---

---

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

---

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, 2002
or

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 000-30289

---

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

---

(Title of Class)

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

Common Stock, par value $.01 per share

---

(Title of Class)

Preferred
Stock Purchase Rights

---

(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 28, 2002, was $162,117,195.

The
number of shares of common stock, par value $.01 per share, outstanding as of February 28, 2003 was 51,822,475.

Documents Incorporated By Reference

Specified portions of the definitive Proxy Statement with respect to the registrant's 2003 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.

---

---

---

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.

---

PRAECIS PHARMACEUTICALS INCORPORATED

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

|         |  |                                                                                                |  | Page
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|Part I  
|Item 1.  |  | Business                                                                                       |  | 2   
|Item 2.  |  | Properties                                                                                     |  | 19  
|Item 3.  |  | Legal Proceedings                                                                              |  | 19  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 19  
|Part II 
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                          |  | 20  
|Item 6.  |  | Selected Financial Data                                                                        |  | 21  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations          |  | 22  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 40  
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 40  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 40  
|Part III
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 41  
|Item 11. |  | Executive Compensation                                                                         |  | 41  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 41  
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 41  
|Item 14. |  | Controls and Procedures                                                                        |  | 41  
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 42  
|         |  | Signatures                                                                                     |  | 45  
|         |  | Certification of Chief Executive Officer                                                       |  | 47  
|         |  | Certification of Chief Financial Officer                                                       |  | 48  
|         |  | Index to Financial Statements                                                                  |  | F-1 

---



PART I

ITEM 1.    BUSINESS.

Overview

We are a drug discovery and development company with a lead product candidate, Plenaxis (abarelix for injectable suspension), for the treatment of hormonally
responsive advanced prostate cancer. We resubmitted our new drug application, or NDA, for Plenaxis to the FDA on February 27, 2003 and expect to receive a response from the FDA regarding our
resubmission within six months of that date. In December 2000, we initially submitted the NDA to the FDA seeking marketing approval for Plenaxis for the treatment of hormonally responsive
prostate cancer. In June 2001, we received a not-approvable letter from the FDA. Based upon a series of subsequent discussions with the FDA, in our NDA resubmission we are now
seeking approval to market Plenaxis in the United States for use in a defined sub-population of advanced prostate cancer patients for whom the use of existing hormonal therapies may not be
appropriate. If approved, we intend to market and sell Plenaxis in the United States through our own sales and marketing team. We also intend to submit a registration dossier in Europe during the
second quarter of 2003 seeking approval to market Plenaxis for a broad population of hormonally responsive advanced prostate cancer patients.

We
are also developing Apan, our drug candidate for the treatment of Alzheimer's disease. Apan is designed to treat what we and others believe to be the underlying cause of Alzheimer's
disease, rather than the symptoms. 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. Results of our preclinical studies suggest that Apan may be facilitating the clearance of beta-amyloid from the brains of guinea pigs and transgenic mice. We are
currently conducting a healthy volunteer, phase Ia dose escalation study of Apan to identify the maximum tolerated dose, or MTD, in healthy volunteers. Assuming favorable FDA review of the study's
final results, we intend to move into a phase Ib trial in Alzheimer's disease patients during the first half of 2003. This Ib study will test a single administration of Apan to establish the MTD in
patients. Upon completion of the phase Ib study, and assuming
favorable FDA review of the study's results, we expect to initiate a phase Ic trial examining multiple administrations of a selected Apan dose in Alzheimer's disease patients.

In
addition to our Plenaxis prostate cancer program, we are also developing Plenaxis for the treatment of endometriosis, a disease that responds to a reduction of the female hormone
estrogen. We believe that patients suffering from endometriosis are not well served by current methods of treatment or remain untreated, and that Plenaxis could fulfill a significant unmet need. We
completed a phase II study of Plenaxis for the treatment of pain associated with endometriosis in March 2002. Results from this study indicated that we may be able to utilize a lower dose
and/or a more prolonged dosing interval in future studies to reduce drug exposure and attendant bone mineral density loss, a known consequence of hormonal therapies that lower estrogen levels.
Accordingly, during 2002, we conducted a pharmacokinetic study of Plenaxis for the treatment of endometriosis to examine the appropriate dose and dosing schedule. Upon completion of our review of the
results of this study, we will determine the next steps for development.

In
addition to our clinical programs, we have numerous programs in the research or preclinical development stage. We intend to file, by mid-year 2003, an investigational new
drug application, or IND, for our most advanced preclinical compound, PPI-2458. Assuming favorable FDA review of our IND, we plan initially to conduct clinical trials to study the
effectiveness of this compound in the treatment of B-Cell Non-Hodgkin's lymphoma. We also plan to continue preclinical studies of PPI-2458 in other potential
indications, including rheumatoid arthritis.

Our
proprietary drug discovery technology called Ligand Evolution to Active Pharmaceuticals, or LEAP, has been valuable in the development of our pipeline of product candidates. Because
LEAP technology uses biological molecules as ligands, we believe it can be used to efficiently develop new drugs against a variety of other disease targets. LEAP was instrumental in the development of
Plenaxis

2

---

and Apan, and we are using it against targets in other disease areas, as well. We have pending patent applications that cover the essential steps of the LEAP process.

Our
technology platform also includes a proprietary drug delivery system known as Rel-Ease. Plenaxis is formulated in Rel-Ease, which allows it to be administered
to prostate cancer patients once every four weeks. We have demonstrated that Rel-Ease is useful for formulating Plenaxis and various other molecules in sustained release formulations. We
hold patents that cover the general application of this technology for a broad range of peptide-based drugs.

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.

PRAECIS,
Plenaxis, Apan, LEAP, Rel-Ease and MASTRscreen 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®, Lupron Depot® and Zoladex®, all of which are the property of their respective owners.

Product Pipeline

We focus our drug development efforts on conditions or diseases where there are unmet needs creating a potential for significant product revenues. We have three
programs that have moved beyond the research phase into clinical testing, as well as various research and preclinical programs. We continually evaluate in early research potential candidates for
development and are currently focusing our discovery efforts on opportunities in the areas of oncology, inflammation and infectious diseases.

We
have outlined our clinical programs and four of our more advanced programs in the research or preclinical development stage, along with the clinical indications they address, in the
following table:

|Product Candidates           |  | Clinical Indication                            |  | Status                 
|---------------------------- |  | ---------------------------------------------- |  | -----------------------
|Plenaxis                     |  | Hormonally Responsive Advanced Prostate Cancer |  | NDA Resubmitted Q1 2003
|Plenaxis                     |  | Endometriosis                                  |  | Phase II               
|Apan                         |  | Alzheimer's Disease                            |  | Phase I                
|PPI-2458                     |  | B-Cell Non-Hodgkin's Lymphoma                  |  | Preclinical            
|Androgen Receptor Antagonist |  | Hormone-Independent Prostate Cancer            |  | Research/Preclinical   
|Endometriosis Diagnostic     |  | Endometriosis                                  |  | Research/Preclinical   
|Antiviral Antagonist         |  | AIDS                                           |  | Research/Preclinical   



Plenaxis (abarelix for injectable suspension) has potential use in treating diseases that respond to the reduction of testosterone, a male hormone, and estrogen,
a female hormone. Examples of these diseases include prostate cancer, endometriosis, benign prostatic hypertrophy, uterine fibroids, breast cancer, polycystic ovarian disease, infertility and
precocious puberty. Treatments that reduce testosterone or estrogen through the use of drugs, known as hormonal therapy, can result in a therapeutic benefit to patients suffering from these diseases.

Currently
available hormonal therapies, known as LHRH agonists, act by overstimulating the GnRH receptor, located on the pituitary gland, a small gland in the center of the brain.
Overstimulation of the pituitary GnRH receptor 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 in males and a surge
of estrogen from the ovaries in females. The temporary surge in hormone levels may result in a worsening, or flare,

3

---

of the disease for which the patient takes the therapy. Only after several weeks following administration of these hormonal therapies does the GnRH receptor become non-responsive and the
desired reduction of hormone levels occurs. Due to this surge, current 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. The FDA mandates precautionary labeling when appropriate, and the drug labels and packaging for these currently
available drugs prominently include precautionary labeling, to protect patients and avoid the use of the drugs in patients who are at risk for developing life-threatening conditions as a
result of the disease flare.

In
contrast, Plenaxis has a blocking, or antagonist, effect on the GnRH receptor. Plenaxis rapidly shuts off the production of LH and FSH and, consequently, rapidly reduces the patient's
levels of testosterone or estrogen. With Plenaxis, unlike commercially available LHRH agonists, there is no increase in hormone levels before achieving the desired hormone level reduction.

Our
most advanced clinical program is the development of Plenaxis for the treatment of hormonally responsive advanced prostate cancer. We are also studying Plenaxis for the treatment of
endometriosis. In addition, a small, investigator-sponsored clinical study was conducted in which the effects of using Plenaxis to treat hormone refractory prostate cancer were evaluated. We have not
begun clinical studies of Plenaxis for any of the other potential indications identified above.



Background.Prostate cancer is one of the most commonly diagnosed cancers in men. The American Cancer Society estimates that
approximately 220,900 new diagnoses of, and 28,900 deaths from, prostate cancer will occur in the United States in 2003. The prostate is a small, walnut-shaped gland located at the base of the male
bladder. Prostate cancer cells require hormones, specifically testosterone and its derivatives, for growth. These hormones stimulate the growth of the cancerous cells. The primary goal of treatment is
to reduce testosterone to low, or castrate, levels, leading to inhibition of prostate cancer cell growth. Available treatments for prostate cancer patients include hormonal therapies, radiation
therapy and surgery. For more advanced, symptomatic patients, for whom the use of existing hormonal therapies may not be appropriate, removal of the testes, known as surgical castration, is often the
only treatment alternative.

As
discussed above, currently available LHRH agonists induce an initial surge in testosterone. This surge of testosterone may last as long as three weeks before the intended medical
effect of reduced testosterone levels takes place. In an attempt to mitigate the potential disease worsening, or flare, that can result from this testosterone surge, many practicing physicians
prescribe additional drugs, known as anti-androgens. Anti-androgens, such as Casodex, marketed by AstraZeneca Pharmaceuticals, are oral drugs given
one-to-three times a day. Anti-androgens function by interfering with the effect of testosterone at the cellular level, but do not reduce circulating testosterone
levels or the initial surge in hormone levels associated with currently available LHRH agonists. This additional therapy may be only partially effective in reducing some of the undesirable effects of
the flare. In addition, anti-androgen therapy may cause various side effects, including liver damage, breast enlargement, lung dysfunction and diarrhea.

Moreover,
some patients with advanced, symptomatic prostate cancer are at higher risk of serious harm resulting from the testosterone surge associated with LHRH agonists. In these
patients, the testosterone surge may lead to urinary blockage, worsening pain, kidney failure, paralysis and nerve damage due to spinal cord compression, and even death. Due to the perceived risks
associated with the use of LHRH agonists in these cases, whether alone or in combination with anti-androgens, many advanced, symptomatic prostate cancer patients may be confronted with the
option of surgical castration as a potential therapy, both to rapidly reduce testosterone levels and avoid the testosterone surge.

4

---

To
date, we have focused on the development of Plenaxis as a treatment for hormonally responsive advanced prostate cancer, and are currently seeking approval from the FDA to market
Plenaxis in the United States specifically for the treatment of a defined sub-population of advanced prostate cancer patients for whom the use of existing hormonal therapies may not be
appropriate. Plenaxis is a proprietary, sustained release depot formulation that enables the drug to be administered once every four weeks. During the first four weeks of administration, an additional
injection is given on day 15,
resulting in two injections during that time period. Our pivotal phase III safety and efficacy studies demonstrate that Plenaxis reduces the time required to achieve therapeutically low testosterone
levels compared to currently available LHRH agonists and completely avoids the testosterone surge associated with these therapies. In addition, based upon the results of our clinical study in
advanced, symptomatic patients, we believe that Plenaxis has the potential to provide a non-surgical alternative to castration for these patients.

Prostate CancerRegulatory Status.We submitted to the FDA an NDA comprised of comprehensive safety and efficacy
data in December 2000 to support marketing approval of Plenaxis for the treatment of hormonally responsive prostate cancer. Our submission included data from two pivotal phase III safety and
efficacy studies, one pivotal phase III safety study, an open-label study in advanced, symptomatic prostate cancer patients, as well as phase I and phase I/II pharmacokinetics studies.

In
January 2001, the FDA informed us that it had accepted and filed the NDA and had granted the filing priority review. In June 2001, we received a letter from the FDA in
which the FDA indicated that the information presented in the NDA was inadequate for approval. In discussions with the FDA following receipt of the not-approvable letter, the FDA
recommended that we analyze the immediate-onset, systemic allergic reactions that occurred in a small subset of clinical trial patients. In addition, the FDA expressed concern that, in a subset of
patients treated beyond the three-month pivotal study time frame, fluctuations in testosterone levels were observed more frequently in patients treated with Plenaxis than in patients treated with
either Lupron Depot or Lupron Depot plus Casodex.

Since
learning of these issues, we have proposed various alternatives to the FDA to address them and improve the risk/benefit profile of Plenaxis. Based upon additional discussions with
the FDA, we now are seeking approval for Plenaxis for use in a defined sub-population of advanced prostate cancer patients for whom the use of existing hormonal therapies may not be
appropriate. The specific sub-population of patients will be determined through additional discussions with the FDA. We resubmitted our NDA on February 27, 2003 seeking approval for
this indication and expect to receive a response from the FDA regarding our resubmission within six months of that date. We cannot assure investors that the information included in our NDA
resubmission will satisfy FDA concerns that have been or may be raised or that we will be successful in obtaining approval for the commercialization of Plenaxis in the United States for the treatment
of a defined sub-population of advanced prostate cancer patients or for any other indication.

We
also intend to seek marketing approval for Plenaxis outside of the United States. During 2002, we met with various European experts and, following these meetings, we announced our
intention to pursue regulatory approval to market Plenaxis in Europe for a broad population of hormonally responsive advanced prostate cancer patients. We intend to pursue a mutual recognition filing
in Europe and have been meeting with potential sponsor countries' regulatory authorities. We expect to make a decision on the country of filing and to submit our registration dossier during the second
quarter of 2003. We cannot assure investors that we will be successful in obtaining regulatory approval to market Plenaxis in Europe.

Prostate Cancer Clinical Studies.In support of our initial NDA filing in December 2000, we submitted data from two
pivotal phase III clinical trials of Plenaxis for the treatment of hormonally responsive prostate cancer. The first phase III clinical trial was a 269 patient study comparing Plenaxis to Lupron
Depot. This study compared the safety of both drugs and the ability of both drugs to avoid the testosterone surge, reduce testosterone levels and achieve and maintain therapeutically low levels of

5

---

testosterone. The second phase III clinical trial was a 251 patient study comparing the safety and efficacy of Plenaxis to the combination therapy of Lupron Depot plus Casodex.

In
these clinical trials, none of the patients treated with Plenaxis experienced a testosterone surge compared to more than 80% of patients treated with Lupron Depot, or a combination of
Lupron Depot plus Casodex. Further, Plenaxis suppressed testosterone levels more rapidly, achieving castration by day eight in 70% of patients compared to none of patients treated with either Lupron
Depot or Lupron Depot plus Casodex. Each treatment therapy studied achieved and maintained therapeutically low testosterone levels from day 29 through day 85 in more than 90% of patients.

All
of the patients enrolled in these studies were to continue treatment beyond the three-month pivotal study timeframe for a total of six months. In addition, physicians could continue
to administer treatment to patients for up to one year. We observed that in a subset of patients treated with Plenaxis for over six months, fluctuations in testosterone above castrate levels occurred
more frequently than they did in patients treated with either Lupron Depot or Lupron Depot plus Casodex. As stated above, the FDA raised concerns with these results in their response to our initial
NDA filing. We have proposed to the FDA that testosterone levels could be monitored by physicians after six months of treatment with Plenaxis as a means of addressing these fluctuations.

In
further support of the safety of Plenaxis, we included results in our NDA from a separate pivotal phase III safety study comparing Plenaxis to Lupron Depot in 582 patients. The
primary objective of this study was to gain more patient exposure to confirm the safety of Plenaxis over a six-month course of therapy. The results of this safety study were consistent
with previous studies and supplement existing patient drug exposure data.

In
addition, we conducted an open-label clinical trial to evaluate the use of Plenaxis in patients with advanced, symptomatic prostate cancer. This study was completed in
September 2000. We submitted preliminary results from this study to the FDA as part of our initial NDA filing. In February 2003, we included as part of our NDA resubmission additional,
more detailed analyses of the data from this study to support approval of Plenaxis for the treatment of a defined sub-population of advanced prostate cancer patients for whom the use of
existing hormonal therapies may not be appropriate. In this trial, Plenaxis was administered to 72 patients with advanced, symptomatic prostate cancer, defined as the presence of one or more of the
following: bone pain from prostate cancer skeletal metastases, ureteral obstruction, impending spinal cord compression, or bladder neck outlet obstruction. Following enrollment and initial evaluation,
it was determined that over half of the patients suffered from more than one sign or symptom of advanced prostate cancer. Patients received a 100 mg dose of Plenaxis every four weeks for 24 weeks,
with one additional dose administered on day 15. The primary endpoint was the avoidance of surgical castration at four and 12 weeks. This endpoint was selected because these patients, if treated with
currently available hormonal therapies, could be required to undergo immediate surgical castration due to disease worsening caused by the testosterone surge associated with those therapies. The
primary endpoint was met by 100% of the patients. In addition, no patient required surgical castration during follow-up in another study. These studies had a cumulative duration of 40
weeks and lasted as long as 159 weeks.

The
trial also had several secondary endpoints, which included the clinical assessment of improvement in bone pain from prostate cancer skeletal metastases. A subset analysis was
performed on those patients with bone pain requiring narcotic analgesic use. Within the first day of treatment with Plenaxis, the median pain score in these patients was reduced from 6.8 to 5.3 on a
scale of 0 (no pain) to 10 (worst pain imaginable), and by week one, the median pain score was reduced to 4.4. At week 24, the median pain score was less than 1. In addition, at week 24, 64% of the
patients suffering from bone pain had a reduction in the frequency, dose and/or potency of narcotic analgesic use, while the remainder reported no change or an increased need.

A
clinical assessment was also made of improvement of urinary symptoms in patients at risk for developing urinary retention. This assessment was based upon several measures, including
the patient's American Urological Association, or AUA, Symptom Score and Post Void Residual, or PVR, urine

6

---

volume. During the first month of treatment, the majority of at-risk patients showed improvements in their symptoms of urinary obstruction demonstrated by decreased AUA scores and PVR
urine volume.

Patients
with metastatic prostate cancer were also evaluated for anti-cancer disease response. Disease response in these patients was determined by radiographic and
serological parameters, and was measured in accordance with modified National Prostate Cancer Project standards. The results of this evaluation showed that a significant portion, at least 75% of these
patients at 12 and 24 weeks, achieved an "overall objective response," classified as either "complete response," "partial response" or "stable disease."

Overall,
90% of the patients studied experienced improvement of one or more of the symptoms associated with their advanced prostate cancer. Due to the advanced stage of disease in the
patients enrolled, ten patients developed progressive disease and six patients died during this study.

Our
former European collaborator also conducted a one-to-one randomized, open label, multicenter phase III clinical study of 177 patients in Europe comparing the
safety and efficacy of Plenaxis to the combination of Zoladex plus Casodex. Available safety data from this study was submitted to the FDA as part of our original NDA submission. We have now received
from our former European corporate collaborator the efficacy data from this study, together with additional safety data. The study included a 48-week primary treatment period, followed by
an extension of up to 96 weeks. Our study report from the primary study was included as part of our NDA resubmission. We intend to submit to the FDA a report on the extension as soon as it is
available.

The
primary endpoint of the European study was time to induction of medical castration during the first 12 weeks of treatment. The results demonstrated that the median time to medical
castration was significantly shorter for patients treated with Plenaxis (seven days), compared to patients treated with Zoladex plus Casodex (21 days).

The
European study also had several secondary endpoints, including the measurement, in a subset of patients, of castration rates at day three. Castration rates at day three were 36% for
Plenaxis patients, compared to zero percent for Zoladex plus Casodex patients. In addition, in a subset of patients, avoidance of testosterone surge was evaluated. Testosterone surge was defined as a
10% increase above baseline levels on days one and/or three. In the group evaluated, no patient treated with Plenaxis experienced a testosterone surge. In contrast, 96% of the patients treated with
Zoladex plus Casodex experienced a surge.

Another
secondary endpoint of the study was maintenance of medical castration. In patients who were castrate by day 84, testosterone fluctuations above castrate levels, defined as
greater than 50 ng/dL, were observed more frequently in patients treated with Plenaxis (22%) than in patients in the comparator arm (8%). Most of the fluctuations in both treatment groups occurred on
or after day 168. An evaluation was also made of disease progression. The findings indicate that overall disease progression rates were approximately 9% in both treatment groups through one year of
treatment.

Finally,
prostate specific antigen, or PSA, levels were also monitored throughout this study. The data indicate that treatment with Plenaxis results in a more rapid reduction in PSA
values compared to treatment with Zoladex plus Casodex. PSA values were significantly lower on day seven in Plenaxis treated patients. PSA levels were similar in both groups on days 14 and 21, and
both treatment therapies achieved a greater than 90% reduction in PSA values from day 56 through the end of the study.

In
general, the overall safety profile of Plenaxis in this study was consistent with other clinical studies of Plenaxis. In contrast to our clinical studies conducted in the United
States, this study had, in accordance with European regulatory guidance, prospectively defined patient inclusion, exclusion and withdrawal criteria based upon electrocardiographic, or ECG, parameters.
This criteria included an evaluation of the QTc interval, which measures a portion of the electrical impulse conduction in the heart. Results of this evaluation indicate that both Plenaxis alone and
the combination of Zoladex plus Casodex were associated with findings of QTc prolongation, although Plenaxis was associated with a

7

---

smaller QTc increase from baseline than the comparator arm. QTc prolongations can be associated with irregularities of the heart rhythm, which, in rare cases, can lead to sudden death. There were no
serious adverse events reported in connection with the QTc prolongations observed in this study. However, one Plenaxis patient and three Zoladex plus Casodex patients were withdrawn for QTc
prolongations. No irregularities in heart rhythm were observed in any of the patients who were withdrawn from the study due to QTc prolongations. We cannot assure investors that the FDA will not
request additional information regarding these findings that could further delay the review and potential approval of our resubmitted NDA.

There
was also one immediate-onset, systemic allergic reaction observed in the Plenaxis arm of the extension of the European study which was not previously reported and which has been
included in our discussion of safety below. The inclusion of this reaction will not materially change the per-injection incidence rate of immediate-onset, systemic allergic reactions
previously reported by the Company due to the overall increase in the number of Plenaxis injections administered to date.

As
previously disclosed, to address questions raised by the FDA, during 2002 we also conducted an open-label clinical study in which patients were treated with Plenaxis for
three months and then switched to a commercially available hormonal therapy for an additional two months of treatment. We included Plenaxis data from this study in our NDA resubmission. As agreed upon
with the FDA, we will submit to the FDA a final report containing all of the results from this study as soon as it is available.

From
a safety perspective, Plenaxis has generally been well tolerated to date. However, a small number of patients in our Plenaxis studies had adverse reactions, including relatively
mild allergic reactions and temporary and reversible elevations of some liver enzymes. We expected these types of relatively non-severe reactions and observed them with similar incidence
in patients taking Lupron Depot, Lupron Depot plus Casodex or Zoladex plus Casodex in our clinical studies.

During
the clinical studies described above, in which approximately 1,400 patients were treated with Plenaxis, 17 Plenaxis patients experienced allergic reactions that resulted in the
discontinuation of trial participation. We observed a similar incidence of allergic reactions resulting in the discontinuation of trial participation in patients treated with Lupron Depot, Lupron
Depot plus Casodex or Zoladex plus Casodex. However, of these 17 Plenaxis patients, six patients experienced immediate-onset, systemic allergic reactions, consisting of either a drop in blood pressure
or temporary syncope (fainting), within ten minutes following the administration of Plenaxis. None of the patients in these studies treated with Lupron Depot, Lupron Depot plus Casodex or Zoladex plus
Casodex, experienced an allergic reaction of similar onset. At the recommendation of the FDA, we conducted additional analyses of the existing samples from these patients to further understand what
the potential cause of these reactions may be. Based upon the results of these analyses and upon additional skin tests and other testing, we have concluded that these reactions are likely
anaphylactoid in nature, meaning that they are not caused by an antibody driven response. We have included in our proposed Plenaxis product label submitted to the FDA a black-box warning
regarding the risk of immediate-onset, systemic allergic reactions. However, we cannot assure investors that this additional information or the proposed label warning will satisfy the FDA or that the
FDA will not continue to raise concerns regarding, or delay or deny approval of our NDA resubmission based on, the incidence of immediate-onset, systemic allergic reactions observed in our clinical
trials.



Background.We are also developing Plenaxis for the treatment of endometriosis. Endometriosis is a condition where
endometrial tissue grows beyond the uterine lining, most often on the surfaces of organs in the pelvic cavity. Endometrial tissue, regardless of location in the body, responds to the normal menstrual
cycling of women. When the location of the endometrial tissue prevents the appropriate sloughing of tissue that normally occurs during menstruation, inflammation, gastrointestinal symptoms and
internal scarring occur. This causes, among other things, pain, fatigue, heavy menstrual

8

---

bleeding, painful sexual intercourse and infertility. Each year in the United States, approximately 300,000 females are diagnosed with endometriosis. In addition, an estimated 5.5 million
females in the United States and Canada suffer from endometriosis. As a result of increased awareness of female health, we believe that the number of patients diagnosed with and treated for
endometriosis will increase.

Existing
treatments for endometriosis include the use of pain management medications, birth control pills and hormonal therapies, of which Lupron Depot and Zoladex are the most commonly
used. The use of available hormonal therapies to suppress estrogen production causes an initial estrogen surge in women. Lupron Depot, Zoladex and other drugs that act in a similar way include drug
product labels warning against the adverse effects associated with an estrogen surge. These labels can include warnings for the worsening in the signs and symptoms of endometriosis, which include
pain, cramping and excessive bleeding, the risk of tumor flare in breast cancer and the development of ovarian cysts. Our initial studies show that Plenaxis causes a more rapid reduction of estrogen
levels and associated relief of menstrual-related pain compared to Lupron Depot. In addition, in these initial studies, there has been no initial estrogen increase associated with the use of Plenaxis.

Endometriosis Clinical Studies.To date, we have completed a 40 patient, phase I/II study of Plenaxis and a 363 patient,
phase II study. In the phase I/II study, we compared various doses of Plenaxis to the standard dose of Lupron Depot. Patients receiving Lupron Depot therapy experienced initial estrogen increases, and
therapeutically low estrogen levels were not achieved for several weeks. Patients treated with Plenaxis experienced a rapid reduction of estrogen levels without the initial increase seen with LHRH
agonist therapy.

Our
phase II study compared the safety and efficacy of various doses of Plenaxis to the standard dose of Lupron Depot for treating endometriosis-associated pain. This randomized,
double-blind, active-control study included 363 women with surgically confirmed, moderate to severe endometriosis. Three different doses of Plenaxis (30 mg, 60 mg and 120 mg), administered
subcutaneously, were compared to the standard dose of Lupron Depot (3.75 mg), administered intramuscularly. Patients were treated once every four weeks over a 24-week period, receiving a
total of six doses of drug. Patients were then followed for 48 weeks post-treatment. The primary endpoint was defined as the achievement of all of the following at four and 24 weeks:
improvement of pelvic pain, improvement in pelvic tenderness and elimination of dysmenorrhea, which is painful menstruation.

The
percentage of patients treated with Plenaxis at any dose who experienced improvement in endometriosis-associated pain was no different than Lupron Depot at four weeks. At 24 weeks,
only patients treated with a 60 mg dose of Plenaxis experienced statistically equivalent relief of endometriosis-associated pain compared to patients treated with Lupron Depot. More patients
experienced an elimination of dysmenorrhea at four weeks at all doses of Plenaxis (30 mg: 96%; 60 mg: 96%; 120 mg: 97%) compared to patients treated with Lupron Depot (72%).

In
addition to the pre-specified endpoints, estrogen levels were also measured at various time points during the study. The data demonstrated that patients treated with
Plenaxis experienced a more rapid reduction in estrogen levels compared to patients treated with Lupron Depot.

Patients
appear to have generally tolerated treatment well with Plenaxis in these studies. No treatment-related serious adverse events or immediate-onset, systemic allergic reactions
were reported in either study. However, as expected, we observed some adverse reactions in both Plenaxis and Lupron Depot patients, including headache, temporary and reversible irritation at the
injection site and temporary and reversible elevation of some liver enzymes. In addition, it is well documented that the use of hormonal therapies that lower estrogen levels results in bone mineral
density loss. Analysis of the results of our phase II study indicates that patients treated with Plenaxis experienced more bone mineral density loss than those treated with Lupron Depot, and that this
loss was dose-related. We are conducting additional analyses of this data to clarify the extent and magnitude of the bone loss.

9

---

In
order to better understand the bone mineral density loss, during 2002 we also conducted a pharmacokinetic study of Plenaxis for the treatment of endometriosis to determine the
appropriate dose and dosing schedule necessary to maximize the benefit of the therapy for patients while minimizing attendant bone mineral density loss. We have completed the treatment and observation
phases of this study and expect to complete our review of the results during the first half of 2003 before deciding upon the next steps for development.



We are developing Apan for the treatment of Alzheimer's disease. Alzheimer's disease affects an estimated four million people in the United States, according to a
1998 report issued by the National Institute of Aging. According to the Alzheimer's Association, Alzheimer's disease is expected to become increasingly prevalent as the population ages. 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. Over the past several years, a large body of clinical, biochemical and genetic evidence has emerged suggesting that the aggregation of beta-amyloid peptide may be
the underlying cause of Alzheimer's disease. This body of evidence has led to the widely held 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. We used our LEAP technology to select Apan to interfere with this aggregation process.

We
have shown inin vitroexperiments that Apan specifically inhibits the aggregation of beta-amyloid and prevents the
associated nerve cell toxicity. In addition, we have shown in rats and mice that Apan reaches the brain in quantities that we believe may be sufficient to block the aggregation of
beta-amyloid molecules and alter the course of the disease. Studies in transgenic mice that develop human Alzheimer's disease plaques in their brains and in guinea pigs suggest that Apan
can facilitate the clearance of beta-amyloid from the brain. Alzheimer's disease, with the associated accumulation of beta-amyloid in the brain, is often thought of as 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. In contrast, transgenic mice treated with Apan show significant increases in
beta-amyloid levels in the CSF, suggesting that Apan may be facilitating the clearance of beta-amyloid from the brain.

In
March 2001, we began a phase Ia dose escalation study of Apan in healthy volunteers. In this study, we are evaluating the safety and pharmacokinetics of the compound and
identifying a MTD in healthy volunteers. As of mid-February 2003, we had enrolled 76 volunteers in 14 dosing groups. Preliminary observations from CSF taken from ten of these
healthy volunteers indicate that Apan can be quantified in the CSF. These preliminary CSF results also indicate that Apan may be promoting clearance from the brain of beta-amyloid. This
trend in the early data is consistent with the CSF beta-amyloid results we have seen with Apan in animal models.

Assuming
favorable FDA review of the study's final results, we intend to move into a phase Ib trial in Alzheimer's patients during the first half of 2003. This phase Ib study will test a
single administration of Apan to establish the MTD in patients. Upon completion of the phase Ib study, and assuming favorable FDA review of the study's results, we expect to initiate a phase Ic trial
examining multiple administrations of a selected dose of Apan in Alzheimer's disease patients.

10

---



PPI-2458 is a novel, proprietary molecule that is based on the fumagillin class of compounds that have been shown to have potent
anti-proliferative and anti-angiogenic activity. These processes are considered to be of critical importance in the growth of aberrant tissues in diseases such as cancer and
rheumatoid arthritis. The dose limiting toxicity associated with fumagillin derivatives have largely prevented the clinical development of these compounds. PPI-2458 was designed to
maintain potent activity while at the same time improving the toxicity profile relative to other members of the fumagillin class of compounds.

In
recent preclinical studies conducted separately by us and the National Cancer Institute, PPI-2458 demonstrated significant anti-tumor activity against certain
types of cancerous cells. Based upon encouraging pre-clinical data, we plan to investigate initially the effectiveness of this compound for the
treatment of B-Cell Non-Hodgkin's lymphoma. We intend to file by mid-year 2003 an IND for PPI-2458 for a study in this indication. Information from this
initial study, combined with on-going preclinical work, will form the basis for next steps in the development of this compound for the treatment of additional indications.

We
are also evaluating through preclinical studies the potential utility of PPI-2458 for treating rheumatoid arthritis. These studies have demonstrated the efficacy of
PPI-2458 in rodent models of rheumatoid arthritis, when administered either by injection or orally. Despite the availability of several new effective disease-modifying
anti-rheumatic drugs, also known as DMARDs, for the treatment of rheumatoid arthritis, there remains a significant unmet medical need. We believe that new drugs which could be used alone
or in combination with established DMARDs could be successful in treating rheumatoid arthritis.



Because testosterone and other hormones are growth factors for prostate cancer cells, hormone-lowering therapy can be a safe and effective treatment for patients
with hormone-dependent prostate cancer. However, most patients eventually progress to a condition known as hormone-independent prostate cancer, where the prostate cancer cells no longer need
testosterone and other hormones to grow and, as a consequence, hormone-lowering therapies are ineffective. Genetic studies in these patients reveal that many of them have accumulated mutations in the
gene encoding the Androgen Receptor, or AR, allowing it to function in the absence of testosterone. These studies indicate that the AR is central to the growth of prostate cancer cells. Using our LEAP
technology, we have discovered and are testing ligands that bind to the AR, which could provide the basis for a new class of drugs to treat hormone-independent prostate cancer. If successful, the use
of these drugs could be expanded to treat prostate cancer at all stages.



Considering that an estimated 5.5 million females in the United States and Canada suffer from endometriosis, and that only approximately 300,000 females in
the United States and an unknown number in Canada are actually diagnosed with the disease, we believe a diagnostic test is critical to better identify, assess and treat those who suffer from the
disease. Currently, endometriosis is diagnosed by a relatively painful and expensive invasive procedure called laparoscopy. We are developing a simple, non-invasive endometriosis
diagnostic test based on the presence of unique proteins in the serum of disease sufferers. Using the proteomics component of our LEAP technology, we are seeking to identify proteins whose abundance
in serum can discriminate between diseased and non-diseased individuals. These proteins could prove useful to diagnose individuals with the disease, as well as enhance understanding of the
disease process.

11

---





Various studies by others have identified groups of individuals who are resistant to HIV infection despite multiple exposures to the virus. Genetic
characterization of these individuals revealed that they have mutations in the CCR5 gene which prevents the expression of the functional CCR5 protein, yet they remain healthy. The HIV virus uses the
CCR5 protein as a point of entry into macrophages and T cells, which are cells in the human immune system that are commonly infected by HIV. Through our collaboration with Human Genome Sciences, we
have licensed certain rights to CCR5 as a disease target. We have been using our LEAP technology to search for ligands against CCR5 that may act as inhibitors of HIV entry, but have not yet identified
a lead candidate. We are currently preparing a report for review by Human Genome Sciences summarizing the results of our research to date. Following delivery of the report, we intend to meet with
Human Genome Sciences to discuss whether further development efforts should be pursued under the collaboration agreement.

We
have also independently initiated a separate research program to discover peptide ligands to disrupt the interaction between CCR5 and the HIV protein, gp120. Disruption in the
interaction of these proteins by antibodies results in the blockade of HIV entry into cells. We are investigating novel peptide structures that target gp120 and possess antiviral activity. In
addition, we have independently expanded our research to include other potential antiviral targets and compounds.

Technology



Our proprietary method for discovering drugs is based on a unique system that 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 believe LEAP is superior to traditional methods of drug discovery that are limited by the number of compounds that the traditional
methods can synthesize and test manually. In a typical LEAP selection process, we can examine millions of molecules in a few months. By contrast, conventional screening and medicinal chemistry permit
the examination of fewer than one million molecules with equivalent resources and requires more time.

In
the case of Plenaxis, LEAP allowed us to take a peptide ligand encoded in the human genome and convert that peptide into a drug. GnRH is a natural peptide ligand that binds to the
GnRH receptor on the pituitary gland triggering the production of LH, which, in turn, triggers the production of testosterone. We used LEAP to evolve GnRH into Plenaxis, a drug that binds to the same
receptor target, but blocks the production of LH.

If
a ligand from the human genome is not available, we can select one encoded in a synthetic gene library using a process we call biological evolution. This process involves the natural
selection of the best ligand from a pool containing billions of natural peptides in a biological system. We can carry out this process in repeated cycles, selecting ligands based on their functions.
We then modify the selected ligand using a unique process that we call chemical evolution. Chemical evolution is powerful because we can make pools of thousands of diverse molecules based on the
structure of the selected ligand and composed of synthetic building blocks. We then select the best molecules from these pools and identify them through our unique application of proteomics technology
and the technology called mass spectrometry. These molecules can behave like drugs, because they bind to their target like natural peptides and have the characteristics of an effective drug. We have
pending patent applications in the United States and abroad that cover the essential steps of the LEAP process.

12

---



We can further enhance the potential clinical utility of our drug candidates by formulating the drugs with our proprietary sustained release technology,
Rel-Ease. For example, using Rel-Ease technology, we are able to formulate Plenaxis in such a way that a physician only needs to administer it to prostate cancer patients once
every four weeks because Rel-Ease continuously releases the drug in the body over that period of time. In many cases, infrequent injections of a drug in a sustained release formulation are
more desirable than oral administration due to patient compliance, convenience or reimbursement issues. We have formulated a variety of molecules with Rel-Ease technology and believe that
Rel-Ease may be useful for formulating drug candidates we discover and develop using our LEAP technology. We may explore in the future the potential use of our Rel-Ease
technology to create 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.



MASTRscreen is our proprietary screening procedure that rapidly identifies and evaluates ligands for the most successful class of drug targets, known as
G-protein coupled receptors. The GnRH receptor is a member of this class of receptors. We developed MASTRscreen in connection with our Plenaxis program, and it was instrumental in the
selection of Plenaxis from pools of modified peptides. MASTRscreen is useful because of its sensitivity to low concentrations of screened material, easily measurable endpoints and adaptability to
various screening systems. We have pending patent applications in the United States and abroad that cover the essential steps of the MASTRscreen process.

Research and Development

As of December 31, 2002, we had a total of 110 employees dedicated to research and development for Plenaxis and our other product candidates. We have spent
substantial funds over the past three years to develop Plenaxis and our other potential drug candidates and expect to continue to do so in the future. We spent approximately $85.9 million in
2000, $59.4 in 2001 and $56.4 in 2002 on research and development activities.

Corporate Collaborations



In January 2000, we entered into an agreement with Human Genome Sciences for the discovery, development and commercialization of compounds targeted to two
proprietary genomic targets that Human Genome Sciences has identified. One of these targets has been identified as CCR5, a human protein the HIV virus uses to enter human cells. Under the agreement,
we have been using LEAP to attempt to identify drug candidates targeted to these molecules. If we discover a lead clinical drug candidate, we will jointly develop it with Human Genome Sciences on an
equal cost and profit sharing basis, unless a pre-existing option that Human Genome Sciences granted to GlaxoSmithKline applies to the drug candidate and GlaxoSmithKline exercises the
option, in which case other terms contained in the agreement will apply. We cannot assure you as to whether or when any drug candidate will be identified and successfully developed and commercialized
under the agreement and, accordingly, we cannot predict the potential value, if any, of the agreement to us. With respect to the CCR5 target, we are currently preparing a report for review by Human
Genome Sciences summarizing the results of our research to date. Following delivery of the report, we intend to meet with Human Genome Sciences to discuss whether further development efforts should be
pursued under the collaboration agreement.

13

---



Effective March 1999, we entered into an agreement with Amgen for the research, development and commercialization of Plenaxis products in the United
States, Canada, Japan and certain other countries. In September 2001, Amgen notified us that it was terminating its agreement with us pursuant to the terms of the agreement. The termination was
effective in December 2001. As a result of the termination, all licenses for Plenaxis granted to Amgen under the agreement, and all of Amgen's rights in the Plenaxis program, have terminated.
In August 2002, we and Amgen entered into a termination agreement with respect to the termination by Amgen of the license agreement. Under the terms of the termination agreement, we paid to
Amgen $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 us of title to, and possession of,
any existing materials inventory.



In May 1997, we entered into a license agreement with Sanofi-Synthélabo for the development and commercialization of Plenaxis products in
specific territories including Europe, Latin America, the Middle East and various countries in Africa. In October 2001, Sanofi-Synthélabo notified us that it was terminating its
license agreement with us pursuant to the terms of the agreement. The termination was effective in December 2001. As a result of the termination, all licenses for Plenaxis granted to Sanofi-
Synthélabo under the agreement, and all of Sanofi-Synthélabo's rights in the Plenaxis program, have terminated. In December 2002, we and
Sanofi-Synthélabo entered into a termination agreement with respect to the termination by Sanofi-Synthélabo of the license agreement.

Technology License

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 Plenaxis and methods of use for Plenaxis. Through December 31, 2002, we have paid
non-refundable fees of $305,000 and performance-based payments of $750,000 under this agreement. We have agreed to make performance-based payments of up to an additional
$3.5 million, and to pay royalties on our net sales of products covered by the license. 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.

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 and clinical supplies and manufacture them in accordance with FDA and European regulations. We have long-term contracts for each stage of the manufacturing process
for our lead drug candidate, Plenaxis.

We
have a development and supply agreement with UCB S.A. under which UCB will supply us with commercial volumes of the Plenaxis drug compound. As of December 31, 2002, we were
committed to purchase from UCB approximately $4.4 million of pharmaceutical grade peptide during 2003. This amount represents the outstanding balance of our purchase commitment under the UCB
agreement.

14

---

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 contributed approximately $6.0 million toward Cambrex's construction and outfitting of a dedicated manufacturing facility, to which we will retain
manufacturing process rights. During 2002, we paid Cambrex approximately $634,000 toward minimum purchase commitments and facility maintenance. We expect to provide Cambrex with a comparable level of
support during 2003.

In
December 2002, we entered into a commercial supply agreement with Baxter Pharmaceutical Solutions LLC to provide for the supply of Plenaxis products in finished vials. Under
the terms of the Baxter agreement, we are required to purchase a minimum of $375,000 of product from Baxter each calendar year until the first anniversary of the first commercial shipment of Plenaxis,
at which time the minimum annual purchase commitment will be adjusted to $650,000. Under our former collaboration agreement with Amgen, Amgen had been performing this stage of the manufacturing
process. As a new manufacturer, Baxter may need to undergo a regulatory pre-approval inspection in connection with the FDA's review of our NDA resubmission for Plenaxis, which, if major
issues are identified, could be costly and could delay the FDA's review of our resubmission.

In
order to meet potential increases in demand in connection with the possible commercial launch of Plenaxis for the treatment of a defined sub-population of advanced
prostate cancer patients, we intend to evaluate the need for a second source for each stage 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 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 development, commercialization and sale of Plenaxis products 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 18 United States patents and exclusive licenses to three United States patents. These patents have expiration dates from 2012 through 2016. In addition, we have filed
or hold exclusive licenses to 32 United States utility and provisional patent applications, as well as 171 related foreign patent applications, including both Patent Cooperation Treaty filings and
national filings. We also have non-exclusive licenses to four United States patents directed to technologies embodied in LEAP.

In
particular, we have United States patents that cover both the Plenaxis compound and the sustained release formulation enabling its once-per-month
administration. We also have patents covering the use of Plenaxis and any other GnRH antagonist in a variety of therapeutic settings, including in combination with surgery or radiation therapy. We
intend to file additional United States and foreign patent applications, where appropriate, relating to new product discoveries 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 of our trade secrets and proprietary information. These agreements
generally provide that the employee,

15

---

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. When appropriate, 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 not to solicit our employees for one year following termination of their employment with us.

Competition

A biotechnology 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 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.

Each
of our potential products in research or development will face competition from other products. For example, if approved for marketing and sale, our Plenaxis products will compete
with numerous established or newly introduced products on the market, including:



We
are also aware of another GnRH antagonist, Degarelix, being developed by Ferring Pharmaceuticals, which is in late-stage clinical trials for the treatment of prostate
cancer. In addition, for each of our product candidates, we 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, which is being developed in one, three and four month subcutaneous injections by Atrix Laboratories, Inc. In 2002, Atrix received FDA approval for its
one- and three-month depot formulations of Eligard for the treatment of advanced prostate cancer.

We
believe that our product candidates will compete favorably in the market with these and other products, 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 and marketing, of pharmaceutical products. State, local and other authorities also regulate pharmaceutical manufacturing
facilities.

As
an initial step in the FDA regulatory approval process, an applicant typically conducts preclinical studies in animals to assess a drug's efficacy and to identify potential safety
problems. An applicant must conduct specified preclinical laboratory and animal studies in compliance with the FDA's good laboratory practice regulations. An applicant must submit the results of these
studies to the FDA as part of an IND. Proposed clinical testing can only begin if the FDA raises no objections to the IND.

16

---

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.

Clinical
testing must meet requirements for Institutional Review Board oversight and informed consent, as well as FDA prior review, oversight and good clinical practice requirements.
Typically, clinical testing involves a three-phase process. Phase I clinical trials involve a small number of subjects and are designed to provide information about both product safety and the
expected dose of the drug. Phase II clinical trials generally provide additional information on dosing and safety in a limited patient population. Generally, phase II trials may provide preliminary
evidence of product efficacy. Phase III clinical trials are large-scale, well-controlled studies. The goal of phase III clinical trials generally is to provide statistically valid proof of
efficacy, as well as safety, in the target patient population. The company performing the preclinical testing and clinical trials of a pharmaceutical product then submits the results to the FDA in the
form of an NDA, for approval to commence commercial sales. Preparing NDA applications involves considerable data collection, verification, analysis and expense. In responding to an NDA, the FDA may
grant marketing approval for a specific indication, request additional information or deny the application if it determines that the application does not satisfy its regulatory approval criteria. In
addition, after approval for an initial indication, further clinical trials would be necessary to gain approval to promote the use of the product for any additional indication.

Among
the conditions for NDA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform on an ongoing basis with good
manufacturing practices. In complying with good manufacturing practices, manufacturers must continue to spend time, money and effort in the areas of production and quality control to ensure full
technical compliance. Manufacturing facilities are subject to periodic inspections by the FDA.

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 refuse to approve an application if it believes the
product does not meet applicable regulatory criteria. The FDA also may require additional testing for safety and efficacy of the drug. If the FDA grants approval of a drug product, the approval will
be limited to specific indications.

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. We can give no assurance that we will obtain marketing approval for Plenaxis or any of our other product candidates.

If
we receive marketing approval, we must comply with FDA requirements for manufacturing, labeling, advertising, record keeping and reporting of adverse experiences and other
information. In addition, we must comply with federal and state anti-kickback and other health care fraud and abuse laws that pertain to the marketing of drugs. For all drugs, failure to
comply with applicable regulatory requirements after obtaining regulatory approval could, among other things, result in suspension of regulatory approval, as well as possible recalls, product
seizures, injunctions and civil and criminal sanctions.

In
addition to regulations enforced by the FDA, 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

17

---

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.

Additionally,
we may have 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. Although there is now a centralized
European Union approval mechanism in place, each European country may nonetheless impose its own procedures and requirements, many of which could be time-consuming and expensive. Thus,
substantial delays could occur in obtaining required approvals from both the FDA and foreign regulatory authorities after the relevant applications are filed. Due to the termination of our
collaboration agreement with Sanofi-Synthélabo, we are relying primarily on third party contractors to assist us with the preparation and submission of our European regulatory filings
for Plenaxis for the treatment of hormonally responsive advanced prostate cancer. However, although we have sought qualified experience and assistance in dealing with the foreign regulatory processes
and interacting with foreign regulatory authorities, we can not assure investors that we will be successful in filing and obtaining the necessary governmental approvals for Plenaxis or any of our
other product candidates in Europe or any other foreign country.

Product Liability Insurance

We maintain product liability insurance for clinical trials in the amount of $15.0 million per occurrence and $15.0 million in the aggregate. We
intend to expand our product liability insurance coverage to include the manufacture, marketing and sale of commercial products if marketing approval for Plenaxis or any of our other product
candidates is obtained. However, 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. In addition, we may be unable to obtain commercially reasonable product liability insurance for Plenaxis or any other product candidates approved for marketing. A
successful product liability claim or series of claims brought against us could result in substantial setbacks for our business.

Employees

As of February 28, 2003, we had 147 full-time employees. 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. 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 senior management personnel. Competition in our industry is intense and we
cannot assure you that we will be able to attract and retain these personnel.

Available Information

We maintain a website with the address www.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.

18

---

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 are attempting to sublease a portion of
the remaining space for up to the next five years, although we have not yet found a tenant. 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 at least the next seven years and that we will be able to obtain additional space as needed on commercially reasonable terms.

ITEM 3.    LEGAL PROCEEDINGS.

We are not currently a party to any material legal proceedings.

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

No matters were submitted to a vote of security holders of the Company during the last quarter of the fiscal year ended December 31, 2002.

19

---



PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

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, 2002:First Quarter

$
5.94

$
4.24Second Quarter


5.80


2.71Third Quarter


3.93


2.60Fourth Quarter


3.54


2.20Year Ended December 31, 2001:First Quarter

$
33.13

$
13.50Second Quarter


31.11


12.75Third Quarter


15.41


3.00Fourth Quarter


6.10


3.37


As
of February 28, 2003, there were approximately 145 holders of record of our common stock registered with our transfer agent, American Stock Transfer & Trust Company.

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. Our board of directors will determine future dividends, if any, based upon our financial condition, results of
operations, capital requirements and other factors that the board deems relevant. Therefore, you will not receive any funds without selling your shares.

20

---

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, 2002, and our balance sheet data at December 31, 2001 and 2002, from our financial statements that have been audited by Ernst & Young LLP, independent auditors, and
which we include elsewhere in this report. We have derived the statement of operations data for the years ended December 31, 1998 and 1999 and the balance sheet data at December 31,
1998, 1999 and 2000 from our audited financial statements, which we do not include in this report.

|                                                    |                            | Year Ended December 31,  |      
|--------------------------------------------------- | -------------------------- | ------------------------ | -----
|
|
|Statement of Operations Data:                       |                            |                          |      
|Revenues:                                           |                            |                          |      
|                                                    | Corporate collaborations   |                          | $    
|                                                    | Contract services          |                          |      
|                                                    |                            |                          |      
|                                                    |                            | Total revenues           |      
|Costs and expenses:                                 |                            |                          |      
|                                                    | Research and development   |                          |      
|                                                    | Sales and marketing        |                          |      
|                                                    | General and administrative |                          |      
|                                                    |                            |                          |      
|                                                    |                            | Total costs and expenses |      
|                                                    |                            |                          |      
|Operating income (loss)                             |                            |                          | 2,258
|Gain on assignment of leasehold improvements        |                            |                          |     
|Gain on termination of collaboration agreement      |                            |                          |     
|Interest income, net                                |                            |                          | 3,516
|                                                    |                            |                          |      
|Income (loss) before income taxes                   |                            |                          | 5,774
|Provision for income taxes                          |                            |                          | 100  
|                                                    |                            |                          |      
|Net income (loss)                                   |                            | $                        | 5,674
|                                                    |                            |                          |      
|Net income (loss) per share:                        |                            |                          |      
|                                                    | Basic                      |                          | $    
|                                                    |                            |                          |      
|                                                    | Diluted                    |                          | $    
|                                                    |                            |                          |      
|Weighted average number of common shares:           |                            |                          |      
|                                                    | Basic                      |                          |      
|                                                    | Diluted                    |                          |      
|Pro forma net loss per share:                       |                            |                          |      
|                                                    | Basic and diluted          |                          | $    
|                                                    |                            |                          |      
|Pro forma weighted average number of common shares: |                            |                          |      
|                                                    | Basic and diluted          |                          |      

|                                                  |  | December 31,
|------------------------------------------------- |  | ------------
|
|
|Balance Sheet Data:                               |  |             
|Cash, cash equivalents and marketable securities  |  | $           
|Working capital                                   |  |             
|Total assets                                      |  |             
|Long-term debt                                    |  |             
|Capital lease obligations, net of current portion |  |             
|Total stockholders' equity                        |  |             

21

---

ITEM 7.    MANAGEMENT'S DISCUSSION 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

Since our inception, we have been engaged in developing drugs for the treatment of a variety of human diseases. Our lead program is the development of Plenaxis
(abarelix for injectable suspension), a drug for the treatment of diseases that respond to the lowering of certain hormone levels. We are developing Plenaxis for the treatment of hormonally responsive
advanced prostate cancer and endometriosis.

We
are also conducting clinical trials of Apan, our proprietary drug candidate for the treatment of Alzheimer's disease. In addition, we have a number of other product candidates in the
research or preclinical development stage.

We
had entered into collaborations with Amgen and Sanofi-Synthélabo to develop and commercialize our Plenaxis products. In September 2001, Amgen notified us that it
was terminating its agreement with us. In October 2001, Sanofi-Synthélabo notified us that it was terminating its agreement with us. Both terminations were effective in
December 2001. As a result, all of the licenses for Plenaxis granted to Amgen and Sanofi-Synthélabo under these agreements, and all rights of Amgen and
Sanofi-Synthélabo in the Plenaxis program, have terminated. In 2002, we entered into an agreement relating to the termination of these collaborations with each of Amgen and
Sanofi-Synthélabo.

Since
our inception, we have had no revenues from product sales. Prior to 2002, a significant portion of our revenues was received under collaboration agreements through which we
converted the potential value underlying our Plenaxis program into a stream of upfront, milestone and expense reimbursement payments from corporate collaborators. In 2001, we regained full ownership
of our Plenaxis program from our corporate collaborators and, as a result, our revenues decreased substantially. We do not anticipate receiving any additional revenues under former collaboration
agreements. Substantially all of our expenditures to date have been for drug development and commercialization activities and for general and administrative expenses.

Our
accumulated deficit as of December 31, 2002 was approximately $130.5 million.

At
December 31, 2002, we had 139 full-time employees, 110 of whom were engaged in research and development activities, compared to 127 full-time employees
at December 31, 2001, 99 of whom were engaged in research and development activities.

Due
to the costs associated with the continued development and potential commercialization of Plenaxis for the treatment of a defined sub-population of advanced prostate
cancer patients, as well as other research and development and general and administrative expenses, and our lack of revenues, we had a net operating loss for the year ended December 31, 2002.
We expect to have net operating losses for the next several years. We do not expect to generate operating income unless we receive FDA approval to market Plenaxis in the United States for the
treatment of a defined sub-population of advanced prostate cancer patients. Assuming that we receive FDA approval by the end of 2003, and that we are able to partner clinical programs at
opportune times, we believe that we will begin to generate operating income by 2006.

The
termination of our collaboration agreement with Sanofi-Synthélabo became effective as of December 31, 2001 and we received a final reimbursement payment of
approximately $1.0 million

22

---

during the second quarter of 2002. Including this payment, we recognized a total of approximately $24.7 million in non-refundable fees and performance-based payments, and a total
of approximately $11.7 million in reimbursement for ongoing development costs under this agreement.

The
termination of our collaboration agreement with Amgen became effective as of December 17, 2001. Under the Amgen agreement, Amgen paid the first $175.0 million of all
authorized costs and expenses associated with the research, development and commercialization of Plenaxis products in the United States. Amgen's initial $175.0 million funding commitment was
fulfilled during the third quarter of 2000. Following Amgen's completion of this funding, we became responsible for one-half of all subsequent United States research and development costs
for Plenaxis products. Additionally, the agreement provided that following Amgen's completion of its $175.0 million funding commitment, we were required to reimburse Amgen for
one-half of the costs associated with establishing a sales and marketing infrastructure for Plenaxis products in the United States. Through December 31, 2001, we
recognized an aggregate of approximately $121.7 million of revenues under the Amgen agreement. During 2002, we recognized no additional revenues under this agreement.

On
August 19, 2002, we executed a termination agreement with Amgen. In accordance with this agreement, we made a final payment to Amgen of $13.0 million. This payment
represented full and complete satisfaction of our share of the expenses incurred under the collaboration agreement, as well as consideration for the receipt from Amgen of full title to, and possession
of, all materials inventory purchased during the term of the collaboration.

Prior
to signing the termination agreement with Amgen, we had provided a $29.1 million accrual representing previously incurred collaboration expenses, our share of purchased
materials inventory, and certain other costs associated with finalizing the termination. As a result of our payment of $13.0 million plus certain related legal fees in connection with the
termination agreement, we eliminated our accrued liability related to the Amgen agreement and recognized a gain on termination of $16.0 million.

Critical Accounting Policies

In December 2001, the Securities and Exchange Commission requested that all registrants discuss their most "critical accounting policies" in Management's
Discussion and Analysis of Financial Condition and Results of Operations. The Commission indicated that a "critical accounting policy" is one which is both important to the portrayal of the company's
financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain. 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 accounting principles generally accepted in the
United States. 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 income and expense that are contingent upon uncertain factors as of the reporting date. The actual payments, and thus our actual results, could differ from our estimates.

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 must be recognized in the financial statements. 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.

23

---

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 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, 2002. We have determined that the undiscounted sum of the expected future cash flows from the building exceeded the
recorded value of the building. 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, 2002 decreased to approximately $1.0 million, from approximately $9.9 million in 2001. The decrease
in revenues was the result of the termination during the fourth quarter of 2001 of our collaboration agreements with Amgen and Sanofi-Synthélabo. During 2001 our revenues were comprised
principally of reimbursement revenues under these agreements. During 2002 our revenues were comprised of a final reimbursement payment received in connection with the termination of our agreement with
Sanofi-Synthélabo. We will not receive any additional revenues under these agreements. Furthermore, if the FDA does not grant marketing approval for Plenaxis in the United States, or if
approval is substantially delayed, such denial or delay is likely to have a materially adverse impact on our future planned revenues.

Research
and development expenses for the year ended December 31, 2002 decreased 5% to approximately $56.4 million, from approximately $59.4 million in 2001. The
slight decrease in expenses primarily reflects slightly reduced spending in our Plenaxis prostate cancer clinical program and, to a lesser extent, the lack of spending on our clinical program for
Latranal, an in-licensed compound that was in development for the treatment of musculoskeletal pain. Development of Latranal was discontinued during the third quarter of 2001. These
decreases were partially offset by increased spending on preclinical studies related to our experimental drug candidate PPI-2458. We are unable to predict the precise level of spending on
individual clinical programs due to the uncertain nature of clinical development. However, as a result of the resubmission of our NDA during February 2003, we plan to reduce our spending on the
clinical development of Plenaxis for the treatment of hormonally
responsive advanced prostate cancer during 2003 and thereafter. We also expect spending on our endometriosis program to decline during 2003 pending decisions regarding further development. We plan to
increase our development efforts on Apan and future clinical programs during 2003 and thereafter and, accordingly, will increase our spending in these areas. Overall, we expect our research and
development expenses to decrease during 2003 and then increase thereafter. In addition, we currently have several other 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 will assess the possibility of entering into corporate
collaborations to offset a portion of 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 2002 and 2001, the majority of our research and development expenses were related to

24

---

manufacturing costs, clinical trial costs, salaries and lab supplies related to our prostate cancer and endometriosis clinical programs. The remaining research and development costs were incurred
primarily in our Alzheimer's disease clinical program, our PPI-2458 preclinical research program and our other research programs.

We
began our clinical program to develop Plenaxis for the treatment of prostate cancer during 1996. In December 2000, we submitted an NDA to the FDA for Plenaxis for the treatment
of hormonally responsive prostate cancer. However, the FDA raised concerns over the occurrence of immediate-onset, systemic allergic reactions in a small subset of clinical trial patients. In
addition, the FDA expressed concern that, in a subset of patients treated beyond the three-month pivotal study time frame, fluctuations in testosterone levels were observed more frequently in patients
treated with Plenaxis than in patients treated with either Lupron Depot or Lupron Depot plus Casodex. We have proposed various alternatives to the FDA to address these issues and improve the
risk/benefit profile of Plenaxis. Based upon our discussions with the FDA, we now are seeking approval for Plenaxis for use in a defined sub-population of advanced prostate cancer patients
for whom the use of existing hormonal therapies may not be appropriate. The specific sub-population of patients will be determined through additional discussions with the FDA. We
resubmitted our NDA on February 27, 2003 seeking approval for this indication and expect a response from the FDA within six months of that date. We also intend to file, during the second
quarter of 2003, a registration dossier in Europe seeking approval to market Plenaxis for the treatment of a broad population of hormonally responsive advanced prostate cancer patients. However, we
cannot assure investors that we will be successful in obtaining approval in the United States or abroad for the commercialization of Plenaxis for the treatment of any portion of the hormonally
responsive advanced prostate cancer patient population or for any other indication.

In
1998, we began our clinical program to develop Plenaxis for the treatment of endometriosis. We completed a phase II study of Plenaxis for the treatment of pain associated with
endometriosis in March 2002. Results from this study have suggested that we may be able to utilize a lower dose and/or a more prolonged dosing interval in future studies to reduce drug exposure
and attendant bone mineral density loss, a known consequence of hormonal therapies that lower estrogen levels. Accordingly,
during 2002, we initiated and completed both the dosing and observation phases of a pharmacokinetic study of Plenaxis for the treatment of endometriosis to examine the appropriate dose and dosing
schedule. Upon completion of our review of the results of this study, we will determine the next steps for development.

We
began our clinical program for Apan in 2000. We are currently conducting a normal volunteer, phase Ia dose escalation study of Apan to identify the MTD in healthy volunteers. Assuming
favorable FDA review of the study's results, we intend to move into a phase Ib trial in Alzheimer's disease patients during the first half of 2003. This Ib study will test a single administration of
Apan to establish the MTD in patients. Upon completion of the phase Ib study and, assuming favorable FDA review of the study's results, we expect to initiate a phase Ic trial examining multiple
administrations of a selected Apan dose in Alzheimer's disease patients.

Sales
and marketing expenses for the year ended December 31, 2002 decreased 79% to approximately $1.8 million, from approximately $8.7 million in 2001. During 2001,
we incurred increased sales and marketing expenses in preparation for the potential launch of Plenaxis for the treatment of hormonally responsive advanced prostate cancer. The subsequent decrease in
sales and marketing expenses was due to the temporary suspension of the majority of marketing efforts resulting from the repositioning of our prostate cancer program in response to issues raised by
the FDA. These expenses are likely to increase during 2003 and thereafter as we again incur costs related to preparing for the possible launch of Plenaxis for the treatment of a defined
sub-population of advanced prostate cancer patients. We intend, upon FDA approval of our application, to market and sell Plenaxis in the United States through our own marketing and sales
team. Accordingly, assuming FDA approval of Plenaxis, we expect our sales and marketing expenses to increase during 2003 and thereafter, and to include expenses relating to the building of a marketing
infrastructure, the cost of our sales force, commissions to the sales force on Plenaxis sales and promotional and marketing programs.

25

---

General
and administrative expenses for the year ended December 31, 2002 increased 39% to approximately $9.7 million, from approximately $7.0 million in 2001. This
increase was due primarily to higher facility-related expenses. In May 2001, we occupied our new, larger facility and began incurring depreciation expense and increased utilities, maintenance
and tax expenses. In addition, higher personnel-related operating costs and increased professional services expenses contributed to the increase in general and administrative expenses. General and
administrative expenses for 2002 and going forward now fully reflect these new facility-related expenses. We expect that general and administrative expenses will increase slightly during 2003 and
thereafter based on normal hiring of additional administrative personnel to support continued growth of our research, development and commercialization initiatives.

Net
interest income for the year ended December 31, 2002 decreased 48% to approximately $4.8 million, from approximately $9.1 million in 2001. 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, 2002 and 2001 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 2001, 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 as of December 31, 2002 and 2001, have been established in each period to reflect these uncertainties.

At
December 31, 2002, we had federal net operating loss carryforwards of $129.0 million that will expire in varying amounts through 2022, 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, 2001 decreased 84% to approximately $9.9 million, from approximately $61.2 million in 2000. The
decrease in revenues was the result of decreases in both the amount and rate of reimbursement of Plenaxis expenses from our former collaborators, as well as the one-time sale of materials
inventory to Amgen during the fourth quarter of 2000.

Research
and development expenses for the year ended December 31, 2001 decreased 31% to approximately $59.4 million, from approximately $85.9 million in 2000. This
decrease in expenses was due primarily to the one-time sale of materials inventory to Amgen during the fourth quarter of 2000 combined with reduced clinical spending during the second half
of 2001 as we repositioned the Plenaxis program in response to issues raised by the FDA.

Sales
and marketing expenses for the year ended December 31, 2001 increased 36% to approximately $8.7 million, from approximately $6.4 million in 2000. The increase
in expenses was primarily the result of our obligation under our agreement with Amgen, beginning in the third quarter of 2000, to pay one-half of all subsequent costs associated with
establishing a sales and marketing infrastructure in the United States for Plenaxis through the launch period. These increases were partially offset by decreased spending on marketing and sales for
the Plenaxis program during the second half of 2001.

General
and administrative expenses for the year ended December 31, 2001 increased 32% to approximately $7.0 million, from approximately $5.3 million in 2000. The
increase was due to an increase in personnel-related operating costs and increased use of professional services.

Net
interest income for the year ended December 31, 2001 increased 16% to approximately $9.1 million, from approximately $7.8 million in 2000. The increase in
interest income was due to increased cash and investment balances from our follow-on public offering in February 2001, offset by

26

---

lower interest rates. The increase in interest expense was due to a higher average principal balance outstanding for a full year during 2001 under the loan agreement entered into in connection with
the purchase in July 2000 of our corporate headquarters and primary research facility.

The
provision for income taxes for the years ended December 31, 2001 and 2000 was zero and $0.1 million, respectively. The provision for income taxes during 2000 was
primarily for state income taxes. We were in a net operating loss carryforward position during 2001 and therefore no benefit from our operating losses was recognized.

Selected Quarterly Operating Results

The following table sets forth our unaudited statement of operations data for the eight quarters ended December 31, 2002. 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 accruals, 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                       |  | $             | 2,582  
|Operating loss                       |  |               | (14,321
|Net loss                             |  |               | (11,847
|Basic and diluted net loss per share |  | $             | (0.26  

---

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. It is likely that our operating results in one or more future quarters may be below the expectations of
securities analysts and investors. In that event, the trading price of our common stock would almost certainly decline.

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,
research and development partnerships, collaborative agreements and investment income.

At
December 31, 2002, we had cash, cash equivalents and marketable securities of approximately $195.0 million and working capital of approximately $185.5 million,
compared to approximately $266.2 million and $229.0 million, respectively, at December 31, 2001. During 2003, we expect to use approximately $75.0 million of our current
cash and investments in our business. We believe that our existing cash and investments will be sufficient to meet our working capital and capital expenditure needs through approximately the end of
2005. Assuming receipt by the end of 2003 of regulatory approval to market Plenaxis in the United States for a defined sub-population of advanced prostate cancer patients, partnering of
clinical programs at opportune times and continued conservative fiscal management, we believe that we should have sufficient financial resources to execute our operating plan and attain profitability
by 2006 without returning to the capital markets.

27

---

For
the year ended December 31, 2002, net cash of approximately $69.9 million was used in operating activities, compared to approximately $31.6 million used in
operating activities during 2001. During the year ended December 31, 2002, our use of cash in operations was due principally to our net loss of approximately $46.1 million, and our
payment of $13.0 million in connection with the Amgen termination agreement, partially offset by depreciation and amortization. We expect our cash utilization to increase during 2003 as a
result of an overall increase in operating expenses as we prepare for the possible commercial launch of Plenaxis in the United States for the treatment of a defined sub-population of
advanced prostate cancer patients, continue with clinical trials for Apan, initiate a new clinical program for PPI-2458 and expand our research and development initiatives. The actual
amount of these expenditures will depend on numerous factors, including the timing of expenses and the timing and progress of our research, development, marketing and sales efforts.

Net
cash used in investing activities of approximately $10.9 million in 2002 consisted of purchases of property and equipment of approximately $1.8 million, and net
purchases of marketable securities of approximately $9.1 million. This represents a decline in net cash used in investing activities of approximately $132.3 million from 2001. Net cash
used in investing activities in 2001 consisted of the conversion of cash equivalents held at the end of the prior year and the proceeds from our follow-on public offering into instruments
with slightly longer maturities, as well as purchases of property and equipment of approximately $23.9 million. Our financing activities for the year ended December 31, 2002 consisted of
approximately $1.0 million of proceeds received from the exercise of common stock options. This contrasts with the approximately $187.3 million in net cash provided by financing
activities in 2001, primarily attributable to our follow-on public offering.

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, 2002, $33.0 million was outstanding under the loan agreement. Advances bear interest at a rate equal to the 30-day LIBOR plus 2.0% (3.38% at December 31,
2002). Interest is payable monthly in arrears. Principal is due and payable in full on July 30, 2003, subject to two one-year extension options. We intend to exercise the option to
extend the maturity date until July 30, 2004 and believe that we will be able to satisfy the conditions for this extension set forth in the loan agreement. The loan is secured by the 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 addition to this financing, we have spent approximately $38.0 million of our own funds in connection with the
build-out and occupancy of this facility. We have occupied this facility since May 2001 and, as planned, are actively seeking to sublease a portion of the facility.

In
addition to our long-term debt, we have fixed purchase obligations under various supply agreements. As of December 31, 2002, our long-term debt and
fixed purchase obligations were as follows:

|                                   |  |   |        | Payments Due By Period
|---------------------------------- |  | - | ------ | ----------------------
|
|
|Long-term debt obligations         |  | $ | 33,000 |                       
|Unconditional purchase obligations |  |   | 6,269  |                       
|                                   |  |   |        |                       
|Total                              |  | $ | 39,269 |                       
|                                   |  |   |        |                       

At
December 31, 2002, we had provided a valuation allowance of $64.1 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.

28

---

Recent Accounting Pronouncements

On October 20, 2001, the Financial Accounting Standards Board issued SFAS No.144. SFAS No. 144 supersedes Statement of Financial Accounting
Standards No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
however it retains the fundamental provision of that statement related to the recognition and measurement of the impairment of long-lived assets to be held and used. In addition, SFAS
No. 144 provides additional guidance on estimating cash flows when performing a recoverability test, requiring that a long-lived asset to be disposed of other than by sale be
classified as an asset held for sale until it is disposed of, and establishes more restrictive criteria to classify an asset as held for sale. SFAS No. 144 became effective in the first quarter
of 2002. The adoption of SFAS No. 144 did not have any effect on the Company's consolidated results of operations in 2002.

In
July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146,Accounting for Costs Associated
with Exit or Disposal Activities, or SFAS No. 146. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring). The principal difference between SFAS No. 146 and EITF Issue No. 94-3 relates to SFAS No. 146's
requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost as generally defined in EITF Issue No. 94-3 was
recognized at the date of an entity's commitment to an exit plan. Therefore, SFAS No. 146 eliminates the definition and requirements for recognition of exit costs in EITF Issue
No. 94-3. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not anticipate the adoption of SFAS No. 146 to have a material
impact on its consolidated financial statements.

On
December 31, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148,Accounting for
Stock-Based CompensationTransition and Disclosure, or SFAS No. 148. SFAS No. 148 amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, or SFAS No. 123, to provide alternative methods of transition to the fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Principles Board Opinion No. 28, Interim Financial Reporting, or APB
No. 28, to include increased pro-forma disclosure of the effects of stock-based employee
compensation on the results of operations. SFAS No. 148 became effective for fiscal years ending after December 15, 2002. The Company has elected to continue to account for employee
stock-based compensation using the intrinsic value method as described in Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to
Employees, and therefore, the adoption of SFAS No. 148 did not have a material impact on the Company's consolidated results of operations in 2002.

29

---

Risk Factors that May Affect Future Results

Because we have not yet marketed or sold any products and anticipate significant increases in our operating expenses over the next several years, 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. All of our potential products are in
the research or development stage. We have not yet marketed or sold any products, and we may not succeed in developing and marketing any product in the future. To date, we have derived substantially
all of our revenues from payments under corporate collaboration and license agreements. Due to the termination of the Amgen and Sanofi-Synthélabo agreements and the uncertainty
regarding regulatory approval for our lead product candidate, Plenaxis, for the foreseeable future, we do not expect to have any revenues, other than interest income. In addition, we expect to
continue to spend significant amounts to develop commercial sales and marketing capabilities, continue clinical studies, seek regulatory approval for our existing product candidates and for further
build-out of our facility. We also intend to spend substantial amounts to fund additional research and development for other potential products, enhance our core technologies, and for
general and administrative purposes. As of December 31, 2002, we had an accumulated deficit of approximately $130.5 million. We expect that our operating expenses will increase
significantly in the near term due primarily to increased expenses related to the continued development and pre-commercialization activities for Plenaxis, resulting in significant
operating losses at least through 2005 and possibly thereafter.

If our clinical trials are not successful, or if we are otherwise unable to obtain and maintain the regulatory approval required to market and sell our potential products, we
would incur additional operating losses.

The development and sale of our product candidates are subject to extensive regulation by governmental authorities. Obtaining and maintaining regulatory approval
typically is costly and takes many years. Regulatory authorities, most importantly, the FDA, have substantial discretion to terminate clinical trials, delay or withhold registration and marketing
approval in the United States, and mandate product recalls. Failure to comply with regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, as well as other actions as to our 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 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 and Alzheimer's disease
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, a clinical trial may experience slow patient enrollment or lack of
sufficient drug supplies. 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

30

---

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. We can give no assurance that we will obtain marketing approval for Plenaxis, our drug candidate for the treatment of hormonally
responsive advanced prostate cancer and endometriosis, or for any of our other product candidates, or regulatory approval may be conditioned upon significant labeling requirements which could
adversely affect the marketability or value of the product.

To
date, none of our product candidates has received regulatory approval for commercial sale. In June 2001, we received a letter from the FDA with respect to our NDA for Plenaxis
for the treatment of hormonally responsive advanced prostate cancer, in which the FDA indicated that the information presented in the NDA was inadequate for approval. The FDA raised concerns over the
occurrence of immediate-onset, systemic allergic reactions in a small subset of clinical trial patients. In addition, the FDA expressed concern that, in a subset of patients treated beyond the
three-month pivotal study time frame, fluctuations in testosterone levels were observed more frequently in patients treated with Plenaxis than in patients treated with either Lupron Depot or Lupron
Depot plus Casodex. We have proposed various alternatives to the FDA to address these issues and improve the risk/benefit profile of Plenaxis. Based upon our discussions with the FDA, we are now
seeking approval for Plenaxis for use in a defined sub-population of advanced prostate cancer patients for whom the use of existing hormonal therapies may not be appropriate. The specific
sub-population of patients will be determined through additional discussions with the FDA. In February 2003, we resubmitted to the FDA our NDA seeking approval for this indication.
We expect to receive a response from the FDA within six months.

The
FDA actions described above have delayed, and otherwise adversely affected, our obtaining regulatory approval to market Plenaxis for the treatment of hormonally responsive advanced
prostate cancer. Moreover, there could be further delays due to FDA review or action, and the FDA could deny approval altogether. If we are further delayed in obtaining or are unable to obtain this
regulatory approval, or regulatory approval to market our other potential products, we may exhaust our available resources significantly sooner than we had planned, particularly given the termination
of the Amgen and Sanofi-Synthélabo agreements. If this were to happen, we would need to either raise additional funds or seek alternative partners to complete development and
commercialization of Plenaxis and
continue our currently planned research and development programs. 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.

The termination by our corporate collaborators of their agreements with us could adversely affect the development and commercialization of Plenaxis.

We depended upon our former corporate collaborators, Amgen and Sanofi-Synthélabo, to provide substantial financial support for the development and
commercialization of Plenaxis. We also relied on them to some extent in seeking regulatory approval in the United States and abroad for Plenaxis for the treatment of hormonally responsive advanced
prostate cancer. In addition, under our agreement with Amgen, they had assumed principal responsibility for the manufacture of Plenaxis, and under our agreements with Amgen and
Sanofi-Synthélabo, those parties were responsible for the marketing, distribution and sale of Plenaxis in their respective licensed territories. Accordingly, we have had, and will
continue for the foreseeable future, to devote funds and other resources to Plenaxis development and commercialization that we had planned would be available from our collaborators. In addition, we
have had, and in the future may have, to enter into new arrangements with third parties to support the Plenaxis program. If we encounter unanticipated expenses or delays in the development and
commercialization of Plenaxis for a defined sub-population of advanced prostate cancer patients, we may be required to curtail or terminate one or more of our other drug development
programs and/or seek additional funding. We cannot assure investors that we would be able to raise such additional funds.

31

---

We may be unable to establish marketing and sales capabilities necessary to successfully commercialize Plenaxis or our other our potential products.

We have no experience in marketing or selling pharmaceutical products and have very limited marketing and sales resources. To achieve commercial success for any
approved product, we must either develop a marketing and sales force, as well as the infrastructure to support it, or enter into arrangements with others to market and sell our products. We may be
unable to establish marketing, sales and distribution capabilities necessary to commercialize and gain market acceptance for our potential products. We have announced our intention to independently
market and sell Plenaxis in the United States if we receive FDA approval of this compound for use in a defined sub-population of advanced prostate cancer patients. Accordingly, we will
need to hire a sales force with expertise in pharmaceutical sales. Recruiting and retaining qualified sales personnel will be critical to our success. Competition for skilled personnel is intense, and
we cannot assure you that we will be able to attract and retain a sufficient number of qualified individuals to successfully launch Plenaxis or any other potential product. In addition, establishing
the expertise necessary to successfully market and sell Plenaxis, or any other product, will require a substantial capital investment. We cannot assure you that we will have the funds necessary to
successfully commercialize Plenaxis for the treatment of a defined sub-population of advanced prostate cancer patients or any other potential product.

In
the event that we decide to contract with third parties to provide sales force capabilities to meet our needs for Plenaxis or any other product candidates, we cannot assure you that
we will be able to enter into such agreements on acceptable terms, if at all. In addition, co-promotion or other marketing arrangements with third parties to commercialize potential
products could significantly limit the revenues we derive from these potential products, and these third parties may fail to commercialize our potential products successfully. To the extent we enter
into any such agreements, the parties to those agreements may also market products that compete with our products, further limiting our potential revenue from product sales.

Even if we receive approval for the marketing and sale of Plenaxis or any of our other product candidates, they may fail to achieve market acceptance and, accordingly, may
never be commercially successful.

Many
factors may affect the market acceptance and commercial success of Plenaxis or any of our other potential products, including:



32

---



If
our products are not commercially successful, we may never become profitable.

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 our product candidates, including Plenaxis, 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 products on a commercial scale. We will continue to rely upon
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
addition, we and the third-party manufacturers that we use must continually adhere to current good manufacturing practice regulations enforced by the FDA through its facilities
inspection program. If our facilities or the facilities of third-party manufacturers cannot pass a pre-approval plant inspection, the FDA pre-market approval of our product
candidates will not be granted. 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 requirements, we may be subject to regulatory sanctions.

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

Under
our collaboration agreement with Amgen, Amgen had control over certain phases of the manufacturing process for Plenaxis and was itself performing certain manufacturing processes.
Due to the termination of our collaboration agreement with Amgen, to assure an adequate supply of drug product for continued clinical studies and, if Plenaxis is approved for marketing, for commercial
sale,

33

---

we were required to enter into a new agreement with a third party manufacturer to provide for the manufacturing functions that Amgen had been performing. Due to the use of a different manufacturer,
we may be required to undergo additional regulatory review and compliance procedures which could result in additional expenses and further delay the regulatory review and potential commercialization
of Plenaxis for the treatment of a defined sub-population of advanced prostate cancer patients.

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

For each stage of Plenaxis production we have relied, and expect in the near term to continue to rely, on a separate third-party manufacturer, and we currently
have not contracted, and in the near term do not expect to contract, with second-source suppliers for any of these production stages. Accordingly, the loss of one or more of these suppliers for any
reason, including as a result of fire, terrorism, acts of God or insolvency or bankruptcy, could result in substantial delays in, or substantially impair our ability to complete, clinical trials and
regulatory submissions or reviews, and could delay or impair substantially our sale or continued sale of Plenaxis products. Such delays or impairment, and the associated costs and expenses, may lower
our potential revenues and delay or prevent our attaining profitability. While we intend to evaluate the possibility of a second source of supply at each stage 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 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 development and commercialization and
sale of Plenaxis products without substantial and costly delays.

Alternative treatments are available which may impair our ability to capture market share for our potential products.

Alternative products exist or are under development to treat the diseases for which we are developing drugs. For example, the FDA has approved several drugs for
the treatment of prostate cancer that responds to changes in hormone levels. Even if the FDA approves Plenaxis for commercialization for the treatment of a defined sub-population of
advanced prostate cancer patients, the approval is expected to be limited to a particular group of patients or to administration over a limited period of time, and Plenaxis may not compete favorably
with existing treatments that already have an established market
share. If Plenaxis does not achieve broad market acceptance as a drug for the treatment of a defined sub-population of advanced prostate cancer patients, we may not become profitable.

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.

34

---

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

The continuing efforts of government and third-party payors to contain or reduce the costs of health care may limit our commercial opportunity. If government and
other third-party payors do not provide adequate coverage and reimbursement for Plenaxis or our other product candidates, physicians may not prescribe them. If we are unable to offer physicians
comparable or superior financial motivation to use Plenaxis or our other product candidates, we may not be able to generate significant revenues. 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, increasing
emphasis on managed care in the United States will continue to put pressure on the pricing of pharmaceutical products. Cost control initiatives could decrease the price that we receive for any
products in the future. Further, cost control initiatives could impair or diminish our ability or incentive, or the ability or incentive of potential partners, to commercialize Plenaxis or any of our
other products, and our ability to earn revenues from this commercialization.

Our
ability to commercialize pharmaceutical products, alone or with collaborators, may depend in part on the availability of reimbursement for our products from:



We
cannot predict the availability of reimbursement for newly approved drugs. 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.

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 biotechnology 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 and marketing. We also face competition from academic and research institutions and government agencies pursuing
alternatives to our products and technologies. We expect that all of our products under development will face intense competition from existing or future drugs. 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:



35

---



The
success of our competitors in any of these efforts would adversely affect our ability to develop, commercialize and market our product candidates and to 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 21 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.

If our technologies, processes or potential 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 or potential products 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 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.

36

---

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, the assignee of Indiana University Foundation, terminated our license with them, we could have to discontinue
development and commercialization of our Plenaxis products. 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 may have substantial exposure to product liability claims and may not have adequate insurance to cover those claims.

We may be held liable if any product we develop, or any product made by others using our technologies, causes injury. We have only limited product liability
insurance coverage for our potential products in clinical trials. We intend to expand our product liability insurance coverage for any of our products for which we obtain marketing approval. However,
this insurance may be prohibitively expensive or may not fully cover our potential liabilities. Our inability to obtain adequate insurance coverage at an acceptable cost could prevent or inhibit the
commercialization of our products. Our collaboration agreements with Amgen and Sanofi-Synthélabo included, and the agreements with them regarding the termination of those collaborations
also include, an indemnification of them for liabilities associated with the development and commercialization of Plenaxis. If a third party, including a former collaborator, sues us for any injury,
or for indemnification for losses, arising out of products made by us or using our technologies, our liability could exceed our total assets.

We may be unable to find suitable tenants for a portion of our facility.

In May 2001, we moved to a new 175,000 square foot facility in Waltham, Massachusetts. We are currently seeking to sublease a portion of this facility. To
date, we have not been able to find suitable sub-tenants to occupy this space. If we are unable to find suitable sub-tenants, we will not be able to offset with rental income
any of the substantial mortgage payments and other operating expenses associated with our facility.

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 Malcolm L. Gefter, Ph.D., our Chief Executive Officer and
Chairman of the Board, and William K. Heiden, our President and Chief Operating Officer. 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. 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 retain these
personnel or to develop this expertise

37

---

could prevent, or result in delays in, the research, development and commercialization of Plenaxis or our other potential products.

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 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.

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 amortization
expenses related to goodwill and other intangible assets.

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:



38

---



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
without current product revenues and 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.

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.

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.

39

---

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 $0.8 million decrease in the fair value of our investments as of December 31, 2002. The same hypothetical increase in interest rates as of
December 31, 2001 would have resulted in an approximate $0.7 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, 2002, approximately 51% of our total portfolio will mature 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 provides for
up to $33.0 million in borrowings at a floating interest rate indexed to 30-day LIBOR. Concurrent with that transaction, the subsidiary also entered into an interest rate cap
agreement which limits exposure to interest rate increases above a certain threshold. Due to the decrease in interest rates since we entered into this interest rate cap, we currently do not believe
that there is material interest rate risk exposure with respect to the loan agreement. In addition, we believe that we have mitigated our risk relating to significant adverse fluctuations in interest
rates with respect to borrowings under the loan agreement, and we do not believe that a 10% change in interest rates would have a material impact on our results of operations or cash flows.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements required by this Item are included on pages F-1 through F-19 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.

40

---



PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information required by this Item with respect to directors, executive officers 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" 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 21, 2003. 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," "Summary Compensation Table," "Option Grants in Fiscal 2002,"
"Aggregated Option Exercises in Last Fiscal Year and Option Values at December 31, 2002," "Employment Agreements/Change of Control Arrangements" 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 21, 2003.
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 21, 2003. 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 21, 2003. Such information is incorporated herein by reference.

ITEM 14.    CONTROLS AND PROCEDURES.



Our chief executive officer and chief financial officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) as of a date within 90 days prior to the filing date of this
annual report, referred to as the evaluation date. Based on this evaluation, these officers have concluded that, as of the evaluation date, the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to the Company required to be included in the Company's reports filed or submitted under the Exchange Act.



Since the evaluation date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect
these controls. There were no significant deficiencies or material weaknesses, and therefore, there were no corrective actions required or undertaken.

41

---

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.



The financials statements filed as part of this report are listed on the Index to Consolidated Financial Statements located on page F-1, immediately
following the Certifications of the chief executive officer and chief financial officer, which immediately follow 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                                                                                                                                                                                                                                                              
|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*       |  | Second Amended and Restated 1995 Stock Plan (3)                                                                                                                                                                                                                                                 
|10.2*       |  | Amendment No. 1 to the Second Amended and Restated 1995 Stock Plan (8)                                                                                                                                                                                                                          
|10.3*       |  | Executive Management Bonus Plan, as amended and restated as of September 12, 2002 (10)                                                                                                                                                                                                          
|10.4*       |  | Employee Stock Purchase Plan (4)                                                                                                                                                                                                                                                                
|10.5*       |  | Amendment No. 1 to the Employee Stock Purchase Plan (7)                                                                                                                                                                                                                                         
|10.6*       |  | Management Incentive Program                                                                                                                                                                                                                                                                    
|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 (9)                                                                                                                                                                                                              
|10.10*      |  | Promissory Note dated May 16, 2002 executed by William K. Heiden in favor of PRAECIS (9)                                                                                                                                                                                                        
|10.11*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Malcolm L. Gefter, Ph.D. (9)                                                                                                                                                                                                       
|10.12*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Kevin F. McLaughlin (9)                                                                                                                                                                                                            
|10.13*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Marc B. Garnick, M.D. (9)                                                                                                                                                                                                          
|10.14      |  | License Agreement effective as of October 17, 1996 by and between PRAECIS and Indiana University Foundation, as amended as of June 3, 1998 (1)                                                                                                                                                  

42

---

|10.15  |  | Supply Agreement dated as of July 23, 1998 by and between PRAECIS and Salsbury Chemicals, Inc. (1)                                                                                                                                                                                                                                                      
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.16  |  | 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)
|10.17 |  | Commercial Supply Agreement dated December 4, 2002 and effective as of June 1, 2002 by and between Baxter Pharmaceutical Solutions LLC and PRAECIS                                                                                                                                                                                                      
|10.18   |  | Termination Agreement dated as of August 19, 2002 by and between PRAECIS and Amgen Inc. (10)                                                                                                                                                                                                                                                            
|10.19   |  | 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)                                                                                                                                                                                                                
|10.20   |  | 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)                                                                                                                                                                   
|10.21   |  | Guaranty of Costs and Completion dated as of July 11, 2000 (3)                                                                                                                                                                                                                                                                                          
|10.22   |  | Guaranty of Non-Recourse Exceptions dated as of July 11, 2000 (3)                                                                                                                                                                                                                                                                                       
|10.23   |  | Environmental Compliance and Indemnity Agreement dated as of July 11, 2000 executed by 830 Winter Street LLC and PRAECIS (3)                                                                                                                                                                                                                            
|10.24   |  | 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 (5)                                                                                                                                                                                                                                                                                                                     
|23.1    |  | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                                                                                                                                                                                                      
|24.1    |  | Power of Attorney (included on the signature page of this Report on Form 10-K)                                                                                                                                                                                                                                                                          
|99.1    |  | 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                                                                                                                                                                                                       
|99.2    |  | 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                                                                                                                                                                                                       

---

43

---



On October 25, 2002, we filed a Current Report on Form 8-K to file under Item 5 (Other Events) a copy of our Press Release dated
October 25, 2002.

44

---



SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City of Waltham, Commonwealth of Massachusetts, on this 19th day of March, 2003.

| |  | PRAECIS PHARMACEUTICALS INCORPORATED
| |  | ------------------------------------
| |  | By:                                 

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Malcolm L. Gefter and Kevin F. McLaughlin 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 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, as amended, this Report has been signed below by the following persons on behalf of the registrant and in the
capacities indicated on March 19, 2003.

|Signature                                           |  | Title                                                                                                               
|--------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------
|                                                    |  |                                                                                                                     
|/s/MALCOLM L. GEFTER, PH.D.Malcolm L. Gefter, Ph.D. |  | Chairman of the Board and Chief Executive Officer (Principal Executive Officer)                                     
|/s/KEVIN F. MCLAUGHLINKevin F. McLaughlin           |  | Chief Financial Officer, Senior Vice President, Treasurer and Secretary (Principal Financial and Accounting Officer)
|/s/G. LEONARD BAKER, JR.G. Leonard Baker, Jr.       |  | Director                                                                                                            
|/s/HENRY F. MCCANCEHenry F. McCance                 |  | Director                                                                                                            
|                                                    |  |                                                                                                                     

45

---

|/s/WILLIAM R. RINGOWilliam R. Ringo   |  | Director
|------------------------------------- |  | --------
|/s/DAVID B. SHARROCKDavid B. Sharrock |  | Director
|/s/PATRICK J. ZENNERPatrick J. Zenner |  | Director
|/s/ALBERT L. ZESIGERAlbert L. Zesiger |  | Director

46

---



CERTIFICATIONS

I,
Malcolm L. Gefter, certify that:





|Date: March 19, 2003                                          |  |  | 
|------------------------------------------------------------- |  |  | 
|/s/MALCOLM L. GEFTERMalcolm L. Gefter
Chief Executive Officer |  |  | 

47

---

I,
Kevin F. McLaughlin, certify that:





|Date: March 19, 2003                                              |  |  | 
|----------------------------------------------------------------- |  |  | 
|/s/KEVIN F. MCLAUGHLINKevin F. McLaughlin
Chief Financial Officer |  |  | 

48

---



PRAECIS PHARMACEUTICALS INCORPORATED  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                |  | Page
|----------------------------------------------- |  | ----
|Report of Independent Auditors                  |  | 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-7 
|Notes to Consolidated Financial Statements      |  | F-8 

F-1

---



Report of Independent Auditors

Board
of Directors and Stockholders
PRAECIS PHARMACEUTICALS INCORPORATED

We
have audited the accompanying consolidated balance sheets of PRAECIS PHARMACEUTICALS INCORPORATED as of December 31, 2001 and 2002, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PRAECIS PHARMACEUTICALS INCORPORATED at
December 31, 2001 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.



Boston,
Massachusetts
January 22, 2003

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                                                                                                                          |              |                                           
|                                     | Prepaid expenses and other assets                                                                                                            |              |                                           
|                                     |                                                                                                                                              |              |                                           
|                                     |                                                                                                                                              |              | Total current assets                      
|Property and equipment, net          |                                                                                                                                              |              | 74,200                                    
|Due from officer                     |                                                                                                                                              |              |                                          
|Other assets                         |                                                                                                                                              |              | 468                                       
|                                     |                                                                                                                                              |              |                                           
|                                     |                                                                                                                                              |              | Total assets                              
|                                     |                                                                                                                                              |              |                                           
|Liabilities and Stockholders' Equity |                                                                                                                                              |              |                                           
|Current liabilities:                 |                                                                                                                                              |              |                                           
|                                     | Accounts payable                                                                                                                             |              | $                                         
|                                     | Accrued expenses                                                                                                                             |              |                                           
|                                     |                                                                                                                                              |              |                                           
|                                     |                                                                                                                                              |              | Total current liabilities                 
|Long-term debt                       |                                                                                                                                              |              | 33,000                                    
|Commitments and contingencies        |                                                                                                                                              |              |                                           
|Stockholders' equity:                |                                                                                                                                              |              |                                           
|                                     | Common Stock, $0.01 par value; 200,000,000 shares authorized; 51,116,135 shares in 2001 and 51,801,423 shares in 2002 issued and outstanding |              |                                           
|                                     | Additional paid-in capital                                                                                                                   |              |                                           
|                                     | Accumulated other comprehensive income                                                                                                       |              |                                           
|                                     | 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, |                         
|------------------------------------------------------------- | -------------------------- | ----------------------- | ------------------------
|
|Corporate collaboration revenue                               |                            | $                       | 61,189                  
|Costs and expenses:                                           |                            |                         |                         
|                                                              | Research and development   |                         |                         
|                                                              | Sales and marketing        |                         |                         
|                                                              | General and administrative |                         |                         
|                                                              |                            |                         |                         
|                                                              |                            |                         | Total costs and expenses
|                                                              |                            |                         |                         
|Operating loss                                                |                            |                         | (36,455                 
|Interest income                                               |                            |                         | 8,195                   
|Interest expense                                              |                            |                         | (376                    
|Gain on assignment of leasehold improvements                  |                            |                         |                        
|Gain on termination of collaboration agreement                |                            |                         |                        
|                                                              |                            |                         |                         
|Loss before income taxes                                      |                            |                         | (28,636                 
|Provision for income taxes                                    |                            |                         | 100                     
|                                                              |                            |                         |                         
|Net loss                                                      |                            | $                       | (28,736                 
|                                                              |                            |                         |                         
|Net loss per share:                                           |                            |                         |                         
|                                                              | Basic and diluted          |                         | $                       
|                                                              |                            |                         |                         
|Weighted average number of common shares:                     |                            |                         |                         
|                                                              | Basic and diluted          |                         |                         
|Unaudited pro forma net loss per share:                       |                            |                         |                         
|                                                              | Basic and diluted          |                         | $                       
|                                                              |                            |                         |                         
|Unaudited pro forma weighted average number of common shares: |                            |                         |                         
|                                                              | Basic and diluted          |                         |                         

See accompanying notes.

F-4

---

PRAECIS PHARMACEUTICALS INCORPORATED
Consolidated Statements of Stockholders' Equity

(In thousands, except share data)

|                                                                                      |  | Preferred Stock |  
|------------------------------------------------------------------------------------- |  | --------------- | -
|
|
|Balance at December 31, 1999                                                          |  | 1,041,166       |  
|Common Stock issued upon initial public offering (net of $7,735 in offering costs)    |  |                 |  
|Conversion of Preferred Stock on initial public offering                              |  | (1,041,166      | )
|Stock compensation                                                                    |  |                 |  
|Issuance of Common Stock                                                              |  |                 |  
|Common Stock issued upon stock grants                                                 |  |                 |  
|Common Stock issued upon warrant exercises                                            |  |                 |  
|Net loss                                                                              |  |                 |  
|                                                                                      |  |                 |  
|Balance at December 31, 2000                                                          |  |                 |  
|Net loss                                                                              |  |                 |  
|Unrealized gain on marketable securities                                              |  |                 |  
|Total comprehensive loss                                                              |  |                 |  
|Common Stock issued upon follow-on public offering (net of $10,476 in offering costs) |  |                 |  
|Stock compensation                                                                    |  |                 |  
|Repurchase of Common Stock                                                            |  |                 |  
|Issuance of Common Stock                                                              |  |                 |  
|                                                                                      |  |                 |  
|Balance at December 31, 2001                                                          |  |                 |  
|Net loss                                                                              |  |                 |  
|Unrealized loss on marketable securities                                              |  |                 |  
|Total comprehensive loss                                                              |  |                 |  
|Stock compensation                                                                    |  |                 |  
|Issuance of Common Stock                                                              |  |                 |  
|                                                                                      |  |                 |  
|Balance at December 31, 2002                                                          |  |                 |  
|                                                                                      |  |                 |  

See accompanying notes.

F-5

---

|                                                                                      |  | Common Stock |   |   |     | Accumulated
Other
Comprehensive
Income |   |         |   |   |     
|------------------------------------------------------------------------------------- |  | ------------ | - | - | --- | -------------------------------------- | - | ------- | - | - | ----
|
|
|Balance at December 31, 1999                                                          |  | 6,358,684    |   | $ | 64  |                                        | $ | 88,710  |   |   |     
|Common Stock issued upon initial public offering (net of $7,735 in offering costs)    |  | 9,200,000    |   |   | 92  |                                        |   | 84,173  |   |   |     
|Conversion of Preferred Stock on initial public offering                              |  | 25,607,850   |   |   | 256 |                                        |   | (221    | ) |   |     
|Stock compensation                                                                    |  |              |   |   |     |                                        |   | 1,325   |   |   |     
|Issuance of Common Stock                                                              |  | 1,006,787    |   |   | 10  |                                        |   | 1,884   |   |   |     
|Common Stock issued upon stock grants                                                 |  | 4,250        |   |   |     |                                        |   | 66      |   |   |     
|Common Stock issued upon warrant exercises                                            |  | 106,628      |   |   | 1   |                                        |   |         |   |   |     
|Net loss                                                                              |  |              |   |   |     |                                        |   |         |   |   |     
|                                                                                      |  |              |   |   |     |                                        |   |         |   |   |     
|Balance at December 31, 2000                                                          |  | 42,284,199   |   |   | 423 |                                        |   | 175,937 |   |   |     
|Net loss                                                                              |  |              |   |   |     |                                        |   |         |   |   |     
|Unrealized gain on marketable securities                                              |  |              |   |   |     |                                        |   |         |   | $ | 730 
|                                                                                      |  |              |   |   |     |                                        |   |         |   |   |     
|Total comprehensive loss                                                              |  |              |   |   |     |                                        |   |         |   |   |     
|Common Stock issued upon follow-on public offering (net of $10,476 in offering costs) |  | 7,587,500    |   |   | 76  |                                        |   | 175,816 |   |   |     
|Stock compensation                                                                    |  |              |   |   |     |                                        |   | (265    | ) |   |     
|Repurchase of Common Stock                                                            |  | (200,000     | ) |   | (2  | )                                      |   | (51     | ) |   |     
|Issuance of Common Stock                                                              |  | 1,444,436    |   |   | 14  |                                        |   | 2,450   |   |   |     
|                                                                                      |  |              |   |   |     |                                        |   |         |   |   |     
|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 
|                                                                                      |  |              |   |   |     |                                        |   |         |   |   |     

See accompanying notes.

F-6

---



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

|                                                                        |                                                | Year Ended December 31,           |        
|----------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------- | -------
|
|Operating activities:                                                   |                                                |                                   |        
|Net loss                                                                |                                                | $                                 | (28,736
|Adjustments to reconcile net loss to cash used in operating activities: |                                                |                                   |        
|                                                                        | Depreciation and amortization                  |                                   |        
|                                                                        | Gain on assignment of leasehold improvements   |                                   |        
|                                                                        | Gain on termination of collaboration agreement |                                   |        
|                                                                        | Deferred income taxes                          |                                   |        
|                                                                        | Stock compensation                             |                                   |        
|                                                                        | Changes in operating assets and liabilities:   |                                   |        
|                                                                        |                                                | Accounts receivable               |        
|                                                                        |                                                | Refundable income taxes           |        
|                                                                        |                                                | Unbilled revenues                 |        
|                                                                        |                                                | Materials inventory               |        
|                                                                        |                                                | Prepaid expenses and other assets |        
|                                                                        |                                                | Due from officer                  |        
|                                                                        |                                                | Accounts payable                  |        
|                                                                        |                                                | Accrued expenses                  |        
|                                                                        |                                                | Deferred revenue                  |        
|                                                                        |                                                | Advance payments                  |        
|                                                                        |                                                | Income taxes payable              |        
|                                                                        |                                                |                                   |        
|Net cash used in operating activities                                   |                                                |                                   | (19,955
|Investing activities:                                                   |                                                |                                   |        
|Purchase of available-for-sale securities                               |                                                |                                   |       
|Sales and maturities of available-for-sale securities                   |                                                |                                   |       
|Proceeds from disposition of property and equipment                     |                                                |                                   |       
|Purchase of property and equipment                                      |                                                |                                   | (52,523
|                                                                        |                                                |                                   |        
|Net cash used in investing activities                                   |                                                |                                   | (52,523
|Financing activities:                                                   |                                                |                                   |        
|Follow-on public offering proceeds                                      |                                                |                                   |       
|Initial public offering proceeds                                        |                                                |                                   | 84,265 
|Proceeds from debt issuance                                             |                                                |                                   | 24,000 
|Proceeds from the issuance of Common Stock, options and warrants        |                                                |                                   | 1,895  
|Repurchase of Common Stock                                              |                                                |                                   |       
|                                                                        |                                                |                                   |        
|Net cash provided by financing activities                               |                                                |                                   | 110,160
|                                                                        |                                                |                                   |        
|Increase (decrease) in cash and cash equivalents                        |                                                |                                   | 37,682 
|Cash and cash equivalents at beginning of year                          |                                                |                                   | 94,525 
|                                                                        |                                                |                                   |        
|Cash and cash equivalents at end of year                                |                                                | $                                 | 132,207
|                                                                        |                                                |                                   |        

See accompanying notes.

F-7

---



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 a drug discovery
and development company engaged in the development of drugs for the treatment of human diseases.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income
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 real estate subsidiary. 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, 2002, the Company's cash, cash
equivalents and marketable securities had a maximum maturity of less than three years with an average maturity of approximately five 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.

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 the balance sheet at

F-8

---

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.

Property and Equipment

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

| | Building                        |  | 30 years                                                            
| | ------------------------------- |  | --------------------------------------------------------------------
| | Building improvements           |  | 30 years or the remaining life of the building, whichever is shorter
| | Laboratory and office equipment |  | 37 years or term of lease, whichever is shorter                    

Interest
capitalized in connection with facilities is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. Interest capitalized into
construction in progress during 2000, 2001 and 2002 was approximately $0.8 million, $0.6 million and zero, respectively.

Revenue Recognition

Revenue is deemed earned when all of the following have occurred: all obligations of the Company relating to the revenue have been met and the earning process is
complete; the monies received or receivable are not refundable irrespective of research results; and there are neither future obligations nor future milestones to be met by the Company with respect to
such revenue.

Corporate collaborations.Revenues are earned based upon research expenses incurred and milestones achieved.
Non-refundable payments upon initiation of contracts are deferred and amortized over the period in which the Company is obligated to participate on a continuing and substantial basis in
the
research and development activities outlined in each contract. Amounts received in advance of reimbursable expenses are recorded as deferred revenue until the related expenses are incurred. Milestone
payments are recognized as revenue in the period in which the parties agree that the milestone has been achieved and it is deemed that no further obligations exist.

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.

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, salaries, lab supplies and other fixed facility costs used in the Company's research and development
operations.

F-9

---

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board ("APB") Opinion No. 25,Accounting for Stock Issued to
Employees("APB No. 25"), 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
reconciliation of net loss and net loss per share, as reported, to pro forma net loss and net loss per share giving effect to employee stock-based compensation accounted for using
the fair value accounting method, is as follows:

|                                                                                                                                                                                                               |  | Year Ended December 31, |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|
|
|Net loss, as reported                                                                                                                                                                                          |  | $                       | (28,736
|Deduct/(add): Stock compensation cost as computed under APB No. 25                                                                                                                                             |  |                         | 1,391  
|Deduct: Stock based employee compensation cost, net of related tax effects, that would have been included in the determination of net loss as reported if the fair value method had been applied to all awards |  |                         | (6,127 
|                                                                                                                                                                                                               |  |                         |        
|Pro forma net loss                                                                                                                                                                                             |  | $                       | (33,472
|                                                                                                                                                                                                               |  |                         |        
|Diluted net loss per share, as reported                                                                                                                                                                        |  | $                       | (0.95  
|                                                                                                                                                                                                               |  |                         |        
|Diluted net loss per share, pro forma                                                                                                                                                                          |  | $                       | (1.11  
|                                                                                                                                                                                                               |  |                         |        

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:

2000

2001

2002Risk-free interest rate

6.2
%
4.0
%
4.0
%Expected life (years)

5

5

6Volatility

84
%
84
%
103
%


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

On October 20, 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived
Assets("SFAS No.144"). SFAS No. 144 supersedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, however it retains the fundamental provision of that statement related to the recognition and measurement of the impairment of
long-lived assets to be held and used. In addition, SFAS No. 144 provides additional guidance on estimating cash flows when performing a recoverability test, requiring that a
long-lived asset to be disposed of other than by sale be classified as an asset held for sale until it is disposed of, and establishes more restrictive criteria to classify an asset as
held for sale. SFAS No. 144 became effective

F-10

---

in the first quarter of 2002. The adoption of SFAS No. 144 did not have any effect on the Company's consolidated results of operations in 2002.

In
July 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities("SFAS
No. 146"). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring) ("EITF Issue No. 94-3"). The principal difference between SFAS No. 146 and EITF Issue No. 94-3 relates to SFAS
No. 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3,
a liability for an exit cost as generally defined in EITF Issue No. 94-3 was recognized at the date of an entity's commitment to an exit plan. Therefore, SFAS No. 146
eliminates the definition and requirements for recognition of exit costs in EITF Issue No. 94-3. SFAS No. 146 also establishes that fair value is the objective for initial
measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged.
The Company does not anticipate the adoption of SFAS No. 146 to have a material impact on its consolidated financial statements.

On
December 31, 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based CompensationTransition and
Disclosure("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition to the fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28,Interim Financial
Reporting("APB No. 28"), to include increased pro-forma disclosure of the effects of stock-based employee compensation on the results of operations. SFAS
No. 148 became effective for fiscal years ending after December 15, 2002. The Company has elected to continue to account for employee stock-based compensation using the intrinsic value
method as described in APB No. 25 and therefore, the adoption of SFAS No. 148 did not have a material impact on the Company's consolidated results of operations in 2002.

Comprehensive Loss

Comprehensive loss consists of net loss and unrealized gains or losses on marketable securities and is reflected in the consolidated statements of stockholders'
equity.

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 common share is the same as basic net loss per common share 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.

F-11

---

Pro Forma Net Loss Per Share (Unaudited)

Pro forma net loss per share is computed using the historical basic and diluted weighted average number of outstanding shares of Common Stock assuming conversion
of the outstanding shares of
Series A, B, C, D and E convertible preferred stock, par value $.01 per share ("Convertible Preferred Stock") into a total of 25,607,850 shares of Common Stock as of their original dates of
issuance.

|                                                                                                                      |  | Year Ended
December 31, 2000
|--------------------------------------------------------------------------------------------------------------------- |  | ----------------------------
|
|Pro Forma (unaudited):                                                                                                |  |                             
|Weighted average number of common shares outstanding used in computing basic and diluted net loss per share           |  | 30,259                      
|Adjustment to reflect the effect of the assumed conversion of preferred stock from the date of issuance               |  | 8,535                       
|                                                                                                                      |  |                             
|Weighted average number of common shares outstanding used in computing pro forma basic and diluted net loss per share |  | 38,794                      
|                                                                                                                      |  |                             

3.    Marketable Securities

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

December 31, 2002Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
ValueU.S. government agencies:Due in one year or less

$
3,089

$
10

$


$
3,099Due in one to three years


33,999


140


(2
)

34,137U.S. corporate securities:Due in one year or less


31,153


158


(109
)

31,202Due in one to three years


61,678


54


(48
)

61,684Total marketable securities

$
129,919

$
362

$
(159
)
$
130,122


December 31, 2001Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
ValueU.S. government agencies:Due in one year or less

$
37,558

$
208

$
(101
)
$
37,665Due in one to three years


52,311


154


(3
)

52,462U.S. corporate securities:Due in one year or less


5,250





(11
)

5,239Due in one to three years


25,682


483





26,165Total marketable securities

$
120,801

$
845

$
(115
)
$
121,531


F-12

---

4.    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. The
loan is full recourse, uncollateralized, bears no interest and becomes due and payable in May of 2012. Under the terms of the promissory note (the "Note") executed in connection with the loan, 10% of
the original loan principal will be forgiven annually on each anniversary date of the Note, provided that the officer remains an employee of the Company. The Company is not responsible for the
personal income tax implications related to the forgiveness of this Note. Upon the officer's voluntary termination of employment with the Company, with certain exceptions, and upon termination by the
Company of the officer's employment for cause, the Note becomes immediately due and payable.

5.    Property and Equipment

Property and equipment consist of the following:

December 31,2001

2002(in thousands)Building

$
56,314

$
56,784Land


10,500


10,500Laboratory and office equipment


14,312


15,306Construction in progress





29281,126


82,882Less: accumulated depreciation and amortization


6,926


11,630$
74,200

$
71,252


6.    Accrued Expenses

Accrued expenses consist of the following:

December 31,2001

2002(in thousands)Clinical trial costs

$
4,514

$
2,644Other


3,194


4,431$
7,708

$
7,075


7.    Stockholders' Equity

Public Offerings

In May 2000, the Company completed an initial public offering of 9,200,000 shares of Common Stock resulting in net proceeds to the Company of approximately
$84.3 million. In February 2001, the Company completed a follow-on public offering of its Common Stock. The Company sold 7,587,500 shares of Common Stock resulting in net
proceeds to the Company of approximately $175.9 million.

F-13

---



7.    Stockholders' Equity (Continued)

Convertible Preferred Stock

Upon the closing of the Company's initial public offering, all of the outstanding shares of the Company's Convertible Preferred Stock automatically converted into
25,607,850 shares of Common Stock. Immediately following the automatic conversion of the Convertible Preferred Stock, the Company filed an amended and restated certificate of incorporation. Under the
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.

Employee Stock Purchase Plan

On February 2, 2000, the Board of Directors adopted, effective as of July 3, 2000, an Employee Stock Purchase Plan and authorized the reservation of
160,000 shares of Common Stock for issuance thereunder. Under the Employee Stock Purchase Plan, 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 the Common Stock at the beginning or the end of each six month period during the term of the Employee Stock Purchase Plan. Participation is limited to the lesser of
10% of the employee's compensation or $25,000 in any calendar year. On March 14, 2002, the Board of Directors approved an amendment to the Employee Stock Purchase Plan extending the initial
two-year term by one additional year. During 2000, 2001 and 2002, the Company issued 9,497, 35,532 and 53,571 shares of Common Stock, respectively, under the Employee Stock Purchase Plan.

F-14

---

Warrants

In connection with its lease financing arrangement entered into on March 29, 1995, the Company agreed to issue warrants to purchase 14,925 shares of
Series A Convertible Preferred Stock at $10.085 per share, which, pursuant to the terms thereof, converted into warrants to purchase 111,495 shares of Common Stock at $1.35 per share upon the
completion of the Company's initial public offering in May 2000. The fair value of the warrants, when issued periodically over the two year period from March 1995 through
March 1997, was not material. Between August and November of 2000, all of the warrants were exercised in three separate net issuance exercises. As a result, the Company issued 106,628 shares of
Common Stock.

In
May 1997, Sanofi-Synthélabo Inc. (formerly Sylamerica, Inc.), a wholly owned subsidiary of Sanofi-Synthélabo S.A. (formerly
Synthélabo S.A.) purchased 1,617,772 shares of Common Stock and a warrant to purchase 404,445 shares of Common Stock, for an aggregate purchase price of $10.0 million. The
warrant had a five-year term, was exercisable at a price of $12.88 per share and expired on May 13, 2002.

Stock Option Plan

The Second Amended and Restated 1995 Stock Plan, as amended (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 consultants under the Plan generally vest over the period of service with the Company. On March 14, 2002, the Board of
Directors approved the Plan, as amended to increase by 3,000,000 the number of shares of Common Stock reserved for issuance under the Plan. At December 31, 2002, a total of 14,375,000 shares of
Common Stock were approved for issuance under the Plan.

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

|                                    |  | 2000  |   | 2001 |       | 2002
|----------------------------------- |  | ----- | - | ---- | ----- | ----
|
|Options outstanding at January 1,   |  | 8,212 |   | $    | 3.35  |     
|Granted                             |  | 1,528 |   |      | 22.99 |     
|Exercised                           |  | (997  | ) |      | 1.74  |     
|Cancelled                           |  | (508  | ) |      | 10.70 |     
|                                    |  |       |   |      |       |     
|Options outstanding at December 31, |  | 8,235 |   | $    | 6.74  |     
|                                    |  |       |   |      |       |     
|Options exercisable at December 31, |  | 3,328 |   | $    | 2.55  |     
|                                    |  |       |   |      |       |     

The
weighted average per share fair value of options granted was $16.64 in 2000, $10.05 in 2001 and $2.75 in 2002. At December 31, 2002, there were 9,992,449 shares of Common
Stock reserved for the exercise of stock options and for issuances under the Employee Stock Purchase Plan, including 2,869,608 options available for grant under the Plan.

F-15

---

The
following table presents weighted average price and weighted average remaining contractual life information about significant option groups outstanding at December 31, 2002
(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

1,230

3.6

$
0.53

921

$
0.62$1.61$6.38

3,845

7.5

$
4.46

1,584

$
4.95$6.39$16.25

1,015

7.6

$
11.58

514

$
11.20$16.26$42.00

971

7.8

$
26.39

311

$
26.217,061






3,330


On
October 3, 2001, an officer of the Company, exercised an option to purchase 200,000 shares of Common Stock at an exercise price of $0.27 per share. On
November 30, 2001, this option exercise was rescinded, and accordingly, the officer returned to the Company the 200,000 shares of Common Stock acquired upon the exercise of the option, the
Company returned to the officer the option exercise price and the option to purchase 200,000 shares of Common Stock was restored. During 2001, the Company recognized approximately $256,000 in
compensation expense related to this transaction.

8.    Income Taxes

The Company's provision for income taxes is as follows:

Year Ended December 31,2000

2001

2002(in thousands)Current:Federal

$
(5,575
)
$


$
State


100





(5,475
)




Deferred:Federal


5,575





5,575





$
100

$


$



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

Year Ended December 31,2000

2001

2002(in thousands)Statutory federal income tax benefit

$
(9,736
)
$
(18,565
)
$
(15,614
)Increase in valuation allowance


9,631


18,565


15,570Other


205





44Income tax provision

$
100

$


$



F-16

---

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

December 31,2001

2002(in thousands)Deferred tax assets:Net operating losses

$
21,010

$
51,943Property and equipment


4,095


2,651Accrued expenses


12,791


1,813Research and development tax credits


4,501


7,640Other


102


74Total deferred tax assets


42,499


64,121Valuation allowance


(42,499
)

(64,121
)$


$



At
December 31, 2001 and 2002, the Company has provided a valuation allowance for the value of the deferred tax assets. The valuation allowance increased by $27.5 million
in 2001 and $21.6 million in 2002 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 $129.0 million, which expire through 2022. 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, 2002 would be allocated as follows (in
thousands):

Reported in the statement of operations

$
59,429Reported in additional paid-in capital


4,692$
64,121


9.    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. Upon initiation, the Company received a
one-time, non-refundable payment of $4.7 million. This initiation fee was recognized into revenue through 2001, which was the period during which the Company was
obligated under the agreement to participate on a continuing and substantial basis in the research, development and manufacturing process development activities.

In
October 2001, Sanofi-Synthélabo notified the Company that it was terminating the Sanofi-Synthélabo agreement effective December 31, 2001.
As a result of the termination of the Sanofi-Synthélabo agreement, all licenses for Plenaxis granted to Sanofi-Synthélabo under the agreement, and all rights of
Sanofi-Synthélabo in the Plenaxis program, have terminated. In addition, in connection with the termination of the Sanofi-Synthélabo agreement, the Company received in
2002 a final

F-17

---

reimbursement payment from Sanofi-Synthélabo of approximately $1.0 million for collaboration expenses incurred by the Company.

The
Company recognized revenues in 2000, 2001 and 2002 of approximately $4.1 million, $2.1 million and $1.0 million, respectively, under the
Sanofi-Synthélabo agreement.

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 accordance with the License Agreement, the Company received from Amgen a $10.0 million, one-time, non-refundable
payment upon initiation. This initiation fee was recognized into revenue through 2001, which was the period during which the Company was obligated under the License Agreement to participate on a
continuing and substantial basis in the research, development and manufacturing process development activities. In addition to the signing payment, Amgen paid the first $175.0 million of all
authorized costs and expenses associated with the development and commercialization of Plenaxis products, including the cost of materials, in the United States. Following Amgen's completion of this
funding during the third quarter of 2000, the Company became responsible for one-half of all subsequent United States research and development costs for Plenaxis products through the
launch period. Additionally, the Company was to reimburse Amgen for one-half of the costs associated with establishing a sales and marketing infrastructure for Plenaxis products in the
United States.

In
September 2001, Amgen notified the Company that it was terminating the License Agreement effective December 17, 2001. As a result of the termination of the License
Agreement, all licenses for Plenaxis granted to Amgen under the License Agreement, and all rights of Amgen in the Plenaxis
program, have terminated. At that time, the Company accrued an estimate of its potential liability of approximately $29.1 million under the License Agreement.

In
January 2002, the Company assumed all of Amgen's rights and obligations under the Development and Supply Agreement with UCB S.A. ("UCB"), including the obligation to pay UCB
approximately $16.1 million for the supply of clinical and commercial volumes of pharmaceutical peptide to be delivered by the end of 2002. Approximately $4.4 million related to this
agreement was remaining at December 31, 2002 which the Company anticipates paying during the first half of 2003.

In
August 2002, the Company and Amgen finalized a termination agreement with respect to the termination by Amgen of the License Agreement (the "Termination Agreement"). Under the
terms of the Termination Agreement, the Company paid to Amgen $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, any existing materials inventory. As a result of the Company's payment of $13.0 million plus certain related legal fees in
connection with the Termination Agreement, the Company eliminated the excess of its previously accrued $29.1 million liability related to Amgen and recognized a gain of $16.0 million
during the third quarter of 2002.

The
Company recognized revenues in 2000, 2001 and 2002 of approximately $57.1 million, $7.8 million and zero, respectively, under the Amgen agreement.

F-18

---

10.    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 for approximately
$41.3 million, the Company's wholly owned real estate 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. Advances bear interest at a rate equal to the 30-day LIBOR plus 2.0% (3.38% at December 31, 2002). Interest is payable monthly in
arrears. Principal is due and payable in full on July 30, 2003, subject to two one-year extension options, exercisable at the Company's option. Since the Company has the ability and
intent to exercise the first such option to extend the maturity date until July 30, 2004, the loan has been classified as long-term debt in the accompanying consolidated balance
sheet. The loan is secured by the facility, together with all fixtures, equipment, improvements and other related items, and by all rents, income or profits received by the Company's real estate
subsidiary. The Company occupied this facility during May 2001 and, as planned, is actively seeking to sublease a portion of the facility.

The
Company has entered into an interest rate cap agreement (the "Interest Rate Cap Agreement") in order to reduce the potential impact of interest rate increases on future income. At
December 31, 2002, the notional amount and fair market value under the Interest Rate Cap Agreement were $33.0 million
and zero, respectively. Interest paid under the loan agreement approximated interest expense in 2000, 2001 and 2002.

During
September 2001, the Company terminated the lease for, and all future obligations with respect to, its Cambridge, Massachusetts facility. In October 2001, the Company
assigned to a third party the Company's right, title and interest in and to the Company's lease for the New Jersey facility and the third party has assumed all obligations thereunder.

11.    Commitments

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. In exchange for the license, the Company 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, if any. The Company made milestone payments of $500,000 in 2000 under the IUF agreement.

Baxter Pharmaceutical Solutions LLC

On December 4, 2002, the Company signed a five-year commercial supply agreement (the "Baxter Agreement") with Baxter Pharmaceutical Solutions
LLC ("Baxter") related to the fill and finish steps of the manufacturing process related to Plenaxis. Under the terms of the Baxter Agreement, the Company is required to purchase a minimum of $375,000
of product from Baxter each calendar year until the first anniversary of the first commercial shipment of Plenaxis, at which time the minimum annual purchase commitment will increase to $650,000. The
Company made no payments under the Baxter Agreement during 2002.

F-19

---

Exhibit Index

|Exhibit No. |  | Exhibit                                                                                                                                                                                                                                                                                                                                                 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Certificate of Incorporation (2)                                                                                                                                                                                                                                                                                                   
|3.2         |  | Third Amended and Restated By-Laws                                                                                                                                                                                                                                                                                                                      
|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*       |  | Second Amended and Restated 1995 Stock Plan (3)                                                                                                                                                                                                                                                                                                         
|10.2*       |  | Amendment No. 1 to the Second Amended and Restated 1995 Stock Plan (8)                                                                                                                                                                                                                                                                                  
|10.3*       |  | Executive Management Bonus Plan, as amended and restated as of September 12, 2002 (10)                                                                                                                                                                                                                                                                  
|10.4*       |  | Employee Stock Purchase Plan (4)                                                                                                                                                                                                                                                                                                                        
|10.5*       |  | Amendment No. 1 to the Employee Stock Purchase Plan (7)                                                                                                                                                                                                                                                                                                 
|10.6*       |  | Management Incentive Program                                                                                                                                                                                                                                                                                                                            
|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 (9)                                                                                                                                                                                                                                                                      
|10.10*      |  | Promissory Note dated May 16, 2002 executed by William K. Heiden in favor of PRAECIS (9)                                                                                                                                                                                                                                                                
|10.11*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Malcolm L. Gefter, Ph.D. (9)                                                                                                                                                                                                                                                               
|10.12*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Kevin F. McLaughlin (9)                                                                                                                                                                                                                                                                    
|10.13*      |  | Letter Agreement dated as of May 9, 2002 between PRAECIS and Marc B. Garnick, M.D. (9)                                                                                                                                                                                                                                                                  
|10.14      |  | License Agreement effective as of October 17, 1996 by and between PRAECIS and Indiana University Foundation, as amended as of June 3, 1998(1)                                                                                                                                                                                                           
|10.15      |  | Supply Agreement dated as of July 23, 1998 by and between PRAECIS and Salsbury Chemicals, Inc. (1)                                                                                                                                                                                                                                                      
|10.16      |  | 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)
|10.17     |  | Commercial Supply Agreement dated December 4, 2002 and effective as of June 1, 2002 by and between Baxter Pharmaceutical Solutions LLC and PRAECIS                                                                                                                                                                                                      
|10.18       |  | Termination Agreement dated as of August 19, 2002 by and between PRAECIS and Amgen Inc. (10)                                                                                                                                                                                                                                                            
|10.19       |  | 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)                                                                                                                                                                                                                
|10.20       |  | 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)                                                                                                                                                                   

---

|10.21 |  | Guaranty of Costs and Completion dated as of July 11, 2000 (3)                                                                                   
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|10.22 |  | Guaranty of Non-Recourse Exceptions dated as of July 11, 2000 (3)                                                                                
|10.23 |  | Environmental Compliance and Indemnity Agreement dated as of July 11, 2000 executed by 830 Winter Street LLC and PRAECIS (3)                     
|10.24 |  | 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 (5)                                                                                                              
|23.1  |  | Consent of Ernst & Young LLP, Independent Auditors                                                                                               
|24.1  |  | Power of Attorney (included on the signature page of this Report on Form 10-K)                                                                   
|99.1  |  | 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
|99.2  |  | 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

---

---

QuickLinks