**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

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** **

**FORM 10-K**

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

**ForThe Fiscal Year Ended December 31, 2006**

**OR**

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

**Forthe transition period from                to               .**

**CommissionFile No. 0-19700**

**AMYLIN PHARMACEUTICALS, INC.**

(Exact Name of Registrant as Specified in itsCharter)

| **Delaware**                              |   | **33-0266089**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer     |
| incorporation or  organization)           |   | 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 toSection 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**

(Titleof 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 the registrantis not required to file reports pursuant to Section 13 or Section 15(d) of theAct. 

Yes  o   No  x

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  x   No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(Section 229.405 of this chapter) is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o

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

Largeaccelerated filer  x   Acceleratedfiler  o  Non-accelerated filer  o

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

Yes  o   No  x

The aggregatemarket value of the common stock of the registrant as of June 30, 2006 held bynon-affiliates was $2,486,864,850.

The number of shares outstanding of the registrant’scommon stock was 131,079,130 as of February 13, 2007.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the registrant’s Definitive Proxy Statement to be filed with the Securitiesand Exchange Commission (the “Commission”) pursuant to Regulation 14A inconnection with the 2007 Annual Meeting of Stockholders to be held on May 23,2007 are incorporated herein by reference into Part III of this Report. SuchDefinitive Proxy Statement will be filed with the Commission not later than 120days after December 31, 2006.

 

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*You should read the followingtogether with the more detailed information regarding our company, our commonstock and our financial statements and notes to those statements appearingelsewhere in this document or incorporated by reference. The Securities andExchange Commission, or SEC, allows us to “incorporate by reference”information that we file with the SEC, which means that we can discloseimportant information to you by referring you to those documents. Theinformation incorporated by reference is considered to be part of this annualreport on Form 10-K.*

*Except for the historicalinformation contained herein, this annual report on Form 10-K and theinformation incorporated by reference contains forward-looking statements thatinvolve risks and uncertainties. These statements include projections about ouraccounting and finances, plans and objectives for the future, future operatingand economic performance and other statements regarding future performance.These statements are not guarantees of future performance or events. Our actualresults may differ materially from those discussed here. Factors that couldcause or contribute to such differences are described in Part I, Item 1A,entitled “Risk Factors,” as well as those discussed in Part II, Item ,7entitled “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” and elsewhere throughout this annual report on Form10-K and in any other documents incorporated by reference into this report. Wedisclaim any obligation to update any forward-looking statement.*

**PART I**

**Item 1. *Business***

We are a biopharmaceutical company committed toimproving the lives of people with diabetes, obesity and other diseases throughthe discovery, development and commercialization of innovative medicines. Wehave developed and gained approval for two first-in-class medicines to treatdiabetes, BYETTA® (exenatide) injection and SYMLIN® (pramlintide acetate) injection, both of whichwere commercially launched in the United States during the second quarter of2005.  BYETTA has also been approved inthe European Union, or EU, and we expect the commercial launch of BYETTA,through our collaboration partner, Eli Lilly and Company, or Lilly, in variousEU member states to occur in 2007.

BYETTA is the first and only approved medicine in anew class of compounds called incretin mimetics. We began selling BYETTA in theUnited States in June 2005. It is approved as an adjunctive therapy toimprove glycemic control in patients with type 2 diabetes who have not achievedadequate gylcemic control and who are taking metformin, sulfonylurea and/or athiazolidinediene (TZD), the three most common oral therapies for type 2diabetes.  Net product sales of BYETTAwere $430.2 million in 2006 and $75.2 million in 2005.

We have an agreement with Lilly for the globaldevelopment and commercialization of exenatide. This agreement includes BYETTAand other formulations of exenatide such as exenatide LAR. Under the terms ofthe agreement, operating profits from products sold in the United States areshared equally between Lilly and us and Lilly will pay us royalties for productsales outside of the United States. Lilly has primary responsibility fordeveloping and commercializing BYETTA outside of the United States, including anysustained-release formulations of exenatide such as exenatide LAR.

SYMLIN is the first and only approved medicine in anew class of compounds called amylinomimetics. We began selling SYMLIN in theUnited States in April 2005. It is approved as an adjunctive therapy toimprove glycemic control in patients with either type 2 or type 1 diabetes whoare treated with mealtime insulin but who have not achieved adequate glycemiccontrol.  We own 100% of the globalrights to SYMLIN.  Net product sales ofSYMLIN were $43.8 million in 2006 and $11.5 million in 2005.

We have a field force of approximately 550 peoplededicated to marketing BYETTA and SYMLIN in the United States.  Lilly co-promotes BYETTA 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 care specialists.

In addition to our marketed products, we have ongoingprograms in pharmaceutical discovery and development, including late-stageprograms****for diabetes and obesity.We are also working with Lilly and Alkermes, Inc., or Alkermes, to develop asustained-release formulation of exenatide, which we refer to as exenatide LAR,to enable once-weekly administration of exenatide for the treatment of type 2diabetes.  As part of our IntegratedNeurohormonal Treatment of Obesity, or INTO, strategy, we have four ongoingclinical trials designed to evaluate novel compounds as new treatments forobesity.  We have partnered with PsychoGenics, Inc. toform Psylin Neurosciences, Inc., or Psylin, a company that will focus on thediscovery and development of peptide hormones for treatment of psychiatricindications.  We also havemultiple early stage programs for diabetes, obesity and other therapeuticareas, maintain an active discovery research program focused on novel peptidetherapeutics and are actively seeking to in-license additional drug candidates.

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In January 2007, we announced that on March 1, 2007Ginger L. Graham will step down as our chief executive officer and willcontinue to serve as a member of our board of directors.  Daniel M. Bradbury, our current president andchief operating officer, will become our president and chief executive officereffective March 1, 2007.

Our principal executive offices are located at 9360Towne Centre Drive, San Diego, CA 92121, and our telephone number is (858)552-2200. We were incorporated in Delaware in September 1987. We maintaina website at *www.amylin.com*. Thereference to our worldwide web address does not constitute incorporation byreference into this report of any of the information contained on our website.

Our periodic and current reports that we file with theSEC are available free of charge on our website at *www.amylin.com* as soon as reasonably practicable after wehave electronically filed them with, or furnished them to, the SEC.

**Diabetes**

Diabetes is a major healthproblem worldwide and is the fifth leading cause of death by disease in theUnited States. Diabetes is a complex, multihormonal disorder of carbohydrate,fat and protein metabolism, primarily resulting from the failure of pancreaticbeta cells to produce sufficient insulin, the hormone needed to convert sugar,starches and other foods into energy. The result is that not enough glucose can enter and fuel the body’scells and it builds up in the bloodstream causing hyperglycemia (high bloodsugar), which may result in severe complications such as kidney failure, nervedamage, blindness, amputation and 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 sugar,which if left untreated, can be fatal.

It is estimated that nearly200** **million people worldwidehave diabetes. Of that population, it is estimated that approximately 90-95%have type 2 diabetes, also known as adult-onset diabetes, and the remainderhave type 1 diabetes, also known as juvenile-onset diabetes. In the UnitedStates alone, in 2005 there were approximately 20.8 million people, or 7% ofthe population, with diabetes and there were approximately 20.6 million over theage of 20, or 9.6% of all people in this age group, with diabetes. However, in2005 only 14.6 million people in the United States had been diagnosed withdiabetes and approximately 1.5 million new cases were diagnosed. From 1997through 2004, new cases of diagnosed diabetes among Americans aged 18-79increased by 54%. In addition, there are currently approximately 54 millionpeople in the United States with pre-diabetes, a condition that raises the riskof developing type 2 diabetes, heart disease and stroke. People withpre-diabetes have blood glucose levels higher than normal but not highenough for a diabetes diagnosis.

Glycated hemoglobin (A1C) isthe most widely accepted measure of long-term blood glucose control. A1C levelis a recognized indicator of an individual’s average blood glucoseconcentrations over the preceeding 3 to 4-month period. Lower A1C levelsindicate better average blood glucose control, with values in people withoutdiabetes usually being less than 6%. The American Diabetes Association, or ADA,suggests that people with diabetes should aim for an A1C value that is lowerthan 7%. It is estimated that nearly two-thirds of Americans being treated fordiabetes are failing to achieve recommended blood glucose levels and, accordingto research studies conducted in the United States and abroad, these patientswould significantly benefit from improved glycemic control. In general, forevery 1-point reduction in A1C, the risk of developing microvascular diabeticcomplications (eye, kidney and nerve disease) is reduced by up to 40%. However,only a minority of people diagnosed with diabetes in the United States are ableto achieve the ADA’s recommended target A1C level, even with available drugtherapies. Additionally, aggressive use of insulin and some oral medications toreduce glucose levels can be associated with an increased risk of hypoglycemiaand weight gain. Consequently, there has long been a need to develop newtreatment strategies that improve the overall health profile of patients withdiabetes and reduce the risk of complications without increased pain andsuffering.

In people without diabetes,the beta cells of the pancreas produce two hormones, insulin and amylin. Type 1diabetes, which is most often diagnosed in children and young adults, destroysbeta cells, resulting in a deficiency of both hormones. Replacement of betacells through islet transplant therapy can, in some cases, temporarily renderpatients insulin-independent; however, life-long daily insulin therapy is usuallyrequired to sustain life for people with type 1 diabetes. The addition ofSYMLIN therapy to insulin therapy reduces the typical rise in blood sugarsafter meals thereby contributing to a reduction in A1C levels.

Type 2 diabetes results fromthe body’s inability to produce sufficient insulin, or to properly useavailable insulin, or both. Secretion of the hormone amylin is also impaired inpeople with type 2 diabetes. Historically, type 2 diabetes occurs later inlife. However, primarily as a result of changes in diet and lifestyle, type 2diabetes is now occurring much earlier in 

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life for many people. Diet and exercise therapy, oralmedications, BYETTA, insulin, and insulin with SYMLIN are currently used totreat type 2 diabetes.

Type 2 diabetes usually beginswith insulin resistance, a disorder in which the cells do not use insulinproperly. As the disease progresses, the beta cells in the pancreas graduallylose their ability to produce insulin in a timely manner. Because of theprogressive nature of the disease, no single therapy is currently proven to beeffective in controlling the disease over time. As the disease progresses,typically one or more oral medications become necessary, and these often becomeineffective in regulating blood glucose levels. Historically, insulin therapyis then added; however, over time, the insulin dosage and number of insulininjections usually need to be increased. Even with additional insulininjections, many people are unable to control their blood glucose levels, or doso at the expense of weight gain and increased risk of hypoglycemia.

In 2005, we introduced twonew treatment options, BYETTA and SYMLIN, for healthcare professionals to usein the diabetes care continuum. BYETTA offers patients with inadequate glycemiccontrol using oral medications the opportunity to better control their bloodglucose levels and lose weight. SYMLIN offers patients with inadequate glycemiccontrol using mealtime insulin the opportunity to better control their bloodglucose levels and lose weight. These novel first-in-class medicines providenew options in disease management and glucose control to millions of peoplesuffering from diabetes.

For people suffering fromdiabetes, poor control of blood glucose levels has been shown to result in severelong-term complications. For instance, the United States Centers for DiseaseControl, or CDC, has stated that complications due to diabetes include:

·                  heartdisease and stroke;

·                  highblood 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.

Weight control and obesityare also major problems for patients with diabetes, particularly for thosepeople using insulin and certain oral medications as part of their treatmentregimen. In addition, patients with diabetes frequently have wide fluctuationsin blood sugar following meals. These fluctuations in blood sugar cansignificantly affect a patient’s quality of life. Collectively, thesecomplications and associated metabolic disorders can lead to increased pain,suffering, reduced quality of life, reduced productivity in the workplace andearly death.

**Marketed Products**

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

BYETTA is the first and only approved medicine in anew class of compounds called incretin mimetics. We began selling BYETTA in theUnited States in June 2005 as add-on therapy to improve glycemic controlin patients with type 2 diabetes who have not achieved adequate gylcemiccontrol and who are taking metformin and/or sulfonylurea, two common oraltherapies for type 2 diabetes.  InDecember 2006, the United States Food and Drug Administration, or 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.

BYETTA provides self-regulating glucose control byaugmenting the body’s natural physiologic processes, allowing the body torespond to blood glucose changes as they occur. BYETTA directly affects thebeta cells’ responses to elevated glucose by enhancing insulin secretion; thiseffect dissipates as glucose levels approach the normal range. BYETTA alsorestores first-phase insulin response, an effect which is evident following theinitial dose. BYETTA is administered twice a day by using a fixed doseinjection, and requires no dose adjustments due to changes in meal size orcomposition, exercise or other variables. No additional glucose monitoring isrequired with BYETTA therapy.

The most common adverse effect of BYETTA is mild tomoderate nausea, which tends to dissipate with time. Mild to moderatehypoglycemia has also been observed, primarily when used in conjunction withsulfonylurea, an agent that is known to cause hypoglycemia.

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We estimate the number of people in the United Statescurrently using metformin, sulfonylurea and/or a TZD to be approximately 8.2million. In addition, we estimate that more than 30% of those patients changetheir oral therapy at least once a year. Approximately two-thirds of alldiabetes patients using oral medications are believed to have an A1C higherthan the ADA’s recommendation of less than 7% and the vast majority of thesepatients could be candidates for BYETTA.

In 2005, we launched BYETTA utilizing our field forceof approximately 400 with the Lilly field organization supporting BYETTA,focusing our sales efforts on an initial target list of approximately 40,000physicians in the United States. These targeted physicians write more than halfof the prescriptions for diabetes medications in the United States.  In late 2006, we expanded our field force toapproximately 550 and, together with the Lilly field organization, expanded ourreach to approximately 65,000 physicians who write approximately 70% of theprescriptions for diabetes medication in the United States.  Our goal is to provide education, throughboth one-on-one interactions and educational programs, to ensure that thesephysicians understand BYETTA including its mechanisms of action, potentialbenefits and important use considerations, and that they are prepared to selectthe appropriate patients to begin BYETTA therapy.

Lilly has primary responsibility for developing andcommercializing BYETTA outside the United States, including anysustained-release formulations such as exenatide LAR.  In November 2006, we announced that theEuropean Commission granted marketing authorization for BYETTA for the treatmentof type 2 diabetes.  We currently expectLilly to commercially launch BYETTA in various EU member states in 2007.

*BYETTA Development Activities*

In June 2006, we announced the results of a two-yearstudy which showed that BYETTA sustained improvements in blood sugar controland reduced body weight in people with type 2 diabetes who previously did notachieve adequate control of the blood sugar level on common oralmedications.  After two years oftreatment, patients sustained an average A1C reduction of 1.1% frombaseline.  This A1C reduction isconsistent with the A1C reduction of 1.1% at the end of the initial 30-weekclinical trial, demonstrating sustained efficacy over the two-year period.  Fifty percent of patients in this studyreached an A1C of 7% or less, and 31% achieved an A1C of 6.5% or less after twoyears of treatment.  Average weight losswas 10 pounds at two years compared to the average loss of five pounds after 30weeks.

In June 2006, we also announced results from a 16-weekstudy that showed BYETTA lowered blood glucose levels for people with type 2diabetes who had not achieved target blood glucose levels despite the use of aTZD with or without metformin.  Patientsusing BYETTA showed improvements in three important measures of blood glucosecontrol:  fasting blood glucose;postprandial blood glucose; and A1C.  A1Cimproved by approximately 0.9% compared to the control group.  Sixty-two percent of study participants usingBYETTA who completed the full study reached a target A1C of 7% or less.  Patients using BYETTA lost an average ofapproximately three pounds of body weight, while those treated with placebolost an average of approximately one-half pound.

In September 2006, we announced results from a 52-weekstudy indicating that BYETTA improves blood sugar levels as effectively asbiphasic insulin aspart 30/70 (NovoMix 30®, NovoNordisk) in people with type 2diabetes failing to achieve acceptable blood sugar control on both metforminand sulfonylurea.  This long-termclinical trial was the second study conducted at European clinical centersdemonstrating that BYETTA can control blood sugar as effectively asinsulin.  During this study, patientsusing BYETTA showed improvements in three important measures of blood glucosecontrol:  fasting blood glucose;postprandial blood glucose; and A1C. BYETTA treatment also resulted in an average reduction in bodyweight.  Thirty-two percent of patientsusing BYETTA reached a target A1C of 7% or less.  When measured against the InternationalDiabetes Federation, or IDF, recommended target of A1C of 6.5% or less, 18% ofpatients in the BYETTA group achieved this level compared to 9% in the biphasicinsulin aspart group.  Patients on BYETTAlost an average of 5.5 pounds, while those receiving biphasic insulin aspartgained an average of 6.4 pounds.  Inaddition, BYETTA significantly reduced peak blood sugar levels after meals.

In September 2006, we also announced results from a32-week study indicating that BYETTA improves blood sugar levels as effectivelyas insulin glargine (Lantus®, Sanofi Aventis) for people with type 2 diabetes failingto achieve acceptable blood sugar control on metformin or a sulfonylurea.  This was the third study demonstrating thatBYETTA can control blood sugar level as effectively as insulin.  Patients experienced similar reductions inA1C when treated with BYETTA or insulin glargine.  In both patient groups, approximately 40% ofstudy participants reached a target A1C of 7% or less.  When measured against the IDF recommended targetof A1C of 6.5% or less, 24% of patients on BYETTA achieved this target comparedwith 14% when treated with glargine. After taking BYETTA, patients lost an average of 4.3 pounds, but aftertaking insulin glargine, patients gained an average of 0.77 pounds.  In addition, BYETTA significantly reducedpeak blood sugar levels after meals.

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In April 2005, concurrently with BYETTA’s initialapproval, the FDA issued an approvable letter for BYETTA when used as amonotherapy (stand-alone therapy) for patients with type 2 diabetes.  In 2006, we commenced a monotherapy study forBYETTA and currently expect to have the results in the second half of 2007. Anyadditional data submitted in response to the FDA’s approvable letter to supporta monotherapy indication is expected to receive a six-month review. We are alsoconducting other clinical trials to further our knowledge of the utility ofBYETTA.

In February 2007, we announced that the FDA approvedmore convenient patient storage instructions for BYETTA.  BYETTA pens can now be kept at roomtemperatures below 77 degrees Fahrenheit after first use.  Prior to first use, BYETTA pens must continueto be refrigerated at temperatures between 36 and 46 degrees Fahrenheit.

In June 2006, we entered into an agreement with NastechPharmaceutical Company to develop a nasal spray formulation of exenatide.  We and Nastech will jointly develop the nasalspray formulation using Nastech’s proprietary nasal delivery technology.  We have the responsibility for thedevelopment program including clinical, non-clinical and regulatory activities,while Nastech will focus on drug delivery and chemistry, and manufacturing andcontrols activities.  We have alsosubmitted an Investigational New Drug Application, or IND, to the FDA for ahuman feasibility study for nasal exenatide. We expect to complete a nasal exenatide Phase 1 clinical trial laterthis year.

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

SYMLIN is the first and only approved medicine in anew class of compounds called amylinomimetics. We began selling SYMLIN in theUnited States in April 2005 as adjunctive therapy to mealtime insulin totreat diabetes. Other than insulin and insulin analogues, SYMLIN is the firstFDA-approved medication addressing glucose control for patients with type 1diabetes since the discovery of insulin over 80 years ago. SYMLIN is intendedto improve blood glucose control in people treated with insulin alone or, inthe case of patients with type 2 diabetes, treated with insulin plus one ormore oral medications.

SYMLIN is indicated for use in adults with type 2 ortype 1 diabetes to control blood sugar. SYMLIN works with insulin to smooth outthe peaks in blood glucose levels to give patients more stable blood glucoselevels after meals and throughout the day. SYMLIN also lowers the A1C levels ofmost patients beyond what insulin alone can achieve. SYMLIN induces satiety,which leads to eating less and weight loss in most patients. In addition,because SYMLIN works with insulin to control blood sugar, patients often needless insulin to achieve desired blood sugar levels after meals.

SYMLIN is used with insulin and has been associatedwith an increased risk of insulin-induced severe hypoglycemia. The risk can bereduced by appropriate patient selection, careful patient instruction andinsulin dose adjustments. Other adverse effects commonly observed are primarilygastrointestinal, including nausea, which decrease over time in most patients.

Our initial SYMLIN launch was focused on a targetphysician population of 3,000, with a goal of educating these physicians onSYMLIN including its mechanisms of action, potential benefits, useconsiderations, and appropriate patient selection for initiating SYMLINtherapy.  SYMLIN is now supported by the full Amylin field force ofapproximately 550 individuals currently targeting approximately 21,000physicians.  These physicians writeapproximately 40% of all insulin prescriptions in the United States.

*SYMLIN Development Activities*

In 2006, we conducted a 16-week study designed toevaluate the efficacy and safety of adding SYMLIN at mealtime to an establishedregimen of once-daily basal insulin.  InSeptember 2006, we announced results from this study including that patientsreceiving SYMLIN on average had better overall A1C, reduced glucosefluctuations, used less insulin and experienced weight loss, compared to thoseusing basal insulin without SYMLIN.  Inthis study, 25% of those patients using basal insulin and mealtime SYMLINachieved all four components of the composite endpoint compared to 7% of thosereceiving basal insulin with placebo. These four components included a drop in A1C level of at least 0.5% frombaseline or achieving a 7% or lower A1C target, limiting post-meal glucose excursionsto 40 mg/dL or less, no weight gain and no severe hypoglycemia.  In the fourth quarter of 2006, we submittedan sNDA to the FDA seeking approval for the use of SYMLIN at mealtime inpatients with type 2 diabetes treated with once-daily basal insulin.

During 2006, we continued to enroll patients in anopen-label observational study of SYMLIN. This study is designed to evaluateSYMLIN use in the marketplace. Patients receive SYMLIN as part of their routinediabetes management and are followed in this real-world setting for a period ofsix months.  In addition, in the secondquarter of 2006 we initiated a 

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smallpharmacokinetic study in pediatric patients (ages 12 to 16) with type 1diabetes that is designed to provide insight into dosing in a pediatricpopulation.

In the second quarter of 2006, we submitted asupplemental New Drug Application, or sNDA, to the FDA seeking approval of adisposable pen for the delivery of SYMLIN in cartridges.  We believe the SYMLIN pen will not onlyenable patients to more easily deliver the proper dose but will also improvethe convenience of administering SYMLIN. If approved by the FDA, we plan to make the SYMLIN pen available topatients in the second half of 2007.

**Research and Development**

***Product Pipeline Programs***

We have late-stage development****programs in the therapeutic areas ofdiabetes and obesity and multiple early-stage programs in diabetes and obesity.Our years 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 thesediseases are linked in numerous ways, which are reflected in the impact eachhas on the other.

#### ***Diabetes***

#### ***Exenatide LAR***

Exenatide LAR is our late stage development program indiabetes.  Exenatide is the activeingredient in BYETTA and is combined with proprietary technology developed byus and our partner, Alkermes, for a sustained release delivery of exenatide.  The combination of potency and theglucose-dependent mechanism of action inherent in exenatide makes it wellsuited to development of a sustained-release formulation. We have an agreementwith Alkermes for the development, manufacture and commercialization ofexenatide LAR and this program is included in our collaboration agreement withLilly. We are working with Lilly and Alkermes to develop a formulation thatenables a once-a-week administration of exenatide for the treatment of type 2diabetes.

In March 2006, following discussions with the FDA, weinitiated a long-term comparator clinical study of exenatide LAR in patientswith type 2 diabetes.  This 30-week studyis designed to generate the type of safety and efficacy data that could formthe basis of a new drug application and will assess whether once-weekly exenatideLAR is at least as effective in improving glucose control as twice-dailyBYETTA.  We expect to have results ofthis study in the second half of 2007.

In June 2006, we announced detailed results from asafety and efficacy study of the LAR formulation of BYETTA.  The study was conducted in 45 patients withtype 2 diabetes unable to achieve adequate glucose control with metformin or adiet and exercise regimen.  Some of thepatients received a once-weekly 2.0 mg dose subcutaneous injection of exenatideLAR or placebo.  After 15 weeks oftreatment there was a 12-week safety monitoring period during which nomedication was administered.  At thebeginning of the study, the average A1C of study participants was approximately8.5%.  In patients receiving 2.0 mg doseof exenatide LAR, the average reduction in A1C was 1.7% compared to an increaseof 0.4% in the placebo group.  Inpatients administered 2.0 mg of exenatide LAR, 86% achieved A1C levels of 7% orless.  None of the patients given placeboachieved this target level of glucose control.

In this study, fasting blood glucose levels werereduced at week 15 by an average of 39 mg/dL in patients receiving the 2.0 mgdose of exenatide LAR compared to an average increase of 18 mg/dL in patientsreceiving placebo.  Average fasting bloodglucose level at the beginning of the study was 179 mg/dL.  Patients who received 2.0 mg of exenatide LARalso experienced average reductions in body weight of 8.4 pounds at week 15with no evidence of a plateau in weight change at that time.  Body weight remained essentially unchangedfor placebo group.  The most frequentadverse event was mild nausea, experienced by 27% of subjects in the 2.0 mgdose group compared to 15% in the placebo group.  No severe hypoglycemia was observed and nosubjects receiving exenatide LAR withdrew because of adverse events.

## ***Obesity***

Obesity is achronic condition that affects millions of people and is linked to increasedhealth risk 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 estimated that the total direct andindirect costs attributed to overweight and obesity 

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health issues exceeds$100 billion in the United States each year.

Genetic,metabolic, psychological and environmental factors can all contribute toobesity. Obesity is measured by Body Mass Index, or BMI, a mathematical formulausing a person’s height and weight. BMI is calculated by dividing a person’sweight in kilograms by the person’s height in meters squared. A person with aBMI between 25 and 29.9 is considered overweight. A person with a BMI of 30 ormore is considered obese, and a person with a BMI of 40 or more is consideredseverely obese. Current treatments for obesity include diet, exercise, drugtherapy and surgery.

***Treatmentof Obesity with Pramlintide***

We are developingpramlintide acetate, the active ingredient in SYMLIN, as a potential treatmentof obesity.  Pramlintide acetate has beenstudied extensively in people with diabetes and has demonstrated the effect oflowering body weight.

In February 2006, we reported results from a Phase 2dose-ranging study evaluating the safety and weight effects of pramlintide inobese subjects. After completing 16 weeks of treatment with pramlintide inaddition to lifestyle intervention, subjects on average experienced an 8.4 to13.4 pound weight loss from baseline, compared to a 6.2 pound weight loss withplacebo plus lifestyle intervention. Several of the twice-daily andthree-times-a-day pramlintide dosage arms achieved the primary study endpointof significant difference in weight from placebo at week 16.

Weight loss experienced with pramlintide was typicallyprogressive in nature through 16 weeks. At the end of the study, morepramlintide recipients than placebo recipients reported that study medicationhad helped them to control appetite and portion sizes.

Pramlintide was well tolerated and showed progressiveweight loss at doses up to 360 micrograms. No new safety signals were observedin this study, which included higher doses than those previously studied inobese subjects. There was clear evidence of a dose response for the twice-dailyregimens. Consistent with previous observations, the most common adverse effectwas mild nausea. Weight loss in subjects who did not experience nausea wassimilar to that seen in the overall study population.

In October 2006,we reported results from a continuation of this study that demonstrated thatpatients completing 52 weeks of pramlintide therapy experienced a 7-8% meanbody weight reduction, depending upon the dose they received, compared to a 1%reduction in patients receiving placebo. We also reported pre-clinical data revealing synergistic weight losseffects when amylin is used in combination with other neurohormones.

***Integrated Neurohormonal Therapyfor Obesity (INTO)***

In 2006, we announced an expansion of our clinicalprogram in obesity which will assess the safety and efficacy of multipleneurohormones used in combination with pramlintide to treat obesity.  We refer to this program as IntegratedNeurohormonal Therapy for Obesity, or INTO. Integrated neurohormonal therapy is designed to restore the body’smetabolism to its pre-disease state by using neurohormones that work togetherto address the physiologic imbalances that cause complex chronic diseases suchas obesity.  Our INTO program is based oncombination therapies and as part of this program, we will study usingcombinations of small molecules and combinations of peptide and proteinhormones.

Three molecular franchises are the primary focus ofour INTO program:  amylin, and inparticular pramlintide acetate, its synthetic version; leptin, a proteinhormone produced from the fat cell that plays a fundamental role in metabolismand also communicates to the brain; and PYY 3-36, a molecule that is secretedin the gut and provides some satiety of hunger control 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**

Based on preclinical and clinical data, pramlintide mayplay an important role in our INTO program. We are currently conducting a clinical study using pramlintide incombination with approved oral obesity agents, phentermine and sibutramine.  This Phase 2b study is designed to replicatepreclinical data showing the additive effects of these combinations.  We expect to have the results of this studyin the second half of 2007.  We are alsoconducting a clinical study using pramlintide in combination with leptin.  This proof of concept study will investigatethe synergy of pramlintide and leptin found in preclinical studies.  We expect to have data from this study in thesecond half of 2007.  We are alsostudying pramlintide in combination with PYY 3-36.  This safety study would facilitate a triplecombination study with pramlintide 

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acetate,leptin and PYY 3-36, if the combination of pramlintide and leptin showspotential.  We are conducting a fourthclinical study to evaluate a second-generation amylinomimetic designed to haveenhanced anti-obesity properties.  Weexpect this study will be completed in the first half of 2007.  In 2006, we submitted an IND application tothe FDA for this Phase 1 drug candidate.

**Leptin**

Leptin is the second compound we are studying inconnection with our INTO program.  Inearly 2006, we acquired the exclusive rights to the leptin molecular franchiseand program from Amgen, Inc., or Amgen. Leptin is a naturally occurring proteinhormone secreted by fat cells. It plays a key role in metabolism throughmultiple metabolic actions and appears to act primarily at the hypothalamus toregulate food intake and energy expenditure. Under the terms of the licenseagreement, we made an up-front payment, may make potential future paymentsrelated to technology transfer and development and regulatory milestones andwill pay royalties on any product sales. Our license includes exclusive rightsto the leptin intellectual property developed by Amgen as well as intellectualproperty Amgen originally licensed from Rockefeller University.

Leptin’s roles in the 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 (insulin resistance,hyperglycemia, and dyslipidemia), are rendered incapable of secretingsufficient amounts of leptin due to the loss of fat cell mass.

In June 2006, we announced pre-clinical study resultsshowing that co-administration of leptin with amylin (a neurohormone producedby beta cells in the pancreas) resulted in sustained, fat-specific weight lossin leptin-resistant diet-induced obese rats. Co-administration of leptin and amylin resulted in a decrease in food intakeand body weight greater than that seen with either hormone alone.  The amylin plus leptin combination alsoincreased fat oxidation and prevented the fall in energy expenditures that isusually expected with weight loss. Weight loss occurred due to decreased fat mass, while lean tissue waspreserved.

We have commenced a 24-week study on 125 randomizedobese patients who will be divided into three groups in order to compare theeffects of treating obesity with a combination of pramlintide and leptin.  We expect this study to provide us with datathat will help us determine whether the combination of pramlintide and leptinworks in humans as we observed in obese animal models.  The primary endpoint of the study will bebody weight. We expect results of this study in the second half of 2007.

**PYY 3-36**

PYY 3-36 is the third compound we are studying inconnection with our INTO program.  We aredeveloping PYY 3-36 as a drug candidate for the potential treatment ofobesity.  Independent researchers havereported a reduction in food intake in humans using PYY 3-36.

### ***Research Activities***

A key element of our strategyis to develop first-in-class compounds for treating metabolic diseases. Toachieve this goal, we are exploring hormones with multiple mechanisms ofaction that will potentially lead to products that have utility in treatment ofmore than one disease with the potential for many product forms. To do so, we take an integrated andbiological, rather than a target-driven, approach to research. Our research iscentered on peptide hormones that play an important metabolic role, and whichwe consider more likely to have an acceptable safety profile because thesehormones exist naturally in the human body. Our development path begins withidentifying a particular peptide and then determining if it is a circulatinghormone, a substance that travels through the bloodstream to affect bodilyfunctions. We then attempt to understand the hormone’s functionality andpotential impact on a disease. Rather than starting with a known biology andtargeting molecules to modify, enhance, or block it, our scientists arediscovering the biology of previously unknown peptides and uncovering utilitythat could potentially translate into a new human therapy.  The conventional development process commonlyused in the pharmaceutical industry, emphasizes utilizing isolated cells ormolecular targets to advance drug discovery. Our approach to research calls forour scientists to quickly move to *in vivo*testing using highly predictive animal models that allow us to design subsequentinformation-rich clinical trials in humans.

Based on a premise that everypeptide hormone has a utility — and a potential therapeutic benefit — we havedeveloped a proprietary and continually growing peptide hormone library we callPHORMOLÔ. PHORMOL encompasses an extensive panel ofpotentially valuable biologics that have been taken from nature, includinghuman peptides not 

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previously described. All of these have beensynthesized to create a rich source of compounds for ongoing research in theirfunctionality, utility, and potential value in treating a range of humandiseases.  In January 2007, we announcedthat we have partnered with PsychoGenics, Inc., to form Psylin, a company thatwill focus on the discovery and development of peptide hormones for treatmentof psychiatric indications.  Psylin willhave access to certain molecules in PHORMOL.

We are developing capabilities in delivery systemresearch and development, focused on product presentations that enhanceclinical outcomes and patient convenience. Delivery systems are selected on the basis of technical feasibility,regulatory acceptance and market preference. They include injectable sustained release formulations such as saltcomplexes, lipids, biodegradable polymer and gel systems, as well asnon-injectable systems such as nasal sprays, inhalation, oral and transdermalsystems.  We are also using our resources to optimizepharmaceutical properties of peptide drugs to develop new peptide hormoneanalogs that may be more amenable to alternative forms of delivery.

We currently have approximately 600 full-timeemployees dedicated to our research and 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 endedDecember 31, 2006, 2005 and 2004, we incurred research and developmentexpense of $222.1 million, $132.1 million and $119.6 million, respectively.

### **In-Licensing Activities**

To augment our internal discovery and developmentcapabilities, we also license or acquire rights to compounds, drug candidatesand technologies that have been developed outside of Amylin. In addition toacquiring the exclusive rights to the leptin molecular franchise and programfrom Amgen, in 2006 we in-licensed intellectual property and other rights toglucose-dependent insulinotropic polypeptide (GIP) agonists fromDiabetica, Ltd.  The transaction included rightsto certain pre-clinical GIP agonist molecules.  Weplan to explore the utility of GIP compounds in diabetes and other metabolicdisorders.  In late 2005, we acquired thechemical ligation technology and intellectual property from GryphonTherapeutics, Inc.  This acquisitionexpands our chemistry capabilities and improves our flexibility for thesynthesis and precision engineering of larger peptides and proteins forresearch.  We continue to evaluate other in-licensing opportunities.

**Sales, Marketing and Distribution**

We have built a sales and marketing organization thatfocuses on healthcare providers, managed healthcare organizations, wholesalersand pharmacies, government purchasers and other third-party payors.  In late 2006, we expanded our field force byapproximately 150 people. We currently have a field force of approximately 550people dedicated to marketing BYETTA and SYMLIN in the United States. Lillyalso co-promotes BYETTA in the United States. Our field force includes aprimary care sales force as well as a specialty sales force of approximately 74representatives who call on endocrinologists and other physicians who havelarge diabetes care practices and other healthcare professionals who supporttheir practices. Our field organization also includes a managed care andgovernment affairs organization, a medical science organization, and diabetescare specialists who support broad medical education programs for both BYETTAand SYMLIN. Members of our sales andmarketing team have extensive industry experience from a wide range of largeand small companies and have substantial experience in the field of diabetes,as well as in launching and marketing pharmaceutical products.

We utilize common pharmaceutical company practices tomarket our products. We call on individual physicians and other healthcareprofessionals and other organizations and individuals involved in theprescribing, 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 on medical education efforts for bothBYETTA and SYMLIN through thousands of programs across the United Statesorganized by our medical affairs and professional 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.

We provide customer service and other related programsfor our products, such as disease and product-specific websites, insuranceresearch services, a customer service call center and order, delivery andfulfillment services. We have programs in the United States that providequalified uninsured and underinsured patients with our products at no charge.

We sell BYETTA and SYMLIN to wholesale distributorswho in turn sell to retail pharmacies and government entities. Decisions madeby these wholesalers and their customers regarding the levels of inventory theyhold, and thus the amount of BYETTA and SYMLIN they purchase, may affect thelevel of our product sales in any particular period.

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**Manufacturing**

Wehave selected manufacturers that we believe comply with current GoodManufacturing Practices, or cGMP, and other 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 contractmanufacturers adhere to cGMP, except for products and product candidates fortoxicology and animal studies, which we require to be manufactured inaccordance with current Good Laboratory Practices, or cGLP.

Although some materials for our drug products are currently availablefrom a single-source or a limited number of qualified sources, we will attemptto acquire a substantial inventory of such materials, establish alternativesources and/or negotiate long-term supply arrangements. We believe we will nothave any significant issues obtaining suppliers; however, we cannot be certainthat we will be able to obtain long-term supplies of our manufacturingmaterials.

***BYETTA Manufacturing***

We obtainexenatide, the active ingredient contained in BYETTA, from Bachem California,or Bachem, and Mallinckrodt, Inc., or Mallinckrodt, pursuant to long-termagreements with each company. We have long-term agreements withWockhardt UK (Holdings) Ltd., or Wockhardt, and Baxter PharmaceuticalSolutions LLC, a subsidiary of Baxter, Inc., or Baxter, to supply us the dosageform of exenatide in cartridges.  We havea long-term agreement with Lilly to supply pens for delivery of BYETTA incartridges.

***SYMLIN Manufacturing***

We obtainpramlintide acetate, the active ingredient contained in SYMLIN, from Bachem andLonza Ltd., or Lonza, pursuant to long-term agreements with each company. Wehave a long-term contract with Baxter for the dosage form of SYMLIN in vials.We also 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 for the assembly of the SYMLIN pen componentsand cartridges.

***Exenatide LAR Manufacturing***

Underthe terms of our development and license agreement with Alkermes, we areresponsible for manufacturing the once-weekly dosing formulation of exenatideLAR for commercial sale and will pay Alkermes milestone payments uponachievement of development milestones and royalties on sales of exenatide LAR.Alkermes will transfer to us its technology for manufacturing the once-weeklyformulation of exenatide LAR and will supply us with the polymer materialsrequired for the commercial manufacture of exenatide LAR.

Weare currently building a facility in West Chester, Ohio to manufacture exenatide LAR. We are working with Alkermes and ParsonsCommercial Technology Group, Inc., or Parsons, a group with significantexperience in the design and construction of pharmaceutical manufacturingfacilities, to complete the design, construction and validation of thisfacility. We expect to complete the commercial-scale manufacturing process forexenatide LAR and the commissioning of the facility in the second half of2008.  We are also evaluating the potentialto expand this project based on the progress of exenatide LAR through thedevelopment process.

**LillyCollaboration**

We entered into acollaboration agreement with Lilly in 2002 for the global development andcommercialization of exenatide, including both the twice-daily version, BYETTA,and sustained-release formulations, such as exenatide LAR. Under the terms ofthe agreement, Lilly made initial payments to us, and purchased approximately1.6 million shares of our common stock. In addition, Lilly has mademilestone payments to us upon the achievement of development and commercialmilestones for BYETTA. The agreement also provides for the payment by Lilly offuture milestone payments to us upon the achievement of additional developmentmilestones, which primarily relate to sustained-release formulations ofexenatide. A portion of future development milestone payments relating tosustained-release formulations of exenatide may be converted into our commonstock, at Lilly’s option, if the filing of the New Drug Application, or NDA,with the FDA for the sustained-release formulation of exenatide does not occuron or before December 31, 2007.  Wecurrently do not expect the NDA to be filed by this date. In addition, Lilly isobligated to make additional future milestone payments to us of up to$100 million contingent upon the commercial launch of exenatide inselected territories throughout the world, including BYETTA andsustained-release formulations of exenatide. Our collaboration agreement may beterminated by Lilly at any time on 60 days 

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notice.

We share exenatide UnitedStates development and commercialization costs with Lilly equally and we payLilly 50% of the operating profits from the sale of products in the UnitedStates.

In October 2006, we amended thecollaboration agreement such that effective January 1, 2007, Lilly will pay ustiered royalties based upon the annual gross margin for all exenatide productsales, including any sustained-release formulations, outside of the UnitedStates.  Royalty payments for exenatideproduct sales outside the United States will commence after a one-timecumulative gross margin threshold has been met. In addition, effective January 1, 2007, Lilly will be responsible for100% of the costs related to development of twice-daily BYETTA for sale outsideof the United States.  Development costsrelated to all other exenatide products for sale outside of the United Stateswill continue to be allocated 80% to Lilly and 20% to us.  Lilly will continue to be responsible for 100%of the 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-promotionarrangement with Lilly, the parties use approximately equal efforts toco-promote BYETTA within the United States and have agreed to use approximatelyequal efforts to co-promote sustained-release formulations of exenatide withinthe United States. Lilly will be responsible for commercialization effortsoutside the United States.  InNovember 2006, we announced the European Commission granted marketingauthorization for BYETTA for the treatment of type 2 diabetes.  We currently expect Lilly to commerciallylaunch BYETTA in various EU member states in 2007.

**Competition**

The biotechnology andpharmaceutical industry is highly competitive. There are many pharmaceuticalcompanies, biotechnology companies, public and private universities andresearch organizations actively engaged in the research and development ofproducts that may be similar to our products. 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. Many of these and other existing orpotential competitors have substantially greater financial, technical and humanresources than we do and may be better equipped to develop, manufacture andmarket products. These companies may develop and introduce products andprocesses competitive with or superior to ours. In addition, other technologiesor products may be developed that have an entirely different approach or meansof accomplishing the intended purposes of our products, which might render ourtechnology and products noncompetitive or obsolete. For example, all of ourcurrent drug products are injectable, and may have to compete with therapiesthat do not require injection. We cannot be certain that we will be able tocompete successfully.

SYMLIN is the onlynon-insulin-based drug product approved for improving blood glucose control inpeople with type 1 diabetes. Further, insulin and oral medications are ofteninsufficient for many people with type 2 diabetes to achieve satisfactoryglucose and weight control. BYETTA or SYMLIN may be complementary to, orcompetitive with, these other medications.

BYETTA and SYMLIN mustcompete with established therapies for market share. In addition, manycompanies are pursuing the development of novel pharmaceuticals that targetdiabetes. These companies may develop and introduce products competitive withor superior to BYETTA or SYMLIN. Such competitive products and potential productsinclude:

·      sulfonylureas;

·      metformin;

·      insulins(injectable and inhaled versions);

·      thiazolidinediones(TZDs);

·      glinides;

·      dipeptidylpeptidase type IV (DPP-IV) inhibitors;

·      incretin/GLP-1agonists;

·      CB-1antagonists;

·      PPARs;and

·      alpha-glucosidaseinhibitors.

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There issubstantial competition in the discovery and development of treatments forobesity, as well as emerging prescription and over-the-counter treatments forthis condition. Current treatments for obesity include dietary therapy, physicalactivity, drug therapy and surgery. Hoffmann-LaRoche and Abbott Laboratoriesalready market oral medicines for the treatment of obesity. Sanofi-Aventis hasa product candidate that has received an approvable letter from the FDA, and anumber of other pharmaceutical companies are developing new potentialtherapeutics.

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

We believe that patents andother proprietary rights are important to our business. Our policy is to filepatent applications to protect technology, inventions and improvements that maybe important to the development of our business. We also rely upon tradesecrets, know-how, continuing technological innovations and licensingopportunities to develop and maintain our competitive position. We plan toenforce our issued patents and our rights to proprietary information andtechnology. We review third-party patents and patent applications, both toshape our own patent strategy and to identify useful licensing opportunities.

We have a number of patents,patent applications and rights to patents related to our compounds, productsand technology, but we cannot be certain that issued patents will beenforceable or provide adequate protection or that pending patent applicationswill result in issued patents. We have also filed foreign counterparts to manyof these issued patents and applications.

We may obtain patents for ourcompounds many years before we obtain marketing approval for them. Becausepatents have a limited life, which may begin to run prior to the commercialsale of the related product, the commercial value of the patent may be limited.However, we may be able to apply for patent term extensions. For example,applications for patent term extensions for patents on BYETTA and SYMLIN havebeen filed in the United States, to compensate in part for delays in obtainingmarketing approval. Similar patent term extensions may be available for otherproducts that we are developing, but we cannot be certain we will obtain them.

Included within our exenatidepatent portfolio are issued patents for:

·                                          pharmaceutical compositions containingexenatide;

·                                          modulating gastric emptying;

·                                          inhibiting glucagon secretion;

·                                          stimulating insulin release; and

·                                          reducing food intake.

These patents expire between 2013 and 2020. We do not have a composition of matter patentfor the exenatide molecule.

Included within ourpramlintide patent portfolio are issued patents for:

·                                          pramlintide and other amylin agonist analoguesinvented by our researchers;

·                                          amylin agonist pharmaceutical compositions,including compositions containing pramlintide; and

·                                          methods for treating diabetes and relatedconditions using amylin agonists.

These patentsexpire between 2009 and 2018.

With respect to our drugcandidates, we have patents and patent applications pending, or have licensedpatents and patent applications, relevant to the development andcommercialization of such drug candidates.

Generally, our policy is tofile foreign counterpart applications in countries with significant pharmaceuticalmarkets.

It is also very importantthat we do not infringe patents or proprietary rights of others and that we donot violate the agreements that grant 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, ifrequired, we could obtain a license to any third-party technology or that wecould obtain one at a reasonable cost. If we were not able to 

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obtain a required license, we could be adverselyaffected. Because patent applications are confidential for at least some periodof time, there may be pending patent applications from which patents willeventually issue and prevent us from developing or selling certain productsunless we can obtain a license to use the patented technology.

Patents relating topharmaceutical, biopharmaceutical and biotechnology products, compounds andprocesses such as those that cover our existing products, compounds andprocesses and those that we will likely file in the future do not alwaysprovide complete or adequate protection. Future litigation or proceedingsinitiated by the United States Patent and Trademark Office regarding theenforcement or validity of our existing patents or any future patents couldinvalidate our patents or substantially reduce their protection. In addition,our pending patent applications and patent applications filed by ourcollaborative partners may not result in the issuance of any patents or mayresult in patents that do not provide adequate protection. As a result, we maynot be able to prevent third parties from developing the same compounds andproducts that we have developed or are developing. In addition, we do not havepatent protection or we may not be able to enforce our patents in certaincountries.  As a result, manufacturersmay be able to sell generic versions of our products in those countries.

We also rely on unpatentedtrade secrets and improvements, unpatented internal know-how and technologicalinnovation. We protect these rights mainly through confidentiality agreementswith our corporate partners, employees, consultants and vendors. Theseagreements provide that all confidential information developed or made known toan individual during the course of their relationship with us will be keptconfidential and will not be used or disclosed to third parties except inspecified circumstances. In the case of employees, the agreements provide thatall inventions made by the individual while employed by us will be ourexclusive property. We cannot be certain that these parties will comply withthese confidentiality agreements, that we have adequate remedies for anybreach, or that our trade secrets will not otherwise become known or beindependently discovered by our competitors. Under some of our research anddevelopment agreements, inventions discovered in certain cases become jointlyowned by us and our corporate partner and in other cases become the exclusiveproperty of one of us. It can be difficult to determine who owns a particularinvention and disputes could arise regarding those inventions.

**Government Regulation**

Regulation by governmentalauthorities in the United States and foreign countries is a significant factorin the development, manufacture and marketing of pharmaceutical products. Allof our potential products will require regulatory approval by governmentalagencies prior to commercialization. In particular, human therapeutic productsare subject 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 regulationsalso govern or influence the manufacturing, safety, labeling, storage, recordkeeping and marketing of such products.

The activities requiredbefore a pharmaceutical agent may be marketed in the United States begin withpreclinical testing. Preclinical tests include laboratory evaluation of productchemistry and animal studies to assess the potential safety and activity of theproduct 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 athree-phase process. In Phase 1, clinical trials are conducted with a smallnumber of healthy volunteers to determine the early safety and tolerabilityprofile and the pattern of drug distribution and metabolism. In Phase 2,clinical trials are conducted with groups of patients afflicted with aspecified disease in order to determine preliminary efficacy, dosing regimensand 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 and clinical trials for a pharmaceuticalproduct are then submitted to the FDA in the form of an NDA for approval tocommence commercial sales. In responding to an NDA, the FDA may grant marketingapproval, request additional information, or deny the application if itdetermines that the application does not satisfy its regulatory approvalcriteria.

Among the conditions for NDAapproval is the requirement that the prospective manufacturer’s quality controland manufacturing procedures conform to cGMP. In complying with cGMP,manufacturers must continue to expend time, money and effort in the area ofproduction, quality control, and quality assurance to ensure full technicalcompliance. Manufacturing facilities are subject to periodic inspections by theFDA to ensure compliance.

We are also subject tovarious federal, state, and local laws, regulations and recommendationsrelating to safe working conditions; laboratory and manufacturing practices;the experimental use of animals; and the use and disposal of hazardous orpotentially hazardous substances, including radioactive compounds andinfectious disease agents, used in connection with our research.

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The activities requiredbefore a pharmaceutical agent may be marketed in the EU are dictated by theInternational Conference on Harmonization and are generally similar to thoseestablished in the United States. Approval of new drugs across the EU relies oneither the mutual recognition process or the centralized approval process ofthe Eurpoean Medicines Evaluation Agency. Under the centralized procedure, themarketing application is referred for review to two review teams, eachrepresenting one of the member countries. Each reviewer then forwards an earlyassessment to the Committee for Proprietary Medicinal Products, or CPMP, fordiscussion and preparation of an initial consolidated assessment report,including a list of questions requesting clarification as well as additionalinformation. This step initiates a series of dialogues, meetings and othercommunications among the CPMP, the two review teams and the applicant, leadingin turn to clarification, education and refinement of the original assessment reports.Ultimately, a decision is reached to either grant marketing approval or denythe application if it is determined that the application does not satisfy theregulatory approval criteria. An alternative regulatory procedure in Europe tothe centralized procedure for some drugs is the mutual recognition process.Under the mutual recognition process, an application is filed in one countryfor review. If the drug is approved in that country, it may only be marketedinitially in that country. However, under the mutual recognition process, otherEuropean countries may individually recognize the approval and allow thedrug to then be marketed in such countries.

The clinical testing,manufacture and sale of pharmaceutical products outside of the United States andthe EU are subject to regulatory approvals by other jurisdictions which may bemore or less rigorous than those required by the United States or the EU.

### **Employees**

As of December 31, 2006,we had approximately 1,550 full-time employees. A significant number of ourmanagement and professional employees have had experience with pharmaceutical,biotechnology or medical product companies. We believe that we have been highlysuccessful in attracting skilled and experienced personnel. None of ouremployees is covered by collective bargaining agreements and we considerrelations with our employees to be good.

**Directors and ExecutiveOfficers**

**The names of our directors andexecutive officers and certain information about them as of February 15, 2007are set forth below:**
| **Name**                            | ** ** | **Age** | ** ** | **Position**                                                             |
|-------------------------------------|------------|---------|------------|--------------------------------------------------------------------------|
| Ginger L. Graham (4)                |       | 51      |       | Chief Executive Officer and  Director                                    |
| Daniel M. Bradbury                  |       | 45      |       | President, Chief Operating  Officer and Director                         |
| Joseph C. Cook, Jr. (4)             |       | 65      |       | Chairman of the Board                                                    |
| Steven R. Altman (1)                |       | 45      |       | Director                                                                 |
| Vaughn D. Bryson (1) (3)            |       | 68      |       | Director                                                                 |
| Karin Eastham (2)                   |       | 57      |       | Director                                                                 |
| James R. Gavin III, M.D., Ph.D. (3) |       | 61      |       | Director                                                                 |
| Howard E. Greene, Jr. (4)           |       | 64      |       | Director                                                                 |
| Jay S. Skyler, M.D., MACP(3)        |       | 60      |       | Director                                                                 |
| Joseph P. Sullivan (2) (4)          |       | 64      |       | Director                                                                 |
| Thomas R. Testman (2)               |       | 70      |       | Director                                                                 |
| James N. Wilson (1) (3)             |       | 63      |       | Director                                                                 |
| Alain D. Baron, M.D.                |       | 53      |       | Senior Vice President,  Research                                         |
| Craig A. Eberhard                   |       | 47      |       | Vice President, Sales                                                    |
| Mark G. Foletta                     |       | 46      |       | Senior Vice President, Finance  and Chief Financial Officer              |
| Mark J. Gergen                      |       | 44      |       | Senior Vice President,  Corporate Development                            |
| Orville G. Kolterman, M.D.          |       | 59      |       | Senior Vice President,  Clinical and Regulatory Affairs                  |
| Marcea Bland Lloyd                  |       | 58      |       | Senior Vice President, Legal  and Corporate Affairs, and General Counsel |
| Roger Marchetti                     |       | 48      |       | Senior Vice President, Human  Resources and Corporate Services           |
| Paul G. Marshall                    |       | 47      |       | Vice President, Manufacturing  and Supply Operations                     |
| Lloyd A. Rowland                    |       | 50      |       | Vice President, Governance and  Compliance, and Corporate Secretary      |
| Joe A. Young                        |       | 39      |       | Senior Vice President,  Marketing                                        |

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**(1)**           Member of theCompensation and Human Resources Committee.

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

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

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

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**Ms.Graham** has served as our Chief Executive Officer since June2006 and she served as our President and Chief Executive Officer from September2003 to June 2006. Ms. Graham has served as a director since November 1995 andcurrently serves on the Finance Committee. She previously served on the AuditCommittee and the Nominating and Governance Committee. Prior to joining Amylin,Ms. Graham held various positions with Guidant Corporation, including GroupChairman, Office of the President; and President of the Vascular InterventionGroup and Vice President. Ms. Graham held various positions with Eli Lilly andCompany from 1979 to 1992 including sales, marketing, finance and strategicplanning positions. She serves on the board of directors of the PharmaceuticalResearch and Manufacturers of America, the California Healthcare Institute, theCalifornia Council on Science and Technology, the Harvard Business SchoolHealth Industry Advisory Board, the Harvard Business School Dean’s AdvisoryBoard, the Advisory Board for the Kellogg Center for Executive Women, and theUniversity of California, San Diego Health Sciences Advisory Board. Ms. Grahamreceived an M.B.A. from Harvard University.

**Mr. Bradbury**has served as ourPresident and Chief Operating Officer since June 2006, serving as our ChiefOperating Officer since June 2003.  Hehas served as a director since June 2006. He previously served as Executive Vice President from June 2000 untilhis promotion to Chief Operating Officer in June 2003.  He joined us in 1994 and has heldofficer-level positions in Corporate Development and Marketing during thattime.  Prior to joining Amylin, Mr.Bradbury spent ten years at SmithKline Beecham Pharmaceuticals, where he held anumber of sales and marketing positions. He is a member of the board of directors of Illumina, Inc. and Novacea,Inc.  He also serves as a board memberfor BIOCOM and the Keck Graduate Institute’s Board of Trustees.  Mr. Bradbury is a member of the RoyalPharmaceutical Society of Great Britain and serves on the UCSD Rady School ofManagement’s Advisory Council.  Hereceived a Bachelor of Pharmacy from Nottingham University and a Diploma inManagement Studies from Harrow and Ealing Colleges of Higher Education.

**Mr. Cook** has been our Chairmanof the Board since March 1998. He currently serves as chair of the FinanceCommittee. He served as Chief Executive Officer from March 1998 until September2003. From 1994 to 1998, Mr. Cook served as a member of our Board and aconsultant 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 adirector of Corcept Therapeutics Incorporated. Mr. Cook is also a founder ofMountain Group Capital, LLC, Clinical Products, Inc., and Mountain Ventures,Inc. Mr. Cook also serves on the Board of Mercy Ministries, Inc. and as Chairof the Advisory Board of the College of Engineering, University of Tennessee,on the Board of Trustees for Louisville Presbyterian Theological Seminary andthe Board of Mercy Ministries, Inc.  Mr.Cook retired as a Group Vice President of Eli Lilly and Company in 1993 aftermore than 28 years of service. Mr. Cook received a B.S. in Engineering from theUniversity of Tennessee.

**Mr.Altman** has served as a director since March 2006 and serveson 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. Altman was named Executive Vice President of QTL and in 2002 he was namedPresident, a position he held until his appointment as President of QUALCOMM in2005.  Mr. Altman serves on the Board ofTrustees of The Salk Institute.  Hereceived his J.D. from the University of San Diego.

**Mr. Bryson** has served as a director since July1999 and serves as the chair of the Corporate Governance Committee and on theCompensation and Human Resources Committee. Mr. Bryson was a thirty-two yearemployee of Eli Lilly and Company and retired as its President and ChiefExecutive Officer in 1993. He was Executive Vice President from 1986 until1991, and served as a member of Eli Lilly’s board of directors from 1984 untilhis retirement in 1993. Mr. Bryson was Vice Chairman of Vector SecuritiesInternational from April 1994 to 1996. Mr. Bryson is President of ClinicalProducts, Inc., which develops and markets medical foods for people withdiabetes and obesity. He serves on the board of directors of AtheroGenics, Inc.Mr. Bryson received a B.S. in Pharmacy from the University of North Carolinaand completed the Sloan Program at the Stanford University Graduate School ofBusiness.

**Ms. Eastham** hasserved as a director since September 2005 and serves as the chair of the AuditCommittee. She has over 25 years experience in financial and operationsmanagement, primarily in life sciences companies. She currently serves asExecutive Vice President and Chief Operating Officer, and as a member of theBoard of Trustees of the Burnham Institute for Medical Research, a non-profitcorporation engaged in basic biomedical research and the home to three researchcenters — a Cancer Center, the Del E. Webb Center for Neuroscience and Agingand a Center for Research on Infectious and Inflammatory Diseases. From April1999 to May 2004, Ms. Eastham served as Senior Vice President, Finance, Chief 

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FinancialOfficer, and Secretary of Diversa Corporation. She previously held similarpositions with CombiChem, Inc., a computational chemistry company, and CytelCorporation, a biopharmaceutical company. Ms. Eastham also held severalpositions, including Vice President, Finance, at Boehringer MannheimCorporation, from 1976 to 1988. Ms. Eastham also serves as a director forTercica, Inc., Illumina, Inc., and SGX Pharmaceuticals, Inc. Ms. Easthamreceived a B.S. and an M.B.A. from Indiana University and is both a CertifiedPublic Accountant and Certified Director.

**Dr. Gavin**hasserved as a director since December 2005 and serves on the Corporate GovernanceCommittee. Dr. Gavin is currently President and Chief Executive Officer ofMicoIslet, Inc. and is Clinical Professor of Medicine, Emory University Schoolof Medicine. He also serves as Executive Vice President for Clinical Affairs,Healing Our Village, Inc. He was President of the Morehouse School of Medicinefrom 2002 to 2004. Dr. Gavin is a member of the board of directors of BaxterInternational Inc., Anastasia Marie Laboratories, Inc., Nuvelo, Inc. andMicroIslet, 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 directorsof Taste for Living, Inc. from 1999 to 2002. From 1991 to 2002, Dr. Gavin wasthe Senior Scientific Officer of the Howard Hughes Medical Institute. From 2002until 2005, he served as National Chairman of the National Diabetes EducationProgram. He received a B.S. in Chemistry at Livingstone College, a Ph.D. inBiochemistry at Emory University and an M.D. at Duke University Medical School.Dr. Gavin has received numerous civic and academic awards and honors.

**Mr. Greene** is our co-founder and has served as adirector since our inception in 1987. Mr. Greene serves on the FinanceCommittee. Mr. Greene is an entrepreneur who has participated in the foundingand/or management of eleven medical technology companies over two decades,including three companies for which he served as chief executive officer. From1987 to 1996, Mr. Greene served as our Chief Executive Officer. From 1986 until1993, Mr. Greene was a founding general partner of Biovest Partners, a seedventure capital firm. He was Chief Executive Officer of Hybritech from 1979until its acquisition by Eli Lilly and Company in 1986, and he was co-inventorof Hybritech’s patented monoclonal antibody assay technology. Prior to joiningHybritech, he was an executive with the medical diagnostics division of BaxterHealthcare Corporation from 1974 to 1979 and a consultant with McKinsey &Company from 1967 to 1974. He is a director of Biosite Incorporated. Mr. Greenereceived an M.B.A. from Harvard University.

**Dr. Skyler****has served as adirector since August 1999 and serves on the Corporate Goverance Committee. Heis Professor of Medicine, Pediatrics and Psychology, in the Division ofEndocrinology 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 since 1976. Heis also Study Chairman for the National Institute of Diabetes & Digestive& Kidney Diseases of the Type 1 Diabetes TrialNet clinical trial network,and serves on the board of directors of DexCom, Inc. Dr. Skyler has served asPresident of the American Diabetes Association and as Vice President of theInternational Diabetes Federation. Dr. Skyler serves on the editorial board ofseveral diabetes and general medicine journals. He received a B.S. fromPennsylvania State University, an M.D. from Jefferson Medical College, andcompleted postdoctoral studies at Duke University Medical Center.

**Mr. Sullivan** has served as a director since September 2003and serves on the Audit Committee and the Finance Committee. Mr. Sullivan iscurrently Chairman of the Board of Advisors of RAND Health and Vice Chairman ofthe Board of the UCLA Medical Center. From 2000 to 2003, Mr. Sullivan served asChairman, Chief Executive Officer and a director of Protocare, Inc. From 1993to 1999, he served as Chairman, Chief Executive Officer and a director ofAmerican Health Properties, Inc. For the previous twenty years, Mr. Sullivanwas an investment banker with Goldman Sachs. Mr. Sullivan also currently serveson the board of directors of Cymetrix, Health Care Property Investors, Inc. (areal estate investment trust) and AutoGenomics, Inc. Mr. Sullivan received anM.B.A. from Harvard University and a J.D. from the University of Minnesota LawSchool.

**Mr. Testman**has served as adirector since December 2002 and serves on the Audit Committee. Mr. Testman isa former managing partner of Ernst & Young, LLP where, during his tenurefrom 1962 to 1992, he served as managing partner of both Health Care Servicesand Management Consulting Services for the West Coast and national practices.He also served as an area managing partner for the audit and tax practice. Mr.Testman currently serves on the board of directors of Endocare, Inc. Heformerly served as Chairman of the Board of Specialty Laboratories, Inc. and onthe board of directors of three other publicly held companies. He also serveson the board of four privately held health-care companies. He received anM.B.A. from Trinity University and is a Certified Public Accountant (retired).

**Mr. Wilson****has served as adirector since March 2002 and serves as the chair of our Compensation and HumanResources Committee and on the Corporate Governance Committee. He is a directorand Chairman of the Board of both Corcept Therapeutics Inc. and NuGEN, Inc.From 1996 to 2001, Mr. Wilson was Chairman of the Board of Amira Medical, Inc.From 1990 to 1994, Mr. Wilson served as President and Chief Operating Officerof Syntex Corporation. Prior to 1990, he served in various senior managementpositions, including Chief Executive Officer for Neurex Corporation andLifeScan, 

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Inc.Mr. Wilson serves on the board of directors of the Palo Alto MedicalFoundation, A Stepping Stone Foundation (pre-school education). Mr. Wilsonreceived a B.A. and an M.B.A. from the University of Arizona.

**Dr. Baron**has served as our Senior Vice President, Research sinceSeptember 2004, and previously served as Senior Vice President, ClinicalResearch since June 2002. He previously served as Vice President, ClinicalResearch since December 1999. Dr. Baron has been clinical Professor of Medicineat the University of California, San Diego, and Clinical VA Staff Physician atthe VA Medical Center, San Diego, since 2001. From 1989 to 2000, Dr. Baronworked for the Indiana University School of Medicine, where he served asProfessor of Medicine and Director, Division of Endocrinology and Metabolism.Earlier, Dr. Baron held academic and clinical positions in the Division ofEndocrinology and Metabolism at the University of California, San Diego, andthe Veterans Administration Medical Center in San Diego. He is the recipient ofseveral prestigious awards for his research in diabetes and vascular disease,including the 1996 Outstanding Clinical Investigator Award from the AmericanFederation for Medical Research, several awards from the American DiabetesAssociation, and is a current National Institutes of Health MERIT awardrecipient. He received an M.D. from the Medical College of Georgia, Augusta, andcompleted postdoctoral studies at the University of California, San Diego.

**Mr. Eberhard**has served as Vice President, Sales since May 2003. Prior to joining us, Mr.Eberhard was Regional Vice President, Sales, at Pharmacia Corporation, forwhich 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. inBiology from California Lutheran University.

**Mr. Foletta**has served as Senior Vice President, Finance and Chief Financial Officer sinceMarch 2006 and he previously served as Vice President, Finance and ChiefFinancial Officer from March 2000 to March 2006. Mr. Foletta previously servedas a Principal of Triton Group Management, Inc. from 1997 to 2000. From 1986 to1997, Mr. Foletta held a number of management positions with Intermark, Inc.and Triton Group Ltd., the most recent of which was Senior Vice President,Chief Financial Officer and Corporate Secretary. From 1982 to 1986, Mr. Folettawas with Ernst & Young, most recently serving as an Audit Manager. He is adirector of Anadys Pharmaceuticals, Inc. Mr. Foletta received a B.A. inBusiness Economics from the University of California, Santa Barbara. He is a Certified Public Accountant and amember of the Financial Executives Institute.

**Mr. Gergen** has served as Senior Vice President,Corporate Development since August 2006 and previously served as Vice Presidentof 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 at CardioNet,Inc. He held various positions at Advanced Tissue Sciences, Inc. from 2000 to2003 most recently as Chief Restructuring Officer and Acting CEO.  He also served as Senior Vice President, ChiefFinancial and Development Officer and Vice President, Development, GeneralCounsel and Secretary.  From 1999 to2000, Mr. Gergen was employed at Premier, Inc. and from 1994 to 1999 he heldvarious positions with Medtronic, Inc. From 1990 to 1994 he held various corporate development positions atJostens, Inc. and from 1986 to 1990, he practiced law at various lawfirms.  Mr. Gergen serves on the Board ofDirectors of a privately held company. Mr. Gergen received a B.A. in Administration from Minot State Universityand a J.D. from the University of Minnesota Law School.

**Dr. Kolterman**has served as Senior Vice President, Clinical and Regulatory Affairs sinceAugust 2005. He previously served as Senior Vice President, Clinical Affairsfrom February 1997 to August 2005, Vice President, Medical Affairs from 1993 to1997, and Director, Medical Affairs from 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 been Adjunct Professor of Medicine at theUniversity of California, San Diego. From 1978 to 1983, he was AssistantProfessor of Medicine in the Endocrinology and Metabolism Division at the Universityof Colorado School of Medicine, Denver. He was a member of the Diabetes Controland Complications Trial Study Group and presently serves as a member of theEpidemiology of Diabetes Intervention and Complications Study. He is also apast-president of the California Affiliate of the American DiabetesAssociation. Dr. Kolterman received his M.D. from Stanford University School ofMedicine.

**Ms. Lloyd** has served as ourSenior Vice President, Legal and Corporate Affairs, and General Counsel sinceFebruary 2007.  Prior to joining us, Ms.Lloyd served as Group Senior Vice President, Chief Administrative Officer,General Counsel and Secretary 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. Lloyd was VicePresident and Assistant General Counsel of Medtronic, Inc. and served asMedtronic’s Assistant General Counsel from 1991 to 1993.  From 1978 to 1991, Ms. Lloyd held variouslegal positions with Medtronic.  Prior tojoining Medtronic, Ms. Lloyd served as 

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counselto Pillsbury Company and Montgomery Ward & Co. and she taught Business Lawat the University of Minnesota Business School. Ms. Lloyd is Chairperson of the Executive Leadership Foundation and anassociate of the Women Business Leaders of the United States Health CareIndustry Foundation.  She received aB.S./B.A. from Knox College and a J.D. from Northwestern University.

**Mr. Marchetti** has served as our Senior Vice President, HumanResources and Corporate Services since November 2005. Prior to joining us, heserved as Vice President, Human Resources for Guidant Corporation from July2002 to October 2005. Prior to this role, he served as Vice President, Financeand Information Systems, Guidant Europe, Middle East, Africa, and Canada, sincethe beginning of 2001. From 1999 through 2000, he served as Vice President,Human Resources for Guidant’s Vascular Intervention group, and served asGuidant’s Corporate Controller and Chief Accounting Officer from 1994 to 1999.He joined Eli Lilly and Company’s Medical Devices and Diagnostics division in1988. In 1992, he became Financial Manager of Lilly’s pharmaceuticalmanufacturing operations in Indianapolis. From 1980 to 1986, he was with theaudit staff of Touche Ross & Co. (currently Deloitte). He received a B.A.from LaSalle University in Philadelphia and an MBA from the Ross School ofBusiness at the University of Michigan. He is a Certified Public Accountant.

**Mr. Marshall** has served as VicePresident, Manufacturing and Supply Operations since December 2006.  Prior to joining us, he was Vice President ofCorporate Manufacturing at Amgen, Inc. From 2002 to 2005, Mr. Marshall served as President of Manufacturing atRecombinant Proteins at the Bioscience Division of Baxter International.  From 1999 to 2002, he was Site Head of theBaxter International Thousand Oaks facility. He joined Creative BioMolecules in 1992, first as Head of ProcessDevelopment and Clinical Manufacturing and then as Head of Operations.  From 1988 to 1992, Mr. Marshall held variousmanagement positions with Welgen Manufacturing Partnership (now Amgen, RhodeIsland), Repligen Corporation and Damon Biotech.  He serves on the board of directors ofMedicago, Inc. and is a member of ISPE and ASCB.  Mr. Marshall received a B.S. and an M.S. inBiology from the University of Massachusetts at Dartmouth and completed threeyears of post-graduate work concentrating in hematology and coagulationresearch at Brown University.

**Mr. Rowland**has served as our Vice President, Governance and Compliance, and CorporateSecretary since February 2007.  Hepreviously served as our Vice President, Legal, Secretary and General Counselfrom September 2001 to February 2007. Prior to joining us, Mr. Rowland served in various positions at AlliancePharmaceutical Corp., including as Vice President beginning in 1999, Secretarybeginning in 1998 and General Counsel and Assistant Secretary beginning in1993. Earlier, Mr. Rowland served as Vice President and Senior Counsel, Financeand Securities, at Imperial Savings Association 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, and theHouston, Texas law firm of Bracewell & Patterson. He received a J.D. fromEmory University.

**Mr. Young** has served as Senior Vice President,Marketing since October 2006.  Prior tojoining us, Mr. Young served as Vice President, Diabetes Brand Marketing atNovo Nordisk where he managed the marketing activities of Novo Nordisk’sinjectable insulin business.  From 2000to 2004, Mr. Young held global and U.S. commercial leadership roles at Aventisfor a variety of metabolic/diabetes compounds. Prior to working at Aventis, Mr. Young held product and sales managementpositions at Parke-Davis.  Mr. Youngreceived a B.S. from Texas A&M University with a concentration inpre-medicine and business.

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

**CAUTIONARY FACTORS THAT MAYAFFECT FUTURE RESULTS**

*Except for the historicalinformation contained herein or incorporated by reference, 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 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 risk factors,either alone or taken together, could adversely affect our business, operatingresults and financial condition, as well as adversely affect the value of aninvestment in our common stock. There may be additional risks that we do notpresently know of or that we currently believe are immaterial which could alsoimpair our business and financial position.*

 

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***We have a historyof operating losses, anticipate future losses and may never become profitable.***

We have experienced significant operating losses sinceour inception in 1987, including losses of $218.9 million in 2006,$206.8 million in 2005 and $157.2 million in 2004. As of December 31,2006, we had an accumulated deficit of approximately $1.2 billion. Theextent of our future losses and the timing of potential profitability areuncertain, and we may never achieve profitable operations. We have been engagedin discovering and developing drugs since inception, which has required, andwill continue to require, significant research and development expenditures. Wederived substantially all of our revenues prior to 2005 from developmentfunding, fees and milestone payments under collaborative agreements and frominterest income. BYETTA and SYMLIN may not be as commercially successful as weexpect and we may not succeed in commercializing any of our other drugcandidates. We may incur substantial operating losses for at least the next fewyears as we continue to expand our commercial function for BYETTA and SYMLINand our research and development activities for the other drug candidates inour development pipeline. These losses, among other things, have had and willhave an adverse effect on our stockholders’ equity and working capital. Even ifwe become profitable, we may not remain profitable.

***We began selling,marketing and distributing our first products, BYETTA and SYMLIN, in 2005 andwe will depend heavily on the success of those products in the marketplace.***

Prior to the launch of BYETTA and SYMLIN in 2005, wehad never sold or marketed our own products. Our ability to generate productrevenue for the next few years will depend solely on the success of these products.The ability of BYETTA and SYMLIN to generate revenue at the levels we expectwill depend on many factors, including the following:

·               acceptance of thesefirst-in-class medicines by the medical community, patients receiving therapyand third party payors;

·               a satisfactoryefficacy and safety profile as demonstrated in a broad patient population;

·     successfullyexpanding and sustaining manufacturing capacity to meet demand;

·     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 encountersafety issues with BYETTA or SYMLIN or any other drugs we market or fail tocomply with extensive continuing regulations enforced by domestic and foreignregulatory authorities, it could cause us to discontinue marketing those drugs,reduce our revenues and harm our ability to generate future revenues, whichwould negatively impact our financial position.***

BYETTA and SYMLIN, in addition to any other of ourdrug candidates that may be approved by the FDA, will be subject to continualreview by the FDA, and we cannot assure you that newly discovered or developedsafety issues will not arise. With the use of any of our marketed drugs by a widepatient population, serious adverse events may occur from time to time thatinitially do not appear to relate to the drug itself, and only if the specificevent occurs with some regularity over a period of time does the drug becomesuspect as having a causal relationship to the adverse event. Any safety issuescould cause us to suspend or cease marketing of our approved products, subjectus to substantial liabilities, and adversely affect our revenues and financialcondition.

Moreover, the marketing of our approved products willbe subject to extensive regulatory requirements administered by the FDA andother regulatory bodies, including adverse event reporting requirements and theFDA’s general prohibition against promoting products for unapproved uses. Themanufacturing facilities for our approved products are also subject tocontinual review and periodic inspection and approval of manufacturingmodifications. Manufacturing facilities that manufacture drug products for theUnited States market, whether they are located inside or outside the UnitedStates, are subject to biennial inspections by the FDA and must comply with theFDA’s cGMP regulations. The FDA stringently applies regulatory standards formanufacturing. Failure to comply with any of these post-approval requirementscan, among other things, result in warning letters, product seizures, recalls,fines, injunctions, suspensions or revocations of marketing licenses, operatingrestrictions 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.

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The manufacturers of our products and drug candidatesalso are subject to numerous federal, state, local and foreign laws relating tosuch matters as safe working conditions, manufacturing practices, environmentalprotection, fire hazard control and hazardous 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 notmanufacture our own drug products or drug candidates and may not be able toobtain adequate supplies, which could cause delays, subject us to productshortages, or reduce product sales.***

The manufacturing of sufficient quantities ofnewly-approved drug products and drug candidates is a time-consuming andcomplex process. We currently have no manufacturing capabilities. In order tosuccessfully commercialize our products, including BYETTA and SYMLIN, andcontinue to develop our drug candidates, including exenatide LAR, we rely onvarious third parties to provide the necessary manufacturing.

There are a limited number of manufacturers thatoperate under the FDA’s cGMP regulations capable of manufacturing for us.  In addition, there are a limited number ofeach of peptide suppliers, cartridge manufacturers and disposable penmanufacturers. If we are not able to arrange for and maintain third-partymanufacturing on commercially reasonable terms, or we lose one of our solesource suppliers used for our existing products or for some components of ourmanufacturing processes for our products or drug candidates, we may not be ableto market our products or complete development of our drug candidates on atimely basis, if at all.

Reliance on third-party manufacturers limits ourability to control certain aspects of the manufacturing process and thereforeexposes us to a variety of significant risks, including, but not limited to,risks to our ability to commercialize our products or conduct clinical trials,risks of reliance on the third-party for regulatory compliance and qualityassurance, third-party refusal to supply on a long-term basis, the possibilityof breach of the manufacturing agreement by the third-party and the possibilityof termination or non-renewal of the agreement by the third-party, based on itsbusiness priorities, at a time that is costly or inconvenient for us. If any ofthese risks occur, our product supply will be interrupted resulting in lost ordelayed revenues and delayed clinical trials. Our reliance on third-party manufacturers for the production of our twocommercial products is described in more detail below.

We rely on Bachem and Mallinckrodt to manufacture ourlong-term commercial supply of bulk exenatide, the active ingredient inBYETTA.  In addition, we rely onsingle-source manufacturers for some of our raw materials used by Bachem andMallinckrodt to produce bulk exenatide. We also rely on Wockhardt and Baxter to manufacture the dosage form ofBYETTA in cartridges. We are further dependent upon Lilly to supply pens fordelivery of BYETTA in cartridges.

 We rely onBachem and Lonza to manufacture our commercial supply of bulk pramlintideacetate, the active ingredient contained in SYMLIN.  In addition, we rely on Baxter to manufacturethe dosage form of SYMLIN in vials.  Wehave submitted an sNDA to the FDA seeking approval of a disposable pen for thedelivery of SYMLIN in cartridges and, if approved, plan to make the SYMLIN penavailable to patients in 2007.  Ifapproved, we would rely on Wockhardt for the dosage form of SYMLIN incartridges and Ypsomed AG to manufacture the components for the SYMLINdisposable pen.  We would also rely onHollister-Stier for the assembly of the SYMLIN Pen.

If any of our existing or future manufacturers ceaseto manufacture or are otherwise unable to timely deliver sufficient quantitiesof BYETTA or SYMLIN, in either bulk or dosage form, or other productcomponents, including pens for the delivery of these products, it could disruptour ability to market our products, subject us to product shortages, reduceproduct sales, and/or reduce our profit margins. Any delay or disruption in themanufacturing of bulk product, the dosage form of our products or other productcomponents, including pens for delivery of our products, could also harm ourreputation in the medical and patient communities. In addition, we may need toengage additional manufacturers, so that we will be able to continue ourcommercialization and development efforts for these products or drugcandidates. The cost and time to establish these new manufacturing facilitieswould be substantial.

Our manufacturers have not produced BYETTA or SYMLINfor commercial use for a sustained period of time. As such, additional unforeseeablerisks may be encountered as we, together with our manufacturers, continue todevelop familiarity and experience with regard to manufacturing our products.Furthermore, we and the other manufacturers used for our drug candidates maynot be able to produce supplies in commercial quantities if our drug candidatesare approved. While we believe that business relations between us and ourmanufacturers are generally good, we cannot predict whether any of themanufacturers that we may use will meet our requirements for quality, quantityor timeliness for the manufacture of bulk exenatide or pramlintide acetate,dosage form of BYETTA or SYMLIN, or pens. Therefore, we may not be able to obtain necessary supplies of productswith acceptable quality, on acceptable terms or in sufficient quantities, if atall. Our dependence on third parties for the manufacture of products may alsoreduce our gross profit margins and our ability to develop and deliver productsin a timely manner.

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In order to manufacture on a commercial scale theonce-weekly formulation of exenatide LAR, if it is approved by the FDA, we mustdesign, construct, commission and validate a new facility. We depend uponAlkermes and Parsons to assist us in the design, construction and validation ofthe manufacturing facility. We have never established or operated amanufacturing facility and cannot assure you that we will be able tosuccessfully establish or operate such a facility in a timely or economicalmanner, or at all. In addition, we depend upon Alkermes to successfully developand transfer to us its technology for manufacturing the once-weekly formulationof exenatide LAR. Although we have completed manufacturing scale-up tointermediate batch size, and together with Alkermes we have completed engineeringbatches of commercial scale at a third party facility, we cannot assure youthat a commercial scale manufacturing process for exenatide LAR will besuccessfully developed and/or transferred to us in a timely or economicalmanner, or at all. In addition, we are dependent upon Alkermes to supply uswith commercial quantities of the polymer required to manufacture exenatideLAR. We also will need to obtain sufficient supplies of diluent, solvents,devices, packaging and other components necessary for commercial manufacture ofexenatide LAR. If we, together with Alkermes, are unable to successfullydevelop a commercial scale manufacturing process and increase our manufacturingscale to a commercially viable level, we may not be able to commercially launchexenatide LAR.

***Our ability togenerate revenues will be diminished if we fail to obtain acceptable prices oran adequate level of reimbursement for our products from third-party payors.***

The continuing efforts of government, private healthinsurers, and other third-party payors to contain or reduce the costs of healthcare through various means, including efforts to increase the amount of patientco-pay obligations, may limit our commercial opportunity. In the United States,we expect that there will continue to be a number of federal and stateproposals to implement government control over the pricing of prescriptionpharmaceuticals. In addition, increasing emphasis on managed care in the UnitedStates will continue to put pressure on the rate of adoption and pricing ofpharmaceutical products.

Significant uncertainty exists as to the reimbursementstatus of health care products. Third-party payors, including Medicare, arechallenging the prices charged for medical products and services. Governmentand other third-party payors increasingly are attempting to contain health carecosts by limiting both coverage and the level of reimbursement for new drugsand by refusing to provide coverage for uses of approved products for diseaseindications for which the FDA has not granted labeling approval. Third-partyinsurance coverage may not be available to patients for BYETTA and/or SYMLIN orany other products we discover and develop. If government and other third-partypayors do not provide adequate coverage and reimbursement levels for ourproducts, the market acceptance of these products may be reduced.

***Competition in thebiotechnology and pharmaceutical industries may result in competing products,superior marketing of other products and lower revenues or profits for us.***

There are many companies that are seeking to developproducts and therapies for the treatment of diabetes and other metabolicdisorders. Our competitors include multinational pharmaceutical and chemicalcompanies, specialized biotechnology firms and universities and other researchinstitutions. A number of our largest competitors, including AstraZeneca,Bristol-Myers Squibb, GlaxoSmithKline, Lilly, Merck & Co., Novartis,Novo Nordisk, Pfizer, Sanofi-Aventis and Takeda Pharmaceuticals, are pursuingthe development or marketing of pharmaceuticals that target the same diseasesthat we are targeting, and it is possible that the number of companies seekingto develop products and therapies for the treatment of diabetes, obesity andother metabolic disorders will increase. Many of our competitors havesubstantially greater financial, technical, human and other resources than wedo and may be better equipped to develop, manufacture and markettechnologically superior products. In addition, many of these competitors havesignificantly greater experience than we do in undertaking preclinical testingand human clinical studies of new pharmaceutical products and in obtainingregulatory approvals of human therapeutic products. Accordingly, ourcompetitors may succeed in obtaining FDA approval for superior products.Furthermore, now that we have received FDA approval for BYETTA and SYMLIN, wemay also be competing against other companies with respect to our manufacturingand product distribution efficiency and sales and marketing capabilities, areasin which we have limited or no experience as an organization.

Our target patient population for BYETTA includespeople with diabetes who have not achieved adequate glycemic control usingmetformin, sulfonylurea and/or a TZD, the three most common oral therapies fortype 2 diabetes. Our target population for SYMLIN is people with either type 2or type 1 diabetes whose therapy includes multiple mealtime insulin injectionsdaily. Other products are currently in development or exist in the market thatmay compete directly with the products that we are developing or marketing.Various other products are available or in development to treat type 2diabetes, including:

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·                   sulfonylureas;

·                   metformin;

·                   insulins,including injectable and inhaled versions;

·                  TZDs;

·                   glinides;

·                   DPP-IVinhibitors;

·                  incretin/GLP-1agonists;

·                  CB-1antagonists;

·                  PPARs; and

·                   alpha-glucosidaseinhibitors.

In addition, several companies are developing variousapproaches to improve treatments for type 1 and type 2 diabetes. We cannotpredict whether our products will have sufficient advantages to cause healthcare professionals to adopt them over other products or that our products willoffer an economically feasible alternative to other products. Our productscould become obsolete before we recover expenses incurred in developing theseproducts.

***Delays in theconduct or completion of our clinical trials, the analysis of the data from ourclinical trials or our manufacturing scale-up activities may result in delaysin our planned filings for regulatory approvals, and may adversely affect ourability to enter into new collaborative arrangements.***

We cannot predict whether we will encounter problemswith any of our completed, ongoing or planned clinical studies that will causeus to delay or suspend our ongoing and planned clinical studies, delay theanalysis of data from our completed or ongoing clinical studies or performadditional clinical studies prior to receiving necessary regulatory approvals.We also cannot predict whether we will encounter delays or an inability tocreate manufacturing processes for drug candidates that allow us to producedrug product in sufficient quantities to be economical, otherwise known asmanufacturing scale-up. If the results of our ongoing or planned clinicalstudies for our drug candidates are not available when we expect or if weencounter any delay in the analysis of data from our clinical studies or if weencounter delays in our ability to scale-up our manufacturing processes:

·     wemay be unable to complete our development programs for exenatide LAR or ourobesity clinical trials;

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

·     wemay not have the financial resources to continue research and development ofany of our drug candidates; and

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

In addition, Lilly can terminate our collaboration for the developmentand commercialization of BYETTA and sustained-release formulations of exenatideat any time on 60 days notice. Moreover, if the FDA does not accept forfiling an NDA for a sustained-release formulation of exenatide by December 31,2007, Lilly will have the right to convert a portion of future milestonepayments that we may receive under our collaboration into shares of our commonstock at a conversion price equal to the fair market value of our common stockat the time of any such conversion.  Wecurrently do not expect the NDA to be filed by this date.

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

·      ongoingdiscussions with the FDA or comparable foreign authorities regarding the scopeor design of our clinical trials;

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·      delaysin enrolling volunteers;

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

·      negativeresults of clinical studies;

·                 insufficientsupply or deficient quality of drug candidate materials or other materialsnecessary for the performance of clinical trials;

·                 our inability toreach agreement with Lilly regarding the scope, design, conduct or costs ofclinical trials with respect to BYETTA, exenatide LAR or nasal exenatide; or

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

***We aresubstantially dependent on our collaboration with Lilly for the development andcommercialization of BYETTA and dependent on Lilly and Alkermes for thedevelopment of exenatide LAR.***

We have entered into a collaborative arrangement with Lilly,who currently markets diabetes therapies and is developing additional diabetesdrug candidates, to commercialize BYETTA and further develop sustained-releaseformulations of BYETTA, including exenatide LAR. We entered into thiscollaboration 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 LAR.

In general, we cannot control the amount and timing ofresources that Lilly may devote to our collaboration. If Lilly fails to assistin the further development of exenatide LAR or the commercialization of BYETTA,or if Lilly’s efforts are not effective, our business may be negativelyaffected. We are relying on Lilly to obtain regulatory approvals outside theUnited States for BYETTA and exenatide LAR. Our collaboration with Lilly maynot continue or result in additional successfully commercialized drugs. Lillycan terminate our collaboration at any time upon 60 days notice. If Lillyceased funding and/or developing and commercializing BYETTA or exenatide LAR,we would have to seek additional sources for funding and may have to delay,reduce or eliminate one or more of our commercialization and development programsfor these compounds. We are also dependent on Alkermes for the development ofexenatide LAR. If Alkermes’ technology is not successfully developed toeffectively deliver exenatide in a sustained release formulation, or Alkermesdoes not devote sufficient resources to the collaboration, our efforts todevelop sustained release formulations of exenatide could be delayed orcurtailed.

***If our patents aredetermined to be unenforceable or if we are unable to obtain new patents basedon current patent applications or for future inventions, we may not be able toprevent others from using our intellectual property.  If we are unable to obtain licenses to thirdparty patent rights for required technologies, we could be adversely affected.***

We own or hold exclusive rights to many issued UnitedStates patents and pending United States patent applications related to thedevelopment and commercialization of exenatide, including BYETTA and exenatideLAR, SYMLIN and our other drug candidates. These patents and applications covercomposition-of-matter, medical indications, methods of use, formulations andother inventive results.  We have issuedand pending applications for formulations of BYETTA and exenatide LAR, but wedo not have a composition-of-matter patent covering exenatide. We also own orhold exclusive rights to various foreign patent applications that correspond toissued United States patents or pending United States patent applications.

Our success will depend in part on our ability toobtain patent protection for our products and drug candidates and technologiesboth in the United States and other countries. We cannot guarantee that anypatents will issue from any pending or future patent applications owned by orlicensed to us. Alternatively, a third party may successfully circumvent ourpatents. Our rights under any issued patents may not provide us with sufficientprotection against competitive products or otherwise cover commerciallyvaluable products or processes. In addition, because patent applications in theUnited States are maintained in secrecy for eighteen months after the filing ofthe applications, and publication of discoveries in the scientific or patentliterature often lag behind actual discoveries, we cannot be sure that theinventors of subject matter covered by our 

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patentsand patent applications were the first to invent or the first to file patentapplications for these inventions. In the event that a third party has alsofiled a patent on a similar invention, we may have to participate ininterference proceedings declared by the United States Patent and TrademarkOffice to determine priority of invention, which could result in a loss of ourpatent position. Furthermore, we may not have identified all United States andforeign patents that pose a risk of infringement.

We also rely upon licensingopportunities for some of our technologies. We cannot be certain that we will not lose our rights to certainpatented technologies under existing licenses or that we will be able to obtaina license to any required third-party technology. If we lose our licensedtechnology rights or if we are not able to obtain a required license, we couldbe adversely affected.

***We may be unable toobtain regulatory clearance to market our drug candidates in the United Statesor foreign countries on a timely basis, or at all.***

Our drug candidates are subject to extensivegovernment regulations related to development, clinical trials, manufacturingand commercialization. The process of obtaining FDA and other regulatoryapprovals is costly, time-consuming, uncertain and subject to unanticipateddelays. Regulatory authorities may refuse to approve an application forapproval of a drug candidate if they believe that applicable regulatorycriteria are not satisfied. Regulatory authorities may also require additionaltesting 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 additionalindications for approved drugs may not be approved, which could limit ourrevenues. Foreign regulatory authorities may apply similar limitations or mayrefuse to grant any approval.  Unexpectedchanges to the FDA or foreign regulatory approval process could also delay orprevent the approval of our drug candidates.

The data collected from our clinical trials may not besufficient to support approval of our drug candidates or additional or expandedindications by the FDA or any foreign regulatory 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 any foreign regulatory authority’s response isdelayed or not favorable for any of our drug candidates, our stock price coulddecline significantly.

Moreover, manufacturing facilities operated by thethird-party manufacturers with whom we may contract to manufacture ourunapproved drug candidates may not pass an FDA or other regulatory authoritypreapproval inspection. Any failure or delay in obtaining these approvals couldprohibit or delay us or any of our business partners from marketing these drugcandidates.

Consequently, even if we believe that preclinical andclinical data are sufficient to support regulatory approval for our drugcandidates, the FDA and foreign regulatory authorities may not ultimatelyapprove our drug candidates for commercial sale in any jurisdiction. If ourdrug candidates are not approved, our ability to generate revenues may belimited and our business will be adversely affected.

***Litigationregarding patents and other proprietary rights may be expensive, cause delaysin bringing products to market and harm our ability 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 pharmaceuticalcompanies against the patents of competitors 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, our ability to obtain and enforce patents isuncertain and involves complex legal and factual questions. Third parties maychallenge, in courts or through patent office proceedings, or infringe upon,existing or future patents. In the event that a third party challenges apatent, a court or patent office may invalidate the patent or determine thatthe patent is not enforceable. Proceedings involving our patents or patentapplications or those of others could result in adverse decisions about:

·     thepatentability of our inventions, products and drug candidates; and/or

·     theenforceability, validity or scope of protection offered by our patents.

The manufacture, use or sale of any of our products or drug candidatesmay infringe on the patent rights of others. If we are unable to avoidinfringement of the patent rights of others, we may be required to seek alicense, defend an infringement action 

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or challengethe validity of the patents in court. Patent litigation is costly and timeconsuming. We may not have sufficient resources to bring these actions to asuccessful conclusion. In addition, if we do not obtain a license, develop orobtain non-infringing technology, fail to successfully defend an infringementaction or have infringing patents declared invalid, we may:

·     incursubstantial monetary damages;

·     encountersignificant delays in bringing our drug candidates to market; and/or

·              be precluded fromparticipating in the manufacture, use or sale of our products or drugcandidates or methods of treatment requiring licenses.

***We are subject to “fraudand abuse” and similar laws and regulations, and a failure to comply with suchregulations or prevail in any litigation related to noncompliance could harmour business.***

Upon approval of BYETTA and SYMLIN by the FDA, we became subject tovarious health care “fraud and abuse” laws, such as the Federal False ClaimsAct, the federal anti-kickback statute and other state and federal laws andregulations. Pharmaceutical companies have faced lawsuits and investigationspertaining to violations of these laws and regulations. We cannot guaranteethat measures that we have taken to prevent such violations, including ourcorporate compliance program, will protect us from future violations, lawsuitsor investigations. If any such actions are instituted against us, and we arenot successful in defending ourselves or asserting our rights, those actionscould have a significant impact on our business, including the imposition ofsignificant fines or other sanctions.

***Our financialresults will fluctuate, and these fluctuations may cause our stock price tofall.***

Forecasting futurerevenues is difficult, especially since we launched our first products in 2005and when the level of market acceptance of these products is changingrapidly.  In addition, our customer baseis highly concentrated with four customers accounting for a majority 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 other factors that could cause our financialresults to fluctuate unexpectedly, including:

·                  product sales;

·                  cost of productsales;

·                  achievement andtiming of research and development milestones;

·                  collaborationrevenues;

·                  cost and timingof clinical trials, regulatory approvals and product launches;

·                  marketing andother expenses;

·                  manufacturing orsupply issues; and

·                  potentialacquisitions of businesses and technologies and our ability to successfullyintegrate any such acquisitions into our existing business.

***We may require additionalfinancing in the future, which may not be available to us on favorable terms,or at all.***

We intend to use our available cash for:

·                  Commercializationof BYETTA and SYMLIN;

·                  Development ofexenatide LAR and other pipeline candidates;

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·                  Executing ourINTO strategy;

·                  Establishment ofadditional manufacturing sources, including our Ohio manufacturing facility;

·                  Our research anddevelopment activities;

·                  Other operatingexpenses;

·                  Potentialacquisitions of complementary technologies or businesses; and

·                  Other generalcorporate purposes.

We may also be required to use our cash to payprincipal and interest on outstanding debt, including our $200 million ofoutstanding convertible senior notes, due in 2011.

***Our business has asubstantial risk of product liability claims, and insurance may not be adequateto cover these claims.***

Our business exposes us to potential product liabilityrisks that are inherent in the testing, manufacturing and marketing of human therapeuticproducts. Product liability claims could result in the imposition ofsubstantial liability on us, a recall of products, or a change in theindications for which they may be used. We currently have limited productliability insurance coverage. We cannot assure you that our insurance willprovide adequate coverage against potential liabilities.

***Our ability toenter into and maintain third-party relationships is important to oursuccessful development and commercialization of BYETTA, SYMLIN and our otherdrug candidates and to our potential profitability.***

With respect to sales, marketing and distributionoutside the United States, we will be substantially dependent on Lilly foractivities relating to BYETTA and sustained-release formulations of BYETTA,including exenatide LAR. We believe that we will likely need to enter intomarketing 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 into arrangements with third parties for thecommercialization of SYMLIN or any of our other drug candidates within theUnited States.

With respect to BYETTA and, if approved, exenatideLAR, Lilly is co-promoting within the United States. If Lilly ceasedcommercializing BYETTA or, if approved, exenatide LAR, for any reason, we wouldlikely need to either enter into a marketing and distribution arrangement witha third party for those products or significantly increase our internal salesand commercialization infrastructure.

We may not be able to enter into marketing anddistribution arrangements or find a corporate partner for SYMLIN or our otherdrug candidates as we deem necessary. If we are not able to enter into amarketing or distribution arrangement or find a corporate partner who canprovide support for commercialization of our drug candidates as we deemnecessary, we may not be able to successfully perform these marketing ordistribution activities. Moreover, any new marketer or distributor or corporatepartner for our drug candidates, including Lilly, with whom we choose tocontract may not establish adequate sales and distribution capabilities or gainmarket acceptance for our products, if any.

***We have asignificant 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 2.5%convertible senior notes due 2011. Our ability to make payments on our debt,including the notes, will depend on our future operating performance andability to generate cash and may also depend on our ability to obtainadditional debt or equity financing. During each of the last five years, ouroperating cash flows were negative and insufficient to cover our fixed charges.We may need to use our cash to pay principal and interest on our debt, therebyreducing the funds available to fund our research and development programs,strategic initiatives and working capital requirements. Our ability to generatesufficient operating cash flow to service our indebtedness, including thenotes, and fund our operating requirements will depend on our ability, alone orwith others, to successfully develop, manufacture, obtain required regulatoryapprovals for and market our drug candidates, as well as other factors,including general economic, financial, competitive, legislative and regulatoryconditions, some of which are beyond our control. Our debt service obligationsincrease our vulnerabilities to competitive pressures, because many of ourcompetitors are less leveraged than we 

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are.If we are unable to generate sufficient operating cash flow to service ourindebtedness and fund our operating requirements, we may be forced to reduceour development programs, sell assets or seek additional debt or equityfinancing, which may not be available to us on satisfactory terms or at all.Our level of indebtedness may make us more vulnerable to economic or industrydownturns. If we incur new indebtedness, the risks relating to our business andour ability to service our indebtedness will intensify.

***We may be requiredto redeem our 2.5% convertible senior notes due 2011 upon a designated event.***

Holders of our 2.5% convertible senior notes due 2011may require us to redeem all or any portion of their notes upon the occurrenceof certain designated events which generally involve a change in control of ourcompany. We may not have sufficient cash funds to redeem the notes upon adesignated event. We may elect, subject to certain conditions, to pay theredemption price in our common stock or a combination of cash and our commonstock. We may be unable to satisfy the requisite conditions to enable us to paysome or all of the redemption price in our common stock. In addition, althoughthere are currently no restrictions on our ability to pay the redemption priceunder our existing debt agreements, future debt agreements may prohibit us fromrepaying the redemption price in either cash or common stock. If we areprohibited from redeeming the notes, we could seek consent from our lenders toredeem the notes. If we are unable to obtain their consent, we could attempt torefinance the notes. If we were unable to obtain a consent or refinance, wewould be prohibited from redeeming the notes. If we were unable to redeem thenotes upon a designated event, it would result in an event of default under theindentures governing the notes. An event of default under the indentures couldresult in a further event of default under our other then-existing debt. Inaddition, the occurrence of a designated event may be an event of default underour other debt.

***If our research anddevelopment programs fail to result in additional drug candidates, the growthof our business could be impaired.***

Certain of our research and development programs fordrug candidates are at an early stage and will require significant research,development, preclinical and clinical testing, manufacturing scale-upactivities, regulatory approval and/or commitments of resources beforecommercialization. We cannot predict whether our research will lead to thediscovery of any additional drug candidates that could generate additional revenuesfor us.

***Our future successdepends on our chief executive officer, and other key executives and ourability to attract, retain and motivate qualified personnel.***

We are highly dependent on our chief executiveofficer, and the other principal members of our executive and scientific teams.The unexpected 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 andother personnel and consultants will also be critical to our success. We maynot be able to attract and retain these personnel and consultants on acceptableterms given the competition between numerous pharmaceutical and biotechnologycompanies. We do not maintain “key person” insurance on any of our employees.

***We may be unable to adequately preventdisclosure of trade secrets and other proprietary information.***

In order to protect our proprietary technology andprocesses, we rely in part on confidentiality agreements with our corporatepartners, employees, consultants, manufacturers, outside scientificcollaborators and sponsored researchers and other advisors. These agreementsmay not effectively prevent disclosure of confidential information and may notprovide an adequate remedy in the event of unauthorized disclosure ofconfidential information. In addition, others may independently discover ourtrade secrets and proprietary information.

Costly and time-consuming litigation could benecessary to enforce and determine the scope of our proprietary rights, andfailure to obtain or maintain trade secret protection could adversely affectour competitive business position.

***Our research anddevelopment activities and planned manufacturing activities involve the use ofhazardous materials, which subject us to regulation, related costs and delaysand potential liabilities.***

Our research and development and our plannedmanufacturing activities involve the controlled use of hazardous materials,chemicals and various radioactive compounds. Although we believe that ourresearch and development safety procedures for handling and disposing of thesematerials comply with the standards prescribed by state and federalregulations, the risk of accidental contamination or injury from thesematerials cannot be eliminated.  Inaddition, as part of the development of our planned manufacturing activities,we will need to development additional safety procedures for the 

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handlingand disposing of hazardous materials.  Ifan accident occurs, we could be held liable for resulting damages, which couldbe substantial. We are also subject to numerous environmental, health andworkplace safety laws and regulations, including those governing laboratoryprocedures, exposure to blood-borne pathogens and the handling of biohazardousmaterials. Additional federal, state and local laws and regulations affectingour operations may be adopted in the future. We may incur substantial costs tocomply with, and substantial fines or penalties if we violate, any of theselaws or regulations.

***We are exposed topotential risks from recent legislation requiring companies to evaluateinternal control over financial reporting.***

The Sarbanes-Oxley Act requires that we reportannually on the effectiveness of our internal control over financial reporting.Among other things, we must perform systems and processes evaluation andtesting. We must also conduct an assessment of our internal control to allowmanagement to report on, and our independent registered public accounting firmto attest to, our assessment of our internal control over financial reporting,as required by Section 404 of the Sarbanes-Oxley Act.  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 have implemented certain remediationactivities resulting from our ongoing assessment of internal control overfinancial reporting. Our future assessment, or the future assessments by ourindependent registered public accounting firm, may reveal material weaknessesin our internal control. If material weaknesses are identified in the future wewould be required to conclude that our internal control over financialreporting are ineffective and we could be subject to sanctions orinvestigations by the SEC, the NASDAQ Global Market or other regulatoryauthorities, which would require additional financial and management resourcesand could adversely affect the market price of our common stock.

***We have implementedanti-takeover provisions that could discourage or prevent an acquisition of ourcompany, even if the acquisition would be beneficial to our stockholders, andas a result our management may become entrenched and hard to replace.***

Provisions in our certificate of incorporation andbylaws could make it more difficult for a third party to acquire us, even ifdoing so would benefit our stockholders. These provisions include:

·     allowingour board of directors to elect a director to fill a vacancy created by theexpansion of the board of directors;

·     allowingour board of directors to issue, without stockholder approval, up to5.5 million shares of preferred stock with terms set by the board ofdirectors;

·     limitingthe ability of holders of our outstanding common stock to call a specialmeeting of our stockholders; and

·     preventingstockholders from taking actions by written consent and requiring allstockholder actions to be taken at a meeting of our stockholders.

Eachof these provisions, as well as selected provisions of Delaware law, coulddiscourage potential takeover attempts, could adversely affect the tradingprice of our securities and could cause our management to become entrenched andhard to replace. In addition to provisions in our charter documents and underDelaware law, an acquisition of our company could be made more difficult by ouremployee benefits plans and our employee change in control plan, under which,in connection with a change in control, stock options held by our employees maybecome vested and our executive officers may receive severance benefits. Wealso have implemented a stockholder rights plan, also called a poison pill,which could make it uneconomical for a third party to acquire us on a hostilebasis.

***Our executiveofficers, directors and major stockholders control approximately 70% of ourcommon stock.***

As of December 31, 2006, executive officers, directorsand holders of 5% or more of our outstanding common stock, in the aggregate,owned or controlled approximately 70% of our outstanding common stock. As aresult, these stockholders are able to influence all matters requiring approvalby our stockholders, including the election of directors and the approval ofcorporate transactions. This concentration of ownership may also delay, deteror prevent a change in control of our company and may make some transactionsmore difficult or impossible to complete without the support of thesestockholders.

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***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 of shares of common stock upon conversion ofour convertible notes or redemption of our convertible notes upon a designatedevent, or upon additional convertible debt or equity financings or other shareissuances by us, including shares issued in connection with potential futurestrategic alliances and the uncertain number of additional shares that we maybe required to issue under our agreements with Lilly, could adversely affectthe trading price of our common stock. Our convertible notes are currentlyconvertible into a total of up to approximately 5.8 million shares. Inaddition, the existence of these notes may encourage short selling of ourcommon stock by market participants.

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

The market prices forsecurities of biopharmaceutical and biotechnology companies, including ourcommon stock, have historically been highly volatile, and the market from timeto time has experienced significant price and volume fluctuations that areunrelated to the operating performance of these biopharmaceutical andbiotechnology companies. Since January 1, 2005, the high and low salesprice of our common stock varied significantly, as shown in the followingtable:
| ** **                                | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| **Year  ending December 31, 2007**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter (through February 13, 2007) |       | $          | 42.45      |       | $          | 35.55 |   |
| **Year  ending 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      |       |
| **Year  ended December 31, 2005**         |       |       |       |       |       |
| Fourth Quarter                            |       | $          | 42.36      |       | $          | 32.63 |   |
| Third Quarter                             |       | 35.47      |       | 18.50      |       |
| Second Quarter                            |       | 21.73      |       | 14.50      |       |
| First Quarter                             |       | 24.95      |       | 17.15      |       |

 

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 maysignificantly affect the market price of our common stock:

·     ourfinancial results and/or fluctuations in our financial results;

·              safety issues with BYETTA,SYMLIN or our product candidates;

·     clinicalstudy results;

·     determinationsby regulatory authorities with respect to our drug candidates;

·                    ourability to complete our Ohio manufacturing facility;

·     developments in our relationships withcurrent or future collaborative partners;

·     ourability to successfully execute our commercialization strategies;

·              developments in ourrelationships with third-party manufacturers of our products and other partieswho provide services to us;

·     technologicalinnovations or new commercial therapeutic products by us or our competitors;

·     developmentsin patent or other proprietary rights; and

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·     governmentalpolicy 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 of volatility in the market price of our commonstock expose us to securities class-action litigation, and we may be the targetof such litigation as a result of market price volatility in the future.

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

None.

**Item 2. *Properties***

Our primary administrativeoffices and research laboratories are located in San Diego, California. As ofDecember 31, 2006, we occupied approximately 360,000 square feet of officeand laboratory space. Our leases on a majority of these properties expire in2015.  We have also entered intoshort-term leases and other agreements for small offices in Boulder, Colorado,Brentwood, Tennessee, Doylestown, Pennsylvania, Mandeville, Louisianna,Beachwood, Ohio, Washington, D.C. and Germany.

Our wholly-owned subsidiary,Amylin Ohio LLC, owns a building and 43 acres of land in West Chester,Ohio.   The building, once built out forthe manufacture of exenatide LAR, will have approximately 150,000 square feetof manufacturing and office space.

**Item 3. *Legal Proceedings***

None.

**Item 4. *Submission of Matters to a Vote of SecurityHolders***

None.

**PART II**

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

Our common stock is traded on The NASDAQ Global Marketunder the symbol “AMLN.” The following table sets forth, for the periodsindicated, the reported high and low sales price per share of our common stockon The NASDAQ Global Market:

|                                       | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------|------------|----------|------------|---------|------------|
| **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   |       |
|                                  |       |     |       |    |       |
| **Year Ended December 31, 2005** |       |     |       |    |       |
| Fourth Quarter                        |       | $        | 42.36      |    | $          | 32.63 |   |
| Third Quarter                         |       | 35.47    |       | 18.50   |       |
| Second Quarter                        |       | 21.73    |       | 14.50   |       |
| First  Quarter                        |       | 24.95    |       | 17.15   |       |

 

The last reported sale price of our common stock on TheNASDAQ Global Market on February 13, 2007 was $40.34. As of February 13, 2007,there were approximately 685 shareholders of record of our common stock.

Wehave never declared or paid any cash dividends on our capital stock. Wecurrently intend to retain any future earnings for funding growth and,therefore, do not anticipate paying any cash dividends in the foreseeablefuture.

For information concerning prior stockholder approvalof and other matters relating to our equity incentive plans, see “EquityCompensation Plan Information” under Item 12 in this annual report on Form10-K.

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

Please read the following selected financial data inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the Consolidated Financial Statements andrelated notes included elsewhere in this annual report on Form 10-K.
| ** **                                                             | ** ** | **Years Ended December 31** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                             | ** ** | ** **                                 | ** ** | **(in thousands, except for per share amounts)** | ** ** | ** ** | ** ** |
| **Consolidated Statements of Operations Data:**                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net product sales                                                      |       | $                                          | 474,038    |   | $ | 86,713 |   | $ | — |   | $ | — |   | $ | — |   |
| Revenues under collaborative agreements                                |       | 36,837                                     |       | 53,761 |   | 34,268 |   | 85,652 |   | 13,395 |   |
| Total revenues                                                         |       | 510,875                                    |       | 140,474 |   | 34,268 |   | 85,652 |   | 13,395 |   |
|                                                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Costs and expenses:                                                    |       |                                       |       |   |   |   |   |   |   |   |   |
| Cost of goods sold                                                     |       | 50,073                                     |       | 14,784 |   | — |   | — |   | — |   |
| Selling, general and administrative                                    |       | 281,950                                    | (1)        | 171,520 |   | 66,958 |   | 56,761 |   | 25,334 |   |
| Research and development                                               |       | 222,053                                    | (2)        | 132,128 |   | 119,558 |   | 149,431 |   | 94,456 |   |
| Collaborative profit-sharing                                           |       | 194,191                                    |       | 31,359 |   | — |   | — |   | — |   |
| Acquired in-process research and development                           |       | —                                     |       | — |   | — |   | 3,300 |   | — |   |
| Total costs and expenses                                               |       | 748,267                                    |       | 349,791 |   | 186,516 |   | 209,492 |   | 119,790 |   |
| Make-whole payment on debt redemption                                  |       | (7,875                                     | )          | — |   | — |   | — |   | — |   |
| Net interest and other income (expense)                                |       | 26,411                                     |       | 2,485 |   | (4,909 | ) | 1,032 |   | (3,392 | ) |
| Net loss                                                               |       | (218,856                                   | )          | (206,832 | ) | (157,157 | ) | (122,808 | ) | (109,787 | ) |
| Net loss per share — basic and diluted                            |       | $                                          | (1.78      | ) | $ | (1.96 | ) | $ | (1.67 | ) | $ | (1.33 | ) | $ | (1.39 | ) |
| Shares used in calculating net loss per share — basic and diluted |       | 122,647                                    |       | 105,532 |   | 94,054 |   | 92,396 |   | 79,106 |   |
|                                                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheets Data:**                                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash equivalents and short-term investments                      |       | $                                          | 767,331    |   | $ | 443,423 |   | $ | 293,756 |   | $ | 269,776 |   | $ | 147,358 |   |
| Working capital                                                        |       | 702,930                                    |       | 415,134 |   | 282,421 |   | 243,144 |   | 92,368 |   |
| Total assets                                                           |       | 1,060,386                                  |       | 566,962 |   | 357,800 |   | 311,045 |   | 168,545 |   |
| Long-term obligations, excluding current portion                       |       | 221,208                                    |       | 399,112 |   | 403,233 |   | 202,425 |   | 88,234 |   |
| Accumulated deficit                                                    |       | (1,223,184                                 | )          | (1,004,328 | ) | (797,496 | ) | (640,339 | ) | (517,531 | ) |
| Total  stockholders’ equity (deficit)                             |       | 635,291                                    |       | 69,264 |   | (87,370 | ) | 63,216 |   | 12,298 |   |

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(1)          Selling, general and administrative expenses forthe year ended December 31, 2006 include approximately $29.0 million 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)          Researchand development expenses for the year ended December 31, 2006 include approximately$22.9 million of employee stock-based compensation expense pursuant to theprovisions of Statement of Financial Accounting Standards No. 123R *“Share-Based Payment”*which the Company adopted on January1, 2006.

 

 

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**Item 7. *Management’s Discussion and Analysis ofFinancial Condition and Results of Operations***

# **Executive Summary**

Amylin Pharmaceuticals, Inc. is a biopharmaceuticalcompany committed to improving the lives of people with diabetes, obesity andother diseases through the discovery, development and commercialization ofinnovative medicines. We have developed and gained approval for twofirst-in-class medicines to treat diabetes, BYETTA® (exenatide) injection and SYMLIN® (pramlintide acetate) injection, both of whichwere commercially launched in the United States during the second quarter of2005.  BYETTA has also been approved inthe European Union, or EU, and we expect the commercial launch of BYETTA invarious EU member states to occur in 2007, through our collaboration partner,Eli Lilly and Company, or Lilly.  We alsohave two late-stage programs in development and multiple early-stage programs.

BYETTA is the first and only approved medicine in anew class of compounds called incretin mimetics. 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 takingmetformin, sulfonylurea and/or a thiazolidinedones, or TZD, the three mostcommon oral therapies for type 2 diabetes. Net product sales of BYETTA were $430.2 million and $75.2 million forthe years ended December 31, 2006 and 2005, respectively.

We have an agreement with Lilly for the globaldevelopment and commercialization of exenatide. This agreement includes BYETTAand any long-acting release formulations of exenatide such as exenatide LAR.Under the terms of the agreement, operating profits from products sold in theUnited States are shared equally between Lilly and us.  On October 31, 2006 we and Lilly amended theagreement, which became effective January 1, 2007.  Prior to amending the agreement, operatingprofits for exenatide, including any long-acting release formulations, outsideof the United States were shared 80% to Lilly and 20% to us.  The amended agreement provides for tieredroyalties payable to us by Lilly based upon the annual gross margin for allexenatide 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.  In addition, effective January 1,2007, Lilly will be responsible for 100% of the costs related to development oftwice-daily BYETTA for sale outside of the United States.  Development costs related to all otherexenatide products for sale outside of the United States will continue to beallocated 80% to Lilly and 20% to us. Lilly will continue to be responsible for 100% of the costs related tocommercialization of all exenatide products for sale outside of the UnitedStates.

SYMLIN is the first and only approved medicine in anew class of compounds called amylinomimetics. We began selling SYMLIN in theUnited States in April 2005 for the treatment of patients with either type1 or type 2 diabetes who are treated with mealtime insulin but who have notachieved adequate glycemic control.  Net productsales of SYMLIN were $43.8 million and $11.5 million for the years endedDecember 31, 2006 and 2005, respectively.

We have a field force of approximately 550 peoplededicated to marketing BYETTA and SYMLIN in the United States.  Our field force includes our specialty andprimary care sales forces, a managed care and government affairs organization,a medical science organization and diabetes care specialists.  Lilly co-promotes BYETTA in the United Statesand has primary responsibility for developing and commercializing BYETTAoutside of the United States, including any long-acting release formulations.

In addition to our marketed products, we have severalprograms in development, including late-stage programs****for diabetes and obesity.

In diabetes, we are working with Lilly and Alkermes,Inc. to develop exenatide LAR, to enable once-weekly administration ofexenatide for the treatment of type 2 diabetes.   We are currently conducting a clinical studyevaluating the exenatide LAR in patients with type 2 diabetes designed togenerate the type of safety and efficacy data that could form the basis of aNew Drug Application, or an NDA, submission to the United States Food and DrugAdministration, or FDA.  In addition, weand Lilly are working with Alkermes and Parsons, Inc. on the construction of amanufacturing facility for exenatide LAR in Ohio.  We expect to complete the commercial scalemanufacturing process in this facility in the second half of 2008.

We have multiple early stage programs for diabetes andobesity.  We have a number of compoundsin development for the potential treatment of obesity which are part of abroader program which we refer to as INTO: Integrated Neurohormonal Therapiesfor Obesity.  As part of this program, weare currently conducting four clinical trials of our drug candidates, orcombinations of our drug candidates. We also maintain an active discoveryresearch program focused on novel peptide therapeutics.  We are actively seeking to in-licenseadditional drug candidates.  We have partnered with PyschoGenics, Inc., 

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to form Psylin Neurosciences, Inc., a company that will focus on thediscovery and development of peptide hormones for treatment of psychiatricindications.

 

**RecentDevelopments**

***BYETTA***

·                  Received FDAapproval in December 2006 for use of BYETTA as an add-on therapy to improveblood sugar control in patients with type 2 diabetes who have not achievedadequate control on a TZD alone or with metformin.

·                  Receivedmarketing authorization for BYETTA from the European Commission in November2006 for the treatment of type 2 diabetes in the EU as adjunctive therapy toimprove blood sugar control in patients with type 2 diabetes who have notachieved adequate glycemic control on metformin and/or a sulfonylurea, twocommon oral diabetes medications.

·                  Received FDAapproval in February 2007 for storage of BYETTA at room temperature not toexceed 77 degrees Fahrenheit after first use.

·                  Continuedefforts to expand the market potential for BYETTA in the United Statesincluding the initiation of a clinical study evaluating BYETTA as a stand alonetherapy for patients with type 2 diabetes.

***SYMLIN***

·                  Submitted twosupplemental New Drug Applications, or sNDA’s, to the FDA for the approval of adisposable pen delivery system for SYMLIN and for the approval of the use ofSYMLIN at mealtime in patients with type 2 diabetes treated with once-dailybasal insulin.

***Late-Stage Development Programs***

·                  Initiated aclinical study of exenatide LAR in patients with type 2 diabetes in March 2006to assess whether once-weekly exenatide LAR is at least as effective inimproving glucose control as twice-daily BYETTA.  This study is designed to generate the typeof safety and efficacy data that could form the basis of an NDA.

·                  Made continuedprogress in the construction of our manufacturing facility for exenatide LAR inOhio, and remain on schedule to complete the commercial-scale manufacturingprocess at this facility in the second half of 2008.  In addition, we successfully manufacturedcommercial-scale engineering batches of exenatide LAR at a third-partymanufacturer.

·                  Reported resultsfrom a 16-week Phase 2 dose-ranging study evaluating the safety and weighteffects of pramlintide, the active pharmaceutical ingredient in SYMLIN, inobese subjects.

·                  Reported resultsfrom a Phase 2 extension study demonstrating that patients completing 52 weeksof pramlintide therapy experienced a 7-8% mean body weight reduction (dependingupon dose) compared to a 1% reduction in patients receiving placebo.

***Early-Stage Programs and Research***

·                  Commenced anextensive program of clinical trials which will assess the safety and efficacyof multiple neurohormones used in combination with pramlintide to treatobesity, which is referred to as our INTO clinical research program.

***Financial and Operational***

·                  Expanded ourfield force by approximately 150 people to a total of approximately 550, andtogether with the Lilly field organization, expanded our capacity to reachapproximately 65,000 physicians, representing a 50% increase in physiciansreached.

·                  Completed apublic offering of 11.5 million shares of common stock in April 2006,generating net proceeds of approximately $508 million.

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·                  Converted $175 million of 2.25% convertible notes issued in 2003 and due 2008, referred to as the 2003 Notes, into approximately 5.6 million shares of our common stock.

Since our inception in September 1987, we havedevoted substantially all of our resources to our research and developmentprograms and, more recently, to the commercialization of our products. All ofour revenues prior to the second quarter of 2005 were derived from feesand expense reimbursements under our BYETTA collaboration agreement with Lilly,previous SYMLIN collaborative agreements, and previous co-promotion agreements.During the second quarter of 2005, we began to derive revenues from productsales of BYETTA and SYMLIN. We havebeen unprofitable since inception and may incur additional operating losses forat least the next few years. At December 31, 2006, our accumulated deficitwas approximately $1.2 billion.

At December 31, 2006, we had $767.3 million in cash, cash equivalentsand short-term investments. We may not generate positive operating cash flowsfor at least the next few years andaccordingly, we may need to raise additional funds from outside sources. Referto the discussions under the headings “*Liquidity and CapitalResources*” below and “*Cautionary Factors ThatMay Affect Future Results*” in Part I, Item 1A for furtherdiscussion regarding our anticipated future capital requirements.

# **CriticalAccounting Policies and Estimates**

Our discussion and analysisof our financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues, expenses andrelated disclosures of contingent assets and liabilities. On an ongoing basis,we evaluate our estimates, including those related to revenue recognition,stock-based compensation, inventory costs, research and development expensesand income taxes. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions.

We believe the followingcritical accounting policies affect the significant judgments and estimatesused in the preparation of our consolidated financial statements (see Note 1 toour consolidated financial statements on page F-7).

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

We recognize revenue from the sale of our products,license fees and milestones earned and for reimbursement of development costsbased on contractual arrangements.

**Net Product Sales**

We sell our products primarily to wholesaledistributors, who in turn, sell to retail pharmacies, pharmacy benefit managersand 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 recognize revenue from the sale of our productswhen delivery has occurred and title has transferred to our wholesale customers,net of allowances for product returns, rebates and wholesaler chargebacks,wholesaler discounts and prescription vouchers. We are required to makesignificant judgments and estimates in determining some of these allowances.  If actual results differ from our estimates,we will be required to make adjustments to these allowances in the future.

***Product Returns***

We donot offer our wholesale customers a general right of return. However, we willaccept returns of products that are damaged or defective when received by thewholesale customer or for any unopened product during the period beginning sixmonths prior to and up to 12 months subsequent to its expiration date. Weestimate product returns based on the experience of our collaborative partner,industry trends for other products with similar characteristics and ourhistorical returns experience. Additionally, we consider several other factorsin our estimation process including our internal sales forecasts,

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the expiration dates of product shipped and third party data to assistus in monitoring estimated channel inventory levels and prescriptiontrends.  Actual returns could exceed ourhistorical experience and our estimates of expected future returns due tofactors such as wholesaler and retailer stocking patterns and inventory levelsand/or competitive changes.  To dateactual returns have not differed materially from our estimates.

 

***Rebatesand Wholesaler Chargebacks***

Allowances for rebates include mandated discountsunder the Medicaid Drug Rebate Program and contracted discounts with commercialpayors.  Rebates are amounts owed afterthe final dispensing of the product by a pharmacy to a benefit plan participantand are based upon contractual agreements or legal requirements with privatesector and public sector (e.g. Medicaid) benefit providers. The allowance forrebates is based on contractual discount rates, expected utilization under eachcontract and our estimate of the amount of inventory in the distributionchannel 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. Wholesaler chargebacks are discountsthat occur when contracted customers purchase directly from an intermediarywholesale purchaser. Contracted customers, which currently consist primarily ofFederal government entities purchasing off the Federal Supply Schedule,generally purchase the product at its contracted price, plus a mark-up from thewholesaler. 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 chargebacksis based on expected 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***

Wholesaler discounts consist of prompt paymentdiscounts and distribution service fees. We offer all of our wholesale customers a 2% prompt-pay discount withinthe first 30 days after the date of the invoice.  Distribution service fees arise fromcontractual agreements with certain of our wholesale customers for distributionservices they provide to us and are generally a fixed percentage of their purchasesof our products in a given period. Prompt payment discounts and distribution service fees are recorded as areduction to gross sales in the period the sales occur. The allowance forwholesaler discounts is based upon actual data of product sales to wholesalecustomers and not on estimates.

***PrescriptionVouchers***

Prescription vouchers result in amounts owed topharmacies that have redeemed vouchers for a free prescription.    We provide prescription vouchers tophysicians, who in turn distribute them to patients.  Patients may redeem a voucher at a pharmacyfor a free prescription. We reimburse the pharmacy for the price it paid thewholesaler for the medicine and record this reimbursement as a reduction to grosssales. The allowance for prescription vouchers is based on the number ofunredeemed vouchers in circulation, and the estimated utilization rate.  The estimated utilization rate is based onour historical utilization rates experience with prescription vouchers.  Generally, prescription vouchers are issuedand expire in the same fiscal quarter.  Accordingly, our allowance for prescription vouchers is based uponactual utilization in the period in which the prescription vouchers wereissued.

**Revenues under collaborative agreements**

Amounts received for upfront product and technologylicense fees under multiple-element arrangements are deferred and recognizedover the period of such services or performance if such arrangements requireon-going services or performance. Amounts received for milestones arerecognized upon achievement of the milestone and the expiration of stockconversion 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-BasedCompensation***

We adopted Financial Accounting Standards Board, or FASB, Statement ofFinancial Accounting Standards No. 123R, or SFAS 123R, “*Share-Based Payment,”*on January 1,2006.  SFAS 123R requires us to expensethe estimated fair value of non-cash, stock-based payments to employees overthe requisite service period, which is generally the vesting period. We adoptedSFAS 123R using the modified prospective method. Under the modified prospectivemethod, prior 

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periods are not revised for comparative purposes. Pursuant to theprovisions of SFAS 123R, we recorded $51.8 million, or $0.42 per share, ofstock-based compensation during year ended December 31, 2006. At December 31,2006, unamortized non-cash, stock-based compensation expense was $108.8 millionand is expected to be amortized over a weighted-average period of approximately2.6 years.

 

We estimate the fair value of stock-based payments to employees usingthe Black-Scholes model. This estimate is affected by our stock price as wellas assumptions regarding a number of inputs that require us to make significantestimates and judgments. These inputs include the expected volatility of ourstock price, the expected term of employee stock options, the risk-freeinterest rate and expected dividends.

We estimate volatility based upon the historicalvolatility of our common stock for a period corresponding to the expected termof our employee stock options and the implied volatility of market-tradedoptions on our common stock with various maturities between six months and twoyears, consistent with the guidance in SFAS 123R and the SEC’s Staff AccountingBulletin, or SAB, No. 107. Prior to the adoption of SFAS 123R, we estimatedvolatility based on the historical volatility of our common stock for a periodcorresponding to the expected term of our employee stock options. Thedetermination to use implied volatility in addition to historical volatilitywas based upon the availability of data related to actively traded options onour common stock and our assessment that the addition of implied volatility ismore representative of future stock price trends than historical volatilityalone.

The expected life of our employee stock optionsrepresents the weighted-average period of time that options granted areexpected to be outstanding in consideration of historical exercise patterns andthe assumption that all outstanding options will be exercised at the mid-pointof the then current date and their maximum contractual term.

The risk-free interest rates are based on the yieldcurve of  United States Treasury stripsecurities in effect at the time of grant for periods corresponding with theexpected life of our employee stock options. We have never paid dividends anddo not anticipate doing so for the foreseeable future. Accordingly, we haveassumed no dividend yield for purposes of estimating the fair value of ourstock-based payments to employees.

If factors underlying the above assumptions change in future periods,the associated estimated non-cash, stock-based compensation expense that werecord may differ significantly from what we have recorded in the currentperiod.

***Inventories and Related Reserves***

Inventoriesconsist of raw materials, work-in-process and finished goods for SYMLIN andBYETTA. We maintain inventory reserves primarily for production failuresand potential product expiration. The manufacturing processes for our productsare complex. Deviations in the manufacturing process may result in productionfailures and additional inventory reserves. Obsolete inventory due toexpiration may also result in additional inventory reserves. In estimatinginventory obsolescence reserves, we analyze the shelf life, expiration datesand internal sales forecasts, each on a product-by-product basis.

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

Researchand development costs are expensed as incurred and include: salaries andbenefits; costs paid to third-party contractors to perform research, conductclinical trials and develop and manufacture drug materials and deliverydevices; and associated overhead expenses and facilities costs. Clinical trialcosts are a significant component of research and development expenses andinclude costs associated with third-party contractors. Invoicing fromthird-party contractors for services performed can lag several months. Weaccrue the costs of services rendered in connection with third-party contractoractivities based on our estimate of management fees, site management andmonitoring costs and data management costs. Differences between actual clinicaltrial costs from estimated clinical trial costs have historically not beenmaterial and are adjusted for in the period in which they become known.

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

We have net deferred taxassets relating primarily to net operating loss carry forwards and research anddevelopment tax credits. Subject to certain limitations, these deferred taxassets may be used to offset taxable income in future periods. Since we havebeen unprofitable since inception and the likelihood of future profitability isnot assured, we have fully reserved for these deferred tax assets in ourconsolidated balance sheets at December 31, 2006 and 2005, respectively.If we determine that we are able to realize a portion or all of thesedeferred tax assets in the future, we will record an adjustment to increasetheir recorded value and a corresponding adjustment to increase income in thatsame period.

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##### ***Recently IssuedAccounting Pronouncements***

In July 2006, theFASB issued FASB Interpretation No. 48, or FIN 48, *“Accountingfor Uncertainty in Income Taxes,”* which prescribes a recognitionthreshold and measurement process for recording in the financial statementsuncertain tax positions taken or expected to be taken in a tax return.Additionally, FIN 48 provides guidance on the derecognition, classification,accounting in interim periods and disclosure requirements for uncertain taxpositions. The provisions of FIN 48 will be effective for us beginning January1, 2007. We are in the process of determining the effect, if any, the adoptionof FIN 48 will have on our financial statements.

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, or SFAS 157, *“Fair Value Measurements.”* SFAS 157 establishes a frameworkfor measuring fair value in generally accepted accounting principles, andexpands disclosures about fair value measurements.  The provisions of SFAS 157 will be effectivefor us beginning January 1, 2007.  TheCompany is in the process of determining the effect, if any, the adoption ofSFAS 157 will have on our financial statements.

In September 2006, theSEC issued SAB No. 108, “**Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements.”****  SAB No. 108** addressesquantifying the financial statement effects of misstatements, specifically, howthe effects of prior year uncorrected errors must be considered in quantifyingmisstatements in the current year financial statements.**   The provisions of SAB No. 108are effective in fiscal year 2006 for us. The adoption of SAB No. 108 did not have a material impact on ourfinancial statements.**

# **Results of Operations**

***Net Product Sales***

***Net Product Sales***

Net product sales for the years ended December 31,2006 and 2005 were $474.0 million and $86.7 million, respectively, andconsisted of sales of BYETTA and SYMLIN, less allowances for product returns,rebates and wholesaler chargebacks, wholesaler discounts, and prescriptionvouchers.  There were no net productsales in 2004 as these products were not approved for sale until 2005.

The following table provides information regarding netproduct sales (in millions):

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

 

The increases in net product sales for BYETTA andSYMLIN for the year ended December 31, 2006 as compared to the same period in2005, primarily reflect continued growth in patient use.

##### ***Revenues under Collaborative Agreements***

Thefollowing table summarizes the components of revenues under collaborativeagreements for the years ended December 31, 2006, 2005 and 2004 (inmillions):

 

|                                    | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Amortization of  up-front payments |       | $                                          | 4.3        |   | $ | 4.3 |   | $ | 4.4 |   |
| Recognition of  milestone payments |       | —                                     |       | 35.0 |   | 5.0 |   |
| Cost-sharing  payments             |       | 32.5                                       |       | 14.5 |   | 24.9 |   |
|                               |       | $                                          | 36.8       |   | $ | 53.8 |   | $ | 34.3 |   |

 

Substantiallyall of the revenue recorded in these periods consists of amounts earnedpursuant to our collaboration agreement with Lilly for exenatide, and consists primarily of the amortization of up-front payments, milestonepayments and cost-sharing payments.

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The amortization of up-front payments for the yearsended December 31, 2006, 2005 and 2004 consists of the continued amortizationof $30million of the $80 million non-refundable initial payment made to us by Lillyupon the signing of our collaboration agreement for exenatide in September2002.  We are amortizing this $30 millionportion of the initial payment to revenue ratably over a seven-year period,representing our estimate of the period of our performance of significantdevelopment activities under the agreement. The remaining $50 million portion of the initial payment was amortizedto revenue prior to 2004.

Milestone payments relate to certain developmentand commercialization events defined in the exenatide collaborationagreement.  We recognize milestonepayments as revenue upon theachievement of performance requirements underlying such milestone payments and,for certain development milestones, the expiration of stock conversion rightsassociated with such payments.

Cost sharing payments consist ofamounts payable by Lilly to us to equalize development expenses under ourcollaboration agreement.  While we continue to lead exenatide andexenatide LAR development efforts in the United States, Lilly also incursexenatide development expenses and makes cost-sharing payments to us toequalize development costs, which are recorded as revenues under collaborativeagreements in the period in which the related development expenses areincurred.

The $17.0 million decrease in revenues undercollaborative agreements in 2006, as compared to 2005, primarily reflects areduction in milestone payments, partially offset by an increase incost-sharing payments.  Milestonepayments in 2005 consisted of the recognition of $35 million of milestonesearned in connection with the regulatory approval and commercial launch ofBYETTA in the United States.  Theincrease in cost-sharing payments in 2006, as compared to 2005 primarilyreflects increased development expenses for exenatide LAR in 2006 as comparedto 2005.

The $19.5 million increase in revenues undercollaborative agreements in 2005, as compared to 2004, primarily reflects anincrease in milestone revenue due to the recognition of $35 million ofmilestones discussed above, partially offset by a reduction in cost-sharingpayments due to lower development expenses for BYETTA in 2005 as compared to2004.

In future periods, revenuesunder collaborative agreements will consist of ongoing cost-sharing paymentsfrom Lilly to equalize United States development costs, possible futuremilestone payments and the continued amortization of the $30 million portion ofthe up-front payment.

# ***Costof Goods Sold***

Cost of goods sold was $50.1 million, representing agross margin of 89%, and $14.8 million, representing a gross margin of 83%, forthe years ended December 31, 2006 and 2005, respectively.   There was no cost of goods sold for 2004 aswe did not begin selling BYETTA and SYMLIN until the second quarter of2005.  Costs of goods sold is comprisedprimarily of manufacturing costs associated with BYETTA and SYMLIN sales duringthe period.  The improvement in grossmargin in 2006 as compared to 2005 primarily reflects lower unit costs for BYETTAdue to higher production volumes. Quarterly fluctuations in gross margins may be influenced by product mixand the level of sales allowances.

***Selling, General and Administrative Expenses***

Selling, general and administrative expenses were$282.0 million, $171.5 million and $67.0 million in the years endedDecember 31, 2006, 2005 and 2004, respectively.

The $110.5 million increase in 2006 as compared to2005 primarily reflects the full annual effect of the 2005 expansion of ourcommercial capabilities to support the launches of BYETTA and SYMLIN, thecontinued expansion in 2006 of these capabilities, including the addition ofapproximately 150 individuals to our field force, increased marketingactivities, including medical education, market research and product samplingfor BYETTA, growth in our business infrastructure and $29.0 million ofstock-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 marketing expenses.Accordingly, our selling, general and administrative expenses include our 50%share of these costs in the United States.

The $104.5 million increase in 2005 as compared to2004 reflects the expansion of our commercial capabilities and additions to ourbusiness infrastructure to support the commercial launches of BYETTA and SYMLINin 2005. This includes the hiring and training of our field force, expandedmarketing and medical education activities, the establishment of customerservice capabilities and related administrative support.

 

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Selling general and administrative expenses areexpected to continue to increase in 2007 due to the full annual cost of ourfield force of 550 people, of which approximately 150 were added during thefourth quarter of 2006, increases in marketing costs for BYETTA and increasesin business infrastructure to support our growth.

***Research and Development Expenses***

Currently, our research and development efforts arefocused on programs for the treatment of diabetes and obesity in various stagesof development.  From inception through1998, we devoted substantially all of our research and development efforts toSYMLIN. Beginning in 1999, our research and development costs started toinclude costs for our other drug candidates, primarily BYETTA and exenatideLAR. In 2004 we initiated our program for the treatment of obesity withpramlintide and in 2006 we commenced our INTO clinical research program forobesity.

The drug development process in the United Statesincludes a series of steps defined by the 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 comprisedof three phases of study: Phase 1, Phase 2 and Phase 3. Generally, the majorityof a drug candidate’s total development costs are incurred during Phase 3,which consists of trials that are typically both the longest and largestconducted during the drug development process. Successful completion of Phase 3clinical testing is followed by the submission of an NDA to the FDA formarketing approval. It is not uncommon for the FDA to request additional datafollowing its review of an NDA, which can significantly increase the drugdevelopment timeline and expenses. Following initial regulatory approval for adrug candidate, companies generally initiate additional clinical trials aimedat expanding product labeling and market potential.

The timing and costs to complete the successfuldevelopment of any of our drug candidates are highly uncertain, and thereforedifficult to estimate.

Our research and development expenses are comprised ofsalaries and benefits; costs paid to third-party contractors to performresearch, conduct clinical trials, develop and manufacture drug materials anddelivery devices; and a portion of our facilities costs. We charge directinternal and external program costs to the respective development programs. Wealso incur indirect costs that are not allocated to specific programs becausesuch costs benefit multiple development programs and allow us to increase ouroverall pharmaceutical development capabilities. These consist primarily offacilities costs and other internally-shared resources related to thedevelopment and maintenance of systems and processes applicable to all of ourprograms.

The following table sets forth information regardingour research and development expenses for our major projects (in millions):

 

|                                    | ** ** | **Year ended December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2006**                                   | ** ** | **2005**   | ** ** | **Increase** | ** ** |
| BYETTA                             |       | $                                          | 35.7       |       | $          | 27.7 |   | $ | 8.0 |   |
| SYMLIN                             |       | 24.8                                       |       | 21.1       |       | 3.7 |   |
| Late-stage  programs               |       | 61.4                                       |       | 33.7       |       | 27.7 |   |
| Early-stage  programs and research |       | 67.3                                       |       | 25.5       |       | 41.8 |   |
| Unallocated                        |       | 32.9                                       |       | 24.1       |       | 8.8 |   |
|                               |       | $                                          | 222.1      |       | $          | 132.1 |   | $ | 90.0 |   |

 

Research and development expenses increased to $222.1million for the year ended December 31, 2006 from $132.1 million for the yearended December 31, 2005.

The $90.0 million increase in 2006 primarily reflectsincreased expenses associated with both our early-stage and late-stageprograms, increased expenses associated with BYETTA and increased expenses forour unallocated research and development expenses.  The increase in expenses for our early-stageprograms and research primarily reflects costs associated with our acquisitionof the rights to leptin from Amgen in early 2006, costs associated with ourobesity programs and growth in our preclinical research.  The increase in expenses for our late-stageprograms primarily reflects costs associated with the development of exenatideLAR including costs associated with manufacturing scale-up and the ongoingclinical study discussed above.  Theincrease in expenses for BYETTA primarily reflects costs associated with label 

40

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expansion activities. The increase in our unallocated research and development expensesprimarily reflects increased facilities costs to support growth in our researchand development activities.

The following table sets forth information regardingour research and development expenses for our major projects (in millions):

 

|                                    | ** ** | **Year ended December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **Increase/decrease** | ** ** |
| BYETTA                             |       | $                                          | 27.7       |       | $          | 40.0 |   | $ | (12.3 | ) |
| SYMLIN                             |       | 21.1                                       |       | 15.8       |       | 5.3 |   |
| Late-stage  programs               |       | 33.7                                       |       | 22.1       |       | 11.6 |   |
| Early-stage  programs and research |       | 25.5                                       |       | 12.2       |       | 13.3 |   |
| Unallocated                        |       | 24.1                                       |       | 29.5       |       | (5.4 | ) |
|                               |       | $                                          | 132.1      |       | $          | 119.6 |   | $ | 12.5 |   |

 

The $12.5 million increase in 2005 as compared to 2004reflects increased expenses associated with our early-stage programs andresearch, our late-stage programs, and SYMLIN development expenses, partiallyoffset by reduced expenses for our BYETTA and unallocated research anddevelopment expenses.

The increased expenses in our early-stage programs andresearch is due to further investments in our discovery research activities,increased costs associated with preclinical development of potential drugcandidates and costs associated with an increased number of employees tosupport these activities.  The increasein expenses for our late-stage programs in 2005 as compared to 2004 primarilyreflects costs associated with the clinical development of exenatide LAR andour obesity program for pramlintide as well as increased costs associated withmanufacturing scale-up for exenatide LAR. The increase in SYMLIN development expensesin 2005 as compared to 2004 primarily reflects increased clinical developmentcosts associated with an open-label study evaluating SYMLIN use in clinicalpractice. The decrease in BYETTA development expenses in 2005 as compared to2004 primarily reflects reduced clinical development costs following thecompletion of activities required to support regulatory approval of BYETTA in2004, which included open-label extensions of the pivotal Phase 3 clinicalstudies for BYETTA and costs associated with manufacturing scale-up. Thedecrease in unallocated research and development expenses in 2005 as comparedto 2004 primarily reflects additional emphasis on development activities in ourlate-stage and early-stage programs.

***Collaborative Profit-Sharing***

Collaborative profit-sharing was $194.2 million and$31.4 million for the years ended December 31, 2006 and 2005, respectively, andconsists of Lilly’s 50% share of the gross margin for BYETTA sales in theUnited States.  There was nocollaborative profit sharing in 2004, as BYETTA was not approved for sale until2005.

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

In July 2006, we called for the redemption on August24, 2006 of all our outstanding 2003 Notes under a provisional redemption basedupon the market price of our common stock exceeding certain thresholds.  All holders elected to convert their 2003Notes into shares of our common stock. In connection with the conversion, we issued approximately 5.6 millionshares, including 180,005 shares as a make-whole payment, representing $112.94per $1,000 principal amount of the 2003 Notes converted less interest actuallypaid.  In connection with this make-wholepayment, we recorded a non-cash, non-operating charge of $7.9 million duringthe third quarter of 2006.

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

Interest and other income consists primarily ofinterest income from investment of cash and investments.  Interest and other income was $34.9 millionin 2006, $13.2 million in 2005 and $4.7 million in 2004.  The increase in both 2006 and 2005 primarilyreflects higher average cash balances available for investment and higherinterest rates in 2006 as compared to 2005. The increase in 2005 primarilyreflects higher average cash balances available for investment and higherinterest rates in 2005 as compared to 2004.

Interest and other expenseconsists primarily of interest expense resulting from long-term debtobligations and includes interest payments and the amortization of debtissuance costs.  Interest and otherexpense was $8.5 million in 2006, $10.7 

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million in 2005 and $9.6 million in 2004. The decreasein 2006 compared to 2005 reflects lower interest expense following the August2006 redemption of our 2003 Notes.  Theincrease in 2005 compared to 2004 reflects a full year of interest expense forthe $200 million of 2.5% convertible senior notes issued in April 2004,referred to as our 2004 Notes.

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

Our net loss for the year endedDecember 31, 2006 was $218.9 million compared to $206.8 million in 2005and $157.2 million in 2004.  Our net lossfor the year ended December 31, 2006 includes $51.8 million of stock-basedcompensation expense pursuant to the adoption of SFAS 123R on January 1,2006.  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 discussedabove.  The increase in our net loss in2005 compared to 2004 reflects the increased costs and expenses, partiallyoffset by the increases in net product sales and revenue, under collaborativeagreements discussed above.

We may incur operating losses for the next fewyears.  Our ability to reachprofitability in the future will be heavily dependent upon the amount ofproduct sales that we achieve for BYETTA and SYMLIN. In addition, ongoing andpotential increased expenses associated with the commercialization of BYETTAand SYMLIN, and expenses associated with the continuation and potentialexpansion of our research and development programs, including our ongoinglate-stage programs and our early-stage development programs, and relatedsupport infrastructure may impact our ability to reach profitability in thefuture. Our operating results may fluctuate from quarter to quarter as a resultof differences in the timing of expenses incurred and revenues recognized.

# **Liquidity and Capital Resources**

Since our inception, we have financed our operationsprimarily through public sales and private placements of our common andpreferred stock, debt financings, payments received pursuant to our BYETTAcollaboration with Lilly, reimbursement of SYMLIN development expenses throughearlier collaboration agreements, and since the second quarter of 2005, throughproduct sales of BYETTA and SYMLIN.

At December 31,2006, we had $767.3 million in cash, cash equivalents and short-terminvestments, compared to $443.4 million at December 31, 2005. InApril 2006 we completed a public offering of 11.5 million shares of our commonstock, generating net proceeds of approximately $508 million.

We used cash of $126.0 million,$182.0 million and $162.9 million for our operating activities in the yearsended December 31, 2006, 2005 and 2004, respectively.   Our cash used for operating activities in2006 included uses of cash due to increases in accounts receivable andinventories of $32.4 million and $32.5 million, respectively.  The increase in accounts receivable reflectsgrowth in our net product sales and the increase in inventories reflectsincreased inventory purchases to support this growth.   Our cash used for operating activities in2006 included sources of cash for increases in our current liabilities,including an increase of $15.8 million in accounts payable, an increase of$10.1 million in accrued compensation, an increase of $35.7 million in payableto collaborative partner and an increase of $22.5 million in other currentliabilities.  The increase in accountspayable primarily reflects growth in our expenses generally and accountspayable timing differences.  The increasein accrued compensation primarily reflects growth in our number ofemployees.  The increase in payable tocollaborative partner, which represents Lilly’s 50% share of BYETTA grossmargins in the United States, reflects increased net product sales for BYETTAand an improvement in gross margins.  Theincrease in other current liabilities primarily reflects growth in salesallowances due to increased net product sales and an increase in accruedcapital additions related to the ongoing construction of our manufacturingfacility for exenatide LAR.

Our investing activities usedcash of $425.9 million, $169.0 million and $53.8 million in the years endedDecember 31, 2006, 2005 and 2004, respectively. Investing activities inall three years consisted primarily of purchases and sales of short-terminvestments and purchases of property and equipment.   Purchases of property and equipmentincreased to $97.9 million in 2006 from $29.6 million in 2005 and $12.9 millionin 2004.  The increase in 2006 primarilyreflects costs associated with our manufacturing facility for exenatide LARand, to a lesser extent, purchases of tenant improvements, office equipment andscientific equipment to support our growth.  Weexpect that our capital expenditures will continue to significantly increase infuture periods due primarily to costs associated with ongoing construction ofour manufacturing facility for exenatide LAR. We expect to complete the commercial-scale manufacturing process in thesecond half of 2008 at an estimated cost of up to approximately $180million.  We are also evaluating thepotential to expand this project based on the progress of exenatide LAR throughthe development process which could increase our capital expendituressignificantly.  In addition, weanticipate continued investments in tenant improvements, office equipment andscientific equipment. We are evaluating various forms of secured debt financingto fund a portion of the cost of our manufacturing facility. In addition, weare evaluating the 

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potential utility of other financing mechanisms,including revolving credit lines or similar facilities, which may be secured byour inventories, accounts receivable or other assets.

Financing activities providedcash of $546.5 million, $362.5 million, and $200.6 million in the years endedDecember 31, 2006, 2005 and 2004, respectively. Financing activities in2006 included approximately $508 million in net proceeds from a public offeringof our common stock in April 2006, proceeds from the exercise of stock optionsand proceeds from our employee stock purchase plan.  Financing activities consist primarily ofproceeds from sales of common stock and the issuance of convertible seniornotes, partially offset by principal payments on notes payable and capitallease obligations.

In August 2006, we completed theredemption of all of the 2003 Notes.  Inconnection with the redemption we issued approximately 5.4 million shares ofcommon stock to note holders upon the conversion of all of the outstanding 2003Notes.  In connection with theconversion, we also issued 180,005 shares as a make-whole payment, representing$112.94 per $1,000 principal value of the converted 2003 Notes less interestactually paid.

At December 31, 2006, wehad $200 million in aggregate principal amount of the 2004 Notes outstanding.The 2004 Notes are currently convertible into a total of up to 5.8 millionshares of our common stock at approximately $34.35 per share. The 2004 Notesare not redeemable at our option.

The following table summarizes our contractualobligations and maturity dates as of December 31, 2006 (in thousands).

 

|                                      | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| **Contractual  Obligations**         | ** ** | **Total**                                 | ** ** | **Less  than 1  year** | ** ** | **2-3 years** | ** ** | **4-5  years** | ** ** | **After 5  years** | ** ** |
| Long-term debt                       |       | $                                         | 200,000    | * * | $ | *—* | * * | $ | *—* |   | $ | 200,000 | * * | $ | *—* | * * |
| Interest on long-term debt           |       | 22,500                                    |       | 5,000 |   | 10,000 |   | 7,500 | * * | *—* | * * |
| Inventory purchase  obligations  (1) |       | 140,215                                   |       | 100,910 |   | 26,835 |   | 12,470 | * * | *—* | * * |
| Operating leases                     |       | 67,505                                    |       | 11,435 |   | 20,007 |   | 13,377 |   | 22,686 |   |
| Total  (2)                           |       | $                                         | 430,220    |   | $ | 117,345 |   | $ | 56,842 |   | $ | 233,347 |   | $ | 22,686 |   |

----

(1)    Includes$92.3 million of outstanding purchase orders, cancelable by us upon 30 days’written notice, subject to reimbursement of costs incurred through the date ofcancellation.

(2)    Excludes long-term obligation of $6.1 millionrelated to deferred compensation, the payment of which is subject to electionsmade by participants that are subject to change.

 

In addition, under certain license and collaborationagreements with other companies we are required to pay royalties and/ormilestone payments upon the successful development and commercialization ofrelated products. We do not expect to make any significant milestone paymentsunder these agreements within 12 months from the date of this annual report.

Our future capital requirementswill depend on many factors, including: the amount of product sales we achievefor BYETTA and SYMLIN; costs associated with the commercialization of BYETTAand SYMLIN; costs associated with the establishment of our exenatide LARmanufacturing facility; costs of potential licenses or acquisitions; thepotential need to repay existing indebtedness; costs associated with an increase in our infrastructure; our ability toreceive or need to make milestone payments; our ability, and the extent, towhich we establish collaborative arrangements for SYMLIN or any of our productcandidates; progress in our research and development programs and the magnitudeof theseprograms; costs involved in preparing, filing, prosecuting, maintaining,enforcing or defending our patents; competing technological and marketdevelopments; and costs of manufacturing, including costs associated withestablishing our own manufacturing capabilities or obtaining and validatingadditional manufacturers of our products; and scale-up costs for our drugcandidates.

**Item 7A. *Quantitative and Qualitative DisclosuresAbout Market Risk***

We invest our excess cashprimarily in United States Government securities, asset-backed securities anddebt instruments of financial institutions and corporations with strong creditratings. These instruments have various short-term maturities, and thereforethe risk of loss due to interest rate risk is considered to be low. We do notutilize derivative financial instruments, derivative commodity instruments orother market risk sensitive instruments, positions or transactions in any 

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material fashion. Accordingly, we believe that, whilethe instruments held are subject to changes in the financial standing of theissuer of such securities, we are not subject to any material risks arisingfrom changes in interest rates, foreign currency exchange rates, commodityprices, equity prices or other market changes that affect market risk sensitiveinvestments. Our debt is not subject to significant swings in valuation asinterest rates on our debt are fixed. At December 31, 2006, the fair valueof our 2004 Notes was $252 million. A hypothetical 1% adverse move in interestrates along the entire interest rate yield curve would not materially affectthe fair value of our financial instruments that are exposed to changes ininterest rates.

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

The financial statements andsupplemental data required by this item are set forth at the pages indicated inPart IV, Item 15(a)(1) of this annual report.

**Item 9. *Changes In and Disagreements withAccountants on Accounting and Financial Disclosure***

None.

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

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

Under the supervision and with the participation ofour management, including our principal executive officer and principalfinancial officer, we conducted an evaluation of our disclosure controls andprocedures as such term is defined under Rule 13a-15(e) promulgated underthe Securities Exchange Act of 1934, as amended, or the Exchange Act. Based onthis evaluation, our principal executive officer and our principal financialofficer concluded that our disclosure controls and procedures were effective asof December 31, 2006.

Our management does not expect that our disclosurecontrols and procedures or our internal controls over financial reporting willprevent 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 inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, ormisstatements due to error, if any, within the Company have been detected.While we believe that our disclosure controls and procedures and internalcontrol over financial reporting are and have been effective, we intend tocontinue to examine and refine our disclosure controls and procedures andinternal control over financial reporting and to monitor ongoing developmentsin these areas.

**Management’sReport on Internal Control Over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl - Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under theframework in *Internal Control — IntegratedFramework*, our management concluded that our internal control overfinancial reporting was effective as of December 31, 2006.

Our management’s assessment of the effectiveness ofour internal control over financial reporting as of December 31, 2006 hasbeen audited by Ernst & Young LLP, an independent registered publicaccounting firm, as stated in their report which is set forth below.

**Changesin Internal Control Over Financial Reporting**

There has been no change in our internal control overfinancial reporting in our most recent fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

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

**To The Board of Directors and Stockholders ofAmylin Pharmaceuticals, Inc.**

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over 

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FinancialReporting, that Amylin Pharmaceuticals, Inc. maintained effective internalcontrol over financial reporting as of December 31, 2006, based on 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 maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance with thestandards 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, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance with authorizationsof management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use, or disposition of the company’s assets that could have a material effecton the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that AmylinPharmaceuticals, Inc. maintained effective internal control over financial reportingas of December 31, 2006, is fairly stated, in all material respects, basedon the COSO criteria. Also, in our opinion, Amylin Pharmaceuticals, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2006, based on****the COSO criteria**.**

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets as of December 31, 2006 and 2005, and therelated consolidated statements of operations, stockholders’ equity (deficit),and cash flows for each of the three years in the period endedDecember 31, 2006 of Amylin Pharmaceuticals, Inc. and our report datedFebruary 23, 2007 expressed an unqualified opinion thereon.

 
|   | San Diego, California |   | /s/ ERNST & YOUNG LLP |   |   |
|--------|-----------------------|--------|---------------------------|--------|--------|
|   | February 23,  2007    |   |                      |   |   |

 

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

None.

**PART III**

**Item 10. *Directors, Executive Officers and CorporateGovernance***

The information required by thisitem with respect to executive officers and directors is incorporated byreference from the information under the captions “Election of Directors” and “Section16(a) Beneficial Ownership Reporting Compliance” contained in the proxystatement to be filed with the SEC pursuant to Regulation 14A in connectionwith our 2007 annual meeting of stockholders.

**Item 11. *Executive Compensation***

The information required by thisitem is incorporated by reference to the information under the captions “ExecutiveCompensation,” “Compensation Committee Report” and “Compensation CommitteeInterlocks and Insider Participation” contained in the proxy statement to befiled with the SEC pursuant to Regulation 14A in connection with our 2007annual meeting of stockholders.

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**Item 12. *Security Ownership of Certain BeneficialOwners and Management and Related Shareholder Matters***

The information required by this item is incorporatedby reference to the information under the caption “Security Ownership ofCertain Beneficial Owners and Management” contained in the proxy statement tobe filed with the SEC pursuant to Regulation 14A in connection with our 2007annual meeting of stockholders.

*EquityCompensation Plan Information*

The following table sets forth information regardingall of our equity compensation plans as of December 31, 2006 (inthousands, except per share amounts):

 
| **Plan Category**                                         | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  issuance under equity  compensation plans,  (excluding securities  reflected in first column)** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Equity  compensation plans approved by securityholders**     |       | 16,213                                                                                                                                               |       | $                                                                                                                | 23.10      |                                                                                                                                                                                                    | 7,588      |   |
| **Equity  compensation plans not approved by securityholders** |       | 9                                                                                                                                                    |       | $                                                                                                                | 6.58       | * *                                                                                                                                                                                                | *—*   | * * |
| Total                                                          |       | 16,222                                                                                                                                               |       | $                                                                                                                | 23.09      |                                                                                                                                                                                                    | 7,588      |   |

 

The following equity compensation plans were in effectas of December 31, 2006 and were each adopted with the approval of ourstockholders:  the 1991 Option Plan, the2001 Equity Incentive Plan, the 2001 Employee Stock Purchase Plan, the 1994Non-Employee Directors’ Stock Option Plan, the 2003 Non-Employee Directors’Stock Option Plan and the Non-Employee Directors’ Deferred Compensation Plan.

Our stockholders were not asked to, and therefore didnot, approve the individual compensation arrangement entered into inJanuary 1995 with Joseph C. Cook, Jr., who served as our Chairman andChief Executive Officer from 1998 to 2003, and continues to serve as anemployee and as our Chairman. From 1994 to 1998, Mr. Cook served as aconsultant to us under various consulting agreements pursuant to which hereceived cash compensation and was granted non-qualified stock options. Inconnection with one of his consulting agreements with us entered into inJanuary 1995, we also entered into a phantom stock unit agreement withFarview Management Co., L.P., a consulting firm of which Mr. Cook is a generalpartner. Pursuant to the phantom stock agreement, Farview received 9,000phantom stock units, each representing the right to receive cash or shares ofour common stock. The phantom stock agreement provides that on the dateMr. Cook ceases to be a consultant to or director of our Company, we willpay Farview the fair market value of the phantom stock units in cash or sharesof our common stock, at our election. The fair market value of each phantomstock unit is to be determined based on the closing price per share of ourcommon stock on The NASDAQ National Market on the last trading day prior to thedate that Mr. Cook ceases to be a consultant to or director of ourcompany.

**Item 13. *Certain Relationships and RelatedTransactions, and Director Independence***

The information required by thisitem is incorporated by reference to the information under the captions “Electionof Directors” and “Certain Transactions” contained in the proxy statement to befiled with the SEC pursuant to Regulation 14A in connection with our 2007annual meeting of stockholders.

**Item 14. *PrincipalAccountant Fees and Services***

The information required by thisitem is incorporated by reference to the information under the captioncontained in “Ratificationof Selection of Independent Auditors”contained in the proxy statement to be filed with the SEC pursuant toRegulation 14A in connection with our 2007 annual meeting of stockholders.

 

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** **

**PART IV**

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

(a)(1) **Index to ConsolidatedFinancial Statements**

The financial statementsrequired by this item are submitted in a separate section beginning onpage 53 of this annual report.

(a)(2) **Financial StatementSchedules:** The following Schedule is filed as part of this Form 10-KAnnual Report:

|                        | ** ** | **Page Number** |
|------------------------|------------|----------------------|
| II. Valuation Accounts |       | F-22                 |

 

All other schedules have been omitted because they arenot applicable or required, or the information required to be set forth thereinis included in the Consolidated 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.                                                                                                        |
| (6)                   |       | 3.2                 |       | Amended and Restated Bylaws of the Registrant.                                                                                                                               |
| (13)                  |       | 3.3                 |       | Certificate of Amendment of Amended and Restated  Certificate of Incorporation of the Registrant.                                                                            |
|                  |       | 4.1                 |       | Reference is made to Exhibits 3.1 - 3.3.                                                                                                                                     |
| (17)(2)               |       | 4.2                 |       | Registration Rights Agreement dated  September 19, 2002, between the Registrant and Eli Lilly and Company.                                                              |
| (16)                  |       | 4.3                 |       | Rights Agreement dated June 17, 2002, between  the Registrant and American Stock Transfer & Trust Company.                                                          |
| (16)                  |       | 4.4                 |       | Certificate of Designation of Series A Junior  Participating Preferred Stock.                                                                                                |
| (24)                  |       | 4.5                 |       | First Amendment to Rights Agreement dated  December 13, 2002, between the Registrant and American Stock Transfer  & Trust Company.                                  |
| (10)                  |       | 4.6                 |       | Indenture, dated as of April 6, 2004, between  Registrant and J.P. Morgan Trust Company, National Association (as Trustee).                                             |
| (10)                  |       | 4.7                 |       | Form of 2.50% Convertible Senior Note due 2011.                                                                                                                              |
| (10)                  |       | 4.8                 |       | Registration Rights Agreement, dated as of  April 6, 2004, between Registrant and Morgan Stanley & Co.  Incorporated and Goldman, Sachs & Co.                   |
| (1)                   |       | 10.1                |       | Form of Indemnity Agreement entered into between the  Registrant and its directors and officers.†                                                                       |
| (14)                  |       | 10.2                |       | Registrant’s 1991 Stock Option Plan, as amended.†                                                                                                                  |
| (5)                   |       | 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.†                                                       |
| (32)                  |       | 10.6                |       | Registrant’s Employee Stock Purchase Plan, as  amended.†                                                                                                           |
| (18)                  |       | 10.7                |       | Registrant’s Non-Employee Directors’ Stock Option  Plan (the “Directors’ Plan”).†                                                              |
| (4)                   |       | 10.8                |       | Phantom Stock Unit Agreement, dated January 4,  1995, between the Registrant and Farview Management Co., L.P.†                                                     |
| (7)(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. |
| (9)                   |       | 10.10               |       | Registrant’s Directors’ Deferred Compensation Plan.†                                                                                                          |
| (21)                  |       | 10.11               |       | Registrant’s Directors’ Plan Stock Option Agreement,  as amended. †                                                                                           |
| (11)                  |       | 10.12               |       | Special Form of Incentive Stock Option Agreement the  1991 Stock Option Plan of the Registrant.†                                                                        |
| (12)                  |       | 10.13               |       | Stock Option Agreement dated March 25, 1998,  between the Registrant and Joseph C. Cook, Jr.†                                                                      |
| (15)(2)               |       | 10.14               |       | Development and License Agreement dated May 15,  2000, between the Registrant and Alkermes Controlled Therapeutics II, Inc.                                                  |
| (8)                   |       | 10.15               |       | Registrant’s Change in Control Employee Severance  Benefits Plan.†                                                                                                 |

47

----

 
| (32)    |   | 10.16  |   | Registrant’s 2001 Equity Incentive Plan, as  amended.†                                                                                                                           |
|---------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (17)(2) |   | 10.17  |   | Collaboration Agreement dated September 19,  2002, between the Registrant and Eli Lilly and Company.                                                                                  |
| (17)(2) |   | 10.18  |   | U.S. Co-Promotion Agreement dated September 19,  2002, between the Registrant and Eli Lilly and Company.                                                                              |
| (17)    |   | 10.19  |   | Milestone Conversion Agreement dated  September 19, 2002, between the Registrant and Eli Lilly and Company.                                                                           |
| (17)    |   | 10.20  |   | Stock Purchase Agreement dated September 19,  2002, between the Registrant and Eli Lilly and Company.                                                                                 |
| (20)    |   | 10.21  |   | Security Agreement dated June 30, 2003, between  the Registrant and Eli Lilly and Company.                                                                                            |
| (22)(2) |   | 10.22  |   | Device Development and Manufacturing Agreement dated  July 1, 2003, between Registrant and Eli Lilly and Company.                                                                     |
| (21)    |   | 10.23  |   | Form of Registrant’s 2001 Equity Incentive Plan  Officer Stock Option Agreement, as amended. †                                                                                   |
| (21)    |   | 10.24  |   | Form of Registrant’s 2001 Equity Incentive Plan  Stock Option Agreement, as amended. †                                                                                           |
| (21)    |   | 10.25  |   | Employment Agreement dated June 9, 2003,  between Registrant and Ginger L. Graham. †                                                                                             |
| (23)(2) |   | 10.26  |   | Manufacturing Agreement dated May 12, 2003, between  Registrant and UCB S.A.                                                                                                               |
| (25)(2) |   | 10.27  |   | Exenatide Manufacturing Agreement dated  October 21, 2003, between Registrant and Mallinckrodt Inc.                                                                                   |
| (25)(2) |   | 10.28  |   | Commercial Supply Agreement for Exenatide dated  December 23, 2003, between Registrant and Bachem, Inc.                                                                               |
| (26)    |   | 10.29  |   | Sublease Agreement dated November 24, 2003,  between Registrant and Bristol-Myers Squibb Company.                                                                                     |
| (26)    |   | 10.30  |   | Lease Agreement dated November 14, 2003,  between Registrant and ARE-9363/9373/9393 Towne Centre, LLC.                                                                                |
| (27)(2) |   | 10.31  |   | Commercial Supply Agreement dated February 14,  2005 between Registrant and Baxter Pharmaceutical Solutions LLC.                                                                      |
| (27)(2) |   | 10.32  |   | Commercial Supply Agreement dated October 7,  2004 between Registrant and CP Pharmaceuticals Ltd.                                                                                     |
| (27)(2) |   | 10.33  |   | Commercial Supply Agreement dated March 2, 2005  between Registrant and Baxter Pharmaceutical Solutions LLC.                                                                               |
|    |   | 10.34  |   | Summary Description of Registrant’s Named Executive  Officer Oral At-Will Employment Agreements.                                                                                      |
| (28)    |   | 10.35  |   | Description of Registrant’s Executive Cash Bonus  Plan.                                                                                                                               |
| (31)    |   | 10.36  |   | Amendment to Development and License Agreement dated  October 24, 2005, between Registrant and Alkermes Controlled Therapeutics II.*                                                       |
| (29)    |   | 10.37  |   | Underwriting Agreement dated March 29, 2006, by and  between Registrant, Morgan Stanley & Co. Incorporated, Goldman, Sachs  & Co., Bear Stearns & Co. and Lehman Brothers Inc. |
| (30)(2) |   | 10.38  |   | Commercial Supply Agreement dated June 28,  2005, between Registrant and Bachem, Inc.                                                                                            |
| (33)    |   | 10.39  |   | Employment Succession Agreement dated June 1, 2006  between Registrant and Daniel M. Bradbury.  †                                                                                     |
|    |   | 10.40  |   | Commercial Supply Agreement dated October 12, 2006  between Registrant and Wockhardt UK (Holdings) Ltd.*                                                                                   |
|    |   | 10.41  |   | Amendment to Collaboration Agreement dated October  31, 2006 between Registrant and Eli Lilly and Company.*                                                                                |
|    |   | 10.42  |   | Registrant’s Deferred Compensation Plan. †                                                                                                                                       |
|    |   | 21.1   |   | Subsidiaries of Registrant.                                                                                                                                                                |
|    |   | 23.1   |   | Consent of Independent Registered Public Accounting  Firm.                                                                                                                                 |
|    |   | 24.1   |   | Power of Attorney. Reference is made to page 52.                                                                                                                                      |
|    |   | 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 orarrangement required to be identified pursuant to Item 15(c).

*                     Confidential treatment has been requested withrespect to certain portions of this exhibit. Omitted portions have been filedseparately with the Securities and Exchange Commission.

48

----

(1)                    Filed as an exhibit to the Registrant’sRegistration Statement on Form S-1 (No. 33-44195) or amendments thereto andincorporated herein by reference.

(2)                    Confidential Treatment has been granted by the Securities and Exchange Commission withrespect to portions of this agreement.

(3)                    Filed as an exhibit to the Registrant’s AnnualReport on Form 10-K for the fiscal year ended December 31, 1993.

(4)                    Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 1994.

(5)                    Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 1995.

(6)                    Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterended June 30, 2001.

(7)                    Filed as anexhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 1996.

(8)                    Filed as anexhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2001.

(9)                    Filed as anexhibit to the Registrant’s Registration Statement on Form S-8 (No. 333-61660)or amendments thereto and incorporated herein by reference.

(10)              Filed as an exhibitto the Registrant’s Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2004.

(11)              Filed as an exhibitto the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March1, 1998, and incorporated herein by reference.

(12)              Filed as an exhibitto the Registrant’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 1998.

(13)              Filed as an exhibitto the Registrant’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2001.

(14)              Filed as an exhibitto the Registrant’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 1999.

(15)              Filed as an exhibitto the Registrant’s Quarterly Report on Form 10-Q for the quarter endedJune 30, 2000.

(16)              Filed as an exhibit onForm 8-K dated June 17, 2002, and incorporated herein by reference.

(17)              Filed as an exhibiton Form 8-K dated October 3, 2002, and incorporated herein by reference.

(18)              Filed as an exhibitto Registrant’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2001.

(19)              Filed as an exhibitto Registrant’s Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2003, and incorporated herein by reference.

(20)              Filed as an exhibitto Registrant’s Quarterly Report on form 10-Q for the quarter ended June 30,2003, and incorporated herein by reference.

(21)              Filed as an exhibitto Registrant’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2003, and incorporated herein by reference .

(22)              Filed as an exhibitto Amendment 1 to Registrant’s Quarterly Report on Form 10-Q/A for the quarterended June 30, 2003, and incorporated herein by reference .

(23)              Filed as an exhibitto Amendment 1 to Registrant’s Quarterly Report on Form 10-Q for the quarterended September 30, 2003, and incorporated herein by reference.

(24)              Filed as an exhibitto Registrant’s Annual Report on Form 10-K for the fiscal year ended December31, 2002, and incorporated herein by reference.

49

----

 

(25)              Filed as an exhibitto Amendment 1 to Registrant’s Annual Report on Form 10-K/A for the fiscal yearended December 31, 2003, and incorporated herein by reference.

(26)              Filed as an exhibitto Registrant’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2003, and incorporated herein by reference.

(27)              Filed as an exhibitto Registrant’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2004, and incorporated herein by reference.

(28)              Filed on Form 8-Kdated December 1, 2006, and incorporated herein by reference.

(29)              Filed as an exhibiton Form 8-K dated March 30, 2006, and incorporated herein by reference.

(30)              Filed as an exhibitto Registrant’s Quarterly Report on Form 10-Q for the quarter endedJune 30, 2005, and incorporated herein by reference.

(31)              Filed as an exhibitto Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31,2005, and incorporated herein by reference.

(32)              Filed as an exhibiton Form 8-K dated May 22, 2006 and incorporated herein by reference.

(33)              Filed as an exhibitto Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,2006, and incorporated herein by reference.

 

50

----

** **

**SIGNATURES**

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

 
|     |              | AMYLIN PHARMACEUTICALS, INC. |
|----------|-------------------|------------------------------|
|     |              |                         |
|     |              |                         |
| Date:    | February 26, 2007 |                         |
|     |              |                         |
|     | * *          | By:                          | */s/Ginger L.  Graham* | * * |
|     |              | Ginger L. Graham             |   |
| * * | * *          | *Chief  Executive Officer*   |   |

 

51

----

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Ginger L. Graham and Mark G. Foletta, and each of them, as his or hertrue and lawful attorneys-in-fact and agents, with full power of substitutionand resubstitution, for him or her and in his or her name, place, and stead, inany and all capacities, to sign any and all amendments to this Report, and anyother documents in connection therewith, and to file the same, with allexhibits thereto, with the Securities and Exchange Commission, granting untosaid attorneys-in-fact and agents, and each of them, full power and authorityto do and perform each and every act and thing requisite and necessary to bedone in connection therewith, as fully to all intents and purposes as he or shemight or could do in person, hereby ratifying and confirming all that saidattorneys-in-fact and agents, or any of them or their or his substitute orsubstituted, may lawfully do or cause to be done by virtue hereof.

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Signatures**                      | ** ** | **Title**                                                         | ** ** | **Date**                |
|-------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------|
|                                |       |                                                              |       |                    |
| /s/ GINGER L. GRAHAM                |       | Chief Executive Officer and  Director                             |       | February 26, 2007       |
| Ginger L. Graham                    |       | *(Principal  Executive Officer)*                                  |       |                    |
|                                |       |                                                              |       |                    |
| /s/ DANIEL M. BRADBURY              |       | President, Chief Operating  Officer and Director                  |       | February 26, 2007       |
| Daniel M. Bradbury                  |       |                                                              |       |                    |
| /s/**MARK G. FOLETTA                |       |  Senior Vice President, Finance and  Chief Financial Officer |       |  February 26, 2007 |
| Mark G. Foletta                     |       | *(Principal  Financial and Accounting Officer)*                   |       |                    |
|                                |       |                                                              |       |                    |
| /s/ JOSEPH C. COOK, JR.             |       | Chairman of the Board                                             |       |  February 26, 2007 |
| Joseph C. Cook, Jr.                 |       |                                                              |       |                    |
|                                |       |                                                              |       |                    |
| /s/ STEVEN R. ALTMAN                |       | Director                                                          |       | February 26, 2007       |
| Steven R. Altman                    |       |                                                              |       |                    |
|                                |       |                                                              |       |                    |
| /s/ VAUGHN D. BRYSON                |       | Director                                                          |       |  February 26, 2007 |
| Vaughn D. Bryson                    |       |                                                              |       |                    |
|                                |       |                                                              |       |                    |
| /s/ KARIN EASTHAM                   |       | Director                                                          |       |  February 26, 2007 |
| Karin Eastham                       |       |                                                              |       |                    |
|                                |       |                                                              |       |                    |
| /s/ JAMES R. GAVIN III, M.D.,  PHD. |       | Director                                                          |       |  February 26, 2007 |
| James R. Gavin III, M.D.,  Ph.D.    |       |                                                              |       |                    |
|                                |       |                                                              |       |                    |
| /s/ HOWARD E. GREENE, JR.           |       | Director                                                          |       |  February 26, 2007 |
| Howard E. Greene, Jr.               |       |                                                              |       |                    |

52

----

 
| /s/ JAY S. SKYLER, M.D.   |   | Director |   |  February 26, 2007 |
|---------------------------|--------|----------|--------|-------------------------|
| Jay S. Skyler, M.D., MACP |   |     |   |                    |
|                      |   |     |   |                    |
| /s/ JOSEPH P. SULLIVAN    |   | Director |   |  February 26, 2007 |
| Joseph P. Sullivan        |   |     |   |                    |
|                      |   |     |   |                    |
| /s/ THOMAS R. TESTMAN     |   | Director |   |  February 26, 2007 |
| Thomas R. Testman         |   |     |   |                    |
|                      |   |     |   |                    |
| /s/ JAMES N. WILSON       |   | Director |   |  February 26, 2007 |
| James N. Wilson           |   |     |   |                    |

 

** **

53

----

** **

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| **Report of Independent Registered Public Accounting Firm**                                                                   | **F-2**  |
|-------------------------------------------------------------------------------------------------------------------------------|----------|
| **Consolidated Balance Sheets as of December 31, 2006  and 2005**                                                        | **F-3**  |
| **Consolidated Statements of Operations for the years ended  December 31, 2006, 2005 and 2004**                          | **F-4**  |
| **Consolidated Statements of Stockholders’ Equity (Deficit)  for the years ended December 31, 2006, 2005 and 2004** | **F-5**  |
| **Consolidated Statements of Cash Flows for the years ended  December 31, 2006, 2005 and 2004**                          | **F-6**  |
| **Notes to Consolidated Financial Statements**                                                                                | **F-7**  |
| **Schedule II Valuation Accounts**                                                                                            | **F-22** |

 

F-1

----

 

**Report of Independent Registered Public Accounting Firm**

The Board of Directorsand Stockholders of Amylin Pharmaceuticals, Inc.

We have audited theaccompanying consolidated balance sheets of Amylin Pharmaceuticals, Inc. as ofDecember 31, 2006 and 2005, and the related consolidated statements ofoperations, stockholders’ equity (deficit), and cash flows for each of thethree years in the period ended December 31, 2006. Our audits also included thefinancial statement schedule listed in the Index at Item 15(a)(2). Thesefinancial 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.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all material respects,the consolidated financial position of Amylin Pharmaceuticals, Inc., atDecember 31, 2006 and 2005, and the consolidated results of its operations andits cash flows for each of the three years in the period ended December 31,2006, in conformity with U.S. generally accepted accounting principles. Also,in our opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

As discussed in Note 1 tothe consolidated financial statements, effective January 1, 2006, AmylinPharmaceuticals, Inc., changed its method of accounting for share-basedpayments in accordance with Statement of Financial Accounting Standards No.123R, *Share-Based Payment*.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of AmylinPharmaceuticals, Inc.’s internal control over financial reporting as of December31, 2006, based on criteria established in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission and our report dated February 23, 2007 expressed an unqualifiedopinion thereon.

 
|                   |   | /S/ ERNST &  YOUNG LLP |   |
|------------------------|--------|----------------------------|--------|
|                   |   |
|                   |   |
| San Diego,  California |   |
| February 23,  2007     |   |

 

F-2

----

**AMYLIN PHARMACEUTICALS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except pershare data)**
| ** **                                                                                                                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                                                                                                                                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                            |       |                  |       |   |   |
| Cash  and cash equivalents                                                                                                                 |       | $                     | 66,640     |   | $ | 72,026 |   |
| Short-term  investments                                                                                                                    |       | 700,691               |       | 371,397 |   |
| Accounts  receivable, net                                                                                                                  |       | 58,089                |       | 25,700 |   |
| Inventories,  net                                                                                                                          |       | 59,299                |       | 26,750 |   |
| Other  current assets                                                                                                                      |       | 22,098                |       | 17,847 |   |
| Total  current assets                                                                                                                      |       | 906,817               |       | 513,720 |   |
|                                                                                                                                       |       |                  |       |   |   |
| Property  and equipment, net                                                                                                               |       | 146,779               |       | 42,050 |   |
| Patents  and other assets, net                                                                                                             |       | 2,870                 |       | 3,687 |   |
| Debt  issuance costs, net                                                                                                                  |       | 3,920                 |       | 7,505 |   |
|                                                                                                                                       |       | $                     | 1,060,386  |   | $ | 566,962 |   |
| ** **                                                                                                                                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                       |       |                  |       |   |   |
| Accounts  payable                                                                                                                          |       | $                     | 36,834     |   | $ | 21,046 |   |
| Accrued  compensation                                                                                                                      |       | 39,251                |       | 29,122 |   |
| Payable  to collaborative partner                                                                                                          |       | 52,338                |       | 16,678 |   |
| Other  current liabilities                                                                                                                 |       | 71,178                |       | 27,454 |   |
| Current  portion of deferred revenue                                                                                                       |       | 4,286                 |       | 4,286 |   |
| Total  current liabilities                                                                                                                 |       | 203,887               |       | 98,586 |   |
|                                                                                                                                       |       |                  |       |   |   |
| Deferred  revenue, net of current portion                                                                                                  |       | 7,372                 |       | 11,658 |   |
|                                                                                                                                       |       |                  |       |   |   |
| Other  long-term obligations, net of current portion                                                                                       |       | 13,836                |       | 12,454 |   |
|                                                                                                                                       |       |                  |       |   |   |
| Convertible  senior notes                                                                                                                  |       | 200,000               |       | 375,000 |   |
|                                                                                                                                       |       |                  |       |   |   |
| Commitments  and contingencies                                                                                                             |       |                  |       |   |   |
|                                                                                                                                       |       |                  |       |   |   |
| Stockholders’  equity:                                                                                                                |       |                  |       |   |   |
| Preferred  stock, $.001 par value, 7,500 shares authorized, none issued and  outstanding at December 31, 2006 and 2005                |       | —                |       | — |   |
| Common  stock, $.001 par value, 200,000 shares authorized, 130,458 and  110,531 issued and outstanding at  December 31, 2006 and 2005 |       | 130                   |       | 111 |   |
| Additional  paid-in capital                                                                                                                |       | 1,857,194             |       | 1,073,948 |   |
| Accumulated  deficit                                                                                                                       |       | (1,223,184            | )          | (1,004,328 | ) |
| Accumulated  other comprehensive income (loss)                                                                                             |       | 1,151                 |       | (467 | ) |
| Total  stockholders’ equity                                                                                                           |       | 635,291               |       | 69,264 |   |
|                                                                                                                                       |       | $                     | 1,060,386  |   | $ | 566,962 |   |

 

See accompanying notes toconsolidated financial statements.

F-3

----

**AMYLIN PHARMACEUTICALS, INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(in thousands, except pershare data)**
| ** **                                                      | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                            |       |                                       |       |   |   |   |   |
| Revenues:                                                       |       |                                       |       |   |   |   |   |
| Net product sales                                               |       | $                                          | 474,038    |   | $ | 86,713 |   | $ | — |   |
| Revenues under collaborative agreements                         |       | 36,837                                     |       | 53,761 |   | 34,268 |   |
| Total revenues                                                  |       | 510,875                                    |       | 140,474 |   | 34,268 |   |
|                                                            |       |                                       |       |   |   |   |   |
| Costs and expenses:                                             |       |                                       |       |   |   |   |   |
| Cost of goods sold                                              |       | 50,073                                     |       | 14,784 |   | — |   |
| Selling, general and administrative                             |       | 281,950                                    |       | 171,520 |   | 66,958 |   |
| Research and development                                        |       | 222,053                                    |       | 132,128 |   | 119,558 |   |
| Collaborative profit-sharing                                    |       | 194,191                                    |       | 31,359 |   | — |   |
| Total costs and expenses                                        |       | 748,267                                    |       | 349,791 |   | 186,516 |   |
|                                                            |       |                                       |       |   |   |   |   |
| Operating loss                                                  |       | (237,392                                   | )          | (209,317 | ) | (152,248 | ) |
|                                                            |       |                                       |       |   |   |   |   |
| Make-whole payment on debt redemption                           |       | (7,875                                     | )          | — |   | — |   |
| Interest and other income                                       |       | 34,903                                     |       | 13,214 |   | 4,696 |   |
| Interest and other expense                                      |       | (8,492                                     | )          | (10,729 | ) | (9,605 | ) |
| Net loss                                                        |       | $                                          | (218,856   | ) | $ | (206,832 | ) | $ | (157,157 | ) |
|                                                            |       |                                       |       |   |   |   |   |
| Net loss per share — basic and diluted                     |       | $                                          | (1.78      | ) | $ | (1.96 | ) | $ | (1.67 | ) |
|                                                            |       |                                       |       |   |   |   |   |
| Shares used in  computing net loss per share, basic and diluted |       | 122,647                                    |       | 105,532 |   | 94,054 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-4

----

**AMYLIN PHARMACEUTICALS, INC.**

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

**For the years endedDecember 31, 2006, 2005 and 2004**

**(in thousands)**
| ** **                                                          | ** ** | **Common stock** | ** ** | **Additional** | ** ** | **Accumulated**          | ** ** | **Deferred** | ** ** | **Accumulated  other  comprehensive** | ** ** | **Total  stockholders’  equity** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------------------|------------|--------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                          | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **paid-in capital** | ** ** | **deficit**  | ** ** | **compensation**                      | ** ** | **income (loss)**                | ** ** | **(deficit)** | ** ** |
| Balance at December 31, 2003                                   |       | 93,625                |       | $              | 94         |                     | $          | 703,479      |       | $                                     | (640,339   | )                                     | $          | (310 | ) | $ | 292 |   | $ | 63,216 |   |
| Comprehensive loss:                                                 |       |                  |       |           |       |                     |       |         |       |                                  |       |                                  |       |   |   |
| Net loss                                                            |       | —                |       | —         |       | —                   |       | (157,157     | )          | —                                |       | —                                |       | (157,157 | ) |
| Unrealized gain on available-for-sale securities                    |       | —                |       | —         |       | —                   |       | —       |       | —                                |       | (555                                  | )          | (555 | ) |
| Comprehensive loss                                                  |       | —                |       | —         |       | —                   |       | —       |       | —                                |       | —                                |       | (157,712 | ) |
| Issuance of common stock upon exercise of options, net              |       | 667                   |       | —         |       | 4,554                    |       | —       |       | —                                |       | —                                |       | 4,554 |   |
| Issuance of common stock for other employee benefit  plans          |       | 197                   |       | —         |       | 2,462                    |       | —       |       | —                                |       | —                                |       | 2,462 |   |
| Deferred compensation related to stock options                      |       | —                |       | —         |       | (38                      | )          | —       |       | 38                                    |       | —                                |       | — |   |
| Amortization of deferred compensation                               |       | —                |       | —         |       | —                   |       | —       |       | 110                                   |       | —                                |       | 110 |   |
| 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 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-5

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**AMYLIN PHARMACEUTICALS, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**
| ** **                                                                                                          | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating  activities:**                                                                                          |       |                                        |       |   |   |   |   |
| Net  loss                                                                                                           |       | $                                           | (218,856   | ) | $ | (206,832 | ) | $ | (157,157 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:                                        |       |                                        |       |   |   |   |   |
| Depreciation  and amortization                                                                                      |       | 16,228                                      |       | 10,487 |   | 7,307 |   |
| Employee  stock-based compensation                                                                                  |       | 51,838                                      |       | — |   | — |   |
| Make-whole  payment on debt redemption                                                                              |       | 7,875                                       |       | — |   | — |   |
| Other  non-cash expenses                                                                                            |       | 4,058                                       |       | 1,535 |   | 1,320 |   |
| Changes  in operating assets and liabilities:                                                                       |       |                                        |       |   |   |   |   |
| Accounts receivable, net                                                                                            |       | (32,389                                     | )          | (25,700 | ) | — |   |
| Inventories, net                                                                                                    |       | (32,549                                     | )          | (11,074 | ) | (3,835 | ) |
| Receivable from collaborative partners                                                                              |       | —                                      |       | 5,770 |   | (4,979 | ) |
| Other current assets                                                                                                |       | (3,995                                      | )          | (8,607 | ) | (2,904 | ) |
| Accounts payable                                                                                                    |       | 15,788                                      |       | 15,524 |   | 1,144 |   |
| Accrued compensation                                                                                                |       | 10,129                                      |       | 15,616 |   | 4,024 |   |
| Payable to collaborative partner                                                                                    |       | 35,660                                      |       | 13,887 |   | 936 |   |
| Other current liabilities                                                                                           |       | 22,505                                      |       | 11,622 |   | (9,571 | ) |
| Deferred revenue                                                                                                    |       | (4,286                                      | )          | (9,285 | ) | (4,286 | ) |
| Other assets and liabilities, net                                                                                   |       | 1,987                                       |       | 5,075 |   | 5,148 |   |
| Net  cash used in operating activities                                                                              |       | (126,007                                    | )          | (181,982 | ) | (162,853 | ) |
|                                                                                                                |       |                                        |       |   |   |   |   |
| **Investing  activities:**                                                                                          |       |                                        |       |   |   |   |   |
| Purchases  of short-term investments                                                                                |       | (714,772                                    | )          | (491,927 | ) | (237,735 | ) |
| Sales  and maturities of short-term investments                                                                     |       | 386,840                                     |       | 353,415 |   | 197,056 |   |
| Purchases  of property and equipment, net                                                                           |       | (97,925                                     | )          | (29,639 | ) | (12,904 | ) |
| Increase  in patents                                                                                                |       | (33                                         | )          | (897 | ) | (211 | ) |
| Net  cash used in investing activities                                                                              |       | (425,890                                    | )          | (169,048 | ) | (53,794 | ) |
|                                                                                                                |       |                                        |       |   |   |   |   |
| **Financing  activities:**                                                                                          |       |                                        |       |   |   |   |   |
| Proceeds  from issuance of common stock, net                                                                        |       | 546,511                                     |       | 362,486 |   | 7,016 |   |
| Proceeds  from issuance of convertible debt, net                                                                    |       | —                                      |       | — |   | 193,613 |   |
| Principal payments on  capital leases                                                                               |       | —                                      |       | (13 | ) | (14 | ) |
| Net  cash provided by financing activities                                                                          |       | 546,511                                     |       | 362,473 |   | 200,615 |   |
|                                                                                                                |       |                                        |       |   |   |   |   |
| Increase  (decrease) in cash and cash equivalents                                                                   |       | (5,386                                      | )          | 11,443 |   | (16,032 | ) |
| Cash  and cash equivalents at beginning of year                                                                     |       | 72,026                                      |       | 60,583 |   | 76,615 |   |
| Cash  and cash equivalents at end of year                                                                           |       | $                                           | 66,640     |   | $ | 72,026 |   | $ | 60,583 |   |
|                                                                                                                |       |                                        |       |   |   |   |   |
| **Supplemental  disclosures of cash flow information:**                                                             |       |                                        |       |   |   |   |   |
| Interest  paid, net of interest capitalized                                                                         |       | $                                           | 6,409      |   | $ | 8,398 |   | $ | 6,563 |   |
| Interest  capitalized                                                                                               |       | $                                           | 560        |   | $ | — |   | $ | — |   |
| Property  and equipment additions in other current liabilities at year end                                          |       | $                                           | 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 toconsolidated financial statements.

F-6

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**AMYLIN PHARMACEUTICALS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.****              Summary of Significant Accounting Policies**

## ***Organization***

Amylin Pharmaceuticals, Inc., referred to as theCompany or Amylin, was incorporated in Delaware on September 29, 1987.Amylin is a biopharmaceutical company engaged in the discovery, development andcommercialization of drug candidates for the treatment of diabetes, obesity andother diseases.

## ***Principles of Consolidation***

The consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries, Amylin EuropeLimited, Amylin Puerto Rico, LLC and Amylin Ohio, LLC. All significantintercompany transactions and balances have been eliminated in consolidation.

***Use of Estimates***

The preparation of the consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

# ***Revenue Recognition***

***Net Product Sales***

The Company sells BYETTA® (exenatide) injection and SYMLIN® (pramlintide acetate) injection primarily towholesale distributors in the United States, who, in turn, sell primarily toretail pharmacies, pharmacy benefit managers, and government entities. Productsales are recognized when delivery of the products has occurred, titlehas passed to the customer, the selling price is fixed or determinable,collectibility is reasonably assured and the Company has no furtherobligations. The Company records allowances for product returns, rebates andwholesaler chargebacks, wholesaler discounts, and prescription vouchers at thetime of sale and reports product sales net of such allowances. The Company mustmake significant judgments in determining some of these allowances. If actual resultsdiffer from the Company’s estimates, the Company will be required to makeadjustments to these allowances in the future.

The Company reports allBYETTA and SYMLIN product sales made in the United States. With respect toBYETTA, the Company has determined that it is qualified as a principal underthe criteria set forth in Emerging Issues Task Force (EITF), Issue 99-19, *“Reporting Gross Revenue as a Principal vs. Net as anAgent,”* based on the Company’s responsibilities under its contractswith Eli Lilly and Company, or Lilly, which include manufacture of product forsale in the United States, responsibility for establishing pricing in theUnited States, distribution, ownership of product inventory and credit riskfrom customers, and accordingly, the Company reports all United States productssales of BYETTA.

***Revenues Under Collaborative Agreements***

Amounts received for upfront product and technologylicense fees under multiple-element arrangements are deferred and recognizedover the period of such services or performance if such arrangements requireon-going services or performance. Amounts received for milestones arerecognized upon achievement of the milestone, and the expiration of stockconversion rights, if any, associated with such payments. Amounts received forequalization of development expenses are recognized in the period in which therelated expenses are incurred. Any amounts received prior to satisfying theserevenue recognition criteria will be recorded as deferred revenue.

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

Collaborative profit-sharing represents Lilly’s 50%share of the gross margin for Byetta sales in the United States.

F-7

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***Shipping and Handling Costs***

Shipping andhandling costs incurred for product shipments are included in cost of goodssold in the accompanying consolidated statements of operations.

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

Research and development costs are expensed asincurred and include salaries, benefits and non-cash stock-based compensation;costs paid to third-party contractors to perform research, conduct clinicaltrials and develop and manufacture drug materials and delivery devices; and aportion of facilities costs. Clinical trial costs are a significant componentof research and development expenses and include costs associated withthird-party contractors. Invoicing from third-party contractors for servicesperformed can lag several months. The Company accrues the costs of servicesrendered in connection with third-party contractor activities based on itsestimate of management fees, site management and monitoring costs and datamanagement costs. Actual clinical trial costs may differ from estimatedclinical trial costs and are adjusted for in the period in which they becomeknown.

## ***Concentrations of Risk***

The Company relies on third-party manufacturers forthe production of its products and drug candidates. If the Company’sthird-party manufacturers are unable to continue manufacturing its productsand/or drug candidates, or if the Company loses one of its sole sourcesuppliers used in its manufacturing processes, the Company may not be able tomeet market demand for its products and could be materially and adverselyaffected.

Lilly provides funding for 50% of the development andcommercialization expenses for BYETTA and exenatide LAR in the United Statespursuant to a global development and commercialization agreement between theparties. Lilly co-promotes the product with the Company in the United Statesand manufactures pen devices for the administration of BYETTA. If Lilly is unableto perform these activities the Company may be unable to meet market demand forits products and could be materially and adversely affected.

The Company is also subject to credit risk from itsaccounts receivable related to product sales. The Company sells its products inthe United States primarily to wholesale distributors. The top four of theCompany’s customers represented approximately 94% of net product sales in 2006and 93% of the accounts receivable balance at December 31, 2006. The Companyevaluates the credit worthiness of its customers and generally does not requirecollateral. The Company has not experienced any material losses onuncollectible accounts receivable to date.

The Company invests its excess cash in U.S. Governmentsecurities and debt instruments of financial institutions and corporations withstrong credit ratings. The Company has established guidelines relative todiversification and maturities that maintain safety and liquidity. Theseguidelines are periodically reviewed. Financial instruments that potentiallysubject the Company to significant credit risk consist principally of cashequivalents and short-term investments.

# ***Cashand Cash Equivalents***

The Company considers instruments with a maturity dateof less than 90 days from the date of purchase to be cash equivalents. Cash andcash equivalents include certificates of deposits underlying letters of creditof $3.3 million and $3.1 million at December 31, 2006 and 2005, respectively.

***Short-Term Investments***

Short-term investments consist principally of U.S.Government securities and other highly liquid debt instruments. The Company has classified its debt securities asavailable-for-sale and are stated at fair value based upon the mostrecently traded price of each security at the balance sheet date, and unrealized holding gains or losses on thesesecurities are carried as a separate component of stockholders’ equity(deficit). The amortized cost of debt securities in this category is adjustedfor amortization of premiums and accretion of discounts to maturity. Suchamortization is included in interest income. Realized gains and losses anddeclines in value judged to be other-than-temporary (of which there have beennone to date) on available-for-sale securities are included in interest income.The cost of securities sold is based on the specific-identification method.

F-8

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***Accounts Receivable***

Trade accountsreceivable are recorded net of allowances for cash discounts for promptpayment, doubtful accounts, product returns and chargebacks. Allowances forrebate discounts and distribution fees are included in other currentliabilities in the accompanying consolidated balance sheets. Estimates forallowances for doubtful accounts are determined based on existing contractualobligations, historical payment patterns and individual customercircumstances.  The allowance fordoubtful accounts was $0.2 million at December 31, 2006.  There was no allowance for doubtful accountsat December 31, 2005.

***Inventories, net***

Inventoriesare stated at the lower of cost (FIFO) or market, net of valuation allowancesfor potential excess and/or obsolete material of $0.4 million and $1.6 millionat December 31, 2006 and 2005, respectively. Raw materials consists ofbulk drug material, work-in-process primarily consists of in-process SYMLINvials and in-process BYETTA cartridges, and finished goods consists of finishedSYMLIN drug product in vials and BYETTA drug product in a disposablepen/cartridge delivery system.

***Property and Equipment***

Property and equipment, consistingprimarily of construction in process, leasehold improvements, office andlaboratory equipment, software and land, are recorded at cost. Depreciation ofequipment and software is computed using the straight-line method, over threeto five years. Leasehold improvements are amortized on a straight-line basisover the shorter of the estimated useful lives of the assets or the remainingterm of the lease. Construction in progress includes costs associated with theCompany’s manufacturing facility for exenatide LAR.  The Company recorded depreciation expense of$14.3 million, $8.3 million and $5.3 million in the years endedDecember 31, 2006, 2005 and 2004, respectively.

The Company records impairment losses on property andequipment used in operations when events and circumstances indicate that assetsmight be impaired and the undiscounted cash flows estimated to be generated bythose assets are less than the carrying amount of those assets. The Companyalso records the assets to be disposed of at the lower of their carrying amountor 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, 2006.

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

The Company records the costs of computer software forinternal use in accordance with AICPA Statement of Position (SOP) 98-1, *“Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use.”* SOP 98-1 requires thatcertain internal-use computer software costs be capitalized. Capitalized costsare amortized on a straight-line basis over the estimated useful life ofsoftware, generally three years and included in depreciation expense.

***Patents***

The Company has filed a number of patent applicationswith the United States Patent and Trademark Office and in foreign countries.Certain legal and related costs incurred in connection with pending patentapplications have been capitalized. Costs related to successful patentapplications are amortized over the lesser of the remaining useful life of therelated technology or the remaining patent life, commencing on the date thepatent is issued. Gross capitalized patent costs were approximately $4.1million at both December 31, 2006 and 2005, respectively. Accumulatedamortization was approximately $1.9 million and $1.7 million at December 31,2006 and 2005, respectively. The Company recorded patent amortization expenseof $0.3 million each of the years ended December 31, 2006, 2005 and 2004,respectively. Capitalized costs related to patent applications are expensed asa selling general and administrative expense in the period during which adetermination not to pursue such applications is made. Such expenses were notmaterial in the years ended December 31, 2006, 2005 and 2004, respectively.

***Net Loss Per Share***

Basic and diluted net lossapplicable to common stock per share is computed using the weighted averagenumber of common shares outstanding during the period. Common stock equivalentsfrom stock options and warrants of approximately 8.0****million,4.3 million and 4.1 million were excluded from the calculation of net loss pershare for the years ended December 31, 2006, 2005 and 2004, respectively,because the effect would be antidilutive. In addition, common stock

F-9

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equivalentsfrom shares underlying the Company’s convertible senior notes of 5.8 million,11.2 million, and 11.2 million were excluded from the net loss per share forthe years ended December 31, 2006,2005 and 2004, respectively, because the effect would be antidilutive. Infuture periods, if the Company reports net income and the common shareequivalents for the Company’s convertible senior notes are dilutive, the commonstock equivalents will be included in the weighted average shares computationand interest expense related to the notes will be added back to net income tocalculate diluted earnings per share.

***Foreign Currency Translation***

Assets and liabilities offoreign operations where the functional currency is other than the U.S. dollarare translated at fiscal year-end rates of exchange, and the related revenueand expense amounts are translated at the average rates of exchange during thefiscal year. Gains and losses resulting from translating foreign currencyfinancial statements resulted in an immaterial impact to the Company’sfinancial statements for the years ended December 31, 2006, 2005 and 2004.

***Comprehensive Income (Loss)***

Statement of FinancialAccounting Standards (SFAS) No. 130, “*Reporting ComprehensiveIncome”*requires that all components of comprehensive income (loss)be reported in the financial statements in the period in which they arerecognized. Comprehensive income is defined as the change in equity during aperiod from transactions and other events and circumstances from non-ownersources. Net income (loss) and other comprehensive income (loss), includingunrealized gains and losses on investments, shall be reported, net of theirrelated tax effect, to arrive at comprehensive 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 (SFAS123R), “*Share-Based Payment,”*whichestablishes accounting for non-cash, stock-based awards exchanged for employeeservices and requires companies to expense the estimated fair value of theseawards over the requisite employee service period, which for the Company isgenerally the vesting period. The Company adopted SFAS 123R using the modifiedprospective method. Under the modified prospective method, prior periods arenot revised for comparative purposes. The valuation provisions of SFAS 123Rapply to new awards and to awards that are outstanding on the effective dateand subsequently modified or cancelled. Estimated non-cash, compensationexpense for awards outstanding at the effective date will be recognized overthe remaining service period using the compensation cost calculated forpro-forma disclosure purposes under SFAS No. 123, *“Accounting for Stock-Based Compensation.”*

**Stock-BasedCompensation Information under SFAS 123R**

Consistent withthe valuation method used for the disclosure-only provisions of SFAS 123, theCompany uses the Black-Scholes model to estimate the value of non-cash,stock-based payments granted to employees under SFAS 123R. The weighted-averageestimated fair value of employee stock options and employee stock purchaserights granted during the year ended December 31, 2006 was $22.07****and**$**12.83****pershare, respectively, using the following weighted-average assumptions:

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

The Companyestimates volatility based upon the historical volatility of its common stockfor a period corresponding to the expected term of its employee stock optionsand the implied volatility of market-traded options on its common stock withvarious maturities between six months and two years, consistent with theguidance in SFAS 123R and the Securities and

F-10

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ExchangeCommission’s Staff Accounting Bulletin (SAB) No. 107.  Prior to January 1, 2006, the Companyestimated expected volatility based upon the historical volatility of itscommon stock for a period corresponding to the expected term of its employeestock options. The determination to use implied volatility in addition to historicalvolatility was based upon the availability of actively traded options on theCompany’s common stock and the Company’s assessment that the addition ofimplied volatility is more representative of future stock price trends thanhistorical 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 effectat the time of grant for periods corresponding with the expected life of theCompany’s employee stock options. The Company has never paid dividends and doesnot anticipate doing so for the foreseeable future. Accordingly, the Companyhas assumed no dividend yield for purposes of estimating the fair value of itsstock-based payments to employees.

Stock-based compensationexpense recognized in accordance with SFAS 123R is based on awards ultimatelyexpected to vest, and therefore is reduced by expected forfeitures. The Companyestimates forfeitures based upon historical forfeiture rates, and will adjustits estimate of forfeitures if actual forfeitures differ, or are expected todiffer, from such estimates. Changes in estimated forfeitures will berecognized through a cumulative adjustment in the period of the change and willalso impact the amount of stock-based compensation expense in future periods.In the Company’s pro-forma disclosures required under SFAS 123 for the periodsprior to January 1, 2006, the Company accounted for forfeitures as theyoccurred.

The Company recorded $51.8 million, or $0.42 per share, oftotal non-cash, stock-based compensation expense for the year ended December31, 2006, as required by the provisions of SFAS 123R. Stock-based compensationexpense capitalized as part of inventory and fixed assets was negligible andthere was no impact on the Company’s reported cash flows for the year endedDecember 31, 2006. The breakdown of total non-cash, stock-based compensationexpense by operating statement classification is presented below (inthousands):
| ** **                                    | ** ** | **Year ended**   | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **December 31,** | ** ** |
| ** **                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Selling, general  and administrative expenses |       | $                     | 28,966     |   | $ | 198 |   |
| Research and  development expenses            |       | 22,872                |       | 235 |   |
|                                          |       | $                     | 51,838     |   | $ | 433 |   |

 

***Pro-FormaInformation under SFAS 123 for Periods Prior to January 1, 2006***

Prior to January 1, 2006,the Company accounted for stock-based compensation plans using the intrinsicvalue method of accounting in accordance with Accounting Principles BoardOpinion No. 25 (APB 25), *“Accounting forStock Issued to Employees,”* and provided the pro-forma disclosuresrequired by SFAS 123. Under APB 25, stock-based compensation expense wasgenerally not recorded because the exercise price of stock options granted wasequal to the market value of the Company’s common stock on the date of grant,and thus the stock options had no intrinsic value on the date of grant. UnderAPB 25, the Company recorded $0.4 million of non-cash, stock-based compensationexpense during the year ended December 31, 2005 as a result of modifications tothe terms of certain outstanding options.

The weighted-averageestimated grant date fair value of employee stock options granted during theyears ended December 31, 2005 and 2004 was $11.51 and $16.36, respectively andthe weighted-average estimated grant date fair value of stock purchase rightsduring the years ended December 31, 2005 and 2004 was $6.12 and $7.87,respectively using the Black-Sholes model and the following weighted averageassumptions:

|                                   | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| **Stock  option plans**           |       |                        |       |   |   |
| Volatility  factor                |       | 64                          | %          | 88 | % |
| Weighted-average  expected life   |       | 5.1                         |       | 5.8 |   |
| Risk-free  interest rate          |       | 3.9                         | %          | 3.7 | % |
| Dividend yield                    |       | —                      | %          | — | % |
|                              |       |                        |       |   |   |
| **Employee  stock purchase plan** |       |                        |       |   |   |
| Volatility  factor                |       | 40                          | %          | 45 | % |
| Weighted-average  expected life   |       | 0.8                         |       | 1.2 |   |
| Risk-free  interest rate          |       | 3.7                         | %          | 3.3 | % |
| Dividend yield                    |       | —                      | %          | — | % |

 

F-11

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SFAS123R requires the presentation of pro-forma information for periods prior tothe adoption of SFAS 123R as if the Company had accounted for all stock-basedcompensation under the fair value method of SFAS 123. The following tableillustrates the effect on net loss and earnings per share as if the Company hadapplied the fair value recognition provisions of SFAS 123 for the periodspresented below (in thousands except per share data):
| ** **                                                                                                                                   | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Net loss, as  reported                                                                                                                       |       | $                                          | (206,832   | ) | $ | (157,157 | ) |
| 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                                    | )          | (34,901 | ) |
| Pro forma net  loss                                                                                                                          |       | $                                          | (246,741   | ) | $ | (192,058 | ) |
|                                                                                                                                         |       |                                       |       |   |   |
| Net loss per share:                                                                                                                          |       |                                       |       |   |   |
| Basic and  diluted — as reported                                                                                                        |       | $                                          | (1.96      | ) | $ | (1.67 | ) |
| Basic and diluted — pro  forma                                                                                                          |       | $                                          | (2.34      | ) | $ | (2.04 | ) |

 

***Reclassifications***

Certain reclassifications have been made to theconsolidated financial statements to provide consistent presentation for allperiods presented.

***Recently Issued Accounting Standards***

In July 2006, theFASB issued Interpretation No. 48 (FIN 48) *“Accountingfor Uncertainty in Income Taxes,”* which prescribes a recognitionthreshold and measurement process for recording in the financial statementsuncertain tax positions taken or expected to be taken in a tax return.Additionally, FIN 48 provides guidance on the derecognition, classification,accounting in interim periods and disclosure requirements for uncertain taxpositions. The provisions of FIN 48 will be effective for the Company beginningJanuary 1, 2007. The Company is in the process of determining the effect, ifany, the adoption of FIN 48 will have on its financial statements.

In September 2006, theFASB issued SFAS No. 157 (SFAS 157)  “*Fair Value Measurements.”* SFAS 157 establishes a frameworkfor measuring fair value in generally accepted accounting principles, andexpands disclosures about fair value measurements.  The provisions of SFAS 157 will be effectivefor the Company beginning January 1, 2007. The Company is in the process of determining the effect, if any, theadoption of SFAS 157 will have on its financial statements.

In September 2006, theSecurities and Exchange Commission issued SAB No. 108 “**Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements.”****  SAB No. 108** addressesquantifying the financial statement effects of misstatements, specifically, howthe effects of prior year uncorrected errors must be considered in quantifyingmisstatements in the current year financial statements.**   The provisions of SAB No. 108are effective in the current fiscal year for the Company.  The adoption of SAB No. 108 did not have amaterial impact on the Company’s financial statements.**

 

F-12

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**2.****              Investments**

The following is a summary ofshort-term investments as of December 31, 2006 and 2005 (in thousands):
| ** **                                                                                       | ** ** | **Available-for-Sale Securities** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                       | ** ** | **Amortized  Cost**                    | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| **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 |   |
|                                                                                             |       |                                   |       |   |   |   |   |   |   |
| **December 31,  2005**                                                                      |       |                                   |       |   |   |   |   |   |   |
| U.S.  Treasury securities and obligations of U.S. Government agencies                            |       | $                                      | 57,635     |   | $ | 1 |   | $ | (203 | ) | $ | 57,433 |   |
| Corporate  debt securities                                                                       |       | 157,193                                |       | 16 |   | (204 | ) | 157,004 |   |
| Asset  backed securities                                                                         |       | 117,217                                |       | 9 |   | (381 | ) | 116,846 |   |
| Mortgage-backed  securities                                                                      |       | 34,797                                 |       | 1 |   | (219 | ) | 34,579 |   |
| Debt  securities issued by states of the United States and political subdivisions  of the states |       | 5,535                                  |       | — |   | — |   | 5,535 |   |
| Total                                                                                            |       | $                                      | 372,377    |   | $ | 27 |   | $ | (1,007 | ) | $ | 371,397 |   |

 

The gross realized gains on sales ofavailable-for-sale securities totaled approximately $0.6 million, $72,000 and$45,000 and the gross realized losses totaled $0.8 million, $0.3 million and$0.6 million for the years ended December 31, 2006, 2005 and 2004,respectively.

Contractualmaturities of short-term investments at December 31, 2006 were as follows (inthousands):

|                              | ** ** | **Fair Value** | ** ** |
|------------------------------|------------|---------------------|------------|
| Due within 1 year            |       | $                   | 193,056    |   |
| After 1 but within 5  years  |       | 375,489             |       |
| After 5 but within 10  years |       | 28,498              |       |
| After 10 years               |       | 103,648             |       |
| Total                        |       | $                   | 700,691    |   |

 

For purposes of these maturity classifications, thefinal maturity date is used for securities not due at a single maturity date,which, for the Company includes asset-backed and mortgage-backed securities.

The following table shows the gross unrealized lossesand fair value of the company’s investments with unrealized losses that are notdeemed to be other-than-temporarily impaired, aggregated by investment categoryand length of time that individual securities have been in a continuousunrealized loss position, at December 31, 2006 (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 |       | $                                      | 67,610     |                                    | $          | (47                 | )          | $ | — |   | $ | — |   | $ | 67,610 |   | $ | (47 | ) |
| Corporate  debt securities                                            |       | 71,785                                 |       | (38                                     | )          |                |       | — |   | 71,785 |   | (38 | ) |
| Asset  backed securities                                              |       | 36,680                                 |       | (16                                     | )          | 3,476               |       | (17 | ) | 40,156 |   | (33 | ) |
| Mortgage-backed  securities                                           |       | 38,437                                 |       | (77                                     | )          | 38,294              |       | (134 | ) | 76,731 |   | (211 | ) |
|                                                                  |       | $                                      | 214,512    | ** **                              | $          | (178                | )          | $ | 41,770 |   | $ | (151 | ) | $ | 256,282 |   | $ | (329 | ) |

 

F-13

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The unrealized losses on the Company’s investments aredue to increased interest rates, and not credit quality. Because the Companyhas the ability and intent to hold these investments until a recovery of fairvalue, which may be maturity, the Company does not consider these investmentsto be other-than-temporarily impaired at December 31, 2006.

**3.****              Other Financial Information**

Inventories consist of the following (in thousands):

|                  | ** ** | **December 31,** | ** ** |
|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Raw  materials   |       | $                     | 37,564     |   | $ | 21,395 |   |
| Work-in  process |       | 12,589                |       | 2,576 |   |
| Finished  goods  |       | 9,146                 |       | 2,779 |   |
|             |       | $                     | 59,299     |   | $ | 26,750 |   |

 

Other current assets consistsof the following (in thousands):

|                                 | ** ** | **At December 31,** | ** ** |
|---------------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Interest  and other receivables |       | $                             | 4,889      |   | $ | 3,388 |   |
| Prepaid  expenses               |       | 17,209                        |       | 14,459 |   |
|                            |       | $                             | 22,098     |   | $ | 17,847 |   |

 

Property and equipment consists of the following (inthousands):

|                                                 | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Land                                            |       | $                             | 1,946      |   | $ | 1,878 |   |
| Office  equipment and furniture                 |       | 20,053                        |       | 12,189 |   |
| Computer  Software                              |       | 17,054                        |       | 11,037 |   |
| Laboratory  equipment                           |       | 20,822                        |       | 13,609 |   |
| Production  equipment                           |       | 6,940                         |       | 4,396 |   |
| Leasehold  improvements                         |       | 23,692                        |       | 9,864 |   |
| Construction  in progress                       |       | 86,730                        |       | 7,684 |   |
|                                            |       | 177,237                       |       | 60,657 |   |
| Less  accumulated depreciation and amortization |       | (30,458                       | )          | (18,607 | ) |
|                                            |       | $                             | 146,779    |   | $ | 42,050 |   |

 

Other current liabilities consist of the following (inthousands):

|                                           | ** ** | **At December 31,** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Accrued  property and equipment additions |       | $                             | 21,219     |   | $ | — |   |
| Accrued  commercial expenses              |       | 9,302                         |       | 6,722 |   |
| Other  current liabilities                |       | 40,657                        |       | 20,732 |   |
|                                      |       | $                             | 71,178     |   | $ | 27,454 |   |

 

**4.****              Collaborative Agreements**

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

InSeptember 2002, the Company and Lilly entered into a collaborationagreement for the global development and commercialization of exenatide,including both twice-daily and sustained release formulations.Under the terms of the agreement Amylin and Lilly will share United Statesdevelopment and commercialization costs equally.

TheCompany and Lilly share equally in operating profits from the sale ofcollaboration products in the United States. In 2005, the Company receivedUnited States Food and Drug Administration (FDA) approval for the twice-dailyformulation of exenatide, which is marketed in the United States under thetrade name BYETTA.

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At signing,Lilly made initial non-refundable payments to the Company totaling $80 million,of which $50 million was amortized to revenues under collaborative agreementsprior to 2004.  The remaining $30million is being amortized to revenues ratably over a seven-year period, whichrepresents the Company’s estimate of the period of its performance ofsignificant development activities under the agreement.

Inaddition to these up-front payments, Lilly agreed to make future milestonepayments of up to $85 million upon the achievement of certaindevelopment milestones, including milestones relating to both twice daily andsustained release formulations of exenatide, of which $40 million have beenpaid through December 31, 2006. Certain of the potential future developmentmilestone payments may be converted into the Company’s common stock, at Lilly’soption, if the filing of a New Drug Application, or NDA,with the FDA forexenatide LAR is delayed beyond December 31, 2007.  The Company currently does not expect  the NDA to be filed by this date.  Lilly also agreed to make additional futuremilestone payments of up to $130 million contingent upon the commercial launchof exenatide in selected territories throughout the world, including bothtwice-daily and sustained release formulations, of which $30 million have beenpaid through December 31, 2006.

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  |   |

 

In October 2006, the Company and Lilly amended their global development andcommercialization agreement for exenatide. Prior to amending the agreement, operating profits for exenatideproducts, including any long-acting release formulations, outside of the UnitedStates were shared 80% to Lilly and 20% to Amylin.  Under the terms of the amended agreement, effectiveJanuary 1, 2007, Lilly will pay the Company tiered royalties 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.  Inaddition, effective January 1, 2007, Lilly will be responsible for 100% of thecosts 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 the Company.  Lilly will continue to be responsible for100% of the costs related to commercialization of all exenatide products forsale outside of the United States.

TheCompany recorded revenue under this collaborative agreement of $36.8 million,$53.8 million and $34.3 million in the years ended December 31, 2006, 2005and 2004, respectively, and incurred reimbursable development expenses of $74.7million, $37.4 million and $53.0 million in the years ended December 31,2006, 2005 and 2004, respectively. Reimbursable development expenses consist ofdirect internal and external expenses for exenatide, including both BYETTA andsustained release formulations.

***Collaborationwith Alkermes, Inc.***

In May 2000, the Company signed an agreement withAlkermes, Inc., a companyspecializing in the development of 

F-15

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productsbased on proprietary drug delivery technologies, for the development,manufacture and commercialization of an injectable long-acting formulation ofexenatide, or exenatide LAR.

Under the terms of the agreement, Alkermes has grantedthe Company an exclusive, worldwide license to its Medisorb®  technology for the development andcommercialization of injectable sustained release formulations of exendins,such as exenatide, and other related compounds 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 willalso receive royalties on any future product sales.

In October 2005,the Company and Alkermes Controlled Therapeutics II, a wholly owned subsidiaryof Alkermes, 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, theCompany will be responsible for manufacturing for commercial sale the onceweekly dosing formulation of exenatide LAR, if approved. The royalty to be paidfrom the Company to Alkermes for commercial sales of exenatide LAR was adjustedto reflect the new manufacturing arrangement.

In December 2005,the Company’s wholly-owned subsidiary, Amylin Ohio LLC, purchased an existingbuilding and land to house the facility for approximately $9 million and theCompany will be responsible for all costs and expenses associated with thedesign, construction, validation and utilization 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 $180 million. At December 31,2006 the Company had incurred $86.7 million associated with the construction ofthis facility.

**5.****              Lease Commitments**

The Company leases its facilities under operatingleases, with various terms, the majority of which expire in 2015. The minimumannual rent on the Company’s facilities is subject to increases based on statedrental adjustment terms of certain leases, taxes, insurance and operatingcosts. For financial reporting purposes, rent expense is recognized on astraight-line basis over the term of the leases. Accordingly, rent expenserecognized in excess of rent paid is reflected as deferred rent. Deferred renttotaled $6.4 million and $5.7 million at December 31, 2006 and 2005,respectively, of which $5.5 million and $5.1 million is included in otherlong-term obligations, net of current portion in the accompanying consolidatedbalance sheets at December 31, 2006 and 2005, respectively. Certain of theCompany’s facility leases contain incentives in the form of reimbursement fromthe landlord for a portion of the costs of leasehold improvements incurred bythe Company. These incentives are recognized as a reduction of rental expenseon a straight-line basis over the term of the respective leases. Unamortizedleasehold improvement incentives totaled $2.6 million and $3.0 million atDecember 31, 2006 and 2005, respectively, of which $2.3 million and $2.6million is included in other long-term obligations, net of current portion inthe accompanying consolidated balance sheets at December 31, 2006 and 2005,respectively.

The Company leases vehicles forits field force under operating leases, with lease terms up to four years, ofwhich the first year is non-cancellable. Minimum future payments for thenon-cancellable term of these leases are $0.9 million at December 31, 2006.

Minimum future annual obligations for facility andvehicle operating leases for years ending after December 31, 2006 are asfollows (in thousands):

| 2007                         |   | $      | 11,435 |   |
|------------------------------|--------|--------|--------|--------|
| 2008                         |   | 10,805 |   |
| 2009                         |   | 9,202  |   |
| 2010                         |   | 6,632  |   |
| 2011                         |   | 6,745  |   |
| Thereafter                   |   | 22,686 |   |
| Total minimum lease payments |   | $      | 67,505 |   |

 

Rent expense for the years ended December 31, 2006,2005 and 2004, was $9.8 million, $10.1 million and $8.2 million, respectively.

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

In April 2004, the Company issued $200 millionaggregate principal amount of 2.5% convertible senior notes due 

F-16

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April 15,2011 in a private placement, referred to as the 2004 Notes. The 2004 Notes havebeen registered under the Securities Act of 1933, as amended, or the SecuritiesAct, to permit registered resale of the 2004 Notes and of the common stockissuable upon conversion of the 2004 Notes. The 2004 Notes bear interest at2.5% per year, payable in cash semi-annually and are convertible into a totalof up to 5.8 million shares of common stock at a conversion price of $34.35 pershare, subject to customary adjustments for stock dividends and other dilutivetransactions.  The Company capitalized$0.6 million of interest expense for the year ended December 31, 2006associated with construction in progress. The Company incurred debt issuance costs of $6.4 million in connectionwith the issuance of the 2004 Notes, which are being amortized to interestexpense on a straight-line basis over the term of the 2004 Notes and had a netbook value of $3.9 million and $4.8****million atDecember 31, 2006 and 2005, respectively. Amortization expense associated with these debt issuance costs were $0.9million, $0.9 million and  $0.7 millionin the years ended December 31, 2006, 2005 and 2004, respectively.  The fair value of the 2004 Notes, determinedby observed market prices, was $252.0****million and$262.0 million at December 31, 2006 and 2005, 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 to pay the purchase price in common stockinstead of cash, or a combination thereof. If paid with common stock the numberof shares of common stock a holder will receive will be valued at 95% of theaverage closing prices of our common stock for the five-day trading periodending on the third trading day before the purchase date.

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

In June andJuly 2003, the Company issued $175 million of 2.25% convertible seniornotes due June 30, 2008 in a private placement referred to as the 2003Notes.   The 2003 Notes were convertibleinto a total of up to 5.4 million shares of common stock at a conversion priceof approximately $32.55 per share.  The2003 notes were provisionally redeemable in whole or in part, at the Company’soption at any time 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 common stock tonote holders upon the conversion of all of the outstanding 2003 Notes in August2006.  In connection with the 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 Notes less interestactually paid.  The Company recorded as aone-time, non-cash, non-operating charge of $7.9 million for the make-wholepayment 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, $1.0million and  $1.0 million in the yearsended December 31, 2006, 2005 and 2004, respectively.  Upon conversion, the $2.0 million unamortizedbalance of these related debt issuance costs were reclassified to additionalpaid-in capital.

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

**Stock-basedCompensation Plans**

***Stock Option Plans***

***The Company has two stock option plans under which itcurrently grants stock options: the 2001 Equity Incentive Plan, or the 2001Plan, which replaced the 1991 Stock Option Plan, or the 1991 Plan, upon the1991 Plan’s expiration in October 2001, and the 2003 Non-Employee Directors’Stock Option Plan, or the 2003 Directors’ Plan. Under the 2003 Directors’ Plan, non qualified stock options and restrictedstock may be granted to non-employee directors of the Company.  The 2003 Directors’ Plan provides forautomatic stock option grants to non-employee directors upon their initialappointment or election to the Company’s Board of Directors and are issued fromshares authorized under the 2001 Plan. Options granted under the 1991 Plan remain outstanding until exercisedor 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, 2006, an aggregate of 23.8million shares were reserved for future issuance under the Company’s stockoption plans, of which 7.6 million shares were available for future grants.

F-17

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Asummary of stock option transactions for all stock option plans is presentedbelow: 
| ** **                                | ** ** | **Shares  (thousands)** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate Intrinsic  Value (thousands)** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Options outstanding at  December 31, 2005 |       | 15,736                  |       | $                                         | 17.47      |                                                              |       |                                                 |       |   |
| Granted                                   |       | 3,571                   |       | $                                         | 42.02      |                                                              |       |                                                 |       |   |
| Exercised                                 |       | (2,454                  | )          | $                                         | 13.76      |                                                              |       |                                                 |       |   |
| Cancelled/Forfeited                       |       | (640                    | )          | $                                         | 27.03      |                                                              |       |                                                 |       |   |
| Options outstanding at  December 31, 2006 |       | 16,213                  |       | $                                         | 23.10      |                                                              | 7.22       |                                                 | $          | 231,125 |   |
|                                      |       |                    |       |                                      |       |                                                              |       |                                                 |       |
| Options exercisable at  December 31, 2006 |       | 8,814                   |       | $                                         | 16.71      |                                                              | 5.99       |                                                 | $          | 171,172 |   |
|                                      |       |                    |       |                                      |       |                                                              |       |                                                 |       |
| Options vested and  expected to vest      |       | 15,767                  |       | $                                         | 22.82      |                                                              | 7.17       |                                                 | $          | 228,181 |   |

 

The total intrinsic valueof stock options exercised was $74.8 million, $28.6 million and $9.9 millionduring the years ended December 31, 2006, 2005 and 2004, respectively. TheCompany received cash from the exercise of stock options of $31.6 million,$16.0****million, and $4.5****millionduring the years ended December 31, 2006, 2005 and 2004, 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 Companyissues new shares of its common stock.

At December 31, 2006,total unrecognized estimated non-cash, stock-based compensation expense relatedto nonvested stock options granted prior to that date was $108.3 million, witha weighted-average amortization period of 2.6 years. The Company recordsnon-cash, stock-based compensation expense for options with pro-rata vesting ona straight-line basis over the awards’ vesting period.

***Employee Stock 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 any offerings under the 2001 Purchase Plan areestablished by the Compensation and Human Resources Committee of the Board ofDirectors. In May 2006, the Compensation and Human Resources Committee approveda series of four consecutive six-month offerings commencing on September 1,2006.  At December 31, 2006, 0.7****million shares were reserved for futureissuance under the 2001 Purchase Plan.

The total intrinsic valueof purchase rights exercised was $10.4 million, $0.6 million and $1.4****million****during theyears ended December 31, 2006, 2005 and 2004, respectively. At December 31, 2006,total unrecognized non-cash, compensation expense for nonvested purchase rightsgranted prior to that date was $0.5 million, with a weighted-averageamortization period of 0.2 years.

***Stock Warrants***

The Company has warrants outstanding, which were grantedin 1997 and 2000, to purchase a total of 1.6 million shares of its commonstock. The warrants are exercisable at prices from $10.01 to $12.00 and expirethrough March 2008.

***Shares Reserved for Future Issuance***

The following shares of common stock are reserved forfuture issuance at December 31, 2006 (in thousands):

| Stock Option Plans                         |   | 23,801 |   |
|--------------------------------------------|--------|--------|--------|
| Stock Purchase Plan                        |   | 676    |   |
| Directors’ Deferred Compensation Plan |   | 21     |   |
| Stock Warrants                             |   | 1,626  |   |
| 401(k) Plan                                |   | 382    |   |
| Convertible Senior Notes                   |   | 5,822  |   |
|                                       |   | 32,328 |   |

 

F-18

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***Issuance of Common Stock***

In February 2005, the Company completed a publicoffering of 9.2 million shares of its common stock at a price of $22.00 pershare. 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 publicoffering of 5.1 million shares of its common stock at a price of $31.00 pershare. This transaction generated net proceeds of approximately $152 millionfor the Company and was completed pursuant to shelf registration statementspreviously filed with Securities and Exchange Commission in 2001 and 2003.

In April 2006, theCompany completed a public offering of 11.5 million shares of its common stockat a price of $46.50 per share. This transaction generated net proceeds ofapproximately $508 million for the Company and was completed pursuant to ashelf registration statement filed with Securities and Exchange Commission inMarch 2006.

***Shareholder Rights Plan***

In June 2002, the Companyadopted a Preferred Share Purchase Rights Plan (the “Rights Plan”). The RightsPlan provides for a dividend distribution of one preferred stock purchase right(a “Right”) for each outstanding share of the Company’s common stock, par value$0.001 per share, held of record at the close of business on June 28,2002. The Rights are not currently exercisable. Under certain conditionsinvolving an acquisition or proposed acquisition by any person or group of 15%or more of the Company’s common stock, the Rights permit the holders (otherthan the 15% holder) to purchase one one-hundredth of a share of Series AJunior Participating Preferred Stock, par value $0.001 per share (the “PreferredShares”) at a price of $100 per one one-hundredth of a Preferred Share, subjectto adjustment. Each one one-hundredth of a share of Preferred Shares hasdesignations and powers, preferences and rights and the qualifications,limitations and restrictions which make its value approximately equal to thevalue of one share of the Company’s common stock. Under certain conditions, theRights are redeemable by the Company’s Board of Directors in whole, but not inpart, at a price of $0.001 per Right.

**9.      BenefitPlans**

The Company has a defined contribution 401(k) plan forthe benefit of all eligible employees. Discretionary matching contributions arebased on a percentage of employee contributions and are funded by newly issuedshares of the Company’s common stock. The fair market value of matchingcontributions made by the Company for the benefit of its employees in 2006,2005 and 2004 were $6.0 million, $2.7 million and $1.0 million, respectively.

In August 1997, the Company adopted aNon-Employee Directors’ Deferred Compensation Plan (the “Directors’ DeferralPlan”) that permits participating non-employee directors to elect, on an annualbasis, to defer all or a portion of their cash compensation in a deferred stockaccount, pursuant to which the deferred fees are credited in the form ofphantom shares of the Company’s common stock, based on the market price of thestock at the time the fees are earned. Deferred amounts are valued at the fairmarket value of the Company’s common stock at each reporting date and areincluded in accrued compensation in the accompanying consolidated balancesheets. Upon termination of service the director’s account is settled in eithercash or stock, at the Company’s discretion. The Company recorded expenseassociated with this plan of $0.1 million, $1.3 million and $0.3 million forthe years ended December 31, 2006, 2005 and 2004, respectively.

The Company adopted a Deferred Compensation Plan in April 2001,which allows officers and directors to defer up to 100% of their annualcompensation. The trust assets, consisting of primarily cash, mutual funds andequity securities are recorded at current market prices. The company-ownedassets are placed in a “rabbi trust” and are included in other current assetsin the accompanying consolidated balance sheets. The trust assets had a fairvalue of $6.1 million and $4.9 million at December 31, 2006 and2005, respectively, including unrealized gains of approximately$0.8 million and $0.5 million at December 31, 2006 and 2005,respectively. Unrealized gains on the trust assets are included in accumulatedother comprehensive income (loss) in the accompanying consolidated balancesheets. The corresponding liability was $6.1 million and $4.9 million atDecember 31, 2006 and 2005, respectively, of which $6.1 million and $4.8million are included in other long-term liabilities, net of current portion inthe accompanying consolidated balance sheets at December 31, 2006 and 2005,respectively. The current portion of the corresponding liability is included inaccrued compensation in the accompanying consolidated balance sheets atDecember 31, 2006 and 2005. Total contributions to this plan, consisting solelyof compensation deferred by participants, were $1.0 million, $1.2 million and$1.0 million for the years ended December 31, 2006, 2005 and 2004,respectively.

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**10.   Income Taxes**

Significant components of theCompany’s deferred tax assets as of December 31, 2006 and 2005 are shownbelow (in thousands). A valuation allowance of approximately $535 million hasbeen recognized at December 31, 2006 to offset the deferred tax assets, asrealization of such assets has not met the more likely than not threshold underSFAS No 109, *“Accounting for Income Taxes.”*

|                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                          |       |     |       |     |       |
| Net operating loss carryforwards              |       | $        | 347,257    |     | $          | 301,263 |   |
| Research tax credits                          |       | 67,667   |       | 52,295   |       |
| Capitalized research and development expenses |       | 73,824   |       | 91,331   |       |
| Other                                         |       | 46,235   |       | 13,183   |       |
| Total deferred tax assets                     |       | 534,983  |       | 458,072  |       |
| Valuation allowance for deferred tax assets   |       | (534,983 | )          | (458,072 | )          |
| Net  deferred tax assets                      |       | $        | —     |     | $          | — |   |

 

Following is a summary of the Company’s Federal netoperating loss carryforwards, Federal research tax credit carryforwards andCalifornia net operating loss carryforwards at December 31, 2006 (inthousands):
| ** **                   | ** ** | **Federal net operating  loss carryforwards** | ** ** | **California net  operating loss  carryforwards** | ** ** | **Federal research and  development tax credit  carryforwards** | ** ** |
|------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| Expiring within one  year    |       | $                                                            | 3,434      |                                                        | $          | —                                                                              |       | $ | 995 |   |
| After 1 but within 5  years  |       | 109,632                                                      |       | —                                                      |       | 4,269                                                                               |       |
| After 5 but within 10  years |       | —                                                       |       | 559,415                                                     |       | —                                                                              |       |
| After 10 years               |       | 852,145                                                      |       | —                                                      |       | 46,769                                                                              |       |
|                         |       | $                                                            | 965,211    |                                                        | $          | 559,415                                                                             |       | $ | 52,033 |   |

 

Changes in control have occurred that triggered thelimitations of Section 382 of the Internal Revenue Code on the Company’s netoperating loss carryforwards.   TheSection 382 limitations were immaterial to the Company’s total net operatinglosses and are reflected in the net operating loss of $965 million presentedabove.

At December 31, 2006, the Company had Federal netoperating loss carryforwards of approximately $965 million, which begin toexpire in 2007. The Company also has California net operating loss carryforwardsof approximately $559 million, which begin to expire in 2012, and UK netoperating loss carryforwards of approximately $8 million, which carry forwardindefinitely. The difference between the Federal and California tax losscarryforwards is attributable to the capitalization of research and developmentexpenses for California tax purposes and the prior years’ limitation onCalifornia loss carryforwards. The Company has Federal research tax creditcarryforwards of $52 million, which begin to expire in 2007, and Californiaresearch tax credit carryforwards of $24 million, which carry forwardindefinitely.

As a result of the adoption of SFAS 123R, the Companyrecognizes windfall tax benefits associated with the exercise of stock optionsdirectly to stockholders’ equity only when realized.  Accordingly, deferred tax assets are notrecognized for net operating loss carryforwards resulting from windfall taxbenefits occurring from January 1, 2006 onward. A windfall tax benefit occurs when the actual tax benefit realized uponan employee’s disposition of a share-based award exceeds the deferred taxasset, if any, associated with the award. At December 31, 2006, deferred tax assets do not include$25 million of excess tax benefits from stock-based compensation.

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**11.   Quarterly Financial Data (Unaudited)**

The following financial information reflects all normalrecurring adjustments, which are, in the opinion of management, necessary for afair statement of the results of the interim periods. Summarized quarterly datafor fiscal 2006 and 2005 are as follows (in thousands, except per share data):
| ** **                                | ** ** | **For the quarters ended** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **March 31**                         | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **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 | ) |
|                                      |       |                                      |       |   |   |   |   |   |   |
| **2005:**                                 |       |                                      |       |   |   |   |   |   |   |
| Net product sales                         |       | $                                         | —     |   | $ | 8,652 |   | $ | 21,872 |   | $ | 56,189 |   |
| Revenues under  collaborative agreements  |       | 4,262                                     |       | 38,114 |   | 4,034 |   | 7,351 |   |
| Gross  profit from product sales          |       | —                                    |       | 7,130 |   | 17,612 |   | 47,187 |   |
| Net  loss                                 |       | (43,604                                   | )          | (26,594 | ) | (69,475 | ) | (67,159 | ) |
| Basic and diluted net loss per share (1)  |       | $                                         | (0.43      | ) | $ | (0.26 | ) | $ | (0.65 | ) | $ | (0.61 | ) |

 

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(1)           Net loss per share is computed independently for each ofthe quarters presented. Therefore, the sum of the quarterly per-sharecalculations will not necessarily equal the annual per share calculation.

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### **Schedule II**

**AMYLINPHARMACEUTICALS, INCSchedule II: Valuation Accounts(in thousands)**

 
| ** **                          | ** ** | **Balance at  beginning of  period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at end of  period** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|---------------|------------|----------------|------------|----------------------------------------------|------------|
| 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 |   |
|                                |       |                                           |       |          |       |           |       |                                         |       |
| Year ended December 31,  2004       |       |                                           |       |          |       |           |       |                                         |       |
| Inventory reserve                   |       | $                                              | 3,337      |          | 3,218      |           | 3,455      |                                         | $          | 3,100 |   |

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(1) Allowances for prompt payment, product returns,doubtful accounts and wholesaler chargebacks.

 

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