fourth quarter of 2006, increasedpromotional expenses for BYETTA and SYMLIN, increased business infrastructureto support our growth and an increase in stock-based compensation includingcosts associated with the adoption of our employee stock ownership plan, orESOP, and increased expense from stock options due to growth in our number ofemployees.

 

The $110.5 millionincrease in 2006 as compared to 2005 primarily reflects the full annual effectof the 2005 expansion of our commercial capabilities to support the launches ofBYETTA and SYMLIN, the continued expansion in 2006 of these capabilities,including the addition of approximately 150 individuals to our field force,increased marketing activities, including medical education, market researchand product sampling for BYETTA, growth in our business infrastructure and$29.0 million of stock-based compensation.

 

We, along withLilly, are jointly responsible for the co-promotion of BYETTA within the UnitedStates, and share equally in sales force costs and external marketingexpenses.  Accordingly, our selling,general and administrative expenses include our 50% share of these costs in theUnited States.

 

Selling general andadministrative expenses are expected to continue to increase in 2008 due tocontinued investment in promotional activities for BYETTA and SYMLIN,investment in prelaunch education activities for exenatide once-weekly, andincreases in business infrastructure to support our growth.

 

***Research and Development Expenses***

 

Currently, ourresearch and development efforts are focused on programs for the treatment ofdiabetes and obesity in various stages of development.  From inception through 1998, we devotedsubstantially all of our research and development efforts to SYMLIN.  Beginning in 1999, our research anddevelopment costs started to include costs for our other drug

 

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candidates,primarily BYETTA and exenatide once weekly. In 2004 we initiated our program for the treatment of obesity withpramlintide and in 2006 we commenced our INTO clinical research program forobesity.

 

The drugdevelopment process in the United States includes a series of steps defined bythe FDA.  The process begins withdiscovery and preclinical evaluation leading up to the submission of an IND tothe FDA, which allows for the initiation of the clinical evaluation of apotential drug candidate in humans. Clinical evaluation is typically comprised of three phases of study:Phase 1, Phase 2 and Phase 3. Generally, the majority of a drug candidate’stotal development costs are incurred during Phase 3, which consists of trialsthat are typically both the longest and largest conducted during the drugdevelopment process.  Successfulcompletion of Phase 3 clinical testing is followed by the submission of an NDAto the FDA for marketing approval.  It isnot uncommon for the FDA to request additional data following its review of anNDA, which can significantly increase the drug development timeline andexpenses.  Following initial regulatoryapproval for a drug candidate, companies generally initiate additional clinicaltrials aimed at expanding product labeling and market potential.

 

The timing and costs tocomplete the successful development of any of our drug candidates are highlyuncertain, and therefore difficult to estimate.

 

Our research anddevelopment expenses are comprised of salaries, benefits, bonus, stock-basedcompensation; license fees, and milestones under license agreements; costs paidto third-party contractors to perform research, conduct clinical trials, anddevelop drug materials and delivery devices; and associated overhead expenses andfacilities costs.  We chargedirect internal and external program costs to the respective developmentprograms.  We also incur indirect coststhat are not allocated to specific programs because such costs benefit multipledevelopment programs and allow us to increase our overall pharmaceuticaldevelopment capabilities.  These consistprimarily of facilities costs and other internally-shared resources related tothe development and maintenance of systems and processes applicable to all ofour programs.

 

The followingtable sets forth information regarding our research and development expensesfor our major projects for the years ended December 31, 2007, 2006 and2005 (in millions):

 
| ** **                         | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Diabetes (1)                       |       | $                                          | 151.8      |   | $ | 104.5 |   | $ | 62.5 |   |
| Obesity                            |       | 44.8                                       |       | 43.9 |   | 17.7 |   |
| Research and  early-stage programs |       | 41.9                                       |       | 40.8 |   | 27.6 |   |
| Indirect costs                     |       | 38.1                                       |       | 32.9 |   | 24.3 |   |
|                               |       | $                                          | 276.6      |   | $ | 222.1 |   | $ | 132.1 |   |

 

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(1)  Research and development expenses consistprimarily of costs associated with Byetta and exenatide once weekly which are shared by Lilly pursuant to ourcollaboration agreement.  Cost-sharingpayments received by Lilly are included in revenues under collaborativeagreements.  Increased expenditures forour diabetes development programs are generally partially offset by an increasein cost-sharing payments from Lilly. Cost-sharing payments were $60.2 million, $32.5 million and $14.5million for the years ended December 31, 2007, 2006 and 2005, respectively

 

Research anddevelopment expenses increased to $276.6 million for the year ended December 31,2007 from $222.1 million for the year ended December 31, 2006.  The $54.5 million increase in 2007 ascompared to 2006 primarily reflects increased expenses associated with ourdiabetes programs.  The increase inexpenses for our diabetes programs primarily reflects increased expenses forexenatide once weekly associated with manufacturing scale-up at third-partymanufacturers and our manufacturing facility in Ohio and expenses associatedwith the recently completed comparator study discussed above.

 

Research anddevelopment expenses increased to $222.1 million for the year ended December 31,2006 from $132.1 million for the year ended December 31, 2005.  The $90.0 million increase in 2006 ascompared to 2005 primarily reflects increased expenses associated with ourdiabetes, obesity, research and early-stage programs, and indirect costs.  The increase in expenses for our diabetesprograms primarily reflects costs associated with the development of exenatideonce weekly, including the recently completed comparator study discussed aboveand manufacturing scale-up for exenatide once weekly; and label expansionactivities for BYETTA, including costs associated with the recently completed monotherapystudy discussed above.  The increase inexpenses for our obesity programs primarily reflects costs associated with ouracquisition of the rights to leptin from Amgen in early 2006.  The increase in research and early-stageprograms primarily reflects costs associated with an increase in discoveryresearch activities.  The increase inindirect costs primarily reflects increased facilities costs to support growthin our research and development activities.

 

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Research and developmentexpenses are expected to continue to increase in 2008 due to increases in thelevel of our spending on our exenatide franchise, including exenatide onceweekly, and investment in our obesity programs.

 

***Collaborative Profit-Sharing***

 

Collaborativeprofit-sharing was $290.9 million, $194.2 million and $31.4 million for theyears ended December 31, 2007, 2006 and 2005, respectively, and consistsof Lilly’s 50% share of the gross margin for BYETTA sales in the United States.

 

***Make-whole Payment on Debt Redemption***

 

In July 2006, wecalled for the redemption on August 24, 2006 of all our outstandingconvertible senior notes due June 2008, or the 2003 Notes, under aprovisional redemption based upon the market price of our common stockexceeding certain thresholds.  Allholders elected to convert their 2003 Notes into shares of our commonstock.  In connection with theconversion, we issued approximately 5.6 million shares, including 180,005shares as a make-whole payment, representing $112.94 per $1,000 principalamount of the 2003 Notes converted less interest actually paid.  In connection with this make-whole payment,we recorded a non-cash, non-operating charge of $7.9 million during the thirdquarter of 2006.

 

##### ***Interest and Other Income and Expense***

#####  

Interest and otherincome consists primarily of interest income from investment of cash andinvestments.  Interest and other incomewas $47.0 million in 2007, $34.9 million in 2006 and $13.2 million in 2005.  The increase in 2007 compared to 2006primarily reflects higher average investment balances due to net proceeds of$558.7 million from our 2007 Notes issued in June 2007.  The increase in 2006 primarily reflectshigher average cash balances available for investment and higher interest ratesin 2006 as compared to 2005.

 

Interestand other expense consists primarily of interest expense resulting fromlong-term debt obligations and includes interest payments and the amortizationof debt issuance costs.  Interest andother expense was $15.1 million in 2007, $8.5 million in 2006 and $10.7 millionin 2005.  The increase in 2007compared to 2006 primarily reflects an increase in additional interest expensefor our 2007 Notes issued in June 2007. The decrease in 2006 compared to2005 reflects lower interest expense following the August 2006 redemptionof our 2003 Notes.

 

##### ***Net Loss***

#####  

Ournet loss for the year ended December 31, 2007 was $211.1 million comparedto $218.9 million in 2006 and $206.8 million in 2005.  The decrease inour net loss in 2007 compared to 2006 primarily reflects increased net productsales and revenues under collaborative agreements, partially offset byincreased selling, general, and administrative expenses, increased research anddevelopment expenses and increased collaborative profit-sharing discussedabove.  The increase in our net loss in2006, compared to 2005 primarily reflects the increased costs and expenses anddecreased revenues under collaborative agreements, partially offset by theincreases in net product sales and interest and other income discussed above.

 

We may incur operatinglosses for the next few years.  Ourability to reach profitability in the future will be heavily dependent upon theproduct sales that we achieve for BYETTA and SYMLIN.  In addition, ongoing and potential increasedexpenses associated with the commercialization of BYETTA and SYMLIN, andexpenses associated with the continuation and potential expansion of ourresearch and development programs, and related support infrastructure mayimpact our ability to reach profitability in the future.  Our operating results may fluctuate fromquarter to quarter as a result of differences in the timing of expensesincurred and revenues recognized.

 

# **Liquidity and Capital Resources**

#  

Since our inception, wehave financed our operations primarily through public sales and privateplacements of our common and preferred stock, debt financings, paymentsreceived pursuant to our BYETTA collaboration with Lilly, reimbursement ofSYMLIN development expenses through earlier collaboration agreements, and sincethe second quarter of 2005, through product sales of BYETTA and SYMLIN.

 

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At December 31, 2007, we had $1,130.4 million in cash, cashequivalents and short-term investments, compared to $767.3 million at December 31,2006.

 

Weused cash of $125.2 million, $126.0 million and $182.0 million for ouroperating activities in the years ended December 31, 2007, 2006 and 2005,respectively.  Our cash used for operatingactivities in 2007 included uses of cash due to increases in accountsreceivable and inventories of $15.5 million and $40.9 million,respectively.  The increase in accountsreceivable reflects growth in our net product sales and the increase in inventoriesreflects increased inventory purchases to support this growth.  Our cash used for operating activities in2007 included sources of cash for increases in our current liabilities,including an increase of $28.1 million in accounts payable and accruedliabilities, an increase of $17.2 million in accrued compensation, and anincrease of $13.8 million in payable to collaborative partner.  The increase in accounts payable and accruedliabilities primarily reflects growth in our expenses generally, and accountspayable timing differences.  The increasein accrued compensation primarily reflects an accrual of $17.2 million for the2007 contribution to the ESOP.  Theincrease in payable to collaborative partner, which represents Lilly’s 50%share of BYETTA gross margins in the United States, reflects increased netproduct sales for BYETTA and an improvement in gross margins.

 

Ourinvesting activities used cash of $296.1 million, $425.9 million and $169.0million in the years ended December 31, 2007, 2006 and 2005,respectively.  Investing activities inall three years consisted primarily of purchases and sales of short-terminvestments and purchases of property, plant and equipment.  Purchases of property, plant and equipmentincreased to $268.7 million in 2007, from $97.9 million in 2006 and $29.6million in 2005.  The increase in 2007primarily reflects costs associated with our manufacturing facility forexenatide once weekly and, to a lesser extent, purchases of tenantimprovements, computer software, office equipment and scientific equipment tosupport our growth.  We expect that our capital expenditures willcontinue to increase in 2008 due primarily to costs associated with ongoingconstruction of our manufacturing facility for exenatide once weekly.  We expect to complete thecommercial-scale manufacturing process in the second half of 2008, at a totalcost of approximately $500 million, including costs associated with theconstruction of the facility, purchase and installation of equipment andcapitalized labor and materials required to validate the facility.  Through December 31, 2007, we hadexpended approximately $262 million associated with the construction of thisfacility.  The full expansion of thisproject is dependent upon on the continued progress of exenatide once weeklythrough the development process.  In addition, we anticipate continued investmentsin tenant improvements, office equipment and scientific equipment.  The $18.3 million increase in otherlong-term assets primarily reflects our investments in Psylin, BioSeek andXenome.

 

Financingactivities provided cash of $776.9 million, $546.5 million and $362.5 millionin the years ended December 31, 2007, 2006 and 2005, respectively.  Financing activities in 2007 included$558.7 million in net proceeds from our issuance of $575 million in aggregateprincipal amount of our 2007 Notes, the exercise of stock options and proceedsfrom our employee stock purchase plan and proceeds of $30.0 million for a contingent share-settled obligation to Lilly.  The contingent share-settled obligation toLilly relates to the $30.0 million ofmilestones received by us in December 2007 for which Lilly is entitled toand elected to convert into shares of our common stock in February 2008.  Financing activities also included $123.5million of net proceeds related to a term loan provided by the credit agreemententered into in December 2007.

 

At December 31,2007, we had $200 million in aggregate principal amount of our 2.5% convertiblesenior notes due in 2011, or the 2004 Notes, and $575 million of the 2007 Notesoutstanding.  The 2004 Notes arecurrently convertible into a total of up to 5.8 million shares of our commonstock at approximately $34.35 per share and are not redeemable at ouroption.  The 2007 Notes are currentlyconvertible into a total of up to 9.4 million shares of our common stock atapproximately $61.07 per share and are not redeemable at our option.

 

In December 2007, we****entered into a $140 million credit agreement.  The credit agreement provides for a $125million term loan and a $15 million revolving credit facility.  Therevolving credit facility also provides for the issuance of letters of creditand foreign exchange hedging up to the $15 million borrowing limit.  The term loan is repayable on a quarterlybasis, with no payments due quarters one through four, 6.25% of the outstandingprincipal due quarters five through eleven, and 56.25% of the outstandingprincipal due in quarter twelve.  At December 31,2007 we had an outstanding balance of $125 million under the term loan and hadissued $5.2 million of letters of credit under the revolving creditfacility.  Both loans have a finalmaturity date of December 21, 2010. Interest on the term loan is payable quarterly in arrears at a rateequal to 1.75% above the London Interbank Offered Rate, or LIBOR, of eitherone, two, three, or six months LIBOR term at our election.  We have entered into an interest rate swapagreement which resulted in a fixed interest rate of 5.717% under the termloan.  The interest rate on the creditfacility is either LIBOR plus 1.0% or the Bank of America prime rate, at ourelection.

 

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Thefollowing table summarizes our contractual obligations and maturity dates as ofDecember 31, 2007 (in thousands).

 
| ** **                                                       | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                       | ** ** | ** **                                | ** ** | **Less** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contractual**                                                  | ** ** | ** **                                | ** ** | **than 1** | ** ** | ** ** | ** ** | **4-5** | ** ** | **After 5** | ** ** |
| **Obligations**                                                  | ** ** | **Total**                                 | ** ** | **year** | ** ** | **2-3 years** | ** ** | **years** | ** ** | **years** | ** ** |
| Long-term convertible debt                                       |       | $                                         | 775,000    |   | $ | — |   | $ | — |   | $ | 200,000 |   | $ | 575,000 |   |
| Interest on long-term convertible debt                           |       | 129,625                                   |       | 22,250 |   | 44,500 |   | 37,000 |   | 25,875 |   |
| Long-term note payable                                           |       | 125,000                                   |       | — |   | 125,000 |   | — |   | — |   |
| Interest on long-term note payable, net of swap transactions (1) |       | 18,312                                    |       | 7,146 |   | 11,166 |   | — |   | — |   |
| Inventory purchase  obligations  (2)                             |       | 156,647                                   |       | 94,294 |   | 58,723 |   | 3,630 |   | — |   |
| Operating leases                                                 |       | 125,804                                   |       | 17,625 |   | 29,124 |   | 28,728 |   | 50,327 |   |
| Total (3)                                                        |       | $                                         | 1,330,388  |   | $ | 141,315 |   | $ | 268,513 |   | $ | 269,358 |   | $ | 651,202 |   |

 

----

(1)    The interest payments shown were calculatedusing a rate of 5.717%, the net rate from the term loan and interest rate swap,on the outstanding principal balance of the term loan.

 

(2)    Includes $100.5 million of outstandingpurchase orders, cancelable by us upon 30 days’ written notice, subject toreimbursement of costs incurred through the date of cancellation.

 

(3)    Excludes long-termobligation of $8.6 million related to deferred compensation, the payment ofwhich is subject to elections made by participants that are subject to change.

 

In addition, under certainlicense and collaboration agreements we are required to pay royalties and/ormilestone payments upon the successful development and commercialization ofrelated products.  We expect to makedevelopment milestone payments up to $9 million associated with licensingagreements in the next 12 months. Additional milestones of up to approximately $280 million could be paidover the next ten to fifteen years if development and commercialization of allour early stage programs continue and are successful.  The significant majority of these milestonesrelate to potential future regulatory approvals and subsequent salesthresholds.  Given the inherent risk inpharmaceutical development, it is highly unlikely that we will ultimately makeall of these milestone payments; however, we would consider these payments aspositive because they would signify that the related products are movingsuccessfully through development and commercialization.

 

Ourfuture capital requirements will depend on many factors, including: the amountof product sales we achieve for BYETTA and SYMLIN; costs associated with thecommercialization of BYETTA and SYMLIN; costs associated with the construction of ourexenatide once weekly manufacturing facility; costs of potential licenses oracquisitions; the potential need to repay existing indebtedness; costs associated with an increase in ourinfrastructure; our ability to receive or need to make milestone payments; ourability, and the extent to which we establish collaborative arrangements forSYMLIN or any of our product candidates; progress in our research anddevelopment programs and the magnitude of these programs; costs involved in preparing,filing, prosecuting, maintaining, enforcing or defending our patents; competingtechnological and market developments; and costs of manufacturing, includingcosts associated with establishing our own manufacturing capabilities orobtaining and validating additional manufacturers of our products; and scale-upcosts for our drug candidates.

 

**Item 7A. *Quantitative and Qualitative Disclosures About Market Risk***

 

Weinvest our excess cash primarily in United States Government securities,securities of agencies sponsored by the United States Government, asset-backedsecurities, mortgage-backed securities and debt instruments of financialinstitutions and corporations with strong credit ratings.  These instruments have various short-termmaturities, and therefore the risk of loss due to interest rate risk isconsidered to be low.  We do not investin auction rate securities.  We mitigatecertain financial exposures, including currency risk and interest rate risk,through a controlled program of risk management that includes the use ofderivative financial instruments, however we do not utilize such instruments inany material fashion.  Accordingly, webelieve that, while the instruments held are subject to changes in thefinancial standing of the issuer of such securities, we are not subject to anymaterial risks arising from changes in interest rates, foreign currencyexchange rates, commodity prices, equity prices or other market changes thataffect market risk sensitive investments. Our debt is not subject to significant swings in valuation as interestrates on a majority of our debt are fixed. The fair value of our 2004 Notes and 2007 Notes at December 31,2007 was approximately $250 million and $549 million, respectively.  Ahypothetical 1% adverse move in interest rates along the entire interest rateyield curve would not materially affect the fair value of our financialinstruments that are exposed to changes in interest rates.

 

46

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**Item 8. *Financial Statements and Supplementary Data***

 

Thefinancial statements and supplemental data required by this item are set forthat the pages indicated in Part IV, Item 15(a)(1) of this annualreport.

 

**Item 9. *Changes In and Disagreements with Accountants on Accounting andFinancial Disclosure***

 

None.

 

**Item 9A. *Controls and Procedures***

 

**Conclusion Regarding the Effectiveness of Disclosure Controlsand Procedures**

 

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended, or the ExchangeAct.  Based on this evaluation, ourprincipal executive officer and our principal financial officer concluded thatour disclosure controls and procedures were effective as of December 31,2007.

 

Our management does notexpect that our disclosure controls and procedures or our internal controlsover financial reporting will prevent all potential error and fraud.  A control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the control system are met.  Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, or misstatements due toerror, if any, within the Company have been detected.  While we believe that our disclosure controlsand procedures and internal control over financial reporting are and have been effective,we intend to continue to examine and refine our disclosure controls andprocedures and internal control over financial reporting and to monitor ongoingdevelopments in these areas.

 

**Management’s Report on Internal Control Over FinancialReporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and15d-15(f).  Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of theeffectiveness of our internal control over financial reporting based on theframework in *Internal Control - IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission.  Based on ourevaluation under the framework in *InternalControl — Integrated Framework*, our management concluded that ourinternal control over financial reporting was effective as of December 31,2007.  The effectiveness of our internalcontrol over financial reporting as of December 31, 2007 has been auditedby Ernst & Young LLP, an independent registered public accountingfirm, as stated in their report which is included herein.

 

**Changes in Internal Control OverFinancial Reporting**

 

There has been no changein our internal control over financial reporting in our most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

47

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**Report of Independent Registered Public AccountingFirm on Internal Control Over Financial Reporting**

** **

**TheBoard of Directors and Stockholders of**Amylin Pharmaceuticals, Inc.

** **

We have audited Amylin Pharmaceuticals, Inc.’sinternal control over financial reporting as of December 31, 2007, basedon criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). AmylinPharmaceuticals, Inc.’s management is responsible for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control Over Financial Reporting.Our responsibility is to express an opinion on the company’s internal controlover financial reporting based on our audit.

 

We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors ofthe company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, AmylinPharmaceuticals, Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2007, basedon****the COSO criteria**.**

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the accompanying consolidated balance sheets of AmylinPharmaceuticals, Inc. as of December 31, 2007 and 2006, and therelated consolidated statements of operations, stockholders’ equity (deficit),and cash flows for each of the three years in the period ended December 31,2007 of Amylin Pharmaceuticals, Inc. and our report dated February 22,2008 expressed an unqualified opinionthereon.

 

 
|   | /s/  Ernst & Young LLP |
|--------|---------------------------------|
|   |
|   | San Diego, California           |
|   | February 22, 2008          |
|        |                                 |  |

 

 

48

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**Item 9B. *Other Information***

 

                None.

 

**PART III**

 

**Item 10. *Directors, Executive Officers and Corporate Governance***

 

Theinformation required by this item with respect to executive officers anddirectors is incorporated by reference from the information under the captions “Electionof Directors,” “Section 16(a) Beneficial Ownership ReportingCompliance,” and “Code of Business Conduct and Ethics” contained in the proxystatement to be filed with the SEC pursuant to Regulation 14A in connectionwith our 2008 annual meeting of stockholders.

 

**Item 11. *Executive Compensation***

 

Theinformation required by this item is incorporated by reference to theinformation under the captions “Compensation of Directors,” “ExecutiveCompensation,” “Report of the Compensation Committee of the Board of Directorson Executive Compensation,” and “Compensation Committee Interlocks and InsiderParticipation” contained in the proxy statement to be filed with the SECpursuant to Regulation 14A in connection with our 2008 annual meeting ofstockholders.

 

**Item 12. *Security Ownership of Certain Beneficial Owners and Management andRelated Shareholder Matters***

 

The information requiredby this item is incorporated by reference to the information under the captions“Security Ownership of Certain Beneficial Owners and Management” and “EquityCompensation Plan Information” contained in the proxy statement to be filedwith the SEC pursuant to Regulation 14A in connection with our 2008 annualmeeting of stockholders.

 

**Item 13. *Certain Relationships and Related Transactions, and DirectorIndependence***

 

Theinformation required by this item is incorporated by reference to theinformation under the captions “Election of Directors” and “CertainTransactions” contained in the proxy statement to be filed with the SECpursuant to Regulation 14A in connection with our 2008 annual meeting ofstockholders.

 

**Item 14.*Principal Accountant Fees and Services***

 

Theinformation required by this item is incorporated by reference to theinformation under the caption contained in “Ratification of Selection of IndependentAuditors” contained in the proxystatement to be filed with the SEC pursuant to Regulation 14A in connectionwith our 2008 annual meeting of stockholders.

 

49

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**PART IV**

** **

**Item 15. *Exhibits and Financial Statement Schedules***

 

(a)(1) **Index to Consolidated Financial Statements**

 

Thefinancial statements required by this item are submitted in a separatesection beginning on page F-1****of this annualreport.

 

(a)(2) **Financial Statement Schedules:** The following Schedule isfiled as part of this annual report on Form 10-K:

 
|        | ** **              | **Page Number** |
|--------|-------------------------|----------------------|
|   | II.  Valuation Accounts | F-28                 |

 

Allother schedules have been omitted because they are not applicable or required,or the information required to be set forth therein is included in theConsolidated Financial Statements or notes thereto.

 

(a)(3) **Index to Exhibits** — See Item 15(b) below.

 

(b)     **Exhibits**

 
| **Exhibit  Footnote** | ** ** | **Exhibit  Number** | ** ** | ** ** |
|-----------------------|------------|---------------------|------------|------------|
| (1)                   |       |                | 3.1        |       | Amended and Restated Certificate of Incorporation of  the Registrant. |
| (5)                   |       |                | 3.2        |       | Third Amended and Restated Bylaws of the Registrant. |
| (11)                  |       |                | 3.3        |       | Certificate of Amendment of Amended and Restated  Certificate of Incorporation of the Registrant. |
| (31)                  |       |                | 3.4        |       | Certificate of Amendment of Amended and Restated  Certificate of Incorporation of the Registrant. |
|                  |       |                | 4.1        |       | Reference is made to Exhibits 3.1 - 3.4. |
| (15)(2)               |       |                | 4.2        |       | Registration Rights Agreement dated  September 19, 2002, between the Registrant and Eli Lilly and Company. |
| (14)                  |       |                | 4.3        |       | Rights Agreement dated June 17, 2002, between  the Registrant and American Stock Transfer & Trust Company. |
| (14)                  |       |                | 4.4        |       | Certificate of Designation of Series A Junior  Participating Preferred Stock. |
| (20)                  |       |                | 4.5        |       | First Amendment to Rights Agreement dated  December 13, 2002, between the Registrant and American Stock  Transfer & Trust Company. |
| (8)                   |       |                | 4.6        |       | Indenture, dated as of April 6, 2004, between  Registrant and J.P. Morgan Trust Company, National Association (as Trustee). |
| (8)                   |       |                | 4.7        |       | Form of 2.50% Convertible Senior Note due 2011. |
| (30)                  |       |                | 4.8        |       | Indenture, dated as of June 8, 2007, between  Registrant and The Bank of New York Trust Company, N.A. (as Trustee). |
| (30)                  |       |                | 4.9        |       | Registration Rights Agreement, dated as of  June 8, 2007, among Registrant, Goldman Sachs & Co. and Morgan  Stanley & Co. Incorporated. |
| (1)                   |       |                | 10.1       |       | Form of Indemnity Agreement entered into  between the Registrant and its directors and officers.† |
| (12)                  |       |                | 10.2       |       | Registrant’s 1991 Stock Option Plan, as amended.† |
| (4)                   |       |                | 10.3       |       | Form of Incentive Stock Option Agreement under  the 1991 Stock Option Plan.† |
| (1)                   |       |                | 10.4       |       | Form of Supplemental Stock Option Agreement under  the 1991 Stock Option Plan.† |
| (1)                   |       |                | 10.5       |       | Form of Supplemental Stock Option Agreement not  granted under the 1991 Stock Option Plan with related schedule.† |
| (29)                  |       |                | 10.6       |       | Registrant’s Amended and Restated 2001Employee Stock  Purchase Plan.† |
| (16)                  |       |                | 10.7       |       | Registrant’s Non-Employee Directors’ Stock Option  Plan (the “Directors’ Plan”).† |
| (3)                   |       |                | 10.8       |       | Phantom Stock Unit Agreement, dated January 4,  1995, between the Registrant and Farview Management Co., L.P.† |
| (6)(2)                |       |                | 10.9       |       | Patent and Technology License Agreement, Consulting  Agreement and Nonstatutory Stock Option Agreement dated October 1, 1996,  between the Registrant and Dr. John Eng. |
| (7)                   |       |                | 10.10      |       | Registrant’s Directors’ Deferred Compensation Plan.† |
| (17)                  |       |                | 10.11      |       | Registrant’s Directors’ Plan Stock Option Agreement,  as amended. † |
| (9)                   |       |                | 10.12      |       | Special Form of Incentive Stock Option  Agreement the 1991 Stock Option Plan of the Registrant.† |
| (10)                  |       |                | 10.13      |       | Stock Option Agreement dated March 25, 1998,  between the Registrant and Joseph C. Cook, Jr.† |
| (13)(2)               |       |                | 10.14      |       | Development and License Agreement dated May 15,  2000, between the Registrant and Alkermes Controlled Therapeutics  II, Inc. |
| (31)                  |       |                | 10.15      |       | Registrant’s Amended and Restated Officer Change in  Control Severance Benefit Plan.† |
| (26)                  |       |                | 10.16      |       | Registrant’s Amended and Restated 2001 Equity  Incentive Plan.† |
| (15)(2)               |       |                | 10.17      |       | Collaboration Agreement dated September 19,  2002, between the Registrant and Eli Lilly and Company. |
| (15)(2)               |       |                | 10.18      |       | U.S. Co-Promotion Agreement dated September 19,  2002, between the Registrant and Eli Lilly and Company. |

 

50

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| (15)    |   |   | 10.19 |   | Milestone Conversion Agreement dated  September 19, 2002, between the Registrant and Eli Lilly and Company.                                                            |
|---------|--------|--------|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (18)(2) |   |   | 10.20 |   | Device Development and Manufacturing Agreement dated  July 1, 2003, between Registrant and Eli Lilly and Company.                                                      |
| (17)    |   |   | 10.21 |   | Form of Registrant’s 2001 Equity Incentive Plan  Officer Stock Option Agreement, as amended. †                                                               |
| (17)    |   |   | 10.22 |   | Form of Registrant’s 2001 Equity Incentive Plan  Stock Option Agreement, as amended. †                                                                       |
| (19)(2) |   |   | 10.23 |   | Manufacturing Agreement dated May 12, 2003,  between Registrant and UCB S.A.                                                                                           |
| (21)(2) |   |   | 10.24 |   | Exenatide Manufacturing Agreement dated  October 21, 2003, between Registrant and Mallinckrodt Inc.                                                                    |
| (21)(2) |   |   | 10.25 |   | Commercial Supply Agreement for Exenatide dated  December 23, 2003, between Registrant and Bachem, Inc.                                                           |
| (22)(2) |   |   | 10.26 |   | Commercial Supply Agreement dated February 14,  2005 between Registrant and Baxter Pharmaceutical Solutions LLC.                                                       |
| (22)(2) |   |   | 10.27 |   | Commercial Supply Agreement dated October 7,  2004 between Registrant and CP Pharmaceuticals Ltd.                                                                      |
| (22)(2) |   |   | 10.28 |   | Commercial Supply Agreement dated March 2, 2005  between Registrant and Baxter Pharmaceutical Solutions LLC.                                                           |
|    |   |   | 10.29 |   | Summary Description of Registrant’s Named Executive  Officer Oral At-Will Employment Agreements. †                                                                |
| (23)    |   |   | 10.30 |   | Description of Registrant’s Executive Cash Bonus  Plan. †                                                                                                         |
| (25)(2) |   |   | 10.31 |   | Amendment to Development and License Agreement dated  October 24, 2005, between Registrant and Alkermes Controlled  Therapeutics II.                                   |
| (24)(2) |   |   | 10.32 |   | Commercial Supply Agreement dated June 28,  2005, between Registrant and Bachem, Inc.                                                                             |
| (27)(2) |   |   | 10.33 |   | Commercial Supply Agreement dated October 12,  2006 between Registrant and Wockhardt UK (Holdings) Ltd.                                                                |
| (27)(2) |   |   | 10.34 |   | Amendment to Collaboration Agreement dated  October 31, 2006 between Registrant and Eli Lilly and Company.                                                             |
| (28)    |   |   | 10.35 |   | Employment Agreement, dated March 7, 2007, by  and between Registrant and Daniel M. Bradbury. †                                                                   |
|    |   |   | 10.36 |   | Registrant’s 2001 Non-Qualified Deferred  Compensation Plan. †                                                                                                    |
|    |   |   | 10.37 |   | Credit Agreement, dated as of December 21,  2007, among Registrant, The Bank of America, N.A. (as Administrative Agent)  and the other lenders set forth therein.      |
|    |   |   | 21.1  |   | Subsidiaries of Registrant.                                                                                                                                                 |
|    |   |   | 23.1  |   | Consent of Independent Registered Public Accounting  Firm.                                                                                                                  |
|    |   |   | 24.1  |   | Power of Attorney. Reference is made to page 55.                                                                                                                       |
|    |   |   | 31.1  |   | Certification of Principal Financial Officer  pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities  Exchange Act of 1934, as amended.        |
|    |   |   | 31.2  |   | Certification of Principal Executive Officer  pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the  Securities Exchange Act of 1934, as amended.        |
|    |   |   | 32.1  |   | Certifications Pursuant to U.S.C. Section 1350,  As Adopted Pursuant to Section 906 of the Public Company Accounting  Reform and Investor Protection Act of 2002. |

 

----

| † | Indicates management or  compensatory plan or arrangement required to be identified pursuant to Item  15(c).                                                                            |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *      | Confidential treatment has  been requested with respect to certain portions of this exhibit. Omitted  portions have been filed separately with the Securities and Exchange  Commission. |

 
| (1)    | Filed  as an exhibit to the Registrant’s Registration Statement on Form S-1  (No. 33-44195) or amendments thereto and incorporated herein by  reference. |   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                                    |   |
| (2)    | Confidential  Treatment has been granted by the  Securities and Exchange Commission with respect to portions of this  agreement.                                        |   |
|   |                                                                                                                                                                    |   |
| (3)    | Filed  as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31,  1994.                                        |   |
|   |                                                                                                                                                                    |   |
| (4)    | Filed  as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31,  1995.                                        |   |

 

51

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| (5)    |   | Filed  as an exhibit on Form 8-K dated October 31, 2007, and incorporated  herein by reference.                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                |
| (6)    |   | Filed as an exhibit to  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 1996.                                                    |
|   |   |                                                                                                                                                                                |
| (7)    |   | Filed as an exhibit to  the Registrant’s Registration Statement on Form S-8 (No. 333-61660)  or amendments thereto and incorporated herein by reference.             |
|   |   |                                                                                                                                                                                |
| (8)    |   | Filed as an exhibit to  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2004.                                                        |
|   |   |                                                                                                                                                                                |
| (9)    |   | Filed as an exhibit to  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  March 1, 1998, and incorporated herein by reference.                   |
|   |   |                                                                                                                                                                                |
| (10)   |   | Filed as an exhibit to  the Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 1998.                                                    |
|   |   |                                                                                                                                                                                |
| (11)   |   | Filed as an exhibit to  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2001.                                                    |
|   |   |                                                                                                                                                                                |
| (12)   |   | Filed as an exhibit to  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 1999.                                                    |
|   |   |                                                                                                                                                                                |
| (13)   |   | Filed as an exhibit to  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2000.                                                         |
|   |   |                                                                                                                                                                                |
| (14)   |   | Filed as an exhibit on  Form 8-K dated June 17, 2002, and incorporated herein by reference.                                                                               |
|   |   |                                                                                                                                                                                |
| (15)   |   | Filed as an exhibit on  Form 8-K dated October 3, 2002, and incorporated herein by  reference.                                                                            |
|   |   |                                                                                                                                                                                |
| (16)   |   | Filed as an exhibit to  Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2001.                                                        |
|   |   |                                                                                                                                                                                |
| (17)   |   | Filed as an exhibit to  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003, and incorporated herein by reference .                 |
|   |   |                                                                                                                                                                                |
| (18)   |   | Filed as an exhibit to  Amendment 1 to Registrant’s Quarterly Report on Form 10-Q/A for the  quarter ended June 30, 2003, and incorporated herein by reference .     |
|   |   |                                                                                                                                                                                |
| (19)   |   | Filed as an exhibit to  Amendment 1 to Registrant’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2003, and incorporated herein by reference.   |
|   |   |                                                                                                                                                                                |
| (20)   |   | Filed as an exhibit to  Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2002, and incorporated herein by reference.                  |
|   |   |                                                                                                                                                                                |
| (21)   |   | Filed as an exhibit to  Amendment 1 to Registrant’s Annual Report on Form 10-K/A for the fiscal  year ended December 31, 2003, and incorporated herein by reference. |
|   |   |                                                                                                                                                                                |
| (22)   |   | Filed as an exhibit to Registrant’s  Annual Report on Form 10-K for the fiscal year ended December 31,  2004, and incorporated herein by reference.                  |
|   |   |                                                                                                                                                                                |
| (23)   |   | Filed on Form 8-K  dated December 7, 2007, and incorporated herein by reference.                                                                                          |
|   |   |                                                                                                                                                                                |
| (24)   |   | Filed as an exhibit to  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2005, and incorporated herein by reference.                       |
|   |   |                                                                                                                                                                                |
| (25)   |   | Filed as an exhibit to  Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2005, and incorporated herein by reference.                  |
|   |   |                                                                                                                                                                                |
| (26)   |   | Filed as an exhibit on  Form 8-K dated May 22, 2006 and incorporated herein by reference.                                                                                 |
|   |   |                                                                                                                                                                                |
| (27)   |   | Filed as an exhibit to  Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2006, and incorporated herein by reference.                  |

 

52

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| (28)   |   | Filed as an exhibit to  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2007, and incorporated herein by reference. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |
| (29)   |   | Filed as an exhibit on  Form 8-K dated May 29, 2007, and incorporated herein by reference.                                                           |
|   |   |                                                                                                                                                           |
| (30)   |   | Filed as an exhibit on  Form 8-K dated June 8, 2007, and incorporated herein by reference.                                                           |
|   |   |                                                                                                                                                           |
| (31)   |   | Filed as an exhibit on  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2007, and incorporated herein by reference.  |

 

53

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** **

**SIGNATURES**

** **

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
|     |                   |     | AMYLIN PHARMACEUTICALS, INC.             |
|----------|------------------------|----------|------------------------------------------|
|     |                   |     |                                     |
|     |                   |     |                                     |
| Date:    | February 27, 2008 |     |                                     |
|     |                   |     |                                     |
|     |                   | * * | By:                                      | *                         /s/ *DANIEL  M. BRADBURY |
|     |                   |     | Daniel M.  Bradbury,                     |
| * * | * *               |     | *President  and Chief Executive Officer* |

 

54

----

 

**POWER OF ATTORNEY**

 

KNOW ALL PERSONS BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Daniel M. Bradbury and Mark G. Foletta, and each of them, as his orher true and lawful attorneys-in-fact and agents, with full power ofsubstitution and resubstitution, for him or her and in his or her name, place,and stead, in any and all capacities, to sign any and all amendments to thisReport, and any other documents in connection therewith, and to file the same,with all exhibits thereto, with the Securities and Exchange Commission,granting unto said attorneys-in-fact and agents, and each of them, full powerand authority to do and perform each and every act and thing requisite andnecessary to be done in connection therewith, as fully to all intents and purposesas he or she might or could do in person, hereby ratifying and confirming allthat said attorneys-in-fact and agents, or any of them or their or hissubstitute or substituted, may lawfully do or cause to be done by virtuehereof.

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this Report has been signed below bythe following persons on behalf of the Registrant and in the capacities and onthe dates indicated.

 
| **Signatures**                      | ** ** | **Title**                                                   | ** ** | **Date**               |
|-------------------------------------|------------|-------------------------------------------------------------|------------|------------------------|
|                                |       |                                                        |       |                   |
| /s/ DANIEL M. BRADBURY              |       | President and Chief Executive  Officer                      |       | February 27, 2008 |
| Daniel M. Bradbury                  |       | *(Principal Executive Officer)*                             |       |                   |
|                                |       |                                                        |       |                   |
| /s/**MARK G. FOLETTA                |       | Senior Vice President, Finance and  Chief Financial Officer |       | February 27, 2008 |
| Mark G. Foletta                     |       | *(Principal Financial and Accounting Officer)*              |       |                   |
|                                |       |                                                        |       |                   |
| /s/ JOSEPH C. COOK, JR.             |       | Chairman of the Board                                       |       | February 27, 2008 |
| Joseph C. Cook, Jr.            |       |                                                        |       |                   |
|                                |       |                                                        |       |                   |
| /s/ ADRIAN ADAMS                    |       | Director                                                    |       | February 27, 2008 |
| Adrian Adams                        |       |                                                        |       |                   |
|                                |       |                                                        |       |                   |
| /s/ STEVEN R. ALTMAN                |       | Director                                                    |       | February 27, 2008 |
| Steven R. Altman                    |       |                                                        |       |                   |
|                                |       |                                                        |       |                   |
| /s/ TERESA BECK                     |       | Director                                                    |       | February 27, 2008 |
| Teresa Beck                         |       |                                                        |       |                   |
|                                |       |                                                        |       |                   |
| /s/ KARIN EASTHAM                   |       | Director                                                    |       | February 27, 2008 |
| Karin Eastham                       |       |                                                        |       |                   |
|                                |       |                                                        |       |                   |
| /s/ JAMES R. GAVIN III, M.D.,  PHD. |       | Director                                                    |       | February 27, 2008 |
| James R. Gavin III, M.D., Ph.D.     |       |                                                        |       |                   |
|                                |       |                                                        |       |                   |
| /s/ GINGER L. GRAHAM                |       | Director                                                    |       | February 27, 2008 |
| Ginger L. Graham                    |       |                                                        |       |                   |
|                                |       |                                                        |       |                   |
| /s/ HOWARD E. GREENE, JR.           |       | Director                                                    |       | February 27, 2008 |
| Howard E. Greene, Jr.          |       |                                                        |       |                   |

 

55

----

 
| /s/ JAY S. SKYLER, M.D.   |   | Director |   | February 27, 2008 |
|---------------------------|--------|----------|--------|------------------------|
| Jay S. Skyler, M.D., MACP |   |     |   |                   |
|                      |   |     |   |                   |
| /s/ JOSEPH P. SULLIVAN    |   | Director |   | February 27, 2008 |
| Joseph P. Sullivan        |   |     |   |                   |
|                      |   |     |   |                   |
| /s/ JAMES N. WILSON       |   | Director |   | February 27, 2008 |
| James N. Wilson           |   |     |   |                   |

 

56

----

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| **Report  of Independent Registered Public Accounting Firm**                                                                  | **F-2**  |
|-------------------------------------------------------------------------------------------------------------------------------|----------|
| **Consolidated Balance Sheets as of December 31,  2007 and 2006**                                                        | **F-3**  |
| **Consolidated Statements of Operations for the years  ended December 31, 2007, 2006 and 2005**                          | **F-4**  |
| **Consolidated Statements of Stockholders’ Equity  (Deficit) for the years ended December 31, 2007, 2006 and 2005** | **F-5**  |
| **Consolidated Statements of Cash Flows for the years  ended December 31, 2007, 2006 and 2005**                          | **F-6**  |
| **Notes to Consolidated Financial Statements**                                                                                | **F-7**  |
| **Schedule II Valuation Accounts**                                                                                            | **F-28** |

 

F-1

----

 

**Reportof Independent Registered Public Accounting Firm**

 

The Boardof Directors and Stockholders of Amylin Pharmaceuticals, Inc.

 

We haveaudited the accompanying consolidated balance sheets of Amylin Pharmaceuticals, Inc.as of December 31, 2007 and 2006, and the related consolidated statementsof operations, stockholders’ equity (deficit), and cash flows for each of thethree years in the period ended December 31, 2007. Our audits alsoincluded the financial statement schedule listed in the Index at Item 15(a)(2).These financial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and schedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of AmylinPharmaceuticals, Inc., at December 31, 2007 and 2006, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2007, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the relatedfinancial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

 

Asdiscussed in Note 1 to the consolidated financial statements, effective January 1,2006, Amylin Pharmaceuticals, Inc., changed its method of accounting forshare-based payments in accordance with Statement of Financial AccountingStandards No. 123R, *Share-Based Payment*.

 

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), Amylin Pharmaceuticals, Inc’s internal controlover financial reporting as of December 31, 2007, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated February 22,2008 expressed an unqualified opinion thereon.

 

 
|                   | /S/  ERNST & YOUNG LLP |
|------------------------|---------------------------------|
|                   |                            |
| San  Diego, California |                            |
| February 22, 2008 |                            |

 

F-2

----

 

**AMYLIN PHARMACEUTICALS, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except per share data)**

 
| ** **                                                                                                                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                                                                                                                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                           |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                 |       | $                     | 422,232    |   | $ | 66,640 |   |
| Short-term investments                                                                                                                    |       | 708,183               |       | 700,691 |   |
| Accounts receivable, net                                                                                                                  |       | 73,579                |       | 58,089 |   |
| Inventories, net                                                                                                                          |       | 100,214               |       | 59,299 |   |
| Other current assets                                                                                                                      |       | 32,100                |       | 22,098 |   |
| Total current assets                                                                                                                      |       | 1,336,308             |       | 906,817 |   |
|                                                                                                                                      |       |                  |       |   |   |
| Property, plant and equipment, net                                                                                                        |       | 390,301               |       | 146,779 |   |
| Other long-term assets, net                                                                                                               |       | 28,082                |       | 2,870 |   |
| Debt issuance costs, net                                                                                                                  |       | 19,520                |       | 3,920 |   |
|                                                                                                                                      |       | $                     | 1,774,211  |   | $ | 1,060,386 |   |
| ** **                                                                                                                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                            | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current  liabilities:                                                                                                                     |       |                  |       |   |   |
| Accounts payable                                                                                                                          |       | $                     | 37,530     |   | $ | 36,834 |   |
| Accrued compensation                                                                                                                      |       | 56,428                |       | 39,251 |   |
| Payable to collaborative partner                                                                                                          |       | 66,116                |       | 52,338 |   |
| Other current liabilities                                                                                                                 |       | 122,924               |       | 71,178 |   |
| Current portion of deferred revenue                                                                                                       |       | 4,286                 |       | 4,286 |   |
| Total current liabilities                                                                                                                 |       | 287,284               |       | 203,887 |   |
|                                                                                                                                      |       |                  |       |   |   |
| Deferred revenue, net of current portion                                                                                                  |       | 3,086                 |       | 7,372 |   |
|                                                                                                                                      |       |                  |       |   |   |
| Other long-term obligations, net of current portion                                                                                       |       | 31,023                |       | 13,836 |   |
|                                                                                                                                      |       |                  |       |   |   |
| Long-term note payable                                                                                                                    |       | 125,000               |       | — |   |
|                                                                                                                                      |       |                  |       |   |   |
| Convertible senior notes                                                                                                                  |       | 775,000               |       | 200,000 |   |
|                                                                                                                                      |       |                  |       |   |   |
| Commitments and contingencies (Note 5)                                                                                                    |       |                  |       |   |   |
|                                                                                                                                      |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                |       |                  |       |   |   |
| Preferred stock, $.001 par value, 7,500 shares authorized, none issued  and  outstanding at December 31, 2007 and 2006               |       | —                |       | — |   |
| Common stock, $.001 par value, 200,000 shares authorized, 135,044 and  130,458  issued and outstanding at December 31, 2007 and 2006 |       | 135                   |       | 130 |   |
| Additional paid-in capital                                                                                                                |       | 1,987,453             |       | 1,857,194 |   |
| Accumulated deficit                                                                                                                       |       | (1,434,320            | )          | (1,223,184 | ) |
| Accumulated other comprehensive (loss) income                                                                                             |       | (450                  | )          | 1,151 |   |
| Total stockholders’ equity                                                                                                           |       | 552,818               |       | 635,291 |   |
|                                                                                                                                      |       | $                     | 1,774,211  |   | $ | 1,060,386 |   |

 

See accompanying notes to consolidated financial statements.

 

F-3

----

 

**AMYLIN PHARMACEUTICALS, INC.**

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(in thousands, except per share data)**

 
| ** **                                                      | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                            |       |                                       |       |   |   |   |   |
| Revenues:                                                       |       |                                       |       |   |   |   |   |
| Net product sales                                               |       | $                                          | 701,450    |   | $ | 474,038 |   | $ | 86,713 |   |
| Revenues under collaborative agreements                         |       | 79,547                                     |       | 36,837 |   | 53,761 |   |
| Total revenues                                                  |       | 780,997                                    |       | 510,875 |   | 140,474 |   |
|                                                            |       |                                       |       |   |   |   |   |
| Costs and expenses:                                             |       |                                       |       |   |   |   |   |
| Cost of goods sold                                              |       | 65,457                                     |       | 50,073 |   | 14,784 |   |
| Selling, general and administrative                             |       | 390,982                                    |       | 281,950 |   | 171,520 |   |
| Research and development                                        |       | 276,600                                    |       | 222,053 |   | 132,128 |   |
| Collaborative profit-sharing                                    |       | 290,934                                    |       | 194,191 |   | 31,359 |   |
| Total costs and expenses                                        |       | 1,023,973                                  |       | 748,267 |   | 349,791 |   |
|                                                            |       |                                       |       |   |   |   |   |
| Operating loss                                                  |       | (242,976                                   | )          | (237,392 | ) | (209,317 | ) |
|                                                            |       |                                       |       |   |   |   |   |
| Make-whole payment on debt redemption                           |       | —                                     |       | (7,875 | ) | — |   |
| Interest and other income                                       |       | 46,969                                     |       | 34,903 |   | 13,214 |   |
| Interest and other expense                                      |       | (15,129                                    | )          | (8,492 | ) | (10,729 | ) |
| Net loss                                                        |       | $                                          | (211,136   | ) | $ | (218,856 | ) | $ | (206,832 | ) |
|                                                            |       |                                       |       |   |   |   |   |
| Net loss per share — basic and diluted                     |       | $                                          | (1.59      | ) | $ | (1.78 | ) | $ | (1.96 | ) |
|                                                            |       |                                       |       |   |   |   |   |
| Shares used in  computing net loss per share, basic and diluted |       | 132,621                                    |       | 122,647 |   | 105,532 |   |

 

See accompanying notes to consolidated financial statements.

 

F-4

----

 

**AMYLINPHARMACEUTICALS, INC.**

 

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY (DEFICIT)**

**For the years ended December 31, 2007, 2006 and 2005**

**(in thousands)**

 
| ** **                                                         | ** ** | **Common stock** | ** ** | **Additional** | ** ** | **Accumulated**          | ** ** | **Deferred** | ** ** | **Accumulated  other  comprehensive** | ** ** | **Total  stockholders’  equity** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------------------|------------|--------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                         | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **paid-in capital** | ** ** | **deficit**  | ** ** | **compensation**                      | ** ** | **(loss) income**                | ** ** | **(deficit)** | ** ** |
| Balance at December 31, 2004                                  |       | 94,489                |       | $              | 94         |                     | $          | 710,457      |       | $                                     | (797,496   | )                                     | $          | (162 | ) | $ | (263 | ) | $ | (87,370 | ) |
| Comprehensive loss:                                                |       |                  |       |           |       |                     |       |         |       |                                  |       |                                  |       |   |   |
| Net loss                                                           |       | —                |       | —         |       | —                   |       | (206,832     | )          | —                                |       | —                                |       | (206,832 | ) |
| Unrealized loss on available-for-sale securities                   |       | —                |       | —         |       | —                   |       | —       |       | —                                |       | (204                                  | )          | (204 | ) |
| Comprehensive loss                                                 |       |                  |       |           |       |                     |       |         |       |                                  |       |                                  |       | (207,036 | ) |
| Issuance of common stock upon exercise of options, net             |       | 1,548                 |       | 2              |       | 15,977                   |       | —       |       | —                                |       | —                                |       | 15,979 |   |
| Issuance of common stock for other employee benefit plans          |       | 226                   |       | —         |       | 4,135                    |       | —       |       | —                                |       | —                                |       | 4,135 |   |
| Stock-based compensation                                           |       | —                |       | —         |       | 433                      |       | —       |       | —                                |       | —                                |       | 433 |   |
| Issuance of common stock in public offering, net                   |       | 14,268                |       | 15             |       | 342,357                  |       | —       |       | —                                |       | —                                |       | 342,372 |   |
| Deferred compensation related to stock options                     |       | —                |       | —         |       | 589                      |       | —       |       | 162                                   |       | —                                |       | 751 |   |
| Balance at December 31, 2005                                  |       | 110,531               |       | 111            |       | 1,073,948                |       | (1,004,328   | )          | —                                |       | (467                                  | )          | 69,264 |   |
| Comprehensive loss:                                                |       |                  |       |           |       |                     |       |         |       |                                  |       |                                  |       |   |   |
| Net loss                                                           |       | —                |       | —         |       | —                   |       | (218,856     | )          | —                                |       | —                                |       | (218,856 | ) |
| Unrealized gain on available-for-sale securities                   |       | —                |       | —         |       | —                   |       | —       |       | —                                |       | 1,618                                 |       | 1,618 |   |
| Comprehensive loss                                                 |       |                  |       |           |       |                     |       |         |       |                                  |       |                                  |       | (217,238 | ) |
| Issuance of common stock upon exercise of options, net             |       | 2,405                 |       | 2              |       | 31,635                   |       | —       |       | —                                |       | —                                |       | 31,637 |   |
| Issuance of common stock for other employee benefit plans          |       | 457                   |       | —         |       | 10,296                   |       | —       |       | —                                |       | —                                |       | 10,296 |   |
| Employee stock-based compensation                                  |       | —                |       | —         |       | 51,485                   |       | —       |       | —                                |       | —                                |       | 51,485 |   |
| Issuance of common stock for restricted stock awards               |       | 8                     |       | —         |       | 353                      |       | —       |       | —                                |       | —                                |       | 353 |   |
| Conversion of convertible senior notes, net of debt issuance costs |       | 5,377                 |       | 5              |       | 172,972                  |       | —       |       | —                                |       | —                                |       | 172,977 |   |
| Issuance of common stock for make-whole payment                    |       | 180                   |       | —         |       | 7,875                    |       | —       |       | —                                |       | —                                |       | 7,875 |   |
| Issuance of common stock in public offering, net                   |       | 11,500                |       | 12             |       | 507,518                  |       | —       |       | —                                |       | —                                |       | 507,530 |   |
| Non-employee stock-based compensation                              |       | —                |       | —         |       | 1,112                    |       | —       |       | —                                |       | —                                |       | 1,112 |   |
| Balance at December 31, 2006                                  |       | 130,458               |       | 130            |       | 1,857,194                |       | (1,223,184   | )          | —                                |       | 1,151                                 |       | 635,291 |   |
| Comprehensive loss:                                                |       |                  |       |           |       |                     |       |         |       |                                  |       |                                  |       |   |   |
| Net loss                                                           |       | —                |       | —         |       | —                   |       | (211,136     | )          | —                                |       | —                                |       | (211,136 | ) |
| Unrealized loss on available-for-sale securities                   |       | —                |       | —         |       | —                   |       | —       |       | —                                |       | (1,601                                | )          | (1,601 | ) |
| Comprehensive loss                                                 |       |                  |       |           |       |                     |       |         |       |                                  |       |                                  |       | (212,737 | ) |
| Issuance of common stock upon exercise of options, net             |       | 2,547                 |       | 3              |       | 37,396                   |       | —       |       | —                                |       | —                                |       | 37,399 |   |
| Issuance of common stock upon exercise of warrants                 |       | 1,604                 |       | 2              |       | 18,370                   |       | —       |       | —                                |       | —                                |       | 18,372 |   |
| Issuance of common stock for other employee benefit plans          |       | 435                   |       | —         |       | 14,735                   |       | —       |       | —                                |       | —                                |       | 14,735 |   |
| Employee stock-based compensation                                  |       | —                |       | —         |       | 59,064                   |       | —       |       | —                                |       | —                                |       | 59,064 |   |
| Non-employee stock-based compensation                              |       | —                |       | —         |       | 694                      |       | —       |       | —                                |       | —                                |       | 694 |   |
| Balance at December 31, 2007                                  |       | 135,044               |       | $              | 135        |                     | $          | 1,987,453    |       | $                                     | (1,434,320 | )                                     | $          | — |   | $ | (450 | ) | $ | 552,818 |   |

 

See accompanying notes to consolidated financial statements.

 

F-5

----

 

**AMYLINPHARMACEUTICALS, INC.**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

 
| ** **                                                                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating activities:**                                                                                          |       |                                        |       |   |   |   |   |
| Net loss                                                                                                           |       | $                                           | (211,136   | ) | $ | (218,856 | ) | $ | (206,832 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:                                       |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                                                      |       | 21,563                                      |       | 16,228 |   | 10,487 |   |
| Employee stock-based compensation                                                                                  |       | 59,064                                      |       | 51,838 |   | — |   |
| Make-whole payment on debt redemption                                                                              |       | —                                      |       | 7,875 |   | — |   |
| Other non-cash expenses                                                                                            |       | 8,847                                       |       | 4,058 |   | 1,535 |   |
| Changes in operating assets and liabilities:                                                                       |       |                                        |       |   |   |   |   |
| Accounts receivable, net                                                                                           |       | (15,490                                     | )          | (32,389 | ) | (25,700 | ) |
| Inventories, net                                                                                                   |       | (40,915                                     | )          | (32,549 | ) | (11,074 | ) |
| Other current assets                                                                                               |       | (10,016                                     | )          | (3,995 | ) | (2,837 | ) |
| Accounts payable and accrued liabilities                                                                           |       | 28,101                                      |       | 38,293 |   | 27,146 |   |
| Accrued compensation                                                                                               |       | 17,177                                      |       | 10,129 |   | 15,616 |   |
| Payable to collaborative partner                                                                                   |       | 13,778                                      |       | 35,660 |   | 13,887 |   |
| Deferred revenue                                                                                                   |       | (4,286                                      | )          | (4,286 | ) | (9,285 | ) |
| Other assets and liabilities, net                                                                                  |       | 8,153                                       |       | 1,987 |   | 5,075 |   |
| Net cash used in operating activities                                                                              |       | (125,160                                    | )          | (126,007 | ) | (181,982 | ) |
|                                                                                                               |       |                                        |       |   |   |   |   |
| **Investing activities:**                                                                                          |       |                                        |       |   |   |   |   |
| Purchases of short-term investments                                                                                |       | (392,155                                    | )          | (714,772 | ) | (491,927 | ) |
| Sales and maturities of short-term investments                                                                     |       | 383,076                                     |       | 386,840 |   | 353,415 |   |
| Purchases of property, plant and equipment, net                                                                    |       | (268,674                                    | )          | (97,925 | ) | (29,639 | ) |
| Increase in other long-term assets                                                                                 |       | (18,348                                     | )          | (33 | ) | (897 | ) |
| Net cash used in investing activities                                                                              |       | (296,101                                    | )          | (425,890 | ) | (169,048 | ) |
|                                                                                                               |       |                                        |       |   |   |   |   |
| **Financing activities:**                                                                                          |       |                                        |       |   |   |   |   |
| Proceeds from issuance of common stock, net                                                                        |       | 64,687                                      |       | 546,511 |   | 362,486 |   |
| Proceeds from issuance of convertible debt, net                                                                    |       | 558,670                                     |       | — |   | — |   |
| Proceeds from  long-term note payable                                                                              |       | 123,496                                     |       | — |   | — |   |
| Proceeds from contingent share settled obligation (Note 4)                                                         |       | 30,000                                      |       | — |   | — |   |
| Principal  payments on capital leases                                                                              |       | —                                      |       | — |   | (13 | ) |
| Net cash provided by financing activities                                                                          |       | 776,853                                     |       | 546,511 |   | 362,473 |   |
|                                                                                                               |       |                                        |       |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                                                                   |       | 355,592                                     |       | (5,386 | ) | 11,443 |   |
| Cash and cash equivalents at beginning of year                                                                     |       | 66,640                                      |       | 72,026 |   | 60,583 |   |
| Cash and cash equivalents at end of year                                                                           |       | $                                           | 422,232    |   | $ | 66,640 |   | $ | 72,026 |   |
|                                                                                                               |       |                                        |       |   |   |   |   |
| **Supplemental disclosures of cash flow information:**                                                             |       |                                        |       |   |   |   |   |
| Interest paid, net of interest capitalized                                                                         |       | $                                           | 9,477      |   | $ | 6,409 |   | $ | 8,398 |   |
| Interest capitalized                                                                                               |       | $                                           | 4,483      |   | $ | 560 |   | $ | — |   |
| Property, plant and equipment additions in other current liabilities at  year end                                  |       | $                                           | 15,559     |   | $ | 21,219 |   | $ | — |   |
| Common stock issued upon conversion of senior convertible notes                                                    |       | $                                           | —     |   | $ | 175,000 |   | $ | — |   |
| Reclassification of debt issuance costs to additional paid-in capital  upon conversion of convertible senior notes |       | $                                           | —     |   | $ | 1,980 |   | $ | — |   |

 

See accompanying notes to consolidated financial statements.

 

F-6

----

 

**AMYLINPHARMACEUTICALS, INC.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.****             ****Summary ofSignificant Accounting Policies**

 

## ***Organization***

##  

AmylinPharmaceuticals, Inc., referred to as the Company or Amylin, wasincorporated in Delaware on September 29, 1987.  Amylin is a biopharmaceutical company engagedin the discovery, development and commercialization of drug candidates for thetreatment of diabetes, obesity and other diseases.

 

## ***Principles of Consolidation***

##  

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries, Amylin Europe Limited, Amylin Puerto Rico, LLC, Amylin Ohio, LLC,and Amylin Investments, LLC.  Allsignificant intercompany transactions and balances have been eliminated inconsolidation.

 

***Use of Estimates***

 

The preparation ofthe consolidated financial statements in conformity with U.S. generallyaccepted accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

# ***Revenue Recognition***

#  

***Net Product Sales***

 

TheCompany sells BYETTA® (exenatide) injection and SYMLIN®(pramlintide acetate) injection primarily to wholesale distributors in theUnited States, who, in turn, sell primarily to retail pharmacies, pharmacybenefit managers, and government entities. Product sales are recognized when delivery of the products has occurred, title haspassed to the customer, the selling price is fixed or determinable,collectability is reasonably assured and the Company has no furtherobligations.  The Company recordsallowances for product returns, rebates and wholesaler chargebacks, wholesalerdiscounts, and prescription vouchers at the time of sale and reports productsales net of such allowances.  TheCompany must make significant judgments in determining some of theseallowances.  If actual results differfrom the Company’s estimates, the Company will be required to make adjustmentsto these allowances in the future.

 

The Company reports all BYETTA and SYMLIN productsales made in the United States.  Withrespect to BYETTA, the Company has determined that it is qualified as aprincipal under the criteria set forth in Emerging Issues Task Force (EITF)Issue 99-19, *“Reporting Gross Revenue as aPrincipal vs. Net as an Agent,”* based on the Company’sresponsibilities under its contracts with Eli Lilly and Company, or Lilly,which include manufacture of product for sale in the United States,responsibility for establishing pricing in the United States, distribution,ownership of product inventory and credit risk from customers, and accordingly,the Company reports all United States products sales of BYETTA.

 

***Revenues Under Collaborative Agreements***

 

Amounts received forupfront product and technology license fees under multiple-element arrangementsare deferred and recognized over the period of such services or performance ifsuch arrangements require on-going services or performance.  Non-refundable amounts received forsubstantive milestones are recognized upon achievement of the milestone, andthe expiration of stock conversion rights, if any, associated with suchpayments.  Amounts received forequalization of development expenses are recognized in the period in which therelated expenses are incurred.  Anyamounts received prior to satisfying these revenue recognition criteria will berecorded as deferred revenue.

 

F-7

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##  

## ***Collaborative Profit-Sharing***

##  

Collaborativeprofit-sharing represents Lilly’s 50% share of the gross margin for Byettasales in the United States.

 

***Shippingand Handling Costs***

 

Shipping and handling costs incurred for productshipments are included in cost of goods sold in the accompanying consolidatedstatements of operations.

 

## ***Research and Development Expenses***

##  

## Research and development costs are expensed asincurred and include salaries, benefits, bonus,stock-based compensation, license fees, milestones under license agreements,costs paid to third-party contractors to perform research, conduct clinicaltrials, and develop drug materials and delivery devices; and associatedoverhead expenses and facilities costs.  Clinical trial costs, including costs associated with third-partycontractors, are a significant component of research and development expenses.Invoicing from third-party contractors for services performed can lag severalmonths.  The Company accrues the costs ofservices rendered in connection with such activities based on its estimate ofmanagement fees, site management and monitoring costs, and data managementcosts.  Actual clinical trial costs maydiffer from estimates and are adjusted in the period in which they becomeknown.  Payments made under certainlicense and collaboration agreements for milestones achieved are recorded as aliability when the obligation is incurred.

##  

## ***Concentrations of Risk***

##  

The Company relies onthird-party manufacturers for the production of its products and drugcandidates.  If the Company’s third-partymanufacturers are unable to continue manufacturing its products and/or drugcandidates, or if the Company loses one of its sole source suppliers used inits manufacturing processes, the Company may not be able to meet market demandfor its products and could be materially and adversely affected.

 

Lilly provides fundingfor 50% of the development and commercialization expenses for BYETTA andexenatide once weekly in the United States pursuant to a global development andcommercialization agreement between the parties.  Lilly co-promotes the product with theCompany in the United States and manufactures pen devices for theadministration of BYETTA.  If Lilly isunable to perform these activities the Company may be unable to meet marketdemand for its products and could be materially and adversely affected.

 

The Company isalso subject to credit risk from its accounts receivable related to productsales.  The Company sells its products inthe United States primarily to wholesale distributors.  The top four of the Company’s customersrepresented approximately 94% of net product sales in 2007 and 94% of theaccounts receivable balance at December 31, 2007.  The Company evaluates the credit worthinessof its customers and generally does not require collateral.  The Company has not experienced any materiallosses on uncollectible accounts receivable to date.

 

Net product sales for theyears ended December 31, 2007, 2006 and 2005 were $701.5 million, $474.0million and $86.7 million, respectively, and consisted of sales of BYETTA andSYMLIN, less allowances for product returns, rebates and wholesalerchargebacks, wholesaler discounts, and prescription vouchers.

 

The following table providesinformation regarding net product sales by product (in millions):

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| BYETTA     |       | $                                          | 636.0      |   | $ | 430.2 |   | $ | 75.2 |   |
| SYMLIN     |       | 65.5                                       |       | 43.8 |   | 11.5 |   |
|       |       | $                                          | 701.5      |   | $ | 474.0 |   | $ | 86.7 |   |

 

Two of the Company’swholesaler customers each accounted for more than 10% of total revenues for theyear ended December 31, 2007, two of the Company’s wholesaler customerseach accounted for more than 10% of total revenues for the year ended December 31,2006 and three of the Company’s wholesaler customers each accounted for morethan 10% of total revenues for the year ended December 31, 2005.  The following table summarizes the percent ofthe Company’s total

 

F-8

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revenues that were attributed to each of these three wholesalercustomers (as a % of total revenues):

 
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| AmerisourceBergen Corporation |       | *                                          |       | * |   | 11 | % |
| McKesson  Corporation         |       | 37                                         | %          | 36 | % | 23 | % |
| Cardinal  Health, Inc.   |       | 32                                         | %          | 34 | % | 23 | % |

 

----

** Less than 10%*

 

# TheCompany invests its excess cash in U.S. Government securities, securities ofagencies sponsored by the U.S. Government, asset-backed securities,mortgage-backed securities, and debt instruments of financial institutions andcorporations with strong credit ratings. The Company has established guidelines relative to diversification andmaturities that maintain safety and liquidity. The primary goal of these guidelines is to safeguard principal and theyare periodically reviewed.  Theseguidelines prohibit investments in auction rate securities.  Financial instruments that potentiallysubject the Company to significant credit risk consist principally of cashequivalents and short-term investments.

#  

# ***Cash and Cash Equivalents***

#  

TheCompany considers instruments with a maturity date of less than 90 days fromthe date of purchase to be cash equivalents. Cash and cash equivalents include certificates of deposits underlyingletters of credit and cash collateral for derivative financial instruments of$3.5 million and $3.3 million at December 31, 2007 and 2006, respectively.

 

***Short-Term Investments***

 

Short-term investmentsconsist principally of U.S. Government securities, securities of agenciessponsored by the U.S. Government, asset-backed securities, mortgage-backedsecurities and debt instruments of financial institutions and corporations withstrong credit ratings.  The Company’s investments in mortgage-backedsecurities consist primarily of securities insured or guaranteed by agenciessponsored by the U.S. government.  The Company has classified its debtsecurities as available-for-sale and they are stated at fair value based uponthe most recently traded price of each security at the balance sheet date, andunrealized holding gains or losses on these securities are carried as aseparate component of stockholders’ equity (deficit).  The amortized cost of debt securities in thiscategory is adjusted for amortization of premiums and accretion of discounts tomaturity.  For investments in mortgage-backed securities, amortization ofpremiums and accretion of discounts are recognized in interest income using theinterest method, adjusted for anticipated prepayments as applicable. Estimates of expected cash flows are updated periodically and changes arerecognized in the calculated effective yield prospectively asappropriate.   Such amortization is included in interest income.Realized gains and losses and declines in value judged to beother-than-temporary (of which there have been none to date) onavailable-for-sale securities are included in interest income.  Inassessing potential impairment of its short-term investments, the Companyevaluates the impact of interest rates, potential prepayments onmortgage-backed securities, changes in credit quality, the length of time andextent to which the market value has been less than cost, and the Company’sintent and ability to retain the security in order to allow for an anticipatedrecovery in fair value.  The cost ofsecurities sold is based on the specific-identification method.

 

***AccountsReceivable***

 

Trade accounts receivableare recorded net of allowances for cash discounts for prompt payment, doubtfulaccounts, product returns and chargebacks of $12.8 million and $6.6 million at December 31,2007 and 2006, respectively.  Allowancesfor rebate discounts and distribution fees are included in other currentliabilities in the accompanying consolidated balance sheets.  Estimates for allowances for doubtfulaccounts are determined based on existing contractual obligations, historicalpayment patterns and individual customer circumstances.  The allowance for doubtful accounts was $0.2million at both December 31, 2007 and 2006.

 

***Inventories, net***

 

Inventoriesare stated at the lower of cost (FIFO) or market, net of valuation allowancesfor potential excess and/or obsolete material of $5.3 million and $0.4 millionat December 31, 2007 and 2006, respectively.  Raw materials consists of 

 

F-9

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bulk drug material, work-in-process primarily consistsof in-process SymlinPen(TM) pen injector devices, in-process SYMLIN vials,in-process BYETTA cartridges, and finished goods consists of finishedSymlinPen(TM) pen injector devices, finished SYMLIN drug product in vials andBYETTA drug product in a disposable pen/cartridge delivery system.

 

***Property, plant and Equipment***

 

Property, plant and equipment, consisting primarily ofconstruction in process, leasehold improvements, computer software, officeequipment and furniture, laboratory equipment, production equipment, land, andbuilding and are recorded at cost. Depreciation of equipment and software is computed using thestraight-line method, over three to fifteen years. Leasehold improvements areamortized on a straight-line basis over the shorter of the estimated usefullives of the assets or the remaining term of the lease.  Depreciation of buildings is computed usingthe straight-line method, over fifteen or thirty years.  Construction in progress includes costsassociated with the Company’s manufacturing facility for exenatide onceweekly.  The Company recordeddepreciation expense of $19.0 million, $14.3 million, and $8.3 million in theyears ended December 31, 2007, 2006 and 2005, respectively.

 

The Companyrecords impairment losses on property, plant and equipment used in operationswhen events and circumstances indicate that assets might be impaired and theundiscounted cash flows estimated to be generated by those assets are less thanthe carrying amount of those assets.  TheCompany also records the assets to be disposed of at the lower of theircarrying amount or fair value less cost to sell.  While the Company’s current and historicaloperating and cash flow losses are indicators of impairment, the Companybelieves the future cash flows to be received support the carrying value of itslong-lived assets and accordingly, the Company has not recognized anyimpairment losses as of December 31, 2007.

 

FDAvalidation costs, which to date relate to the Company’s manufacturing facilityfor exenatide once weekly, are capitalized as part of the effort required toacquire and construct long-lived assets, including readying them for theirinitial intended use, and are amortized over the estimated useful life of theasset.

 

***Computer Software Costs for Internal Use***

 

TheCompany records the costs of computer software for internal use in accordancewith AICPA Statement of Position (SOP) 98-1, *“Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use.”*  SOP 98-1 requires that certain internal-usecomputer software costs be capitalized. Capitalized costs are amortized on a straight-line basis over theestimated useful life of software, generally three years and included indepreciation expense.

 

***Investments in Unconsolidated Entities***

 

The Company uses the equity method of accounting forinvestments in other companies that are not controlled by the Company and inwhich the Company’s interest is generally between 20% and 50% of the votingshares or the Company has significant influence over the entity, or both.  The Company’s share of the income or lossesof these entities are included in interest and other expense or interest andother income, and the investments which have a net book value of $15.7 millionat December 31, 2007 are included in other long-term assets.  The Company recorded $1.8 million for itsshare of equity method investee losses during the year ended December 31,2007.  The Company did not have anyequity method investments at December 31, 2006.

 

***Patents***

 

TheCompany has filed a number of patent applications with the United States Patentand Trademark Office and in foreign countries. Certain legal and related costs incurred in connection with pendingpatent applications have been capitalized. Costs related to successful patent applications are amortized over thelesser of the remaining useful life of the related technology or the remainingpatent life, commencing on the date the patent is issued.  Gross capitalized patent costs wereapproximately $4.9 million and $4.1 million at December 31, 2007 and 2006,respectively.  Accumulated amortizationwas approximately $2.2 million and $1.9 million at December 31, 2007 and2006, respectively.  Patents areclassified as other long-term assets in the accompanying consolidated balancesheets.  The Company recorded patentamortization expense of $0.3 million in each of the years ended December 31,2007, 2006 and 2005.  Capitalized costsrelated to patent applications are expensed as a selling general andadministrative expense in the period during which a determination not to pursuesuch applications is made.  Such expenseswere not material in the years ended December 31, 2007, 2006 and 2005,respectively.

 

F-10

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***Net Loss Per Share***

 

Basic and diluted net loss applicable to common stockper share is computed using the weighted average number of common sharesoutstanding during the period.  Commonstock equivalents from stock options and warrants of approximately 6.8****million, 8.0 million and 4.3 million were excluded from thecalculation of net loss per share for the years ended December 31, 2007,2006 and 2005, respectively, because the effect would be antidilutive.  In addition, common stock equivalents from shares underlying theCompany’s convertible senior notes of 11.1 million, 5.8 million, and 11.2 million were excluded from the netloss per share for the years ended December 31,2007, 2006 and 2005, respectively, because the effect would beantidilutive.  In future periods, if theCompany reports net income and the common share equivalents for the Company’sconvertible senior notes are dilutive, the common stock equivalents will beincluded in the weighted average shares computation and interest expenserelated to the notes will be added back to net income to calculate dilutedearnings per share.

 

***Foreign Currency Translation***

 

Assets and liabilities of foreign operations where thefunctional currency is other than the U.S. dollar are translated at fiscalyear-end rates of exchange, and the related revenue and expense amounts aretranslated at the average rates of exchange during the fiscal year.  Gains and losses resulting from translatingforeign currency financial statements resulted in an immaterial impact to theCompany’s financial statements for the years ended December 31, 2007, 2006and 2005, respectively.

 

***Derivative Financial Instruments***

 

The Company mitigates certain financial exposures,including currency risk and interest rate risk, through a controlled program ofrisk management that includes the use of derivative financial instruments.  Derivatives are recorded on the balance sheetat fair value, with changes in value being recorded in interest and otherincome and interest and other expense. The Company recognized unrealized losses on derivative financialinstruments of $0.1 million for the year ended December 31, 2007.  The Company did not have any derivativefinancial instruments for the years ended December 31, 2006 or 2005.

 

***Comprehensive Income (Loss)***

 

Statement of Financial Accounting Standards (SFAS) No. 130,“*Reporting Comprehensive Income”*requiresthat all components of comprehensive income (loss) be reported in the financialstatements in the period in which they are recognized.  Comprehensive income is defined as the changein equity during a period from transactions and other events and circumstancesfrom non-owner sources.  Net income (loss)and other comprehensive income (loss), including unrealized gains and losses oninvestments, shall be reported, net of their related tax effect, to arrive atcomprehensive income (loss).

 

***Accounting for Stock-Based Compensation***

** **

Effective January 1,2006, the Company adopted the fair value method of accounting for stock-basedcompensation arrangements in accordance with Financial Accounting StandardsBoard (FASB) SFAS No. 123R, “*Share-BasedPayment,”*which establishes accounting for non-cash, stock-basedawards exchanged for employee services and requires companies to expense the estimatedfair value of these awards over the requisite employee service period, whichfor the Company is generally the vesting period.  The Company adopted SFAS No. 123R usingthe modified prospective method. Under the modified prospective method, priorperiods are not revised for comparative purposes.  The valuation provisions of SFAS No. 123Rapply to new awards and to awards that are outstanding on the effective dateand subsequently modified or cancelled. Estimated non-cash, compensation expense for awards outstanding at theeffective date will be recognized over the remaining service period using thecompensation cost calculated for pro-forma disclosure purposes under SFAS No. 123,*“Accounting for Stock-Based Compensation.”*

 

**Stock-Based Compensation Information under SFAS No. 123R**

** **

Consistent with thevaluation method used for the disclosure-only provisions of SFAS No. 123,the Company uses the Black-Scholes model to estimate the value of non-cash,stock-based payments granted to employees under SFAS No. 123R.

 

F-11

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The weighted-averageestimated fair value of employee stock options and employee stock purchaserights granted during the year ended December 31, 2007 was $18.09****and**$**10.01****pershare, respectively, and the weighted-average estimated fair value of employeestock options and employee stock purchase rights granted during the year ended December 31,2006 was $22.07****and**$**12.83****per share, respectively using thefollowing weighted-average assumptions:

 
| ** **                        | ** ** | **Years ended**  | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Stock  option plans**           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Volatility                        |       | 44.2                  | %          | 52.4 | % |
| Expected life in  years           |       | 5.4                   |       | 5.4 |   |
| Risk-free  interest rate          |       | 4.7                   | %          | 4.8 | % |
| Dividend yield                    |       | —                | %          | — | % |
| ** **                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Employee  stock purchase plan** | ** ** | ** **            | ** ** | ** ** | ** ** |
| Volatility                        |       | 27.9                  | %          | 43.2 | % |
| Expected life in  years           |       | 0.5                   |       | 0.5 |   |
| Risk-free  interest rate          |       | 4.9                   | %          | 4.9 | % |
| Dividend yield                    |       | —                | %          | — | % |

 

The Company estimatesvolatility based upon the historical volatility of its common stock for aperiod corresponding to the expected term of its employee stock options and theimplied volatility of market-traded options on its common stock with variousmaturities between six months and two years, consistent with the guidance inSFAS No. 123R and the Securities and Exchange Commission’s StaffAccounting Bulletin (SAB) No. 107. Prior to January 1, 2006, the Company estimated expected volatilitybased upon the historical volatility of its common stock for a periodcorresponding to the expected term of its employee stock options.  The determination to use implied volatilityin addition to historical volatility was based upon the availability ofactively traded options on the Company’s common stock and the Company’sassessment that the addition of implied volatility is more representative of futurestock price trends than historical volatility alone.

 

The expected life of theCompany’s employee stock options represents the weighted-average period of timethat options granted are expected to be outstanding in consideration ofhistorical exercise patterns and the assumption that all outstanding optionswill be exercised at the mid-point of the then current date and their maximumcontractual term.

 

The risk-free interestrates are based on the yield curve of U.S. Treasury strip securities in effect atthe time of grant for periods corresponding with the expected life of theCompany’s employee stock options.  TheCompany has never paid dividends and does not anticipate doing so for theforeseeable future.  Accordingly, theCompany has assumed no dividend yield for purposes of estimating the fair valueof its stock-based payments to employees.

 

Stock-based compensationexpense recognized in accordance with SFAS No. 123R is based on awardsultimately expected to vest, and therefore is reduced by expectedforfeitures.  The Company estimatesforfeitures based upon historical forfeiture rates, and will adjust itsestimate of forfeitures if actual forfeitures differ, or are expected todiffer, from such estimates.  Changes inestimated forfeitures will be recognized through a cumulative adjustment in theperiod of the change and will also impact the amount of stock-basedcompensation expense in future periods. In the Company’s pro-forma disclosures required under SFAS No. 123for the periods prior to January 1, 2006, the Company accounted forforfeitures as they occurred.

 

The Company recorded$59.1 million, or $0.45 per share, and $51.8million, or $0.42 per share, of total employee non-cash, stock-basedcompensation expense for the years ended December 31, 2007 and 2006,respectively, as required by the provisions of SFAS No. 123R.  Stock-based compensation expense capitalizedas part of inventory and fixed assets was negligible and there was no impact onthe Company’s reported cash flows for the years ended December 31, 2007and 2006.  The breakdown of totalemployee non-cash, stock-based compensation expense by operating statementclassification is presented below (in thousands):

 

F-12

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| ** **                                    | ** ** | **Year ended**   | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **December 31,** | ** ** |
| ** **                                    | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Selling, general  and administrative expenses |       | $                     | 35,420     |   | $ | 28,966 |   | $ | 198 |   |
| Research and  development expenses            |       | $                     | 23,644     |   | 22,872 |   | 235 |   |
|                                          |       | $                     | 59,064     |   | $ | 51,838 |   | $ | 433 |   |

 

***Pro-Forma Information under SFAS No. 123for Periods Prior to January 1, 2006***

*** ***

Prior to January 1,2006, the Company accounted for stock-based compensation plans using theintrinsic value method of accounting in accordance with Accounting PrinciplesBoard Opinion No. 25 (APB 25), *“Accountingfor Stock Issued to Employees,”* and provided the pro-formadisclosures required by SFAS No. 123. Under APB 25, stock-based compensation expense was generally notrecorded because the exercise price of stock options granted was equal to themarket value of the Company’s common stock on the date of grant, and thus thestock options had no intrinsic value on the date of grant.  Under APB 25, the Company recorded $0.4million of non-cash, stock-based compensation expense during the year ended December 31,2005 as a result of modifications to the terms of certain outstanding options.

 

The weighted-averageestimated grant date fair value of employee stock options granted during theyear ended December 31, 2005 was $11.51 and the weighted-average estimatedgrant date fair value of stock purchase rights during the year ended December 31,2005 was $6.12 using the Black-Scholes model and the following weighted averageassumptions:

 

| ** **                        | ** ** | **Year ended**   | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2005**              | ** ** |
| **Stock  option plans**           |       |                  |       |
| Volatility  factor                |       | 64                    | %          |
| Weighted-average  expected life   |       | 5.1                   |       |
| Risk-free  interest rate          |       | 3.9                   | %          |
| Dividend yield                    |       | —                | %          |
|                              |       |                  |       |
| **Employee  stock purchase plan** |       |                  |       |
| Volatility  factor                |       | 40                    | %          |
| Weighted-average  expected life   |       | 0.8                   |       |
| Risk-free  interest rate          |       | 3.7                   | %          |
| Dividend yield                    |       | —                | %          |

 

SFAS No. 123Rrequires the presentation of pro-forma information for periods prior to theadoption of SFAS No. 123R as if the Company had accounted for allstock-based compensation under the fair value method of SFAS No. 123.  The following table illustrates the effect onnet loss and earnings per share as if the Company had applied the fair valuerecognition provisions of SFAS No. 123 for the periods presented below (inthousands except per share data):

 
| ** **                                                                                                                                   | ** ** | **Year ended**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                   | ** ** | **2005**              | ** ** |
| Net loss, as  reported                                                                                                                       |       | $                     | (206,832   | ) |
| Add: Stock-based  employee compensation expense included in reported net loss                                                                |       | 433                   |       |
| Deduct:  Stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |       | (40,342               | )          |
| Pro forma net  loss                                                                                                                          |       | $                     | (246,741   | ) |
|                                                                                                                                         |       |                  |       |
| Net loss per  share:                                                                                                                         |       |                  |       |
| Basic and  diluted — as reported                                                                                                        |       | $                     | (1.96      | ) |
| Basic and  diluted — pro forma                                                                                                          |       | $                     | (2.34      | ) |

 

F-13

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***Recently Issued Accounting Standards***

 

In December 2007,FASB issued SFAS No. 141 (revised 2007), “*BusinessCombinations*” and SFAS No. 160, “*NoncontrollingInterests in Consolidated Financial Statements, an amendment of AccountingResearch Bulletin No. 51.*” SFAS No. 141R will change how business acquisitions areaccounted for and will impact financial statements both on the acquisition dateand in subsequent periods.  SFAS No. 160will change the accounting and reporting for minority interests, which will berecharacterized as noncontrolling interests and classified as a component ofequity.  SFAS No. 141R andSFAS No. 160 are effective for us beginning in the first quarter offiscal 2009.  Early adoption is notpermitted.  The Company is currentlyevaluating the impact that adoption of SFAS No. 141R and SFAS No. 160will have on its consolidated financial statements.

 

In June 2007, theFASB ratified the EITF consensus on EITF Issue No. 07-3, *“Accounting for Nonrefundable Advance Payments for Goods or ServicesReceived for Use in Future Research and Development Activities.”*  EITF Issue No. 07-3 requires thatnonrefundable advance payments for goods or services that will be used orrendered for future research and development activities should be deferred andcapitalized.  Such amounts should berecognized as an expense as the related goods are delivered or the relatedservices are performed.  Entities shouldcontinue to evaluate whether they expect the goods to be delivered or servicesto be rendered.  If an entity does notexpect the goods to be delivered or services to be rendered, the capitalizedadvance payment should be charged to expense. The adoption of EITF Issue No. 07-3 is not expected to have amaterial effect on the Company’s consolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities.”* SFAS No. 159 givesthe Company the irrevocable option to carry many financial assets andliabilities at fair values, with changes in fair value recognized inearnings.  SFAS No. 159 is effectivefor the Company beginning January 1, 2008, although early adoption ispermitted.  The Company is currentlyevaluating the impact, if any, that adoption of SFAS No. 159 will have onits consolidated financial statements.

 

In September 2006,the FASB issued SFAS No. 157, “*Fair Value Measurements*,”which defines fair value, establishes guidelines for measuring fair value andexpands disclosures regarding fair value measurements.  SFAS No. 157 does not require anynew fair value measurements but rather eliminates inconsistencies in guidancefound in various prior accounting pronouncements.  SFAS No. 157 is effective forfiscal years beginning after November 15, 2007.  The adoption of SFAS No. 157 is notexpected to have a material effect on the Company’s consolidated financialstatements.

 

**2.             Investments**

 

The following is a summary of short-terminvestments as of December 31, 2007 and 2006 (in thousands):

 
| ** **                                                                                      | ** ** | **Available-for-Sale Securities** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                      | ** ** | **Amortized  Cost**                    | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| **December 31, 2007**                                                                      |       |                                   |       |   |   |   |   |   |   |
| U.S. Treasury securities and obligations of U.S. Government agencies                            |       | $                                      | 96,246     |   | $ | 385 |   | $ | (36 | ) | $ | 96,595 |   |
| Corporate debt securities                                                                       |       | 408,020                                |       | 101 |   | (1,576 | ) | 406,545 |   |
| Asset backed securities                                                                         |       | 138,447                                |       | 258 |   | (655 | ) | 138,050 |   |
| Mortgage-backed securities                                                                      |       | 66,676                                 |       | 441 |   | (124 | ) | 66,993 |   |
| Total                                                                                           |       | $                                      | 709,389    |   | $ | 1,185 |   | $ | (2,391 | ) | $ | 708,183 |   |
|                                                                                            |       |                                   |       |   |   |   |   |   |   |
| **December 31, 2006**                                                                      |       |                                   |       |   |   |   |   |   |   |
| U.S. Treasury securities and obligations of U.S. Government agencies                            |       | $                                      | 67,658     |   | $ | — |   | $ | (47 | ) | $ | 67,611 |   |
| Corporate debt securities                                                                       |       | 331,881                                |       | 66 |   | (38 | ) | 331,909 |   |
| Asset backed securities                                                                         |       | 115,596                                |       | 238 |   | (33 | ) | 115,801 |   |
| Mortgage-backed securities                                                                      |       | 182,084                                |       | 407 |   | (211 | ) | 182,280 |   |
| Debt securities issued by states of the United States and political  subdivisions of the states |       | 3,090                                  |       | — |   | — |   | 3,090 |   |
| Total                                                                                           |       | $                                      | 700,309    |   | $ | 711 |   | $ | (329 | ) | $ | 700,691 |   |

 

Thegross realized gains on sales of available-for-sale securities totaledapproximately $1.1 million, $0.6 million and $0.1 million and the grossrealized losses totaled $0.8 million, $0.8 million and $0.3 million for theyears ended December 31, 2007, 2006 and 2005, respectively.

 

F-14

----

 

Contractual maturities ofshort-term investments at December 31, 2007 were as follows (inthousands):

 
| ** **                   | ** ** | **Fair Value** | ** ** |
|------------------------------|------------|---------------------|------------|
| Due within 1  year           |       | $                   | 325,590    |   |
| After 1 but  within 5 years  |       | 304,205             |       |
| After 5 but  within 10 years |       | 11,939              |       |
| After 10 years               |       | 66,449              |       |
| Total                        |       | $                   | 708,183    |   |

 

Forpurposes of these maturity classifications, the final maturity date is used forsecurities not due at a single maturity date, which, for the Company includesasset-backed and mortgage-backed securities.

 

Thefollowing table shows the gross unrealized losses and fair value of the Company’sinvestments with unrealized losses that are not deemed to beother-than-temporarily impaired, aggregated by investment category and lengthof time that individual securities have been in a continuous unrealized lossposition, at December 31, 2007 (in thousands):

 
| ** **                                                           | ** ** | **Less then 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**           | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|---------------------|------------|
| ** **                                                           | ** ** | **Fair Value**                    | ** ** | **Unrealized  Losses**                  | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
|                                                                 |       |                                   |       |                                    |       |                |       |   |   |   |   |   |   |
| U.S. Treasury securities and obligations of U.S. government agencies |       | $                                      | 162,826    |                                    | $          | (36                 | )          | $ | — |   | $ | — |   | $ | 162,826 |   | $ | (36 | ) |
| Corporate debt securities                                            |       | 171,471                                |       | (614                                    | )          | 77,627              |       | (962 | ) | 249,098 |   | (1,576 | ) |
| Asset backed securities                                              |       | 53,161                                 |       | (611                                    | )          | 13,275              |       | (44 | ) | 66,436 |   | (655 | ) |
| Mortgage-backed securities                                           |       | 8,801                                  |       | (76                                     | )          | 11,412              |       | (48 | ) | 20,213 |   | (124 | ) |
|                                                                 |       | $                                      | 396,259    |                                    | $          | (1,337              | )          | $ | 102,314 |   | $ | (1,054 | ) | $ | 498,573 |   | $ | (2,391 | ) |

 

Theunrealized losses on the Company’s investments is due to the increasedvolatility in the markets impacting the classes of securities the Companyinvests in and not a deterioration in credit ratings.  The Company’s investments have a shorteffective duration, and since the Company has the ability and intent to holdthese investments until a recovery of fair value, which may be maturity, theCompany does not consider these investments to be other-than-temporarilyimpaired at December 31, 2007.

 

**3.****             ****OtherFinancial Information**

 

Inventoriesconsist of the following (inthousands):

 
| ** **      | ** ** | **At December 31,** | ** ** |
|-----------------|------------|-------------------------------|------------|
| ** **      | ** ** | **2007**                      | ** ** | **2006** | ** ** |
| Raw materials   |       | $                             | 55,706     |   | $ | 37,564 |   |
| Work-in process |       | 24,463                        |       | 12,589 |   |
| Finished goods  |       | 20,045                        |       | 9,146 |   |
|            |       | $                             | 100,214    |   | $ | 59,299 |   |

 

Other current assets consists of the following (inthousands):

 
| ** **                     | ** ** | **At December 31,** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **2007**                      | ** ** | **2006** | ** ** |
| Prepaid expenses               |       | $                             | 15,787     |   | $ | 10,463 |   |
| Interest and other receivables |       | 5,831                         |       | 4,889 |   |
| Other current assets           |       | 10,482                        |       | 6,746 |   |
|                           |       | $                             | 32,100     |   | $ | 22,098 |   |

 

F-15

----

 

Property,plant and equipment consists of the following (in thousands):

 
| ** **                                     | ** ** | **At December 31,** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|
| ** **                                     | ** ** | **2007**                      | ** ** | **2006** | ** ** |
| Land                                           |       | $                             | 7,768      |   | $ | 1,946 |   |
| Office equipment and furniture                 |       | 30,680                        |       | 20,053 |   |
| Computer software                              |       | 37,988                        |       | 17,054 |   |
| Laboratory equipment                           |       | 29,985                        |       | 20,822 |   |
| Production equipment                           |       | 11,528                        |       | 6,940 |   |
| Leasehold improvements                         |       | 58,977                        |       | 23,692 |   |
| Building                                       |       | 1,150                         |       | — |   |
| Construction in progress                       |       | 260,746                       |       | 86,730 |   |
|                                           |       | 438,822                       |       | 177,237 |   |
| Less accumulated depreciation and amortization |       | (48,521                       | )          | (30,458 | ) |
|                                           |       | $                             | 390,301    |   | $ | 146,779 |   |

 

Othercurrent liabilities consist of the following (in thousands):

 
| ** **                                         | ** ** | **At December 31,** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **2007**                      | ** ** | **2006** | ** ** |
| Contingent share-settled obligation (1)            |       | $                             | 30,000     |   | $ | — |   |
| Accrued research and development contract services |       | 20,107                        |       | 11,635 |   |
| Accrued rebate discounts                           |       | 19,673                        |       | 9,835 |   |
| Accrued property, plant and equipment additions    |       | 15,559                        |       | 21,219 |   |
| Other accrued sales allowances                     |       | 13,989                        |       | 10,818 |   |
| Other current liabilities                          |       | 23,596                        |       | 17,671 |   |
|                                               |       | $                             | 122,924    |   | $ | 71,178 |   |

 

----

(1)  Represents a liability for $30 million inmilestone payments received from Lilly that are convertible into the Company’scommon stock (refer to footnote 4).

 

**4.****             ****CollaborativeAgreements**

 

***Collaboration with Eli Lilly and Company***

 

In September 2002, theCompany and Lilly entered into a collaboration agreement for the globaldevelopment and commercialization of exenatide.  The agreement was amended in 2006.

 

Thisagreement includes BYETTA and any sustained release formulations of exenatidesuch as once weekly exenatide, the Company’s once-weekly formulation ofexenatide for the treatment of type 2 diabetes. Under the terms of the agreement,operating profits from products sold in the United States are shared equallybetween Lilly and us.  In 2005, the Companyreceived United States Food and Drug Administration (FDA) approval for thetwice-daily formulation of exenatide, which is marketed in the United Statesunder the trade name BYETTA.  Theagreement provides for tiered royalties payable to us by Lilly based upon theannual gross margin for all exenatide product sales, including any long-actingrelease formulations, outside of the United States.  Royalty payments for exenatide product salesoutside of the United States will commence after a one-time cumulative grossmargin threshold amount has been met.  Lillyis responsible for 100% of the costs related to development of twice-dailyBYETTA for sale outside of the United States. Development costs related to all other exenatide products for saleoutside of the United States are allocated 80% to Lilly and 20% to us.  Lilly is responsible for 100% of the costsrelated to commercialization of all exenatide products for sale outside of theUnited States.

 

At signing, Lilly made initial non-refundable payments to the Company totaling $80million, of which $50 million was amortized to revenues under collaborativeagreements prior to 2004.  The remaining $30million is being amortized to 

 

F-16

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revenues ratably over a seven-year period, whichrepresents the Company’s estimate of the period of its performance ofsignificant development activities under the agreement.

 

In addition to these up-frontpayments, Lilly agreed to make future milestone payments of up to $85 millionupon the achievement of certaindevelopment milestones, including milestones relating to both twice daily andsustained release formulations of exenatide such as exenatide once weekly, ofwhich $75 million have been paid through December 31, 2007.  No additional development milestones may beearned under the collaboration agreement. In December 2007, the Company received milestone payments of $30million associated with the results of a thirty week comparator study ofexenatide once weekly and BYETTA in patients with type 2 diabetes.  Since the New Drug Application filing forexenatide once weekly did not occur by December 31, 2007, Lilly isentitled to and in February 2008 elected to convert the milestones intoshares of the Company’s common stock. The milestones will be converted into 0.8 million shares of the Company’scommon stock at a conversion price equal to $37.9535, the immediately precedingtwenty day average closing market price of the Company’s common stock on December 31,2007.  Due toLilly’s right to convert these milestones, they were deferred and are included in other currentliabilities at December 31, 2007.

 

Lilly also agreed to makeadditional future milestone payments of up to $130 million contingent upon thecommercial launch of exenatide in selected territories throughout the world,including both twice-daily and sustained release formulations, of which $40million have been paid and recorded as revenue through December 31, 2007.

 

The following table summarizesthe milestones received to date and the manner of recognition in theaccompanying consolidated financial statements:

 
| **Amount** | ** **  | **Year  Received** | ** ** | **Milestone event** | ** **                                                       | **Manner of recognition** | ** **                                                                                                                                | **Type** |
|------------|-------------|--------------------|------------|--------------------------|------------------------------------------------------------------|-------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|----------|
| $          | 30  million |               | 2003       |                     | Completion of  Phase 3 clinical trials for BYETTA.               |                                | Recognized as  revenue under collaborative agreements upon receipt.                                                                       |     | Development |
|       |        |               |       |                     |                                                             |                                |                                                                                                                                      |     |   |
| $          | 5 million   |               | 2003       |                     | Completion of  Phase 3 clinical trials for BYETTA.               |                                | Deferred upon  receipt and recognized as revenue under collaborative agreements in 2005  following contents of approved label for BYETTA. |     | Development |
|       |        |               |       |                     |                                                             |                                |                                                                                                                                      |     |   |
| $          | 5 million   |               | 2004       |                     | Results of  clinical study comparing BYETTA to insulin-glargine. |                                | Recognized as  revenue under collaborative agreements upon filing of BYETTA New Drug  Application in 2004.                                |     | Development |
|       |        |               |       |                     |                                                             |                                |                                                                                                                                      |     |   |
| $          | 30 million  |               | 2005       |                     | Regulatory  approval and commercial launch of BYETTA.            |                                | Recognized as  revenue under collaborative agreements upon commercial launch of BYETTA in  2005.                                          |     | Commercial |
|       |        |               |       |                     |                                                             |                                |                                                                                                                                      |     |   |
| $          | 5 million   |               | 2007       |                     | Results of  clinical study comparing BYETTA to insulin-glargine. |                                | Recognized as  revenue under collaborative agreements upon receipt.                                                                       |     | Development |
|       |        |               |       |                     |                                                             |                                |                                                                                                                                      |     |   |
| $          | 10 million  |               | 2007       |                     | Commercial  launch of BYETTA in the EU.                          |                                | Recognized as  revenue under collaborative agreements upon commercial launch of BYETTA in  2007.                                          |     | Commercial |
|       |        |               |       |                     |                                                             |                                |                                                                                                                                      |     |   |
| $          | 30 million  |               | 2007       |                     | Completion of  Phase 3 trial for once weekly exenatide.          |                                | Deferred upon  receipt until stock conversion rights contingency finalized. (1)                                                           |     | Development |

 

----

(1)  In February 2008, Lilly elected toconvert these milestones into shares of the Company’s common stock.

 

The Company recorded revenueunder this collaborative agreement of $78.8 million, $36.8 million and $53.8million in the years ended December 31, 2007, 2006 and 2005, respectively,and incurred reimbursable development expenses of $100.5 million, $74.7 millionand $37.4 million in the years ended December 31, 2007, 2006 and 2005,respectively.  

 

F-17

----

 

Reimbursable development expenses consist of directinternal and external expenses for exenatide, including both BYETTA andsustained release formulations.

 

***Collaboration with Alkermes, Inc.***

 

In May 2000,the Company signed an agreement with Alkermes, Inc., a companyspecializing in the development of products based on proprietary drug deliverytechnologies, for the development, manufacture and commercialization of an injectablelong-acting formulation of exenatide, or exenatide once weekly.

 

Underthe terms of the agreement, Alkermes has granted the Company an exclusive,worldwide license to its Medisorb® technology for the development and commercialization of injectable sustainedrelease formulations of exendins, such as exenatide, and other relatedcompounds that Amylin may develop.  Inexchange, Alkermes receives funding for research and development and may earnfuture milestone payments upon achieving specified development and commercialization goals.  Alkermes will also receive royalties on anyfuture product sales.

 

In October 2005, theCompany and Alkermes Controlled Therapeutics II, a wholly owned subsidiary ofAlkermes, Inc., entered into an Amendment to Development and LicenseAgreement (the “Amendment”), which amends the Development and License Agreementbetween the parties dated May 15, 2000. Under the terms of the Amendment, the Company will be responsible formanufacturing for commercial sale the once weekly dosing formulation ofexenatide once weekly, if approved.  Theroyalty to be paid from the Company to Alkermes for commercial sales ofexenatide once weekly was adjusted to reflect the new manufacturingarrangement.

 

In December 2005,the Company’s wholly-owned subsidiary, Amylin Ohio LLC, purchased an existingbuilding and land to house the facility and the Company is responsible for allcosts and expenses associated with the design, construction, validation andutilization of the facility.  The Companyexpects to complete the commercial-scale manufacturing process in the secondhalf of 2008 at a total cost of up to approximately $500 million.  At December 31, 2007 the Company hadcapitalized $275.1 million associated with the construction of this facility.

 

***Other Collaborations***

 

In connection with itsstrategic equity investments, the Company has entered into collaborativeagreements with certain of its equity method investees.  Collaborative revenues associated with theseagreements were $0.7 million for the year ended December 31, 2007.

 

**5.****             ****Commitments and Contingencies**

 

**Lease Commitments**

 

TheCompany leases its facilities under operating leases, with various terms, themajority of which expire between 2015 and 2019. The minimum annual rent on the Company’s facilities is subject toincreases based on stated rental adjustment terms of certain leases, taxes,insurance and operating costs.  Forfinancial reporting purposes, rent expense is recognized on a straight-line basisover the term of the leases.  Accordingly,rent expense recognized in excess of rent paid is reflected as deferredrent.  Deferred rent totaled $9.8 millionand $6.4 million at December 31, 2007 and 2006, respectively, of which$8.7 million and $5.5 million is included in other long-term obligations, netof current portion in the accompanying consolidated balance sheets at December 31,2007 and 2006, respectively.  Certain ofthe Company’s facility leases contain incentives in the form of reimbursementfrom the landlord for a portion of the costs of leasehold improvements incurredby the Company.  These incentives arerecognized as a reduction of rental expense on a straight-line basis over theterm of the respective leases. Unamortized leasehold improvement incentives totaled $14.0 million and$2.6 million at December 31, 2007 and 2006, respectively, of which $12.5million and $2.3 million is included in other long-term obligations, net ofcurrent portion in the accompanying consolidated balance sheets at December 31,2007 and 2006, respectively.

 

The Company leases vehicles for its field force underoperating leases, with lease terms up to four years, of which the first year isnon-cancellable.  Minimum future paymentsfor the non-cancellable term of these leases are $0.9 million at December 31,2007.

 

F-18

----

 

Minimum future annual obligations for facility andvehicle operating leases for years ending after December 31, 2007 are asfollows (in thousands):

 
| 2008                         |   | $      | 17,625  |   |
|------------------------------|--------|--------|---------|--------|
| 2009                         |   | 15,341 |    |
| 2010                         |   | 13,783 |    |
| 2011                         |   | 14,186 |    |
| 2012                         |   | 14,542 |    |
| Thereafter                   |   | 50,327 |    |
| Total minimum lease payments |   | $      | 125,804 |   |

 

Rentexpense for the years ended December 31, 2007, 2006 and 2005, was $16.2million, $9.8 million and $10.1 million, respectively.

 

# **OtherCommitments**

#  

TheCompany has committed to make potential future milestone payments to thirdparties as part of in-licensing and development programs primarily related toresearch and development agreements. Potential future payments generally become due and payable only upon theachievement of certain developmental, regulatory and/or commercial milestones,such as achievement of regulatory approval, successful development andcommercialization of products, and subsequent product sales.  Because the achievement of these milestonesis neither probable nor reasonably estimable, the Company has not recorded aliability on the balance sheet for any such contingencies.

 

As of December 31,2007, if all such milestones are successfully achieved, the potential futuremilestone and other contingency payments due under certain contractualagreements are approximately $288 million in aggregate, of which $9 million areexpected to be paid over the next twelve months.

 

TheCompany has committed to make future minimum payments to third parties forcertain inventories in the normal course of business.  The minimum contractual purchase commitmentstotal $56.1 million as of December 31, 2007, the majority of which relateto BYETTA.

 

**6.****             ****Convertible Senior Notes**

 

In April 2004,the Company issued $200 million aggregate principal amount of 2.5% convertiblesenior notes due April 15, 2011 in a private placement, referred to as the2004 Notes.  The 2004 Notes have beenregistered under the Securities Act of 1933, as amended, or the Securities Act,to permit registered resale of the 2004 Notes and of the common stock issuableupon conversion of the 2004 Notes.  The2004 Notes bear interest at 2.5% per year, payable in cash semi-annually andare convertible into a total of up to 5.8 million shares of common stock at aconversion price of $34.35 per share, subject to customary adjustments forstock dividends and other dilutive transactions.  The Company incurred debt issuance costs of$6.4 million in connection with the issuance of the 2004 Notes, which are beingamortized to interest expense on a straight-line basis over the term of the2004 Notes and had a net book value of $3.0 million and $3.9****million at December 31, 2007 and 2006,respectively.  Amortization expenseassociated with these debt issuance costs were approximately $0.9 million foreach of the years ended December 31, 2007, 2006 and 2005.  The fair value of the 2004 Notes, determinedby observed market prices, was $249.9****million and$252.0 million at December 31, 2007 and 2006, respectively.

 

Upon a change in control,the holders of the 2004 Notes may elect to require the Company to re-purchasethe 2004 Notes.  The Company may elect topay the purchase price in common stock instead of cash, or a combinationthereof. If paid with common stock the number of shares of common stock aholder will receive will be valued at 95% of the average closing prices of theCompany’s common stock for the five-day trading period ending on the thirdtrading day before the purchase date.

 

In June 2007, theCompany issued the 2007 Notes in a private placement, which have an aggregateprincipal amount of $575 million, and are due June 15, 2014.  The 2007 Notes are senior unsecuredobligations and rank equally with all other existing and future senior unsecureddebt.  The 2007 Notes bear interest at3.0% per year, payable in cash semi-annually, and are initially convertibleinto a total of up to 9.4 million shares of common stock at a conversion priceof $61.07 per share, subject to the customary adjustment for stock dividendsand other dilutive transactions.  Inaddition, if a “fundamental change” (as defined in the associated indentureagreement) occurs prior to the maturity date, the Company will in some cases

 

F-19

----

 

increase the conversionrate for a holder of notes that elects to convert its notes in connection withsuch fundamental change.  The maximumconversion rate is 22.9252, which would result in a maximum issuance 13.2 millionshares of common stock if all holders converted at the maximum conversion rate.

 

The 2007 Notes will beconvertible into shares of the Company’s common stock unless the Company electsnet-share settlement.  If net-sharesettlement is elected by the Company, the Company will satisfy the accretedvalue of the obligation in cash and will satisfy the excess of conversion valueover the accreted value in shares of the Company’s common stock based on adaily conversion value, determined in accordance with the associated indentureagreement, calculated on a proportionate basis for each day of the relevant20-day observation period.  Holders mayconvert the 2007 Notes only in the following circumstances and to the followingextent: (1) during the five business-day period after any five consecutivetrading period (the measurement period) in which the trading price per note foreach day of such measurement period was less than 97% of the product of thelast reported sale price of the Company’s common stock and the conversion rateon each such day; (2) during any calendar quarter after the calendarquarter ending March 31, 2007, if the last reported sale price of theCompany’s common stock for 20 or more trading days in a period of 30consecutive trading days ending on the last trading day of the immediatelypreceding calendar quarter exceeds 130% of the applicable conversion price ineffect on the last trading day of the immediately preceding calendar quarter; (3) uponthe occurrence of specified events; and (4) the 2007 Notes will beconvertible at any time on or after April 15, 2014 through the scheduledtrading day immediately preceding the maturity date.

 

Subject to certainexceptions, if the Company undergoes a “designated event” (as defined in theassociated indenture agreement) including a “fundamental change,” holders ofthe 2007 Notes will, for the duration of the notes, have the option to requirethe Company to repurchase all or any portion of their 2007 Notes. Thedesignated event repurchase price will be 100% of the principal amount of the2007 Notes to be purchased plus any accrued interest up to but excluding therelevant repurchase date.  The Companywill pay cash for all notes so repurchased. The Company may not redeem the Notes prior to maturity.

 

The 2007 Notes have beenregistered under the Securities Act of 1933, as amended, to permit registeredresale of the 2007 Notes and of the common stock issuable upon conversion ofthe 2007 Notes.  Subject to certainlimitations, the Company will be required to pay the holders of the 2007 Notesspecial interest on the 2007 Notes if the Company fails to keep suchregistration statement effective during specified time periods.  The 2007 Notes pay interest in cash,semi-annually in arrears on June 15 and December 15 of each year,which began on December 15, 2007. The Company incurred debt issuance costs of $16.3 million in connectionwith the issuance of the 2007 Notes, which are being amortized to interestexpense on a straight-line basis over the term of the 2007 Notes and had a netbook value of $15.0 million at December 31, 2007.  Amortization expense associated with thesedebt issuance costs was $1.3 million in the year ended December 31,2007.  The fair value of the 2007 Notes,determined by observed market prices, was $549.3****millionat December 31, 2007.

 

The Company capitalized$4.5 million and $0.6 million of interest expense for the years ended December 31,2007 and 2006, respectively, associated with construction in progress.

 

**7.****              Redemptionof Convertible Senior Notes**

 

In June and July 2003,the Company issued $175 million of 2.25% convertible senior notes due June 30,2008 in a private placement referred to as the 2003 Notes.  The 2003 Notes were convertible into a totalof up to 5.4 million shares of common stock at a conversion price of approximately$32.55 per share.  The 2003 notes wereprovisionally redeemable in whole or in part, at the Company’s option at anytime on or after June 30, 2006, upon the satisfaction of certainconditions, at specified redemption prices plus accrued interest.  The Company called the notes for redemptionin July 2006 and issued approximately 5.4 million shares of its commonstock to note holders upon the conversion of all of the outstanding 2003 Notesin August 2006.  In connection withthe conversion, the Company also issued 180,005 shares as a make-whole payment,representing $112.94 per $1,000 principal value of the converted 2003 Notesless interest actually paid.  The Companyrecorded as a one-time, non-cash, non-operating charge of $7.9 million for themake-whole payment in the quarter ended September 30, 2006.  Debt issuance costs of $5.3 million wereincurred in connection with the issuance of the 2003 Notes and were beingamortized to interest expense on a straight-line basis over the contractualterm of the 2003 Notes.  Amortizationexpense associated with these debt issuance costs were $0.7 million and $1.0million in the years ended December 31, 2006 and 2005, respectively.  Upon conversion, the $2.0 million unamortizedbalance of these related debt issuance costs were reclassified to additionalpaid-in capital.

 

F-20

----

 

**8.**    **Long-Term****Note Payable**

 

In December 2007, theCompany****entered into a $140 millioncredit agreement with Bank of America, N.A., as administrative agent,collateral agent and letter of credit issuer, Silicon Valley Bank and RBS AssetFinance, Inc., as syndication agents, and Comerica Bank and BMO CapitalMarkets Financing, Inc., as documentation agents.  The creditagreement provides for a $125 million term loan and a $15 million revolvingcredit facility.  The proceeds of both loans will be used for generalcorporate purposes.  The revolving creditfacility also provides for the issuance of letters of credit and foreignexchange hedging up to the $15 million borrowing limit.  At December 31, 2007 the Company had anoutstanding balance of $125.0 million under the term loan and had issued $5.2million of letters of credit under the revolving credit facility, primarily inconnection with office leases.

 

The Company’s domesticsubsidiaries, Amylin Ohio LLC and Amylin Investments LLC, will be co-borrowersunder the credit agreement.  The loans under the revolving credit facilitywill be secured by substantially all of the Company’s and the two domesticsubsidiaries’ assets (other than intellectual property and certain otherexcluded collateral).  The term loan is repayable on a quarterlybasis, with no payments due quarters one through four, 6.25% of the outstandingprincipal due quarters five through eleven, and 56.25% of the outstandingprincipal due in quarter 12.  Interest onthe term loan will be paid quarterly on the unpaid principal balance at 1.75%above the London Interbank Offered Rate, or LIBOR, based on the Company’selection of either one, two, three, or six months LIBOR term, and payable atthe end of the selected interest period but no less frequently than quarterlyas of the first business day of the quarter prior to the period in which thequarterly installment is due.  The Companyhas elected to use the three month LIBOR, which was 4.85% at December 31,2007.  Interest periods on the revolvingcredit facility may be either one, two, three, or six months, and payable atthe end of the selected interest period but no less frequently than quarterly,and the interest rate will be either LIBOR plus 1.0% or the Bank of Americaprime rate, as selected by the Company. Both loans have a final maturity date of December 21, 2010.

 

The credit agreementcontains certain covenants, including a requirement to maintain minimumunrestricted cash and cash equivalents in excess of $400 million, and events ofdefault that permit the administrative agent to accelerate the Company’soutstanding obligations if not cured within applicable grace periods, includingnonpayment of principal, interest, fees or other amounts, violation ofcovenants, inaccuracy of representations and warranties, and default underother indebtedness.  In addition, the credit agreement provides forautomatic acceleration upon the occurrence of bankruptcy and other insolvencyevents.  There is an annual commitmentfee associated with the revolving credit facility of 0.25%.

 

Maturities of long-term debt for years ending after December 31,2007 are as follows (in thousands):

 
| 2008                                  |   | $      | —  |   |
|---------------------------------------|--------|--------|---------|--------|
| 2009                                  |   | 31,250 |    |
| 2010                                  |   | 93,750 |    |
| Thereafter                            |   | — |    |
| Total minimum long-term debt payments |   | $      | 125,000 |   |

 

The Company incurred debtissuance costs of $1.5 million in connection with the credit agreement, whichare being amortized to interest expense on a straight-line basis over the termof the credit agreement and had a net book value of $1.5 million at December 31,2007.  Amortization expense associatedwith these debt issuance costs was $15.3 thousand in the year ended December 31,2007.

 

** **In connection with theexecution of the term loan, the Company entered into an interest rate swap withan initial notional amount of $125 million on December 21, 2007.  The Company will make payments to acounter-party at 3.967% and receive payments at LIBOR which is reset everythree months, the first reset date being December 21, 2007.  Payments will be made on the 21stof each March, June, September, and December, commencing on March 21, 2008for the period December 21, 2007 through March 21, 2008.  The recognized loss on the interest rate swapfor the year ending December 31, 2007 was $0.4 million.  The interest rate swap has resulted in anall-in fixed rate of 5.717% for net interest receipts and payments for the termloan and interest rate swap transactions.

 

F-21

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**9.****              Stockholders’ Equity (Deficit)**

 

***Stock-basedCompensation Plans***

 

***Stock Option Plans***

 

The Company has two stockoption plans under which it currently grants stock options: the 2001 EquityIncentive Plan, or the 2001 Plan, which replaced the 1991 Stock Option Plan, orthe 1991 Plan, upon the 1991 Plan’s expiration in October 2001, and the2003 Non-Employee Directors’ Stock Option Plan, or the 2003 Directors’Plan.  Under the 2003 Directors’ Plan,non qualified stock options and restricted stock may be granted to non-employeedirectors of the Company.  The 2003Directors’ Plan provides for automatic stock option grants to non-employeedirectors upon their initial appointment or election to the Company’s Board ofDirectors and are issued from shares authorized under the 2001 Plan.  Options granted under the 1991 Plan remainoutstanding until exercised or cancelled.

 

To date, stock-basedcompensation awards under the 1991 Plan, the 2001 Plan and the 2003 Directors’Plan consist primarily of incentive and non-qualified stock options.  Stock options granted under the 2001 Plan andthe 2003 Directors’ Plan must have an exercise price equal to at least 100% ofthe fair market value of the Company’s common stock on the date of grant, havea maximum contractual term of 10 years and generally vest over four years.  At December 31, 2007, an aggregate of21.2 million shares were reserved for future issuance under the Company’s stockoption plans, of which 4.0 million shares were available for futuregrants.  A summary of stock optiontransactions for all stock option plans is presented below:

 
| ** **                                     | ** ** | **Shares  (thousands)** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate Intrinsic  Value (thousands)** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Options  outstanding at December 31, 2006 |       | 16,213                  |       | $                                         | 23.10      |                                                            |       |                                                 |       |   |
| Granted                                        |       | 4,092                   |       | $                                         | 38.60      |                                                            |       |                                                 |       |   |
| Exercised                                      |       | (2,585                  | )          | $                                         | 15.16      |                                                            |       |                                                 |       |   |
| Cancelled/Forfeited                            |       | (553                    | )          | $                                         | 33.00      |                                                            |       |                                                 |       |   |
| Options  outstanding at December 31, 2007 |       | 17,167                  |       | $                                         | 27.67      |                                                            | 7.05       |                                                 | $          | 182,916 |   |
|                                           |       |                    |       |                                      |       |                                                            |       |                                                 |       |
| Options  exercisable at December 31, 2007 |       | 9,569                   |       | $                                         | 21.64      |                                                            | 5.94       |                                                 | $          | 153,915 |   |
|                                           |       |                    |       |                                      |       |                                                            |       |                                                 |       |
| Options vested and expected to vest            |       | 16,376                  |       | $                                         | 27.25      |                                                            | 6.97       |                                                 | $          | 180,740 |   |

 

The total intrinsic valueof stock options exercised was $72.9 million, $74.8 million and $28.6 millionduring the years ended December 31, 2007, 2006 and 2005,respectively.  The Company received cashfrom the exercise of stock options of $37.4 million, $31.6****million,and $16.0****million during the years ended December 31,2007, 2006 and 2005, respectively.  TheCompany did not record any tax benefits related to the exercise of employeestock options due to its net loss position. Upon option exercise, the Company issues new shares of its common stock.

 

At December 31,2007, total unrecognized estimated non-cash, stock-based compensation expenserelated to nonvested stock options granted prior to that date was $113.1million, with a weighted-average amortization period of 2.5 years.  The Company records non-cash, stock-basedcompensation expense for options with pro-rata vesting on a straight-line basisover the awards’ vesting period.

 

***EmployeeStock Purchase Plan***

*** ***

The Company’s 2001Employee Stock Purchase Plan, or the 2001 Purchase Plan, enables participantsto contribute up to 15% of their eligible compensation for the purchase of theCompany’s common stock at the lower of 85% of the fair market value of theCompany’s common stock (i) on the employee’s enrollment date or (ii) thepurchase date.  The terms of anyofferings under the 2001 Purchase Plan are established by the Compensation andHuman Resources Committee of the Board of Directors.  In May 2006, the Compensation and HumanResources Committee approved a series of four consecutive six-month offeringscommencing on September 1, 2006.  AtDecember 31, 2007, 1.4****millionshares were reserved for future issuance under the 2001 Purchase Plan.

 

F-22

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The total intrinsic valueof purchase rights exercised was $1.5 million, $10.4 million and $0.6****million****during theyears ended December 31, 2007, 2006 and 2005, respectively.  At December 31, 2007, total unrecognizednon-cash, compensation expense for nonvested purchase rights granted prior tothat date was $0.5 million, with a weighted-average amortization period of 0.2years.

 

***Shares Reserved for Future Issuance***

 

Thefollowing shares of common stock are reserved for future issuance at December 31,2007 (in thousands):

 
| Stock Option Plans                         |   | 21,216 |   |
|--------------------------------------------|--------|--------|--------|
| Employee Stock Purchase Plan               |   | 1,412  |   |
| Directors’ Deferred Compensation Plan |   | 12     |   |
| 401(k) Plan                           |   | 220    |   |
| Convertible Senior Notes                   |   | 15,238 |   |
|                                       |   | 38,098 |   |

 

***Issuance of Common Stock***

 

In April 2006, theCompany completed a public offering of 11.5 million shares of its common stockat a price of $46.50 per share.  Thistransaction generated net proceeds of approximately $508 million for theCompany and was completed pursuant to a shelf registration statement filed withSecurities and Exchange Commission in March 2006.

 

In February 2005,the Company completed a public offering of 9.2 million shares of its commonstock at a price of $22.00 per share. This transaction generated net proceeds of approximately $190 millionfor the Company and was completed pursuant to a $300 million universal shelfregistration statement initially filed with Securities and Exchange Commissionin December 2003.

 

In September 2005,the Company completed a public offering of 5.1 million shares of its commonstock at a price of $31.00 per share.  Thistransaction generated net proceeds of approximately $152 million for theCompany and was completed pursuant to shelf registration statements previouslyfiled with Securities and Exchange Commission in 2001 and 2003.

 

***Shareholder Rights Plan***

 

In June 2002, the Company adopted a Preferred SharePurchase Rights Plan (the “Rights Plan”). The Rights Plan provides for a dividend distribution of one preferredstock purchase right (a “Right”) for each outstanding share of the Company’scommon stock, par value $0.001 per share, held of record at the close ofbusiness on June 28, 2002.  TheRights are not currently exercisable. Under certain conditions involving an acquisition or proposedacquisition by any person or group of 15% or more of the Company’s commonstock, the Rights permit the holders (other than the 15% holder) to purchaseone one-hundredth of a share of Series A Junior Participating PreferredStock, par value $0.001 per share (the “Preferred Shares”) at a price of $100per one one-hundredth of a Preferred Share, subject to adjustment.  Each one one-hundredth of a share ofPreferred Shares has designations and powers, preferences and rights and thequalifications, limitations and restrictions which make its value approximatelyequal to the value of one share of the Company’s common stock.  Under certain conditions, the Rights areredeemable by the Company’s Board of Directors in whole, but not in part, at aprice of $0.001 per Right.

 

**10.   Benefit Plans**

 

***Defined Contribution 401(k) Plan***

 

TheCompany has a defined contribution 401(k) plan for the benefit of alleligible employees. Discretionary matching contributions are based on apercentage of employee contributions and are funded by newly issued shares ofthe Company’s common stock.  The fairmarket value of matching contributions made by the Company for the benefit ofits employees in 2007, 2006 and 2005 were $4.4 million, $6.0 million and $2.7million, respectively.

 

F-23

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***Deferred Compensation Plans***

 

In August 1997,the Company adopted a Non-Employee Directors’ Deferred Compensation Plan (the “Directors’Deferral Plan”) that permits participating non-employee directors to elect, onan annual basis, to defer all or a portion of their cash compensation in adeferred stock account, pursuant to which the deferred fees are credited in theform of phantom shares of the Company’s common stock, based on the market priceof the stock at the time the fees are earned. Deferred amounts are valued at the fair market value of the Company’scommon stock at each reporting date and are included in accrued compensation inthe accompanying consolidated balance sheets. Upon termination of service the director’s account is settled in eithercash or stock, at the Company’s discretion. The Company recorded expense associated with this plan of $0.8 million,$0.1 million and $1.3 million for the years ended December 31, 2007, 2006and 2005, respectively.

 

The Company adopted aDeferred Compensation Plan in April 2001, which allows officers anddirectors to defer up to 100% of their annual compensation.  The trust assets, consisting of primarilycash, mutual funds and equity securities are recorded at current market prices.  The company-owned assets are placed in a “rabbitrust” and are included in other current assets in the accompanyingconsolidated balance sheets.  The trustassets had a fair value of $9.3 million and $6.1 million at December 31,2007 and 2006, respectively, including unrealized gains of approximately$0.8 million at both December 31, 2007 and 2006.  Unrealized gains on the trust assets areincluded in accumulated other comprehensive income (loss) in the accompanyingconsolidated balance sheets.  The correspondingliability was $9.3 million and $6.1 million at December 31, 2007 and 2006,respectively, of which $8.6 million and $6.1 million are included in otherlong-term liabilities, net of current portion in the accompanying consolidatedbalance sheets at December 31, 2007 and 2006, respectively.  The current portion of the correspondingliability is included in accrued compensation in the accompanying consolidatedbalance sheets at December 31, 2007 and 2006.  Total contributions to this plan, consistingsolely of compensation deferred by participants, were $3.0 million, $1.0million and $1.2 million for the years ended December 31, 2007, 2006 and2005, respectively.

 

***Employee Stock Ownership Plan***

 

In December 2007,the Company adopted an Employee Stock Ownership Plan, or ESOP.  Active employees who are at least 18 yearsold and have met minimum service requirements are eligible to participate.  Each participant has an account with theESOP, in which mandatory contributions of 10% of a participant’s eligiblecompensation are made by the Company. The Company may make discretionary contributions for any plan year, andcontributions are limited to the lesser of 100% of a participant’s plan yearcompensation and limitations established by the Internal Revenue Service Code(IRS Code). A participant’s compensation primarily includes wages and bonus.

 

Anycash dividends paid with respect to shares of the Company’s stock allocated toa participant’s account may be used to purchase new shares of the Company’sstock, paid by the Company directly in cash to participants on anon-discriminatory basis.  Any stockdividends paid with respect to shares of the Company’s stock allocated to aparticipant’s account will be held and distributed in the same manner as theshares of the Company’s stock to which such stock dividend applies.

 

Participantsvest in their accounts over four years of service, at 25% for more than oneyear of service but less than two years, at 50% for more than two years ofservice but less than three years, at 75% for more than three years of servicebut less than four years, and 100% for more than four years of service.  Any forfeitures of non-vested amounts shallbe used to restore any rehired employees who previously forfeited theirnonvested balance under certain circumstances, or shall be used to reduce futureemployer contributions and shall be allocated to the participant accounts.  Distributions are made upon termination ofemployment, when a participant is age 55 and has at least ten years ofparticipation in the ESOP, when the participant is seventy and one-half and isnot a five percent owner or the year after a participant is seventy andone-half and is a five percent owner, upon termination of the ESOP, and asnecessary by regulatory requirements.

 

Shares committedto be released or that have been allocated to participant accounts are treatedas outstanding shares for calculating earnings per share.  At December 31, 2007 the ESOP held noshares.  The Company accruedapproximately $17.2 million at December 31, 2007 of expense for the ESOPfor the Company’s 2007 contribution, which is included in other currentliabilities in the accompanying consolidated balance sheets, and will be fundedby contribution of newly issued shares in 2008.

 

F-24

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**11.   Income Taxes**

 

The provision (benefit) for income taxes includes thefollowing (in thousands):

 
| ** **                         | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current provision:                 |       |                                        |       |   |   |   |   |
| Federal                            |       | $                                           | —     |   | $ | — |   | $ | — |   |
| State                              |       | 38                                          |       | — |   | — |   |
| Foreign                            |       | 30                                          |       | 17 |   | — |   |
| Total current provision            |       | 68                                          |       | 17 |   | — |   |
|                               |       |                                        |       |   |   |   |   |
| Deferred (benefit) provision:      |       |                                        |       |   |   |   |   |
| Federal                            |       | —                                      |       | — |   | — |   |
| State                              |       | (1,117                                      | )          | — |   | — |   |
| Foreign                            |       | —                                      |       | — |   | — |   |
| Total deferred (benefit) provision |       | (1,117                                      | )          | — |   | — |   |
|                               |       |                                        |       |   |   |   |   |
| Total (benefit) provision          |       | $                                           | (1,049     | ) | $ | 17 |   | $ | — |   |

 

These amounts are included in “Interest and otherexpense” in the consolidated statements of operations.

 

The deferred state income tax benefit reflects the Texasmargin tax (TMT) credit available to offset future margin taxes over the next19 years.  The Company estimatesthat its future TMT liability will be based on its gross revenues in Texas,rather than its apportioned taxable income. Therefore, it is more likely thannot that the Company’s TMT credit will be recovered and, accordingly, the Companyhas not established a valuation allowance against this asset.

 

Deferred income taxes reflect the temporary differencesbetween the carrying amounts of assets and liabilities for financial statementpurposes and the amounts used for income tax purposes and the net tax effectsof net operating loss and credit carryforwards. Significant components of the Company’s deferred tax assets as of December 31,2007 and 2006 are shown below (in thousands). A valuation allowance of approximately $585 million has been recognizedat December 31, 2007 to offset the deferred tax assets, as realization ofsuch assets has not met the more likely than not threshold under SFAS No. 109,*“Accounting for Income Taxes.”*

 
| ** **                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                          |       |     |       |     |       |
| Net operating loss carryforwards              |       | $        | 412,349    |     | $          | 347,257 |   |
| Research tax credits                          |       | 58,845   |       | 67,667   |       |
| Capitalized research and development expenses |       | 54,253   |       | 73,824   |       |
| Stock compensation expense                    |       | 18,011   |       | 9,509    |       |
| Other, net                                    |       | 42,805   |       | 36,726   |       |
| Total deferred tax assets                     |       | 586,263  |       | 534,983  |       |
| Valuation allowance for deferred tax assets   |       | (585,146 | )          | (534,983 | )          |
| Net deferred tax assets                       |       | $        | 1,117      |     | $          | — |   |

 

Thenet deferred tax assets are included in “Other long-term assets” in theaccompanying consolidated balance sheets.

 

F-25

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Followingis a summary of the Company’s Federal net operating loss carryforwards, Federalresearch tax credit carryforwards and California net operating losscarryforwards at December 31, 2007 (in thousands):

 
| ** **                   | ** ** | **Federal net operating  loss carryforwards** | ** ** | **California net  operating loss  carryforwards** | ** ** | **Federal research and  development tax credit  carryforwards** | ** ** |
|------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| Expiring within  one year    |       | $                                                            | 18,837     |                                                        | $          | —                                                                              |       | $ | 1,066 |   |
| After 1 but  within 5 years  |       | 148,830                                                      |       | 20,961                                                      |       | 5,048                                                                               |       |
| After 5 but  within 10 years |       | —                                                       |       | 498,875                                                     |       | —                                                                              |       |
| After 10 years               |       | 998,713                                                      |       | —                                                      |       | 59,942                                                                              |       |
|                         |       | $                                                            | 1,166,380  |                                                        | $          | 519,836                                                                             |       | $ | 66,056 |   |

 

Changesin control have occurred that triggered the limitations of Section 382 ofthe Internal Revenue Code on the Company’s net operating losscarryforwards.  The Section 382limitations were immaterial to the Company’s total net operating losses and arereflected in the net operating loss of $1.2 billion presented above.

 

At December 31,2007, the Company had Federal net operating loss carryforwards of approximately$1.2 billion, which begin to expire in 2008. The Company also has California net operating loss carryforwards ofapproximately $520 million, which begin to expire in 2011, and other state netoperating loss carryforwards of approximately $231 million, which begin toexpire in 2010.  The difference betweenthe Federal and California tax loss carryforwards is attributable to thecapitalization of research and development expenses for California taxpurposes, the prior years’ limitation on California loss carryforwards andapportionment of losses to other states. The Company has Federal research tax credit carryforwards of $66million, which begin to expire in 2008, and California research tax creditcarryforwards of $28 million, which carry forward indefinitely.

 

Thereconciliation between the Company’s effective tax rate and the federalstatutory rate is as follows:

 
| ** **                                                                        | ** ** | **Tax rate for the years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Federal statutory rate applied to net loss before income tax (benefit)  provision |       | (35.0                                                                            | )%         | (35.0 | )% | (35.0 | )% |
| State taxes                                                                       |       | —                                                                           |       | (4.0 | )% | (6.6 | )% |
| Research and  development tax credits                                             |       | (3.0                                                                             | )%         | (3.2 | )% | (2.2 | )% |
| Stock-based  compensation                                                         |       | 4.2                                                                              | %          | 4.6 | % | — |   |
| Increase in  valuation allowance                                                  |       | 30.9                                                                             | %          | 35.1 | % | 43.4 | % |
| Other                                                                             |       | 2.4                                                                              | %          | 2.5 | % | 0.4 | % |
| Effective tax  rate                                                               |       | (0.5                                                                             | )%         | — | % | — | % |

 

Thestate tax effects during 2007 and 2006 include the expiration of state netoperating loss carryforwards.

 

As aresult of the adoption of SFAS No. 123R, the Company recognizes windfalltax benefits associated with the exercise of stock options directly tostockholders’ equity only when realized. Accordingly, deferred tax assets arenot recognized for net operating loss carryforwards resulting from windfall taxbenefits occurring from January 1, 2006 onward.  A windfall tax benefit occurs when the actualtax benefit realized upon an employee’s disposition of a share-based awardexceeds the deferred tax asset, if any, associated with the award.  At December 31, 2007, deferred taxassets do not include $44 million of excess tax benefits from stock-basedcompensation.

 

Incometaxes paid during the years ended December 31, 2007 and 2006 totaled $30thousand and $17 thousand, respectively. No income taxes were paid during 2005.

 

In July 2006,the FASB issued Interpretation No. 48 (FIN 48) “*Accountingfor Uncertainty in Income Taxes* - *AnInterpretation of FASB Statement No. 109.” *FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in an entity’s financial statements in accordance with SFAS No. 109,“*Accounting for Income Taxes,*” andprescribes a recognition threshold and measurement attributes for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn.  Under FIN 48, the impact of anuncertain income tax position on the income tax return must be recognized atthe largest amount that is more-likely-than-not to be sustained upon audit bythe relevant taxing authority.  Anuncertain income tax position will not be recognized if it has less than a 50%likelihood of being sustained. Additionally, FIN 48 provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.

 

F-26

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TheCompany adopted the provisions of FIN 48 on January 1, 2007.  No unrecognized tax benefits were recorded asof the date of adoption.  As a result ofthe implementation of FIN 48, the Company recognized a $23.6 million increasein unrecognized tax benefits which was accounted for as a reduction to deferredtax assets (primarily related to reductions in tax credits) and a correspondingreduction to the valuation allowance, resulting in no net effect on accumulateddeficit.

 

Thereconciliation of the total amounts of unrecognized tax benefits at thebeginning and end of the year ended December 31, 2007 is as follows (inthousands):

 
| ** **                                                                                                                               | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Reconciliation of unrecognized tax benefits:                                                                                             |       |     |       |
| Unrecognized tax benefits related to reductions in tax credits as of  January 1, 2007                                               |       | $        | 23,645     |   |
| Increase in unrecognized tax benefits related to reductions in tax  credits as a result of tax positions taken during a prior period     |       | 339      |       |
| Increase in unrecognized tax benefits related to reductions in tax credits  as a result of tax positions taken during the current period |       | 5,929    |       |
| Unrecognized tax benefits related to reductions in tax credits as of  December 31, 2007                                             |       | $        | 29,913     |   |

 

Thebalance of unrecognized tax benefits at December 31, 2007 of $29.9 millionare tax benefits that, if recognized, would not affect the Company’s effectivetax rate since they are subject to a full valuation allowance.  The net effect on the deferred tax assets andcorresponding decrease in the valuation allowance at December 31, 2007resulting from unrecognized tax benefits is $19.4 million.  The Company has not recognized any accruedinterest and penalties related to unrecognized tax benefits during the yearsended December 31, 2007, 2006 and 2005. The Company is subject to taxation in the United States and variousstates and foreign jurisdictions. Effectively, all of the Company’s historical tax years are subject toexamination by the Internal Revenue Service and various state and foreignjurisdictions due to the generation of net operating loss and creditcarryforwards.  The Company does notforesee any material changes to unrecognized tax benefits within the nexttwelve months.  The Company will elect atreatment for interest and penalties when they occur.

 

**12.  QuarterlyFinancial Data (Unaudited)**

 

Thefollowing financial information reflects all normal recurring adjustments,which are, in the opinion of management, necessary for a fair statement of theresults of the interim periods. Summarized quarterly data for fiscal 2007 and 2006 are as follows (inthousands, except per share data):

 
| ** **                               | ** ** | **For the quarters ended** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **March 31**                         | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **2007:**                                |       |                                      |       |   |   |   |   |   |   |
| Net product  sales                       |       | $                                         | 162,003    |   | $ | 167,337 |   | $ | 177,391 |   | $ | 194,719 |   |
| Revenues under  collaborative agreements |       | 9,975                                     |       | 29,616 |   | 12,637 |   | 27,319 |   |
| Gross profit from product sales          |       | 146,793                                   |       | 152,975 |   | 163,641 |   | 172,584 |   |
| Net loss                                 |       | (49,414                                   | )          | (45,023 | ) | (39,758 | ) | (76,941 | ) |
| Basic and diluted net loss per share (1) |       | $                                         | (0.38      | ) | $ | (0.34 | ) | $ | (0.30 | ) | $ | (0.57 | ) |
|                                     |       |                                      |       |   |   |   |   |   |   |
| **2006:**                                |       |                                      |       |   |   |   |   |   |   |
| Net product  sales                       |       | $                                         | 75,872     |   | $ | 108,787 |   | $ | 138,798 |   | $ | 150,581 |   |
| Revenues under  collaborative agreements |       | 6,474                                     |       | 9,362 |   | 8,219 |   | 12,782 |   |
| Gross profit from product sales          |       | 66,128                                    |       | 94,102 |   | 124,290 |   | 139,445 |   |
| Net loss                                 |       | (67,901                                   | )          | (46,394 | ) | (46,140 | ) | (58,421 | ) |
| Basic and diluted net loss per share (1) |       | $                                         | (0.61      | ) | $ | (0.38 | ) | $ | (0.36 | ) | $ | (0.45 | ) |

 

----

(1)           Netloss per share is computed independently for each of the quarterspresented.  Therefore, the sum of thequarterly per-share calculations will not necessarily equal the annual pershare calculation.

 

F-27

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**ScheduleII**

 

**AMYLIN PHARMACEUTICALS, INCSchedule II: Valuation Accounts(in thousands)**

 
| ** **                          | ** ** | **Balance at  beginning of  period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at end of  period** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|---------------|------------|----------------|------------|----------------------------------------------|------------|
| Year ended  December 31, 2007  |       |                                           |       |          |       |           |       |                                         |       |
| Inventory  reserve                  |       | $                                              | 385        |          | 7,637      |           | 2,695      |                                         | $          | 5,327 |   |
| Accounts receivable allowances (1)  |       | $                                              | 6,558      |          | 27,787     |           | 21,576     |                                         | $          | 12,769 |   |
|                                |       |                                           |       |          |       |           |       |                                         |       |
| Year ended December 31,  2006  |       |                                           |       |          |       |           |       |                                         |       |
| Inventory  reserve                  |       | $                                              | 1,618      |          | 3,481      |           | 4,714      |                                         | $          | 385 |   |
| Accounts  receivable allowances (1) |       | $                                              | 1,628      |          | 17,203     |           | 12,273     |                                         | $          | 6,558 |   |
|                                |       |                                           |       |          |       |           |       |                                         |       |
| Year ended  December 31, 2005  |       |                                           |       |          |       |           |       |                                         |       |
| Inventory  reserve                  |       | $                                              | 3,100      |          | 1,697      |           | 3,179      |                                         | $          | 1,618 |   |
| Accounts  receivable allowances (1) |       | $                                              | —     |          | 3,293      |           | 1,665      |                                         | $          | 1,628 |   |

 

----

(1) Allowancesfor prompt payment, product returns, doubtful accounts and wholesalerchargebacks.

 

F-28

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