UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|ý | 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 number 000-30289

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PRAECIS PHARMACEUTICALS INCORPORATED(Exact name of registrant as specified in its charter)

|Delaware                                                       | 04-3200305                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer
Identification No.)
|830 Winter Street
Waltham, Massachusetts                       | 02451-1420                          
|(Address of principal executive offices)                       | (Zip code)                          

(781) 795-4100(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:None

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(Title of Class)

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

Common Stock, par value $.01 per share

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(Title of Class)

Preferred
Stock Purchase Rights

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(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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. ý

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

The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant, based upon the last sale price of the common stock, par value
$.01 per share, reported on The Nasdaq National Market on June 30, 2004, was $189,077,428.

The
number of shares of common stock, par value $.01 per share, outstanding as of February 28, 2005 was 52,423,101.

Documents Incorporated By Reference

Specified
portions of the definitive Proxy Statement with respect to the registrant's 2005 Annual Meeting of Stockholders to be filed by the registrant with the Securities and Exchange
Commission are incorporated by reference into Part III of this Annual Report on Form 10-K.



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Factors That May Affect Future Results

The Company's prospects are subject to certain uncertainties and risks. This Annual Report on Form 10-K also contains certain forward-looking statements
within the meaning of the federal securities laws. The Company's future results may differ materially from its current results and actual results could differ materially from those projected in the
forward-looking statements as a result of certain risk factors. READERS SHOULD PAY PARTICULAR ATTENTION TO THE CONSIDERATIONS DESCRIBED IN THE SECTION OF THIS REPORT ENTITLED "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSRISK FACTORS THAT MAY AFFECT FUTURE RESULTS." Readers should also carefully review the risk factors described in the other
documents the Company files from time to time with the Securities and Exchange Commission.

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PRAECIS PHARMACEUTICALS INCORPORATED

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

|         |  |                                                                                                              |  | Page
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|Part I  
|Item 1.  |  | Business                                                                                                     |  | 1   
|Item 2.  |  | Properties                                                                                                   |  | 17  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 18  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 18  
|Part II 
|Item 5.  |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 19  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 20  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 21  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 48  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 49  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 49  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 49  
|Item 9B. |  | Other Information                                                                                            |  | 51  
|Part III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 52  
|Item 11. |  | Executive Compensation                                                                                       |  | 52  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 52  
|Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 52  
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 52  
|Part IV 
|Item 15. |  | Exhibits, Financial Statement Schedules                                                                      |  | 53  
|         |  | Signatures                                                                                                   |  | 57  
|         |  | Index to Financial Statements                                                                                |  | F-1 

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PART I

ITEM 1.    BUSINESS.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of innovative therapies that either address unmet medical needs or
offer improvements over existing therapies. In early 2004, we launched in the United States our first product, Plenaxis® (abarelix for injectable suspension) for the palliative treatment
of men with advanced symptomatic prostate cancer for whom other hormonal therapies are not appropriate, who have refused surgical castration and who are experiencing one or more of a specific set of
symptoms. We are promoting Plenaxis in the United States through our own marketing and sales team. We have submitted a marketing authorization application for Plenaxis in Germany. This application is
pending with the German regulatory authorities, and there may be regulatory action on the application in the second quarter of 2005 that will enable us and our partner, Schering AG, to determine
whether, and for what patient population, Plenaxis will be approved and made commercially available in Germany. Assuming favorable action by the German regulatory authorities, we plan to seek, in
collaboration with Schering AG, additional European Union member state approvals through the Mutual Recognition Procedure. Our research and development pipeline includes clinical programs in
Alzheimer's disease, non-Hodgkin's lymphoma and androgen-independent prostate cancer, as well as early stage discovery projects. During 2004, we made significant progress on the development of our
Direct Select technology platform. Direct Select offers significant enhancements over our proprietary drug discovery technology called Ligand Evolution to Active Pharmaceuticals, or LEAP. Direct
Select should allow us to generate vast pharmaceutical libraries and more rapidly and directly identify lead compounds with high affinity and specificity, and will serve as the foundation for future
drug development projects.

We
were incorporated in Delaware in July 1993 under the name Pharmaceutical Peptides, Inc. In June 1997, we changed our name to PRAECIS PHARMACEUTICALS INCORPORATED.
Our corporate headquarters and research facility is located in Waltham, Massachusetts. We conduct our business in one business segment. For the years ended December 31, 2002 and 2004,
substantially all of our revenue was generated in the United States. We did not have any revenue for the year ended December 31, 2003. Long-lived assets consist primarily of property and
equipment and are located solely in the United States for all periods presented.

Plenaxis®
and PRAECIS® are registered trademarks of our company. Apan, LEAP, Direct Select, Rel-Ease and the
PLUS Program are trademarks or trade names of our Company. This Annual Report on Form 10-K also contains trademarks, trade names and service marks of other companies, including but
not limited to Casodex®, Eligard®, Lupron Depot®, Viadur® and Zoladex®, all of which are the property of their respective owners.

Commercial, Research and Development Programs

Our business objective is to discover, in a rapid and efficient manner using our Direct Select and other proprietary technologies, develop and commercialize drugs
that either address unmet medical needs or offer improvements over existing therapies. We are currently promoting in the United States our first approved product, Plenaxis. In addition, we have two
other compounds in clinical testing, as well as various research and technology programs. Key elements of our strategy to achieve our business objective are:



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We
have outlined below the status of our commercial, research and development programs, along with the clinical indications they address, where applicable:

|                                  |                                      | Program Status
|--------------------------------- | ------------------------------------ | --------------
|
|
|
|Plenaxis (United States)          |                                      |               
|                                  | Advanced Symptomatic Prostate Cancer |               
|                                  | Androgen Independent Prostate Cancer |               
|Plenaxis (European Union)         |                                      |               
|                                  | Prostate Cancer                      |               
|Apan                              |                                      |               
|                                  | Alzheimer's Disease                  |               
|PPI-2458                          |                                      |               
|                                  | Non-Hodgkin's Lymphoma               |               
|                                  | Cancer/Rheumatoid Arthritis          |               
|Direct Select Technology Platform |                                      |               

Successful
research and development in the biotechnology industry is highly uncertain, and very few research and development programs yield a commercial product. Product candidates that
appear promising in the early phases of research and development may fail to reach the clinic for a number of reasons. We evaluate on a regular basis the progress of our research and development
programs to determine if our resources and personnel are allocated appropriately and our programs are progressing on a reasonable timeline and demonstrating favorable results. During 2004, we decided
to reallocate resources and personnel from our programs relating to the androgen receptor antagonist and certain antiviral therapies to other research and development programs. In addition, as
previously reported, we determined not to pursue further development of our endometriosis diagnostic test. As a result of our decision regarding the endometriosis diagnostic, we also determined not to
continue to allocate resources or personnel to the further development of our Biomarker discovery platform.

We
have spent substantial funds over the past three years to develop Plenaxis and our other drug candidates and expect to continue to do so in the future. We spent approximately
$56.4 million in 2002, $41.8 million in 2003 and $31.5 million in 2004 on research and development activities.



In November 2003, we received FDA approval to market our first product, Plenaxis (abarelix for injectable suspension) in the United States. Plenaxis is the
first gonadotropin releasing hormone (GnRH) antagonist approved for use in prostate cancer patients as a depot formulation. Plenaxis is indicated for the palliative treatment of men with advanced
symptomatic prostate cancer, in whom LHRH agonist therapy is not appropriate and who refuse surgical castration, and have one or more of the following: (1) risk of neurological compromise due
to metastases, (2) ureteral or bladder outlet obstruction due to local encroachment or metastatic disease, or (3) severe bone pain from skeletal metastases persisting on narcotic
analgesia. Plenaxis is not indicated for use in women or children. For safety reasons, Plenaxis is approved with marketing restrictions under 21 CFR 314, Subpart H, and is available only to physicians
who enroll in the PLUS (Plenaxis User Safety) Program. Full prescribing information for Plenaxis is available atwww.plenaxis.com.

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In
January 2004, we began shipping Plenaxis to our authorized distributors. We are promoting Plenaxis to physicians, primarily urologists and, to a lesser extent, oncologists,
through our own dedicated marketing and sales team. Substantially all of our revenues during 2004 were derived from sales of Plenaxis. Since the initial launch of Plenaxis, we have faced many
challenges that have had an adverse impact on the uptake of the product in the market. These challenges have included the need to establish more effective messaging to educate physicians about the
product's indication and to differentiate the appropriate patient population, overcome physician uncertainty and concerns over reimbursement, reposition our marketing campaign, strengthen and focus
our sales force, and hire representatives for open territories. Sales of Plenaxis during 2004 were significantly lower than expected. We continue to believe that Plenaxis is an important therapy for
patients in the indicated population who have limited treatment options available. However, we cannot assure investors that we will be able to successfully commercialize Plenaxis in the United States.

Background.Prostate cancer is one of the most commonly diagnosed cancers in men. The American Cancer Society estimates that
approximately 232,000 new diagnoses of, and 30,000 deaths from, prostate cancer will occur in the United States in 2005. At the time of approval, the FDA estimated that approximately 5-10% of men with
prostate cancer would be candidates for Plenaxis.

Most
prostate cancer cells require hormones, specifically testosterone and its derivatives, for growth. These hormones stimulate the growth of the cancerous cells. Available treatments
for prostate cancer patients include hormonal therapies, radiation therapy and surgery. The primary goal of hormonal therapy is to reduce testosterone to low, or castrate, levels, leading to
inhibition of prostate cancer cell growth.

Currently
available hormonal therapies, known as LHRH agonists, act by overstimulating the GnRH receptor. This overstimulation causes the GnRH receptor to become non-responsive after
approximately three weeks. However, this overstimulation first leads to increased production of two hormones, luteinizing hormone, or LH, and follicle stimulating hormone, or FSH. The increased level
of LH causes an initial surge of testosterone from the testes. The temporary surge in hormone levels may result in an exacerbation of symptoms, or clinical flare, in some patients. In an attempt to
mitigate the flare, physicians may prescribe additional drugs known as anti-androgens. This additional therapy may be only partially effective in reducing some of the undesirable effects of the flare.
Only after several weeks following administration of these hormonal therapies does the GnRH receptor become non-responsive and the desired reduction of hormone levels occur. In contrast, Plenaxis has
a blocking, or antagonist, effect on the GnRH receptor. Clinical studies have demonstrated that Plenaxis directly reduces levels of testosterone with no initial surge.

For
some advanced symptomatic prostate cancer patients, whose disease has progressed, the use of LHRH agonists may not be appropriate because the initial testosterone surge may lead to
an exacerbation of symptoms, which could include urinary blockage, worsening pain, kidney failure, paralysis and nerve damage due to spinal cord compression, or, in rare instances, death. LHRH
agonists, such as Lupron Depot, marketed by TAP Pharmaceutical Products Inc., and Zoladex, marketed by AstraZeneca Pharmaceuticals L.P., have precautionary labeling about the hormone-induced
flare and resulting worsening of clinical symptoms in some patients. For these patients, removal of the testes, known as surgical castration or orchiectomy, may be the only treatment option available
to rapidly reduce testosterone levels and avoid the testosterone surge, and this option is not always an acceptable one for the patient. Plenaxis offers the first non-surgical alternative approved for
these patients.

Plenaxis User Safety Program.As an element of the FDA's approval of Plenaxis, we are marketing Plenaxis under a
comprehensive risk management program developed with the FDA to ensure that patients and physicians are fully informed about the risks and benefits of Plenaxis before using it. The PLUS Program
includes, among other elements: product labeling regarding the risk of immediate-onset systemic allergic reactions and the decreased effectiveness of Plenaxis in suppressing serum testosterone to
castrate levels with continued dosing in some patients; agreements for physicians and hospital

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pharmacists
which must be signed in order to purchase the drug; a patient information form which patients sign, indicating that they are informed about the risks and benefits of the drug; an expanded
adverse events reporting program that includes immediate-onset systemic allergic reactions; several post-approval, or phase 4, studies; and measures to actively monitor and evaluate the program.

Medicare Coverage.Due to the average patient age at the time of diagnosis and treatment, a substantial majority of Plenaxis
patients are likely to be Medicare beneficiaries. In December 2004, we announced that the Centers for Medicare and Medicaid Services, or CMS, had issued a draft decision memorandum in support
of a National Coverage Determination, or NCD, for Plenaxis. NCDs are issued by the Secretary of Health and Human Services for a particular item or service if the Secretary determines that Medicare
coverage for the item or service should be defined on a nationwide basis. CMS has proposed Medicare coverage for Plenaxis under the following conditions: the product must be administered to a patient
meeting all of the criteria of the labeled indication; and the prescribing physician must be enrolled in the PLUS Program. When used in accordance with the product's labeling, there would be no
limitation on coverage regardless of the duration of Plenaxis therapy. Without this
comprehensive NCD, Plenaxis could receive inconsistent coverage among the Medicare carriers and intermediaries who may fail to distinguish the drug from LHRH agonists. We expect that the draft
decision memorandum will become effective by the end of March 2005, although CMS may modify it based on comments it received during the open comment period.

Federal
legislation, enacted in December 2003, has altered the way in which physician-administered drugs covered by Medicare are reimbursed, generally leading to lower
reimbursement levels. Medicare reimbursement for Plenaxis, as well as for other hormonal therapies for prostate cancer, was reduced by the cuts implemented January 1, 2005 (which entailed a new
reimbursement methodology based on a product's "average sales price" or "ASP" rather than the "average wholesale price" methodology previously utilized). Effective January 1, 2005, Plenaxis
will be reimbursed at 106% of its ASP. In December 2004, CMS published the ASP for Plenaxis to be in effect for the first quarter of 2005. This ASP will remain in effect for one quarter and
will be updated quarterly thereafter. Because physicians will receive a lower rate of reimbursement for Plenaxis, it is possible that some physicians may alter practice patterns and/or refer Medicare
patients to hospital outpatient settings rather than continue to treat patients in-office and it is unclear at this time how such a shift in the marketplace dynamic might affect sales of Plenaxis.



European Regulatory Status.In June 2003, we initiated the regulatory submission process in the European Union seeking
approval to market Plenaxis for the hormonal management of prostate cancer where androgen suppression is appropriate. We submitted a marketing authorization application, or MAA, in Germany comprised
of comprehensive safety and efficacy data utilized to obtain approval in the United States. This application is pending with the German regulatory authorities, and there may be regulatory action on
the application in the second quarter of 2005 that will enable us and our partner, Schering AG, to determine whether, and for what patient population, Plenaxis will be approved and made commercially
available in Germany. Assuming favorable action by the German regulatory authorities, we plan to seek, in collaboration with Schering AG, additional European Union member state approvals through the
Mutual Recognition Procedure. However, we cannot assure investors whether or when such regulatory action on our MAA will occur, or that any such action will enable or result in the successful
commercialization of Plenaxis in Germany or in any other country in the European Union.

During
2004, we entered into a license, supply and distribution agreement with Schering AG, under which we granted exclusive rights to Schering AG to commercialize Plenaxis in the field
of prostate cancer in Europe, Russia, the Middle East, South Africa, Australia and New Zealand. This agreement is described more fully below under the heading "License AgreementsSchering
AG."

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Other Territories.We also are continuing to evaluate potential licensing opportunities for the development and
commercialization of Plenaxis in Japan and other ex-U.S. territories not covered by the Schering AG agreement. We expect to actively pursue such opportunities following approval in Germany. It is
likely that the Japanese regulatory authorities will require clinical trials to be conducted in Japanese men prior to a filing for marketing approval in Japan. Other foreign regulatory authorities may
also require additional clinical studies. We cannot assure investors that we will be successful in obtaining regulatory approval in any region outside of the United States for the commercialization of
Plenaxis for the treatment of any portion of the prostate cancer patient population or for any other indication, or that we will be able to enter into additional collaboration agreements on favorable
terms, or at all.



In addition to our clinical studies in hormonally responsive advanced prostate cancer, a small, investigator-sponsored clinical study was previously conducted in
which the effects of using Plenaxis to treat androgen-independent prostate cancer were evaluated. In this disease, the prostate cancer cells no longer need testosterone to grow and, as a consequence,
testosterone-lowering therapies are ineffective. The focus of this study was on the suppression of FSH by Plenaxis and the results of the study were encouraging. Accordingly, we initiated our own
phase 1 study in May 2004 to evaluate the use of Plenaxis in approximately 22 subjects with androgen-independent prostate cancer who have progressed following treatment with an LHRH agonist.



We have also conducted clinical studies of Plenaxis for the treatment of endometriosis. We began this clinical program in 1998 and in March 2002 we
completed a phase 2 study. Based upon the results of this study, during 2002 and 2003 we conducted an additional pharmacokinetic study to attempt to determine the appropriate dose and dosing schedule.
We do not currently have any additional endometriosis studies planned and do not expect to conduct further studies without a corporate partner. Any additional clinical trials of Plenaxis for the
treatment of endometriosis would also require concurrence by the FDA.



Plenaxis, in addition to its approved indication, may have potential use in treating other diseases or conditions that respond to the reduction of either
testosterone, estrogen, LH or FSH. We intend to evaluate and support, when appropriate, small, investigator-sponsored studies in indications where there
are unmet medical needs, and where we believe that the potential benefits of treatment with Plenaxis will outweigh the potential risks. Examples of these diseases or conditions may include other types
of prostate cancer, gynecological cancers, benign prostatic hypertrophy, gonadal protection during high dose chemotherapy and immune-deficiency disorders. If these small studies yield encouraging
results, we intend to work with the FDA to reach agreement on a clinical research program to obtain approval for the use of Plenaxis in these expanded indications in the future.



We are developing Apan for the treatment of Alzheimer's disease. Alzheimer's disease affects an estimated 4.5 million people in the United States, and is
expected to become increasingly prevalent as the population ages, according to the Alzheimer's Association. Current therapies provide temporary relief for the symptoms of Alzheimer's disease in some
patients, but do not affect the progression of the disease itself.

A
hallmark of Alzheimer's disease is the accumulation of plaque-like deposits in brain tissue. A major component of this plaque is a small peptide called beta-amyloid. A large body of
clinical, biochemical and genetic evidence suggests that the aggregation of beta-amyloid peptide may be the

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underlying
cause of Alzheimer's disease. This body of evidence has led to the theory that when single beta-amyloid molecules aggregate they become toxic to nerve cells, and that this toxicity leads to
the development and progression of Alzheimer's disease. Alzheimer's disease, with the associated accumulation of beta-amyloid in the brain, may also involve a defect in the ability to clear excess
beta-amyloid from the brain to the cerebrospinal fluid, or CSF. Both humans and transgenic mice with Alzheimer's disease-like plaques show increased levels of beta-amyloid in the brain and decreased
levels in the CSF as the disease progresses.

Apan
inhibits the aggregation of beta-amyloid in several preclinical models. Results of other preclinical studies suggest that Apan may reach the brain in quantities sufficient to block
the aggregation of beta-amyloid molecules and, consequently, alter the course of the disease.

In
March 2003, we completed a phase 1a dose escalation study of Apan in healthy volunteers. In this study, we evaluated the safety and pharmacokinetics of the compound and
identified a maximum tolerated dose, or MTD, in healthy volunteers. Apan was detectable in the CSF after single dose administration to healthy volunteers.

We
are currently enrolling Alzheimer's patients in a phase 1/2a, multiple dose study of Apan, which is designed to provide additional safety data and will include certain cognitive
analyses and brain-imaging
techniques which may provide surrogate indications of therapeutic response. An ongoing phase 1b study, which is designed to determine the MTD of Apan in Alzheimer's patients, continues to take longer
than originally anticipated due to the enrollment of cohorts at dose levels that are beyond the predicted MTD, which was based upon the phase 1a study, as well as slower than expected patient accrual.

In
light of the significant anticipated development costs estimated for phase 2 and phase 3 studies, we will seek to partner the Apan clinical program with respect to further development
activities beyond the current studies.



PPI-2458 is a novel, proprietary molecule that acts by irreversibly inhibiting the enzyme methionine aminopeptidase type 2, or MetAP-2. PPI-2458 is based on the
fumagillin class of compounds. This class of compounds has been shown to prevent both the formation of new blood vessels (known as anti-angiogenesis) and abnormal cell growth, which contribute to the
growth of aberrant tissues in diseases such as cancer and rheumatoid arthritis. The dose limiting toxicity associated with other fumagillin derivatives that have entered clinical trials has largely
prevented their further development. In preclinical studies to date, PPI-2458 continues to demonstrate the potent activity of this class of compounds while displaying an improved toxicity profile.

In
preclinical studies conducted separately by us and the National Cancer Institute, or NCI, using bothin vitroand animal models,
PPI-2458 demonstrated significant anti-tumor activity against certain types of cancer cell lines. We have developed a proprietary pharmacodynamic assay to assess the level of inhibition achieved by
PPI-2458 of its target enzyme, MetAP-2. This assay is being utilized in our phase 1 program described below. Data from preclinical studies in the B16F10 xenograft mouse model, which is a commonly used
cell line in cancer studies, showed that PPI-2458 significantly inhibited tumor growth and that the degree of growth inhibition was correlated to the level of MetAP-2 inhibition achieved by PPI-2458.
The NCI has also presented its data on the anti-angiogenic activity of PPI-2458 and itsin vivoefficacy in a variety of xenograft animal models of
human cancer, which indicate that the activity of PPI-2458 compares favorably to that of another compound of this class known as TNP-470, which was in development at TAP Pharmaceutical
Products Inc.

In
December 2003, we initiated an open-label phase 1 dose escalation study of PPI-2458 in non-Hodgkin's lymphoma patients. Initial results collected from the first two patients
enrolled in this study demonstrated that orally dosed PPI-2458 achieves inhibition of MetAP-2 peripheral blood cells in humans. In March 2004, the FDA placed this trial on clinical hold until
questions relating to a

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neuropathological
finding observed in a three-month animal toxicology study were satisfactorily resolved. The results of this animal study were not available at the time that the clinical trial was
initiated. In June 2004, we received clearance from the FDA, following its review of additional non-clinical data and our revised clinical plan, to resume clinical trials. In late 2004, we
opened a new phase 1 clinical trial of PPI-2458 in non-Hodgkin's lymphoma patients and expect patient enrollment to begin during the first half of 2005. This trial is designed to assess the
safety and tolerability of PPI-2458 as well as to identify an optimal pharmacological dose. We will utilize our proprietary assay to measure the inhibition of MetAP-2 achieved by PPI-2458. We are
additionally evaluating the feasibility of expanding our clinical program to include patients with solid tumors.

In
December 2003, we entered into a collaboration with the NCI's Division of Cancer Treatment and Diagnosis for the expansion of clinical development of PPI-2458 for the treatment of
various forms of cancer. Under the collaboration agreement, we intend to work with the NCI to optimize the clinical development path for PPI-2458.

We
also intend to continue to evaluate potential trials for PPI-2458 in autoimmune diseases, including rheumatoid arthritis. A hallmark of rheumatoid arthritis is the progressive
destruction of articular joints and joint surfaces, characterized by the rapid, uncontrolled growth of the cells that line the joints, called synoviocytes. The synoviocytes, in turn, secrete a variety
of chemicals that contribute to inflammation, tissue degradation and harmful new blood vessel formation. Data from preclinical studies published during 2004 demonstrate that PPI-2458 inhibits the
growth of both human fibroblast-like synoviocytes derived from rheumatoid arthritis patients and human endothelial cells. Both cell types are thought to be important in the progression of joint
destruction in rheumatoid arthritis patients. In addition, growth inhibition of these PPI-2458-sensitive cell types in rheumatoid arthritis has been shown in preclinical studies to be linked to
MetAP-2 enzyme inhibition in a dose-dependent fashion. In a rodent model of rheumatoid arthritis, PPI-2458 also significantly lessened joint swelling at well-tolerated doses when administered
therapeutically after the onset of chronic disease. We believe the mechanism of action of PPI-2458, its improved toxicity profile and the marked attenuation of chronic disease in the rodent arthritis
modelin vivo, may position this compound as a potential treatment for rheumatoid arthritis and other inflammatory and autoimmune disorders.

In
light of the anticipated development costs associated with the PPI-2458 clinical program, we anticipate seeking a partner for this program as clinical development advances.



Our proprietary method for discovering drugs combines the power and diversity of biological selection to identify compounds with potentially favorable drug-like
properties with an ability to enhance and optimize these compounds using medicinal chemistry. We call this process Ligand Evolution to Active Pharmaceuticals, or LEAP. We have several granted foreign
patents, as well as pending patent applications in the United States and abroad, that cover the essential steps of the LEAP process.

As
part of the ongoing evolution and enhancement of this discovery process, during 2004, we focused our research efforts on developing a novel technology platform which we call Direct
Select. We have made significant progress on the development of Direct Select, including solving many of the technical challenges associated with creating and screening ultra-large advanced
combinatorial chemistry libraries. We believe that Direct Select technology, through the creation of these vast libraries of drug-like molecules, will allow us to more rapidly and directly identify
lead compounds with a higher affinity and specificity than has routinely been possible using traditional drug discovery methods or our existing LEAP technology. The enhanced capabilities of these
libraries lie in their sheer size, up to 10,000 times the size of compound libraries typically used in the pharmaceutical industry. In pilot trials using Direct Select technology, 250 thousand
member libraries were routinely prepared in less than two weeks. These libraries were characterized extensively by mass spectrometry and validated by the selection of novel compounds to defined
targets. Our scientists next scaled the process to create multiple libraries

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consisting
of greater than 100 million molecules containing highly diverse structures. These larger Direct Select libraries are now being applied to the discovery of new orally available
compounds directed at selected human disease targets. Construction of a much larger library incorporating additional diversity, scaffolds and drug-like properties is underway with expected completion
in early 2005. We continue to develop new chemistries and chemical scaffolds to incorporate into libraries and anticipate producing numerous ultra-large libraries using our automated platform during
2005. We have filed United States and foreign patent applications covering the essential steps of the Direct Select process.

We
intend to seek partnering opportunities with respect to our Direct Select discovery platform during 2005, and may also use this technology in identifying new compounds for internal
development.



We developed Rel-Ease, our proprietary sustained release drug delivery technology, to allow for the delivery of drugs in a long-acting depot formulation. For
example, using Rel-Ease technology, we are able to formulate Plenaxis in such a way that a physician needs to administer it to prostate cancer patients only once every four weeks (following the first
month, in which a dose is given on day 15).
Besides the obvious benefit of reducing the frequency of dosing for injectable drugs, less frequent injections of a drug in a sustained release formulation may also be more advantageous and desirable
than oral administration, leading to improved patient compliance, added convenience and/or simplified reimbursement.

Rel-Ease,
unlike many other sustained release injectable formulations, allows for high drug loads with minimal initial "burst" and uses aqueous processes which are compatible with
biomolecules. Moreover, Rel-Ease uses readily available pharmaceutical grade raw materials, has a robust manufacturing process that readily scales to commercial quantities and has demonstrated its
approvability with the FDA's approval of Plenaxis in November 2003. We have formulated a variety of molecules with Rel-Ease technology, including Plenaxis, other peptides and low molecular
weight pharmaceuticals, and believe that Rel-Ease may be useful for formulating drugs in clinical development, as well as creating improved formulations and sustained release formulations of approved
drugs. We hold patents that cover the general application of this technology for a broad range of peptide-based drugs.

License Agreements



In April 2004, we entered into a license, supply and distribution agreement with Schering AG under which we granted exclusive rights to Schering AG to
commercialize Plenaxis in the field of prostate cancer in Europe, Russia, the Middle East, South Africa, Australia and New Zealand. The Schering AG agreement provides for a combination of upfront,
regulatory approval and performance-based milestone payments, as well as a share of revenue through transfer price payments for drug product which will be supplied by us. The transfer price will vary
based upon net sales of Plenaxis, as well as pricing and reimbursement levels, in the licensed territory. The milestone payments may total over time approximately $90.0 million, depending on
Euro/U.S. Dollar conversion rates and the attainment of specified annual sales levels which the majority of the milestone payments are conditioned upon. The overall financial terms of the Schering AG
agreement are intended, depending upon performance levels, to approximate an equal sharing of the net present value of Plenaxis for the prostate cancer indication in the licensed territory.

We
received a $2.0 million signing payment from Schering AG during the second quarter of 2004, which we are recognizing into revenues over the remaining patent life of Plenaxis in
Europe of approximately twelve years. We recognized approximately $0.1 million in revenues under the Schering AG agreement during 2004.

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In October 1996, we entered into a license agreement with Indiana University Foundation. The license agreement was amended in June 1998, and Indiana
University Foundation assigned it to Indiana University's Advanced Research and Technology Institute, Inc. Under the agreement, we have an exclusive worldwide license under patent applications,
future patents and technology of Indiana University Foundation relating to GnRH antagonist compounds, including abarelix, which is the active ingredient of Plenaxis, and methods of use for abarelix.
We have agreed to make performance-based payments of up to an additional $1.5 million, and to pay royalties on our net sales of products covered by the license, including Plenaxis. Through
December 31, 2004, we had paid non-refundable fees, performance-based payments and royalties of approximately $3.1 million under this agreement. These amounts were recorded as expenses
during the periods amounts were paid. The license agreement remains in effect until the last licensed patent expires, currently 2015. Expiration of the license will not preclude us from continuing to
develop and market the licensed products and use the licensed technology, provided we obtain the consent of Advanced Research and Technology Institute to extend the license term past the expiration
date. Advanced Research and Technology Institute may not unreasonably withhold its consent to our request for such an extension. We can terminate the agreement at any time upon 90 days notice.
Advanced Research and Technology Institute may terminate upon 90 days notice if we materially breach the agreement or fail to make required payments.

Marketing and Sales

We have established an internal infrastructure to support the marketing and sale of Plenaxis in the United States, including marketing and sales support
professionals based at our headquarters in Waltham, Massachusetts. We have also established a nationwide network of 40 sales territories, supported by five regional managers. Our sales force promotes
Plenaxis to physicians, primarily urologists and, to a lesser extent, oncologists, who are involved in the treatment of patients with advanced symptomatic prostate cancer, and educates physicians and
hospital pharmacists about the PLUS Program and the risks and benefits of Plenaxis. In addition to marketing and sales personnel, we have hired a staff of medical science liaisons to engage in
scientific exchange, help respond to medical and scientific questions from physicians and facilitate the participation of clinical sites in our phase 4 studies. To date, we have experienced
significant turnover in both our sales management and field sales personnel. We believe that this turnover has had, and that the field sales personnel turnover will continue to have, an adverse impact
on our ability to market and sell Plenaxis.

In
the event that our MAA for Plenaxis is approved in Germany and other countries in the European Union, Plenaxis will be exclusively marketed and sold in those countries by Schering AG
pursuant to the license, supply and distribution agreement described above.

Distribution/Customers

We sell Plenaxis directly to a limited number of authorized specialty pharmaceutical distributors and pharmacies who, in turn, sell the product to physicians and
hospital pharmacists enrolled in the PLUS Program. There are a relatively small number of specialty distributors and pharmacies that provide such services. From time to time, our distributors may
increase or decrease the level of Plenaxis held in inventory which could adversely affect our operating results. For the year-ended December 31, 2004, sales to Oncology Therapeutics Network
Joint Venture, L.P., McKesson Specialty Distribution Services, Priority Healthcare Corporation, ASD Specialty Healthcare, Inc. and Cardinal Health 108, Inc. represented approximately
39%, 18%, 16%, 16% and 10%, respectively, of our aggregate net product sales.

These
specialty distributors and pharmacies must also distribute Plenaxis only to physicians and hospital pharmacists enrolled in the PLUS Program. There can be no assurance that these
specialty

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distributors
and pharmacies will adequately provide their services to either the end users or to us or that we could find additional outlets to distribute Plenaxis.

Authorized
distributors may return Plenaxis in its original container three months prior to, and six months after, the product expiration date, or if the product is damaged when
received, the wrong quantity is shipped, or in connection with a product recall. Product shipped during 2004 had an initial approved shelf-life of 24 months with expiration dates of
February 2005 and June 2006. At the end of 2004, the FDA approved an extension of the shelf life to 36 months which will be applied to all future commercial lots.

We
currently provide substantially all of our distributors with payment terms of up to 120 days on purchases of Plenaxis. Through December 31, 2004, payments have generally
been made in a timely manner.

Manufacturing

We generally manufacture in-house the drug supply required to support our early preclinical studies. External contractors provide all of our later-stage
preclinical, clinical and commercial supplies. We have long-term contracts for each stage of the commercial manufacturing process for Plenaxis.

We
have a development and supply agreement with UCB S.A. under which UCB supplies us with commercial volumes of the active pharmaceutical ingredient, or API, for Plenaxis. The UCB
agreement was assigned to us by Amgen Inc. effective as of December 17, 2001. In August 2004, we amended our agreement with UCB. Under the amendment, we have committed to purchase
a specified quantity of API for delivery in 2005 (at a lower price than would otherwise be applicable under the agreement), for an aggregate purchase price of $3.9 million, $1.6 million
of which was included in current liabilities as of December 31, 2004, with the remainder due upon the later of the delivery of the API and December 31, 2005. This API will be produced
using quantities of materials in UCB's inventory purchased by UCB pursuant to forecasts submitted to UCB prior to 2001 under the terms of the UCB agreement.

In
addition, we have committed to purchase the remaining materials referenced above for an aggregate purchase price of approximately $3.4 million. We are required to purchase a
specified quantity of such materials each year beginning in 2006 and ending in 2009. UCB has granted us the option, in lieu of purchasing the remaining materials, to purchase each year, at the same
reduced price as noted above, specified quantities of API produced using such materials. The option can be exercised in whole or in part. Materials purchased in one year can be utilized at a later
date for the manufacture of API, and we will be credited the cost of such previously purchased materials. We made payments under the UCB Agreement of approximately $1.1 million during 2004.

We
also have a supply agreement with Cambrex Charles City, Inc., formerly Salsbury Chemicals, Inc. Under this supply agreement, Cambrex has agreed to manufacture for us the
commercial depot formulations of Plenaxis. We retain all rights in manufacturing technology developed in connection with this agreement. During 2004, we amended our supply agreement with Cambrex.
Under the amendment, the term of the original agreement has been extended for an additional five years (through July 2010), with an option for us to further extend the term for up to an
additional five years, subject to an agreed upon increase in price and in the minimum annual purchase commitment. As part of the amendment, we agreed to a minimum annual purchase commitment of
$900,000 per year through 2010. We made payments under the Cambrex agreement of approximately $1.1 million during 2004.

In
addition, we have a commercial supply agreement with Baxter Pharmaceutical Solutions LLC to supply Plenaxis in finished vials. Our minimum annual purchase commitment for 2005 and
annually for the remainder of the term (through June 2007) is $650,000. We made payments under the Baxter agreement of approximately $1.0 million during 2004.

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In order to meet potential increases in demand in connection with the commercialization of Plenaxis, or in the event of a disruption in supply resulting from a force majeure event, we
continue to evaluate, as part of our strategic planning process, the possibility of a second source for certain stages of Plenaxis production. However, the number of qualified alternative suppliers is
limited, and we cannot assure investors that we will be able to locate alternative suppliers or negotiate second supply agreements on reasonable terms. Furthermore, the process of engineering a new
supplier's facility for the production of Plenaxis and obtaining the necessary FDA or foreign regulatory approval of the facility would require substantial lead-time and could be extremely costly. We
cannot assure investors that we will not lose one or more of our suppliers, or that in such event we would be readily able to continue the commercialization and sale of Plenaxis or the further
development of Plenaxis without substantial and costly delays.

Patents and Proprietary Rights

Proprietary protection for our products, technology and processes is essential to our business. We seek proprietary protection predominantly in the form of
patents on our products and the processes we use to discover them. With respect to a particular product, we generally seek patent protection on the compound itself, its commercial formulation, its
range of applications and its production. Where possible, we also seek patent coverage that could prevent the marketing of, or restrict the commercial threat of, competitive products.

We
currently hold 26 United States patents and exclusive licenses to three United States patents. These patents have expiration dates from 2015 through 2020. We also hold or have
exclusive licenses to 100 granted foreign patents. In addition, we have filed or hold exclusive licenses to 34 United States utility and provisional patent applications, as well as 122 related foreign
patent applications, including both Patent Cooperation Treaty filings and national filings.

In
particular, we have or hold exclusive licenses to United States patents that cover both the active ingredient of Plenaxis, known as abarelix, as well as methods of use for abarelix
for treating a variety of conditions, including prostate cancer, and the sustained release formulation enabling its once-per-month administration. These patents expire in 2015 and 2016. We also have
patents covering the use of abarelix and certain specific uses of any other GnRH antagonist in various therapeutic settings, including in combination with surgery or radiation therapy. In addition, we
have issued United States patents and pending United States patent applications covering Apan and PPI-2458, as well as various pending United States and foreign patent applications directed to the
Direct Select technology platform. We intend to file additional United States and foreign patent applications, where appropriate, relating to new product discoveries, technologies or improvements.

We
also rely on trade secrets, know-how and continuing technological advances to protect various aspects of our core technology. We require our employees, consultants and scientific
collaborators to execute confidentiality and invention assignment agreements with us to maintain the confidentiality, and our ownership, of our trade secrets and proprietary information. These
agreements generally provide that the employee, consultant or scientific collaborator will not disclose our confidential information to third parties, compete with us or solicit our employees during
the course of their employment, consultancy or collaboration with us. These agreements also provide that inventions conceived by the employee, consultant or scientific collaborator in the course of
working for us will be our exclusive property. Additionally, our employees agree, for one year following termination of their employment with us, not to solicit our other employees.

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Competition

A biopharmaceutical company such as ours faces intense competition. Many companies, both public and private, including large pharmaceutical companies, chemical
companies and biotechnology companies, develop products or technologies competitive with our products or technologies. Many of these companies have greater financial resources and more experience than
we do in discovering and developing drugs, obtaining regulatory approvals, manufacturing and marketing. In addition, academic, government and industry-based research is intense, resulting in
considerable competition in obtaining qualified research personnel, submitting patent filings for protection of intellectual property rights and establishing strategic corporate alliances.

Our
product, Plenaxis, as well as each of our potential products in research or development, face or will face competition from other products. In addition, there are several companies
with technology platforms that will compete with Direct Select. More specifically, Plenaxis, although approved in the United States only for the palliative treatment of men with advanced symptomatic
prostate cancer for whom other hormonal therapies are not appropriate, who have refused surgical castration and who are experiencing one or more of a specific set of symptoms, will still compete to
some extent with established or newly introduced products, including Lupron Depot, Zoladex, Casodex and other pharmaceuticals used by physicians for the treatment of hormonally responsive advanced
prostate cancer in the United States and Europe. Many established products are available in long-acting formulations, including six and twelve-month implants, and one newly introduced treatment for
prostate cancer is available as a nasal spray.

We
are also aware of several other GnRH antagonists in phase 2 clinical trials for the treatment of prostate cancer, at least one of which may have a more favorable safety profile than
Plenaxis. Several other companies are also conducting clinical trials of orally-active, small molecule GnRH antagonist compounds. In addition, Plenaxis and each of our product candidates will face
increasing competition from generic formulations of existing drugs whose active components are no longer covered by patents.
Specifically, we are aware of various formulations of leuprorelin, the active ingredient of Lupron Depot, including Viadur, marketed by Bayer Corporation as a 12-month hormone therapy implant, and
Eligard, marketed by Atrix Laboratories, Inc. in one-, three-, four- and six-month depot formulations for the treatment of advanced prostate cancer.

We
believe that the principal competitive factors affecting the market for Plenaxis are the safety and efficacy profile, physician and patient acceptance of the product, product
features, including the dosing schedule, and pricing and reimbursement factors. We believe that Plenaxis should be adopted by practitioners and patients as an acceptable and competitive therapy for
the subset of advanced symptomatic prostate cancer patients for which Plenaxis is indicated, although no assurance can be given in this regard.

Government Regulation

The manufacture and marketing of pharmaceutical products and our ongoing research and development activities in the United States require the approval of numerous
governmental authorities, including the FDA. We also must obtain similar approvals from comparable agencies in most foreign countries. The FDA has established mandatory procedures and safety standards
which apply to preclinical testing and clinical trials, as well as to the manufacture, storage, distribution, marketing, sales, import and export of pharmaceutical products. State, local and other
authorities also regulate pharmaceutical manufacturing and distribution facilities, among other things.

The
pharmaceutical research, development and approval process in the United States is typically intensive, uncertain, lengthy and rigorous and can take many years, depending on the
product under consideration. As an initial step in the FDA regulatory approval process, an applicant typically conducts preclinical studies in animals to assess a drug's pharmacological profile and to
identify potential safety issues. An applicant must conduct specified preclinical laboratory and animal studies in compliance with the FDA's good laboratory practice regulations. Failure to follow
these requirements can invalidate the

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data,
among other things. An applicant must submit the results of these studies to the FDA as part of an investigational new drug application, or IND, before initiating testing in humans. Proposed
clinical testing can only begin if the FDA raises no objections to the IND. We can give no assurance that any submission of an IND to the FDA relating to our product candidates will result in the
commencement of a clinical trial. The FDA may prevent studies from moving forward by imposing a clinical hold, and may suspend or terminate studies once initiated.

Clinical
testing must meet requirements for institutional review board, or IRB, oversight and study subject informed consent, as well as FDA prior review, oversight and good clinical
practice requirements. Independent IRBs are responsible for overseeing studies at particular sites and protecting human research study subjects. An IRB may prevent a study from beginning or suspend or
terminate a study once initiated. Typically, clinical testing involves a three-phase process. Phase 1 clinical trials generally involve a small number of subjects and are designed to provide
information about both product safety and the expected dose of the drug. Phase 2 clinical trials generally provide additional information on dosing and safety in a limited patient population.
Generally, phase 2 trials may also provide preliminary evidence of product efficacy. Phase 3 clinical trials are large-scale, well-controlled studies. The goal of phase 3 clinical trials generally is
to provide statistically valid proof of efficacy, as well as safety, in the target patient population to support marketing authorization. In order to seek approval to commence commercial sales, the
company performing the preclinical testing and clinical trials of a pharmaceutical product then submits the results to the FDA in the form of a new drug application, or NDA, along with proposed
labeling for the product and information about the manufacturing processes and facilities that will be used to ensure product quality. Each NDA submission requires a substantial user fee payment for
which the FDA has committed generally to review and make a decision concerning approval within 10 months, and of a new "priority" drug within 6 months. However final FDA action on the
NDA can take substantially longer and also may involve review and recommendations by an independent FDA advisory committee. Preparing NDA applications involves considerable data collection,
verification, analysis and expense. In responding to an NDA, the FDA may conduct a pre-approval inspection of the relevant manufacturing facility or facilities to assess conformance to the current
good manufacturing practice requirements and may also inspect sites of clinical investigators involved in the clinical development program to ensure their conformance to good clinical practices.

The
FDA must grant approval of our products, which includes a review of the manufacturing processes and facilities used to produce these products, before we can market these products in
the United States. The process of obtaining approvals from the FDA can be costly, time consuming and subject to unanticipated delays. The FDA may not approve an NDA, or may require revisions to the
product labeling, require that additional studies be conducted prior to or as a condition of approval, or impose other limitations or conditions on product distribution, including, for example,
adoption of a special risk management plan. If the FDA grants approval of a drug product, the approval will be limited to specific indications. Approval may also be withdrawn if new issues arise
concerning a drug's safety or effectiveness.

The
FDA has considerable discretion in determining whether to grant marketing approval for a drug, and may delay or deny approval even in circumstances where the applicant's clinical
trials have proceeded in compliance with FDA procedures and regulations and have met the established end-points of the trials. Challenges to FDA determinations are generally time-consuming and costly,
and rarely if ever succeed. In November 2003, we received FDA approval to market Plenaxis for the palliative treatment of men with advanced symptomatic prostate cancer for whom other hormonal
therapies are not appropriate, who have refused surgical castration and who are experiencing one or more of a specific set of symptoms. We can give no assurance that we will obtain marketing approval
for any of our other product candidates.

Now
that we have received marketing approval for Plenaxis, we must comply with FDA requirements for manufacturing, labeling, advertising, record keeping and reporting of adverse
experiences and other information. In addition, we must seek FDA approval for any significant changes

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to
the product, the manufacturing of the product, or the labeling. Drug advertising and promotion are subject to federal and state regulations. In the United States, the FDA regulates all company and
product promotion, including direct-to-consumer advertising. The manufacture of a product after approval is also subject to comprehensive and continuing regulation. These regulations require the
manufacture of products in specific approved facilities and in accordance with current good manufacturing practices, and the listing of products and registration of manufacturing establishments with
the FDA. These regulations also impose certain organizational, procedural and documentation requirements with respect to manufacturing and quality assurance activities. All manufacturing facilities
are subject to comprehensive, periodic inspections by the FDA.

In
addition, Plenaxis has been approved under regulations concerning drugs with certain safety profiles, under which the FDA has established special restrictions to ensure safe use.
Under these regulations, Plenaxis was approved with a comprehensive risk management program. This program includes educational outreach to patients and physicians regarding the risks and benefits of
Plenaxis, restricted distribution of the product only to physicians enrolled in a prescribing registry, an expanded adverse events reporting program and auditing requirements to evaluate the
effectiveness of the program. We are also required to conduct several phase 4 studies to evaluate the risk management program and the appropriate use of the drug in the indicated population. These
regulations also give the FDA authority to pre-approve all promotional materials and permit an expedited market withdrawal procedure if issues arise regarding the safe use of Plenaxis.

Our
manufacturing, sales, promotion, and other activities following product approval are subject to regulation by numerous regulatory authorities in addition to the FDA, including
potentially the Federal Trade Commission, the Department of Justice and individual U.S. Attorney offices within the Department of Justice, CMS, other divisions of the Department of Health and Human
Services, and state and local governments. Any distribution of pharmaceutical samples to physicians must comply with applicable rules, including the Prescription Drug Marketing Act. Our sales,
marketing and scientific/educational programs must comply with the anti-kickback provisions of the Social Security Act, the False Claims Act, and similar state laws. Our pricing and rebate programs
must comply with pricing and reimbursement rules, including the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veteran's Health Care Act. If products are made
available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of our activities are potentially subject to federal
and state consumer protection and unfair competition laws.

Depending
on the circumstances, failure to meet these applicable legal and regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or
seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, private "qui tam" actions brought by individual whistleblowers in the name of
the government, or refusal to allow us to enter into supply contracts, including government contracts. In addition, even if we comply with FDA and other requirements, new information regarding the
safety or effectiveness of a product could lead FDA to modify or withdraw a product approval.

We
also are subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal
of hazardous or potentially hazardous substances, including chemicals, micro-organisms and various radioactive compounds used in connection with our research and development activities. Although we
believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by state and federal regulations, we cannot assure you that accidental
contamination or injury from these materials will not occur. Compliance with laws and regulations relating to the protection of the environment has not had a material effect on our capital
expenditures or our competitive position. However, we cannot accurately predict the extent of government regulation, and the cost and effect thereof on our competitive position, which might result
from any legislative or administrative action.

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Additionally,
we will likely need to obtain approval of a product from comparable regulatory authorities in foreign countries prior to the commencement of marketing of the product in
those countries. The approval procedure varies among countries, may involve additional testing and the time required may differ from that required for FDA approval. Under the current regulatory system
in the European Union, marketing authorization applications may be submitted pursuant to a centralized, a decentralized or a national level process. The centralized procedure is mandatory for the
approval of biotechnology products and high technology products and available at the applicant's option for other products. The centralized procedure provides for the grant of a single marketing
authorization that is valid in all European Union member states. The decentralized procedure is available for all medicinal products that are not subject to the centralized procedure. The
decentralized procedure provides for mutual recognition of national approval decisions, changes existing procedures for national approvals and establishes procedures for coordinated European Union
actions on products, suspensions and withdrawals. Under this procedure, the holder of a national marketing authorization for which mutual recognition is sought may submit an application to one or more
European Union member states, certify that the dossier is identical to that on which the first approval was based or explain any differences and certify that identical dossiers are being submitted to
all member states for which recognition is sought. Within 90 days of receiving the application and assessment report, each European Union member state must decide whether to recognize approval.
The procedure encourages member states to work with applicants and other regulatory authorities to resolve disputes concerning mutual recognition. Lack of objection of a given country within
90 days automatically results in approval of the European Union country. Following receipt of marketing authorization in a member state, we would then be required to engage in pricing
discussions and negotiations with a separate prescription pricing authority in that country.

We
are seeking European regulatory approval for the use of Plenaxis for hormonally responsive prostate cancer under the decentralized procedure and filed our first MAA in Germany in
June 2003. That review is currently pending. We are relying primarily on third party contractors to assist us with our European regulatory filings for Plenaxis, as well as assistance from our
corporate collaborator, Schering AG. However, although we have sought qualified experience and assistance in dealing with the foreign regulatory processes and interacting with foreign regulatory
authorities, we cannot assure investors that we will be successful in filing for and obtaining the necessary governmental approvals for Plenaxis or any of our other product candidates in Europe or any
other foreign country.

Price Controls

In many of the markets where we operate or intend to operate, the prices of pharmaceutical products are subject to direct price controls (by law) and to drug
reimbursement programs with varying price control mechanisms.

In
the United States, debate over the reform of the health care system has resulted in an increased focus on pricing. Although there are currently no direct government price controls
over private sector purchases in the United States, federal legislation requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs to enable them to be eligible for reimbursement
under certain public health care programs. Various states have adopted mechanisms under Medicaid and otherwise that seek to control drug prices, including by disfavoring certain higher priced drugs
and by seeking supplemental rebates from manufacturers. In the absence of new government regulation, managed care has become a potent force in the marketplace that increases downward pressure on the
prices of pharmaceutical products. Federal legislation, enacted in December 2003, has altered the way in which physician-administered drugs covered by Medicare are reimbursed, generally leading
to lower reimbursement levels. Due to the average patient age at the time of diagnosis and treatment, a substantial majority of Plenaxis patients are likely to be Medicare beneficiaries. Medicare
reimbursement for Plenaxis, as well as for other hormonal therapies for prostate cancer, was reduced as a consequence of the new federal legislation as of January 1, 2005 (which entailed a new
reimbursement methodology based on a product's "average sales price" or "ASP" rather than the

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"average
wholesale price" methodology previously utilized). Effective January 1, 2005, Plenaxis will be reimbursed at 106% of its ASP. Because physicians will receive a lower rate of
reimbursement for Plenaxis, it is possible that some physicians may alter practice patterns and/or refer Medicare patients to hospital outpatient settings rather than continue to treat patients
in-office and it is unclear at this time how such a shift in the marketplace dynamic might affect sales of Plenaxis.

This
new legislation has also added an outpatient prescription drug benefit to Medicare, effective January 2006. In the interim, Congress has established a discount drug card
program for Medicare beneficiaries. Both benefits will be provided primarily through private entities, which will attempt to negotiate price concessions from pharmaceutical manufacturers. While these
negotiations may increase pricing pressures, it is also possible that the new Medicare prescription drug benefit may increase the volume of pharmaceutical drug purchases, offsetting, at least in part,
potential price discounts. The new law specifically prohibits the United States government from interfering in price negotiations between manufacturers and Medicare drug plan sponsors, but CMS has
indicated that it will review the discounts obtained by drug plan sponsors, and will influence pricing in other ways such as through the establishment of formulary design parameters. In addition, some
members of Congress are still pursuing legislation that would permit the United States government to use its enormous purchasing power to demand discounts from pharmaceutical companies thereby
creating de facto price controls on prescription drugs.

This
focus on pricing has led to other adverse government action, and may lead to other action in the future. For example, in December 2003 federal legislation was enacted to
change United States import laws and expand the ability to import lower priced versions of our and competing products from Canada, where there are government price controls. These changes to the
import laws will not take effect unless and until the Secretary of Health and Human Services certifies that the changes will lead to substantial savings for consumers and will not create a public
health safety issue. The prior Secretary of Health and Human Services determined that there was not a basis to make such a certification. However, it is possible that the current Secretary or a
subsequent Secretary could make the certification in the future. In addition, legislative proposals have been made to implement the changes to the import laws without any certification, and to broaden
permissible imports in other ways. Even if the changes to the import laws do not take effect, and other changes are not enacted, imports from Canada and elsewhere may increase due to market and
political forces, and the limited enforcement resources of the FDA, the Customs Service, and other government agencies. For example, numerous states and localities have initiated or proposed programs
to facilitate Canadian and other imports, notwithstanding questions raised by FDA about the legality of such actions. We expect that pressures on pricing and operating results will continue.

In
the European Union, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a
large part of the cost of such products to consumers. The approach taken varies from member state to member state. Some jurisdictions operate positive and/or negative list systems under which products
may only be marketed once a reimbursement price has been agreed. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward
pressure on health care costs in general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are being erected to the entry of new products, as exemplified by
the National Institute for Clinical Excellence in the United Kingdom which evaluates the data supporting new medicines and provides reimbursement recommendations to the government. In addition, in
some countries cross-border imports from low-priced markets (parallel imports) exert a commercial pressure on pricing within a country.

In
Japan, the National Health Ministry biannually reviews the pharmaceutical prices of individual products. In the past, these reviews have resulted in price reductions.

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Product Liability Insurance

We maintain product liability insurance for the manufacture and commercial sale of Plenaxis, as well as for clinical trials, in the amount of $20.0 million
per occurrence and $20.0 million in the aggregate. Although we maintain product liability insurance, we cannot be sure that this coverage is adequate or that it will continue to be available to
us on acceptable terms. Insurance coverage is becoming increasingly expensive, and we may be unable to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against
losses due to liability. We may incur significant liability and our business would be harmed if product liability lawsuits are initiated against us and are successful.
Furthermore, product liability claims, regardless of their merits or outcome, could be costly and divert management's attention from other business concerns, or adversely affect our reputation and the
demand for Plenaxis.

Human Resources

As of February 28, 2005, we had 172 full-time employees, all of whom were located in the United States. We also utilize consultants and independent
contractors on a regular basis to assist in the development and potential commercialization of our products. None of our employees are party to a collective bargaining agreement and we have never
experienced a work stoppage. We consider our employee relations to be good. We believe that our future success is dependent in part on our ability to attract and retain skilled scientific, sales and
marketing, and other professional and senior management personnel. Competition in our industry is intense and we cannot assure you that we will be able to attract, integrate and retain these
personnel.

Available Information

We maintain a website with the addresswww.praecis.com. We are not including the information contained on our
website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or
furnish such material to, the Securities and Exchange Commission.

ITEM 2.    PROPERTIES.

Our corporate headquarters and principal research facility is located in Waltham, Massachusetts, where we own, through our wholly owned real estate subsidiary,
land and a building of approximately 175,000 square feet. We have entered into a 15-year lease for this facility with our subsidiary. We currently occupy approximately 100,000 square feet of this
facility and would sublease a portion of the remaining space for up to the next three to five years upon acceptable financial terms. However, given the current market conditions for commercial real
estate in the Boston area, it is unlikely that we will sublease our excess space on financially acceptable terms in the foreseeable future. In connection with the acquisition of our corporate
headquarters and principal research facility, our subsidiary granted a security interest in the facility, together with all fixtures, equipment, improvements and related items, as more fully discussed
in "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources" appearing elsewhere in this report.

We
believe that our facility will be adequate for our operations under our current long-term operating plan and that we would be able to obtain additional space as needed on commercially
reasonable terms.

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ITEM 3.    LEGAL PROCEEDINGS.

In December 2004 and January 2005, the Company, Chairman and (now former) Chief Executive Officer Malcolm Gefter, President and (now former) Chief
Operating Officer Kevin F. McLaughlin, Chief Financial Officer and Treasurer Edward C. English, and former President and Chief Operating Officer William K. Heiden, were named as defendants in three
purported class action securities lawsuits filed in the United States District Court for the District of Massachusetts. Those purported class actions are captionedKatz v.
Praecis Pharmaceuticals Inc., Malcolm Gefter, Kevin McLaughlin, Edward English and William K. Heiden, Civil Action No. 04-12581-GAO (filed December 9,
2004),Schwartz v. Praecis Pharmaceuticals Inc., Malcolm Gefter, Kevin McLaughlin, Edward English and William K. Heiden, Civil Action
No. 04-12704-REK (filed December 27, 2004) andBassin v. Praecis Pharmaceuticals Inc., Malcolm L. Gefter, Ph.D., Kevin F. McLaughlin, Edward C. English and
William K. Heiden, Civil Action No. 05-10134-GAO (filed January 21, 2005). The complaints generally allege securities fraud during the period from
November 25, 2003 through December 6, 2004. Each of the complaints purports to assert claims under Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder, and alleges that the Company and the individually named defendants made materially false and misleading public statements concerning the Company's business
and financial results, particularly relating to statements regarding the commercialization of Plenaxis.

On
February 7, 2005, a motion was filed to consolidate theKatz,Schwartzand Bassinactions and to
appoint lead plaintiffs and lead counsel. On February 18, 2005, the Company and the individual defendants filed a brief
response to that motion, reserving their rights to challenge the adequacy and typicality, among other things, of the proposed lead plaintiffs in connection with class certification proceedings, if
any. The Court has not yet entered any Orders regarding the consolidation of the pending cases or the appointment of lead plaintiffs and approval of such plaintiffs' selection of lead counsel. At this
time, plaintiffs have not specified the amount of damages they are seeking in the actions.

Management
believes that the allegations against the Company are without merit, and the Company intends to vigorously defend against the plaintiffs' claims. As this litigation is in an
initial stage, management is unable to predict its outcome or its ultimate effect, if any, on the Company's financial condition. However, we expect that the costs and expenses related to this
litigation may be significant. Our current director and officer liability insurance policies (which, subject to the terms and conditions thereof, also provide "entity coverage" for the Company for
this litigation) provide that the Company is responsible for the first $2.5 million of such costs and expenses. Also, a judgment in or settlement of these actions could exceed our insurance
coverage. If we are not successful in defending these actions, our business and financial condition could be adversely affected. In addition, whether or not we are
successful, the defense of these actions may divert the attention of our management and other resources that would otherwise be engaged in running our business.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders of the Company during the last quarter of the fiscal year ended December 31, 2004.

18

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our
common stock is traded on The Nasdaq National Market under the symbol "PRCS." The following table shows the range of high and low per share sale prices of our common stock as
reported on The Nasdaq National Market for the periods indicated.

Common Stock
PriceHigh

LowYear Ended December 31, 2004:First Quarter

$
7.58

$
5.12Second Quarter


6.56


3.36Third Quarter


3.99


1.96Fourth Quarter


2.46


1.60Year Ended December 31, 2003:First Quarter

$
4.49

$
2.90Second Quarter


5.80


3.83Third Quarter


7.25


4.51Fourth Quarter


7.98


6.25


As
of February 28, 2005, there were approximately 132 holders of record of our common stock registered with our transfer agent, American Stock Transfer & Trust Company.
Because many of these shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the record holders.

We
have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our common stock in the foreseeable future. We expect
to retain future earnings, if any, to fund the development and growth of our business. Therefore, you should not expect to receive any funds in respect of shares of our common stock without selling
your shares.

The
information under the heading "Equity Compensation Plan Information" in the Company's definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting
of
Stockholders expected to be held on May 12, 2005 is incorporated into Item 12 of this report by reference.

19

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ITEM 6.    SELECTED FINANCIAL DATA.

You should read the following selected financial data in conjunction with our consolidated financial statements and the related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this report. We have derived our statement of operations data for each of the three years in the period ended
December 31, 2004, and our balance sheet data at December 31, 2003 and 2004, from our audited consolidated financial statements, which we include elsewhere in this report. We have
derived the statement of operations data for the years ended December 31, 2000 and 2001 and the balance sheet data at December 31, 2000, 2001 and 2002 from our audited consolidated
financial statements, which we do not include in this report.

|                                                           |                              | Year Ended December 31,  |        
|---------------------------------------------------------- | ---------------------------- | ------------------------ | -------
|
|
|Statement of Operations Data:                              |                              |                          |        
|Revenues:                                                  |                              |                          |        
|                                                           | Product sales                |                          | $      
|                                                           | Licensing and other revenues |                          |        
|                                                           |                              |                          |        
|                                                           |                              | Total revenues           |        
|Costs and expenses:                                        |                              |                          |        
|                                                           | Cost of goods sold           |                          |        
|                                                           | Research and development     |                          |        
|                                                           | Sales and marketing          |                          |        
|                                                           | General and administrative   |                          |        
|                                                           |                              |                          |        
|                                                           |                              | Total costs and expenses |        
|                                                           |                              |                          |        
|Operating loss                                             |                              |                          | (36,455
|Gain on assignment of leasehold improvements               |                              |                          |       
|Gain on termination of collaboration agreement             |                              |                          |       
|Interest income, net                                       |                              |                          | 7,819  
|                                                           |                              |                          |        
|Loss before provision for income taxes                     |                              |                          | (28,636
|Provision for income taxes                                 |                              |                          | 100    
|                                                           |                              |                          |        
|Net loss                                                   |                              | $                        | (28,736
|                                                           |                              |                          |        
|Basic and diluted net loss per common share                |                              | $                        | (0.95  
|                                                           |                              |                          |        
|Weighted average number of basic and diluted common shares |                              |                          | 30,259 

|                                                 |  | December 31,
|------------------------------------------------ |  | ------------
|
|
|Balance Sheet Data:                              |  |             
|Cash, cash equivalents and marketable securities |  | $           
|Working capital                                  |  |             
|Total assets                                     |  |             
|Long-term debt (including current portion)       |  |             
|Total stockholders' equity                       |  |             

20

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ITEM 7.    MANAGEMENT'S DISCUSSON AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Financial Data" and our
consolidated financial statements and notes thereto appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ substantially from those anticipated in these forward-looking statements.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of innovative therapies that either address unmet medical needs or
offer improvements over existing therapies. Key elements of our strategy to achieve our business objective are:



We
launched our first product, Plenaxis (abarelix for injectable suspension), in the United States in early 2004 using our own dedicated marketing and sales team. Sales of Plenaxis
during 2004 were significantly lower than expected. We continue to believe that Plenaxis is an important therapy for patients in the indicated population who have limited treatment options available.
We began our clinical program to develop Plenaxis for the treatment of prostate cancer during 1996. In November 2003, the FDA approved Plenaxis for the palliative treatment of men with advanced
symptomatic prostate cancer, in whom LHRH agonist therapy is not appropriate and who refuse surgical castration, and have one or more of the following: (1) risk of neurological compromise due
to metastases, (2) ureteral or bladder outlet obstruction due to local encroachment or metastatic disease, or (3) severe bone pain from skeletal metastases persisting on narcotic
analgesia. For safety reasons, Plenaxis was approved with marketing restrictions which include a risk management programthe Plenaxis User Safety (PLUS) Program. Only physicians enrolled
in the PLUS Program may prescribe Plenaxis. Plenaxis is available to authorized physicians and pharmacies through a network of specialty distributors with whom we have contracted.

In
June 2003, we initiated the regulatory submission process in the European Union seeking approval to market Plenaxis for the hormonal management of prostate cancer where
androgen suppression is appropriate. We submitted a marketing authorization application, or MAA, in Germany comprised of comprehensive safety and efficacy data utilized to obtain approval in the
United States. This application is pending with the German regulatory authorities, and there may be regulatory action on the application in the second quarter of 2005 that will enable us and our
partner, Schering AG, to determine whether, and for what patient population, Plenaxis will be approved and made commercially available in Germany. Assuming favorable action by the German regulatory
authorities, we plan to seek, in collaboration with Schering AG, additional European Union member state approvals through the Mutual Recognition Procedure. However, we cannot assure investors whether
or when such regulatory action on our MAA will occur, or that any such action will enable or result in the successful commercialization of Plenaxis in Germany or in any other country in the European
Union.

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In
April 2004, we signed an agreement with Schering AG of Berlin, Germany, for the commercialization of Plenaxis across Europe, Russia, the Middle East, South Africa, Australia
and New Zealand. The Schering AG agreement provides for a combination of upfront, regulatory approval and performance-based milestone payments, as well as a share of revenue through transfer price
payments for drug product which will be supplied by us. The transfer price will vary based upon net sales of Plenaxis, as well as pricing and reimbursement levels, in the licensed territory. The
milestone payments to us may total over time up to approximately $90.0 million, depending upon Euro/U.S. Dollar conversion rates,
and the attainment of specified annual sales levels which the majority of the milestone payments are conditioned upon. The overall financial terms are intended, depending upon performance levels, to
approximate an equal sharing of the net present value of the product. We received a $2.0 million signing payment from Schering AG during the second quarter of 2004, which we are recognizing
into revenues over the remaining patent life of Plenaxis in Europe of approximately twelve years. We recognized approximately $0.1 million of revenues under this agreement during 2004.

We
also are continuing to evaluate potential licensing opportunities for the development and commercialization of Plenaxis in Japan and other ex-U.S. territories not covered by the
Schering AG agreement. We expect to actively pursue such opportunities following approval in Germany. We cannot assure investors that we will be successful in obtaining regulatory approval abroad for
the commercialization of Plenaxis for the treatment of any portion of the prostate cancer patient population or for any other indication, or that we will be able to enter into additional collaboration
agreements on favorable terms, or at all.

Our
research and development pipeline includes clinical programs in Alzheimer's disease, non-Hodgkin's lymphoma and androgen-independent prostate cancer, as well as early stage discovery
projects. During 2004, we made significant progress on the development of our Direct Select technology platform. Direct Select offers significant enhancements over our proprietary drug discovery
technology called Ligand Evolution to Active Pharmaceuticals, or LEAP. Direct Select should allow us to generate vast pharmaceutical libraries and more rapidly and directly identify lead compounds
with high affinity and specificity, and will serve as the foundation for future drug development projects.

We
began our clinical program for Apan, our investigational compound for Alzheimer's disease, in 2000. We have completed a normal volunteer, phase 1a dose escalation study of Apan and
have identified a maximum tolerated dose, or MTD, in healthy volunteers. We are currently enrolling patients in a phase 1/2a, multiple dose study of Apan. An ongoing phase 1b study initiated during
the second quarter of 2003, which is designed to determine the MTD of Apan in Alzheimer's patients, continues to take longer than originally anticipated due to the enrollment of cohorts at dose levels
that are beyond the predicted MTD, which was based upon the phase 1a study, as well as slower than expected patient accrual. In light of the significant anticipated development costs estimated for
phase 2 and phase 3 studies, we will seek to partner the Apan clinical program with respect to further development activities beyond the current studies.

During
the fourth quarter of 2003, we initiated our first clinical trial for PPI-2458 evaluating an oral formulation in non-Hodgkin's lymphoma patients who were no longer benefiting from
other therapies. In March 2004, the FDA placed this trial on clinical hold until questions relating to a neuropathological finding observed in a three-month animal toxicology study were
satisfactorily resolved. The results of this animal study were not available at the time that the clinical trial was initiated. In June 2004, we received clearance from the FDA, following its
review of additional non-clinical data and our revised clinical plan, to resume clinical trials. In late 2004, we opened a new phase 1 clinical trial of PPI-2458 in non-Hodgkin's lymphoma patients and
expect patient accrual to begin during the first half of 2005. We are also evaluating the feasibility of expanding our clinical program to include patients with solid tumors. In addition, we intend to
continue evaluating the potential utility of PPI-2458 for treating certain inflammatory and autoimmune disorders, including rheumatoid arthritis. In light of the anticipated development costs
associated with the PPI-2458 clinical program, we anticipate seeking a partner for this program as clinical development advances.

22

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We
have also conducted clinical studies of Plenaxis for the treatment of endometriosis. We began this clinical program in 1998 and in March 2002 we completed a phase 2 study.
Based upon the results of this study, during 2002 and 2003 we conducted an additional pharmacokinetic study to attempt to determine the appropriate dose and dosing schedule. We do not currently have
any additional endometriosis studies planned and do not expect to conduct further studies without a corporate partner. Any additional clinical trials of Plenaxis for the treatment of endometriosis
would also require concurrence by the FDA.

Most
of our expenditures to date have been for drug development, commercialization activities and for general and administrative expenses.

Due
primarily to the costs associated with the commercialization of Plenaxis in the United States and its continued development, as well as other research and development and general and
administrative expenses, we had a net operating loss during 2004. Our accumulated deficit as of December 31, 2004 was approximately $243.9 million. We expect to continue to have net
operating losses through at least 2006.

We
do not expect to generate operating income unless sales of Plenaxis increase significantly. In addition, in order to generate operating income, we must successfully carry out the
following key elements of our operating plan: gain approval of Plenaxis in the European Union; reduce, through collaboration arrangements or otherwise, our net expenses related to our Apan and
PPI-2458 clinical programs; and receive significant revenues through research collaborations involving our Direct Select technology platform. At this time we are not providing estimates of future
Plenaxis sales and, as previously announced, we do not anticipate providing guidance on future results until a consistent trend for Plenaxis sales emerges. Moreover, we cannot assure investors that we
will be able to gain approval of Plenaxis outside of the United States, or enter into appropriate collaborative arrangements relating to our clinical programs and technology platform in a timely
manner and on favorable terms, if at all. If we are unable to successfully carry out the key elements of our operating plan as described above, we would have to seek additional sources of funding or
significantly modify this plan. If we are
required to raise money in the future and we experience difficulties doing so, our business will be materially adversely affected.

At
December 31, 2004, we had 168 full-time employees compared to 146 full-time employees at December 31, 2003. This increase in headcount is due primarily to the hiring of
our sales force following FDA approval in November 2003 to market Plenaxis in the United States.

Critical Accounting Policies

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this report,
we believe the following accounting policies to be critical:

Use of Estimates.We prepare our financial statements in accordance with U.S. generally accepted accounting principles. These
principles require that we make estimates and use assumptions that affect the reporting of our assets and our liabilities as well as the disclosures that we make regarding assets and liabilities and
revenues and expenses that are contingent upon uncertain factors as of the reporting date. Actual payments, and thus our actual results, could differ from our estimates.

Revenue Recognition.We follow the provisions of the Securities and Exchange Commission's Staff Accounting Bulletin
No. 104,Revenue Recognition. We recognize revenues from product sales in the period when the product is delivered, provided there is pervasive
evidence that an arrangement exists, the price is fixed or determinable and collection of the related receivable is probable. Revenues are recorded net of applicable allowances as provision is made
for estimated sales returns, rebates, distributor fees and other applicable discounts and allowances. Shipping and other distribution costs are charged to cost of product sales.

23

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We
prepare our provisions for sales returns and allowances, rebates and discounts based primarily on estimates. Contractual allowances and rebates result primarily from sales under
contracts with healthcare providers, Medicaid programs and other government agencies. Our policy for sales returns allows authorized distributors to return the product three months prior to, and six
months after, product expiration. Product shipped during 2004 had an initial approved shelf-life of 24 months with expiration dates of February 2005 and June 2006. At the end of
2004, the FDA approved an extension of the shelf life to 36 months which will be applied to all future commercial lots. The reserve for sales returns is determined by reviewing the history of
returns for products with similar characteristics to Plenaxis. We also utilize daily reports itemizing sales to physicians and hospital pharmacies, obtained directly from our authorized distributors,
in order to analyze specific account ordering trends. This data is reviewed to monitor product movement through the supply chain to identify remaining inventory that
may result in chargebacks or sales returns. We estimate that there was approximately $0.3 million of product at distributors at December 31, 2004. The reserves are reviewed at each
reporting period and adjusted to reflect data available at that time. We accrued approximately $0.3 million in sales return reserves and $0.2 million in other revenue reserves as of
December 31, 2004. To the extent our estimates of contractual allowances, rebates and sales returns are different from actuals, we adjust the reserve which impacts the amount of product sales
revenue recognized in the period of the adjustment. We had not received any significant returns through December 31, 2004.

We
currently provide substantially all of our distributors with payment terms of up to 120 days on purchases of Plenaxis. Through December 31, 2004, payments have generally
been made in a timely manner.

We
analyze our multiple element arrangements to determine whether the elements can be separated and accounted for individually as separate units of accounting in accordance with EITF
No. 00-21,Revenue Arrangements with Multiple Deliverables.Nonrefundable upfront licensing fees and certain guaranteed, time-based payments that
require continuing involvement in the form of development, manufacturing or other commercialization efforts by us are recognized as licensing revenue ratably over the period under which we are
obligated to perform those services. Milestone payments are recognized as licensing revenue or product sales when the performance obligations, as defined in the contract, are achieved. Performance
milestones typically consist of significant milestones in the development and/or commercialization of a product such as obtaining approval from regulatory agencies and the achievement of targeted
sales levels. Reimbursements of development costs are recognized as licensing revenue as the related costs are incurred.

When
the period over which a fee or payment will be recognized as revenue cannot be specifically identified from the contract, management estimates the deferral period based upon other
critical factors contained within the contract, including but not limited to patent life or contract term. We continually review these estimates which could result in a change in the deferral period
and might impact the timing and the amount of revenue recognized.

Inventory.We value inventory at cost or, if lower, market value. We determine cost using the first-in, first-out method. We
analyze our inventory levels quarterly and write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of
expected requirements, to cost of goods sold. Expired inventory is disposed of and the related costs are written off. If actual market conditions are less favorable than that estimated by us,
additional write-downs of existing inventory may be required in future periods. We classify any inventory that we estimate to be sold in the next twelve months as current with the remaining amount
classified as long-term inventory.

Impairment or Disposal of Long-Lived Assets.Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,or SFAS No. 144, requires that if the sum of the undiscounted future cash flows
expected to result from a company's asset, net of interest charges, is less than the reported value of the asset, an asset impairment may be recognized in the financial statements if the reported
value of the asset exceeds the fair value determined by either a

24

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quoted
market price, if any, or a value determined by utilizing a discounted cash flow technique. We evaluate our property, plant and equipment for impairment whenever indicators of impairment exist.
The amount of the impairment to be recognized is calculated by subtracting the fair value of the asset from the reported value of the asset.

We
believe that the application of SFAS No. 144 and the method used to determine the impairment of our property, plant and equipment involve critical accounting estimates because
they are highly susceptible to change from period to period and because they require management to make assumptions about future cash flows, including residual values. In addition, we believe that had
alternative assumptions been used, the impact of recognizing an impairment, if any, on the assets reported on our balance sheet, as well as our net loss, may have been material.

We
reviewed our building for impairment as of December 31, 2004. We have determined that the undiscounted sum of the expected future cash flows from the building exceeded its
recorded value. As a result, no impairment allowance was required in accordance with SFAS No. 144.

Management
has discussed the development, selection and disclosure of these critical accounting policies with the audit committee of our board of directors.

Results of Operations



Revenues for the year ended December 31, 2004 were approximately $3.0 million, compared to zero for the corresponding period in 2003. Of this
amount, approximately $2.8 million was related to sales of Plenaxis, with the majority of the remaining amount being comprised of revenue amortization with respect to a $2.0 million
signing payment from Schering AG received during the second quarter of 2004. We recognized revenues of approximately $0.1 million under this agreement during 2004. In
January 2004, we began shipping Plenaxis to our authorized distributors. Since the initial launch of Plenaxis, we have faced many challenges that have had an adverse impact on the uptake of the
product in the market and as a result, sales of Plenaxis during 2004 were significantly lower than expected. These challenges have included the need to establish more effective messaging to educate
physicians about the product's indication and to differentiate the appropriate patient population, overcome physician uncertainty and concerns over reimbursement, reposition our marketing campaign,
strengthen and focus our sales force, and hire representatives for open territories. Our actual revenues from sales of Plenaxis in the United States will substantially depend upon our ability to
successfully overcome these challenges. We expect our other sources of revenues during 2005 to be from potential payments under our agreement with Schering AG, and potential payments under other
future corporate collaborations relating to Plenaxis, our clinical programs and our technology platform, if consummated. The amount and timing of these other potential sources of revenues will depend
on the timing and scope of regulatory approvals in the European Union, as well as the success of our clinical programs and technology platform and our ability to partner these programs.

Cost
of goods sold for the year ended December 31, 2004 was approximately $1.7 million, compared to no cost of goods sold for the corresponding period in 2003. In
January 2004, we began selling Plenaxis and accordingly, began recognizing costs related to those sales. The majority of our cost of goods sold during 2004 was related to a $1.0 million
milestone payment which became due and payable upon the first commercial sale of Plenaxis under our license agreement with Indiana University Advanced Research and Technology Institute, Inc.
Much of the raw material used to produce Plenaxis (including the active pharmaceutical ingredient) was purchased prior to the FDA granting approval for the commercial sale of Plenaxis in the United
States. Accordingly, these purchases were treated as research and development costs and expensed as incurred. Excluding the effect of the $1.0 million milestone payment to Indiana University
Advanced Research and Technology Institute during the first quarter of 2004, we anticipate that cost of goods sold will increase as sales volume increases, but may decline as a percentage of revenue
as fixed costs would be spread over a larger volume of sales. Cost of goods sold will increase as a percentage of revenue as previously expensed materials are exhausted. We

25

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cannot
predict when such previously expensed materials will be exhausted, as this will be dependent upon the commercial success of Plenaxis in both the United States and abroad.

We
currently have several ongoing research and development programs. Using industry estimates, typical drug development programs may last for ten or more years and may cost hundreds of
millions of dollars to complete. As our programs progress, we assess the possibility of entering into corporate collaborations to offset a portion or all of our research and development costs. The
ultimate success of our research and development programs and the impact of these programs on our operations and financial results cannot be accurately predicted and will depend, in large part, upon
the outcome and timing of many variables outside of our control.

Members
of our research and development team typically work on a number of projects concurrently. In addition, a substantial amount of our fixed costs such as facility depreciation,
utilities and maintenance are shared by our various programs. Accordingly, we have not and do not plan to specifically identify all costs related to each of our research and development programs. We
estimate that during 2004 and 2003, the majority of our research and development expenses were related to manufacturing costs, clinical trial costs, salaries, benefits and lab supplies related to our
prostate cancer,
Alzheimer's disease and non-Hodgkin's lymphoma programs. The remaining research and development costs consisted primarily of salaries, benefits and lab supplies for our other research programs.

Research
and development expenses for the year ended December 31, 2004 decreased 25% to approximately $31.5 million, from approximately $41.8 million in 2003. The
decrease reflects reduced spending in our clinical development programs and management of internal resources during 2004. As a result of FDA approval of Plenaxis in November 2003, spending on
prostate cancer clinical development was reduced during 2004 by approximately $6.2 million, specifically manufacturing related costs which were previously expensed to research and development
but, beginning in January 2004, are being capitalized to inventory. Spending on our Apan program during the year ended December 31, 2004 decreased compared to the prior year due to lower
preclinical expenses of approximately $1.9 million and lower manufacturing related activities of approximately $0.4 million. Spending related to our PPI-2458 program during the year
ended December 31, 2004 was higher than in the prior year. This was due to an increase in preclinical spending of approximately $0.7 million resulting from several ongoing studies
necessary to resume clinical trials of PPI-2458 and higher clinical spending of approximately $0.4 million in preparation for our phase 1 trial, offset by a reduction in manufacturing
activities of approximately $0.5 million. The remaining decrease was due to lower research and development personnel-related expenses of approximately $2.4 million during the year ended
December 31, 2004 compared to the prior year. Although we are unable to predict the precise level of spending on individual clinical programs due to the uncertain nature of clinical
development, we expect our research and development expenses in 2005 and thereafter to remain generally consistent with 2004 levels, as we provide support for certain investigator-sponsored and
FDA-mandated clinical studies of Plenaxis, and continue our clinical trials of PPI-2458 and Apan.

Sales
and marketing expenses for the year ended December 31, 2004 increased by approximately $13.3 million to approximately $18.9 million, from approximately
$5.6 million in 2003. The increase resulted primarily from increased sales expenses of approximately $10.2 million related to the commercial launch of Plenaxis in the United States,
principally the hiring of our sales force, as well as the establishment of the commercial infrastructure to support the sales force. We also experienced increased marketing expenses of approximately
$3.1 million related to market research, various physician and national meetings, advertising, pricing and reimbursement consulting, and other marketing activities. We promote Plenaxis in the
United States through our own marketing and sales team. We expect our sales and marketing expenses in 2005 and thereafter will remain generally consistent with 2004 levels.

General
and administrative expenses for the year ended December 31, 2004 decreased 11% to approximately $8.7 million, from approximately $9.7 million in 2003. The
decrease resulted primarily from lower expenses related to business development activities and professional services. We expect

26

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that
general and administrative expenses will increase slightly during 2005 and thereafter. As described in detail in this report under Item 3. "Legal Proceedings," in December 2004 and
January 2005, the Company and certain of its current and former executive officers were named as defendants in three purported class action securities lawsuits filed in the United States
District Court for the District of Massachusetts. Management believes that the allegations against the Company are without merit, and the Company intends to vigorously defend against the plaintiffs'
claims. As this litigation is in an initial stage, management is unable to predict its outcome or its ultimate effect, if any, on our financial condition. However, we expect that the costs and
expenses related to this litigation may be significant. Our current director and officer liability insurance policies (which, subject to the terms and conditions thereof, also provide "entity
coverage" for the Company for this litigation) provide that the Company is responsible for the first $2.5 million of such costs and expenses. If we are not successful in defending these
actions, our business and financial condition could be adversely affected.

Net
interest income for the year ended December 31, 2004 decreased to approximately $0.1 million, from approximately $1.3 million in 2003. The decrease in net
interest income was due primarily to the refinancing of the mortgage on our facility from a lower variable rate to a higher fixed rate and lower average cash balances.

The
provision for income taxes for the years ended December 31, 2004 and 2003 was zero. We anticipate that we will continue to be in a net operating loss carryforward position for
the next several years. Therefore, as in 2003, no benefit from our operating losses has been recognized. We account for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain.
Accordingly, valuation allowances, in amounts equal to the net deferred tax assets have been established in each period to reflect these uncertainties.

At
December 31, 2004, we had federal net operating loss carryforwards of approximately $226.0 million and research tax credits of approximately $7.3 million, that
will expire in varying amounts through 2024, if not utilized. Utilization of net operating loss and tax credit carryforwards will be subject to substantial annual limitations under the Internal
Revenue Code of 1986, as amended. The annual limitations may result in the expiration of the net operating loss and tax credit carryforwards before full utilization.



Revenues for the year ended December 31, 2003 were zero compared to approximately $1.0 million in 2002. During 2002 our revenues were comprised of a
final reimbursement payment received in connection with the termination of our European Plenaxis collaboration agreement with Sanofi-Synthélabo S.A.

Research
and development expenses for the year ended December 31, 2003 decreased 26% to approximately $41.8 million, from approximately $56.4 million in 2002. The
decrease in expenses reflects reduced spending in our clinical and preclinical programs. As a result of the resubmission of the Plenaxis NDA in February 2003, spending on the prostate cancer
clinical development program was reduced significantly. Further, we incurred no direct expenses in connection with our endometriosis program during 2003 and do not expect any additional spending on
this program. Slightly offsetting these decreases in clinical spending, during the second quarter of 2003, we initiated a phase 1b clinical trial for Apan which is currently ongoing. We also initiated
a phase 1 clinical trial for PPI-2458 in patients with non-Hodgkin's lymphoma during the fourth quarter of 2003.

Sales
and marketing expenses for the year ended December 31, 2003 increased by approximately $3.8 million to approximately $5.6 million, from approximately
$1.8 million in 2002. During 2003, we incurred increased sales and marketing expenses in preparation for the launch of Plenaxis in the United States. This was due to increased costs related to
pre-commercialization efforts, in particular for market research, various physician and national meetings, pricing and reimbursement consulting, and sales force hiring and deployment activities.

27

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General
and administrative expenses for the years ended December 31, 2003 and 2002 remained consistent at approximately $9.7 million.

Net
interest income for the year ended December 31, 2003 decreased 72% to approximately $1.3 million, from approximately $4.8 million in 2002. The decrease in net
interest income was due primarily to lower average cash balances and reduced average interest rates.

The
provision for income taxes for the years ended December 31, 2003 and 2002 was zero. We anticipate that we will continue to be in a net operating loss carryforward position for
the next several years. Therefore, no benefit from our operating losses or research tax credits in these years has been recognized.

Selected Quarterly Operating Results

The following table sets forth our unaudited statement of operations data for each of the eight quarters ended December 31, 2004. This information has been
derived from our unaudited financial statements. The unaudited financial statements have been prepared on the same basis as the audited financial statements appearing in this report and include all
adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of such information when read in conjunction with our annual audited financial
statements and notes thereto appearing elsewhere in this report. You should not draw any conclusions from the operating results for any quarter.

|                                            |  | Quarter Ended |        
|------------------------------------------- |  | ------------- | -------
|
|
|Total revenues                              |  | $             |       
|Operating loss                              |  |               | (11,831
|Net loss                                    |  |               | (11,415
|Basic and diluted net loss per common share |  | $             | (0.22  

We expect to experience significant fluctuations in our quarterly operating results in the future, and, therefore, we will continue to have
difficulty providing an accurate forecast of our quarterly revenues and operating results. We believe that period-to-period comparisons of our operating results may not be meaningful, and you should
not rely upon them as any indication of future performance. Operating results in one or more future quarters may be different from the expectations of securities analysts and investors. In the event
that our operating results are lower than expectations, the trading price of our common stock would likely decline. As previously announced, we do not anticipate providing sales or earnings guidance
until a consistent trend for Plenaxis sales emerges.

Liquidity and Capital Resources

To date, our operations and capital requirements have been financed primarily with the proceeds of public and private sales of common stock and preferred stock,
payments received under research and development partnerships and collaborative agreements, investment income and revenues from product sales. We have no committed sources of capital and do not know
whether additional financing will be available when needed, or, if available, that the terms will be favorable to us.

At
December 31, 2004, we had cash, cash equivalents and marketable securities of approximately $83.3 million and working capital of approximately $76.4 million,
compared to approximately $143.2 million and $133.0 million, respectively, at December 31, 2003.

We
expect to continue to have net operating losses through at least 2006. We do not expect to generate operating income unless sales of Plenaxis increase significantly. In addition, in
order to generate operating income, we must successfully carry out the following key elements of our operating plan: gain approval of Plenaxis in the European Union; reduce, through collaboration
arrangements or

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otherwise,
our net expenses related to our Apan and PPI-2458 clinical programs; and receive significant revenues through research collaborations involving our Direct Select technology platform. At
this time we are not providing estimates of future Plenaxis sales and, as previously announced, we do not anticipate providing guidance on future results until a consistent trend for Plenaxis sales
emerges. Moreover, we cannot assure investors that we will be able gain approval of Plenaxis outside of the United States or enter into appropriate collaborative arrangements relating to our clinical
programs and technology platform in a timely manner and on favorable terms, if at all. If we are unable to successfully carry out the key elements of our operating plan as described above, we believe
that our existing cash and investments will be sufficient to meet our working capital and capital expenditure needs through approximately the second quarter of 2006. If we are able to successfully
carry out the key elements of our operating plan, we may be able, without obtaining additional funding, to continue to meet our working capital and capital expenditure needs beyond that time, although
we cannot provide any assurances as to if or for how long we would be able to do so. If we are unable to successfully carry out the key elements of our operating plan, we will have to seek additional
sources of funding or significantly curtail our operations. We have no committed sources of capital and do not know whether additional financing will be available when needed, or, if available, that
the terms will be favorable to us. If we are required to raise money in the future and we experience difficulties or are unable to do so, it could become necessary for us to cease operations or seek
protection under state or federal insolvency or bankruptcy laws.

For
the year ended December 31, 2004, net cash of approximately $58.0 million was used in operating activities, compared to approximately $50.9 million used in
operating activities during 2003. During the year ended December 31, 2004, our use of cash in operations was due principally to our net loss of approximately $57.6 million, stemming from
our continued investment in research and development, as well as sales and marketing expenses related to the Plenaxis launch, and our purchases of inventory of approximately $4.2 million,
partially offset by approximately $4.4 million of depreciation and amortization. During the year ended December 31, 2003, our use of cash in operations was due principally to our net
loss of approximately $55.8 million, partially offset by approximately $4.6 million of depreciation and amortization. We expect our cash utilization to continue for 2005 and thereafter
as we continue commercial activities for Plenaxis, continue with clinical trials for Apan and PPI-2458, and with our other research and development initiatives. We expect that cash used for inventory
purchases and accounts receivable build will increase through the end of 2006 to support commercial sales of Plenaxis and purchase commitments under our manufacturing and supply agreements. The actual
amount of overall expenditures will depend on numerous factors, including the timing of expenses and the timing and progress of our research, development and commercialization efforts.

Net
cash provided by investing activities of approximately $53.8 million in 2004 consisted of net sales of marketable securities of approximately $55.1 million and
purchases of property and equipment of approximately $1.3 million. This compares to net cash used in investing activities of approximately $25.5 million during 2003. Net cash used in
investing activities during 2003 consisted of net purchases of marketable securities of approximately $26.6 million and purchases of property and equipment of approximately $1.0 million.

Our
financing activities for the year ended December 31, 2004 consisted of approximately $0.3 million of proceeds received from the exercise of common stock options and
approximately $0.7 million in principal repayments under our acquisition and construction loan agreement described below. Our financing activities for the year ended December 31, 2003
consisted of approximately $0.6 million of proceeds received from the exercise of common stock options and approximately $0.4 million in principal repayments under our acquisition and
construction loan agreement.

In
July 2000, in connection with the purchase, through our wholly owned real estate subsidiary, of our corporate headquarters and research facility in Waltham, Massachusetts, the
subsidiary entered into an acquisition and construction loan agreement providing for up to $33.0 million in financing for the acquisition of, and improvements to, the facility. As of
December 31, 2004, approximately $32.0 million was outstanding under the loan agreement, as amended as described below. The loan is secured by the

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facility,
together with all fixtures, equipment, improvements and other related items, and by all rents, income or profits received by our real estate subsidiary, and is unconditionally guaranteed by
us.

In
June 2004, the acquisition and construction loan agreement was amended to extend the maturity date of the loan and modify certain other terms of the original agreement. Under
the amended loan agreement, on July 30, 2009 the principal amount then outstanding is due and payable in full, subject to two one-year extension options which are exercisable at our election
provided we are in compliance with certain financial covenants. The outstanding principal bears interest at a fixed rate of 5.95% through April 2009 and at a floating rate for the remainder of
the term. Principal and interest are payable through a fixed monthly payment of approximately $207,000, with the principal portion being calculated using a 25-year amortization schedule. The amended
loan agreement also provides for certain additional financial operating covenants, one of which was effective immediately and the remainder of which will become effective as of December 31,
2006. The covenant which was immediately effective is tested on a quarterly basis and requires that we maintain $25.0 million in unrestricted cash, cash equivalents and marketable securities.
In the event that we are unable to successfully carry out the key elements of our operating plan, we cannot assure investors that we will not default on our financial covenants under the loan
agreement.

In
addition to our debt, we have significant contractual obligations under various agreements. As of December 31, 2004, our debt and estimated significant contractual obligations
were as follows:

|                                           |  |   |        | Payments Due By Period
|------------------------------------------ |  | - | ------ | ----------------------
|
|
|Debt obligations (1)                       |  | $ | 31,969 |                       
|Unconditional purchase obligations (2)     |  |   | 14,650 |                       
|Estimate of clinical trial commitments (3) |  |   | 8,845  |                       
|                                           |  |   |        |                       
|Total                                      |  | $ | 55,464 |                       
|                                           |  |   |        |                       

---

At
December 31, 2004, we had provided a valuation allowance of $110.7 million for our deferred tax assets. The valuation allowance represents the value of the deferred tax
assets. Due to anticipated operating losses in the future, we believe that it is more likely than not that we will not realize the net deferred tax assets in the future and we have provided an
appropriate valuation allowance.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, Share-Based PaymentAn
Amendment of FASB Statements No. 123 and 95, or SFAS No. 123R, which requires all companies to measure
compensation cost for all share-based payments, including employee stock options, at fair value, effective for public companies for interim or annual periods beginning after June 15, 2005.
Generally, the approach in SFAS No. 123R is

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similar
to the approach described in Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation. However, SFAS
No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is
no longer an alternative. The adoption of SFAS No. 123R will have a significant impact on our results of operations, although it will have no impact on our overall financial position. We are
evaluating SFAS No. 123R and have not yet determined the amount of stock option expense which will be incurred in future periods.

In
December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151,Inventory
Costs, or SFAS No. 151. SFAS No. 151 requires abnormal amounts of inventory costs related to idle facility, freight handling and wasted material expenses to be
recognized as current period charges. Additionally, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the
production facilities. The
standard is effective for fiscal years beginning after June 15, 2005. We do not believe that the adoption of SFAS No. 151 will have a material impact on our consolidated financial
statements.

Risk Factors that May Affect Future Results

The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or
that are currently deemed immaterial may also impair our business, financial condition and results of operations. If any of these risks actually occur, our business, financial condition and results of
operations could be materially adversely affected.

We have a history of losses and anticipate significant operating expenses at least through 2006, and we may not be profitable in the future.

We cannot assure you that we will be profitable in the future or, if we attain profitability, that it will be sustainable. In November 2003, we received
FDA approval to market Plenaxis for the palliative treatment of men with advanced symptomatic prostate cancer for whom other hormonal therapies are not appropriate, who have refused surgical
castration and who are experiencing one or more of a specific set of symptoms. All of our other product candidates are in the research or development stage. Sales of Plenaxis began in
January 2004 and were significantly lower than expected. Prior to the launch of Plenaxis, we had never marketed or sold any products. Our marketing and selling efforts with regard to Plenaxis
may not be commercially successful, and we may be unable to successfully develop or market any other products in the future. To date, we have derived substantially all of our revenues from payments
under corporate collaboration and license agreements, and only recently generated revenues from product sales. We expect to continue to spend significant amounts to support commercial sales of
Plenaxis in the United States, pursue regulatory approval for Plenaxis in the European Union, continue our clinical studies and enhance our core technologies. We also intend to spend substantial
amounts for general and administrative purposes. As of December 31, 2004, we had an accumulated deficit of approximately $243.9 million. We expect that our operating expenses will
continue at current levels due primarily to expenses set forth above, resulting in significant operating losses at least through 2006.

We
do not expect to generate operating income unless sales of Plenaxis increase significantly. In addition, in order to generate operating income, we must successfully carry out the
following key elements of our operating plan: gain approval of Plenaxis in the European Union; reduce, through collaboration arrangements or otherwise, our net expenses related to our Apan and
PPI-2458 clinical programs; and receive significant revenues through research collaborations involving our Direct Select technology platform. At this time we are not providing estimates of future
Plenaxis sales and, as previously announced, we do not anticipate providing guidance on future results until a consistent trend for Plenaxis sales emerges. Moreover, we cannot assure investors that we
will be able to gain approval of Plenaxis outside of the United States, or enter into appropriate collaborative arrangements relating to our clinical programs and technology platform in a timely
manner and on favorable terms, if at all. We also cannot assure investors that we will be successful in carrying out any of the elements of our operating plan.

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If we are unable to successfully carry out the key elements of our operating plan, we would have to seek additional sources of funding or significantly modify our operating
plan and could default on our financial covenants under our acquisition and construction loan agreement and be required to cease operations or seek protection under state or federal insolvency or
bankruptcy laws.

If we are unable to successfully carry out the key elements of our operating plan, we believe that our existing cash and investments will be sufficient to meet
our working capital and capital expenditure needs through approximately the second quarter of 2006. If we are able to successfully carry out the key elements of our operating plan described above, we
may be able, without obtaining additional funding, to continue to meet our working capital and capital expenditure needs beyond that time, although we cannot provide any assurances as to if or for how
long we would be able to do so. If we are unable to successfully carry out the key elements of our operating plan, we will have to seek additional sources of funding or significantly curtail our
operations. In this event, we would have to seek additional sources of funding or significantly modify our operating plan. We have no committed sources of capital and do not know whether additional
financing will be available when needed, or, if available, that the terms will be favorable to us.

To
date, our operations and capital requirements have been financed primarily with the proceeds of public and private sales of common stock and preferred stock, payments under research
and development partnerships and collaborative agreements, investment income and revenues from product sales. There can be no assurance that we will be able to sell any such securities, enter into
additional partnerships and collaborative agreements or borrow funds in the future at favorable terms, or at all. If we raise additional funds by issuing equity securities, further dilution to
existing stockholders will result. In addition, as a condition to giving additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. We
may also be required to take other actions, which may lessen the value of our common stock or dilute our common stockholders, including borrowing money on terms that are not favorable to us. If we are
required to raise money in the future and we experience difficulties or are unable to do so, it could become necessary for us to cease operations or seek protection under state or federal insolvency
or bankruptcy laws.

In
addition, we recently amended the acquisition and construction loan agreement relating to our corporate headquarters. As of December 31, 2004, approximately
$32.0 million was outstanding under the amended loan agreement. The amended loan agreement provides for certain additional financial operating covenants, one of which was effective immediately
and the remainder of which will become effective as of December 31, 2006. The covenant which was immediately effective is tested on a quarterly basis and requires that we maintain
$25.0 million in unrestricted cash, cash equivalents and marketable securities. In the event that we are unable to successfully carry out the key elements of our operating plan, we cannot
assure investors that we will not default on our financial covenants under the loan agreement. To the extent that we are not able to comply with the financial covenants of our loan agreement, we may
be unable to borrow additional amounts and outstanding amounts may become due on an accelerated basis, which would adversely affect our liquidity and could result in us seeking protection under state
or federal insolvency or bankruptcy laws.

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Our business is substantially dependent on the commercial success of Plenaxis in both the United States and abroad. If Plenaxis fails to achieve market acceptance, it may never
be commercially successful and we would have insufficient funds to continue our operations as currently planned.

The success of our business is substantially dependent on the successful commercialization of Plenaxis in both the United States and abroad. Plenaxis is new to
the market in the United States and may be unfamiliar to members of the medical community and to patients. In addition, the FDA's approval of Plenaxis is limited to use in a subset of advanced
symptomatic prostate cancer patients, and distribution of Plenaxis will only be made in accordance with our risk management program, which includes physician enrollment in a prescribing program and a
signed patient consent form regarding the risks and benefits of the therapy. Due to the potential risk of immediate-onset systemic allergic reactions, physicians must also monitor patients for
30 minutes following each injection of Plenaxis. Prescribing physicians and patients may view these requirements as burdensome or may recommend or choose alternative treatments that are more
acceptable to the doctor and/or the patient. Moreover, market acceptance will depend largely on our ability to demonstrate, to the urology and oncology communities in particular, the efficacy and
safety of Plenaxis as an alternative to current therapies or surgical options. We must also continue to effectively differentiate, and educate physicians on, the indicated patient population in order
to ensure that the appropriate patients are identified for therapy and maximize the usage of Plenaxis in those patients. We cannot be certain that Plenaxis will provide benefits considered adequate by
providers of urology or oncology services or that enough providers will use the product to ensure its commercial success.

To
date, sales of Plenaxis since its initial launch in the United States in January 2004 have been significantly lower than expected. Many factors may affect its market acceptance
and commercial success in both the United States, and assuming approval, abroad, including:



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In
addition, we must continually submit any labeling, advertising and promotional material for Plenaxis to the FDA for review and pre-approval. There is risk that the FDA will prohibit
use of marketing materials in the form we desire. In addition, the pre-clearance process is time consuming and can delay the availability of marketing materials for use by our sales representatives
promoting Plenaxis.

Unfavorable
outcomes resulting from any of the factors identified above could limit sales of Plenaxis or cause sales of Plenaxis to decline. If Plenaxis is not commercially successful,
we would have insufficient funds to continue our operations as currently planned. In those circumstances, or if we are unsuccessful in carrying out the other key elements of our operating plan, we
would have to find additional sources of funding or scale back or cease operations. If we require additional funding and were unable to obtain it, it could become necessary for us to seek protection
under state or federal insolvency or bankruptcy laws.

We may be unable to alter long-term physician prescribing habits, which may impair our ability to capture or maintain market share for Plenaxis.

Alternative products and medical treatments exist or are under development to treat advanced symptomatic prostate cancer. For example, the FDA has approved
several drugs for the treatment of hormonally responsive prostate cancer, and there are other treatment alternatives available, including radiation therapy and surgery. Plenaxis is indicated for the
palliative treatment of men with advanced symptomatic prostate cancer for whom other hormonal therapies are not appropriate, who have refused surgical castration and who are experiencing one or more
of a specific set of symptoms. Currently available hormonal therapies known as LHRH agonists may cause an initial surge of testosterone, which in turn may result in an exacerbation of symptoms, or
clinical flare, in some patients, particularly those that fall within the labeled indication for Plenaxis. In an attempt to mitigate the flare, physicians may prescribe additional drugs known as
anti-androgens. This additional therapy may be only partially effective in reducing some of the undesirable effects of the flare. LHRH agonists have precautionary labeling about the hormone-induced
flare and resulting worsening of clinical symptoms in some patients. However, agonist and anti-androgen therapies have been on the market for many years and doctors may still prescribe them alone or
in combination to advanced symptomatic prostate cancer patients, despite these precautions. Physicians may not prescribe Plenaxis if we fail to educate them regarding the appropriate patients for
Plenaxis and/or are unable to change long-term prescribing habits. If, due to these factors, Plenaxis does not achieve an appropriate level of market acceptance in its indicated patient population, it
will never achieve commercial success and, as noted above, we would not have sufficient funds to continue our operations as currently planned.

We may be unable to either establish and maintain marketing and sales capabilities or enter into corporate collaborations necessary to successfully commercialize Plenaxis or
our other potential products.

We have limited experience in marketing or selling pharmaceutical products and have limited marketing and sales resources. To achieve commercial success for
Plenaxis, or any other approved product, we must either rely upon our limited marketing and sales force and related infrastructure, or enter into arrangements with others to market and sell our
products. We are promoting Plenaxis in the United States through our own dedicated marketing and sales team. Recruiting, training and retaining qualified sales personnel is therefore critical to our
success. To date, we have experienced significant turnover in both our sales management and field sales personnel. We believe that this turnover has had, and that the field sales personnel turnover
will continue to have, an adverse impact on our ability to commercialize Plenaxis. Competition for experienced and skilled marketing and sales personnel is intense, and we cannot assure you that we
will be able to continue to attract and retain a sufficient number of qualified individuals to successfully promote Plenaxis. Accordingly, we may be unable to establish and maintain marketing, sales
and distribution capabilities necessary to successfully commercialize and gain market acceptance for Plenaxis in the United States.

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In
addition, establishing the expertise necessary to successfully market and sell Plenaxis, or any other product, requires a substantial capital investment. Our ability to make that
investment and also execute our current operating plan is dependent on numerous factors, including, as described above, gaining approval of Plenaxis in the European Union, reducing, through
collaboration arrangements or otherwise, our net expenses related to our Apan and PPI-2458 clinical programs, and receiving significant revenues through research collaborations involving our Direct
Select technology platform. Accordingly, we cannot assure investors that we will have the funds to successfully commercialize Plenaxis or any other potential product in the United States or elsewhere.

Moreover,
Plenaxis competes, and our product candidates in development are likely to compete, with products of other companies that currently have extensive and well-funded marketing and
sales operations. Because these companies are capable of devoting significantly greater resources to their marketing and sales efforts, our marketing and sales efforts may not compete successfully
against the efforts of these other companies.

We
have also announced our intention to market and sell Plenaxis outside of the United States through one or more marketing partners upon receipt of approval abroad. During 2004, we
entered into an agreement with Schering AG, of Berlin, Germany, for the commercialization of Plenaxis in the field of prostate cancer across Europe, Russia, the Middle East, South Africa, Australia
and New Zealand. We have limited influence over the decisions made by Schering AG or the resources they devote to the marketing and distribution of Plenaxis products in their licensed territory, and
we cannot assure you that they will meet their obligations in this regard. Moreover, Schering AG may market certain products that compete with our products, which could limit potential revenues from
product sales. Our marketing and distribution arrangement with Schering AG may not be successful, and we may not
receive any revenues from it. Also, we cannot assure you that we will be able to enter into marketing and sales agreements on acceptable terms, if at all, for Plenaxis in territories not covered by
the Schering AG agreement, or for any of our other product candidates.

We may experience pressure to lower the price of Plenaxis or our other potential products to remain competitive in light of new and/or proposed federal legislation.

Due to the average patient age at the time of diagnosis and treatment, a substantial majority of Plenaxis patients are likely to be Medicare beneficiaries.
Federal legislation, enacted in December 2003, has altered the way in which physician-administered drugs covered by Medicare are reimbursed, generally leading to lower reimbursement levels.
Medicare reimbursement for Plenaxis, as well as for other hormonal therapies for prostate cancer, was reduced by cuts implemented January 1, 2005 (which entailed a new reimbursement methodology
based on a product's "average sales price" or "ASP" rather than the "average wholesale price" methodology previously utilized). Effective January 1, 2005, Plenaxis will be reimbursed at 106% of
its ASP. In December 2004, CMS published the ASP for Plenaxis to be in effect for the first quarter of 2005. This ASP will remain in effect for one quarter and will be updated quarterly
thereafter. Because physicians will receive a lower rate of reimbursement for Plenaxis, it is possible that some physicians may alter practice patterns and/or refer Medicare patients to hospital
outpatient settings rather than continue to treat patients in-office and it is unclear at this time how such a shift in the marketplace dynamic might affect sales of Plenaxis. It is also possible that
payors other than Medicare may adopt an average sales price reimbursement over time, and the effect of this on Plenaxis sales is also unclear.

The
new legislation creates various opportunities for private entities to become involved in the administration of the Medicare drug benefit. Among other things, the new legislation
added an outpatient prescription drug benefit to Medicare, effective January 2006, to be administered primarily through private entities. Increased privatization of the Medicare drug benefit
under the new legislation may increase the number and leverage of private entities attempting to negotiate price concessions from pharmaceutical manufacturers and may lower participating provider
reimbursement levels, and the effect that this may have on Plenaxis sales is unclear.

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While
the new law specifically prohibits the United States government from interfering in price negotiations between manufacturers and Medicare drug plan sponsors, CMS has indicated that
it will review the discounts obtained by drug plan sponsors, and will influence pricing in other ways such as through the establishment of formulary design parameters. In addition, some members of
Congress are pursuing legislation that would permit the United States government to use its enormous purchasing power to demand discounts from pharmaceutical companies, thereby creating de facto price
controls on prescription drugs. The new law also contains triggers for Congressional consideration of cost containment measures for Medicare in the event Medicare cost increases exceed a certain
level. These cost containment measures could include some sorts of limitations on prescription drug prices. Additionally, the expanded Medicare coverage for prescription drugs beginning in 2006 may
impact
physician decision-making with respect to self-administered drugs that were not covered previously and may compete directly or indirectly with Plenaxis.

Any
or all of these issues may create pressure to lower the price of Plenaxis in order to be or remain competitive in the changing marketplace. It is unclear to what extent, if any,
Plenaxis sales would increase or decrease in response to price changes.

Our potential revenues will diminish if we fail to obtain adequate reimbursement coverage from third-party payors for Plenaxis or our other product candidates.

The continuing efforts of government and third-party payors to contain or reduce the costs of health care may limit our commercial opportunity. In some foreign
markets, pricing and profitability of prescription pharmaceuticals are subject to government control. In the United States, we expect that there will continue to be federal and state proposals for
similar controls. In addition, managed care initiatives in the United States will continue to put pressure on the pricing of pharmaceutical products. If government and other third-party payors do not
provide appropriate coverage and adequate reimbursement for Plenaxis or our other product candidates, physicians may not prescribe them and/or patients may be unwilling to have them administered.

Our
ability to earn revenues from Plenaxis, or any other potential product, alone or with collaborators, may depend in part on the availability and levels of reimbursement from:



In
December 2004, we announced that the CMS had issued a draft decision memorandum in support of a National Coverage Determination, or NCD, for Plenaxis. NCDs are issued by the
Secretary of Health and Human Services for a particular item or service if the Secretary determines that Medicare coverage for the item or service should be defined on a nationwide basis. CMS has
proposed Medicare coverage for Plenaxis under the following conditions: the product must be administered to a patient meeting all of the criteria of the labeled indication; and the prescribing
physician must be enrolled in the PLUS Program. When used in accordance with the product's label, there would be no limitation on coverage regardless of the duration of Plenaxis therapy. Without this
comprehensive NCD, Plenaxis could receive inconsistent coverage among the Medicare carriers and intermediaries who may fail to distinguish the drug from LHRH agonists. We expect that the draft
decision memorandum will become effective by the end of March 2005, although CMS may modify it based on comments it received during the open comment period. We cannot predict the availability
of coverage or reimbursement for newly approved drugs such as Plenaxis by Medicare or any other payor. Third-party payors, including Medicare, are increasingly challenging the prices charged for
medical products and services. Government and other third-party payors increasingly are limiting both coverage and the level of reimbursement for new drugs and, in some cases, refusing to provide
coverage for a patient's use of an approved drug for purposes not approved by the FDA. Third-party insurance coverage may not be available to patients for Plenaxis or any of our other products.

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As Plenaxis is used commercially, unanticipated side effects or adverse reactions could occur that could result in additional regulatory controls and reduced sales.

During research and development, the use of pharmaceutical products, such as Plenaxis, is limited principally to clinical trial patients under controlled
conditions and under the care of expert physicians. The widespread commercial use of Plenaxis could produce unanticipated or undesirable side effects that have not been evident in our clinical trials.
In addition, in patients who take multiple medications, drug interactions could occur that can be difficult to predict. These events, among others, could result in the imposition of additional
regulatory controls that could limit the circumstances under which Plenaxis is prescribed or even lead to the withdrawal of the product from the market. Due to the occurrence of immediate-onset
systemic allergic reactions in patients treated with Plenaxis during clinical trials, Plenaxis has been approved under regulations concerning drugs with certain safety profiles, under which the FDA
has established special restrictions to ensure safe use. Post-marketing phase 4 studies are also required to evaluate the incidence of and further characterize such allergic reactions to the extent
they occur. Any violation of these special restrictions or unfavorable findings in the phase 4 studies or from the overall commercial experience with the drug could lead to the imposition of further
restrictions or withdrawal of Plenaxis from the market.

If we fail to develop and maintain our relationships with third-party manufacturers, or if these manufacturers fail to perform adequately, we may be unable to commercialize
Plenaxis or any of our product candidates.

Our ability to conduct, or continue to conduct, clinical trials and commercialize Plenaxis or other product candidates, will depend in part on our ability to
manufacture, or arrange for third-party manufacture of, our products on a large scale, at a competitive cost and in accordance with regulatory requirements. We must establish and maintain a commercial
scale formulation and manufacturing process for each of our potential products for which we seek marketing approval. We or third-party manufacturers may encounter difficulties with these processes at
any time that could result in delays in clinical trials, regulatory submissions or in the commercialization of potential products.

We
have no experience in large-scale product manufacturing, nor do we have the resources or facilities to manufacture all products for use in humans. We will continue to rely on contract
manufacturers to produce Plenaxis and other compounds for later-stage preclinical, clinical and commercial purposes for a significant period of time. Third-party manufacturers may not be able to meet
our needs as to timing, quantity or quality of materials. If we are unable to contract for a sufficient supply of needed materials on acceptable terms, or if we encounter delays or difficulties in our
relationships with manufacturers, our clinical trials may be delayed, thereby preventing or delaying the submission of product candidates for, or the granting of, regulatory approval and the
commercialization of our potential products. Any such delays may lower our revenues and delay or prevent our attaining or maintaining profitability.

If
the third-party manufacturers upon which we rely fail to meet our needs for clinical or commercial supply, we may be required to supplement our manufacturing capacity by building our
own manufacturing facilities. This would require substantial expenditures. Also, we would need to hire and train significant numbers of employees to staff a new facility. If we are required to build
our own facility, we may not be able to develop sufficient manufacturing capacity to produce drug materials for clinical trials or commercial use in a timely manner, if at all.

In
addition, we and the third-party manufacturers that we use must continually adhere to current good manufacturing practice requirements enforced by the FDA through its facilities
inspection program. Foreign regulatory authorities may also inspect our third-party manufacturers as a condition of approval. In complying with these regulations and foreign regulatory requirements,
we and any of our third-party manufacturers will be obligated to expend time, money and effort in production, record-keeping and quality control to assure that our potential products meet applicable
specifications and other requirements. If we or any of our third-party manufacturers fail to comply with these

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requirements,
we may be subject to regulatory sanctions, manufacturing delays, or the facilities could be shut down.

Any
of these factors could prevent, or cause delays in, obtaining regulatory approvals for our potential products, and the manufacturing, marketing or selling of Plenaxis, and could also
result in significantly higher operating expenses.

The loss or failure of any of our third-party manufacturers could substantially delay or impair our sale or continued sale of Plenaxis.

For each stage of Plenaxis production we have relied, and expect in the near term to continue to rely, on a single source third-party manufacturer. Accordingly,
the loss of one or more of these third-party suppliers for any reason, including as a result of fire, terrorism, acts of God or insolvency or bankruptcy, could delay or impair substantially our sale
or continued sale of Plenaxis or result in substantial delays in, or substantially impair our ability to complete, foreign regulatory submissions or reviews. Such delays or impairment, and the
associated costs and expenses, may lower our potential revenues and delay or prevent our attaining profitability. While we continue to evaluate, as part of our strategic planning process, the
possibility of a second source of supply at certain stages of Plenaxis production, the number of qualified alternative suppliers is limited, and we cannot assure investors that we will be able to
locate alternative suppliers or negotiate second supply agreements on reasonable terms. Furthermore, the process of engineering a new supplier's facility for the production of Plenaxis and obtaining
the necessary FDA and foreign regulatory approval of the facility would require substantial lead-time and could be extremely costly. We cannot assure investors that we will not lose one or more of our
suppliers, or that in such event we would be readily able to continue the commercialization of Plenaxis without substantial and costly delays.

If our corporate collaborator reduces, delays or terminates its support, we may be unable to successfully commercialize Plenaxis outside of the United States.

We will depend upon our corporate collaborator, Schering AG, to help us obtain regulatory approval for Plenaxis and to commercialize Plenaxis in Schering AG's
licensed territory. Despite our collaborative relationship, we have limited influence over the amount and timing of resources that Schering AG will devote to Plenaxis. In addition, Schering AG may
terminate our collaboration agreement in various circumstances. We cannot assure you that Schering AG or future collaborators will meet their obligations to us under our collaboration agreements with
them. If Schering AG or another collaborator terminates its agreement with us or fails to perform, or delays performance of, its obligations, it could delay or otherwise adversely affect or prevent,
the commercialization of Plenaxis in certain regions outside of the United States. As a result, we could be forced to devote unforeseen additional resources to Plenaxis commercialization outside of
the United States. We cannot assure you that we would be able to raise the necessary funds or negotiate additional corporate collaborations on acceptable terms, if at all, and in that event we could
have to curtail planned operations for the commercialization of Plenaxis outside of the United States and would not be able to successfully carry out our current operating plan. As described in the
second risk factor in this section and elsewhere in this report, if we are unable to successfully carry out the key elements of our operating plan we would need to raise additional capital and, if we
were unable to do so, it could become necessary for us to cease operations or seek protection under state or federal insolvency or bankruptcy laws.

We are subject to extensive government regulation that increases our costs and could prevent us from selling Plenaxis or our other potential products.

The development and sale of Plenaxis, and our product candidates, is subject to extensive regulation by governmental authorities. Obtaining regulatory approval
typically is costly and takes many years; maintaining regulatory approval also requires substantial resources. Regulatory authorities, most importantly, the FDA, have substantial discretion to place
on clinical hold or terminate clinical trials, delay, withhold or withdraw registration and marketing approval in the United States, and effectively mandate product recalls. Failure to comply with
regulatory requirements may result in criminal

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prosecution,
civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other actions as to Plenaxis, our other potential products or against
us. Outside the United States, we can market a product only if we receive marketing authorization from the appropriate regulatory authorities. This foreign regulatory approval process includes all of
the risks associated with the FDA approval process, and may include additional risks.

To
gain regulatory approval from the FDA and foreign regulatory authorities for the commercial sale of any product, we must demonstrate in clinical trials, and satisfy the FDA and
foreign regulatory authorities as to, the safety and efficacy of the product. If we develop a product to treat a long-lasting disease, such as cancer or Alzheimer's disease, we must gather data over
an extended period of time. There are many risks associated with our clinical trials. For example, we may be unable to achieve the same level of success in later trials as we did in earlier ones.
Additionally, data we obtain from preclinical and clinical activities are susceptible to varying interpretations that could impede regulatory approval. Further, some patients in our prostate cancer,
Alzheimer's disease and non-Hodgkin's lymphoma programs have a high risk of death, age-related disease or other adverse medical events that may not be related to our products. These events may affect
the statistical analysis of the safety and efficacy of our products. If we obtain regulatory approval for a product, the approval will be limited to those diseases for which our clinical trials
demonstrate the product is safe and effective.

In
addition, many factors could delay or result in termination of our ongoing or future clinical trials. For example, results from ongoing preclinical studies or analyses could raise
concerns over the safety or efficacy of a product candidate. In March 2004, the FDA placed our phase 1 clinical trial of PPI-2458 on clinical hold. Although we subsequently received clearance
from the FDA to resume clinical testing of PPI-2458, we cannot assure investors that the FDA will not place this or other clinical trials on hold in the future. A clinical trial may also experience
slow patient enrollment. For example, our phase 1b trial of Apan in Alzheimer's disease patients has experienced slow patient enrollment, which has delayed the progress of that trial. A study could
also be delayed due to lack of sufficient drug supply. Patients may experience adverse medical events or side effects, and there may be a real or perceived lack of effectiveness of, or of safety
issues associated with, the drug we are testing. Future governmental action or existing or changes in FDA policies or precedents, may also result in delays or rejection of an application for marketing
approval. The FDA has considerable discretion in determining whether to grant marketing approval for a drug, and may delay or deny approval even in circumstances where the applicant's clinical trials
have proceeded in compliance with FDA procedures and regulations and have met the established end-points of the trials. Challenges to FDA determinations are generally time-consuming and costly, and
rarely, if ever, succeed. Although we received FDA approval to market
Plenaxis in the United States in November 2003, we can give no assurance that we will obtain marketing approval for any of our other product candidates.

Any
regulatory approval may be conditioned upon significant labeling requirements and, as in the case of the FDA approval of Plenaxis, marketing restrictions and post-marketing study
commitments. Such labeling and marketing restrictions could materially adversely affect the marketability or value of a product, including Plenaxis, resulting in decreased sales. In such a case, we
would not have sufficient funds to continue operations as currently planned.

In
addition, even after regulatory approval is obtained, our Company, product(s) and the manufacturing facilities for our product(s) will be subject to continual review and periodic
inspection. Later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on the product, the manufacturer or us, including withdrawal of the
product from the market. The FDA stringently applies regulatory standards. Our manufacturing facilities will also be subject to FDA inspections for adherence to good manufacturing practices prior to
marketing clearance and periodically during the manufacturing process. Failure to comply can, among other things, result in fines, denial or withdrawal of regulatory approvals, product recalls or
seizures, operating restrictions, injunctions and criminal prosecution. If there are any modifications to a product, further regulatory approval will be required.

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For
safety reasons, Plenaxis was approved by the FDA with a comprehensive risk management program. This program includes educational outreach to patients and physicians regarding the
risks and benefits of Plenaxis, restricted distribution of the product only to physicians enrolled in a prescribing registry, a system for collecting and reporting adverse events to the FDA and
auditing requirements to evaluate the effectiveness of the program. We are also required to conduct several phase 4 studies to evaluate the risk management program and the appropriate use of the drug
in the indicated population. Under the regulations under which Plenaxis was approved, the FDA has the authority to pre-approve all promotional materials and has available to it an expedited market
withdrawal procedure if issues arise regarding the safe use of Plenaxis.

The
FDA could determine that the risk management program is not effective and/or that enhancements should be made. Additional requirements imposed by the FDA could be unduly burdensome
for the Company to implement and could jeopardize our ability to support the further promotion of Plenaxis. If approval for Plenaxis is withdrawn, or if we otherwise determine that we are not able to
continue selling Plenaxis, we would not have sufficient funds to continue operations as currently planned.

Our
manufacturing, sales, promotion, and other activities following product approval are subject to regulation by numerous regulatory authorities in addition to the FDA, including
potentially the Federal Trade Commission, the Department of Justice and individual U.S. Attorney offices within the Department of Justice, CMS, other divisions of the Department of Health and Human
Services, and
state and local governments. Any distribution of pharmaceutical samples to physicians must comply with applicable rules, including the Prescription Drug Marketing Act. Our sales, marketing and
scientific/educational programs must comply with the anti-kickback provisions of the Social Security Act, the False Claims Act, and similar state laws. Our pricing and rebate programs must comply with
pricing and reimbursement rules, including the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veteran's Health Care Act. If products are made available to
authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of our activities are potentially subject to federal and state
consumer protection and unfair competition laws.

Depending
on the circumstances, failure to meet these applicable legal and regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or
seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, private "qui tam" actions brought by individual whistleblowers in the name of
the government, or refusal to allow us to enter into supply contracts, including government contracts.

If
we are unable to maintain FDA approval, obtain any foreign regulatory approval for Plenaxis, or to obtain or successfully carry out the other elements of our operating plan, we would
need to raise additional capital and, if we were unable to do so, it could become necessary for us to cease operations or seek protection under state or federal bankruptcy laws.

We may have substantial exposure to product liability claims and may not have adequate insurance to cover those claims.

The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims whether or not the drugs are actually at
fault for causing an injury. As Plenaxis is used more widely, the likelihood of an adverse drug reaction (both expected or unexpected) or unintended side effect will increase. Furthermore, Plenaxis or
our product candidates may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until
the drug has been administered to patients for some time.

Product
liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a negative effect on our financial performance. The
costs of product liability insurance have increased dramatically in recent years, and the availability of coverage has decreased. Although the Company carries insurance that it regards as reasonably
adequate to

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protect
it from potential claims, there can be no assurance that the Company will be able to maintain its current product liability insurance at a reasonable cost, or at all. Our former collaboration
agreements included, and the agreements regarding the termination of those collaborations also include, an indemnification for liabilities associated with the development and commercialization of
Plenaxis. Our agreement with Schering AG contains similar indemnification provisions. If a third party, including a former collaborator, successfully sues us for any injury, or for indemnification for
losses, there is no guarantee that the amount of the claim would not exceed the limit of the Company's insurance coverage. Further, a successful claim could result in the recall of Plenaxis, or could
reduce revenues from sales of Plenaxis. Even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may interfere with our business.

We rely upon a limited number of specialty pharmaceutical distributors and specialty pharmacies for the distribution of Plenaxis in the United States. The loss of one of them,
or changes in their purchasing patterns, could impact sales of Plenaxis, and potentially adversely affect our operating results.

In the United States, we sell to a limited number of specialty distributors and pharmacies that we rely upon for the delivery of Plenaxis to physicians and
hospital pharmacies. There are a relatively small number of specialty distributors and wholesalers who provide such services. For the year-ended December 31, 2004, sales to Oncology
Therapeutics Network Joint Venture, L.P., McKesson Specialty Distribution Services, Priority Healthcare Corporation, ASD Specialty Healthcare, Inc. and Cardinal Health 108, Inc.
represented approximately 39%, 18%, 16%, 16% and 10%, respectively, of our aggregate net product sales. Consolidation or financial difficulties among our specialty pharmaceutical distributors and
pharmacies could result in situations which could temporarily increase returns of Plenaxis from such entities and /or cause these entities to reduce their respective inventory levels by delaying
purchases of Plenaxis. In addition, these specialty distributors and pharmacies may increase or decrease purchase levels in anticipation of future price changes which may also cause an unexpected
change in the level of trade inventories that they would normally maintain. Although we have developed a plan to manage trade inventory levels of Plenaxis, this plan may not be effective. If trade
inventory levels of Plenaxis become too high, or if prescription growth of Plenaxis is lower than expected by the trade, specialty distributors and pharmacies could reduce their orders for Plenaxis,
which could adversely affect our operating results.

These
specialty distributors and pharmacies must also distribute Plenaxis only to physicians and hospital pharmacists enrolled in our risk management program. There can be no assurance
that these specialty distributors and pharmacies will adequately provide their services to either the end users or to us or that we could find additional outlets to distribute Plenaxis.

Because we depend on third parties to conduct laboratory testing and human clinical studies and assist us with regulatory compliance, we may encounter delays in product
development and commercialization.

We have contracts with a limited number of research organizations to design and conduct our laboratory testing and human clinical studies. If we cannot contract
for testing activities on acceptable terms, or at all, we may not complete our product development efforts in a timely manner. To the extent we rely on third parties for laboratory testing and human
clinical studies, we may lose some control over these activities. For example, third parties may not complete testing activities on schedule or when we request them to do so. In addition, these third
parties may conduct our clinical trials in a manner inconsistent with regulatory requirements or otherwise in a manner that yields misleading or unreliable data. This, or other failures of these third
parties to carry out their duties, could result in significant additional costs and expenses and could delay or prevent the development and commercialization of our product candidates.

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Many of our competitors have substantially greater resources than we do and may be able to develop and commercialize products that make our potential products and technologies
obsolete or non-competitive.

A biopharmaceutical company such as ours must keep pace with rapid technological change and faces intense competition. We compete with biotechnology and
pharmaceutical companies for funding, access to new technology, research personnel and in product research and development. Many of these companies have greater financial resources and more experience
than we do in developing drugs, obtaining regulatory approvals, manufacturing, marketing and sales. We also face competition from academic and research institutions and government agencies pursuing
alternatives to our products and technologies. We expect that Plenaxis, and all of our products under development, will face intense competition from existing or future drugs and other medical
treatments. In addition, for each of our product candidates, we may face increasing competition from generic formulations or existing drugs whose active components are no longer covered by patents.

Our
competitors may:



The
success of our competitors in any of these efforts would adversely affect our ability to promote Plenaxis and to develop and commercialize our product candidates, and to ultimately attain and
maintain profitability.

If we are unable to obtain and enforce valid patents, we could lose any competitive advantage we may have.

Our success will depend in part on our ability to obtain patents and maintain adequate protection of our technologies and potential products. If we do not
adequately protect our intellectual property, competitors may be able to use our technologies and erode any competitive advantage we may have. For example, if we lose our patent protection for
Plenaxis, another party could produce and market the compound in direct competition with us. Some foreign countries lack rules and methods for defending intellectual property rights and do not protect
proprietary rights to the same extent as the United States. Many companies have had difficulty protecting their proprietary rights in foreign countries.

Patent
positions are sometimes uncertain and usually involve complex legal and factual questions. We can protect our proprietary rights from unauthorized use by third parties only to the
extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We currently own or have exclusively licensed 29 issued United
States patents. We have applied, and will continue to apply, for patents covering both our technologies and products as we deem appropriate. Others may challenge our patent applications or our patent
applications may not result in issued patents. Moreover, any issued patents on our own inventions, or those licensed from third parties, may not provide us with adequate protection, or others may
challenge the validity of, or seek to narrow or circumvent, these patents. Third-party patents may impair or block our ability to conduct our business. Additionally, third parties may independently
develop products similar to our products, duplicate our unpatented products, or design around any patented products we develop.

If we are unable to protect our trade secrets and proprietary information, we could lose any competitive advantage we may have.

In addition to patents, we rely on a combination of trade secrets, confidentiality, nondisclosure and other contractual provisions, and security measures
to protect our confidential and proprietary information. These measures may not adequately protect our trade secrets or other proprietary information. If these measures do not adequately protect our
rights, third parties could use our technology, and we could lose any competitive advantage we may have. In addition, others may independently develop similar proprietary information or techniques,
which could impair any competitive advantage we may have.

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If our technologies, processes or products conflict with the patents or other intellectual property rights of competitors, universities or others, we could have to engage in
costly litigation and be unable to commercialize those products.

Our technologies, processes, product or product candidates may give rise to claims that they infringe patents or other intellectual property rights of third
parties. A third party could force us to pay damages, stop our use of these technologies or processes, or stop our manufacturing or marketing of the affected products by bringing a legal action
against us for infringement. In addition, we could be required to obtain a license to continue to use the technologies or processes or to manufacture or market the affected products, and we may not be
able to do so on acceptable terms or at all. We believe that significant litigation will continue in our industry regarding patent and other intellectual property rights. If we become involved in
litigation, it could consume a substantial portion of our resources. Even if legal actions were meritless, defending a lawsuit could take significant time, be expensive and divert management's
attention from other business concerns.

If third parties terminate our licenses, we could experience delays or be unable to complete the development and commercialization of our potential products.

We license some of our technology from third parties. Termination of our licenses could force us to delay or discontinue some of our development and
commercialization programs. For example, if Advanced Research and Technology Institute, Inc., the assignee of Indiana University Foundation, terminated our license with them due to a breach by
us of the terms of that license, we could have to discontinue the commercialization of Plenaxis. We cannot assure you that we would be able to license substitute technology in the future. Our
inability to do so could impair our ability to conduct our business because we may lack the technology, or the necessary rights to technology, required to develop and commercialize our potential
products.

We are a defendant in purported class action securities lawsuits regarding the adequacy of our public disclosure which could have a material adverse affect on our financial
condition.

As described in detail in this report under Item 3. "Legal Proceedings," in December 2004 and January 2005, the Company, Chairman and (now former)
Chief Executive Officer Malcolm Gefter, President and (now former) Chief Operating Officer Kevin F. McLaughlin, Chief Financial Officer and
Treasurer Edward C. English, and former President and Chief Operating Officer William K. Heiden, were named as defendants in three purported class action securities lawsuits filed in the United States
District Court for the District of Massachusetts. The complaints generally allege securities fraud during the period from November 25, 2003 through December 6, 2004. Each of the
complaints purports to assert claims under Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and alleges that the Company and the
individually named defendants made materially false and misleading public statements concerning the Company's business and financial results, particularly statements regarding the commercialization of
Plenaxis.

Management
believes that the allegations against the Company are without merit, and the Company intends to vigorously defend against the plaintiffs' claims. As this litigation is in an
initial stage, management is unable to predict its outcome or its ultimate effect, if any, on the Company's financial condition. However, we expect that the costs and expenses related to this
litigation may be significant. Our current director and officer liability insurance policies (which, subject to the terms and conditions thereof, also provide "entity coverage" for the Company for
this litigation) provide that the Company is responsible for the first $2.5 million of such costs and expenses. Also, a judgment in or settlement of these actions could exceed our insurance
coverage. If we are not successful in defending these actions, our business and financial condition could be adversely affected. In addition, whether or not we are successful, the defense of these
actions may divert the attention of our management and other resources that would otherwise be engaged in running our business.

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Pharmaceutical companies have been the target of lawsuits and investigations and there is no assurance that if we were to be involved in any such lawsuits or investigation,
that our defense would be successful.

Pharmaceutical companies have been the target of lawsuits and investigations including, in particular, claims asserting violations of the Federal False Claim Act,
Anti-Kickback Act, the Prescription Drug Marketing Act or other violations in connection with Medicare and/or Medicaid reimbursement, and claims under state laws, including state anti-kickback and
fraud laws. Public companies may also be the subject of certain other types of claims, including those related to environmental matters. There is no assurance that if we were to be involved in any
such lawsuits or investigation, that we would be successful in defending ourselves or in asserting our rights. Government investigations of these sorts of issues are typically expensive, disruptive
and burdensome, and generate negative publicity. If our promotional activities were found to be in violation of the law, we would likely face significant fines and penalties, and would likely be
required to change substantially our sales, promotion, grant and educational activities. In addition, we and our senior officers could be civilly or criminally prosecuted, potentially resulting in our
exclusion from participation in government healthcare programs such as Medicare and Medicaid.

If we lose our key personnel or are unable to attract and retain additional skilled personnel, we may be unable to pursue our product development and commercialization efforts.

We depend substantially on the principal members of our management and scientific staff, including Kevin F. McLaughlin, our President and Chief Executive Officer,
Marc B. Garnick, M.D., our Executive Vice President and Chief Medical and Regulatory Officer, Richard W. Wagner, Ph.D., our Executive Vice President, Discovery Research and Michael J. Keavany, our
Senior Vice President, Sales and Marketing. We do not have employment agreements with any of our executive officers. Any officer or employee can terminate his or her relationship with us at any time
and work for one of our competitors. The loss of these key individuals could result in competitive harm because we could experience delays in our product research, development and commercialization
efforts without their expertise. For example, one of our former officers, who was primarily responsible for commercial operations, resigned as our President and Chief Operating Officer during the
third quarter of 2004. As a result, we were required to appoint a new head of commercialization in an expedited fashion. We cannot assure investors that this management transition will go smoothly or
that our commercial operations will not be adversely affected.

Recruiting
and retaining qualified scientific personnel to perform future research and development work also will be critical to our success. Competition for skilled personnel is intense
and the turnover rate can be high. We compete with numerous companies and academic and other research institutions for experienced scientists. This competition may limit our ability to recruit and
retain qualified personnel on acceptable terms. Failure to attract and retain qualified personnel would prevent us from continuing to develop our potential products, enhancing our technologies and
launching our products commercially. Our planned activities will require the addition of new personnel, including management and marketing and sales personnel, and the development of additional
expertise by existing management personnel, in particular in the area of product marketing and sales. The inability to attract and retain these people or to develop this expertise could prevent, or
result in delays in, the marketing and sale of Plenaxis or the research, development and commercialization of our product candidates.

We use hazardous chemicals and radioactive and biological materials in our business and any claims relating to the handling, storage or disposal of these materials could be
time consuming and costly.

Our research and development processes involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials, which may
pose health risks. For example, the health risks associated with accidental exposure to Plenaxis include temporary impotence or infertility and harmful effects on pregnant women. Our operations also
produce hazardous waste products. We cannot completely eliminate the risk of accidental contamination or discharge from

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hazardous
materials and any resultant injury. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. Compliance with health
and safety and environmental laws and regulations is necessary and expensive. Current or future health and safety and environmental regulations may impair our research, development or production
efforts. We may be required to pay fines, penalties or damages in the event of noncompliance or the exposure of individuals to hazardous materials.

From
time to time, third-parties have also worked with hazardous materials in connection with our agreements with them. We have agreed to indemnify our present and former collaborators
in some circumstances against damages and other liabilities arising out of development activities or products produced in connection with these collaborations.

Changes in the securities laws and regulations have increased, and are likely to continue to increase, our costs.

The Sarbanes-Oxley Act of 2002, which became law in July 2002, has required changes in some of our corporate governance, securities disclosure and
compliance practices. In response to the requirements of that Act, the SEC and the Nasdaq have promulgated new rules and listing standards covering a variety of subjects. Compliance with these new
rules and listing standards has increased our legal costs, and significantly increased our financial and accounting costs, and we expect these increased costs to continue. These developments may make
it more difficult and more expensive for us to obtain director and officer liability insurance. Likewise, these developments may make it more difficult for us to attract and retain qualified members
of our board of directors, particularly independent directors, or qualified executive officers.

If we or our independent registered public accounting firm are unable to affirm the effectiveness of our internal control over financial reporting in future years, the market
value of our common stock could be adversely affected.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the
Company's internal control over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of the company's internal control over
financial reporting. In addition, the independent registered public accounting firm auditing the Company's financial statements must attest to and report on management's assessment and on the
effectiveness of the Company's internal control over financial reporting. Our independent registered public accounting firm has provided us with an unqualified report as to our assessment and the
effectiveness of our internal control over financial reporting as of December 31, 2004, which report is included in this Annual Report on Form 10-K at page 50. However, we cannot
assure you that management or our independent registered public accounting firm will be able to provide such an assessment or unqualified report as of future year-ends as required by
Section 404 of the Sarbanes-Oxley Act of 2002. In this event, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the market
value of our common stock.

The market price of our common stock may experience extreme price and volume fluctuations.

The market price of our common stock may fluctuate substantially due to a variety of factors, including, but not limited to:



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In
addition, the stock market has experienced extreme price and volume fluctuations. The market prices of the securities of biotechnology companies, particularly companies like ours with
limited product revenues and without earnings, have been highly volatile, and may continue to be highly volatile in the future. This volatility has often been unrelated to the operating performance of
particular companies. In the past, securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Whether or not
meritorious, litigation brought against us could result in substantial costs and a diversion of management's attention and resources.

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We expect that our quarterly results of operations will fluctuate, and this fluctuation could cause our stock price to decline.

Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to decline. Some
of the factors that could cause our operating results to fluctuate include:



Due
to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future
performance.

If we fail to meet the Nasdaq National Market's minimum bid price continued listing standard our common stock may be delisted from the Nasdaq National Market.

The market price of our common stock has declined substantially (see Item 5. of Part II of this report, "Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities"). As of March 11, 2005, the closing bid price per share of our common stock on the NASDAQ National Market was $1.41. If the
closing bid price per share of our common stock falls and remains below $1.00 for 30 consecutive business days and does not equal or exceed $1.00 for 10 consecutive business days during the subsequent
180 calendar day period, the Nasdaq Stock Market could take action seeking to delist our common stock from the Nasdaq National Market. If at the end of the 180 calendar day period, we met the initial
listing requirements of the Nasdaq SmallCap Market, other than its minimum bid price requirement, we would be permitted to list on the Nasdaq SmallCap Market and would be afforded an additional 180
calendar day period to meet the $1.00 per share minimum bid price requirement for continued listing on the Nasdaq SmallCap Market. Delisting of our common stock from the Nasdaq National Market, even
if it were listed and traded on the Nasdaq SmallCap Market, would likely result in reduced liquidity, thereby increasing the volatility of the trading price, of our common stock, a loss of coverage by
certain analysts and a diminution of institutional investor interest. It could also potentially cause a loss of confidence of corporate collaborators, contract manufacturers and our employees, which
could adversely affect our business.

If we engage in an acquisition, we will incur a variety of costs and may never realize the anticipated benefits of the acquisition.

If appropriate opportunities become available, we may attempt to acquire businesses, or acquire or in-license products or technologies, that we believe are a
strategic fit with our business. We currently have no commitments or agreements for any acquisitions. If we do undertake any transaction of this sort, the process of integrating an acquired business,
or an acquired or in-licensed product or technology, may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available
for the ongoing development of our business. Moreover, we may fail to realize the anticipated benefits of any transaction of this sort. To the extent we issue stock in a transaction, the ownership
interest of our stockholders will be diluted. Transactions of this kind could also cause us to incur debt, expose us to future liabilities and result in expenses related to goodwill and other
intangible assets.

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Anti-takeover provisions in our charter and by-laws, our rights agreement and certain provisions of Delaware law may make an acquisition of us more difficult, even if an
acquisition would be beneficial to our stockholders.

Provisions in our certificate of incorporation and by-laws may delay or prevent an acquisition of us or a change in our management. Also, because we are
incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit or delay large stockholders, in particular those owning
15% or more of our outstanding voting stock, from merging or combining with us. In addition, the rights issued under our rights agreement may be a substantial deterrent to a person acquiring 10% or
more of our common stock without the approval of our board of directors. These provisions in our charter and by-laws, rights agreement and under Delaware law could reduce the price that investors
might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without
significantly increasing risk. We have not entered into any instruments for trading purposes. Some of the securities that we invest in may have market risk. This means that an increase in prevailing
interest rates may cause the principal amount of the investment to decrease. To minimize this risk in the future, we maintain our portfolio of cash equivalents and short-term investments in a variety
of securities, including commercial paper, money market funds and government and non-government debt securities. An immediate hypothetical 100 basis point increase in interest rates would have
resulted in an approximate $0.2 million decrease in the fair value of our investments as of December 31, 2004. The same hypothetical increase in interest rates as of December 31,
2003 would have resulted in an approximate $0.3 million decrease in the fair value of our investments. Due to the conservative nature of our investments and relatively short duration, interest
rate risk is mitigated. As of December 31, 2004, approximately 90% of our total portfolio will mature or reset in one year or less, with the remainder maturing in less than three years.

In
connection with the purchase of our new facility in July 2000, our wholly owned real estate subsidiary executed an acquisition and construction loan agreement that provided for
up to $33.0 million in borrowings at a floating interest rate indexed to 30-day LIBOR. In July 2003, we exercised the first of two one-year extension options extending the maturity date
of the loan until July 30, 2004. In
connection with this extension, the subsidiary entered into an interest rate cap agreement which limited exposure to interest rate increases above a certain threshold through July 30, 2004.

In
June 2004, the acquisition and construction loan agreement was amended to extend the maturity date of the loan and modify certain other terms of the original agreement. Under
the amended loan agreement, on July 30, 2009 the principal amount then outstanding is due and payable in full, subject to two one-year extension options which are exercisable at our election
provided we are in compliance with certain financial covenants. The outstanding principal bears interest at a fixed rate of 5.95% through April 2009 and at a floating rate for the remainder of
the term. Principal and interest are payable through a fixed monthly payment of approximately $207,000, with the principal portion being calculated using a 25-year amortization schedule. The amended
loan agreement also provides for certain additional financial operating covenants, one of which was effective immediately and the remainder of which will become effective as of December 31,
2006. The covenant which was immediately effective is tested on a quarterly basis and requires that we maintain $25.0 million in unrestricted cash, cash equivalents and marketable securities.
Because of this amendment to the loan agreement, we do not believe that there is material interest rate risk exposure with respect to the loan facility.

48

---



ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements required by this Item are included on pages F-1 through F-21 of this report. The supplementary financial information required by this
Item is included in the section of this report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Selected Quarterly Operating
Results."

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not applicable.

ITEM 9A.    CONTROLS AND PROCEDURES.



The Company's management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by
this report. Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures were
effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, on a
timely basis, and is accumulated and communicated to the Company's management, including the Company's chief executive officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.



Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company's principal executive and principal financial
officers and effected by the Company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:



Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management
assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria
established inInternal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

49

---



Based
on this assessment, management has concluded that, as of December 31, 2004, the Company's internal control over financial reporting is effective.

Ernst &
Young LLP, the Company's independent registered public accounting firm, has issued a report on management's assessment and the effectiveness of the Company's internal
control over financial reporting, as of December 31, 2004. This report appears immediately below.



Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting

Board
of Directors and Stockholders
PRAECIS PHARMACEUTICALS INCORPORATED

We
have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that PRAECIS PHARMACEUTICALS INCORPORATED
maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). PRAECIS PHARMACEUTICALS INCORPORATED's management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on
the effectiveness of the company's internal control over financial reporting based on our audit.

We
conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

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

50

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In
our opinion, management's assessment that PRAECIS PHARMACEUTICALS INCORPORATED maintained effective internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our opinion, PRAECIS PHARMACEUTICALS INCORPORATED maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2004
and 2003 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004 of PRAECIS PHARMACEUTICALS
INCORPORATED and our report dated March 10, 2005 expressed an unqualified opinion thereon.



Boston,
Massachusetts
March 10, 2005



There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) during the quarter ended 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.

51

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

We have adopted a code of ethics and conduct that applies to all of our directors, officers and employees. We have made a copy of our code of ethics and conduct
available on our website under "Investor RelationsCorporate Governance." We may satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or
a waiver from, a provision of our code of ethics and conduct that applies to our principal executive officer or our principal financial and accounting officer by posting such information on our
website.

Information
required by this Item with respect to directors, executive officers, the Company's audit committee and compliance with Section 16(a) of the Securities Act of 1934, as
amended, may be found in the sections captioned "Nominees for Election to the Board of Directors," "Executive Officers Who Are Not Directors," "Board Actions; Committees of the Board of
DirectorsAudit Committee" and "Section 16(a) Beneficial Ownership Reporting Compliance," appearing in our definitive Proxy Statement to be delivered to stockholders in connection
with the Annual Meeting of Stockholders expected to be held on May 12, 2005. Such information is incorporated herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION.

Information required by this Item may be found in the sections captioned "Director Compensation," "Executive Compensation and Other Information," and
"Compensation Committee Interlocks and Insider Participation," appearing in our definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders
expected to be held on May 12, 2005. Such information is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Information required by this Item may be found in the sections captioned "Stock Ownership of Certain Beneficial Owners and Management" and "Equity Compensation
Plan Information," appearing in our definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders expected to be held on May 12, 2005. Such
information is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information required by this Item may be found in the section captioned "Certain Relationships and Related Transactions," appearing in our definitive Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders expected to be held on May 12, 2005. Such information is incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information required by this Item may be found in the section captioned "Independent Registered Public Accounting Firm Fees," appearing in our definitive Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders expected to be held on May 12, 2005. Such information is incorporated herein by reference.

52

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES.



The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements located on page F-1, which immediately follows
the signature page of this report.



All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.



|Exhibit No. |  | Exhibit                                                                                                                                                                                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Certificate of Incorporation (2)                                                                                                                                                                                                                                           
|3.2         |  | Third Amended and Restated By-Laws (10)                                                                                                                                                                                                                                                         
|4.1         |  | Specimen certificate representing shares of common stock (1)                                                                                                                                                                                                                                    
|4.2         |  | Specimen certificate representing shares of common stock (including Rights Agreement Legend) (5)                                                                                                                                                                                                
|4.3         |  | Rights Agreement between PRAECIS and American Stock Transfer & Trust Company, as Rights Agent (6)                                                                                                                                                                                               
|4.4         |  | Form of Certificate of Designations of Series A Junior Participating Preferred Stock (attached as Exhibit A to the Rights Agreement filed as Exhibit 4.3 hereto) (6)                                                                                                                            
|4.5         |  | Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit 4.3 hereto) (6)                                                                                                                                                                                      
|10.1*       |  | Third Amended and Restated 1995 Stock Plan (14)                                                                                                                                                                                                                                                 
|10.2*       |  | Form of Incentive Stock Option Agreement (17)                                                                                                                                                                                                                                                   
|10.3*       |  | Form of Non-Qualified Stock Option Agreement (17)                                                                                                                                                                                                                                               
|10.4*       |  | Executive Management Bonus Plan, as amended and restated as of September 12, 2002 (9)                                                                                                                                                                                                           
|10.5*       |  | Amended and Restated Employee Stock Purchase Plan (11)                                                                                                                                                                                                                                          
|10.6*       |  | Management Incentive Program (10)                                                                                                                                                                                                                                                               
|10.7*       |  | Amended and Restated Stockholders Agreement dated as of April 30, 1998 by and among PRAECIS and certain stockholders referred to therein, as amended by Amendment No. 1 dated as of May 14, 1998, Amendment
No. 2 dated as of July 21, 1998 and Amendment No. 3 dated as of January 31, 2000 (1)
|10.8*       |  | Amendment No. 4 dated as of September 1, 2000 to Amended and Restated Stockholders Agreement dated as of April 30, 1998 by and among PRAECIS and certain stockholders referred to therein, as amended (4)                                                                                       
|10.9*       |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and William K. Heiden (8)                                                                                                                                                                                                              
|10.10*      |  | Promissory Note dated May 16, 2002 executed by William K. Heiden in favor of PRAECIS (8)                                                                                                                                                                                                        
|10.11*      |  | Amendment dated March 29, 2004 to Letter Agreement dated as of May 9, 2002 between PRAECIS and William K. Heiden (13)                                                                                                                                                                           
|10.12*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Malcolm L. Gefter, Ph.D. (8)                                                                                                                                                                                                       
|10.13*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Kevin F. McLaughlin (8)                                                                                                                                                                                                            
|10.14*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Marc B. Garnick, M.D. (8)                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                 

53

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|10.15*  |  | Letter Agreement dated as of September 16, 2004 between PRAECIS and Edward C. English (16)                                                                                                                                                                                                                                                              
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.16*  |  | Letter Agreement dated as of September 16, 2004 between PRAECIS and Richard W. Wagner, Ph.D. (16)                                                                                                                                                                                                                                                       
|10.17*  |  | Letter Agreement dated as of November 11, 2004 between PRAECIS and Michael J. Keavany                                                                                                                                                                                                                                                                   
|10.18*  |  | Summary of Executive Officer and Non-Employee Director Compensation Arrangements for 2005                                                                                                                                                                                                                                                               
|10.19  |  | License Agreement effective as of October 17, 1996 by and between PRAECIS and Indiana University Foundation, as amended as of June 3, 1998 (1)                                                                                                                                                                                                          
|10.20  |  | Supply Agreement dated as of July 23, 1998 by and between PRAECIS and Salsbury Chemicals, Inc. (1)                                                                                                                                                                                                                                                      
|10.21  |  | Amendment No. 2 dated as of July 1, 2004 by and between PRAECIS and Cambrex Charles City, Inc. (formerly Salsbury Chemicals, Inc.) to the Supply Agreement dated as of July 23, 1998 by and between PRAECIS
and Salsbury Chemicals, Inc., as amended (15)                                                                                               
|10.22  |  | Development and Supply Agreement effective as of June 21, 2000 by and between UCB S.A. and Amgen Inc., as amended by Amendment No. 1 thereto dated as of March 26, 2002 (together with the Assignment of
Development and Supply Agreement entered into January 18, 2002 and effective as of December 17, 2001 by and between Amgen Inc. and PRAECIS) (7)
|10.23 |  | Amendment No. 2 dated as of August 30, 2004 to the Development and Supply Agreement effective as of June 21, 2000 by and between PRAECIS and UCB S.A. (17)                                                                                                                                                                                              
|10.24  |  | Commercial Supply Agreement dated December 4, 2002 and effective as of June 1, 2002 by and between Baxter Pharmaceutical Solutions LLC and PRAECIS (10)                                                                                                                                                                                                 
|10.25   |  | Termination Agreement dated as of August 19, 2002 by and between PRAECIS and Amgen Inc. (9)                                                                                                                                                                                                                                                             
|10.26  |  | License, Supply and Distribution Agreement dated April 27, 2004 by and between the PRAECIS and Schering AG (15)                                                                                                                                                                                                                                         
|10.27   |  | Contract of Sale dated as of January 14, 2000 by and between Best Property Fund, L.P. and PRAECIS, as amended as of February 7, 2000 (1)                                                                                                                                                                                                                
|10.28   |  | Acquisition and Construction Loan Agreement dated as of July 11, 2000 between 830 Winter Street LLC and Anglo Irish Bank Corporation plc and related Loan and Security Agreements (3)                                                                                                                                                                   
|10.29   |  | First Amendment to Acquisition and Construction Loan Agreement dated as of July 11, 2000 between 830 Winter Street LLC and Anglo Irish Bank Corporation plc, together with related Loan Security and Assignment
Agreements, each as amended as of June 28, 2004 (15)                                                                                    
|10.30   |  | Guaranty of Non-Recourse Exceptions dated as of July 11, 2000 (3)                                                                                                                                                                                                                                                                                       
|10.31   |  | First Amendment to and Reaffirmation of Guaranty of Non-Recourse Exceptions dated as of June 28, 2004 by and between PRAECIS and Anglo Irish Bank Corporation plc (15)                                                                                                                                                                                  
|10.32   |  | Environmental Compliance and Indemnity Agreement dated as of July 11, 2000 executed by 830 Winter Street LLC and PRAECIS (3)                                                                                                                                                                                                                            
|10.33   |  | First Amendment to and Reaffirmation of Environmental Compliance and Indemnity Agreement dated as of June 28, 2004 by and between 830 Winter Street LLC, PRAECIS and Anglo Irish Bank Corporation plc (15)                                                                                                                                              
|10.34   |  | Lease Agreement dated as of July 11, 2000 between 830 Winter Street LLC, as landlord, and PRAECIS, as tenant (3)                                                                                                                                                                                                                                        
|21.1    |  | List of Subsidiaries of PRAECIS (12)                                                                                                                                                                                                                                                                                                                    
|23.1    |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                             
|24.1    |  | Power of Attorney (included on the signature page of this Report on Form 10-K)                                                                                                                                                                                                                                                                          
|31.1    |  | Certification of Chief Executive Officer                                                                                                                                                                                                                                                                                                                
|31.2    |  | Certification of Chief Financial Officer                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                         

54

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|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

55

---



56

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SIGNATURE

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.

|                     |  | PRAECIS PHARMACEUTICALS INCORPORATED
|-------------------- |  | ------------------------------------
|Date: March 15, 2005 |  | By:                                 

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin F. McLaughlin and Edward C. English and each of
them, as such person's true and lawful attorney-in-fact and agent with full power of substitution and revocation for such person and in such person's name, place and stead, in any and all capacities,
to execute any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents
and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities
indicated on March 15, 2005.

|Signature                                           |  | Title                                                                                                                 
|--------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------
|                                                    |  |                                                                                                                       
|/s/KEVIN F. MCLAUGHLINKevin F. McLaughlin           |  | President, Chief Executive Officer and Director(Principal Executive Officer)                                          
|/s/EDWARD C. ENGLISHEdward C. English               |  | Chief Financial Officer, Vice President, Treasurer and Assistant Secretary(Principal Financial and Accounting Officer)
|/s/MALCOLM L. GEFTER, PH.D.Malcolm L. Gefter, Ph.D. |  | Chairman of the Board and Chief Scientific Officer                                                                    
|/s/G. LEONARD BAKER, JR.G. Leonard Baker, Jr.       |  | Director                                                                                                              
|/s/GAREN G. BOHLINGaren G. Bohlin                   |  | Director                                                                                                              
|                                                    |  |                                                                                                                       

57

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|/s/HENRY F. MCCANCEHenry F. McCance             |  | Director
|----------------------------------------------- |  | --------
|/s/LEONARD E. POST, PH.D.Leonard E. Post, Ph.D. |  | Director
|/s/DAVID B. SHARROCKDavid B. Sharrock           |  | Director
|/s/PATRICK J. ZENNERPatrick J. Zenner           |  | Director

58

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PRAECIS PHARMACEUTICALS INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                        |  | Page
|------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm |  | F-2 
|Consolidated Balance Sheets                             |  | F-3 
|Consolidated Statements of Operations                   |  | F-4 
|Consolidated Statements of Stockholders' Equity         |  | F-5 
|Consolidated Statements of Cash Flows                   |  | F-6 
|Notes to Consolidated Financial Statements              |  | F-7 

F-1

---





Report of Independent Registered Public Accounting Firm

Board
of Directors and Stockholders
PRAECIS PHARMACEUTICALS INCORPORATED

We
have audited the accompanying consolidated balance sheets of PRAECIS PHARMACEUTICALS INCORPORATED as of December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PRAECIS PHARMACEUTICALS INCORPORATED at
December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of PRAECIS PHARMACEUTICALS INCORPORATED's
internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 10, 2005 expressed an unqualified opinion thereon.

|                                     |  | /s/ Ernst & Young LLP
|------------------------------------ |  | ---------------------
|Boston, Massachusetts
March 10, 2005 |  |                      

F-2

---





PRAECIS PHARMACEUTICALS INCORPORATED  Consolidated Balance Sheets  (In thousands, except share data)

|                                     |                                                                                                                                              | December 31,                               |       
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------
|
|Assets                               |                                                                                                                                              |                                            |       
|Current assets:                      |                                                                                                                                              |                                            |       
|                                     | Cash and cash equivalents                                                                                                                    |                                            | $     
|                                     | Marketable securities                                                                                                                        |                                            |       
|                                     | Accounts receivable                                                                                                                          |                                            |       
|                                     | Inventory                                                                                                                                    |                                            |       
|                                     | Prepaid expenses and other assets                                                                                                            |                                            |       
|                                     |                                                                                                                                              |                                            |       
|                                     |                                                                                                                                              | Total current assets                       |       
|Property and equipment, net          |                                                                                                                                              |                                            | 67,713
|Inventory                            |                                                                                                                                              |                                            |      
|Due from officer                     |                                                                                                                                              |                                            | 833   
|Other assets                         |                                                                                                                                              |                                            | 14    
|                                     |                                                                                                                                              |                                            |       
|                                     |                                                                                                                                              | Total assets                               |       
|                                     |                                                                                                                                              |                                            |       
|Liabilities and Stockholders' Equity |                                                                                                                                              |                                            |       
|Current liabilities:                 |                                                                                                                                              |                                            |       
|                                     | Accounts payable                                                                                                                             |                                            | $     
|                                     | Accrued expenses                                                                                                                             |                                            |       
|                                     | Deferred revenue                                                                                                                             |                                            |       
|                                     | Current portion of long-term debt                                                                                                            |                                            |       
|                                     |                                                                                                                                              |                                            |       
|                                     |                                                                                                                                              | Total current liabilities                  |       
|Deferred revenue                     |                                                                                                                                              |                                            |      
|Long-term debt                       |                                                                                                                                              |                                            | 31,880
|Commitments and contingencies        |                                                                                                                                              |                                            |       
|Stockholders' equity:                |                                                                                                                                              |                                            |       
|                                     | Common Stock, $0.01 par value; 200,000,000 shares authorized; 52,011,002 shares in 2003 and 52,378,398 shares in 2004 issued and outstanding |                                            |       
|                                     | Additional paid-in capital                                                                                                                   |                                            |       
|                                     | Accumulated other comprehensive income (loss)                                                                                                |                                            |       
|                                     | Accumulated deficit                                                                                                                          |                                            |       
|                                     |                                                                                                                                              |                                            |       
|                                     |                                                                                                                                              | Total stockholders' equity                 |       
|                                     |                                                                                                                                              |                                            |       
|                                     |                                                                                                                                              | Total liabilities and stockholders' equity |       
|                                     |                                                                                                                                              |                                            |       

See accompanying notes.

F-3

---



PRAECIS PHARMACEUTICALS INCORPORATED
Consolidated Statements of Operations
(In thousands, except per share data)

|                                                                       |                              | Year Ended December 31,  |        
|---------------------------------------------------------------------- | ---------------------------- | ------------------------ | -------
|
|Revenues:                                                              |                              |                          |        
|                                                                       | Product sales                |                          | $      
|                                                                       | Licensing and other revenues |                          |        
|                                                                       |                              |                          |        
|                                                                       |                              | Total revenues           |        
|Costs and expenses:                                                    |                              |                          |        
|                                                                       | Cost of goods sold           |                          |        
|                                                                       | Research and development     |                          |        
|                                                                       | Sales and marketing          |                          |        
|                                                                       | General and administrative   |                          |        
|                                                                       |                              |                          |        
|                                                                       |                              | Total costs and expenses |        
|                                                                       |                              |                          |        
|Operating loss                                                         |                              |                          | (66,867
|Interest income                                                        |                              |                          | 6,113  
|Interest expense                                                       |                              |                          | (1,341 
|Gain on termination of collaboration agreement                         |                              |                          | 16,020 
|                                                                       |                              |                          |        
|Net loss                                                               |                              | $                        | (46,075
|                                                                       |                              |                          |        
|Basic and diluted net loss per common share                            |                              | $                        | (0.89  
|                                                                       |                              |                          |        
|Weighted average number of basic and diluted
common shares outstanding |                              |                          | 51,678 

See accompanying notes.

F-4

---





PRAECIS PHARMACEUTICALS INCORPORATED  Consolidated Statements of Stockholders' Equity  (In thousands, except share data)

|                                         |  | Common Stock |  |   |     | Accumulated
Other
Comprehensive
Income (Loss) |   |         |   |   |     
|---------------------------------------- |  | ------------ |  | - | --- | --------------------------------------------- | - | ------- | - | - | ----
|
|
|Balance at December 31, 2001             |  | 51,116,135   |  | $ | 511 |                                               | $ | 353,887 |   | $ | 730 
|Net loss                                 |  |              |  |   |     |                                               |   |         |   |   |     
|Unrealized loss on marketable securities |  |              |  |   |     |                                               |   |         |   |   | (527
|                                         |  |              |  |   |     |                                               |   |         |   |   |     
|Total comprehensive loss                 |  |              |  |   |     |                                               |   |         |   |   |     
|Stock compensation                       |  |              |  |   |     |                                               |   | (185    | ) |   |     
|Issuance of Common Stock                 |  | 685,288      |  |   | 7   |                                               |   | 974     |   |   |     
|                                         |  |              |  |   |     |                                               |   |         |   |   |     
|Balance at December 31, 2002             |  | 51,801,423   |  |   | 518 |                                               |   | 354,676 |   |   | 203 
|Net loss                                 |  |              |  |   |     |                                               |   |         |   |   |     
|Unrealized loss on marketable securities |  |              |  |   |     |                                               |   |         |   |   | (130
|                                         |  |              |  |   |     |                                               |   |         |   |   |     
|Total comprehensive loss                 |  |              |  |   |     |                                               |   |         |   |   |     
|Stock compensation                       |  |              |  |   |     |                                               |   | 148     |   |   |     
|Issuance of Common Stock                 |  | 209,579      |  |   | 2   |                                               |   | 549     |   |   |     
|                                         |  |              |  |   |     |                                               |   |         |   |   |     
|Balance at December 31, 2003             |  | 52,011,002   |  |   | 520 |                                               |   | 355,373 |   |   | 73  
|Net loss                                 |  |              |  |   |     |                                               |   |         |   |   |     
|Unrealized loss on marketable securities |  |              |  |   |     |                                               |   |         |   |   | (242
|                                         |  |              |  |   |     |                                               |   |         |   |   |     
|Total comprehensive loss                 |  |              |  |   |     |                                               |   |         |   |   |     
|Stock compensation                       |  |              |  |   |     |                                               |   | 18      |   |   |     
|Issuance of Common Stock                 |  | 367,396      |  |   | 4   |                                               |   | 330     |   |   |     
|                                         |  |              |  |   |     |                                               |   |         |   |   |     
|Balance at December 31, 2004             |  | 52,378,398   |  | $ | 524 |                                               | $ | 355,721 |   | $ | (169
|                                         |  |              |  |   |     |                                               |   |         |   |   |     

See accompanying notes.

F-5

---



PRAECIS PHARMACEUTICALS INCORPORATED
Consolidated Statements of Cash Flows
(In thousands)

|                                                                        |                                                | Year Ended December 31,           |         
|----------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------- | --------
|
|Operating activities:                                                   |                                                |                                   |         
|Net loss                                                                |                                                | $                                 | (46,075 
|Adjustments to reconcile net loss to cash used in operating activities: |                                                |                                   |         
|                                                                        | Depreciation                                   |                                   |         
|                                                                        | Gain on termination of collaboration agreement |                                   |         
|                                                                        | Stock compensation                             |                                   |         
|                                                                        | Changes in operating assets and liabilities:   |                                   |         
|                                                                        |                                                | Accounts receivable               |         
|                                                                        |                                                | Inventory                         |         
|                                                                        |                                                | Prepaid expenses and other assets |         
|                                                                        |                                                | Due from officer                  |         
|                                                                        |                                                | Accounts payable                  |         
|                                                                        |                                                | Accrued expenses                  |         
|                                                                        |                                                | Deferred revenue                  |         
|                                                                        |                                                |                                   |         
|Net cash used in operating activities                                   |                                                |                                   | (69,879 
|Investing activities:                                                   |                                                |                                   |         
|Purchase of available-for-sale securities                               |                                                |                                   | (161,286
|Sales and maturities of available-for-sale securities                   |                                                |                                   | 128,102 
|Proceeds from disposition of property and equipment                     |                                                |                                   |        
|Purchase of property and equipment                                      |                                                |                                   | (1,756  
|                                                                        |                                                |                                   |         
|Net cash (used in) provided by investing activities                     |                                                |                                   | (34,940 
|Financing activities:                                                   |                                                |                                   |         
|Repayments of debt                                                      |                                                |                                   |        
|Proceeds from the issuance of Common Stock                              |                                                |                                   | 981     
|                                                                        |                                                |                                   |         
|Net cash provided by (used in) financing activities                     |                                                |                                   | 981     
|                                                                        |                                                |                                   |         
|Decrease in cash and cash equivalents                                   |                                                |                                   | (103,838
|Cash and cash equivalents at beginning of year                          |                                                |                                   | 144,685 
|                                                                        |                                                |                                   |         
|Cash and cash equivalents at end of year                                |                                                | $                                 | 40,847  
|                                                                        |                                                |                                   |         

See accompanying notes.

F-6

---





PRAECIS PHARMACEUTICALS INCORPORATED  Notes to Consolidated Financial Statements

1.    Basis of Presentation

The Company

PRAECIS PHARMACEUTICALS INCORPORATED (the "Company") was incorporated in July 1993 under the laws of the State of Delaware. The Company is engaged in the
discovery, development and commercialization of drugs for the treatment of human diseases.

Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles 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.

Principles of Consolidation

The accompanying consolidated financial statements include the Company's accounts and the accounts of its wholly owned subsidiaries, 830 Winter Street LLC and
PRAECIS Europe Limited. All significant intercompany account balances and transactions between the companies have been eliminated.

2.    Significant Accounting Policies

Cash Equivalents

Cash equivalents consist principally of money market funds and other investments with original maturities of three months or less at the date of purchase.

Marketable Securities

The Company invests in marketable securities of highly rated financial institutions and investment-grade debt instruments and limits the amount of credit exposure
with any one entity. The Company has classified its marketable securities as "available-for-sale" and, accordingly, carries such securities at aggregate fair value. Unrealized gains and losses, if
any, are reported as other comprehensive income in stockholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. Realized gains and losses on available-for-sale securities are included in interest income and expense. The cost of securities sold is based
on the specific identification method. Interest and dividends are included in interest income. At December 31, 2004, the Company's marketable securities had a maximum estimated life of less
than three years with a weighted average maturity of approximately four months.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents and marketable
securities. The Company places its cash, cash
equivalents and marketable securities with high credit quality financial institutions and, by policy, limits its credit exposure to any one financial instrument, sovereignty or issuer.

F-7

---



The
Company sells Plenaxis directly to a limited number of authorized specialty pharmaceutical distributors and pharmacies which, in turn, sell the product to physicians and hospital
pharmacists. The Company had five significant customers which accounted for 39%, 18%, 16%, 16% and 10% of the Company's product sales in 2004. The Company had no product sales during 2003 and 2002. In
order to control credit risk, the Company performs regular credit evaluations of its customers' financial condition. The Company has not realized any credit losses or recorded an allowance for
doubtful accounts to date.

Derivatives and Hedging

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities("SFAS No. 133"), and its amendments SFAS No. 137 and No. 138, in
June 1999 and June 2000, respectively. SFAS No. 133 requires the Company to recognize all derivatives on its balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value
of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. As of December 31, 2004, the Company had no derivative instruments.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful life of the asset as follows:

Building

30 yearsBuilding improvements

30 years or the remaining life of the building, whichever is shorterLaboratory, computer and office equipment

3-7 years or term of lease, whichever is shorter


In
accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews property,
plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Recoverability of these assets is measured by
comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate over their remaining economic life. No revision to the estimated useful life or recorded
amount of property and equipment was required.

Revenue Recognition

The Company follows the provisions of the Securities and Exchange Commission's Staff Accounting Bulletin No. 104,Revenue
Recognition. Revenues from product sales are recognized in the period when the product is delivered, provided there is pervasive evidence that an arrangement exists, the price
is fixed or determinable and collection of the related receivable is probable. Revenues are recorded net of applicable allowances as provision is made for estimated sales returns, rebates, distributor
fees and other applicable discounts and allowances. Shipping and other distribution costs are charged to cost of product sales.

F-8

---



The
Company prepares its provisions for sales returns and allowances, rebates and discounts based primarily on estimates. Contractual allowances and rebates result primarily from sales
under contracts with healthcare providers, Medicaid programs and other government agencies. The Company's policy for sales returns allows authorized distributors to return the product three months
prior to, and six months after, product expiration. Product shipped during 2004 had an initial approved shelf-life of 24 months with expiration dates of February 2005 and
June 2006. At the end of 2004, the FDA approved an extension of the shelf life to 36 months which will be applied to all future commercial lots. The reserve for sales returns is
determined by reviewing the history of returns for products with similar characteristics to Plenaxis. The Company also utilizes daily reports itemizing sales to physicians and hospital pharmacies,
obtained directly from its authorized distributors, in order to analyze specific account ordering trends. This data is reviewed to monitor product movement through the supply chain
to identify remaining inventory that may result in chargebacks or sales returns. The Company estimates that there was approximately $0.3 million of product at distributors at
December 31, 2004. The reserves are reviewed at each reporting period and adjusted to reflect data available at that time. The Company accrued approximately $0.3 million in sales return
reserves and $0.2 in other revenue reserves as of December 31, 2004. To the extent the Company's estimates of contractual allowances, rebates and sales returns are different from actuals, the
Company adjusts the reserve which impacts the amount of product sales revenue recognized in the period of the adjustment. The Company had not received any significant returns through
December 31, 2004.

The
Company currently provides substantially all of its distributors with payment terms of up to 120 days on purchases of Plenaxis. Through December 31, 2004, payments have
generally been made in a timely manner.

In
April 2004, the Company entered into a license, supply and distribution agreement with Schering AG ("Schering AG"), of Berlin, Germany (the "Schering AG Agreement"). The
Schering AG Agreement provides for a combination of upfront, regulatory approval and performance-based milestone payments, as well as a share of revenue through transfer price payments for drug
product which will be supplied by the Company. The Company analyzes such multiple element arrangements to determine whether the elements can be separated and accounted for individually as separate
units of accounting in accordance with EITF No. 00-21,Revenue Arrangements with Multiple Deliverables.Nonrefundable upfront licensing fees and
certain guaranteed, time-based payments that require continuing involvement in the form of development, manufacturing or other commercialization efforts by the Company are recognized as licensing
revenue ratably over the period under which the Company is obligated to perform those services. Milestone payments are recognized as licensing revenue or product sales when the performance
obligations, as defined in the contract, are achieved, so long as the milestone is deemed to be substantive. Performance milestones typically consist of milestones in the development and/or
commercialization of a product, such as obtaining approval from regulatory agencies and the achievement of targeted sales levels. Reimbursements of development costs are recognized as licensing
revenue as the related costs are incurred.

When
the period over which a fee or payment will be recognized as revenue cannot be specifically identified from the contract, management estimates the deferral period based upon other
critical factors contained within the contract, including but not limited to patent life or contract term. The Company continually reviews these estimates which could result in a change in the
deferral period and might impact the timing and the amount of revenue recognized.

F-9

---



Income Taxes

The Company provides for income taxes under SFAS No. 109,Accounting for Income Taxes.Under this method,
deferred taxes are recognized using the liability method, whereby tax rates are applied to
cumulative temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes based on when and how they are
expected to affect the tax return.

Segment Information

SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information("SFAS No. 131"),
established standards for reporting information on operating segments in interim and annual financial statements. Under SFAS No. 131, the Company operates in one segment, the discovery,
development and commercialization of drugs for the treatment of human diseases. The Company does not operate any material separate lines of business with respect to its products or product candidates.
Accordingly, the Company does not accumulate discrete financial information with respect to separate product areas and does not have separately reportable segments. Substantially all of the Company's
revenues are currently generated within the United States.

Research and Development

Research and development costs, including those associated with technology, licenses and patents, are expensed as incurred. Research and development costs include
primarily costs related to ongoing clinical programs, manufacturing and materials inventory costs for use in clinical trials, salaries, lab supplies and other fixed facility costs used in the
Company's research and development operations.

Advertising Costs

All advertising costs are expensed as incurred. Advertising expenses were zero in 2002, and approximately $0.2 million in 2003 and $2.0 million in
2004.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to
Employees("APB No. 25") and related interpretations, in accounting for its stock-based employee compensation plans using the intrinsic value method, rather than the
alternative fair value accounting method provided for under SFAS No. 123,Accounting for Stock-Based Compensation("SFAS No. 123"), as
SFAS No. 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, when the exercise price of options granted
to employees under these plans equals the market price of the underlying stock on the date of grant, no
compensation expense is required. The Company also follows the provisions of SFAS No. 148,Accounting for Stock-Based CompensationTransition and Disclosure,
an amendment of FASB Statement No. 123("SFAS No. 148").

F-10

---



Had
compensation expense for the Company's stock option plans been determined based on the fair value at the grant date for awards under these plans, consistent with the methodology
prescribed under SFAS No. 123, the Company's net loss and net loss per share would have approximated the pro forma amounts indicated below (in thousands, except per share data):

|                                                                                                                                                                         |  | Year Ended December 31, |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | -------
|
|Net loss, as reported                                                                                                                                                    |  | $                       | (46,075
|Deduct/(add): Stock compensation cost as computed under APB No. 25, included in the determination of net loss as reported                                                |  |                         | (185   
|Deduct: Stock-based compensation cost that would have been included in the determination of net loss as reported if the fair value method had been applied to all awards |  |                         | (10,792
|                                                                                                                                                                         |  |                         |        
|Pro forma net loss                                                                                                                                                       |  | $                       | (57,052
|                                                                                                                                                                         |  |                         |        
|Basic and diluted net loss per common share, as reported                                                                                                                 |  | $                       | (0.89  
|                                                                                                                                                                         |  |                         |        
|Basic and diluted net loss per common share, pro forma                                                                                                                   |  | $                       | (1.10  
|                                                                                                                                                                         |  |                         |        

The
fair value of the stock options at the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

2002

2003

2004Risk-free interest rate

4.0
%
4.0
%
4.0
%Expected life (years)

6

6

6Volatility

103
%
84
%
82
%


The
Company has never declared or paid any cash dividends on any of its capital stock and does not expect to do so in the foreseeable future.

Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R,Share-Based PaymentAn Amendment of FASB Statements
No. 123 and 95("SFAS No. 123R"), which requires all companies to measure compensation cost for all share-based payments, including employee stock options, at
fair value, effective for public companies for interim or annual periods beginning after June 15, 2005. Generally, the approach in SFAS No. 123R is similar to the approach described in
SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. The adoption of SFAS No. 123R will have a significant impact on the Company's results of operations, although it will have no
impact on the Company's overall financial
position. The Company is evaluating SFAS No. 123R and has not yet determined the amount of stock option expense which will be incurred in future periods.

F-11

---





In December 2004, the FASB issued SFAS No. 151,Inventory Costs("SFAS No. 151"). SFAS
No. 151 requires abnormal amounts of inventory costs related to idle facility, freight handling and wasted material expenses to be recognized as current period charges. Additionally, SFAS
No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The standard is effective for fiscal
years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS No. 151 will have a material impact on its consolidated financial statements.

Comprehensive Loss

SFAS No. 130,Reporting Comprehensive Income, establishes standards for the reporting and display of
comprehensive loss and its components in the consolidated financial statements. The Company's accumulated other comprehensive loss is comprised of net unrealized gains or losses on available-for-sale
securities. The Company's comprehensive loss was as follows:

Year Ended December 31,2002

2003

2004(in thousands)Net loss

$
(46,075
)
$
(55,798
)
$
(57,598
)Changes in comprehensive loss:Net unrealized holding losses on investments


(527
)

(130
)

(242
)Total comprehensive loss

$
(46,602
)
$
(55,928
)
$
(57,840
)


Net Loss Per Share

Basic net loss per share is based on the weighted average number of shares of common stock, par value $.01 per share ("Common Stock") outstanding. For all years
presented, diluted net loss per share of Common Stock is the same as basic net loss per share of Common Stock as the inclusion of Common Stock equivalents, including the effect of stock options and
warrants, would be antidilutive due to the Company's net loss position for all periods presented. Diluted net loss per share of Common Stock excluded 7,061,441, 8,357,077 and 7,820,906 Common Stock
options for the years ended 2002, 2003 and 2004, respectively.

Reclassification

Certain amounts reported in previous periods have been reclassified to conform to the current period presentation.

F-12

---



3.    Marketable Securities

The Company's marketable securities, which are classified as available-for-sale, are as follows:

December 31, 2004Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value(in thousands)U.S. government agencies:Estimated life of one year or less

$
9,974

$


$
(32
)
$
9,942Estimated life of one to three years


13,081





(123
)

12,958U.S. auction rate debt securities:Estimated life of one to three years


40,902








40,902U.S. corporate securities:Estimated life of one year or less


5,236





(1
)

5,235Estimated life of one to three years


3,147





(13
)

3,134Total marketable securities

$
72,340

$


$
(169
)
$
72,171


December 31, 2003Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value(in thousands)U.S. government agencies:Estimated life of one year or less

$
5,126

$
14

$


$
5,140Estimated life of one to three years


10,068


17





10,085U.S. auction rate debt securities:Estimated life of one to three years


71,843








71,843U.S. corporate securities:Estimated life of one year or less


8,766





(9
)

8,757Estimated life of one to three years


31,629


77


(26
)

31,680Total marketable securities

$
127,432

$
108

$
(35
)
$
127,505


4.    Inventory

Inventory is stated at the lower of cost or market with cost determined under the first-in/first-out ("FIFO") method. The Company will write down any obsolete,
excess or otherwise unmarketable inventory to its estimated net realizable value, as necessary. If the net realizable value is determined to be less than that estimated by the Company, additional
inventory write-downs may be required in future periods.

F-13

---



The
components of inventory are as follows:

December 31,2003

2004(in thousands)Raw materials

$


$
1,644Work-in-process





2,442Finished goods





143Total inventory





4,229Less current portion





(93
)Long-term inventory

$


$
4,136


Raw
materials, work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. The Company classifies any inventory that is estimated to be sold in
the next twelve months as current inventory, with the remaining amount classified as long-term inventory. The current portion of inventory at December 31, 2004 was approximately $93,000. Much
of the raw material used to produce Plenaxis (including the active pharmaceutical ingredient) was expensed as research and development costs prior to the FDA granting approval for the commercial sale
of Plenaxis in the United States.

5.    Due from Officer

In May 2002, the Company extended a $1.0 million loan to an officer in connection with the officer's acceptance of employment with the Company.
Under the terms of the promissory note (the "Note") executed in connection with the loan, 10% of the original loan principal was forgiven annually on each anniversary date of the Note, provided that
the officer remained an employee of the Company. In September 2004, the officer left the Company and paid $0.8 million to the Company, representing the remaining balance due under the
Note.

6.    Property and Equipment

Property and equipment consist of the following:

December 31,2003

2004(in thousands)Building

$
57,010

$
56,675Land


10,500


10,500Laboratory, computer and office equipment


16,384


16,808Construction in progress





76883,894


84,751Less: accumulated depreciation


16,181


20,213$
67,713

$
64,538


F-14

---



7.    Accrued Expenses

Accrued expenses consist of the following:

December 31,2003

2004(in thousands)Clinical trial costs

$
2,642

$
1,913Accrued compensation


1,833


1,831Unvouchered invoices


1,054


144Professional services


469


671Other


1,709


1,526$
7,707

$
6,085


8.    Stockholders' Equity

Convertible Preferred Stock

Under the Company's amended and restated certificate of incorporation, the Company is authorized to issue 200,000,000 shares of Common Stock and 10,000,000 shares
of preferred stock, par value $.01 per share ("Preferred Stock"). The Preferred Stock is issuable in one or more classes or series, each of such classes or series to have such rights and preferences,
including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as may be determined by the Board of Directors. No shares of Preferred Stock have been
issued.

Rights Plan

In January 2001, the Company adopted a Rights Agreement (the "Rights Agreement"), commonly known as a "poison pill." Under the Rights Agreement, the
Company distributed certain rights to acquire shares of the Company's Series A junior participating preferred stock (the "Rights") as a dividend for each share of Common Stock held of record as
of February 5, 2001. Each share of Common Stock issued after the February 5, 2001 record date has an attached Right. Under certain conditions involving an acquisition by any person or
group of 10% or more of the Common Stock, each Right permits the holder (other than the 10% holder) to purchase Common Stock having a value equal to twice the exercise price of the Right, upon payment
of the exercise price of the Right. In addition, in the event of certain business combinations after an acquisition by a person or group of 10% or more of the Common Stock, each Right entitles the
holder (other than the 10% holder) to receive, upon payment of the exercise price, Common Stock having a value equal to twice the exercise price of the Right. The Rights have no voting privileges and,
unless and until they become exercisable, are attached to, and automatically trade with, the Company's Common Stock. The Rights will terminate upon the earlier of the date of their redemption or ten
years from the date of issuance.

F-15

---



Employee Stock Purchase Plan

Under the Company's Amended and Restated Employee Stock Purchase Plan (the "ESPP"), eligible employees may purchase shares of Common Stock at a price per share
equal to 85% of the lower of the fair market value per share of Common Stock at the beginning or the end of each six month period during the term of the ESPP. Participation is limited to the lesser of
10% of the employee's compensation or $25,000 in any calendar year. In May 2003, the stockholders of the Company approved an amendment to the ESPP extending the term of this plan through 2005
and increasing the number of shares authorized for issuance to 400,000 shares. During 2002, 2003 and 2004, the Company issued 53,571, 55,866 and 37,071 shares of Common Stock, respectively, under the
ESPP.

Stock Option Plan

The Company's Third Amended and Restated 1995 Stock Plan (the "Plan") allows for the granting of incentive and nonqualified options and awards to purchase shares
of Common Stock. Incentive options granted to employees under the Plan generally vest at 20% on the first anniversary of the date of grant, with the remaining shares vesting equally over four years
following such anniversary date. Nonqualified options issued to non-employee directors and consultants under the Plan generally vest during their period of service with the Company. Options granted
under the Plan have a maximum term of ten years from the date of grant. At December 31, 2004, a total of 15,875,000 shares of Common Stock were approved for issuance under the Plan.

Information
regarding options under the Plan is summarized below (in thousands, except price per share data):

|                                    |  | 2002  |   | 2003 |      | 2004
|----------------------------------- |  | ----- | - | ---- | ---- | ----
|
|Options outstanding at January 1,   |  | 6,659 |   | $    | 8.54 |     
|Granted                             |  | 1,779 |   |      | 3.30 |     
|Exercised                           |  | (632  | ) |      | 1.31 |     
|Cancelled                           |  | (745  | ) |      | 9.07 |     
|                                    |  |       |   |      |      |     
|Options outstanding at December 31, |  | 7,061 |   | $    | 7.82 |     
|                                    |  |       |   |      |      |     
|Options exercisable at December 31, |  | 3,330 |   | $    | 6.70 |     
|                                    |  |       |   |      |      |     

The
weighted average per share fair value of options granted was $2.75 in 2002, $3.70 in 2003, and $2.38 in 2004. At December 31, 2004, there were 11,222,974 shares of Common
Stock reserved for the exercise of stock options and for issuances under the ESPP, including 3,193,605 options available for future grant under the Plan.

F-16

---





The following table presents weighted average exercise price and weighted average remaining contractual life information about significant option groups
outstanding at December 31, 2004 (option amounts in thousands):

Exercise Price

Options
Outstanding

Weighted-
Average
Remaining
Contractual
Life (Years)

Weighted-
Average
Exercise
Price

Options
Exercisable

Weighted-
Average
Exercise
Price$0.13$1.60

855

1.7

$
0.61

788

$
0.64$1.61$6.38

4,941

6.6

$
3.89

2,563

$
4.54$6.39$16.25

1,212

7.3

$
9.16

715

$
10.11$16.26$42.00

813

5.8

$
26.39

501

$
26.597,821






4,567


9.    Income Taxes

The Company has reported no income tax provision or benefit in 2002, 2003 or 2004 due to the significant net operating losses in these years as well as
limitations on the recognition of deferred tax assets for financial reporting purposes.

A
reconciliation of the Company's income tax provision to the statutory federal provision is as follows:

Year Ended December 31,2002

2003

2004(in thousands)Statutory federal income tax benefit

$
(15,614
)
$
(18,971
)
$
(19,583
)Increase in valuation allowance


15,570


18,921


19,435Other


44


50


148Income tax provision

$


$


$



Significant
components of the Company's deferred tax assets are as follows:

December 31,2003

2004(in thousands)Deferred tax assets:Net operating losses

$
69,531

$
91,961Deferred revenue





761Property and equipment


9,793


10,321Accrued expenses


1,066


286Research and development tax credits


5,953


7,259Other


113


111Total deferred tax assets


86,456


110,699Valuation allowance


(86,456
)

(110,699
)$


$



F-17

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At
December 31, 2003 and 2004, the Company has provided a valuation allowance for the value of the deferred tax assets. The valuation allowance increased by $22.3 million
in 2003 and $24.2 million in 2004 due primarily to the increase in net operating losses and tax credit carryforwards. The Company has federal net operating loss carryforwards in the amount of
approximately $226.0 million, which expire through 2024. Due to anticipated operating losses in the future, the Company believes that it is more likely than not that it will not realize the net
deferred tax assets in the future and has provided an appropriate valuation allowance.

Any
subsequent recognized tax benefits relating to a reduction in the valuation allowance for deferred tax assets as of December 31, 2004 would be allocated as follows (in
thousands):

Reported in the statement of operations

$
106,020Reported in additional paid-in capital


4,679$
110,699


10.    Corporate Collaborations

Sanofi-Synthélabo Agreement

In May 1997, the Company entered into a license agreement with Synthélabo S.A., which subsequently merged with Sanofi S.A. forming
Sanofi-Synthélabo S.A. ("Sanofi-Synthélabo"), for the development and commercialization of the Company's Plenaxis products. In October 2001,
Sanofi-Synthélabo notified the Company that it was terminating the Sanofi-Synthélabo agreement effective December 31, 2001. In connection with the termination of
the Sanofi-Synthélabo agreement, the Company received in 2002 a final reimbursement payment from Sanofi-Synthélabo of approximately $1.0 million for collaboration
expenses incurred by the Company.

Amgen Agreement

In March 1999, the Company entered into a binding agreement in principle (the "License Agreement") with Amgen Inc. ("Amgen") for the development and
commercialization of the Company's Plenaxis products. In September 2001, Amgen notified the Company that it was terminating the License Agreement effective December 17, 2001. At that
time, the Company accrued an estimate of its potential liability of approximately $29.1 million under the License Agreement. Under the terms of the termination agreement with Amgen, the Company
paid $13.0 million in full and complete satisfaction of all amounts payable under the License Agreement and in consideration of the transfer from Amgen to the Company of title to, and
possession of, existing materials inventory. As a result, the Company recognized a gain of $16.0 million during the third quarter of 2002.

Schering AG Agreement

In April 2004, the Company entered into the Schering AG Agreement, under which the Company granted exclusive rights to Schering AG to commercialize
Plenaxis in the field of prostate cancer in Europe, Russia, the Middle East, South Africa, Australia and New Zealand (the "Licensed Territory"). The Schering AG Agreement provides for a combination of
upfront, regulatory approval and performance-based milestone payments, as well as a share of revenue through transfer price payments for drug product which will be supplied by the Company. The
transfer price will vary based upon net sales of Plenaxis, as well as pricing and reimbursement levels, in the Licensed Territory. The milestone payments to the Company may total over time up to
approximately $90.0 million, depending upon

F-18

---



Euro/U.S.
Dollar conversion rates, and the attainment of specified annual sales levels which the majority of the milestone payments are conditioned upon. The Company received a $2.0 million
signing payment from Schering AG during the second quarter of 2004, which the Company is recognizing into revenues over the remaining patent life of Plenaxis in Europe of approximately twelve years.
As of December 31, 2004, the Company has recognized approximately $0.1 million in revenues under the Schering AG Agreement.

11.    Building and Related Mortgage Financing

In July 2000, in connection with the purchase of the Company's corporate headquarters and research facility in Waltham, Massachusetts, the Company's wholly
owned real estate subsidiary executed an acquisition and construction loan agreement that provided for up to $33.0 million in borrowings at a floating interest rate indexed to
30-day LIBOR. In July 2003, the Company exercised the first of two one-year extension options extending the maturity date of the loan until July 30, 2004. In
connection with this extension, the subsidiary entered into an interest rate cap agreement which limited exposure to interest rate increases above a certain threshold through July 30, 2004.

In
June 2004, the Company amended its acquisition and construction loan agreement (the "Amended Loan Agreement") to extend the maturity date of the loan and modify certain other
terms of the original agreement. Under the Amended Loan Agreement, on July 30, 2009 the principal amount then outstanding is due and payable in full, subject to two one-year extension options
which are exercisable at the Company's election provided the Company is in compliance with certain financial covenants. The outstanding principal bears interest at a fixed rate of 5.95% through
April 2009 and at a floating rate for the remainder of the term. Principal and interest are payable through a fixed monthly payment of approximately $207,000, with the principal portion being
calculated using a 25-year amortization schedule. Interest paid under the loan agreement approximated interest expense in 2002, 2003 and 2004.

The
Amended Loan Agreement also provides for certain additional financial operating covenants, one of which was effective immediately and the remainder of which will become effective as
of December 31, 2006. The covenant which was immediately effective is tested on a quarterly basis and requires that the Company maintain $25.0 million in unrestricted cash, cash
equivalents and marketable securities.

12.    Commitments and Contingencies

Indiana University Foundation ("IUF") License Agreement

The Company has a license agreement with IUF, which was assigned by IUF to IUF's Advanced Research and Technology Institute, Inc., with respect to rights
to Plenaxis and certain related technology. Under the license agreement, the Company has agreed to pay (a) fees of $0.3 million, (b) up to an additional $4.3 million upon
achievement of specific milestones and (c) a royalty percentage of net sales of licensed products. The Company made milestone payments of $1.0 million in 2003, and milestone and royalty
payments of approximately $1.0 million in 2004 under the IUF agreement. These amounts have been recorded as expenses during the periods amounts were paid. As of December 31, 2004,
$1.5 million in milestones remained subject to future achievement.

F-19

---



Baxter Pharmaceutical Solutions LLC ("Baxter")

On December 4, 2002, the Company signed a five-year commercial supply agreement (the "Baxter Agreement") with Baxter related to the fill and finish steps
of the manufacturing process for Plenaxis. In January 2005, the first anniversary of the first commercial shipment of Plenaxis, the minimum annual purchase commitment increased to $650,000
through 2007. The Company made payments under the Baxter Agreement of approximately $1.8 million and $1.0 million during 2003 and 2004, respectively.

Cambrex Charles City, Inc. ("Cambrex")

In July 1998, the Company entered into a seven-year supply agreement with Cambrex (formerly Salsbury Chemicals, Inc.) for the manufacture of the
commercial depot formulation of Plenaxis. In July 2004, the supply agreement was amended. The Company retains all rights in manufacturing technology developed in connection with this agreement.
Under the amendment, the term of the original agreement was extended for an additional five years (through July 2010) and the minimum annual purchase commitment through 2010 was increased to
$900,000. The Company made payments to Cambrex of approximately $0.6 million, $0.6 million and $1.1 million during 2002, 2003 and 2004, respectively.

UCB S.A. ("UCB")

In August 2004, the Company amended its Development and Supply Agreement dated as of June 21, 2000 with UCB (the "UCB Agreement"). The UCB Agreement
was assigned to the Company by
Amgen Inc. effective as of December 17, 2001. The UCB Agreement provides for the supply by UCB of commercial volumes of the active pharmaceutical ingredient ("API") for Plenaxis. Under
the amendment, the Company has committed to purchase a specified quantity of API for delivery in 2005 (at a lower price than would otherwise be applicable under the UCB Agreement), for an aggregate
purchase price of $3.9 million, $1.6 million of which was included in current liabilities as of December 31, 2004, with the remainder due upon the later of the delivery of the API
and December 31, 2005. Such API will be produced using quantities of materials in UCB's inventory purchased by UCB pursuant to forecasts submitted to UCB prior to 2001 under the terms of the
UCB Agreement (the "Materials").

In
addition, the Company has committed to purchase the remaining Materials for an aggregate purchase price of approximately $3.4 million. The Company is required to purchase a
specified quantity of such Materials each year beginning in 2006 and ending in 2009. UCB has granted the Company the option, in lieu of purchasing the remaining Materials, to purchase each year, at
the same reduced price as noted above, specified quantities of API produced using such Materials. The option can be exercised in whole or in part. Materials purchased in one year can be utilized at a
later date for the manufacture of API, and the Company will be credited the cost of such previously purchased Materials. The Company made payments under the UCB Agreement of approximately
$12.3 million, $4.3 million and $1.1 million during 2002, 2003 and 2004, respectively.

Litigation

In December 2004 and January 2005, the Company, Chairman and (now former) Chief Executive Officer Malcolm Gefter, President and (now former) Chief
Operating Officer Kevin F. McLaughlin, Chief Financial Officer and Treasurer Edward C. English, and former President and Chief Operating Officer William K. Heiden, were named as defendants in three
purported class action securities lawsuits

F-20

---



filed
in the United States District Court for the District of Massachusetts. The complaints generally allege securities fraud during the period from November 25, 2003 through December 6,
2004. Each of the complaints purports to assert claims under Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and alleges that the
Company and the individually named defendants made materially false and misleading public statements concerning the Company's business and financial results, particularly relating to statements
regarding the commercialization of Plenaxis.

On
February 7, 2005, a motion was filed to consolidate the three actions and to appoint lead plaintiffs and lead counsel. On February 18, 2005, the Company and the
individual defendants filed a brief response to that motion, reserving their rights to challenge the adequacy and typicality, among other things, of the proposed lead plaintiffs in connection with
class certification proceedings, if any. The Court has not yet entered any Orders regarding the consolidation of the pending cases or the appointment of lead plaintiffs and approval of such
plaintiffs' selection of lead counsel. At this time, plaintiffs have not specified the amount of damages they are seeking in the actions.

The
Company has not recorded an estimated liability associated with the legal proceedings described above. Due to the uncertainties related to both the likelihood and the amount of any
potential loss, we are unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. Management believes that the allegations against the Company are without
merit, and the Company intends to vigorously defend against the plaintiffs' claims. However, if the Company is not successful in defending these actions, its business and financial condition could be
adversely affected.

F-21

---



Exhibit Index

|Exhibit No. |  | Exhibit                                                                                                                                                                                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Certificate of Incorporation (2)                                                                                                                                                                                                                                           
|3.2         |  | Third Amended and Restated By-Laws (10)                                                                                                                                                                                                                                                         
|4.1         |  | Specimen certificate representing shares of common stock (1)                                                                                                                                                                                                                                    
|4.2         |  | Specimen certificate representing shares of common stock (including Rights Agreement Legend) (5)                                                                                                                                                                                                
|4.3         |  | Rights Agreement between PRAECIS and American Stock Transfer & Trust Company, as Rights Agent (6)                                                                                                                                                                                               
|4.4         |  | Form of Certificate of Designations of Series A Junior Participating Preferred Stock (attached as Exhibit A to the Rights Agreement filed as Exhibit 4.3 hereto) (6)                                                                                                                            
|4.5         |  | Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit 4.3 hereto) (6)                                                                                                                                                                                      
|10.1*       |  | Third Amended and Restated 1995 Stock Plan (14)                                                                                                                                                                                                                                                 
|10.2*       |  | Form of Incentive Stock Option Agreement (17)                                                                                                                                                                                                                                                   
|10.3*       |  | Form of Non-Qualified Stock Option Agreement (17)                                                                                                                                                                                                                                               
|10.4*       |  | Executive Management Bonus Plan, as amended and restated as of September 12, 2002 (9)                                                                                                                                                                                                           
|10.5*       |  | Amended and Restated Employee Stock Purchase Plan (11)                                                                                                                                                                                                                                          
|10.6*       |  | Management Incentive Program (10)                                                                                                                                                                                                                                                               
|10.7*       |  | Amended and Restated Stockholders Agreement dated as of April 30, 1998 by and among PRAECIS and certain stockholders referred to therein, as amended by Amendment No. 1 dated as of May 14, 1998, Amendment
No. 2 dated as of July 21, 1998 and Amendment No. 3 dated as of January 31, 2000 (1)
|10.8*       |  | Amendment No. 4 dated as of September 1, 2000 to Amended and Restated Stockholders Agreement dated as of April 30, 1998 by and among PRAECIS and certain stockholders referred to therein, as amended (4)                                                                                       
|10.9*       |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and William K. Heiden (8)                                                                                                                                                                                                              
|10.10*      |  | Promissory Note dated May 16, 2002 executed by William K. Heiden in favor of PRAECIS (8)                                                                                                                                                                                                        
|10.11*      |  | Amendment dated March 29, 2004 to Letter Agreement dated as of May 9, 2002 between PRAECIS and William K. Heiden (13)                                                                                                                                                                           
|10.12*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Malcolm L. Gefter, Ph.D. (8)                                                                                                                                                                                                       
|10.13*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Kevin F. McLaughlin (8)                                                                                                                                                                                                            
|10.14*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Marc B. Garnick, M.D. (8)                                                                                                                                                                                                          
|10.15*      |  | Letter Agreement dated as of September 16, 2004 between PRAECIS and Edward C. English (16)                                                                                                                                                                                                      
|10.16*      |  | Letter Agreement dated as of September 16, 2004 between PRAECIS and Richard W. Wagner, Ph.D. (16)                                                                                                                                                                                               
|10.17*      |  | Letter Agreement dated as of November 11, 2004 between PRAECIS and Michael J. Keavany                                                                                                                                                                                                           
|10.18*      |  | Summary of Executive Officer and Non-Employee Director Compensation Arrangements for 2005                                                                                                                                                                                                       
|10.19      |  | License Agreement effective as of October 17, 1996 by and between PRAECIS and Indiana University Foundation, as amended as of June 3, 1998 (1)                                                                                                                                                  
|10.20      |  | Supply Agreement dated as of July 23, 1998 by and between PRAECIS and Salsbury Chemicals, Inc. (1)                                                                                                                                                                                              
|10.21      |  | Amendment No. 2 dated as of July 1, 2004 by and between PRAECIS and Cambrex Charles City, Inc. (formerly Salsbury Chemicals, Inc.) to the Supply Agreement dated as of July 23, 1998 by and between PRAECIS
and Salsbury Chemicals, Inc., as amended (15)                                       
|            |  |                                                                                                                                                                                                                                                                                                 

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|10.22  |  | Development and Supply Agreement effective as of June 21, 2000 by and between UCB S.A. and Amgen Inc., as amended by Amendment No. 1 thereto dated as of March 26, 2002 (together with the Assignment of
Development and Supply Agreement entered into January 18, 2002 and effective as of December 17, 2001 by and between Amgen Inc. and PRAECIS) (7)
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.23 |  | Amendment No. 2 dated as of August 30, 2004 to the Development and Supply Agreement effective as of June 21, 2000 by and between PRAECIS and UCB S.A. (17)                                                                                                                                                                                              
|10.24  |  | Commercial Supply Agreement dated December 4, 2002 and effective as of June 1, 2002 by and between Baxter Pharmaceutical Solutions LLC and PRAECIS (10)                                                                                                                                                                                                 
|10.25   |  | Termination Agreement dated as of August 19, 2002 by and between PRAECIS and Amgen Inc. (9)                                                                                                                                                                                                                                                             
|10.26  |  | License, Supply and Distribution Agreement dated April 27, 2004 by and between the PRAECIS and Schering AG (15)                                                                                                                                                                                                                                         
|10.27   |  | Contract of Sale dated as of January 14, 2000 by and between Best Property Fund, L.P. and PRAECIS, as amended as of February 7, 2000 (1)                                                                                                                                                                                                                
|10.28   |  | Acquisition and Construction Loan Agreement dated as of July 11, 2000 between 830 Winter Street LLC and Anglo Irish Bank Corporation plc and related Loan and Security Agreements (3)                                                                                                                                                                   
|10.29   |  | First Amendment to Acquisition and Construction Loan Agreement dated as of July 11, 2000 between 830 Winter Street LLC and Anglo Irish Bank Corporation plc, together with related Loan Security and Assignment
Agreements, each as amended as of June 28, 2004 (15)                                                                                    
|10.30   |  | Guaranty of Non-Recourse Exceptions dated as of July 11, 2000 (3)                                                                                                                                                                                                                                                                                       
|10.31   |  | First Amendment to and Reaffirmation of Guaranty of Non-Recourse Exceptions dated as of June 28, 2004 by and between PRAECIS and Anglo Irish Bank Corporation plc (15)                                                                                                                                                                                  
|10.32   |  | Environmental Compliance and Indemnity Agreement dated as of July 11, 2000 executed by 830 Winter Street LLC and PRAECIS (3)                                                                                                                                                                                                                            
|10.33   |  | First Amendment to and Reaffirmation of Environmental Compliance and Indemnity Agreement dated as of June 28, 2004 by and between 830 Winter Street LLC, PRAECIS and Anglo Irish Bank Corporation plc (15)                                                                                                                                              
|10.34   |  | Lease Agreement dated as of July 11, 2000 between 830 Winter Street LLC, as landlord, and PRAECIS, as tenant (3)                                                                                                                                                                                                                                        
|21.1    |  | List of Subsidiaries of PRAECIS (12)                                                                                                                                                                                                                                                                                                                    
|23.1    |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                             
|24.1    |  | Power of Attorney (included on the signature page of this Report on Form 10-K)                                                                                                                                                                                                                                                                          
|31.1    |  | Certification of Chief Executive Officer                                                                                                                                                                                                                                                                                                                
|31.2    |  | Certification of Chief Financial Officer                                                                                                                                                                                                                                                                                                                
|32.1    |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                       
|32.2    |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                       

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