##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   Form 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                    to
 Commission File No. 0-21198   Zonagen, Inc. (Exact name of registrant as specified in its charter)
 Delaware
    
    76-0233274(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)2408 Timberloch Place, Suite B-1
    
    77380The Woodlands, Texas
    
    (Zip Code)(Address of principal executive offices)
 (281) 719-3400
(Registrants telephone number, including area code)   Securities registered pursuant to Section 12(b) of the Act: Name of EachTitle of Each Class
    
    Exchange on Which RegisteredCommon Stock, $.001 par value
Rights to purchase Series One Junior
Participating Preferred Stock
    
    Pacific Exchange, Inc.
Pacific Exchange, Inc.
 Securities registered pursuant to Section 12(g) of the Act: Name of EachTitle of Each Class
    
    Exchange on Which RegisteredCommon Stock, $.001 par value
Rights to purchase Series One Junior
Participating Preferred Stock
    
    Nasdaq SmallCap Market
Nasdaq SmallCap Market
 Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes o No þ The aggregate market value of the voting stock held by non-affiliates of the registrant was
approximately $11,000,000 as of June 30, 2004, the last business day of the registrants most
recently completed second fiscal quarter, based on the closing sales price of the registrants
common stock on the Nasdaq National Market on such date of $2.56 per share. For purposes of the
preceding sentence only, all directors, executive officers and beneficial owners of ten percent or
more of the shares of the registrants common stock are assumed to be affiliates. As of December 31, 2004, there were 4,992,901 common shares outstanding and as of March 16,
2005, there were 10,079,601 shares of the registrants common stock outstanding. Documents incorporated by reference: Portions of the registrants definitive proxy statement
relating to the registrants 2005 Annual Meeting of Shareholders, which proxy statement will be
filed under the Securities Exchange Act of 1934 within 120 days of the end of the registrants
fiscal year ended December 31, 2004, are incorporated by reference into Part III of this Form 10-K.




---



ZONAGEN, INC.
2004 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PagePART IItem 1. Business
    
    
    2Item 2. Properties
    
    
    26Item 3. Legal Proceedings
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26PART IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    27Item 6. Selected Consolidated Financial Data
    
    
    28Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 8. Financial Statements and Supplementary Data
    
    
    34Item 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure
    
    
    34Item 9A. Controls and Procedures
    
    
    35Item 9B. Other Information
    
    
    35PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    36Item 11. Executive Compensation
    
    
    36Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    36Item 13. Certain Relationships and Related Transactions
    
    
    36Item 14. Principal Accounting Fees and Services
    
    
    36PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    37Lease AgreementConsent of PricewaterhouseCoopers LLPCertification Pursuant to Rule Section 302Certification Pursuant to Section 302Certification Furnished Pursuant to Section 906Certification Furnished Pursuant to Section 906
  This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The words may, anticipate, believe, expect, estimate, project,
suggest, intend and similar expressions are intended to identify forward-looking statements.
Such statements reflect the Companys current views with respect to future events and financial
performance and are subject to certain risks, uncertainties and assumptions, including those
discussed in Item 1. Description of Business  Business Risks. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may
vary materially from those anticipated, believed, expected, estimated, projected, suggested or
intended. -1-




---



##### Table of Contents



PART I 
 ITEM 1. BUSINESS Overview Zonagen, Inc. (the Company, Zonagen, or we, us or our) was organized on August 28,
1987 and is a development stage company. We are a biopharmaceutical company focused on the
development of new drugs to treat hormonal and reproductive system disorders. Our lead product
candidate, ProgentaTM, is an orally available small molecule compound that we are
developing for the treatment of uterine fibroids and endometriosis. We are developing Progenta
under an exclusive, worldwide license from the National Institutes of Health, or NIH. Progenta is
being developed to alleviate adverse symptoms associated with both uterine fibroids and
endometriosis by selectively blocking the progesterone receptor in women. We believe it may have
advantages over the current standards of care for the treatment of uterine fibroids and
endometriosis, which include surgery and treatment with gonadotropin releasing hormone agonists, or
GnRH agonists, such as Lupron®. Unlike Progenta, GnRH agonists create a low estrogen,
menopausal-like state in women, and estrogen is necessary for the maintenance of bone mineral
density. Therefore, GnRH agonists tend to promote bone loss and cannot be used for more than six
months at a time. When women cease treatment with GnRH agonists, fibroids rapidly regenerate and
symptoms associated with endometriosis quickly reappear. We believe Progenta may have advantages
over treatment with GnRH agonists because, in our animal research to date, Progenta does not appear
to induce a low estrogen state and therefore should not promote bone loss, which could make
Progenta a better treatment option for patients prior to surgery. In addition, we believe Progenta
may provide an attractive alternative to surgery because of its potential to treat these conditions
in a chronic fashion resolving the symptoms that most commonly lead to surgical treatment. We
recently completed a Phase Ib clinical trial for Progenta in Poland for the treatment of uterine
fibroids. We intend to begin a Phase II clinical trial for Progenta in the United States for the
treatment of uterine fibroids during 2005, subject to review of our Phase Ib data by the U.S. Food
and Drug Administration, or FDA. The FDA has agreed to meet with us on May 25, 2005 for the purpose
of reviewing Zonagens pre-IND proposal. We have not yet filed an investigational new drug
application, or IND, with the FDA. If the FDA approves our IND, only then would we be permitted to
conduct a clinical trial in the United States for Progenta. We also plan to conduct a Phase II
clinical trial in Poland for Progenta for the treatment of endometriosis in 2005. However, we have
not yet conducted any clinical trials for Progenta for the treatment of endometriosis, and any
clinical trials we may conduct may not produce positive results. Our second product candidate is AndroxalTM, an orally available small molecule
compound being developed for the treatment of testosterone deficiency in men. Androxal, our
proprietary compound, is designed to restore normal testosterone production in males with
functional testes and diminished pituitary function, a condition commonly referred to in the aging
male as andropause. We believe Androxal may have advantages over current therapies because it is
being designed as an oral therapy that acts centrally to restore normal testosterone function in
the body, rather than simply replacing diminished testosterone. The administration of replacement
testosterone has been linked to numerous potential adverse effects, including shrinkage of the
testes. In addition, a safe and effective oral treatment for testosterone deficiency has to date
been unavailable. We recently completed a Phase I/II clinical trial for Androxal in the United
States for the treatment of men with testosterone deficiency and submitted final data to the FDA.
We met with the staff of the Division of Reproductive and Urologic Products of the FDA on November
10, 2004 to review our clinical plan for the approval of Androxal. The FDA agreed to review our
protocols for our trials in a timely fashion under a special protocol assessment, or SPA. The FDA
deems Androxal to be a new chemical entity, and additional lengthy animal studies will be required
before long term human studies may be initiated or a New Drug Application, or NDA, may be filed. On
February 1, 2005, we completed our follow-on public offering of 5,060,000 shares of
our common stock at $4.00 per share (which included the underwriters exercise of its over
allotment option for 660,000 shares). The shares offered by us were issued out of our
existing treasury stock, and the offering resulted in net proceeds to
us of approximately
$18.1 million. Business Strategy Our primary business strategy is to concentrate our resources on the clinical development of
Progenta and Androxal. We intend to outsource our activities required to conduct these clinical
trials and to continue to operate in -2-




---



##### Table of Contents



a near-virtual manner until we complete our pivotal trials. We have no current intentions to
build manufacturing or acquire sales and marketing capabilities but will seek to create value by
developing our technology and realizing such value, if successful, by securing licensing fees,
milestone payments and royalties through corporate collaborations. We also intend to sell or
out-license our phentolamine-based sexual dysfunction products and/or in-license other product
candidates for the treatment of hormonal and reproductive system disorders if the right opportunity
presents itself. Market Overviews Uterine Fibroids Uterine fibroids are common non-cancerous tumors that arise from the smooth muscle layer of
the uterus. The National Uterine Fibroid Foundation estimates that possibly as many as 80% of all
women in the United States have uterine fibroids, and one in four of these women have symptoms
severe enough to require treatment. The two most common symptoms are abnormal uterine bleeding and
pelvic pressure. Uterine fibroids may also cause fetal malpresentations and complications with
labor. Pressure on internal organs caused by fibroids can cause difficulty in bowel movements,
constipation, urinary frequency and incontinence. In general, fibroids only need to be treated if they are causing symptoms. Currently, the
primary treatment for patients with large or symptomatic fibroids is surgery. Hysterectomy, or
surgical removal of the entire uterus, is the most frequent operative technique used to treat this
disorder. In fact, fibroids are the most common indication for hysterectomy, accounting for
approximately one-third of hysterectomies, or about 200,000 procedures annually, in the United
States, according to the Center for Uterine Fibroids, or CUF. We estimate that the costs associated
with these procedures reaches approximately $1 to $1.5 billion annually. When women wish to preserve childbearing potential, a myomectomy may be performed. Unlike
hysterectomy in which the entire uterus is removed, myomectomy is a surgical procedure in which
individual fibroid(s) are removed. The CUF reports that approximately 18,000 myomectomies are
performed annually in the United States, and this procedure, in general, diminishes menorrhagia, or
prolonged and/or profuse menstrual flow, in roughly 80% of patients presenting with this symptom.
Unfortunately, there is a significant risk of recurrence of fibroids after myomectomy. The CUF has
also stated that, in some studies, up to 10% of women who underwent an initial myomectomy required
a second major operative procedure, and one-quarter to one-half of women who underwent myomectomies
had evidence of recurrence of their fibroids within one to ten years. Drugs can help control fibroid-related symptoms. The most effective medications for the
treatment of fibroids are GnRH agonists, including Lupron and Zoladex®, which are marketed by TAP
Pharmaceuticals and Astra Zeneca PLC, respectively. GnRH agonists induce a low-estrogen,
menopause-like state. Because fibroids are dependent on estrogen for their development and growth,
induction of a low estrogen state causes reduction of tumor and uterus mass, resolving pressure
symptoms. Specifically, uterine volume has been shown to decrease approximately 50% after three
months of GnRH agonist therapy. In addition to decreasing the size of the uterus, treatment with
GnRH agonists also stops menstrual flow, a disorder known as amenorrhea, allowing women with
bleeding-induced anemia to significantly increase their iron stores. However, there are two significant problems with GnRH agonists:  1.
    Bones require estrogen. GnRH agonists induce a low estrogen state in women, and
estrogen is necessary for the maintenance of bone mineral density. Therefore, GnRH agonists
tend to promote bone loss and cannot be used for more than six months at a time, usually in
preparation for a surgical procedure.2.
    When women cease treatment with GnRH agonists, their fibroids rapidly regenerate. Therefore, use of GnRH agonists alone for treatment of fibroids is usually limited to a short
one to three month preoperative course to shrink the uterus to facilitate a surgical procedure or
to induce amenorrhea to improve hematologic condition before surgery. -3-




---



##### Table of Contents



Endometriosis Endometriosis occurs when endometrial tissue, which is tissue that normally lines the inside
of the uterus, is found outside of the uterus. This misplaced tissue develops into growths or
lesions which react to the menstrual cycle the same way that the endometrium reacts, which results
in internal bleeding and inflammation and can cause pain, infertility, scar tissue formation and
bowel problems. According to the Endometriosis Association, endometriosis affects 5.5 million women
in the United States and Canada and millions more worldwide. Surgery is the current customary standard of care for endometriosis, either through
laparoscopy or laparotomy. Conservative surgery seeks to remove or destroy the growths, relieve
pain, and may allow pregnancy to occur in some cases. Hormonal therapy may be prescribed along with
conservative surgery. Radical surgery, which may be necessary in severe cases, involves
hysterectomy, removal of all growths, and removal of ovaries. Physicians often prescribe pain medications, such as aspirin, acetaminophen, ibuprofen and
naproxen, to reduce the pain associated with endometriosis. Hormonal treatments, such as the GnRH
agonists described earlier, are designed to stop ovulation for as long as possible. Other hormonal
treatments include oral contraceptives, progesterone drugs and danazol (a testosterone derivative).
Surgery is expensive and invasive. GnRH agonists are currently the most effective form of treatment
for endometriosis other than surgery but suffer from the same problems as described above when used
for treating uterine fibroids, namely, bone loss and recurrence of the condition after cessation of
treatment. Testosterone Deficiency Low testosterone is linked to several negative physical and mental conditions in the aging
male population, including loss of muscle tone, reduced sexual desire and deterioration of memory
and certain other cognitive functions. Testosterone plays an essential role in the development of
the normal male and in the maintenance of many male characteristics, including muscle mass and
strength, bone mass, libido, potency, and spermatogenesis. Testosterone deficiency occurs with
disorders that damage the testes, including traumatic or surgical castration (primary testicular
failure) or disorders in which the gonadotropin stimulation of the testes is reduced, a condition
known as hypogonadotropic hypogonadism. Men with hypogonadotropic hypogonadism have low plasma
testosterone levels and luteinizing hormone levels that may be low or low-normal. This condition is
a normal part of aging and is commonly referred to as andropause. According to the Urology Channel,
recent estimates show that approximately 13 million men in the United States experience
testosterone deficiency. Current therapies focus on testosterone replacement. They deliver testosterone to the blood
stream either transdermally or via injection. The current standard therapy in the industry is
Androgel®, a topical gel with sales of approximately $283 million in 2003, marketed by
Solvay Pharmaceuticals. Testim® is another topical gel currently sold and marketed by Auxilium
Pharmaceuticals. Watson Pharmaceuticals markets a transdermal patch called AndroDerm®.
There are several other companies attempting to get FDA approval for testosterone gels and at least
two companies attempting to obtain generic approval for a topical testosterone gel. We anticipate
that the U.S. market is approximately $375 million today and could grow to nearly a billion dollars
worldwide within the next several years as aging and the resulting effects on lifestyle become
increasingly important. However, there are two significant problems with the current therapies:  1.
    The use of any of the current therapies, including the transdermal therapies, may
create high peaks of testosterone levels. Such high peaks can lead to excitation and
aggressive behavior, sleeplessness, anxiety, depression and headaches and have been
associated with prostate disease.2.
    While transdermal delivery through gels and patches produces a more constant drug level
in the blood stream, transdermal delivery also results in elevated levels of
dihydrotestosterone, or DHT. Elevated levels of DHT in the blood stream also have been
associated with prostate disease. -4-




---



##### Table of Contents



Our Product Candidates We intend to address the markets described above with our novel small molecule compounds,
Progenta and Androxal, that we believe may have advantages over the current common standards of
care in each respective market. Progenta We believe that current therapies for uterine fibroids and endometriosis are less than ideal
and leave room for improved drugs with different modes of action. Particularly, we believe that
anti-progestational agents like Progenta may have advantages over GnRH agonists because they are
designed to selectively block progesterone without inducing a low estrogen state. Therefore, it may
be possible to use Progenta on a long-term, or chronic, basis without the bone loss problems
associated with GnRH agonists. Although we believe Progenta may be effective as an alternative six
month pre-treatment to surgery for uterine fibroids, we also believe this product candidate may
hold the potential to eventually become a chronic therapy for uterine fibroids and endometriosis
that could eliminate the need for uterine fibroid surgery. We currently have rights, under the terms of our license from the NIH, to a U.S. issued patent
and a foreign filing made by the NIH regarding Progenta. Please see Agreement with National
Institutes of Health for a description of the current status of our license with the NIH. In January 2005, we completed dosing in a three-month, 30-patient, randomized Phase Ib
clinical trial in Poland comparing Progenta to placebo and Lucrin® (the trade name for leucrolide
acetate in Poland) in treating uterine fibroids. 28 of the 30 enrolled patients completed dosing.
Patients enrolled in the trial were randomly distributed across five parallel groups. Each group
consisted of five to six patients, and each group was dosed with a different medication: placebo,
12.5 mg Progenta, 25 mg Progenta, 50 mg Progenta, or Lucrin. The placebo and Progenta groups were
administered in a double-blind fashion, meaning that the attending physician and the patient were
both unaware of which medication was administered. The placebo contains no active ingredient, and
is used to assess the psychological impact of treatment and to assure that the positive or negative
effects experienced by patients receiving medication in a clinical study are in fact drug-related.
The Lucrin group was included in the clinical trial so that the effects of Progenta can be compared
against a drug currently approved and marketed for the indication. This is referred to as having a
positive control in the clinical trial. The study consisted of three phases. One day dosing was conducted for both initial safety and
pharmacokinetics. Patients then entered a one-week washout period, during which no drug was
administered. This period was included as a safety assessment to determine how long the positive or
negative effects of the drug are observed, as well as to determine if the drug has the potential to
accumulate within the patient. Following the one week washout and safety assessment, women took the
drug for an additional 30 days after which time they are readmitted into the clinic to evaluate
steady state pharmacokinetics, effects on fibroid size, bone mineral density and hemoglobin. Women
showing positive effects on fibroid volume and hemoglobin without adverse reactions were allowed to
continue in the trial for an additional two months. Women not experiencing a benefit with the study
drug were allowed to switch to the GnRH agonists for the duration of the study. At the end of the
study, women on Progenta were evaluated after a 30 day follow up period for changes in bone mineral
density, hemoglobin levels and fibroid size and compared against the changes experienced by the
positive control group dosed with GnRH agonists. This study is of a small sample size of five to six patients per group. The primary purpose of
the study is to show that the drug is safe, over the period and number of patients exposed, and to
determine whether the drug warrants further development. Only drugs with significant therapeutic
effects could be expected to exhibit statistically significant separation from placebo for any
endpoints in such a small study. The purpose of including a positive control is to provide further
information regarding the activity of the drug and to not over- or under-interpret the results from
the study. For example, if an approved drug does not achieve statistical significance in a given
study it suggests that the product candidate, if equally not significant, should not be abandoned.
Typically, after such a small study is undertaken, a larger Phase II or Phase III trial is
performed. In cases where the subsequent trial achieves statistical significance and shows an
adequate dose response, it may be used as one of the two pivotal trials necessary to obtain
regulatory approval for the product candidate. Longer term open label studies, where both -5-




---



##### Table of Contents



patients and physicians know what drug is used, are usually conducted to fulfill the safety
requirements for chronically administered drugs. We announced initial three-month data from this study on February 24, 2005. All clinical trial
results are subject to review by the FDA, and the FDA may disagree with our conclusions about
safety or efficacy. All 28 women remaining in the trial completed the three month chronic exposure
to Progenta or Lucrin. None of the women in the double blinded portion of this cohort elected to
switch to Lucrin. Furthermore, none of the women in the study experienced any side effects or
changes in clinical chemistry. To date, Progenta has been well tolerated. The women in the high
dose Progenta group of the study experienced reduction in fibroid size, as measured by ultrasound,
at least numerically equivalent to GnRH agonists. These results may be reversed by the final
results of this clinical trial or from later stage clinical trials with significantly larger and
more diverse patient populations treated for longer periods of time. We intend to begin a Phase II clinical trial for Progenta in the United States for the
treatment of uterine fibroids during 2005, subject to the review of our Phase Ib data by the FDA.
We have not yet filed an IND with the FDA. If the FDA approves our IND, only then would we be
permitted to conduct a clinical trial in the United States for Progenta. Based on our regulatory
timeline, we do not foresee filing an NDA for Progenta prior to 2007. Several animal studies, including a nine-month primate study, were previously conducted
exploring both the safety and activity of the product candidate, which were funded by a Small
Business Innovative Research, or SBIR, grant. The data from those studies currently are being
analyzed. Furthermore, based on observations of menstrual bleeding patterns in the primate study,
the Company does not believe that there will be any adverse effects on endometrial tissue. We also
intend to conduct a Phase II clinical trial for Progenta in Poland for the treatment of
endometriosis in 2005. However, we have not yet conducted any clinical trials for Progenta for the
treatment of endometriosis, and any clinical trials we may conduct may not produce positive
results. Androxal We are developing Androxal as a once a day oral therapy for the treatment of men with
testosterone deficiency. Androxal is being designed to act centrally, thereby causing an increase
in certain hormones that stimulate increased production of testosterone by the testes. We believe
that the endogenous production of testosterone brought about by a compound like Androxal would not
provide the significant negative feedback that occurs with the administration of high
concentrations of exogenous testosterone (as with Androgel). This negative feedback signals the
body to stop producing testosterone naturally, and has been linked to numerous potential adverse
effects, including shrinkage of the testes. We believe that Androxal has the potential to restore
near normal levels of testosterone, in as close to a natural process as possible, by restoring
testicular production of testosterone, rather than simply replacing testosterone, and that Androxal
could be the first significant therapy approved in this market that treats testosterone deficiency
in this manner. In addition, a safe and effective oral treatment for testosterone deficiency has to
date been unavailable. Because Androxal induces naturally occurring cycles of testosterone production internally, we
believe it may have advantages over the current therapies on the market for the following reasons:  
    Our Phase I/II clinical trial results indicate that
Androxal does not cause abnormal peaks in blood
testosterone levels which can be caused by some current
testosterone replacement therapies; and
    the data so far do not indicate the elevated levels of
dihydroxytestosterone, or DHT, associated with
transdermal therapies. All clinical trial results are subject to review by the FDA, and the FDA may disagree with our
conclusions about safety or efficacy. In addition, these results are from early stage clinical
trials, and may be reversed by the results of larger or later stage clinical trials with
significantly larger and more diverse patient populations treated for longer periods of time. Our Androxal product candidate is covered by eight pending patent applications in the United
States and 19 foreign pending patent applications. All of these applications relate to methods and
materials for the treatment of -6-




---



##### Table of Contents



testosterone deficiency in men. A third party holds an issued patent related to the use of an
anti-estrogen such as clomiphene citrate for use in the treatment of androgen deficiency and
disorders related thereto. Androxal is purified from clomiphene citrate. We believe that the claims
of the other partys patent are invalid because several printed publications previously available
in the public domain. On that basis, we filed a request for reexamination of the patent with the
U.S. Patent and Trademark Office, or PTO, in light of a number of these publications. The PTO has
since rejected all of such claims of the patent on the grounds that each of the claims are
anticipated by, or obvious in view of, a number of printed publications that were already in the
public domain. The third party filed a response to those rejections and the PTO recently finally rejected
the claims in such response. The third party now has an opportunity to appeal such ruling, subject
to certain timing requirements. We do not believe that the third party will overcome the rejections
made by the PTO. Even if the other party appeals and such appeal is successful and its patent is
upheld, we believe that our contemplated use of Androxal may not infringe any valid claims of the
patent. However, it is possible that the claims of this patent could be construed so as to block
our use of Androxal for indications such as the treatment of testosterone deficiency. If this were
to occur, we may then be required to obtain a license from the holder of such patent in order to
develop Androxal further, and such license may not be available on acceptable terms or at all. In
this case, we would not be able to develop or commercialize Androxal. In July 2004, we released results from a randomized Phase I/II clinical trial in the United
States comparing Androxal to placebo and to Androgel in hypogonadal men. The trial tested 52
clinically diagnosed hypogonadal men with testosterone levels less than 300 ng/dL, whereas normal
levels range from 298 to 1034 ng/dL. Patients were randomized into five different arms and each arm
was dosed with a different medication: three dose levels of Androxal, placebo, or the low dose of
Androgel. Upon completion of these arms of the trial, a sixth arm comprised of 10 men from the
initial group was formed to test the high dose of Androgel. The placebo and Androxal doses were
administered in a double-blind fashion, meaning that the attending physician and the patient are
both unaware of which medication is administered. Androgel was administered as an open label
treatment, where both patient and physician know what drug is being administered. Following a two
week drug treatment, patients were followed for an additional seven to 10 days to evaluate their
testosterone levels. There were no side effects noted in either the Androxal or Androgel arms of
the study that were statistically different than placebo. Furthermore, all three dose levels of
Androxal produced statistically significant changes in testosterone from baseline testosterone
levels. The low, mid and high dose levels achieved mean increases of 169, 247 and 294 ng/dL,
respectively, as compared to baseline. There were no statistically significant changes within the
placebo group. Seven of 10 men in the low dose group, 10 of 11 in the mid dose group and 10 of 10
men in the high dose group had restoration of normal testosterone levels. All clinical trial
results are subject to review by the FDA, and the FDA may disagree with our conclusions about
safety and efficacy. We caution that these results may be reversed by the results of later stage
clinical trials with significantly larger and more diverse patient populations treated for longer
periods of time. Comparing average testosterone levels during the trial period, all three doses of Androxal
achieved blood levels of total testosterone that were statistically indistinguishable from the high
dose of Androgel. In each patient studied, Androxal also produced average testosterone levels below
1000 ng/dL at day 14, whereas several Androgel patients had average testosterone levels far above
the normal range. In the subset of men whose blood testosterone levels were measured six times over
a 24-hour period, three of five men on the high dose of Androgel had multiple measurements above
the normal range. In contrast, only one man out of 15 on Androxal had a single measurement above
the normal range. Similar to our Progenta clinical trial, this study is of a small sample size. The
primary purpose of the study is to show that the drug is safe, over the period and number of
patients exposed, and to determine whether the drug warrants further development. We caution that
these results may be reversed by the results of later stage clinical trials with significantly
larger patient populations treated for longer periods of time. We met with members of the staff of the Division of Reproductive and Urologic Products of the
FDA on November 10, 2004 to review our clinical plan for the approval of Androxal. Based on the
written record of this meeting, the FDA will require an additional clinical endpoint, for example,
improved libido or improvement in depression scores, associated with the primary endpoint of
increased testosterone levels. The FDA agreed to review our protocols for our trials in a timely
fashion under a special protocol assessment, or SPA. In the SPA process, the FDA reviews the
design, size and planned analysis of our Phase III clinical trial and provides comments regarding
the trials adequacy to form a basis with respect to effectiveness for approval of a NDA, if the
trial is successful in meeting its predetermined objectives. The FDAs written agreement is binding
on its review decision, except in limited circumstances, such as when a substantial scientific
issue essential to determining the safety or effectiveness of a product candidate is identified
after the Phase III clinical trial is commenced. Even if a NDA is filed, there is no -7-




---



##### Table of Contents



guarantee that the application will be approved. Any change to the protocol for our Phase III
clinical trial included in the SPA would require prior FDA approval, which could delay our ability
to implement such change. The FDA deems Androxal to be a new chemical entity, and additional
lengthy animal studies will be required before long term human studies may be initiated. In
particular, a twelve week study in dogs and rats must be completed before humans may be dosed in a
Phase III clinical trial. In addition, before we can submit our NDA for Androxal, we will be
required to successfully complete a two-year carcinogenicity study in rats. Therefore, we would not
be able to file an NDA for Androxal prior to 2007. Below is a summary of our product candidates and the related stages of development for each.
The information in the column labeled Estimate of Completion of Current Phase contains
forward-looking statements regarding timing of completion of product development phases. The
successful development of our product candidates is highly uncertain. Estimated completion dates
and R&D expenses can vary significantly for each product candidate and are difficult to predict.
The actual timing of completion of those phases could differ materially from the estimates provided
in the table. Estimate ofProduct
    
    
    
    
    
    
    
    
    
    
    
    Current Phase of
    
    
    
    
    
    
    
    
    
    
    
    Completion ofCandidate
    
    
    
    
    
    Indication
    
    
    
    
    
    Development
    
    
    
    
    
    Collaborator
    
    
    
    
    
    Current PhaseProgenta (1)
    
    
    
    
    
    Uterine fibroids
    
    
    
    
    
    Phase II (pending
FDA review  United
States)
    
    
    
    
    
    None
    
    
    
    
    
    Initial study data end of
1st half
2006Androxal (2)
    
    
    
    
    
    Testosterone deficiency
    
    
    
    
    
    Phase III (Pending
FDA review of
protocol  United
States)
    
    
    
    
    
    None
    
    
    
    
    
    Initial study data
end of
1st half
2006Progenta (3)
    
    
    
    
    
    Endometriosis
    
    
    
    
    
    Phase II (Europe)
    
    
    
    
    
    None
    
    
    
    
    
    Initial study data
end of
1st half
2006
   (1)
    
    Female health small molecule opportunity. We intend to begin a
Phase II clinical trial for Progenta in the United States for the
treatment of uterine fibroids during 2005, subject to review of
our Phase Ib data by the FDA. The FDA has agreed to meet with us
on May 25, 2005 for the purpose of reviewing Zonagens pre-IND
proposal. We are seeking guidance from the FDA regarding our trial
design for Progenta and the suitability of our recently completed
Phase Ib clinical study data as support for the FDA to allow us to
begin an advanced stage clinical trial program with Progenta in
the United States. We have not yet filed an IND with the FDA. If
the FDA approves our IND, only then would we be permitted to
conduct a clinical trial in the United States for Progenta.(2)
    
    Internal small molecule program. We have described a patent
potentially competitive with our patent on Androxal. We met with
FDA staff members on November 10, 2004 to review our clinical plan
for the approval of Androxal. The FDA agreed to review our
protocols for our trials in a timely fashion under a SPA. The FDA
deems Androxal to be a new chemical entity, and additional lengthy
animal studies will be required before long term human studies may
be initiated or a NDA may be filed.(3)
    
    Female health small molecule opportunity. We have not yet
conducted any clinical trials for Progenta for the treatment of
endometriosis, and any clinical trials we may conduct may not
produce positive results. Additional Potential Indications for Progenta We believe Progenta may be effective for the treatment of breast cancer and as a hormone
replacement therapy but are not actively developing Progenta for these indications at this time. Breast Cancer We believe Progenta may possess the potential capability to treat breast cancers that are
resistant to Tamoxifin®therapy, a commonly used anti-estrogen breast cancer therapy. Our initial
rodent studies funded by a SBIR grant showed a strong dose dependent effect on the reduction and
elimination of tumors in a well accepted breast cancer model. Hormone Replacement Therapy We believe Progenta may have the potential to eliminate many of the side effects, particularly
endometrial cancer, seen with estrogen-only therapies in women with low hormone levels. The side
effects of estrogen-only hormone replacement therapies for women are alleviated with
estrogen-progestin combination therapies. However, -8-




---



##### Table of Contents



recent data have shown that such combination therapies may increase the risk of breast cancer,
heart attacks, strokes and blood clots. Unlike progestins, Progenta is devoid of progesterone-like
activity and instead opposes its actions. The result of this action could lead to a new class of
hormone replacement therapies with Progenta combinations. Out-Licensing Opportunities Our phentolamine-based products for the treatment of sexual dysfunction include VASOMAX®, an
oral therapy for male erectile dysfunction, or MED; an oral therapy for female sexual arousal
disorder; BimexesTM, an oral combination drug therapy for MED; and ERxinTM, a
multi-drug component injection therapy for MED. Although VASOMAX was previously approved for sale
in eight non-U.S. countries, some approvals have lapsed and the existing approvals may be difficult
to transfer to another entity or could also lapse. Although the products previously being developed
to treat sexual dysfunction are our most advanced in terms of clinical development, they all
contain phentolamine, which the FDA has on partial clinical hold. The interim results of a November
2000 mechanistic study designed to address the FDAs concerns over phentolamine were positive, but
in October 2002, the FDA decided to require us to perform an additional two-year rat study in order
to lift the partial clinical hold. At this time, we do not intend to conduct this additional study.
There can be no assurance that even if we were to complete this additional study that the FDA would
remove its partial clinical hold on phentolamine. All of our phentolamine-based products have been
tested in humans, though each is at a different stage of development. Before the FDA will consider
the approval to market any of our phentolamine-based products, the partial clinical hold must first
be lifted. In addition, Schering-Plough, Ltd. and Schering Corporation, the previous licensees of our
phentolamine-based products, decided to withdraw their December 2001 submission to the Medicines
Control Agency in the United Kingdom after receipt and review of comments from the Committee on
Safety of Medicines on such submission. In July 2002, the Schering group agreed to terminate its
worldwide licensing agreements with us. Schering returned all rights to our phentolamine-based
product candidates to us for a nominal up front cash fee and certain continuing royalty obligations
in the event we have any sales of VASOMAX or our other phentolamine-based products. We intend to
outlicense some or all of this technology if the right opportunity presents itself, although we may
not be able to realize any value from this technology. Research and Development We have limited resources and utilize consultants and outside entities to perform clinical
development and limited research activities in connection with preclinical studies and clinical
trials. Our primary research and development, or R&D, expenses for 2004 are for the payment of
consultants and contract research organizations in connection with our clinical trials for Progenta
for the treatment of uterine fibroids and for Androxal for testosterone deficiency. In addition, we
will incur expenses relating to the clinical development of Progenta for endometriosis. We believe
that these expenses will continue to be our primary R&D expenses in the near future. Agreement with National Institutes of Health In 1999, we licensed rights to Progenta from the NIH under an exclusive, worldwide license in
the field of treatment of human endocrinologic pathologies or conditions in steroid sensitive
tissues which expires upon the expiration of the last licensed patent. Under the terms of the
agreement, we are obligated to meet developmental milestones as outlined in a commercial
development plan. This development plan outlines a preclinical and clinical program leading to the
stated objective of submitting an NDA for regulatory approval of Progenta for the treatment of
uterine fibroids in 2008. We provide annual updates to the NIH on the progress of our development
of Progenta. Based on our interaction with the NIH to date, we believe our license and relationship
with NIH are in good standing. The NIH has the ability to terminate the agreement for lack of
payment or if we are not meeting milestones as outlined in the commercial development plan and for
other reasons as outlined in the agreement. The NIH retains, on behalf of the government, a
nonexclusive, nontransferable, worldwide license to practice the inventions licensed under the
licensed patents by or on behalf of the government. For the purpose of encouraging basic research,
the NIH retains the right to grant nonexclusive research licenses to third parties. Due to the work
that was done on Progenta at the NIH prior to our license agreement, the government also has
certain rights to use the product in the event of a national emergency pursuant to the Patent and
Trademark Laws Amendments Act of 1980, as amended. During the period when we were considering
redeployment of our assets, we were not in compliance with all of the original requirements stated
in the commercial development plan. In July 2002, we and the NIH amended the license -9-




---



##### Table of Contents



agreement to include a revision of the original commercial development plan relating to the
targeted dates for certain objectives. Additional updates of the original commercial development
plan have been reached with the NIH thereafter in order to expedite development. Although we
believe that we have a good working relationship with the NIH, there can be no assurance that all
of the objectives and conditions in the commercial development plan will be met on a timely basis
or at all, or that, if we fail to meet any of such objectives, the NIH will again agree to amend
this agreement to our satisfaction. Failure to comply with the material terms contained in the
license agreement could result in termination of such agreement, which would prohibit us from
further development of Progenta and severely harm our business prospects. Manufacturing We do not have any facilities to manufacture products necessary for clinical trials or
commercial sales and do not expect to establish any of our own manufacturing capacity in the
foreseeable future. We have in the past relied and intend to continue to rely on third parties for
the foreseeable future for the manufacture and supply of commercial quantities of any compounds or
products that we may develop. Other than some initial amounts from the NIH, we have used the same
outside supplier, Bridge Organics, for all of the Progenta needed for our clinical trials to date.
We are in the process of seeking a suitable source for a long-term manufacturing agreement for the
product candidate. There can be no assurance that we will be able to successfully negotiate a
long-term agreement with any of such potential manufacturers at a reasonable price and on other
acceptable terms or that any potential manufacturer will be able to reproduce the results obtained
by Bridge Organics in manufacturing Progenta to date. We have obtained all of our supply of
Androxal to date from BioVectra. Also, our dependence on third parties for the manufacture of any
products we may develop may adversely affect our product margins and our ability to develop and to
deliver products in a timely manner. Any such third-party suppliers or any manufacturing facility
we establish will be required to meet FDA manufacturing requirements. FDA certification of
manufacturing facilities for a drug, and compliance with current Good Manufacturing Practices
requirements, is a prerequisite to approval of a NDA for that drug. We may encounter significant
delays in obtaining supplies from third-party manufacturers or experience interruptions in our
supplies. The effects of any such delays or interruptions will be more severe if we rely on a
single source of supply. If we were unable to obtain adequate supplies, our business would be
materially adversely affected. Sales and Marketing We have no experience in the sales, marketing and distribution of pharmaceutical products. If
in the future we fail to reach or elect not to enter into an arrangement with a collaborative
partner with respect to the sales and marketing of any of our future potential product candidates,
we would need to develop a sales and marketing organization with supporting distribution capability
in order to market such products directly. Significant additional expenditures would be required
for us to develop such a sales and marketing organization. Patents and Proprietary Information Our ability to compete effectively with other companies is materially dependent on the
proprietary nature of our patents and technologies. We actively seek patent protection for our
proprietary technology in the United States and abroad. We have previously written off capitalized
patents relating to the zona pellucida immuno-contraceptive vaccine and our phentolamine-based
products, which includes VASOMAX, our hCG immuno-contraceptive vaccine, our two vaccine adjuvants
and our two prostate cancer vaccines. However, we continue to maintain our phentolamine-based
patents relating to these technologies and include these costs in R&D expenses. Under a license agreement with the NIH, we have exclusive rights to a U.S. patent application,
which recently has issued, and a foreign filing made by the NIH regarding Progenta. We also have
the following patent applications pending relating to Androxal and methods of use: eight pending
patent applications in the United States, and 19 foreign pending patent applications. A third party holds an issued patent related to the use of an anti-estrogen such as clomiphene
citrate for use in the treatment of androgen deficiency and disorders related thereto. Androxal is
purified from clomiphene citrate. We believe that the claims of the others party patent are
invalid because of several printed publications previously available in the public domain. On that
basis, we filed a request for reexamination of the patent with the PTO in light of a number of
these publications. The PTO rejected all of such claims of the patent on the grounds that each of
the -10-




---



##### Table of Contents



claims are anticipated by, or obvious in view of, a number of printed publications that were
already in the public domain. The third party filed a response to those rejections and the PTO
recently finally rejected the claims in such response. The third party now has an opportunity to appeal
such ruling, subject to certain timing requirements. We do not believe that the third party will
overcome the rejections made by the PTO. Even if the other party appeals and such appeal is
successful and its patent is upheld, we believe that our contemplated use of Androxal may not
infringe any valid claims of the patent. However, it is possible that the claims of this patent
could be construed so as to block our use of Androxal for indications such as the treatment of
testosterone deficiency. If this were to occur, we may then be required to obtain a license from
the holder of such patent in order to develop Androxal further, and such license may not be
available on acceptable terms or at all. In this case, we would be not be able to develop or
commercialize Androxal. Competition We are engaged in pharmaceutical product development, an industry that is characterized by
extensive research efforts and rapid technological progress. Many established pharmaceutical and
biotechnology companies, universities and other research institutions with financial, scientific
and other resources significantly greater than ours are marketing or may develop products that
directly compete with any products we may develop. These entities may succeed in developing
products that are safer, more effective or less costly than products we may develop. Even if we can
develop products which should prove to be more effective than those developed by other companies,
other companies may be more successful than us because of greater financial resources, greater
experience in conducting preclinical studies and clinical trials and in obtaining regulatory
approval, stronger sales and marketing efforts, earlier receipt of approval for competing products
and other factors. If we commence significant commercial sales of any products, we or our
collaborators will compete in areas in which Zonagen has no experience, such as manufacturing and
marketing. There can be no assurance that our products, if commercialized, will be accepted and
prescribed by healthcare professionals. Our main competitors for the treatment of uterine fibroids and endometriosis are GnRH
agonists, especially Lupron, the current most common therapeutic standard of care for uterine
fibroids, with annual sales of $787.8 million in the United States and Canada for all indications.
Lupron is marketed by TAP Pharmaceuticals, which has far greater resources and marketing
capabilities than we have. In addition, surgical treatment of both uterine fibroids and
endometriosis competes with Progenta by removing uterine fibroids and by removing misplaced tissue
in women with endometriosis. We believe we can potentially compete with Lupron and other GnRH
agonists because we believe that Progenta will not present the same side effect of a decrease in
bone mineral density given its specific focus on progesterone inhibition, which differentiates it
from GnRH agonists that create a low estrogen state. There are additional companies developing
similar progesterone-blocking technology. Asoprisnil, an anti-progestin being developed by TAP
Pharmaceuticals in partnership with Schering AG, is currently in Phase III clinical trials. Our main competitors for the treatment of testosterone deficiency are the testosterone
replacement therapies currently being marketed. The current most common standard of care is
Androgel, a topical gel for the replacement of testosterone, which is marketed by Solvay
Pharmaceuticals, a considerably larger company than we are. There is another topical gel, Testim®,
currently marketed by Auxilium Pharmaceuticals, and a transdermal patch, AndroDerm, marketed by
Watson Pharmaceuticals. We believe we can compete with Androgel and the other replacement therapies
because we believe that Androxal avoids the abnormally high peaks of testosterone levels and
elevated levels of DHT which can be associated with current testosterone replacement therapies like
Androgel. Based on our clinical trial supply cost to date, we currently expect that Androxal, if
approved, can compete favorably on a cost basis with current testosterone replacement therapies. Governmental Regulation Our research and development activities, preclinical studies and clinical trials, and
ultimately the manufacturing, marketing and labeling of any products we may develop, are subject to
extensive regulation by the FDA and other regulatory authorities in the United States and other
countries. The U.S. Federal Food, Drug and Cosmetic Act and the regulations promulgated thereunder
and other federal and state statutes and regulations govern, among other things, the testing,
manufacture, storage, record keeping, labeling, advertising, promotion, marketing and distribution
of any products we may develop. Preclinical study and clinical trial requirements and the
regulatory approval process take many years and require the expenditure of substantial resources.
Additional -11-




---



##### Table of Contents



government regulation may be established that could prevent or delay regulatory approval of
our product candidates. Delays in obtaining or rejections of regulatory approvals would adversely
affect our ability to commercialize any product candidate we develop and our ability to receive
product revenues or to receive milestone payments or royalties from any product rights we might
license to others. If regulatory approval of a product candidate is granted, the approval may
include significant limitations on the indicated uses for which the product may be marketed or may
be conditioned on the conduct of post-marketing surveillance studies. The standard process required by the FDA before a pharmaceutical agent may be marketed in the
United States includes: (1) preclinical tests; (2) submission to the FDA of an investigational new
drug application which must become effective before human clinical trials may commence; (3)
adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug
for its intended application; (4) submission of an NDA to the FDA; and (5) FDA approval of the NDA
prior to any commercial sale or shipment of the drug. Even if regulatory approvals for any products we may develop are obtained, we, our potential
collaborators, our products, and the facilities manufacturing our products would be subject to
continual review and periodic inspection. The FDA will require post-marketing reporting to monitor
the safety of our products. Each U.S. drug-manufacturing establishment must be registered with the
FDA. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must
comply with the FDAs requirements regarding current Good Manufacturing Practices. To supply drug
products for use in the United States, foreign manufacturing establishments must comply with the
FDAs Good Manufacturing Practices and are subject to periodic inspection by the FDA or by
regulatory authorities in those countries under reciprocal agreements with the FDA. In complying
with current Good Manufacturing Practices, manufacturers must expend funds, time and effort in the
area of production and quality control to ensure full technical compliance. We do not have any drug
manufacturing capabilities and must rely on outside firms for this capability. The FDA stringently
applies regulatory standards for manufacturing. Identification of previously unknown problems with
respect to a product, manufacturer or facility may result in restrictions on the product,
manufacturer or facility, including warning letters, suspensions of regulatory approvals, operating
restrictions, delays in obtaining new product approvals, withdrawal of the product from the market,
product recalls, fines, injunctions and criminal prosecution. Before any products we may develop could be marketed outside of the United States, they would
be subject to regulatory approval similar to FDA requirements in the United States, although the
requirements governing the conduct of clinical trials, product licensing, pricing, and
reimbursement vary widely from country to country. No action can be taken to market any drug
product in a country until the regulatory authorities in that country have approved an appropriate
application. FDA approval does not assure approval by other regulatory authorities. The current
approval process varies from country to country, and the time spent in gaining approval varies from
that required for FDA approval. In some countries, the sale price of a drug product must also be
approved. The pricing review period often begins after market approval is granted. Even if a
foreign regulatory authority approves any products we may develop, no assurance can be given that
it will approve satisfactory prices for the products. Our research and development involves the controlled use of hazardous materials and chemicals.
Although we believe that our procedures for handling and disposing of those materials comply with
state and federal regulations, the risk of accidental contamination or injury from these materials
cannot be eliminated. If such an accident occurs, we could be held liable for resulting damages,
which could be material to our financial condition and business. We are also subject to numerous
environmental, health and workplace safety laws and regulations, including those governing
laboratory procedures, exposure to blood-borne pathogens, and the handling of biohazardous
materials. Additional federal, state and local laws and regulations affecting us may be adopted in
the future. Any violation of, and the cost of compliance with, these laws and regulations could
materially and adversely affect us. Third-Party Reimbursement and Pricing Controls In the United States and elsewhere, sales of pharmaceutical products depend in significant
part on the availability of reimbursement to the consumer from third-party payers, such as
government and private insurance plans. Since we have no commercial products, we have not had to
face this issue yet. However, third-party payers are increasingly challenging the prices charged
for medical products and services. It will be time consuming and expensive for us to go through the
process of seeking reimbursement from Medicaid, Medicare and private payers. -12-




---



##### Table of Contents



Our products may not be considered cost effective, and coverage and reimbursement may not be
available or sufficient to allow us to sell our products on a competitive and profitable basis. The
passage of the Medicare Prescription Drug and Modernization Act of 2003 imposes new requirements
for the distribution and pricing of prescription drugs which may affect the marketing of our
products. In many foreign markets, including the countries in the European Union, pricing of
pharmaceutical products is subject to governmental control. In the United States, there have been,
and we expect that there will continue to be, a number of federal and state proposals to implement
similar governmental pricing control. While we cannot predict whether such legislative or
regulatory proposals will be adopted, the adoption of such proposals could have a material adverse
effect on our profitability. The Hatch-Waxman Act Under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984, known as the
Hatch-Waxman Act, newly approved drugs and indications benefit from a statutory period of
non-patent marketing exclusivity. The Hatch-Waxman Act provides five year marketing exclusivity to
the first applicant to gain approval of an NDA for a new chemical entity, or NCE, meaning that the
FDA has not previously approved any other new drug containing the same active ingredient. Both of
our current product candidates are considered NCEs. The Hatch-Waxman Act prohibits an abbreviated
new drug application, or ANDA, where the applicant does not own or have a legal right of reference
to all the data required for approval, to be submitted by another company for another version of
such drug during the five year exclusive period. Protection under the Hatch-Waxman Act will not
prevent the filing or approval of another full NDA, however, the applicant would be required to
conduct its own adequate and well-controlled clinical trials to demonstrate safety and
effectiveness. The Hatch-Waxman Act also provides three years of marketing exclusivity for the
approval of new NDAs with new clinical trials for previously approved drugs and supplemental NDAs,
for example, for new indications, dosages, or strengths of an existing drug, if new clinical
investigations are essential to the approval. This three year exclusivity covers only the new
changes associated with the supplemental NDA and does not prohibit the FDA from approving ANDAs for
drugs containing the original active ingredient or indications. The Hatch-Waxman Act also permits a patent extension term of up to five years as compensation
for patent term lost during product development and the FDA regulatory review process. However,
patent extension cannot extend the remaining term of a patent beyond a total of 14 years. The
patent term restoration period is generally one-half the time between the effective date of an IND
and the submission date of an NDA, plus the time between the submission date of an NDA and the
approval of that application. Only one patent applicable to an approved drug is eligible for the
extension and it must be applied for prior to expiration of the patent. The PTO, in consultation
with the FDA, reviews and approves or rejects the application for patent term extension. Litigation We are not currently a party to any material legal proceedings. Nasdaq SmallCap Market Listing In
January 2004, we accepted for purchase 6,547,635 shares (approximately 57% of our
outstanding common stock, at that time) at a purchase price of $2.10 per share in accordance with
the terms of our self tender offer, which included 60,888 shares issuable upon exercise of options
tendered by directors, for a total aggregate cost of approximately $14.0 million, inclusive of costs
associated with the offer. After the tender offer, we had 4,992,901 shares outstanding. On July 8, 2004, our common stock transferred from the Nasdaq National Market to the Nasdaq
SmallCap Market after Nasdaq approved our application for this transfer. We applied for a Nasdaq
SmallCap Market listing after Nasdaq informed us that we no longer met the $10,000,000 minimum
stockholders equity listing requirement for the Nasdaq National Market. This shortfall was a
result of the completed January 2004 self tender offer. -13-




---



##### Table of Contents



Employees and Consultants Employees At March 28, 2005, we had five full-time employees, a number which we believe is currently
sufficient to advance the clinical development of our Progenta product candidate for the treatment
of uterine fibroids and endometriosis and our Androxal product candidate for the treatment of
testosterone deficiency. We utilize part-time consultants as well as contract research
organizations and other outside specialty firms for various services such as clinical trial
support, manufacturing and regulatory approval advice. We intend to increase the number of
employees we have, particularly in the area of research and development. We believe our
relationship with our employees is good. Scientific Advisors and Consultants We benefit from consultation with prominent scientists active in fields related to our
technology. For this purpose, we have part-time consulting relationships with a number of
scientific advisors. At our request, these advisors review the feasibility of product development
programs under consideration, advise us with advances in areas related to our technology, and aid
in recruiting personnel. All of the advisors are employed by academic institutions or other
entities and may have commitments to or advisory agreements with other entities that limit their
availability to us. Our consultants are required to sign an agreement providing that they are to
disclose and assign to us any ideas, discoveries and inventions they develop in the course of
providing consulting services. We also use consultants for various administrative needs. None of
our consultants are otherwise affiliated with us. In addition to the consultants described above, we have engaged two U.S. contract research
organizations to conduct our clinical trials. Pharm-Olam International Ltd. conducts our clinical
trial in Poland for Progenta for the treatment of uterine fibroids and Advanced Biomedical
Research, Inc. conducted our clinical trial in the United States for Androxal for the treatment of
testosterone deficiency. Under our arrangements with these contract research organizations, we
design the protocols for the clinical trials and direct the contract research organizations in
their efforts. Both Pharm-Olam and Advanced Biomedical have agreed that we own all of the data
associated with the clinical trials. -14-




---



##### Table of Contents



RISK FACTORS Our product candidates are at an early stage of development, and if we are not able to successfully
develop and commercialize them, we may not generate sufficient revenues to continue our business
operations. We currently have only two active product candidates, and both are in early stages of
development. We recently completed a Phase I/II clinical trial for Androxal in the United States
for the treatment of men with testosterone deficiency, and have completed a Phase Ib clinical trial
for Progenta in Poland for the treatment of uterine fibroids. We have expended significant time,
money and effort in the development of Progenta and Androxal and we will have to spend considerable
additional time, money and effort before seeking regulatory approval to market these product
candidates. For example, we will be required to complete additional animal studies before we can
begin pivotal clinical trials for Androxal in humans. Our business depends primarily on our ability to successfully complete clinical trials, obtain
required regulatory approvals and successfully commercialize Progenta and Androxal. If we fail to
commercialize Progenta and Androxal, we may be unable to generate sufficient revenues to attain
profitability or continue our business operations and our reputation in the industry and in the
investment community could likely be significantly damaged, each of which would cause our stock
price to decline. Because the data from preclinical studies and early clinical trials for Progenta and Androxal are
not necessarily predictive of future results, we can provide no assurances that these product
candidates will have favorable results in clinical trials or receive regulatory approval. Before we can obtain regulatory approval for the commercial sale of any product candidate that
we wish to develop, we are required to complete preclinical development and extensive clinical
trials in humans to demonstrate its safety and efficacy. Positive data from preclinical studies or
early clinical trials should not be relied upon as evidence that those studies or trials will
produce positive results, or that later or larger-scale clinical trials will succeed. Initial
clinical trials for Progenta and Androxal have been conducted only in small numbers of patients
that may not fully represent the diversity present in larger populations, and thus the limited data
we have obtained may not predict results from studies in larger numbers of patients drawn from more
diverse populations, and therefore may not predict the ability of Progenta to treat uterine
fibroids and endometriosis or Androxal to treat testosterone deficiency. We will be required to
demonstrate through larger-scale clinical trials that these product candidates are safe and
effective for use in a diverse population before we can seek regulatory approvals for their
commercial sale. There is typically an extremely high rate of attrition from the failure of drug
candidates proceeding through clinical trials. We will also be required to complete a two year rat
carcinogenicity study before we are permitted to file a new drug application, or NDA, for Androxal.
If Progenta, Androxal, or any other potential future product candidate fails to demonstrate
sufficient safety and efficacy in any clinical trial, we would experience potentially significant
delays in, or be required to abandon, development of that product candidate. If we delay or abandon
our development efforts related to Progenta or Androxal, we may not be able to generate sufficient
revenues to continue operations or become profitable. If we fail to obtain the capital necessary to fund our operations, we will have to delay, reduce or
eliminate our research and development programs or commercialization efforts. We expect to make additional capital outlays and to increase operating expenditures over the
next several years to support our preclinical development and clinical trial activities,
particularly as we enter into pivotal clinical trials for Progenta and Androxal. Our existing
financial resources, are expected to be sufficient to fund our
operations through the first quarter 2006.
Therefore we will need to seek additional funding through public or private financings, including
equity or debt financings, and/or through other means, including collaborations and license
agreements. We do not know whether additional financing will be available when needed, or that, if
available, we will obtain financing on terms favorable to our stockholders or us. If adequate funds
are not available to us, we may be required to:  
    delay, reduce the scope of or eliminate one or more of our development programs; -15-




---



##### Table of Contents




    relinquish, license or otherwise dispose of rights to technologies, product
candidates or products that we would otherwise seek to develop or commercialize
ourselves at an earlier stage or on terms that are less favorable than might otherwise
be available; or
    liquidate and dissolve our company. Our future capital requirements will depend upon a number of factors, including:  
    the size, complexity, results and timing of our clinical programs;
    the cost to obtain sufficient supply of the compounds necessary for our product
candidates at a reasonable cost;
    the time and costs involved in obtaining regulatory approvals;
    the costs involved in preparing, filing , prosecuting, maintaining, defending and
enforcing patent claims; and
    competing technological and market developments. These factors could result in variations from our currently projected operating and liquidity
requirements. We have a history of operating losses, and we expect to incur increasing net losses and may not
achieve or maintain profitability for some time or at all. We have experienced significant operating losses in each fiscal year since our inception. As
of December 31, 2004, we had an accumulated deficit of approximately $86.8 million. We expect to
continue incurring net losses and may not achieve or maintain profitability for some time or at
all. As we increase expenditures for clinical development of Progenta and Androxal, we expect our
operating losses to increase for at least the next few years. Our ability to achieve profitability
will depend, among other things, on successfully completing the development of Progenta and
Androxal, obtaining regulatory approvals, establishing marketing, sales and manufacturing
capabilities or collaborative arrangements with others that possess such capabilities, and raising
sufficient funds to finance our activities. There can be no assurance that we will be able to
achieve profitability or that profitability, if achieved, can be sustained. Raising additional funds by issuing securities or through collaboration and licensing arrangements
may cause dilution to existing stockholders, restrict our operations or require us to relinquish
propriety rights. We may raise additional funds through public or private equity offerings, debt financings or
corporate collaborations and licensing arrangements. We cannot be certain that additional funding
will be available on acceptable terms, or at all. To the extent that we raise additional capital by
issuing equity securities, our stockholders ownership will be diluted. Any debt financing we enter
into may involve covenants that restrict our operations. These restrictive covenants may include
limitations on borrowing and specific restrictions on the use of our assets, as well as
prohibitions on our ability to create liens, pay dividends, redeem capital stock or make
investments. In addition, if we raise additional funds through collaboration and licensing
arrangements, it may be necessary to relinquish potentially valuable rights to our potential
products or proprietary technologies, or grant licenses on terms that are not favorable to us. For
example, we might be forced to relinquish all or a portion of our sales and marketing rights with
respect to Progenta, Androxal or other potential products or license intellectual property that
enables licensees to develop competing products. -16-




---



##### Table of Contents



We licensed our rights to Progenta from the National Institutes of Health, or NIH, and our
inability to fulfill our commitments and obligations under such license may result in forfeiture of
our rights. Our rights to Progenta are licensed exclusively to us from the NIH under a license agreement.
This license agreement contains numerous detailed performance obligations, with time sensitive
dates for compliance, relating to clinical development and commercialization activities required by
us or our designated third-party providers, as well as additional financial milestones and
royalties. Failure to achieve the benchmarks specified in the commercial development plan attached
to the license agreement or meet payment obligations could result in termination of the license
agreement and the loss of our rights to develop and commercialize Progenta. During the period when
we were considering redeployment of our assets, we were not in compliance with all of the original
requirements stated in the commercial development plan. In July 2002, the license agreement was
amended to include a revision of the original commercial development plan relating to the targeted
dates for certain objectives. Additional updates of the original commercial development plan have
been reached with the NIH thereafter in order to expedite development. There can be no assurance
that we will be able to meet any or all of such performance objectives in the future on a timely
basis or at all, or that, if we fail to meet any of such objectives, the NIH will again agree to
amend such agreement to our satisfaction. The NIH has the ability to terminate the agreement for
failure to comply with the material terms contained in the license agreement and for other reasons
as outlined in the agreement. Should the NIH terminate the license agreement, we would lose all
rights to commercialize Progenta, which would have a material adverse effect on us. There is a patent holder that claims priority over our patent application for Androxal. U.S. Patent No. 6,391,920 was issued to a competitor on May 21, 2002 and is directed to the
use of an anti-estrogen such as clomiphene citrate for use in the treatment of androgen deficiency
and disorders related thereto. Androxal is purified from clomiphene citrate. We filed a request for
reexamination of this patent with the U.S. Patent and Trademark Office, or PTO. The PTO rejected
all claims of this patent on the grounds that each of the claims are anticipated by, or obvious in
view of, a number of printed publications that were already in the public domain. The third party
filed a response to those rejections and the PTO recently finally rejected the claims in such response.
The third party now may appeal such ruling, subject to certain timing requirements. If the other
party appeals on a timely basis, and such appeal is successful, it is possible that the claims of
this patent could be construed so as to block our use of Androxal for indications such as the
treatment of testosterone deficiency. If this were to occur, we may then be required to obtain a
license from the holder of such patent in order to develop Androxal further and such license may
not be available on acceptable terms or at all. In this case, we would not be able to develop or
commercialize Androxal. We cannot assure that our manufacture, use or sale of Progenta and Androxal will not infringe on
the patent rights of others. There can be no assurance that the manufacture, use or sale of Progenta or Androxal and any
potential future product candidates will not infringe the patent rights of others. We may be unable
to avoid infringement of the patent rights of others and may be required to seek a license, defend
an infringement action or challenge the validity of the patents in court. There can be no assurance
that a license to the allegedly infringed patents will be available to us on terms and conditions
acceptable to us, if at all, or that we will prevail in any patent litigation. Patent litigation is
extremely costly and time-consuming, and there can be no assurance that we will have sufficient
resources to defend any possible litigation related to such infringement. If we do not obtain a
license on acceptable terms under such patents, or are found liable for infringement, or are not
able to have such patents declared invalid, we may be liable for significant money damages, may
encounter significant delays in bringing Progenta and Androxal to market, or may be precluded from
participating in the manufacture, use or sale of Progenta or Androxal, any of which would
materially and adversely affect our business. We face substantial uncertainty in our ability to protect our patents and proprietary technology. Our ability to commercialize our products will depend, in part, on our or our licensors
ability to obtain patents, to enforce those patents and preserve trade secrets, and to operate
without infringing on the proprietary rights of -17-




---



##### Table of Contents



others. The patent positions of biopharmaceutical companies are highly uncertain and involve
complex legal and factual questions. There can be no assurance that:  
    patent applications for our product Androxal, will result in issued patents
    patent protection will be secured for any particular technology;
    any patents that have been or may be issued to us, such as our pending patent
application for Androxal, or our licensors, such as the patents underlying our Progenta
compound, when issued, will be valid or enforceable;
    any patents will provide meaningful protection to us;
    others will not be able to design around the patents; or
    our patents will provide a competitive advantage or have commercial application. The failure to obtain and maintain adequate patent protection would have a material adverse
effect on us and may adversely affect our ability to enter into, or affect the terms of, any
arrangement for the marketing of any product. We cannot assure that our patents will not be challenged by others. There can be no assurance that patents owned by or licensed to us will not be challenged by
others. We could incur substantial costs in proceedings, including interference proceedings before
the PTO and comparable proceedings before similar agencies in other countries in connection with
any claims that may arise in the future. These proceedings could result in adverse decisions about
the patentability of our or our licensors inventions and products, as well as about the
enforceability, validity or scope of protection afforded by the patents. Any adverse decisions
about the patentability of our product candidates could cause us to either lose rights to develop
and commercialize our product candidates or to license such rights at substantial cost to us. In
addition, even if we were successful in such proceedings, the cost and delay of such proceedings
would most likely have a material adverse effect on our business. Confidentiality agreements with employees and others may not adequately prevent disclosure of trade
secrets and other proprietary information, may not adequately protect our intellectual property,
and will not prevent third parties from independently discovering technology similar to or in
competition with our intellectual property. We rely on trade secrets and other unpatented proprietary information in our product
development activities. To the extent we rely on trade secrets and unpatented know-how to maintain
our competitive technological position, there can be no assurance that others may not independently
develop the same or similar technologies. We seek to protect trade secrets and proprietary
knowledge, in part, through confidentiality agreements with our employees, consultants, advisors,
collaborators and contractors. Nevertheless, these agreements may not effectively prevent
disclosure of our confidential information and may not provide us with an adequate remedy in the
event of unauthorized disclosure of such information. If our employees, scientific consultants,
advisors, collaborators or contractors develop inventions or processes independently that may be
applicable to our technologies, product candidates or products, disputes may arise about ownership
of proprietary rights to those inventions and processes. Such inventions and processes will not
necessarily become our property, but may remain the property of those persons or their employers.
Protracted and costly litigation could be necessary to enforce and determine the scope of our
proprietary rights. If we fail to obtain or maintain trade secret protection for any reason, the
competition we face could increase, reducing our potential revenues and adversely affecting our
ability to attain or maintain profitability. -18-




---



##### Table of Contents



We have not filed an Investigational New Drug application to conduct clinical trials for Progenta
in the United States and we may not be able to obtain FDA approval of such application to permit us
to conduct clinical trials for Progenta in the United States. Prior to commencing any clinical trials for Progenta in the United States, we will need to
submit an IND application to the FDA. Any IND application that we submit to the FDA for Progenta
will likely incorporate the results of our clinical trial in Poland. The FDA may not accept the
results of this clinical trial and may request further preclinical data before approving the IND.
Moreover, the FDA may subject the trial data that we submit to additional scrutiny and we may incur
additional costs and delays responding to FDA requests for supplemental information or
clarification. If we are unable to obtain FDA approval for an IND for Progenta, we will not be
permitted to conduct clinical trials for Progenta in the United States and ultimately seek or
obtain regulatory approval for commercialization in the United States. As a result, any delay in an
IND becoming effective for Progenta would delay the further development and potential
commercialization of our lead product candidate and delay our ability to generate product sales. Delays in the commencement of clinical testing of our current and potential product candidates
could result in increased costs to us and delay our ability to generate revenues. Our product candidates will require continued preclinical testing and extensive clinical
trials prior to the submission of a regulatory application for commercial sales. We recently
completed our Phase I/II clinical trial for Androxal in the United States for the treatment of men
with testosterone deficiency and have completed our Phase Ib clinical trial for Progenta in Poland.
We have very limited experience conducting clinical trials for these product candidates. In part,
because of this limited experience, we do not know whether future planned clinical trials will
begin on time, if at all. Delays in the commencement of clinical testing could significantly
increase our product development costs and delay any product commercialization. In addition, many
of the factors that may cause, or lead to, a delay in the commencement of clinical trials may also
ultimately lead to denial of regulatory approval of a product candidate. The commencement of clinical trials can be delayed for a variety of reasons, including delays
in:  
    obtaining approval of an IND application from the FDA for Progenta and any other
potential product candidates;
    conducting additional animal studies required by the FDA before commencement of
pivotal clinical trials for Androxal;
    conducting and completing a two-year rat carcinogenicity study required by the FDA
prior to submission of an NDA for Androxal and Progenta;
    demonstrating sufficient safety and efficacy in past clinical trials to obtain
regulatory approval to commence a further clinical trial;
    reaching agreement on acceptable terms with prospective contract research
organizations and clinical trial sites;
    manufacturing sufficient quantities of a product candidate; and
    obtaining institutional review board approval to conduct a clinical trial at a prospective site. In addition, the commencement of clinical trials may be delayed due to insufficient patient
enrollment, which is a function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites, the availability of effective
treatments for the relevant disease, and the eligibility criteria for the clinical trial. -19-




---



##### Table of Contents



Delays in the completion of, or the termination of, clinical testing of our current and potential
product candidates could result in increased costs to us, and could delay or prevent us from
generating revenues. Once a clinical trial has begun, it may be delayed, suspended or terminated by us or the FDA,
or other regulatory authorities due to a number of factors, including:  
    ongoing discussions with the FDA or other regulatory authorities regarding the scope
or design of our clinical trials;
    the U.S. FDA may not accept data obtained from clinical studies conducted in Poland,
particularly relating to our trials with Progenta, as meeting all applicable U.S. FDA
clinical trial standards;
    requests by the FDA for supplemental information or clarification of the results of
our clinical trials in Poland;
    lower than anticipated retention rate of patients in clinical trials;
    inspection of the clinical trial operations or trial sites by the FDA or other
regulatory authorities resulting in the imposition of a clinical hold;
    lack of adequate funding to continue clinical trials;
    negative results of clinical trials;
    insufficient supply or deficient quality of drug candidates or other materials
necessary for the conduct of our clinical trials; or
    serious adverse events or other undesirable drug-related side effects experienced by
participants. Many of these factors that may lead to a delay, suspension or termination of clinical testing
of a current or potential product candidate may also ultimately lead to denial of regulatory
approval of a current or potential product candidate. We experienced a clinical hold beginning in
1999 during our development of VASOMAX, which resulted in our abandonment of development of that
product candidate. If we experience delays in the completion of, or termination of, clinical
testing of any product candidates in the future, our financial results and the commercial prospects
for our product candidates will be harmed, and our ability to generate product revenues will be
delayed. Even if we successfully complete clinical trials for Progenta and Androxal, there are no assurances
that we will be able to submit, or obtain FDA approval of, a new drug application. There can be no assurance that, if our clinical trials for Progenta and Androxal are
successfully completed, we will be able to submit a new drug application, or NDA, to the FDA or
that any NDA we submit will be approved by the FDA in a timely manner, if at all. After completing
clinical trials for a product candidate in humans, a drug dossier is prepared and submitted to the
FDA as an NDA, and includes all preclinical and clinical trial data that clearly establish both
short-term and long-term safety, as well as carcinogenicity studies for a product candidate that
will be used as a chronic treatment, and data that establishes the statistically significant
efficacy of a product candidate, in order to allow the FDA to review such drug dossier and to
consider a product candidate for approval for commercialization in the United States. If we are
unable to submit an NDA with respect to Progenta or Androxal, or if any NDA we submit is not
approved by the FDA, we will be unable to commercialize that product. The FDA can and does reject
NDAs and requires additional clinical trials, even when drug candidates perform well or achieve
favorable results in large-scale Phase III clinical trials. If we fail to commercialize Progenta or
Androxal, we may be unable to generate sufficient revenues to continue operations or attain
profitability and our reputation in the industry and in the investment community would likely be
damaged. -20-




---



##### Table of Contents



If commercialized, our product candidates may not be approved for sufficient governmental or
third-party reimbursements, which would adversely affect our ability to market our product
candidates. In the United States and elsewhere, sales of pharmaceutical products depend in significant
part on the availability of reimbursement to the consumer from third-party payers, such as
government and private insurance plans. Since we have no commercial products, we have not had to
face this issue yet; however, third-party payers are increasingly challenging the prices charged
for medical products and services. It will be time consuming and expensive for us to go through the
process of seeking reimbursement from Medicaid, Medicare and private payers for Progenta and
Androxal. Our products may not be considered cost effective, and coverage and reimbursement may not
be available or sufficient to allow us to sell our products on a competitive and profitable basis.
The passage of the Medicare Prescription Drug and Modernization Act of 2003 imposes new
requirements for the distribution and pricing of prescription drugs which may negatively affect the
marketing of our potential products. If we successfully develop products but those products do not achieve and maintain market
acceptance, our business will not be profitable. Even if Progenta and Androxal are approved for commercial sale by the FDA or other regulatory
authorities, the degree of market acceptance of any approved product by physicians, healthcare
professionals and third-party payers and our profitability and growth will depend on a number of
factors, including:  
    relative convenience and ease of administration;
    the prevalence and severity of any adverse side effects;
    availability, effectiveness and cost of alternative treatments;
    pricing and cost effectiveness of Progenta and Androxal;
    effectiveness of our or our collaborators sales and marketing strategies; and
    our ability to obtain sufficient third-party insurance coverage or reimbursement. If Progenta does not provide a treatment regimen that is more beneficial than Lupron, a GnRH
agonist and the current therapeutic standard of care for uterine fibroids, or otherwise provide
patient benefit, it likely will not be accepted favorably by the market. Similarly, if Androxal
does not provide a treatment regime that is more beneficial than Androgel, the current standard of
care for the treatment of testosterone deficiency, or otherwise provide patient benefit, it likely
will not be accepted favorably by the market. If any products we may develop do not achieve market
acceptance, then we will not generate sufficient revenue to achieve or maintain profitability. In addition, even if our products achieve market acceptance, we may not be able to maintain
that market acceptance over time if:  
    new products or technologies are introduced that are more favorably received than
our products, are more cost effective or render our products obsolete;
    unforeseen complications arise with respect to use of our products; or
    sufficient third-party insurance coverage or reimbursement does not remain available. -21-




---



##### Table of Contents



We currently rely on third-party manufacturers and other third parties for production of our
product candidates, and our dependence on these manufacturers may impair the development of our
product candidates. Currently, we do not have the ability internally to manufacture the product candidates that we
need to conduct our clinical trials. We have entered into purchase orders with third-party
manufacturers to produce our supplies of Progenta and Androxal; however, we have no long-term
contracts with suppliers of either product candidate. To date, other than some initial amounts from
the NIH, we have obtained all of our supply of Progenta for our clinical trials from Bridge
Organics pursuant to purchase orders on an as needed basis. We are in the process of identifying a manufacturer for a long-term supply contract of the
product candidate. There are several potential manufacturers capable of manufacturing Progenta.
There can be no assurance that we will be able to successfully negotiate a long-term agreement with
any of such potential manufacturers at a reasonable price and on other acceptable terms or that any
potential manufacturer will be able to reproduce the results obtained by Bridge Organics in
manufacturing Progenta to date. We have obtained all of our supply of Androxal to date from
BioVectra. We have not faced any material problems with BioVectra in supplying us with our
necessary quantities of Androxal for our clinical trials and anticipate utilizing them for
commercial production if Androxal is approved. There are numerous other suitable manufacturers
capable of manufacturing Androxal. For the foreseeable future, we expect to continue to rely on third-party manufacturers and
other third parties to produce, package and store sufficient quantities of Progenta, Androxal and
any future product candidates for use in our clinical trials. These product candidates are
complicated and expensive to manufacture. If our third-party manufacturers fail to deliver our
product candidates for clinical use on a timely basis, with sufficient quality, and at commercially
reasonable prices, we may be required to delay or suspend clinical trials or otherwise discontinue
development and production of our product candidates. While we may be able to identify replacement
third-party manufacturers or develop our own manufacturing capabilities for these product
candidates, this process would likely cause a delay in the availability of our product candidates
and an increase in costs. We may also be required to enter into long-term manufacturing agreements
that contain exclusivity provisions and/or substantial termination penalties. In addition,
third-party manufacturers may have a limited number of facilities in which our product candidates
can be produced, and any interruption of the operation of those facilities due to events such as
equipment malfunction or failure or damage to the facility by natural disasters could result in the
cancellation of shipments, loss of product in the manufacturing process or a shortfall in available
product candidates. We also depend on outside vendors for the supply of the active pharmaceutical ingredients and
raw materials used to produce our product candidates. Although we believe there are numerous
third-party suppliers available, if our current third-party suppliers were to cease production or
otherwise fail to supply us with quality raw materials and we were unable to contract on acceptable
terms for these raw materials with alternative suppliers, our ability to have our product
candidates manufactured and to conduct preclinical testing and clinical trials of our product
candidates would be adversely affected. Our product candidates have only been manufactured in small quantities to date, and we may face
delays or complications in manufacturing quantities of our product candidates in sufficient
quantities to meet the demands of late stage clinical trials and marketing. We cannot assure that we will be able to successfully increase the manufacturing capacity or
scale-up manufacturing volume per batch, whether on our own or in reliance on third-party
manufacturers, for any of our product candidates in a timely or economical manner, or at all. To
date our product candidates have been manufactured exclusively by third parties in small quantities
for pre-clinical and clinical trials. We will need to arrange for the production of significantly
larger quantities of our product candidates for future clinical trials and for future commercial
sale in the event that our product candidates are approved by the FDA or foreign regulatory bodies.
Significant scale-up of manufacturing may require certain additional validation studies, which the
FDA must review and approve. If we or our third-party manufacturers are unable to successfully
increase the manufacturing capacity for a product candidate, the regulatory approval or commercial
launch of that product candidate may be delayed or there may be a shortage in supply of that
product candidate. -22-




---



##### Table of Contents



Our product candidates require precise, high-quality manufacturing which may not be available at
acceptable costs. Progenta and Androxal are novel compounds that have never been produced in large scale. As in
the development of any new compound, there are underlying risks associated with its manufacture.
These risks include, but are not limited to, cost, process scale-up, process reproducibility,
construction of a suitable process plant, timely availability of raw materials, as well as
regulatory issues associated with the manufacture of an active pharmaceutical agent. Any of these
risks may prevent us from successfully developing Progenta or Androxal. Our failure, or the failure
of our third-party manufacturers to achieve and maintain these high manufacturing standards,
including the incidence of manufacturing errors and reliable product packaging for diverse
environmental conditions, could result in patient injury or death, product recalls or withdrawals,
delays or failures in product testing or delivery, cost overruns or other problems that could
seriously hurt our business. We may experience delays in the development of our product candidates if the third-party
manufacturers of our product candidates cannot meet FDA requirements relating to Good Manufacturing
Practices. Our third-party manufacturers are required to produce our product candidates under FDA current
Good Manufacturing Practices in order to meet acceptable standards for our clinical trials. If such
standards change, the ability of third-party manufacturers to produce our product candidates on the
schedule we require for our clinical trials may be affected. In addition, third-party manufacturers
may not perform their obligations under their agreements with us or may discontinue their business
before the time required by us to gain approval for or commercialize our product candidates. Any
difficulties or delays in the manufacturing and supply of our product candidates could increase our
costs or cause us to lose revenue or postpone or cancel clinical trials. The FDA also requires that we demonstrate structural and functional comparability between the
same drug product produced by different third-party manufacturers. Because we may use multiple
sources to manufacture Progenta and Androxal, we may need to conduct comparability studies to
assess whether manufacturing changes have affected the product safety, identity, purity or potency
of any commercial product candidate compared to the product candidate used in clinical trials. If
we are unable to demonstrate comparability, the FDA could require us to conduct additional clinical
trials, which would be expensive and significantly delay commercialization of our product
candidates. We rely on third parties to conduct clinical trials for our product candidates, and their failure
to timely and properly perform their obligations may result in costs and delays that prevent us
from obtaining regulatory approval or successfully commercializing our product candidates. We rely on independent contractors, including researchers at clinical research organizations
and universities, in certain areas that are particularly relevant to our research and product
development plans, such as the conduct of clinical trials. Pharm-Olam International Ltd. conducted
our clinical trial in Poland for Progenta for the treatment of uterine fibroids and Advanced
Biomedical Research, Inc. conducted our clinical trial in the United States for Androxal for the
treatment of testosterone deficiency. The competition for these relationships is intense, and we
may not be able to maintain our relationships with them on acceptable terms. These independent
contractors generally may terminate their engagements with us at any time. As a result, we can
control their activities only within certain limits, and they will devote only a certain amount of
their time conducting research on and trials of our product candidates and assisting in developing
them. If they do not successfully carry out their duties under their agreements with us, fail to
inform us if these trials fail to comply with clinical trial protocols, or fail to meet expected
deadlines, our clinical trials may need to be extended, delayed or terminated. We may not be able
to enter into replacement arrangements without undue delays or excessive expenditures. If there are
delays in testing or regulatory approvals as a result of the failure to perform by our independent
contractors or other outside parties, our drug development costs will increase and we may not be
able to attain regulatory approval for or successfully commercialize our product candidates. Our liability insurance may not provide adequate coverage nor may it always be available on
favorable terms or at all. Neither Progenta nor Androxal has been approved for commercial sale. However, the current and
future use of our product candidates by us and potential corporate collaborators in clinical
trials, and the sale of any approved -23-




---



##### Table of Contents



products in the future, may expose us to liability claims. These claims might be made
directly by consumers or healthcare providers or indirectly by pharmaceutical companies, potential
corporate collaborators or others selling such products. We may experience financial losses in the
future due to product liability claims. We have obtained limited general commercial liability
insurance coverage for our clinical trials. We intend to expand our insurance coverage to include
the sale of commercial products if we obtain marketing approval for any of our product candidates.
However, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient
amounts to protect us against losses. If a successful product liability claim or series of claims
is brought against us for uninsured liabilities or for liabilities in excess of our insurance
limits, our assets may not be sufficient to cover such claims and our business operations could be
impaired. We face significant competition with many companies with substantially greater resources than we
have and other possible advantages. We are engaged in biopharmaceutical product development, an industry that is characterized by
extensive research efforts and rapid technological progress. The biopharmaceutical industry is also
highly competitive. Our success will depend on our ability to acquire, develop and commercialize
products and our ability to establish and maintain markets for Androxal and Progenta or any
products for which we receive marketing approval. Potential competitors in North America, Europe
and elsewhere include major pharmaceutical companies, specialty pharmaceutical companies and
biotechnology firms, universities and other research institutions and government agencies. Many of
our competitors have substantially greater research and development and regulatory capabilities and
experience, and substantially greater management, manufacturing, distribution, marketing and
financial resources, than we do. Accordingly, our competitors may:  
    develop or license products or other novel technologies that are more effective,
safer or less costly than the product candidates that we are developing;
    obtain regulatory approval for products before we do; or
    commit more resources than we can to developing, marketing and selling competing products. The main therapeutic products competitive with Progenta for the treatment of uterine fibroids
and endometriosis are GnRH agonists, especially Lupron, which is marketed by TAP Pharmaceuticals.
There are additional companies developing similar progesterone-blocking technology. Asoprisnil, an
anti-progestin being developed by TAP Pharmaceuticals in partnership with Schering AG, is currently
in Phase III clinical trials. TAP Pharmaceuticals is a much larger company than we are with greater
resources and greater ability to promote their products than we currently have. In addition,
surgical treatment of both uterine fibroids and endometriosis competes with Progenta by removing
uterine fibroids and by removing misplaced tissue in women with endometriosis. Our main competitors for the treatment of testosterone deficiency are the testosterone
replacement therapies currently being marketed. The current standard of care is Androgel, a topical
gel for the replacement of testosterone developed by Solvay Pharmaceuticals. Solvay is a much
larger company than we are with greater resources and marketing ability. Androxal would also
compete with other forms of testosterone replacement therapies such as oral treatments, patches,
injectables and a tablet applied to the upper gum. There is another topical gel currently marketed
by Auxilium Pharmaceuticals called Testim, and a transdermal patch marketed by Watson
Pharmaceuticals called AndroDerm. There can be no assurance that our product candidates will be
more successful than competitive products. In addition, other potential competitors may be
developing testosterone therapies similar to ours. We are thinly staffed and highly dependent on a limited number of management persons and key
personnel, and if we lose these members of our team or are unable to attract and retain additional
qualified personnel, our future growth and ability to compete would suffer. The competition for qualified personnel in the biopharmaceutical field is intense, and our
future success depends upon our ability to attract, retain and motivate highly skilled scientific,
technical and managerial employees. We have only five full-time employees at the present time,
including our President and CEO, Joseph S. -24-




---



##### Table of Contents



Podolski, and our Vice President, Business Development and CFO, Louis Ploth, Jr. We are highly
dependent on Messrs. Podolski and Ploth for the management of our company and the development of
our technologies. Both Messrs. Podolski and Ploth have employment agreements with us. There can be
no assurance that either or both of Messrs. Podolski and Ploth will remain with us through
development of our current product candidates. We do not maintain key person life insurance on any
of our directors, officers or employees. The loss of the services of Mr. Podolski or Mr. Ploth
could delay or curtail our research and product development efforts. Additionally, in order to commercialize our products successfully, we will be required to
expand our workforce, particularly in the areas of clinical trials management, regulatory affairs,
business development, sales and marketing and administrative and accounting functions. These
activities will require the addition of new personnel and the development of additional expertise
by management. We face intense competition for qualified individuals from numerous
biopharmaceutical companies, as well as academic and other research institutions. Our intention is
to hire three to seven employees over the next two years. To the extent we are not able to attract
and retain employees on favorable terms, we may face delays in the development or commercialization
of our product candidates and extensive costs in retaining current employees or searching for and
training new employees. Our plan to use collaborations to leverage our capabilities may not be successful. As part of our business strategy, we intend to enter into collaboration arrangements with
strategic partners to develop and commercialize our product candidates. For our collaboration
efforts to be successful, we must identify partners whose competencies complement ours. We must
also successfully enter into collaboration agreements with them on terms attractive to us and
integrate and coordinate their resources and capabilities with our own. We may be unsuccessful in
entering into collaboration agreements with acceptable partners or negotiating favorable terms in
these agreements. In addition, we may face a disadvantage in seeking to enter into or negotiating
collaborations with potential partners because other potential collaborators may have greater
management and financial resources than we do. Also, we may be unsuccessful in integrating the
resources or capabilities of these collaborators. In addition, our collaborators may prove
difficult to work with or less skilled than we originally expected. If we are unsuccessful in our
collaborative efforts, our ability to develop and market product candidates could be severely
limited. Healthcare reform measures could adversely affect our business. The business and financial condition of pharmaceutical companies are affected by the efforts
of governmental and third-party payers to contain or reduce the costs of healthcare. In the United
States and in foreign jurisdictions there have been, and we expect that there will continue to be,
a number of legislative and regulatory proposals aimed at changing the healthcare system. For
example, in some countries other than the United States, pricing of prescription drugs is subject
to government control, and we expect proposals to implement similar controls in the United States
to continue. The pendency or approval of such proposals could result in a decrease in our stock
price or limit our ability to raise capital or to obtain strategic collaborations or licenses. We face high volatility in our stock price. We are a development stage company and the market prices for securities of development
companies in the biotechnology sector have been highly volatile and may continue to be very
volatile in the future. The following listed factors as well as other factors may have a significant impact on the
price of our common stock:  
    announcements of technology innovations and new products developed by other competitors;
    developments relating to proprietary rights and patents;
    publicity relating to actual or potential medical results relating to products under
development or being commercialized by our other competitors; -25-




---



##### Table of Contents




    regulatory developments concerning our products in the United States and foreign
countries;
    issues concerning the safety of our products in development or similar products
being developed by our competitors; and
    economic and other external factors or a disaster or crisis. 
 ITEM 2. PROPERTIES The Company executed a new 74 month lease effective May 1, 2004, for 4,800 square feet of
laboratory and office space located in its current building in The Woodlands, Texas. This space
replaces its prior 2,518 square foot facility which was under a lease that expired on June 30,
2004. 
 ITEM 3. LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Companys security holders in the fourth quarter of
2004. -26-




---



##### Table of Contents



PART II 
  ITEM 5.
    MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES The Companys common stock is quoted on The Nasdaq SmallCap Market and the Pacific Exchange
under the symbol ZONA. The following table shows the high and low sale prices per share of common
stock, as reported by The Nasdaq National Market through July 7, 2004 and thereafter by the Nasdaq
SmallCap Market, during the periods presented. Price RangeHigh
    
    
    Low2003First Quarter
    
    $
    1.20
    
    
    $
    0.87Second Quarter
    
    
    1.73
    
    
    
    1.15Third Quarter
    
    
    1.97
    
    
    
    1.28Fourth Quarter
    
    
    1.91
    
    
    
    1.502004First Quarter
    
    $
    4.35
    
    
    $
    1.83Second Quarter
    
    
    5.40
    
    
    
    2.44Third Quarter
    
    
    5.95
    
    
    
    2.76Fourth Quarter
    
    
    4.50
    
    
    
    3.07
 All of the foregoing prices reflect interdealer quotations, without retail mark-up, markdowns
or commissions and may not necessarily represent actual transactions in the common stock. On March 16, 2005, the last sale price of the common stock,
as reported by the Nasdaq SmallCap Market, was $3.00 per share. On March 16, 2005, there were approximately 202 holders of record and
approximately 3,600 beneficial holders of the Companys common stock. Dividends The Company has never paid dividends on the common stock. The Company currently intends to
retain earnings, if any, to support the development of the Companys business and does not
anticipate paying dividends in the foreseeable future. Payment of future dividends, if any, will be
at the discretion of the Companys Board of Directors after taking into account various factors,
including the Companys financial condition, operating results, current and anticipated cash needs
and plans for expansion. On September 1, 1999, the Board of Directors of the Company adopted a stockholder rights plan,
which has been subsequently amended on September 6 and October 30, 2002 (as amended, the Rights
Plan) pursuant to which a dividend consisting of one preferred stock purchase right (a Right)
was distributed for each share of common stock held as of the close of business on September 13,
1999, and is to be distributed to each share of common stock issued thereafter until the earlier of
(i) the Distribution Date (as defined in the Rights Plan), (ii) the Redemption Date (as defined in
the Rights Plan) or (iii) September 13, 2005. The Rights Plan is designed to deter coercive
takeover tactics and to prevent an acquirer from gaining control of the Company without offering
fair value to the Companys stockholders. The Rights will expire on September 13, 2005, subject to
earlier redemption or exchange as provided in the Rights Plan. Each Right entitles the holder
thereof to purchase from the Company one one-hundredth of a share of a new series of Series One
Junior Participating Preferred Stock of the Company at a price of $20.00 per one one-hundredth of a
share, subject to adjustment. The Rights are generally exercisable only if a Person (as defined)
acquires beneficial ownership of 20 percent or more of the Companys outstanding common stock. A complete description of the Rights, the Rights Agreement between the Company and
Computershare Investor Services, LLC, (as successor in interest to Harris Trust and Savings Bank),
as Rights Agent, and the Series One Junior Participating Preferred Stock is hereby incorporated by
reference from the information appearing under the caption Item 1. Description of the Registrants
Securities to be Registered contained in the Registration Statement -27-




---



##### Table of Contents



on Form 8-A filed on September 3, 1999, and as amended by amendments to such Registration
Statement on Form 8-A/A filed on September 11 and October 31, 2002. 
 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The statement of operations data for the years ended December 31, 2004, 2003 and 2002, and the
balance sheet data as of December 31, 2004 and 2003, have been derived from our audited financial
statements included elsewhere in this annual report on Form 10-K that have been audited by
PricewaterhouseCoopers LLP, our independent registered public accounting firm. The statements of
operations data for the years ended December 31, 2001 and 2000, and the balance sheet data as of
December 31, 2002, 2001 and 2000 have been derived from our audited financial statements not
included in this annual report on Form 10-K. Our historical results are not necessarily indicative
of results to be expected for any future period. The data presented below have been derived from
financial statements that have been prepared in accordance with accounting principles generally
accepted in the United States and should be read with our financial statements, including notes,
and with Managements Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this annual report on Form 10-K. STATEMENTS OF OPERATIONS DATA: Year Ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(In thousands except per share amounts)Revenues and Other Income:Licensing fees
    
    $
    2,115
    
    
    $
    2,162
    
    
    $
    4,228
    
    
    $
    
    
    
    $
    Product royalties
    
    
    164
    
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    Research and development grants
    
    
    72
    
    
    
    115
    
    
    
    315
    
    
    
    595
    
    
    
    118Interest income
    
    
    2,239
    
    
    
    1,526
    
    
    
    711
    
    
    
    318
    
    
    
    104Gain on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35Total revenues
    
    
    4,590
    
    
    
    3,861
    
    
    
    5,254
    
    
    
    1,015
    
    
    
    257Expenses:Research and development
    
    
    4,495
    
    
    
    3,028
    
    
    
    6,420
    
    
    
    2,161
    
    
    
    2,471General and administrative
    
    
    2,796
    
    
    
    1,672
    
    
    
    2,716
    
    
    
    2,183
    
    
    
    1,483Total expenses
    
    
    7,291
    
    
    
    4,700
    
    
    
    9,136
    
    
    
    4,344
    
    
    
    3,954Net loss before cumulative effect of change in accounting principle
    
    
    (2,701
    )
    
    
    (839
    )
    
    
    (3,882
    )
    
    
    (3,329
    )
    
    
    (3,697
    )Cumulative effect of change in accounting principle
    
    
    (8,454
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (11,155
    )
    
    $
    (839
    )
    
    $
    (3,882
    )
    
    $
    (3,329
    )
    
    $
    (3,697
    )Loss per share  basic and diluted:Net loss before cumulative effect of change in accounting principle
    
    $
    (0.24
    )
    
    $
    (0.07
    )
    
    $
    (0.34
    )
    
    $
    (0.29
    )
    
    $
    (0.72
    )Cumulative effect of change in accounting principle
    
    
    (0.75
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss per share(1)
    
    $
    (0.99
    )
    
    $
    (0.07
    )
    
    $
    (0.34
    )
    
    $
    (0.29
    )
    
    $
    (0.72
    )Shares used in loss per share calculation
    
    
    11,303
    
    
    
    11,333
    
    
    
    11,412
    
    
    
    11,487
    
    
    
    5,117BALANCE SHEET DATA:Cash, cash equivalents and marketable securities
    
    $
    32,951
    
    
    $
    30,056
    
    
    $
    25,138
    
    
    $
    22,946
    
    
    $
    5,536Total assets
    
    
    40,374
    
    
    
    36,914
    
    
    
    27,370
    
    
    
    24,028
    
    
    
    6,606Deficit accumulated during the development stage
    
    
    (75,007
    )
    
    
    (75,846
    )
    
    
    (79,728
    )
    
    
    (83,057
    )
    
    
    (86,754
    )Total stockholders equity
    
    
    31,060
    
    
    
    30,569
    
    
    
    26,851
    
    
    
    23,487
    
    
    
    5,992
   (1)
    
    See Note 2. Summary of Significant Accounting Policies of Notes to Consolidated Financial
Statements for a description of the computation of loss per share. -28-




---



##### Table of Contents



ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following managements discussion and analysis should be read in conjunction with our
historical consolidated financial statements and their notes included elsewhere in thisForm 10-K.
This discussion contains forward-looking statements that reflect our current views with respect to
future events and financial performance. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors, such as those set
forth under Risk Factors and elsewhere in thisForm 10-K. Overview Zonagen, Inc. (the Company, Zonagen, or we, us or our) was organized on August 28, 1987
and is a development stage company. We are a biopharmaceutical company focused on the development
of new drugs to treat hormonal and reproductive system disorders. Our lead product candidate,
Progenta, is an orally available small molecule compound that we are developing for the treatment
of uterine fibroids and endometriosis. We recently completed a Phase Ib clinical trial for Progenta
in Poland for the treatment of uterine fibroids. We intend to begin a Phase II clinical trial for
Progenta in the United States for the treatment of uterine fibroids during 2005, subject to review
of our Phase Ib data by the U.S. Food and Drug Administration, or FDA. The FDA has agreed to meet
with us on May 25, 2005 for the purpose of reviewing Zonagens pre-IND proposal. We also
plan to conduct a Phase II clinical trial in Poland for Progenta for the treatment of endometriosis
in 2005. Our second product candidate is Androxal, an orally available small molecule compound
being developed for the treatment of testosterone deficiency in men. We recently completed a Phase
I/ II clinical trial in the United States for Androxal for the treatment of men with testosterone
deficiency and submitted final data to the FDA. We met with FDA staff members on November 10, 2004
to review our clinical plan for the approval of Androxal. The FDA has agreed to review our
protocols for our trials in a timely fashion under a special protocol assessment, or SPA. The FDA
deems Androxal to be a new chemical entity, and additional lengthy animal studies will be required
before long term human studies may be initiated and an NDA may be filed. We have five full-time employees who utilize the services of contract research organizations,
contract manufacturers and various consultants to assist us in performing regulatory services for
the clinical development of our products. We are completely dependent on our various contract
groups to adequately perform the activities required to obtain regulatory approval of our products. On
February 1, 2005, we completed our follow-on public offering of 5,060,000 shares of
our common stock at $4.00 per share (which included the
underwriters exercise of its over
allotment option for 660,000 shares). The shares offered by us were issued out of our
existing treasury stock, and the offering resulted in net proceeds to
us of approximately
$18.1 million. The clinical development of pharmaceutical products is a complex undertaking, and many
products that begin the clinical development process do not obtain regulatory approval. The costs
associated with our clinical trials may be impacted by a number of internal and external factors,
including the number and complexity of clinical trials necessary to obtain regulatory approval, the
number of eligible patients necessary to complete our clinical trials and any difficulty in
enrolling these patients, and the length of time to complete our clinical trials. Given the
uncertainty of these potential costs, we are unable to estimate the total costs we will incur for
the clinical development of our product candidates. We do, however, expect these costs to increase
substantially in future periods as we continue later-stage clinical trials, initiate new clinical
trials for additional indications and seek to obtain regulatory approvals. Any failure by us to
obtain, or any delay in obtaining, regulatory approvals could cause our research and development
expenditures to increase and, in turn, have a material adverse effect on our results of operations. We have not generated any revenue from commercial sale of our current product candidates,
Progenta and Androxal. We will not receive any revenue from commercial sales unless we complete the
clinical trial process, obtain regulatory approval, and successfully commercialize one or more of
our product candidates. If we were to obtain regulatory approval of Progenta, we will need to
develop a long-term, commercially viable source of bulk Progenta to successfully commercialize the
product candidate. We cannot be certain when or if any net cash inflow from any of our current
product candidates will commence. -29-




---



##### Table of Contents



We have experienced negative cash flows from operations since inception and have funded our
activities to date primarily from equity financings and corporate collaborations. On February 1,
2005 the Company completed both a follow-on public offering of 4,400,000 shares of its common stock
at $4.00 per share and the exercise of the over allotment provision of 660,000 for a total
aggregate sale of 5,060,000 shares of common stock. All of the shares were offered by the Company
which resulted in net proceeds to the Company of approximately $18.1 million. We believe that our
existing capital resources under our current operating plan will be sufficient to fund our
operations through the first quarter 2006. There can be no assurance that changes in our current strategic plans
or other events will not result in accelerated or unexpected expenditures. We will need to raise additional capital through the sale of equity securities and/or through
partnerships to continue the clinical development of our products. If we are not able to raise
capital through the sale of equity securities, or cannot locate an alternative source of financing,
the outcome would have a material adverse effect on us and the clinical development timeline of our
product candidates. If we are not able to raise adequate capital for our clinical development
plans, then we will have to adjust our plans, which will delay the approval process of our product
candidates. Our results of operations may vary significantly from year to year and quarter to quarter, and
depend, among other factors, on our ability to be successful in our clinical trials, the regulatory
approval process in the United States and other foreign jurisdictions and the ability to complete
new licenses and product development agreements. The timing of our revenues may not match the
timing of our associated product development expenses. To date, research and development expenses
have generally exceeded revenue in any particular period and/or fiscal year. As of December 31, 2004, we had an accumulated deficit of $86.8 million. Due to various tax
regulations, including change in control provisions in the tax code, the value of our tax assets to
us can be substantially diminished. For additional information relating to our net operating loss
carryforward, see Note 6. Federal Income Taxes of the Notes to Consolidated Financial Statements.
Losses have resulted principally from costs incurred in conducting clinical trials for VASOMAX, in
research and development activities related to efforts to develop our products and from the
associated administrative costs required to support those efforts. We do not intend to commit any
additional resources toward the development of these products. There can be no assurance that we
will be able to successfully complete the transition from a development stage company to the
successful introduction of commercially viable products. Our ability to achieve profitability will
depend, among other things, on successfully completing the clinical development of our products in
a reasonable time frame and at a reasonable cost, obtaining regulatory approvals, establishing
marketing, sales and manufacturing capabilities or collaborative arrangements with others that
possess such capabilities, our and our partners ability to realize value from our research and
development programs through the commercialization of those products and raising sufficient funds
to finance its activities. There can be no assurance that we will be able to achieve profitability
or that profitability, if achieved, can be sustained. See Item 1. Business  Risk Factors and
Note 1. Organization and Operations of Notes to Consolidated Financial Statements. Historical Background Prior to 2004, we focused most of our resources on the development of VASOMAX and related
phentolamine-based products for the treatment of male erectile dysfunction. Beginning in 1999, the
FDA placed our phentolamine-based products on clinical hold, which was subsequently lifted to a
partial clinical hold the following year. As a result of the setbacks associated with this FDA
hold, as well as other setbacks with the European regulatory agency in connection with
phentolamine, we undertook two separate efforts in 2000 and 2002 to identify strategic
alternatives. These efforts culminated in the signing of a definitive merger agreement in October
2002 with a potential strategic partner, which was subsequently terminated in March 2003 for
regulatory and other reasons. During the remainder of 2003, the board continued to review all of
the options available to us. As a result of the numerous board discussions during 2003, our board of directors approved a
modified Dutch auction self tender offer to purchase up to 8,571,428 shares of our then-outstanding
common stock at a purchase price not greater than $2.10 nor less than $1.83 per share. In January
2004, we accepted for purchase 6,547,635 shares (approximately 57% of our outstanding
common stock, at that time) at a purchase price of $2.10 per share in accordance with the terms of
our self tender offer, which included 60,888 shares issuable upon exercise of options tendered by
directors, for a total aggregate cost of approximately $14.0 million, inclusive of costs associated
with the offer. Four of the five members of our board of directors at that time tendered all of
their shares -30-




---



##### Table of Contents



and in-the-money options (except in-the-money options exercisable for 5,000 shares held by one
director) in the tender offer. Joseph S. Podolski, our President and CEO, did not tender any of
his shares or options. These four board members did not stand for re-election at our 2003 annual
meeting of stockholders, which was held on January 14, 2004. At that meeting, four new directors
were elected. We will continue our efforts to sell or out-license our phentolamine-based product candidates,
including VASOMAX. We will no longer maintain our current patent portfolio for any of our
immunotherapies, including our hCG and zona pellucida immuno-contraceptive vaccines and associated
vaccine adjuvants. There can be no assurance that we will be able to create any value from
out-licensing activities of our prior development programs. Critical Accounting Policies and the Use of Estimates The preparation of our financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in our financial statements and accompanying notes. Please see Note 2, Summary of
Significant Accounting Policies, for a discussion of our critical accounting policies. Actual
results could differ materially from those estimates. The items in our financial statements
requiring significant estimates and judgments are as follows:  
    The Company maintains an inventory of bulk phentolamine which is the active ingredient
in VASOMAX, the Companys oral treatment for male erectile dysfunction, or MED. Due to the
termination of the Schering-Plough Agreements in July 2002, the future uncertainty
surrounding the VASOMAX product and the fact that the Company is not presently committing
resources toward the approval of VASOMAX, the Company recorded a reserve for both its bulk
phentolamine inventory previously valued at $4.4 million and its patent estate valued at
approximately $1.0 million in the quarter ended June 30, 2002.
    During 2000, the Company adopted U.S. Securities and Exchange Commission Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101)
which requires up-front, non-refundable license fees to be deferred and recognized over the
performance period. In situations where the Company receives payment in advance of the
performance of services, such amounts are deferred and recognized as revenue as the related
services are performed. The Company recognizes revenue from non-refundable, up-front
license and milestone payments, not specifically tied to a separate earnings process,
ratably over the performance period of the agreement. When payments are specifically tied
to a separate earnings process, revenue is recognized when earned. Prior to January 1,
2000, the Company had recognized revenue from non-refundable fees when the Company had no
obligation to refund the fees under any circumstances, and there were no additional
contractual services to be provided or costs to be incurred by the Company in connection
with the non-refundable fees. The cumulative effect of adopting SAB 101 at January 1, 2000
resulted in a one-time, non-cash charge of $8.5 million, with a corresponding increase to
deferred revenue that was recognized in subsequent periods. The $8.5 million represents
portions of 1997 and 1998 payments received from Schering-Plough in consideration for the
exclusive license of the Companys VASOMAX product for the treatment of MED. For the years
ended December 31, 2004 and 2003, the Company did not recognize any licensing fees revenue
that was included in the cumulative effect adjustment as of January 1, 2000. Due to the
mutual termination of the Companys agreements with Schering-Plough in July 2002, the
Company recognized the remaining $3.2 million of deferred revenue in the quarter ended
September 30, 2002.
    The Company has had losses since inception and, therefore, has not been subject to
federal income taxes. The Company has accumulated approximately $2.9 million of research
and development tax credits. As of December 31, 2004 and 2003, the Company had
approximately $78.5 million and $75.6 million, respectively, of net operating loss (NOL)
carry-forwards for federal income tax purposes. Additionally, approximately $1.3 million of
NOLs, and approximately $52,000 of research and development tax credits, will expire in
2005. Under SFAS No. 109, Accounting for Income Taxes, an NOL requires the recognition of
a deferred tax asset. As the Company has incurred losses since inception, and there is no
certainty of future revenues, the Companys deferred tax assets have been reserved in full
in the accompanying consolidated financial statements. -31-




---



##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No.
123(R) will require that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. SFAS No. 123(R) replaces FASB
Statement No. 123, Accounting for Stock-Based Compensation , and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS No. 123, as originally issued in 1995, established
as preferable a fair value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing to apply the
guidance in APB Opinion No. 25, as long as the footnotes to financial statements disclosed what net
income would have been had the preferable fair value-based method been used. Public entities will
be required to apply SFAS No. 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. We are in the process of evaluating the impact the adoption of SFAS No. 123(R)
will have on our consolidated financial position, results of operations and cash flows. Results of Operations Comparison of Years Ended December 31, 2004 and 2003 Revenues. Total revenues for 2004 were $257,000 as compared to $1.0 million for 2003.
Research and development grants for 2004 were $118,000 as compared to $595,000 for 2003 relating to
the Companys Small Business Innovative Research, or SBIR grants. Interest income decreased 67% to $104,000 for 2004 as compared with $318,000 for 2003
primarily due to lower cash balances due to the Companys completion of its self tender offer in
January 2004. The Company sold substantially all of its fixed assets for approximate net proceeds of
$225,000 and recognized a gain of $102,000 over their book value for the year ended 2003. Other income totaled $35,000 for 2004 as compared zero for 2003. The increase in other income
was from the sale of some of the Companys preclinical phentolamine data that is to be used for a
purpose that does not compete with the Companys sexual dysfunction technologies. Research and Development Expenses. Research and development (R&D) expenses include
contracted research, regulatory affairs activities and general research and development expenses.
Following the April 2002 withdrawal of the Companys regulatory application for VASOMAX®in the United Kingdom by Schering-Plough, the Company continued scaling back non-SBIR grant
R&D spending activities through October 2003 to maintain its cash reserves for future redeployment.
R&D expenses increased 14% to $2.5 million in 2004, as compared with $2.2 million in 2003. The
increase in 2004 is primarily due to an increase of $1.0 million related to the Companys clinical
development program for Progenta, an impairment charge against the Companys patent portfolio
related to its vaccine adjuvants, prostate cancer vaccines and hCG immuno-contraceptive vaccine in
the amount of $308,000 which was offset by a corresponding decrease of $468,000 of costs associated
with the Companys SBIR grant funded R&D, a decrease of $320,000 in costs associated with Androxal
clinical development, a decrease of $122,000 which occurred in 2003 relating to prior employees
severance compensation and a decrease of $92,000 in facilities rent costs due to a decrease in
facility size in 2004. General and Administrative Expenses. General and administrative (G&A) expenses decreased 32%
to $1.5 million in 2004 as compared with $2.2 million in 2003. The decrease in expenses is
primarily due to a decrease in the Companys directors and officers insurance premium of $473,000
related to the Companys self tender offer which was completed in January 2004, costs associated
with potential strategic alternative opportunities of $388,000 and a reduction in professional
services due to a $200,000 reimbursement of the deductible from the Companys directors &
officers insurance policy relating to the Companys previous class action lawsuit which was
received in the quarter ended December 31, 2004, partially offset by an increase in non cash stock
option compensation expenses. -32-




---



##### Table of Contents



Comparison of Years Ended December 31, 2003 and 2002 Revenues. Total revenues for 2003 were $1.0 million as compared to $5.3 million for 2002.
Licensing fees for 2003 were zero as compared to $4.2 million in 2002. Due to the termination of
the Companys agreements with Schering-Plough in July 2002, the Company recognized the remaining
$3.2 million of deferred revenue in the quarter ended September 30, 2002. Research and development
grants for 2003 were $595,000 as compared to $315,000 for 2002 relating to the Companys SBIR
grants. The Company did not receive any milestone payments from Schering-Plough in 2002 for
VASOMAXunder the agreements that were mutually terminated in July 2002. Product
royalties from sales of VASOMAXin Latin America were zero for the year ended December
31, 2002. Due to the termination of the Companys agreements with Schering-Plough, the Company does
not expect to receive any royalties in the foreseeable future. Interest income decreased 55% to $318,000 in 2003 as compared with $711,000 in 2002 primarily
due to a reduction in interest rates and lower cash balances. The Company sold substantially all of its fixed assets for approximate net proceeds of
$225,000 and recognized a gain of $102,000 over their book value. These proceeds were collected in
July 2003. Research and Development Expenses. R&D expenses include contracted research, regulatory
affairs activities and general research and development expenses. Following the April 2002
withdrawal of the Companys regulatory application for VASOMAXin the United Kingdom by
Schering-Plough, the Company continued scaling back R&D spending activities to maintain its cash
reserves for potential future redeployment. R&D expenses decreased 66% to $2.2 million in 2003, as
compared with $6.4 million in 2002, which included net non-cash expenses of $4.1 million related to
the Companys VASOMAX product. Due to the termination of the Companys agreements with
Schering-Plough in July 2002, the future uncertainty surrounding the VASOMAX product and the fact
that the Company was not presently committing resources toward the approval of VASOMAX, the Company
wrote-off non-cash expenses for its bulk phentolamine inventory previously valued at $4.4 million
and its VASOMAX patent estate previously valued at approximately $1.0 million in the quarter ended
June 30, 2002, and in July 2002, a liability due to Schering-Plough of $1.3 million relating to a
prior joint clinical development program for VASOMAXwas forgiven and taken as a
reduction to R&D expenses. In addition, R&D expenses in the quarter ended June 30, 2002 were
reduced by $188,000 due to a reimbursement of prior clinical expenses for VASOMAX®that
was received from a clinical research organization after a reconciliation was completed comparing
actual expenses to payments made by the Company. R&D expenses excluding the four adjustments listed
above would have been $2.5 million for the year ended December 31, 2002. General and Administrative Expenses. G&A expenses decreased 20% to $2.2 million in 2003 as
compared with $2.7 million in 2002. The decrease in expenses is primarily due to the decrease in
costs associated with potential strategic alternative opportunities, professional services and
non-cash compensation expenses offset by an increase in insurance expense. Liquidity and Capital Resources Since its inception, the Company has financed its operations primarily with proceeds from
private placements and public offerings of equity securities and with funds received under
collaborative agreements. On February 1, 2005 the Company completed a public offering of 5,060,000
shares (including the underwriters over-alottment option) and received net proceeds of
approximately $18.1 million. The Companys primary use of cash to date has been in operating
activities to fund research and development, including preclinical studies and clinical trials, and
general and administrative expenses. The Company had cash, cash equivalents and marketable
securities of approximately $5.5 million at December 31, 2004 as compared to $22.9 million at
December 31, 2003. The decrease in cash balances from December 31, 2004 as compared to the same
period in the prior year is primarily due to the completion of the Companys self tender offer in
January 2004 in which the Company purchased 6,547,635 shares at an aggregate cost of approximately
$14 million. Excluding maturities and purchases of marketable securities, net cash of approximately
$3.0 million, $3.0 million, and $3.6 million was used in operating activities during 2004, 2003,
and 2002, respectively. Although the use of cash for the years ended December 31, 2004 and 2003
remained constant, the Company increased its spending by $695,000 for the year ended December 31,
2004 in its clinical development programs as compared to the previous year. This increase was
offset by a decrease in the Companys directors and officers insurance premium, costs associated
with potential strategic alternative opportunities and -33-




---



##### Table of Contents



professional services. In addition, there continued to be a reduction in contracted clinical
costs associated with the development of VASOMAX and the Companys other phentolamine-based
products due to the 1999 U.S. clinical hold placed on those products. The Company spent
approximately $1.4 million in connection with clinical development programs during 2004 as compared
to approximately $727,000 in 2003 and $761,000 in 2002. As of December 31, 2004, in addition to general operating obligations, the Company also had
non-cancelable purchase orders relating to the clinical development of both Progenta and Androxal
in the amounts of $739,700 and $185,300, respectively. As of December 31, 2003, the Company had
non-cancelable purchase orders relating to the clinical development of Androxal in the amount of
$11,600. The Company has had losses since inception and, therefore, has not been subject to federal
income taxes. The Company has accumulated approximately $2.9 million of research and development
tax credits. As of December 31, 2004 and 2003, the Company had approximately $78.5 million and
$75.6 million, respectively, of net operating loss (NOL) carry-forwards for federal income tax
purposes. Additionally, approximately $1.3 million of NOLs, and approximately $52,000 of research
and development tax credits will expire in the year 2005. Due to various tax regulations, including
change in control provisions in the tax code the value of this tax asset to the Company can be
substantially diminished. For additional information relating to the Companys Net Operating Loss
carryforward see Note 6. Federal Income Taxes of the Notes to Consolidated Financial Statements. The Company has experienced negative cash flows from operations since inception and has funded
its activities to date primarily from equity financings and corporate collaborations. The Company
will require substantial funds for research and development, including preclinical studies and
clinical trials of our product candidates, and to commence sales and marketing efforts if
appropriate, if the FDA or other regulatory approvals are obtained. The Company believes that its
existing capital resources under its current operating plan will be sufficient to fund the
Companys operations through the first quarter 2006. There can be no assurance that changes in our current
strategic plans or other events will not result in accelerated or unexpected expenditures. The Companys capital requirements will depend on many factors, including the costs and timing
of seeking regulatory approvals of the Companys products; the problems, delays, expenses and
complications frequently encountered by development stage companies; the progress of the Companys
preclinical and clinical activities; the costs associated with any future collaborative research,
manufacturing, marketing or other funding arrangements; the Companys ability to obtain regulatory
approvals; the success of the Companys potential future sales and marketing programs; the cost of
filing, prosecuting and defending and enforcing any patent claims and other intellectual property
rights; changes in economic, regulatory or competitive conditions of the Companys planned
business; and additional costs associated with being a publicly-traded company. Estimates about the
adequacy of funding for the Companys activities are based on certain assumptions, including the
assumption that the development and regulatory approval of the Companys products can be completed
at projected costs and that product approvals and introductions will be timely and successful.
There can be no assurance that changes in the Companys research and development plans,
acquisitions or other events will not result in accelerated or unexpected expenditures. To satisfy
its capital requirements, the Company may seek to raise additional funds in the public or private
capital markets. The Company may seek additional funding through corporate collaborations and other
financing vehicles. There can be no assurance that any such funding will be available to the
Company on favorable terms or at all. If the Company is successful in obtaining additional
financing, the terms of such financing may have the effect of diluting or adversely affecting the
holdings or the rights of the holders of the Companys common stock. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this item are set forth in Item 15 of this Report. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -34-




---



##### Table of Contents



ITEM 9A. CONTROLS AND PROCEDURES The Companys chief executive officer and chief financial officer have evaluated the Companys
disclosure controls and procedures as of December 31, 2004, the end of the period covered by this
report. Based upon that evaluation, the Companys chief executive officer and chief financial
officer concluded that the Companys disclosure controls and procedures were effective to ensure
that information required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms. There were no changes in the Companys internal control over financial reporting during the
fiscal quarter ending December 31, 2004 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting. 
 ITEM 9B. OTHER INFORMATION Not applicable. -35-




---



##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item as to the directors and executive officers of the
Company, the Section 16(a) reporting compliance information and the information relating to the
Companys Code of Ethics is hereby incorporated by reference from the information appearing under
the captions Election of Directors, Section 16(a) Beneficial Ownership Reporting Compliance and
Board Committees in the Companys proxy statement (the Proxy Statement) for its 2005 annual
meeting of stockholders. Such Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), within
120 days of the end of the Companys fiscal year ended December 31, 2004. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this item as to the management of the Company is hereby
incorporated by reference from the information appearing under the captions Executive
Compensation and Election of DirectorsDirector Compensation in the Companys Proxy Statement.
Such Proxy Statement will be filed with the Securities and Exchange Commission pursuant to the
Exchange Act within 120 days of the end of the Companys fiscal year ended December 31, 2004.
Notwithstanding the foregoing, in accordance with the instructions to Item 402 of Regulation S-K,
the information contained in the Companys proxy statement under the sub-heading Report of the
Compensation Committee of the Board of Directors and Performance Graph shall not be deemed to be
filed as part of or incorporated by reference into this Annual Report on Form 10-K. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item as to the ownership by management and others of
securities of the Company is hereby incorporated by reference from the information appearing under
the caption Security Ownership of Certain Beneficial Owners and Management in the Companys Proxy
Statement. Such Proxy Statement will be filed with the Securities and Exchange Commission pursuant
to the Exchange Act within 120 days of the end of the Companys fiscal year ended December 31,
2004. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item as to certain business relationships and transactions
with management and other related parties of the Company is hereby incorporated by reference from
the information appearing under the caption Certain Transactions in the Companys Proxy
Statement. Such Proxy Statement will be filed with the Securities and Exchange Commission pursuant
to the Exchange Act within 120 days of the end of the Companys fiscal year ended December 31,
2004. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item as to the principal accountant fees and services and the
Audit Committees pre-approval policies and procedures is hereby incorporated by reference from the
information appearing under the captions Fees Paid to Registered Independent Public Accounting
Firm and Audit Committee Pre-Approval Policies and Procedures in the Companys Proxy Statement.
Such Proxy Statement will be filed with the Securities and Exchange Commission pursuant to the
Exchange Act within 120 days of the end of the Companys fiscal year ended December 31, 2004. -36-




---



##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed as a Part of this Report. Financial Statements
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    F-2Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002 and (unaudited)
from Inception (August 20, 1987) through December 31, 2004
    
    
    F-3Consolidated Statement of Stockholders Equity (from inception)
    
    
    F-4Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 and (unaudited) from Inception
(August 20, 1987) through December 31, 2004
    
    
    F-10Notes to Consolidated Financial Statements
    
    
    F-11
 All schedules are omitted because they are not applicable, not required, or because the
required information is included in the financial statements or the notes thereto. (b) Exhibits. Exhibits to the Form 10-K have been included only with the copies of the Annual Report on Form
10-K filed with the Securities and Exchange Commission. Upon request to the Company and payment of
a reasonable fee, copies of the individual exhibits will be furnished. Exhibit Number
    
    
    
    Identification Of Exhibit3.1(a)
    
    
    
    Restated Certificate of Incorporation. Exhibit 3.3 to the
Companys Registration Statement on Form SB-2 (No.
33-57728-FW), as amended (Registration Statement), is
incorporated herein by reference.3.1(b)
    
    
    
    Certificate of Designation of Series One Junior
Participating Preferred Stock dated September 2, 1999.
Exhibit A to Exhibit 4.1 to the Companys Registration
Statement on Form 8-A as filed with the Commission on
September 3, 1999 (the Rights Plan Registration
Statement), is incorporated herein by reference.3.2
    
    
    
    Restated Bylaws of the Company. Exhibit 3.4 to the
Registration Statement is incorporated herein by
reference.4.1
    
    
    
    Specimen Certificate of Common Stock, $.001 par value, of
the Company. Exhibit 4.1 to the Registration Statement is
incorporated herein by reference.4.2
    
    
    
    Rights Agreement dated September 1, 1999 between the
Company and Computershare Investor Services LLC (as
successor in interest to Harris Trust & Savings Bank), as
Rights Agent. Exhibit 4.1 to the Rights Plan
Registration Statement is incorporated herein by reference.4.3
    
    
    
    First Amendment to Rights Agreement, dated as of September
6, 2002, between the Company, Harris Trust & Savings Bank
and Computershare Investor Services LLC. Exhibit 4.3 to
Amendment No. 1 to the Rights Plan
Registration Statement on Form 8-A/A as filed with the
Commission on September 11, 2002 is incorporated herein by
reference.4.4
    
    
    
    Second Amendment to Rights Agreement, dated as of October
30, 2002, between the Company and Computershare Investor
Services LLC. Exhibit 4.4 to Amendment No. 2 to the Rights
Plan Registration Statement on Form 8-A/A as filed with
the Commission on October 31, 2002 is incorporated herein
by reference.
 -37-




---



##### Table of Contents



Exhibit Number
    
    
    
    Identification Of Exhibit4.5
    
    
    
    Form of Rights Certificate. Exhibit B to Exhibit 4.1 to
the Rights Plan Registration Statement is incorporated
herein by reference.10.1+
    
    
    
    Amended and Restated 1993 Employee and Consultant Stock
Option Plan. Exhibit 10.3 to the Registration Statement is
incorporated herein by reference.10.2+
    
    
    
    First Amendment to the Zonagen, Inc. Amended and Restated
1993 Stock Option Plan. Exhibit 10.22 to the Companys
Annual Report on Form 10-K for the year ended December 31,
1999 (the 1999 Form 10-K) is
incorporated herein by reference.10.3+
    
    
    
    1996 Non-Employee Directors Stock Option Plan. Exhibit
10.1 to the Companys Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1997 is incorporated
herein by reference.10.4+
    
    
    
    2000 Non-Employee Directors Stock Option Plan. Appendix B
to the Companys Definitive Proxy Statement filed on April
26, 2000 is incorporated herein by reference.10.5+
    
    
    
    First Amendment to the Zonagen, Inc. 2000 Non-Employee
Directors Stock Option Plan. Exhibit 10.21 to the 2000
Form 10-K is incorporated herein by
reference.10.6+
    
    
    
    Second Amendment to 2000 Non-Employee Directors Stock
Option Plan. Exhibit 10.6 to the Companys Annual Report
on Form 10-K for the year ended December 31, 2002 (the
2002 Form 10-K) is incorporated herein by
reference.10.7+
    
    
    
    Zonagen, Inc. 2004 Stock Option Plan. Exhibit 10.17 to
the Companys Registration Statement on Form S-1 (No.
333-119861), as amended, is incorporated herein by
reference.10.8+
    
    
    
    Employment Agreement between the Company and Joseph S.
Podolski. Exhibit 10.5 to the Registration Statement is
incorporated herein by reference.10.9+
    
    
    
    First Amendment to Employment Agreement between the
Company and Joseph S. Podolski. Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2001 is incorporated herein by
reference.10.10+
    
    
    
    Second Amendment to Employment Agreement between the
Company and Joseph S. Podolski. Exhibit 10.17 to the 2002
Form 10-K is incorporated herein by reference.10.11+
    
    
    
    Employment Agreement between the Company and Louis Ploth,
Jr. Exhibit 10.5 to the 1999 Form 10-K is incorporated
herein by reference.10.12+
    
    
    
    First Amendment to Employment Agreement between the
Company and Louis Ploth, Jr. Exhibit 10.7 to the 2000 Form
10-K is incorporated herein by reference.10.13+
    
    
    
    Second Amendment to Employment Agreement between the
Company and Louis Ploth, Jr. Exhibit 10.18 to the 2002
Form 10-K is incorporated herein by reference.10.14*
    
    
    
    Lease Agreement dated May 11, 2004 between the Company and
Sealy Woodlands, L.P.
 -38-




---



##### Table of Contents



Exhibit Number
    
    
    
    Identification Of Exhibit10.15++
    
    
    
    Letter Agreement dated July 15, 2002 between the Company,
Schering Plough Ltd. and Schering-Plough Corporation.
Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 2002 is
incorporated herein by reference.10.16++
    
    
    
    PHS Patent License Agreement dated April 16, 1999 between
the Company and certain agencies of the United States
Public Health Service within the
Department of Health and Human Services, with amendments.
Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q for the fiscal quarter ended
September 30, 2003 is incorporated herein by reference.23.1*
    
    
    
    Consent of PricewaterhouseCoopers LLP31.1*
    
    
    
    Certification Pursuant to Rule 13(a)-14(a) or 15(d)-14(a)
of the Exchange Act, As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)31.2*
    
    
    
    Certification Pursuant to Rule 13(a)-14(a) or 15(d)-14(a)
of the Exchange Act, As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)32.1*
    
    
    
    Certification Furnished Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Executive Officer)32.2*
    
    
    
    Certification Furnished Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
   *
    
    Filed herewith.+
    
    Management contract or compensatory plan.++
    
    Portions of this exhibit have been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. Such omitted portions have been filed separately
with the Commission. -39-




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. ZONAGEN, INC.By:
    /s/ Joseph S. PodolskiJoseph S. PodolskiPresident and Chief Executive Officer Dated: March 30, 2005 Signature
    
    Title
    
    Date/s/
    
    Joseph S. Podolski
    
    President, Chief Executive Officer
    
    March 30, 2005Joseph S. Podolski
    
    and Director(Principal Executive Officer)/s/
    
    Louis Ploth, Jr
    
    Chief Financial Officer, VP Business
    
    March 30, 2005Louis Ploth, Jr.
    
    Development, Director and Secretary(Principal Financial Officer andPrincipal Accounting Officer)/s/
    
    Daniel F. Cain
    
    Director
    
    March 30, 2005Daniel F. Cain/s/
    
    Jean L. Fourcroy, M.D., Ph.D., M.P.H
    
    Director
    
    March 30, 2005Jean L. Fourcroy, M.D., Ph.D., M.P.H./s/
    
    Nola Masterson
    
    Director
    
    March 30, 2005Nola Masterson/s/
    
    David Poorvin, Ph.D.
    
    Director
    
    March 30, 2005David Poorvin, Ph.D.
 -40-




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders of Zonagen, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, stockholders equity, and cash flows present fairly, in all material
respects, the financial position of Zonagen, Inc., and subsidiaries (a development stage company)
at December 31, 2004 and 2003 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. /s/ PricewaterhouseCoopers LLP Houston, Texas
March 25, 2005 F-1




---



##### Table of Contents



ZONAGEN, INC. AND SUBSIDIARY
(A development stage company) 
 CONSOLIDATED BALANCE SHEETS  December 31,
    
    
    December 31,2004
    
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    736
    
    
    $
    20,946Marketable securities
    
    
    4,800
    
    
    
    2,000Prepaid expenses and other current assets
    
    
    34
    
    
    
    235Total current assets
    
    
    5,570
    
    
    
    23,181Fixed Assets, net
    
    
    18
    
    
    
    Other Assets, net
    
    
    1,018
    
    
    
    847Total assets
    
    $
    6,606
    
    
    $
    24,028LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    144
    
    
    $
    126Accrued expenses
    
    
    470
    
    
    
    415Total current liabilities
    
    
    614
    
    
    
    541Commitments & ContingenciesStockholders EquityUndesignated Preferred Stock, $.001 par value, 5,000,000 shares
authorized, none issued and outstanding
    
    
    
    
    
    
    Common Stock, $.001 par value, 20,000,000 shares authorized,
11,989,936 and 11,929,048 shares issued, respectively; 4,992,901
and 11,479,648 shares outstanding, respectively
    
    
    12
    
    
    
    12Additional paid-in capital
    
    
    114,455
    
    
    
    114,065Deferred compensation
    
    
    (234
    )
    
    
    Cost of treasury stock, 6,997,035 and 449,400 shares, respectively
    
    
    (21,487
    )
    
    
    (7,533
    )Deficit accumulated during the development stage
    
    
    (86,754
    )
    
    
    (83,057
    )Total stockholders equity
    
    
    5,992
    
    
    
    23,487Total liabilities and stockholders equity
    
    $
    6,606
    
    
    $
    24,028
 The accompanying notes are an integral part of these
consolidated financial statements. F-2




---



##### Table of Contents



ZONAGEN, INC. AND SUBSIDIARY
(A development stage company) 
 CONSOLIDATED STATEMENTS OF OPERATIONS  From Inception(August 20, 1987)ThroughFor the Year Ended December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002
    
    
    2004(Unaudited)REVENUES AND OTHER INCOMELicensing fees
    
    $
    
    
    
    $
    
    
    
    $
    4,228
    
    
    $
    28,755Product royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    627Research and development grants
    
    
    118
    
    
    
    595
    
    
    
    315
    
    
    
    1,215Interest income
    
    
    104
    
    
    
    318
    
    
    
    711
    
    
    
    13,126Gain on disposal of fixed assets
    
    
    
    
    
    
    102
    
    
    
    
    
    
    
    102Other income
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    35Total revenues and other Income
    
    
    257
    
    
    
    1,015
    
    
    
    5,254
    
    
    
    43,860EXPENSESResearch and development
    
    
    2,471
    
    
    
    2,161
    
    
    
    6,420
    
    
    
    94,260General and administrative
    
    
    1,483
    
    
    
    2,183
    
    
    
    2,716
    
    
    
    26,623Interest expense and amortization of
intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    388Total expenses
    
    
    3,954
    
    
    
    4,344
    
    
    
    9,136
    
    
    
    121,271Loss from continuing operations
    
    
    (3,697
    )
    
    
    (3,329
    )
    
    
    (3,882
    )
    
    
    (77,411
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,828
    )Gain on disposal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    939Net loss before cumulative effect of change
in accounting principle
    
    
    (3,697
    )
    
    
    (3,329
    )
    
    
    (3,882
    )
    
    
    (78,300
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,454
    )NET LOSS
    
    $
    (3,697
    )
    
    $
    (3,329
    )
    
    $
    (3,882
    )
    
    $
    (86,754
    )NET LOSS PER SHARE  BASIC AND
DILUTED
    
    $
    (0.72
    )
    
    $
    (0.29
    )
    
    $
    (0.34
    )Shares used in net loss per share calculation:Basic
    
    
    5,117
    
    
    
    11,487
    
    
    
    11,412Diluted
    
    
    5,117
    
    
    
    11,487
    
    
    
    11,412
 The accompanying notes are an integral part of these
consolidated financial statements. F-3




---



##### Table of Contents



ZONAGEN, INC. AND SUBSIDIARY
(A development stage company) 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY  DeficitAccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    During The
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Deferred
    
    
    Treasury Stock
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Shares
    
    
    Amount
    
    
    Stage
    
    
    EquityExchange of common stock ($.004 per
share) for technology rights and services
from founding stockholders
    
    
    
    
    
    $
    
    
    
    
    245,367
    
    
    $
    
    
    
    $
    1
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (28
    )BALANCE AT DECEMBER 31, 1987 (unaudited)
    
    
    
    
    
    
    
    
    
    
    245,367
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (27
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (327
    )
    
    
    (327
    )BALANCE AT DECEMBER 31, 1988 (unaudited)
    
    
    
    
    
    
    
    
    
    
    245,367
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (355
    )
    
    
    (354
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    65,431
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (967
    )
    
    
    (967
    )BALANCE AT DECEMBER 31, 1989 (unaudited)
    
    
    
    
    
    
    
    
    
    
    310,798
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,322
    )
    
    
    (1,318
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    467
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,426
    )
    
    
    (1,426
    )BALANCE AT DECEMBER 31, 1990 (unaudited)
    
    
    
    
    
    
    
    
    
    
    311,265
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,748
    )
    
    
    (2,744
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,820
    )
    
    
    (1,820
    )BALANCE AT DECEMBER 31, 1991 (unaudited)
    
    
    
    
    
    
    
    
    
    
    311,265
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,568
    )
    
    
    (4,564
    )Conversion of 391,305 shares of Series C
preferred stock into common stock
    
    
    
    
    
    
    
    
    
    
    91,442
    
    
    
    
    
    
    
    360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    360Purchase of retirement of common stock
    
    
    
    
    
    
    
    
    
    
    (23,555
    )
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    16,946
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,583
    )
    
    
    (1,583
    )BALANCE AT DECEMBER 31, 1992 (unaudited)
    
    
    
    
    
    
    
    
    
    
    396,098
    
    
    
    1
    
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,151
    )
    
    
    (5,781
    )Issuance of common stock for cash, April
1, 1993, and May 12, 1993 ($5.50 per
share), net of offering costs of $1,403
    
    
    
    
    
    
    
    
    
    
    1,534,996
    
    
    
    2
    
    
    
    7,037
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,039Issuance of common stock for cash and
license agreement, December 9, 1993
($10.42 per share), net of offering
costs of $47
    
    
    
    
    
    
    
    
    
    
    239,933
    
    
    
    
    
    
    
    2,453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,453Conversion of Series A preferred stock
to common stock
    
    
    
    
    
    
    
    
    
    
    179,936
    
    
    
    
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600Conversion of Series B preferred stock
to common stock
    
    
    
    
    
    
    
    
    
    
    96,013
    
    
    
    
    
    
    
    378
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    378Conversion of Series C preferred stock
to common stock
    
    
    
    
    
    
    
    
    
    
    876,312
    
    
    
    1
    
    
    
    3,443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,444Conversion of Series D preferred stock
to common stock
    
    
    
    
    
    
    
    
    
    
    280,248
    
    
    
    
    
    
    
    599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600Conversion of bridge loan to common stock
    
    
    
    
    
    
    
    
    
    
    64,000
    
    
    
    
    
    
    
    256
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    256Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,532
    )
    
    
    (2,532
    )
 F-4




---



##### Table of Contents



ZONAGEN, INC. AND SUBSIDIARY
(A development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands except share amounts) DeficitAccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    During The
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Deferred
    
    
    Treasury Stock
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Shares
    
    
    Amount
    
    
    Stage
    
    
    EquityBALANCE AT DECEMBER 31, 1993 (unaudited)
    
    
    
    
    
    $
    
    
    
    
    3,667,536
    
    
    $
    4
    
    
    $
    15,136
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    (8,683
    )
    
    $
    6,457Deferred compensation resulting from grant of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188
    
    
    
    (188
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Exercise of warrants to purchase common stock
for cash, June 30, 1994 ($3.94 per share)
    
    
    
    
    
    
    
    
    
    
    39,623
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156Issuance of common stock for purchase of FTI, October
13, 1994
    
    
    
    
    
    
    
    
    
    
    111,111
    
    
    
    
    
    
    
    1,567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,567Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,970
    )
    
    
    (3,970
    )BALANCE AT DECEMBER 31, 1994
Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    3,818,270
    
    
    
    4
    
    
    
    17,047
    
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    (12,653
    )
    
    
    4,248Exercise of options to purchase common stock for cash,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37January and April 1995 ($.10 to $6.13 per share)
    
    
    
    
    
    
    
    
    
    
    4,546
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Issuance of common stock for cash and a financing
charge, March 9, 1995
    
    
    
    
    
    
    
    
    
    
    16,000
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76Issuance of Series A preferred stock for cash,
October 4, 1995, and October 19, 1995 ($10.00 per
share), net of offering costs of $651
    
    
    598,850
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    5,336
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,337Conversion of warrants to purchase common stock
as a result of offering under antidilution clause,
October 19, 1995 ($3.63 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of Series A preferred stock into
common stock, November and December 1995
    
    
    (94,000
    )
    
    
    
    
    
    
    259,308
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,287
    )
    
    
    (4,287
    )BALANCE AT DECEMBER 31, 1995
    
    
    504,850
    
    
    
    1
    
    
    
    4,098,124
    
    
    
    4
    
    
    
    22,473
    
    
    
    (113
    )
    
    
    
    
    
    
    
    
    
    
    (16,940
    )
    
    
    5,425Deferred compensation resulting from grant of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86
    
    
    
    (86
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54Exercise of warrants to purchase common stock for
cash, January through December 1996 ($3.63 per share)
    
    
    
    
    
    
    
    
    
    
    227,776
    
    
    
    
    
    
    
    827
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    827Conversion of Series A preferred stock into common
stock, January through November 1996
    
    
    (507,563
    )
    
    
    (1
    )
    
    
    1,396,826
    
    
    
    2
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of options for services, January 12, 1996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99Exercise of options to purchase common stock for
cash, February through November 1996 ($.001 to $5.50
per share)
    
    
    
    
    
    
    
    
    
    
    23,100
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75Issuance of common stock for agreement not to
compete, April 13, 1996
    
    
    
    
    
    
    
    
    
    
    19,512
    
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Exercise of warrants to purchase Series A preferred
stock under cashless exercise provision, June 5,
1996
    
    
    2,713
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of Series B preferred stock for cash,
September 30, 1996, and October 11, 1996 ($10.00 per
share), net of offering costs of $2,557
    
    
    1,692,500
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    14,366
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,368Conversion of Series B preferred stock into common
stock, November through December 1996
    
    
    (177,594
    )
    
    
    
    
    
    
    268,058
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,470
    )
    
    
    (9,470
    )
 F-5




---



##### Table of Contents



ZONAGEN, INC. AND SUBSIDIARY
(A development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands except share amounts) DeficitAccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    During The
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Deferred
    
    
    Treasury Stock
    
    
    
    
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Shares
    
    
    Amount
    
    
    Stage
    
    
    EquityBALANCE AT DECEMBER 31, 1996
    
    
    1,514,906
    
    
    $
    2
    
    
    
    6,033,396
    
    
    $
    6
    
    
    $
    38,125
    
    
    $
    (145
    )
    
    
    
    
    
    $
    
    
    
    $
    (26,410
    )
    
    $
    11,578Deferred compensation resulting from grant
of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,110
    
    
    
    (2,110
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    854
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    854Exercise of options to purchase common stock
for cash, January through December 1997
($0.00 to $22.25 per share)
    
    
    
    
    
    
    
    
    
    
    90,955
    
    
    
    
    
    
    
    522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    522Exercise of warrants to purchase common stock
for cash, January through December 1997
($3.63 and $3.07 per share)
    
    
    
    
    
    
    
    
    
    
    22,368
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75Issuance of common stock for a cashless
exercise of Series A preferred stock
warrants, February through September 1997
    
    
    
    
    
    
    
    
    
    
    81,294
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of Series A preferred stock warrants
to purchase common stock for cash, April 1997
($11.00 per share)
    
    
    
    
    
    
    
    
    
    
    818
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Issuance of common stock for a cashless
exercise of Series B preferred stock
warrants, April through November 1997
    
    
    
    
    
    
    
    
    
    
    88,223
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of Series B preferred stock warrants
to purchase common stock for cash, April
through July 1997 ($11.00 per share)
    
    
    
    
    
    
    
    
    
    
    17,169
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Issuance of common stock as final purchase
price for acquisition of FTI, January 31, 1997
($9.833 per share)
    
    
    
    
    
    
    
    
    
    
    305,095
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Issuance of common stock as final debt payment
on FTI acquisition, January 31, 1997 ($9.833 per share)
    
    
    
    
    
    
    
    
    
    
    19,842
    
    
    
    
    
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94Conversion of Series B preferred stock into
common stock, January through October 1997
    
    
    (1,514,906
    )
    
    
    (2
    )
    
    
    2,295,263
    
    
    
    2
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Issuance of common stock for cash, July 25,
1997 ($30.00 per share), net of offering
costs of $5,439
    
    
    
    
    
    
    
    
    
    
    2,587,500
    
    
    
    3
    
    
    
    72,183
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,186Purchase of treasury stock, December 1997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,500
    
    
    
    (1,287
    )
    
    
    
    
    
    
    (1,287
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,174
    )
    
    
    (13,174
    )
 F-6




---



##### Table of Contents



ZONAGEN, INC. AND SUBSIDIARY
(A development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands except share amounts) DeficitAccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    During The
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Deferred
    
    
    Treasury Stock
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Shares
    
    
    Amount
    
    
    Stage
    
    
    EquityBALANCE AT DECEMBER 31, 1997
    
    
    
    
    
    $
    
    
    
    
    11,541,923
    
    
    $
    12
    
    
    $
    113,236
    
    
    $
    (1,401
    )
    
    
    61,500
    
    
    $
    (1,287
    )
    
    $
    (39,584
    )
    
    $
    70,976Deferred compensation resulting from grant of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    422
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    422Forfeiture of stock options, December 1998
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of options to purchase common stock for
cash, January through October 1998 ($0.43 to $22.25
per share)
    
    
    
    
    
    
    
    
    
    
    63,022
    
    
    
    
    
    
    
    344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344Issuance of common stock for services, January 15,
1998
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103Issuance of common stock for a cashless exercise of
Series B preferred stock warrants, May through July
1998
    
    
    
    
    
    
    
    
    
    
    11,195
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of treasury stock, January through
September 1998 ($13.00 to $20.65 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    353,800
    
    
    
    (6,197
    )
    
    
    
    
    
    
    (6,197
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,316
    )
    
    
    (12,316
    )BALANCE AT DECEMBER 31, 1998
    
    
    
    
    
    
    
    
    
    
    11,621,140
    
    
    
    12
    
    
    
    113,717
    
    
    
    (958
    )
    
    
    415,300
    
    
    
    (7,484
    )
    
    
    (51,900
    )
    
    
    53,387Deferred compensation resulting from grant of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (229
    )
    
    
    229
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    239Exercise of options to purchase common stock for
cash, February through September 1999 ($0.04 to
$8.375 per share)
    
    
    
    
    
    
    
    
    
    
    31,866
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72Issuance of common stock for a cashless exercise of
common stock warrants, February 1999
    
    
    
    
    
    
    
    
    
    
    4,775
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock for a cashless exercise of
Series A preferred stock warrants, April 1999
    
    
    
    
    
    
    
    
    
    
    22,131
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock for a cashless exercise of
Series B preferred stock warrants, March through
April 1999
    
    
    
    
    
    
    
    
    
    
    876
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of Series B preferred stock warrants to
purchase common stock for cash, January 1999 ($11.00 per share)
    
    
    
    
    
    
    
    
    
    
    536
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,952
    )
    
    
    (11,952
    )BALANCE AT DECEMBER 31, 1999
    
    
    
    
    
    
    
    
    
    
    11,681,324
    
    
    
    12
    
    
    
    113,564
    
    
    
    (490
    )
    
    
    415,300
    
    
    
    (7,484
    )
    
    
    (63,852
    )
    
    
    41,750Deferred compensation resulting from grant of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    283Exercise of options to purchase common stock for
cash, March through September 2000 ($0.43 to $8.375
per share)
    
    
    
    
    
    
    
    
    
    
    49,416
    
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112Issuance of common stock through employee
stock purchase plan for cash, December 2000
    
    
    
    
    
    
    
    
    
    
    9,379
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Issuance of common stock to Board of Director
members for services, May through December 2000
    
    
    
    
    
    
    
    
    
    
    2,034
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,155
    )
    
    
    (11,155
    )
 F-7




---



##### Table of Contents



ZONAGEN, INC. AND SUBSIDIARY
(A development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands except share amounts) DeficitAccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    During The
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Deferred
    
    
    Treasury Stock
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Shares
    
    
    Amount
    
    
    Stage
    
    
    EquityBALANCE AT DECEMBER 31, 2000
    
    
    
    
    
    $
    
    
    
    
    11,742,153
    
    
    $
    12
    
    
    $
    113,780
    
    
    $
    (241
    )
    
    
    415,300
    
    
    $
    (7,484
    )
    
    $
    (75,007
    )
    
    $
    31,060Compensation resulting from grant of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Compensation resulting from extension of
warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    230
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    230Exercise of options to purchase common stock
for cash, February through December 2001
($0.64 to $4.00 per share)
    
    
    
    
    
    
    
    
    
    
    12,242
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Issuance of common stock through employee
stock purchase plan for cash, June and
December 2001
    
    
    
    
    
    
    
    
    
    
    8,431
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Issuance of common stock to Board of Director
members for services, February through
December 2001
    
    
    
    
    
    
    
    
    
    
    2,690
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (839
    )
    
    
    (839
    )BALANCE AT DECEMBER 31, 2001
    
    
    
    
    
    $
    
    
    
    
    11,765,516
    
    
    $
    12
    
    
    $
    113,898
    
    
    $
    (11
    )
    
    
    415,300
    
    
    $
    (7,484
    )
    
    $
    (75,846
    )
    
    $
    30,569Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11Exercise of options to purchase common stock
for cash, January and February 2002 ($0.64 to $2.94 per share)
    
    
    
    
    
    
    
    
    
    
    31,265
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Purchase common stock through employee stock
purchase plan for cash, June 2002
    
    
    
    
    
    
    
    
    
    
    4,824
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Issuance of common stock to Employees
    
    
    
    
    
    
    
    
    
    
    105,000
    
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111Issuance of common stock to Board of Director
members for services, March through December
2002
    
    
    
    
    
    
    
    
    
    
    11,572
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,882
    )
    
    
    (3,882
    )BALANCE AT DECEMBER 31, 2002
    
    
    
    
    
    $
    
    
    
    
    11,918,177
    
    
    $
    12
    
    
    $
    114,051
    
    
    $
    
    
    
    
    415,300
    
    
    $
    (7,484
    )
    
    $
    (79,728
    )
    
    $
    26,851Issuance of common stock to Board of Director
members for services, February through
May 2003
    
    
    
    
    
    
    
    
    
    
    10,871
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Purchase of treasury stock April ($1.37 to
$1.50 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,100
    
    
    
    (49
    )
    
    
    
    
    
    
    (49
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,329
    )
    
    
    (3,329
    )BALANCE AT DECEMBER 31, 2003
    
    
    
    
    
    $
    
    
    
    
    11,929,048
    
    
    $
    12
    
    
    $
    114,065
    
    
    $
    
    
    
    
    449,400
    
    
    $
    (7,533
    )
    
    $
    (83,057
    )
    
    $
    23,487
 F-8




---



##### Table of Contents



ZONAGEN, INC. AND SUBSIDIARY
(A development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands except share amounts) DeficitAccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    During The
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Deferred
    
    
    Treasury Stock
    
    
    Development
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Shares
    
    
    Amount
    
    
    Stage
    
    
    EquitySelf tender offer of 6,547,635 shares
at $2.10 January 2004 including
60,888 exercised options
    
    
    
    
    
    
    
    
    
    
    60,888
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,547,635
    
    
    
    (13,665
    )
    
    
    
    
    
    
    (13,665
    )Cost associated with self tender offer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (289
    )
    
    
    
    
    
    
    (289
    )Noncash stock compensation related to
stock option bonus program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78Issuance of 354,474 stock options to
employees on March 29, 2004 and
approved on September 29, 2004
(exercise price of $2.72, fair value
of $3.60)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    312
    
    
    
    (312
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,697
    )
    
    
    (3,697
    )BALANCE AT DECEMBER 31, 2004
    
    
    
    
    
    $
    
    
    
    
    11,989,936
    
    
    $
    12
    
    
    $
    114,455
    
    
    $
    (234
    )
    
    
    6,997,035
    
    
    
    (21,487
    )
    
    $
    (86,754
    )
    
    $
    5,992
 The accompanying notes are an integral part of these consolidated financial statements. F-9




---



##### Table of Contents



ZONAGEN, INC. AND SUBSIDIARY
(A development stage company) 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  From Inception(August 20, 1987)ThroughFor The Year Ended December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002
    
    
    2004UnauditedCash Flows from Operating ActivitiesNet loss
    
    $
    (3,697
    )
    
    $
    (3,329
    )
    
    $
    (3,882
    )
    
    $
    (86,754
    )Gain on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (939
    )Gain on disposal of fixed assets
    
    
    
    
    
    
    (102
    )
    
    
    
    
    
    
    (102
    )Adjustments to reconcile net loss to net cash used in
operating activities:Noncash financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    316Noncash inventory impairment
    
    
    
    
    
    
    
    
    
    
    4,417
    
    
    
    4,417Noncash patent impairment
    
    
    308
    
    
    
    
    
    
    
    1,031
    
    
    
    1,339Noncash decrease in accounts payable
    
    
    
    
    
    
    
    
    
    
    (1,308
    )
    
    
    (1,308
    )Depreciation and amortization
    
    
    9
    
    
    
    78
    
    
    
    226
    
    
    
    3,773Noncash expenses related to stock-based transactions
    
    
    156
    
    
    
    14
    
    
    
    137
    
    
    
    2,728Common stock issued for agreement not to compete
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Series B Preferred Stock issued for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18Maturities (purchases) of marketable securities
    
    
    (2,800
    )
    
    
    14,455
    
    
    
    12,080
    
    
    
    23,735Changes in operating assets and liabilities (net effects of
purchase of businesses in 1988 and 1994):(Increase) decrease in receivables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (199
    )Decrease (increase) in inventory
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,447
    )(Increase) decrease in prepaid expenses and other
current assets
    
    
    201
    
    
    
    297
    
    
    
    262
    
    
    
    265(Decrease) increase in accounts payable and accrued
expenses
    
    
    73
    
    
    
    22
    
    
    
    (290
    )
    
    
    1,809Decrease in deferred revenue
    
    
    
    
    
    
    
    
    
    
    (4,228
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    (5,750
    )
    
    
    11,435
    
    
    
    8,445
    
    
    
    (55,149
    )Cash Flows from Investing ActivitiesMaturities (purchase) of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,723
    )Capital expenditures
    
    
    (21
    )
    
    
    
    
    
    
    (49
    )
    
    
    (2,289
    )Purchase of technology rights and other assets
    
    
    (169
    )
    
    
    (64
    )
    
    
    (261
    )
    
    
    (2,438
    )(Increase) decrease in note receivable
    
    
    
    
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    Proceeds from sale of fixed assets
    
    
    
    
    
    
    225
    
    
    
    
    
    
    
    225Cash acquired in purchase of FTI
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Proceeds from sale of subsidiary, less $12,345 for
operating losses during 1990 phase-out period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138Proceeds from sale of the assets of FTI
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,250Increase in net assets held for disposal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (213
    )Net cash provided by (used in) investing activities
    
    
    (190
    )
    
    
    1,161
    
    
    
    (1,310
    )
    
    
    (31,047
    )Cash Flows from Financing ActivitiesProceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    84,224Increase in prepaid offering costs
    
    
    (316
    )
    
    
    (284
    )
    
    
    
    
    
    
    (600
    )Proceeds from issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,688Purchase of treasury stock
    
    
    (13,954
    )
    
    
    (49
    )
    
    
    
    
    
    
    (21,487
    )Proceeds from issuance of notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,839Principal payments on notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,732
    )Net cash provided by (used in) financing activities
    
    
    (14,270
    )
    
    
    (333
    )
    
    
    27
    
    
    
    86,932Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (20,210
    )
    
    
    12,263
    
    
    
    7,162
    
    
    
    736Cash and Cash Equivalents at beginning of Period
    
    
    20,946
    
    
    
    8,683
    
    
    
    1,521
    
    
    
    Cash and Cash Equivalents at end of Period
    
    $
    736
    
    
    $
    20,946
    
    
    $
    8,683
    
    
    $
    736
 The accompanying notes are an integral part of these consolidated financial statements. F-10




---



##### Table of Contents



1.
    ORGANIZATION AND OPERATIONS: Zonagen, Inc. (the Company, Zonagen, or we, us or our) was organized on August 28, 1987
and is a development stage company. We are a biopharmaceutical company focused on the development
of new drugs to treat hormonal and reproductive system disorders. Our lead product candidate,
Progenta, is an orally available small molecule compound that we are developing for the treatment
of uterine fibroids and endometriosis. Our second product candidate is Androxal, an orally
available small molecule compound being developed for the treatment of testosterone deficiency in
men. On February 1, 2005 the Company completed its follow-on public offering of 5,060,000 shares of
its common stock at $4.00 per share (which included the underwriters exercise of its over
allotment option for 660,000 shares). The shares offered by the
Company were issued out of its
existing treasury stock, and the offering resulted in net proceeds to the Company of approximately
$18.1 million. Prior to 2004, we focused our resources on the development of VASOMAX®, and related
phentolamine-based products for the treatment of male erectile dysfunction. Beginning in 1999, the
US Food and Drug Administration (FDA) placed our phentolamine-based products on clinical hold,
which was subsequently lifted to a partial clinical hold the following year. As a result of the
setbacks associated with this FDA hold, as well as other setbacks with the European regulatory
agency in connection with phentolamine, we undertook two separate efforts in 2002 and 2000 to
aggressively locate strategic alternatives, including the use of two investment banks to assist in
this search. All of these efforts culminated in a definitive merger agreement being signed in
October 2002 with a potential strategic partner, which was subsequently terminated in March 2003
for regulatory and other reasons. During the remainder of 2003, the Board continued to review all
of the options available to us. In
January 2004, the Company accepted for purchase 6,547,635 shares
(approximately 57% of its
outstanding common stock, at that time) at a purchase price of $2.10 per share in accordance with
the terms of the self tender offer, which included 60,888 shares issuable upon exercise of options
tendered by directors, for a total aggregate cost of approximately $14.0 million, inclusive of costs
associated with the offer. Nasdaq has established rules and policies with respect to the continued listing of securities
on Nasdaq. Due to the Companys self tender offer which was completed in January 2004, the Company
had fallen below the Nasdaq National Market requirement that a listed company have at least $10
million in stockholders equity. Due to this shortfall in equity, the Company applied for a Nasdaq
SmallCap Market listing which was approved by Nasdaq and the Companys stock began trading on the
Nasdaq SmallCap Market on July 8, 2004. The Company has experienced negative cash flows from operations since inception and has funded
its activities to date primarily from equity financings and corporate collaborations. The Company
will continue to require substantial funds for research and development, including preclinical
studies and clinical trials of our product candidates, and to commence sales and marketing efforts
if appropriate, if the FDA or other regulatory approvals are obtained. The Company believes that
its existing capital resources under its current operating plan will be sufficient to fund the
Companys operations through the first quarter 2006. There can be no assurance that changes in our current
strategic plans or other events will not result in accelerated or unexpected expenditures. Zonagens results of operations may vary significantly from year to year and quarter to
quarter, and depend, among other factors, on the Companys ability to be successful in our clinical
trials, the regulatory approval process in the United States and other foreign jurisdictions and
the ability to complete new licenses and product development agreements. The timing of our revenues
may not match the timing of our associated product development expenses. To date, research and
development expenses have generally exceeded revenue in any particular period and/or fiscal year. As of December 31, 2004, the Company had an accumulated deficit of $86.8 million. Losses have
resulted principally from costs incurred in conducting clinical trials for VASOMAX® and
the related female sexual dysfunction product, in research and development activities related to
efforts to develop our products and from the associated administrative costs required to support
those efforts. Due to various tax regulations, including change in control provisions in the tax
code the value of this tax asset to the Company can be substantially diminished. For additional
information relating to the Companys net operating loss carryforward see Note 6. Federal Income
Taxes of the Notes to Consolidated Financial Statements. F-11




---



##### Table of Contents



2.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. CERTAIN RISKS AND UNCERTAINTIES Our product candidates under development require approval from the FDA or other international
regulatory agencies prior to commercial sales. There can be no
assurance our product candidates will receive
the necessary clearance. If we are denied clearance or clearance is delayed, it may have a
material adverse impact on us. Our product candidates are concentrated in rapidly changing, highly competitive markets, which are
characterized by rapid technological advances, evolving regulatory requirements and industry
standards. Any failure by us to anticipate or to respond adequately to technological developments
in our industry, changes in regulatory requirements or industry standards, or any significant
delays in the development or introduction of products or services, could have a material adverse
effect on our business, operating results and future cash flows. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all cash
accounts and highly liquid investments having original maturities of three months or less to be
cash and cash equivalents. MARKETABLE SECURITIES Management determines the appropriate classification of investments in debt and equity
securities at the time of purchase and re-evaluates such designation as of each subsequent balance
sheet date. Securities for which the Company has the ability and intent to hold to maturity are
classified as held to maturity. Securities classified as trading securities are recorded at
fair value. Gains and losses on trading securities, realized and unrealized, are included in
earnings and are calculated using the specific identification method. Any other securities are
classified as available for sale. At December 31, 2004 all securities were classified as trading
securities. The cost basis including purchased premium for these securities was $4.8 million and
$2.0 million at December 31, 2004 and 2003, respectively. Marketable securities as of December 31, 2004 consist of only short term investments totaling
$4.8 million. The Companys investments typically include corporate bonds and notes, Euro-dollar
bonds, taxable auction securities and asset-backed securities. The Companys policy is to require
minimum credit ratings of A2/A and A1/P1 with maturities of up to three years. The average life of
the investment portfolio may not exceed 24 months. PRODUCT INVENTORY The Company maintains an inventory of bulk phentolamine which is the active ingredient in
VASOMAX®, the Companys oral treatment for male erectile dysfunction (MED). Due to the
mutual termination of the Schering-Plough Agreements in July 2002, the future uncertainty
surrounding the VASOMAX® product and the fact that the Company is not presently
committing resources toward the approval of VASOMAX®, the Company wrote-off its bulk
phentolamine inventory previously valued at $4.4 million in the quarter ended June 30, 2002. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets primarily consist of prepaid insurance, prepaid
operating expenses and other miscellaneous assets, interest and other receivables. F-12




---



##### Table of Contents



FIXED ASSETS Fixed assets include lab equipment, furniture and leasehold improvements and are recorded at
cost, less accumulated depreciation and amortization. Depreciation is computed on the straight-line
method over an estimated useful life of three to five years or, in the case of leasehold improvements,
amortized over the remaining term of the lease. Maintenance and repairs that do not improve or
extend the life of assets are expensed as incurred. When assets are sold or retired, the cost and
accumulated depreciation are removed from the accounts and the resulting gain or loss is included
in income during the period in which the transaction occurred. Since the Company was operating primarily as a virtual company utilizing outside consultants
to perform limited research and development and clinical development activities and previously
intended to redeploy its existing assets, the Company held an auction in June 2003 and sold
substantially all of its fixed assets for approximate net proceeds of $225,000, which was $102,000
over their book value. OTHER ASSETS As of December 31, 2004 other assets consist of both prepaid offering costs in the amount of
$601,000 relating to the Companys public offering which was completed on February 1, 2005, and
capitalized patent costs in the amount of $417,000. Patent costs are being amortized over 20 years,
or the lesser of the legal or the estimated economic life of the patent. Amortization of patent
costs was $7,000, $9,000 and $35,000 in 2004, 2003 and 2002, respectively. Of the $417,000 in capitalized patents $274,000 related to patents for Progenta which is being
developed as an oral treatment for uterine fibroids and endometriosis and $143,000 related to
Androxal, which is being developed as an oral treatment for testosterone deficiency. The Company
will no longer maintain its current patent portfolio for its vaccine adjuvants, prostate cancer
vaccines, hCG and zona pellucida immuno-contraceptive vaccines. This decision resulted in an
impairment charge of approximately $308,000 during 2004 against capitalized patent costs. The Company incurred $284,000 in the three month period ended December 31, 2003 relating to
transaction costs associated with its self tender offer. These costs were recorded as other assets
and were charged to treasury stock in January 2004 when the self tender offer was completed. REVENUE RECOGNITION Licensing Fees During 2000, the Company adopted U.S. Securities and Exchange Commission Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended, which
requires up-front, non-refundable license fees to be deferred and recognized over the performance
period. In situations where the Company receives payment in advance of the performance of services,
such amounts are deferred and recognized as revenue as the related services are performed. The
Company recognized revenue from non-refundable, up-front license and milestone payments, not
specifically tied to a separate earnings process, ratably over the performance period of the
agreement. When payments are specifically tied to a separate earnings process, revenue is
recognized when earned. Prior to January 1, 2000, the Company had recognized revenue from
non-refundable fees when the Company had no obligations to refund the fees under any circumstances,
and there were no additional contractual services to be provided or costs to be incurred by the
Company in connection with the non-refundable fees. The cumulative effect of adopting SAB 101, as amended, at January 1, 2000 resulted in a
one-time, non-cash charge of $8.5 million, with a corresponding increase to deferred revenue that
was recognized in later periods. The $8.5 million represents portions of 1997 and 1998 payments
received from Schering-Plough in consideration for the exclusive license of the Companys
VASOMAX® product for the treatment of MED. For the year ended December 31, 2002, the
Company recognized $4.2 million of licensing fees revenue that was included in the cumulative
effect adjustment as of January 1, 2000. Due to the mutual termination of the Schering-Plough
Agreements in July 2002, the Company recognized the remaining $3.2 million of deferred revenue in
the quarter ended September 30, 2002. F-13




---



##### Table of Contents



Product Royalties Under the terms of the Schering-Plough Agreements, the Company had previously received
quarterly royalty payments based on net sales of VASOMAX® in Mexico and Brazil by
Schering-Plough. The Company recognized royalty revenue when it was received. Due to the July 2002
mutual termination of the Schering-Plough Agreements the Company does not expect to receive any
royalties in the foreseeable future. Research and Development Grants The Company applies for research and development grants from the federal government usually in
the form of Small Business Innovation Research, or SBIR grants. When the Company is awarded one of
these research and development grants it is obligated to spend grant dollars on research activities
based on a budget that was submitted with the grant application. The Company typically bills the
federal government on a monthly basis after it has expended its funds for the grant activities. At
that time the Company recognizes research and development grant revenues. During 2002 the Company
was awarded three SBIR grants totaling in excess of $1 million. The last SBIR grant was
essentially depleted during 2004. RESEARCH AND DEVELOPMENT COSTS Research and development, or R&D expenses include salaries and related employee expenses,
contracted regulatory affairs activities, insurance coverage for clinical trials and product sales,
contracted research and consulting fees, facility costs and internal research and development
supplies. The Company expenses research and development costs in the period they are incurred.
These costs consist of direct and indirect costs associated with specific projects as well as fees
paid to various entities that perform research on behalf of the Company. LOSS PER SHARE Basic EPS is computed by dividing net loss by the weighted average number of shares of common
stock outstanding during the year. Diluted EPS is computed in the same manner as fully diluted EPS,
except that, among other changes, the average share price for the period is used in all cases when
applying the treasury stock method to potentially dilutive outstanding options. In all applicable
years all common stock equivalents were antidilutive and accordingly were not included in the
computation. STOCK-BASED COMPENSATION The Company has two stock-based compensation plans at December 31, 2004, which are described
more fully in note 8. The Company accounts for its stock option plans under APB No. 25 Accounting for Stock Issued
to Employees. Accordingly, deferred compensation is recorded for stock options based on the excess
of the market value of the common stock on the measurement date over the exercise price of the
options. This deferred compensation is amortized over the vesting period of each option. F-14




---



##### Table of Contents



The Company has adopted the disclosure requirements of SFAS No. 123 Accounting for
Stock-Based Compensation, as amended, for employee stock-based compensation and has elected not to
record related compensation expense in accordance with this statement. Had compensation expense for
its stock option plans been determined consistent with SFAS No. 123, the Companys net loss and
loss per share would have been increased to the following pro forma amounts (in thousands, except
for per share amounts): December 31,2004
    
    
    2003
    
    
    2002Net loss, as reported
    
    $
    (3,697
    )
    
    $
    (3,329
    )
    
    $
    (3,882
    )Add: Stock-based employee
compensation expense included in
reported net income, net of
related tax effects
    
    
    156
    
    
    
    14
    
    
    
    137Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards, net
of related tax effects
    
    
    (457
    )
    
    
    (1,374
    )
    
    
    (2,175
    )Pro forma net loss
    
    $
    (3,998
    )
    
    $
    (4,689
    )
    
    $
    (5,920
    )Loss per shareBasic and diluted  as reported
    
    $
    (0.72
    )
    
    $
    (0.29
    )
    
    $
    (0.34
    )Basic and diluted  pro forma
    
    
    (0.78
    )
    
    
    (0.41
    )
    
    
    (0.52
    )
 Under SFAS No. 123, the fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted average assumptions were used
for grants in 2004, 2003, and 2002, respectively: risk-free interest rates of 3.5%, 3.8%, and 5.4%;
with no expected dividends; expected lives of 6.4, 4.2, and
4.9 years; expected volatility of 88%,
90%, and 88%. The weighted average fair value of options granted at market for 2004, 2003 and 2002
was $1.99, $0.39 and $3.22, respectively. The Black-Scholes option valuation model and other existing models were developed for use in
estimating the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of and are highly sensitive to
subjective assumptions including the expected stock price volatility. The Companys employee stock
options have characteristics significantly different from those of traded options and changes in
the subjective input assumptions can materially affect the fair value estimate. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No.
123(R) will require that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. SFAS No. 123(R) replaces FASB
Statement No. 123, Accounting for Stock-Based Compensation , and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS No. 123, as originally issued in 1995, established
as preferable a fair value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing to apply the
guidance in APB Opinion No. 25, as long as the footnotes to financial statements disclosed what net
income would have been had the preferable fair value-based method been used. Public entities will
be required to apply SFAS No. 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. We are in the process of evaluating the impact the adoption of SFAS No. 123(R)
will have on our consolidated financial position, results of operations and cash flows.  3.
    FIXED ASSETS: Fixed assets are classified as follows (in thousands): December 31,2004
    
    
    2003Laboratory equipment
    
    $
    4
    
    
    $
    Office equipment
    
    
    10
    
    
    
    Leasehold improvements
    
    
    7
    
    
    
    21
    
    
    
    Less  Accumulated depreciation and amortization
    
    
    3
    
    
    
    Total
    
    $
    18
    
    
    $
    
 F-15




---



##### Table of Contents



The Company held an auction in June 2003 and sold substantially all of its fixed assets for
approximate net proceeds of $225,000, which was $102,000 over their book value. In addition to
purchases in 2004, the Company currently possesses some lab equipment and furniture whose value had
previously been fully depreciated. 4.       OPERATING LEASES: The Company leases laboratory and office space, and equipment pursuant to leases accounted for
as operating leases. The lease for the Companys laboratory and office space expires in June 2010.
Rental expense for the years ended December 31, 2004, 2003 and 2002, was approximately $37,000,
$145,000 and $255,000, respectively. Future minimum lease payments under non-cancelable leases with
original terms in excess of one year as of December 31, 2004, are as follows (in thousands): 2005
    
    $
    382006
    
    
    392007
    
    
    402008 & later
    
    
    102Total
    
    $
    219
  5.
    ACCRUED EXPENSES: Accrued expenses consist of the following (in thousands): December 31,2004
    
    
    2003Research and development costs
    
    $
    7
    
    
    $
    39Legal
    
    
    48
    
    
    
    91Insurance
    
    
    
    
    
    
    75Offering costs
    
    
    250
    
    
    
    Other
    
    
    165
    
    
    
    210Total
    
    $
    470
    
    
    $
    415
  6.
    FEDERAL INCOME TAXES: The Company has had losses since inception and, therefore, has not been subject to federal
income taxes. The Company has accumulated approximately $2.9 million of research and development
tax credits. As of December 31, 2004 and 2003, the Company had approximately $78.5 million and
$75.6 million, respectively, of net operating loss (NOL) carry-forwards for federal income tax
purposes. Additionally, approximately $1.3 million of NOLs, and approximately $52,000 of research
and development tax credits will expire in 2005. The Tax Reform Act of 1986 provided for a limitation on the use of NOL and tax credit
carryforwards following certain ownership changes that could limit the Companys ability to utilize
these NOLs and tax credits. The sale of preferred stock in 1996, together with previous changes in
stock ownership, resulted in an ownership change in 1996 for federal income tax purposes. The
Company estimates that the amount of pre-1997 NOL carryforwards and the credits available to offset
taxable income is limited to approximately $5.4 million per year on a cumulative basis.
Accordingly, if the Company generates taxable income in any year in excess of its then cumulative
limitation, the Company may be required to pay federal income taxes even though it has unexpired
NOL carryforwards. Additionally, because U.S. tax laws limit the time during which NOLs and tax
credit carryforwards may be applied against future taxable income and tax liabilities, the Company
may not be able to take full advantage of its NOLs and tax credit carryforwards for federal income
tax purposes. The redemption of shares under the Companys tender offer in January 2004 (Note 1) and the
Companys follow-on public offering completed on February 1, 2005 (Note 12) may have created a
change of ownership for Federal Income tax purposes. The Company has not undertaken a study to
determine if this has occurred. A change in ownership for Federal income tax purposes may result
in a limitation in the use of net operating loss carryforwards in future periods. F-16




---



##### Table of Contents



Under SFAS No. 109, Accounting for Income Taxes, an NOL requires the recognition of a
deferred tax asset. As the Company has incurred losses since inception, and there is no certainty
of future revenues, a valuation allowance has been provided in full in the accompanying
consolidated financial statements. The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets are as follows (in thousands): December 31,2004
    
    
    2003Net operating loss carryforwards
    
    $
    26,693
    
    
    $
    25,704Research and development tax credits
    
    
    2,871
    
    
    
    2,905Accruals/expenses not currently deductible
    
    
    1,510
    
    
    
    1510Total deferred tax assets
    
    
    31,074
    
    
    
    30,119Less  Valuation allowance
    
    
    (31,074
    )
    
    
    (30,119
    )Net deferred tax assets
    
    $
    
    
    
    $
    
  7.
    STOCKHOLDERS EQUITY: TREASURY STOCK On January 13, 2004 the Company announced the final results of its self tender offer, which
expired on January 7, 2004. Zonagen accepted for purchase 6,547,635 shares at a purchase price of
$2.10 per share in accordance with the terms of the offer, which included 60,888 shares issuable
upon exercise of options tendered by directors, for a total aggregate cost of approximately $14.0
million, which is inclusive of costs associated with the offer. In
April 2003, the Company bought back an additional 34,100 treasury shares at an aggregate
purchase price of $49,000 for an average price of $1.44 per share. As
of December 31, 2004, the Company had 6,997,035 shares of treasury stock. The Company sold
5,060,000 of these shares in its public offering which was completed on February 1, 2005. EARNINGS PER SHARE The following table presents information necessary to calculate earnings per share for the
three years ended December 31, 2004, 2003 and 2002 (in thousands, except per share amounts): 2004
    
    
    2003
    
    
    2002Net loss
    
    $
    (3,697
    )
    
    $
    (3,329
    )
    
    $
    (3,882
    )Weighted average common shares outstanding
    
    
    5,117
    
    
    
    11,487
    
    
    
    11,412Basic earnings per share
    
    $
    (0.72
    )
    
    $
    (0.29
    )
    
    $
    (0.34
    )Weighted average common and dilutive potential common
shares outstanding:Weighted average common shares outstanding
    
    
    5,117
    
    
    
    11,487
    
    
    
    11,412Assumed exercise of stock options
    
    
    
    
    
    
    
    
    
    
    5,117
    
    
    
    11,487
    
    
    
    11,412Diluted earnings per share
    
    $
    (0.72
    )
    
    $
    (0.29
    )
    
    $
    (0.34
    )
  8.
    STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN: During 2004 the Company had three stock option plans available which were the 1994 Employee
and Consultant Stock Option Plan, or 1994 Plan which expired in June 2004; the 2000 Non-Employee
Directors Stock Option Plan, or 2000 Director Plan; and the 2004 Stock Option Plan, or 2004 Plan.
Due to the expiration of the Companys Amended and Restated 1993 Employee and Consultant Stock
Option Plan, or 1993 Plan, in May 2003, the Companys Board of Directors approved the 2004 Plan on
February 24, 2004. The 2004 Plan was approved by shareholders at the 2004 Annual Shareholders
Meeting which was held on September 29, 2004. As
of December 31, 2004, there were 298,536 options available under
the 2004 Plan and 500,000
available under the 2000 Director Plan. The 2000 Director Plan has an
evergreen provision pursuant to which the number of shares available
under such plan are automatically increased each year on the day
after the Companys annual Shareholders Meeting by the number
of shares granted during the prior year under such plan (or by
one-half percent of the Companys then outstanding common stock,
if greater). There are no significant differences between the provisions of the
two remaining plans. In general, options are F-17




---



##### Table of Contents



granted with an exercise price per share as determined by the board of directors, which is
typically equal to the fair market value per share of common stock on the date of grant. Vesting
provisions for each grant are determined by the board of directors and typically vest quarterly
over a three year period. All options expire no later than the tenth anniversary of the grant date. During the 2003 Annual Shareholders Meeting which was concluded on January 14, 2004, four
prior Board Members did not stand for re-election and four new Board Members were elected which
consisted of 3 outside directors and the Companys Chief Financial Officer. Pursuant to the terms
of the Companys 2000 Director Plan, each of the three new non-employee directors were
automatically granted options to purchase 40,000 shares of the Companys common stock at an
exercise price of $2.40, which was the closing price on the date of grant. On February 24, 2004,
the Board of Directors approved an amendment to these options to provide that such options vest in
quarterly installments over a three year period. Under the general terms of the 2000 Director Plan the four prior Board Members who did not
stand for re-election at the Companys 2003 Annual Shareholders Meeting were automatically granted
a 2 year extension to January 14, 2006 to exercise their fully vested options. These options
consisted of 140,715 shares with exercise prices ranging from $1.70 to $5.65. In addition, these
same Directors also received an extension to January 14, 2006 for any fully vested options granted
under other option plans. These options consisted of 112,500 shares with exercise prices ranging
from $4.00 to $22.25 On March 29, 2004, the Compensation Committee approved grants to the Companys executive
officers of (i) incentive options to purchase 358,763 shares of its common stock that vest
quarterly over three years and (ii) incentive options to purchase 79,486 shares of its common stock
that vest in the event certain milestones are attained by
January 25, 2005. To date, the
Compensation Committee has not convened to determine if these milestones were achieved. All of the
options were granted at an exercise price of $2.72, the fair market value of the Companys common
stock on the date of grant. In addition, the following grants were approved on March 29, 2004 to non-executive employees
of the Company: (i) incentive options to purchase 123,350 shares that vest quarterly over three
years, (ii) incentive options to purchase 17,504 shares that vest upon the achievement of certain
milestones and (iii) incentive options to purchase 22,361 shares (granted in lieu of additional
increases in cash compensation) that vest in equal increments through December 31, 2004. All of the
options were granted at an exercise price of $2.72, the fair market value of the Companys common
stock on the date of grant. Of all of the options granted to both executive officers and employees, options to purchase
150,000 shares were granted under the Companys 1994 Plan (of which, options to purchase 56,737
shares were granted to Mr. Podolski and 38,245 shares were granted to Mr. Ploth) and the remaining
options were granted under the new 2004 Employee and Consultant Stock Option Plan. All of the
options granted under the 1994 Plan are immediately valid and all of the options granted under the
new 2004 Plan were subject to shareholder approval of the 2004 Plan. The 2004 Plan was approved by
shareholders at the September 29, 2004 Annual Shareholders Meeting. Due to the approval of these
options, the Company recorded non-cash compensation expense of $78,000 for the year ended December
31, 2004 and will record additional non-cash compensation expense of $26,000 per quarter through
the quarter ended March 31, 2007. This expense represents the difference between the grant price of
$2.72, which was the closing price of the Companys common stock on the date of grant on March 29,
2004, and $3.60, the closing price of the Companys common stock on September 29, 2004, the date
under which these options were approved by stockholders at the Companys 2004 Annual Meeting of
Stockholders. In
June 2004, the Company amended the terms of 96,990 incentive options such that awards would
vest based on the occurrence of ten milestones. As a result of this
modification, the Company
records compensation expense under variable plan accounting. At December 31, 2004 the Company has
met five milestones and as a result recorded approximately $78,000 in compensation expense which is
included in the accompanying Statement of Operations for the year ended December 31, 2004. During 2000, the Company amended the 2000 Director Plan to allow for issuance of stock awards
and options in lieu of cash for fees owed to directors and consultants. In connection with this
amendment, no shares of common stock or options to purchase common stock were issued to directors
and consultants in 2004. In connection with this amendment, during 2003, the Company granted
options to a director, totaling 12,972 shares of common stock at F-18




---



##### Table of Contents



exercise prices ranging from $0.93 to $1.58, which was the fair market value at the time of
issue. In addition, during 2003, the Company issued stock awards to directors, totaling 10,871
shares of common stock in connection with the same amendment at the closing price on the date of
grant. A summary of the status of the Companys option plans at December 31, 2004, 2003, and 2002 and
changes during the years then ended is presented in the tables below: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AverageExercise
    
    
    Exercise
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    1,225,470
    
    
    $
    5.98
    
    
    
    1,531,710
    
    
    $
    6.76
    
    
    
    1,295,429
    
    
    $
    7.63Granted
    
    
    816,464
    
    
    
    2.78
    
    
    
    12,972
    
    
    
    1.23
    
    
    
    330,360
    
    
    
    3.89Exercised
    
    
    (60,888
    )
    
    
    1.39
    
    
    
    
    
    
    
    
    
    
    
    (31,265
    )
    
    
    .67Forfeited
    
    
    (194,200
    )
    
    
    5.24
    
    
    
    (319,212
    )
    
    
    9.52
    
    
    
    (62,814
    )
    
    
    12.67Outstanding at end of year
    
    
    1,786,846
    
    
    
    4.77
    
    
    
    1,225,470
    
    
    
    5.98
    
    
    
    1,531,710
    
    
    
    6.76Exercisable at end of year
    
    
    858,930
    
    
    
    6.44
    
    
    
    810,370
    
    
    
    6.97
    
    
    
    981,710
    
    
    
    8.32
 The following table summarizes information about stock options outstanding at December
31, 2004: Weighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Remaining
    
    
    Exercise
    
    
    Number
    
    
    ExerciseRange Of Exercise Prices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$       .00 to
    
    $
    5.00
    
    
    
    1,498,792
    
    
    
    7.2
    
    
    $
    3.18
    
    
    
    570,876
    
    
    $
    3.105.01 to
    
    
    10.00
    
    
    
    207,554
    
    
    
    1.7
    
    
    
    8.36
    
    
    
    207,554
    
    
    
    8.3610.01 to
    
    
    15.00
    
    
    
    7,500
    
    
    
    1.0
    
    
    
    13.44
    
    
    
    7,500
    
    
    
    13.4415.01 to
    
    
    20.00
    
    
    
    5,400
    
    
    
    2.5
    
    
    
    18.56
    
    
    
    5,400
    
    
    
    18.5620.01 to
    
    
    25.00
    
    
    
    25,600
    
    
    
    1.3
    
    
    
    20.92
    
    
    
    25,600
    
    
    
    20.9225.01 to
    
    
    30.00
    
    
    
    30,000
    
    
    
    3.3
    
    
    
    29.67
    
    
    
    30,000
    
    
    
    29.6730.01 to
    
    
    35.00
    
    
    
    12,000
    
    
    
    2.4
    
    
    
    33.25
    
    
    
    12,000
    
    
    
    33.251,786,846
    
    
    
    
    
    
    
    
    
    
    
    858,930
 On May 23, 2000, the shareholders also approved the Companys 2000 Employee Stock
Purchase Plan (the Purchase Plan). The Purchase Plan provides all eligible full-time employees
with an opportunity to purchase common stock through accumulated payroll deductions. Purchases of
common stock are made at the lower of 85% of the fair market value at the beginning or end of each
six-month offering period. A total of 150,000 shares of common stock have been reserved for
issuance under the Purchase Plan through December 2000. In addition, the Purchase Plan provides for
annual increases in the number of shares available for issuance under the Purchase Plan on the
first day of each year, beginning January 1, 2001, in an amount equal to 50,000 shares. In 2004,
the Company did not issue any common stock and there was no participation under the Purchase Plan
in 2004.  9.
    LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS: NATIONAL INSTITUTES OF HEALTH (NIH) In 1999, we licensed rights to Progenta from the NIH under an exclusive, worldwide license in
the field of treatment of human endocrinologic pathologies or conditions in steroid sensitive
tissues which expires upon the expiration of the last licensed patent. Under the terms of the
agreement, we are obligated to meet developmental milestones as outlined in a commercial
development plan. This development plan outlines a preclinical and clinical program leading to the
stated objective of submitting an NDA for regulatory approval of Progenta for the treatment of
uterine fibroids in 2008. We provide annual updates to the NIH on the progress of our development
of Progenta. Based on our interaction with the NIH to date, we believe our license and relationship
with NIH are in good standing. The NIH has the ability to terminate the agreement for lack of
payment or if we are not meeting milestones as outlined in the commercial development plan and for
other reasons as outlined in the agreement. The NIH retains, on behalf of the government, a
nonexclusive, nontransferable, worldwide license to practice the inventions licensed under the
licensed patents by or on behalf of the government. For the purpose of encouraging basic research,
the NIH retains the right to grant nonexclusive research licenses to third parties. Due to the work
that was done on Progenta at the NIH prior to our license agreement, the government also has
certain rights to use the product in the event of a national emergency pursuant to the Patent and
Trademark Laws Amendments Act of 1980, as amended. During the period when we were considering
redeployment of our assets, we were not in compliance with all of the F-19




---



##### Table of Contents



original requirements stated in the commercial development plan. In July 2002, we and the NIH
amended the license agreement to include a revision of the original commercial development plan
relating to the targeted dates for certain objectives. Additional updates of the original
commercial development plan have been reached with the NIH thereafter in order to expedite
development. Although we believe that we have a good working relationship with the NIH, there can
be no assurance that all of the objectives and conditions in the commercial development plan will
be met on a timely basis or at all, or that, if we fail to meet any of such objectives, the NIH
will again agree to amend this agreement to our satisfaction. Failure to comply with the material
terms contained in the license agreement could result in termination of such agreement, which would
prohibit us from further development of Progenta and severely harm our business prospects. SCHERING-PLOUGH CORPORATION TERMINATION AGREEMENT On July 15, 2002, the Company and Schering-Plough announced that they had mutually agreed to
terminate the worldwide licensing agreements dated as of November 14, 1997 that covered Zonagens
phentolamine-based technologies for sexual dysfunction which include VASOMAX®. In
exchange for the termination, the Company paid to Schering-Plough a nominal cash fee upon execution
of the termination agreement and agreed to make a milestone payment to Schering-Plough in the event
that worldwide annual sales of VASOMAX® exceed a certain amount, which payment may be
paid in several installments. In addition, the Company agreed to make royalty payments to
Schering-Plough based on a percentage of future sales of VASOMAX® in Brazil and other
countries in which there existed certain patent rights at the time of the termination. The
Companys obligation to make royalty payments terminates after aggregate royalties paid under this
termination agreement reach a certain maximum amount. Also, the Company agreed to make royalty
payments to Schering-Plough based on future sales of certain combination products covered by
combination patents controlled by Schering-Plough. These royalty payments are not subject to the
cap on royalty payments for VASOMAX® sales described above. Included in the rights
returned to Zonagen were all licenses, options and other rights with respect to Zonagens
phentolamine-based products, Zonagens combination products, patent rights, know-how and trademarks
for the treatment of sexual dysfunction for both men and women. Schering-Plough has transferred and
assigned to Zonagen rights, title and interest in and to any and all New Drug Applications or
similar foreign submissions or approvals. Zonagen is solely responsible for all obligations in the
relevant countries with respect to such submissions and approvals. At this time, the Company does
not intend to commit any additional resources toward the clinical development of its
phentolamine-based products.  10.
    COMMITMENTS AND CONTINGENCIES: We are not currently a party to any other material legal proceedings. As of December 31, 2004, in addition to general operating obligations, the Company also had
non-cancelable purchase orders relating to the clinical development of both Progenta and Androxal
in the amounts of $739,700 and $185,300, respectively. As of December 31, 2003, the Company had
non-cancelable purchase orders relating to the clinical development of Androxal in the amount of
$11,600. F-20




---



##### Table of Contents



11.
    QUARTERLY FINANCIAL INFORMATION (UNAUDITED): First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth QuarterEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2004
    
    
    2004
    
    
    2004
    
    
    2004(In thousands except per share amounts)Revenues and other income:Licensing fees
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Research and development grants
    
    
    64
    
    
    
    53
    
    
    
    2
    
    
    
    Interest income
    
    
    26
    
    
    
    22
    
    
    
    27
    
    
    
    28Gain on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Income
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    Total revenues
    
    
    125
    
    
    
    75
    
    
    
    29
    
    
    
    28Expenses:Research and development
    
    
    477
    
    
    
    508
    
    
    
    929
    
    
    
    557General and administrative
    
    
    434
    
    
    
    294
    
    
    
    540
    
    
    
    215Total expenses
    
    
    911
    
    
    
    802
    
    
    
    1,469
    
    
    
    772Net loss before cumulative effect of
change in accounting principle
    
    
    (786
    )
    
    
    (727
    )
    
    
    (1,440
    )
    
    
    (744
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (786
    )
    
    $
    (727
    )
    
    $
    (1,440
    )
    
    $
    (744
    )Loss per share  basic and diluted:Net loss before cumulative effect of
change in accounting principle
    
    $
    (0.14
    )
    
    $
    (0.15
    )
    
    $
    (0.29
    )
    
    $
    (0.15
    )Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss per share(1)
    
    $
    (0.14
    )
    
    $
    (0.15
    )
    
    $
    (0.29
    )
    
    $
    (0.15
    )Shares used in loss per share calculation
    
    
    5,492
    
    
    
    4,993
    
    
    
    4,993
    
    
    
    4,993
 First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth QuarterEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2003
    
    
    2003
    
    
    2003
    
    
    2003(In thousands except per share amounts)Revenues and other income:Licensing fees
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Research and development grants
    
    
    121
    
    
    
    217
    
    
    
    122
    
    
    
    135Interest income
    
    
    112
    
    
    
    74
    
    
    
    67
    
    
    
    65Gain on disposal of fixed assets
    
    
    
    
    
    
    102
    
    
    
    
    
    
    
    Total revenues
    
    
    233
    
    
    
    393
    
    
    
    189
    
    
    
    200Expenses:Research and development
    
    
    564
    
    
    
    579
    
    
    
    439
    
    
    
    579General and administrative
    
    
    613
    
    
    
    490
    
    
    
    606
    
    
    
    474Total expenses
    
    
    1,177
    
    
    
    1,069
    
    
    
    1,045
    
    
    
    1,053Net loss before cumulative effect of
change in accounting principle
    
    
    (944
    )
    
    
    (676
    )
    
    
    (856
    )
    
    
    (853
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (944
    )
    
    $
    (676
    )
    
    $
    (856
    )
    
    $
    (853
    )Loss per share  basic and diluted:Net loss before cumulative effect of
change in accounting principle
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    (0.07
    )Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss per share(1)
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    (0.07
    )Shares used in loss per share calculation
    
    
    11,504
    
    
    
    11,484
    
    
    
    11,480
    
    
    
    11,480
 F-21




---



##### Table of Contents



The Company continued to incur costs associated with the redeployment of its assets for the
full year of 2003 which have been captured under the heading General & Administrative Expense. In the second quarter ended June 30, 2003, the Company held an auction and sold substantially
all of its fixed assets for approximate net proceeds of $225,000, which was $102,000 over their
book value.  12.
    SUBSEQUENT EVENT: On
February 1, 2005, the Company completed its follow-on public offering of 5,060,000 shares of
its common stock at $4.00 per share (which included the underwriters exercise of its over
allotment option for 660,000 shares). The shares offered by the Company were issued out of our
existing treasury stock, and the offering resulted in net proceeds to the Company of approximately
$18.1 million. F-22




---



##### Table of Contents



INDEX TO EXHIBITS Exhibit Number
    
    Identification Of Exhibit3.1(a)
    
    
    
    Restated Certificate of Incorporation. Exhibit 3.3 to
the Companys Registration Statement on Form SB-2 (No.
33-57728-FW), as amended (Registration Statement),
is incorporated herein by reference.3.1(b)
    
    
    
    Certificate of Designation of Series One Junior
Participating Preferred Stock dated September 2, 1999.
Exhibit A to Exhibit 4.1 to the Companys Registration
Statement on Form 8-A as filed with the Commission on
September 3, 1999 (the Rights Plan Registration
Statement), is incorporated herein by reference.3.2
    
    
    
    Restated Bylaws of the Company. Exhibit 3.4 to the
Registration Statement is incorporated herein by
reference.4.1
    
    
    
    Specimen Certificate of Common Stock, $.001 par value,
of the Company. Exhibit 4.1 to the Registration
Statement is incorporated herein by reference.4.2
    
    
    
    Rights Agreement dated September 1, 1999 between the
Company and Computershare Investor Services LLC (as
successor in interest to Harris Trust & Savings Bank),
as Rights Agent. Exhibit 4.1 to the Rights Plan
Registration Statement is incorporated herein by
reference.4.3
    
    
    
    First Amendment to Rights Agreement, dated as of
September 6, 2002, between the Company, Harris Trust &
Savings Bank and Computershare Investor Services LLC.
Exhibit 4.3 to Amendment No. 1 to the Rights Plan
Registration Statement on Form 8-A/A as filed with the
Commission on September 11, 2002 is incorporated
herein by reference.4.4
    
    
    
    Second Amendment to Rights Agreement, dated as of
October 30, 2002, between the Company and
Computershare Investor Services LLC. Exhibit 4.4 to
Amendment No. 2 to the Rights Plan Registration
Statement on Form 8-A/A as filed with the Commission
on October 31, 2002 is incorporated herein by
reference.4.5
    
    
    
    Form of Rights Certificate. Exhibit B to Exhibit 4.1
to the Rights Plan Registration Statement is
incorporated herein by reference.10.1+
    
    
    
    Amended and Restated 1993 Employee and Consultant
Stock Option Plan. Exhibit 10.3 to the Registration
Statement is incorporated herein by reference.10.2+
    
    
    
    First Amendment to the Zonagen, Inc. Amended and
Restated 1993 Stock Option Plan. Exhibit 10.22 to the
Companys Annual Report on Form 10-K for the year
ended December 31, 1999 (the 1999 Form 10-K) is
incorporated herein by reference.10.3+
    
    
    
    1996 Non-Employee Directors Stock Option Plan.
Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1997 is
incorporated herein by reference.10.4+
    
    
    
    2000 Non-Employee Directors Stock Option Plan.
Appendix B to the Companys Definitive Proxy Statement
filed on April 26, 2000 is incorporated herein by
reference.10.5+
    
    
    
    First Amendment to the Zonagen, Inc. 2000 Non-Employee
Directors Stock Option Plan. Exhibit 10.21 to the
2000 Form 10-K is incorporated herein by reference.10.6+
    
    
    
    Second Amendment to 2000 Non-Employee Directors Stock
Option Plan. Exhibit 10.6 to the Companys Annual
Report on Form 10-K for the year ended December 31,
2002 (the 2002 Form 10-K) is incorporated herein by
reference.




---



##### Table of Contents



Exhibit Number
    
    Identification Of Exhibit10.7+
    
    
    
    Zonagen, Inc. 2004 Stock Option Plan. Exhibit 10.17
to the Companys Registration Statement on Form S-1
(No. 333-119861), as amended, is incorporated herein
by reference.10.8+
    
    
    
    Employment Agreement between the Company and Joseph S.
Podolski. Exhibit 10.5 to the Registration Statement
is incorporated herein by reference.10.9+
    
    
    
    First Amendment to Employment Agreement between the
Company and Joseph S. Podolski. Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2001 is incorporated herein by
reference.10.10+
    
    
    
    Second Amendment to Employment Agreement between the
Company and Joseph S. Podolski. Exhibit 10.17 to the
2002 Form 10-K is incorporated herein by reference.10.11+
    
    
    
    Employment Agreement between the Company and Louis
Ploth, Jr. Exhibit 10.5 to the 1999 Form 10-K is
incorporated herein by reference.10.12+
    
    
    
    First Amendment to Employment Agreement between the
Company and Louis Ploth, Jr. Exhibit 10.7 to the 2000
Form 10-K is incorporated herein by reference.10.13+
    
    
    
    Second Amendment to Employment Agreement between the
Company and Louis Ploth, Jr. Exhibit 10.18 to the 2002
Form 10-K is incorporated herein by reference.10.14*
    
    
    
    Lease Agreement dated May 11, 2004, between the
Company and Sealy Woodlands, L.P.10.15++
    
    
    
    Letter Agreement dated July 15, 2002 between the
Company, Schering Plough Ltd. and Schering-Plough
Corporation. Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the fiscal quarter ended June
30, 2002 is incorporated herein by reference.10.16++
    
    
    
    PHS Patent License Agreement dated April 16, 1999
between the Company and certain agencies of the United
States Public Health Service within the Department of
Health and Human Services, with amendments. Exhibit
10.1 to the Companys Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 2003 is
incorporated herein by reference.23.1*
    
    
    
    Consent of PricewaterhouseCoopers LLP31.1*
    
    
    
    Certification Pursuant to Rule 13(a)-14(a) or
15(d)-14(a) of the Exchange Act, As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)31.2*
    
    
    
    Certification Pursuant to Rule 13(a)-14(a) or
15(d)-14(a) of the Exchange Act, As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)32.1*
    
    
    
    Certification Furnished Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Executive Officer)32.2*
    
    
    
    Certification Furnished Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
   *
    
    Filed herewith.+
    
    Management contract or compensatory plan.++
    
    Portions of this exhibit have been omitted based on a request for
confidential treatment pursuant to Rule 24b-2 of the Exchange Act.
Such omitted portions have been filed separately with the Commission.