UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

For the ~~Quarterly~~quarterly ~~Period~~period ~~Ended~~ended ~~March 31~~June 30, ~~2005~~2008

¨	Transition report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

Commission File Number 000-50461

TERCICA, INC.

(Exact name of Registrant as specified in its charter)

Delaware

26-0042539

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

~~651~~2000 ~~Gateway Boulevard~~Sierra Point Parkway, Suite 400

~~Suite~~Brisbane, ~~950~~San Francisco, CA 94005

South San Francisco, CA 94080

(650) 624-4900

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as~~a ~~defined~~non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). ~~Yes ¨ No x~~

AsLarge ofaccelerated ~~April~~filer ~~30,~~¨ ~~2005,~~Accelerated ~~there~~filer ~~were~~x ~~31,583,517~~Non-accelerated ~~shares~~filer of¨ ~~the~~(Do ~~Registrant’s~~not ~~Common~~check ~~Stock~~if ~~outstanding.~~a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of July 31, 2008, there were 68,464,752 shares of the Registrant’s Common Stock outstanding.

TERCICA, INC.

FORM 10-Q FOR THE QUARTER ENDED ~~MARCH~~JUNE 3130, ~~2005~~2008

INDEX

	Page	~~Page~~
PART I – FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS (Unaudited)
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Balance Sheets – March 31, 2005 and December 31, 2004		3
Condensed Balance Sheets – June 30, 2008 and December 31, 2007	3
Condensed Statements of Operations – Three months ended March 31, 2005 and 2004, and the period from October 1, 2000 (inception) through March 31, 2005		4
Condensed Statements of Operations – Three and six months ended June 30, 2008 and 2007	4
Condensed Statements of Cash Flows – Three months ended March 31, 2005 and 2004, and the period from October 1, 2000 (inception) through March 31, 2005		5
Condensed Statements of Cash Flows – Six months ended June 30, 2008 and 2007	5
Notes to Condensed Financial Statements		6
Notes to the Condensed Financial Statements	6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
Report of Independent Registered Public Accounting Firm	18
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 4.	CONTROLS AND PROCEDURES	33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	31
	PART II – OTHER INFORMATION
ITEM 4. CONTROLS AND PROCEDURES	31
ITEM 1.	LEGAL PROCEEDINGS	34
PART II – OTHER INFORMATION
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	34
ITEM 1A. RISK FACTORS	32
ITEM 5.	OTHER INFORMATION	35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	49
ITEM 6.	EXHIBITS	36
ITEM 5. OTHER INFORMATION	50
Signatures		37
ITEM 6. EXHIBITS	50
Signature	53

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

TERCICA, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED BALANCE SHEETS

(In thousands)

(Unaudited)

	March 31,2005			December 31,2004
	June 30,2008			December 31,2007
Assets
Current assets:
Cash and cash equivalents	$	2460,~~324~~022		$	1472,~~126~~353
Short-term investments		6711,~~779~~394			3741,~~875~~132
Prepaid expenses and other current assets		963			705
Accounts receivable, net – (including amounts from related party: 2008-$554; 2007-$165)		3,259			1,607
Total current assets		93,066			52,706
Inventories		26,300			13,891
Property and equipment, net		2,433			2,266
Prepaid expenses and other current assets		2,503			2,117
Restricted cash		790			—
Total current assets		103,478			131,100
Other assets		90			50
Property and equipment, net		2,229			3,023
Total assets	$	96,379		$	55,022
Intangible assets		40,267			41,672
Restricted cash		540			440
Other assets		358			448
Total assets	$	146,872		$	176,683
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2,794		$	3,967
Accounts payable – (including amounts due to related party: 2008 - $511; 2007 – $77)	$	5,102		$	2,366
Accrued expenses		2,090			3,032
Accrued expenses – (including amounts due to related party: 2008 $263; 2007 – $32)		13,860			11,539
Liability for early exercise of stock options		155			165
Other current liabilities		333			310
Total current liabilities		5,039			7,164
Deferred revenue, less long-term portion		776			881
Liability for early exercise of stock options—noncurrent portion		143			181
Total current liabilities		20,071			15,096
Deferred rent		12			—
Long-term convertible notes, net (refer to Note 6)		77,527			86,691
Deferred rent		896			1,062
Deferred revenue, long-term portion		10,287			10,675
Total liabilities		108,781			113,524
Commitments and contingencies
Stockholders’ equity:
Common stock		31			24
Preferred stock		—			—
Additional paid-in capital		225,421			173,621
Common stock		52			52
Deferred stock compensation		(5,591	)		(6,388	)
Additional paid-in capital		356,108			352,278
Accumulated other comprehensive loss		(60	)		(72	)
Accumulated other comprehensive income		11			33
Deficit accumulated during the development stage		(128,616	)		(119,508	)
Accumulated deficit		(318,080	)		(289,204	)
Total stockholders’ equity		9138,~~185~~091			4763,~~677~~159
Total liabilities and stockholders’ equity	$	96146,~~379~~872		$	55176,~~022~~683

See accompanying notes.

TERCICA, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except ~~share and~~ per share data)

(Unaudited)

	Three months ended March 31,						Period fromOctober 1, 2000(inception)through March 31, 2005
	Three Months EndedJune 30,						Six Months EndedJune 30,
	2005			2004
	2008			2007			2008			2007
Costs and expenses:
Net revenues
Research and development*	$	4,871		$	5,674		$	54,495
Net product sales (including amounts from related party: three and six months 2008 - $419 and $729; three and six months 2007 – $52 and $52)	$	6,214		$	2,048		$	10,562		$	3,139
Selling, general and administrative*		4,179			1,881			24,170
Licenses revenue		194			194			388			388
Acquired in-process research and development		—			250			8,158
Royalty revenue (including amounts from related party: three and six months 2008 - $100 and $160; three and six months 2007 - none)		104			—			169			—
Total costs and expenses		(9,050	)		(7,805	)		(86,823	)
Total net revenues		6,512			2,242			11,119			3,527
Interest expense		(499	)		—			(605	)
Costs and expenses:
Interest and other income, net		441			115			1,840
Cost of sales*		3,565			1,131			6,706			1,632
Net loss		(9,108	)		(7,690	)		(85,588	)
Manufacturing start-up costs*		1,749			742			3,293			840
Deemed dividend related to beneficial conversion feature of convertible preferred stock		—			—			(44,153	)
Research and development*		5,403			4,101			11,512			9,013
Net loss allocable to common stockholders	$	(9,108	)	$	(7,690	)	$	(129,741	)
Selling, general and administrative*		15,514			10,282			27,889			19,833
Basic and diluted net loss per share allocable to common stockholders	$	(0.32	)	$	(1.47	)
Amortization of intangibles		703			—			1,405			—
Shares used to compute basic and diluted net loss per share allocable to common stockholders		28,128,755			5,235,759
Total costs and expenses		(26,934	)		(16,256	)		(50,805	)		(31,318	)
* Includes non-cash stock-based compensation expense as follows:
Loss from operations		(20,422	)		(14,014	)		(39,686	)		(27,791	)
Research and development	$	320		$	390		$	2,501
Interest expense		(1,331	)		(190	)		(2,596	)		(378	)
Selling, general and administrative		326			392			2,039
Change in estimated fair value of embedded derivative		9,743			—			11,700			—
Total	$	646		$	782		$	4,540
Interest and other income, net		609			1,397			1,716			2,968
Loss before income taxes		(11,401	)		(12,807	)		(28,866	)		(25,201	)
Provision for income taxes		5			—			10			—
Net loss	$	(11,406	)	$	(12,807	)	$	(28,876	)	$	(25,201	)
Basic and diluted net loss per share	$	(0.22	)	$	(0.26	)	$	(0.56	)	$	(0.50	)
Shares used to compute basic and diluted net loss per share		51,624			50,178			51,597			50,161
* Includes non-cash stock-based compensation expense as follows:
Cost of sales	$	32		$	—		$	66		$	—
Manufacturing start-up costs		38			—			66			—
Research and development		388			525			745			1,049
Selling, general and administrative		1,119			1,110			2,168			2,087
Total	$	1,577		$	1,635		$	3,045		$	3,136

See accompanying notes.

TERCICA, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three months EndedMarch 31,						Period fromOctober 1, 2000(inception)through March 31, 2005
	Six months endedJune 30,
	2005			2004
	2008			2007
Cash flows from operating activities:
Net cash used in operating activities	$	(1042,~~902~~989	)	$	(628,~~973~~034	)	$	~~(71,438~~	)
Cash flows from investing activities:
Purchases of property and equipment		(~~260~~111	)		(~~160~~340	)		~~(3,101~~	)
Purchases of available-for-sale securities		(50,775	)		(19,440	)		(227,612	)
Proceeds received from sale of equipment		11			—
Proceeds from sales and maturities of available-for-sale securities		21,020			—			158,985
Purchases of available-for-sale securities		(21,150	)		(57,536	)
Net cash used in investing activities		(30,015	)		(19,600	)		(71,728	)
Proceeds from sales and maturities of available-for-sale securities		51,223			71,559
Cash flows from financing activities:
Net cash provided by investing activities		29,973			13,683
Net proceeds from issuance of preferred stock		—			—			63,960
Cash flows from financing activities:
Net proceeds from issuance of common stock		~~51,190~~685			~~43,233~~216			~~102,111~~
Other, net		(75	)		—			1,419
Net cash provided by financing activities		685			216
Net cash provided by financing activities		51,115			43,233			167,490
Net decrease in cash and cash equivalents		(12,331	)		(14,135	)
Net increase in cash and cash equivalents		10,198			16,660			24,324
Cash and cash equivalents, beginning of period		72,353			40,339
Cash and cash equivalents, beginning of period		14,126			12,049			—
Cash and cash equivalents, end of period	$	60,022		$	26,204
Cash and cash equivalents, end of period	$	24,324		$	28,709		$	24,324
Supplemental schedule of noncash activities:
Issuance of Series A convertible preferred stock to a collaboration partner in exchange for acquired in-process research and development	$	—		$	—		$	4,071
Deferred stock compensation, net of forfeitures	$	(179	)	$	3,986		$	10,205
Deemed dividend related to beneficial conversion feature of convertible preferred stock	$	—		$	—		$	44,153
Issuance of common stock for stock subscription receivable	$	—		$	6,905		$	—
Conversion of Series A and B convertible preferred stock into common stock	$	—		$	68,636		$	68,636
Other, net	$	768		$	24		$	1,820

See accompanying notes.

TERCICA, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. Company and ~~Summary~~Basis of ~~Significant~~Presentation ~~Accounting Policies~~

~~Organization and~~Company ~~Business~~

Tercica ~~Limited~~, ~~a New Zealand Company, was formed in October 2000. Tercica Medica,~~ Inc. ~~was incorporated in Delaware in December 2001, adopted the calendar year as its fiscal year and subsequently changed its name in September 2003 to Tercica, Inc.~~ (the “Company”). Inis ~~early~~a ~~2002, the~~biopharmaceutical ~~Company~~company ~~acquired~~developing ~~(at~~and ~~amounts~~marketing ~~approximating~~a ~~Tercica~~portfolio ~~Limited’s historical net book value) an immaterial amount~~ of ~~assets,~~endocrine ~~including~~products. ~~intellectual property rights, from Tercica Limited as its operations were moved from New Zealand to~~The ~~California.~~Company Incurrently ~~March~~has ~~2002,~~the ~~Tercica~~following ~~Limited~~products ~~made~~and aproduct ~~final,~~candidates ~~immaterial~~in ~~distribution to~~ its ~~stockholders~~commercialization inand ~~connection~~development ~~with~~portfolio: ~~its legal liquidation.~~

~~These~~• ~~development~~Increlex®, ~~stage~~which ~~financial~~is ~~statements~~approved ~~and~~for ~~accompanying~~marketing ~~notes include the results of operations from the inception of Tercica Limited~~ in ~~October 2000 as~~ both ~~entities were under common control as evidenced by~~ the ~~following~~United ~~factors:~~States (i) all of the investors of Tercica Limited were founding stockholders of the Company, (ii) substantially all of the employees of Tercica Limited became employees of the Company, (iii) the nearly identical business plans adopted by both entities and ~~(iv)~~ the ~~commencement~~European of negotiations to obtain the license for recombinant human insulin-like growth factor-1 (“ rhIGF-1”) from Genentech, Inc. by Tercica Limited, and the completion of those negotiations by the Company. Union;

~~The~~• ~~Company~~Somatuline® is a biopharmaceutical company focused on the development and commercialization of new theraputics for the treatment of short stature and other related metabolic disorders. Our current product candidate is IncrelexDepot, ~~recombinant~~which human insulin-like growth factor-1 (“rhIGF-1”). The Company licensed the rights of Genentech to develop, manufacture and commercialize rhIGF-1 products for a broad range of indications, including short stature, worldwide. The Company’s initial focus is onapproved ~~developing Increlex as a replacement therapy~~ for ~~primary~~marketing IGF-1 deficiency (“Primary IGFD”). The Company defines the indication Primary IGFD to mean a child who has a height standard deviation score (“Height SDS”) and an IGF-1 standard deviation score (“IGF-1 SDS”), of less than minus two, and the indication Severe Primary IGFD to mean a child who has a Height SDS and IGF-1 SDS of minus three or less, in ~~each case~~both in the ~~presence~~United ofStates ~~normal or elevated levels of growth hormone. The Company submitted a New Drug Application (“NDA”) to the U.S. Food~~ and ~~Drug~~Canada; Administration (“FDA”) in February 2005 seeking approval of long-term rhIGF-1 replacement therapy for Severe Primary IGFD, based on Phase III clinical trial data. The Company’s NDA was accepted for filing and ~~granted priority review by the FDA in April 2005. The Company has initiated one late-stage clinical trial for the use of rhIGF-1 in Primary IGFD and plans to initiate another.~~

~~The~~• ~~Company~~Two isproduct ~~considered~~candidates tocontaining bedifferent incombinations ~~the~~of ~~development~~Genentech ~~stage~~Inc.’s asrecombinant ~~its~~human ~~primary~~growth ~~activities~~hormone ~~since~~(“rhGH”) ~~incorporation~~(Nutropin ~~have~~AQ®), ~~been~~and ~~establishing~~recombinant ~~its~~human ~~facilities,~~insulin-like ~~recruiting~~growth ~~personnel~~factor-1 (“rhIGF-1”) (i.e., ~~conducting~~Increlex®). ~~research~~One ~~and~~product ~~development,~~candidate ~~business~~is ~~development,~~for ~~business~~the treatment of short stature associated with low insulin-like growth factor-1 (“IGF-1”) levels and ~~financial~~ ~~planning~~the other product candidate is for the treatment of adult growth hormone deficiency (“AGHD”). In January 2008, the Company initiated dosing patients with Nutropin AQ® and ~~raising~~Increlex® ~~capital.~~in a Phase II study for the treatment of short stature associated with low IGF-1 levels.

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by ~~accounting~~U.S. ~~principles~~ generally accepted inaccounting ~~the~~principles ~~United States~~ (“GAAP”) can be condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. The condensed balance sheet at December 31, 2007 has been derived from the audited financial statements at that date.

The results of the Company’s operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year or any future periods. The information included in this quarterly report on Form 10-Q should be read in conjunction with the audited financial statements for the year ended December 31, ~~2004~~ 2007, included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2004~~2007, filed with the ~~Securities~~SEC ~~and~~on ~~Exchange~~February 29, ~~Commission~~2008. onSee ~~March~~Note ~~24,~~3 ~~2005~~– “Proposed Acquisition by Affiliates of Ipsen S.A.” which describes the proposed merger agreement with Ipsen S.A.

The ~~condensed~~preparation ~~balance~~of ~~sheet~~financial atstatements ~~December~~in ~~31,~~conformity ~~2004~~with ~~has~~GAAP ~~been~~for ~~derived~~interim ~~from~~financial ~~the~~reporting ~~audited~~requires ~~financial~~management ~~statements~~to atmake ~~that~~estimates ~~date~~and ~~but~~assumptions that ~~does~~affect ~~not~~the ~~include~~amounts ~~all~~reported ofin the ~~information~~ ~~and~~condensed ~~footnotes~~financial ~~required~~statements byand ~~GAAP~~accompanying innotes. ~~the~~Actual ~~United~~results ~~States~~could ~~for~~differ ~~complete~~from ~~financial~~those ~~statements~~estimates.

2. Significant Accounting Policies

During 2008, the Company applied the new accounting standard Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”), related to the fair value measurements of the Company’s assets and liabilities as described more fully below. There have been no significant changes in the Company’s significant accounting policies during the six months ended June 30, 2008 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out basis. The valuation of inventory requires the Company to estimate obsolete or excess inventory based on analysis of future demand for the Company’s products. Due to the nature of the Company’s business and our target markets, we believe levels of inventory in the distribution channel, changes in demand due to price changes from competitors and the introduction of new products are not significant factors when estimating the Company’s excess or obsolete inventory for Increlex^® but can be significant factors in estimating excess or obsolete inventories for Somatuline^® Depot. If inventory costs exceed expected market value due to obsolescence or lack of demand, inventory write-downs may be recorded as deemed necessary by management for the difference between the cost and the market value in the period that impairment is first recognized. Inventories may include products manufactured at facilities awaiting regulatory approval and are capitalized based on management’s judgment of probable near term regulatory approval. In addition, inventories include employee stock-based compensation expenses capitalized under SFAS No. 123R.

~~TERCICA~~In general, ~~INC~~the process for evaluating potential excess or obsolete inventory is not a complex process and does not require significant management judgment. The factors considered in evaluating potential excess or obsolete inventory are:

(A• ~~DEVELOPMENT~~the ~~STAGE~~Company’s ~~COMPANY)~~forecast of future demand, which is updated on a quarterly basis;

~~NOTES~~• TOthe ~~THE~~expiration ~~CONDENSED~~date ~~FINANCIAL~~for ~~STATEMENTS~~each ~~(continued)~~lot manufactured; and

~~(Unaudited)~~• any noncancelable open purchase orders associated with the Company’s commercial supply agreements.

~~Follow~~In May 2007, the Company began to transfer its manufacturing process to new facilities and as such, there will be a period of time during which the Company will need to cease production of Increlex® until the new manufacturing facilities are fully validated, approved by the Food & Drug Administration (“FDA”) and operational. The Company is increasing its inventory levels in an effort to ensure that the Company has adequate supplies to meet future demand and therefore the Company’s long-onterm Increlex® ~~Public~~sales ~~Offering~~forecast will become more critical in management’s evaluation of excess Increlex® inventories throughout 2008. Once the transfer of manufacturing facilities is complete, the Company will have more flexibility in the manufacturing schedule to ensure inventory supply is in line with a shorter forward demand forecast for Increlex®. As of June 30, 2008, the Company had total inventories of $26.3 million. The total inventory of $26.3 million at June 30, 2008 included work-in-process inventory of $5.5 million, at our new fill and finish manufacturing agent that will be available to us as finished goods only upon a successful approval of manufacturing process transfer by the FDA. The FDA requires that when technical processes are transferred to a new manufacturer, a certain number of conformance lots must be produced using the new manufacturers facilities and evaluated for process consistency.

OnRevenue ~~February~~Recognition 11, 2005, the Company completed a follow-on public offering of 6,900,000 shares of its common stock, including the exercise of the over-allotment option by the underwriters, at a public offering price of $8.00 per share. Net cash proceeds from this offering were approximately $51,200,000 after deducting underwriter discounts and other offering expenses.

~~Use~~The Company recognizes revenue from the sale of ~~Estimates~~its products and license and collaboration agreements pursuant to SAB No. 104, Revenue Recognition, and Emerging Issues Task Force (“EITF”) Issue 00-21 Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). Multiple element agreements entered into are evaluated under the provision of EITF 00-21. The Company evaluates whether there is stand-alone value for the delivered elements and objective and reliable evidence of fair value to allocate revenue to each element in multiple element agreements. When the delivered element does not have stand-alone value or there is insufficient evidence of fair value for the undelivered element(s), the Company recognizes the consideration for the combined unit of accounting in the same manner as the revenue is recognized for the final deliverable, which is generally ratably over the longest period of involvement.

Product revenues. The ~~preparation~~Company ofrecognizes ~~financial~~revenue ~~statements~~from inproduct ~~conformity with~~sales ~~GAAP~~when inthere is persuasive evidence that an arrangement exists, title passes, the ~~United~~price ~~States~~is ~~requires~~fixed ~~management~~or determinable and collectibility is reasonably assured. The Company records provisions for discounts to ~~make~~customers ~~estimates~~and rebates to government agencies and ~~assumptions~~international ~~that~~distributors, ~~affect~~which are based on contractual terms and regulatory requirements. The rebates and discounts may require management judgment to estimate percentage of eligible sales to these customers. The Company’s product returns policy only allows for the ~~amounts~~return ~~reported~~of product damaged in transit, product shipped in error by the ~~financial~~Company, ~~statements~~or discontinued, withdrawn or recalled merchandise. To date, product returns have been de minimis and ~~accompanying~~based ~~notes~~on the Company’s historical experience as well as the specialized nature of the Company’s products, the Company historically has not provided a reserve for product returns. ~~Actual~~The ~~results~~Company ~~could~~will ~~differ~~continue to ~~from~~monitor ~~those~~returns ~~estimates~~in the future and will reassess the need to estimate a product returns reserve if the returns experience increases or facts and circumstances suggests a returns reserve is necessary.

~~Research~~License revenues. License revenue generally includes upfront and ~~Development~~continuing ~~Costs~~licensing fees and milestone payments. Nonrefundable upfront fees that require the Company’s continuing involvement in the manufacturing or other commercialization efforts by the Company are recognized as revenue ratably over the contractual term. Fees associated with substantive milestones, which are contingent upon future events for which there is reasonable uncertainty as to their achievement at the time the agreement was entered into, are recognized as revenue when these milestones, as defined in each contract, are achieved.

InRoyalty ~~accordance~~revenues. ~~with~~The ~~Statement~~Company recognizes royalty revenues from sales of ~~Financial~~Increlex® ~~Accounting~~in ~~Standards (“SFAS”)~~Ipsen’s ~~No.~~territory 2,on ~~Accounting~~a ~~for~~sliding ~~Research~~scale ~~and~~from ~~Development~~15% ~~Costs,~~to ~~research~~25% ~~and~~of ~~development~~net ~~costs~~sales. Royalties are ~~expensed~~recognized as ~~incurred.~~earned ~~Research~~in ~~and~~accordance ~~development~~with ~~expenses~~the ~~include~~contract ~~payroll~~terms ~~and~~when ~~personnel~~royalties ~~expenses,~~from ~~consulting~~Ipsen ~~expenses,~~can ~~laboratory~~be reasonably ~~supplies~~estimated and ~~certain~~collectibility ~~allocated~~is ~~expenses~~reasonably assured.

~~Stock~~Manufacturing ~~Compensation~~Start-up Costs

~~The~~Manufacturing ~~Company~~start-up ~~accounts~~costs ~~for~~are ~~employee~~comprised ~~stock~~primarily ~~options~~of ~~using~~third-party ~~the~~costs ~~intrinsic-value method~~related into ~~accordance~~the establishment ~~with~~of ~~Accounting~~alternative ~~Principles~~manufacturers ~~Board~~for ~~(“APB”)~~the ~~Opinion~~Company’s ~~No.~~drug ~~25,~~substance ~~Accounting~~rhIGF-1 ~~for~~and ~~Stock~~drug ~~Issued~~product toIncrelex® ~~Employees,~~and ~~Financial~~absorption ~~Accounting~~of ~~Standards~~personnel ~~Board~~costs ~~Interpretation~~supporting ~~(“FIN”)~~these Noactivities. ~~44,~~These expenses ~~Accounting~~include ~~for~~costs ~~Certain Transactions~~associated ~~involving~~with ~~Stock~~the ~~Compensation,~~Company’s ancontract ~~interpretation~~manufacturers, ofpre-approval ~~APB~~product ~~No. 25~~manufacturing, ~~and~~process ~~related~~transfer, ~~interpretations~~validation and ~~has~~qualification ~~adopted~~activities, ~~the~~and ~~disclosure~~compliance-~~only~~related ~~provisions~~support, ofpre-regulatory ~~SFAS~~approval ~~No.~~preparations ~~123,~~for current ~~Accounting~~good ~~for~~manufacturing ~~Stock-Based~~practices ~~Compensation,~~(“cGMP”) asand ~~amended~~FDA approval.

The Company has elected to continue to follow the intrinsic value method of accounting as prescribed by APB Opinion No. 25. The information regarding net loss as required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement.

The fair value of each option grant is estimated at the date of grant using the Black-Scholes method with the following weighted-average assumptions:

	Three months endedMarch 31,
	2005		2004
Risk-free interest rate	3.7	%	2.6	%
Volatility	0.5		0.8
Weighted-average expected life of options (years)	4.0		3.9
Dividend yield	—		—

~~TERCICA,~~Valuation ~~INC.~~of Derivative Instruments

The Company issued a convertible note denominated in Euros in September 2007 and valued certain features embedded therein as a derivative liability. The terms of the note provided that the holder may convert the note into shares of the Company’s common stock based upon a fixed Euro amount per share. Because the conversion option was not fixed in the Company’s functional currency (Athe ~~DEVELOPMENT~~U.S. dollar), ~~STAGE~~the ~~COMPANY~~conversion option is not considered indexed to the Company’s common stock. Therefore, under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), the Company accounted for the conversion option as an embedded derivative that is bifurcated and measured separately from the convertible note (the host instrument). The note was denominated in Euros and the liability was remeasured into U.S. dollars each quarter end based upon the then current Euro-U.S. dollar exchange ratio. Remeasurement of the liability is recorded as foreign currency gains or losses in change in estimated fair value of embedded derivative in the accompanying condensed statements of operations. The Company estimates the fair value of its derivative liabilities each quarter-end using the Black-Scholes-Merton valuation model. This model is complex and requires significant judgments in the estimation of fair values based on various factors, including the Company’s current stock price and stock price volatility, the volatility of the Euro against the U.S. dollar, and other assumptions. Changes in the fair value of the embedded conversion option are recorded as non-cash gains and losses within change in estimated fair value of embedded derivative in the Company’s condensed statements of operations with offsetting amounts classified on the condensed balance sheet in the convertible note host debt instrument. Changes in the fair value of the embedded conversion option can have a material impact on the Company’s financial statements. Following conversion of the note into the Company’s common stock in accordance with its terms, the carrying value of the host debt instrument will be reclassified into common stock and additional paid in capital. The changes in the fair value of the embedded conversion option from the last remeasurement date through the date of conversion will be charged to current operations. See Note 11 – “Subsequent Events” for a discussion regarding the conversion of this convertible note on July 22, 2008.

~~NOTES~~The TOembedded ~~THE~~derivative ~~CONDENSED~~liability ~~FINANCIAL~~does ~~STATEMENTS~~not ~~(continued)~~qualify for hedge accounting under SFAS No. 133 and therefore, subsequent changes in fair value are recorded as non-cash valuation adjustments within change in estimated fair value of embedded derivative in the condensed statements of operations.

~~(Unaudited)~~Recent Accounting Pronouncements

~~During~~On January 1, 2008, the ~~period~~Company ~~from~~adopted ~~February~~SFAS 1,No. 157. ~~2003~~SFAS ~~through~~No. 157 ~~January~~provides ~~31,~~guidance ~~2004,~~for ~~certain stock~~using ~~options~~fair ~~were~~value ~~granted~~to ~~with~~measure ~~exercise~~assets ~~prices~~and liabilities. ~~that~~SFAS ~~were~~No. 157 ~~below~~applies ~~the~~both ~~reassessed~~to items recognized and reported at fair value ofin the ~~common~~financial ~~stock~~statements and to items disclosed at fair value in the ~~date~~notes ofto ~~grant~~the financial statements. ~~Total~~SFAS ~~deferred~~No. 157 ~~compensation~~does ofnot ~~$6,888,000~~change ~~was~~existing accounting ~~recorded~~rules ingoverning ~~accordance~~what ~~with~~can ~~APB~~or ~~Opinion~~must ~~No.~~be ~~25,~~recognized and isreported ~~being~~at ~~amortized over~~fair ~~the~~value ~~related~~and ~~vesting~~clarifies ~~period~~that offair ~~the~~value ~~options.~~is ~~The~~defined ~~Company~~as ~~recorded~~the ~~employee~~price ~~stock-based~~received ~~compensation~~to ~~expense~~sell ofan ~~$618~~asset,~~000~~ ~~and~~or ~~$755~~paid to transfer a liability,~~000~~ ~~for~~in ~~the~~an ~~three~~orderly ~~months~~transaction ~~ended~~between ~~March~~market participants ~~31,~~at ~~2005~~the ~~and~~measurement ~~2004~~date. Additionally, ~~respectively~~SFAS No. 157 ~~During~~does ~~the~~not ~~three~~eliminate ~~months~~practicability ~~ended~~exceptions ~~March~~that ~~31,~~exist ~~2005~~in accounting pronouncements amended by SFAS No. 157 when measuring fair value. As a result, the Company ~~reversed~~is ~~$179,000~~not required ofto ~~previously~~recognize ~~recognized~~any ~~stock~~new ~~compensation~~assets ~~due~~or toliabilities ~~the~~at ~~forfeiture~~fair ofvalue. ~~unvested~~SFAS ~~stock~~No. 157 ~~options~~also ~~resulting~~establishes ~~from~~a ~~employee~~framework ~~terminations~~for measuring fair value. ~~The~~Fair ~~following~~value ~~table~~is ~~illustrates~~generally ~~the~~determined ~~effect~~based on ~~net~~quoted ~~loss~~market ~~allocable~~prices toin ~~common~~active ~~stockholders had~~markets ~~the~~for ~~Company~~identical ~~applied~~assets ~~the~~or liabilities. ~~fair~~If ~~value~~quoted ~~provisions~~market ofprices are not available, SFAS No. 157 ~~123~~provides guidance on alternative valuation techniques that place greater reliance on observable inputs and less reliance on unobservable inputs. See Note 10 – “Fair Value of Financial Instruments” in the notes to ~~employee~~these ~~stock~~condensed ~~compensation:~~financial statements.

(In thousands, except per share data)	Three months endedMarch 31,						Period fromOctober 1, 2000(inception)through March 31, 2005
	2005			2004
Net loss allocable to common stockholders, as reported	$	(9,108	)	$	(7,690	)	$	(129,741	)
Plus: Employee stock compensation expense based on intrinsic value method		618			755			4,256
Less: Employee stock compensation expense determined under the fair value method for all awards		(964	)		(692	)		(5,268	)
Pro forma net loss allocable to common stockholders	$	(9,454	)	$	(7,627	)	$	(130,753	)
Net loss per share allocable to common stockholders:
Basic and diluted, as reported	$	(0.32	)	$	(1.47	)
Basic and diluted, pro forma	$	(0.34	)	$	(1.46	)

In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which permits entities to elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This election is irrevocable. SFAS No. 159 was effective in the first quarter of fiscal 2008. The Company did not elect to apply the fair value option to any of our financial instruments.

~~Stock~~In ~~compensation arrangements~~June ~~with~~2007, ~~non-employees~~the ~~are~~FASB ~~accounted~~ratified ~~for~~Emerging inIssues ~~accordance~~Task ~~with~~Force ~~SFAS~~(“EITF”) Issue No. 07-3, ~~123~~Accounting ~~and~~for ~~Emerging~~Nonrefundable ~~Issues~~Advance ~~Task~~Payments ~~Force~~for Goods or Services Received for Use in Future Research and Development Activities (“EITF No. 07-3”). EITF No. 96 07-~~18,~~3 ~~Accounting~~requires ~~for~~that ~~Equity~~nonrefundable ~~Instruments~~advance ~~that~~payments ~~Are~~for ~~Issued~~goods toor ~~Other~~services ~~than~~that ~~Employees~~will ~~for~~be ~~Acquiring,~~used or inrendered for future ~~Conjunction~~research ~~with~~and ~~Selling,~~development ~~Goods~~activities be deferred and capitalized and recognized as an expense as the goods are delivered or ~~Services~~the related services are performed. EITF No. 07-3 is effective, ~~using~~on a ~~fair~~prospective ~~value~~basis, ~~approach~~for fiscal years beginning after December 15, 2007. The ~~compensation~~adoption ~~costs~~ of ~~these~~EITF ~~arrangements~~No. 07-3 ~~are~~did ~~subject~~not tohave ~~remeasurement~~any ~~over~~impact on the ~~vesting~~Company’s ~~terms~~financial asposition ~~earned~~or results of operations.

~~Clinical~~In ~~Trial~~December ~~Expenses~~2007, the SEC issued SAB No. 110 (“SAB 110”). SAB 110 expresses the views of the Staff regarding the use of the simplified method, as discussed in SAB No. 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS No. 123R. SAB 110 allows public companies that do no have historically sufficient experience to provide a reasonable estimate to continue use of the simplified method for estimating the expected term of “plain vanilla” share option grants after December 31, 2007. The Company currently uses the simplified method to estimate the expected term for share option grants as it does not have enough historical experience to provide a reasonable estimate. The Company will continue to use the simplified method until it has enough historical experience to provide a reasonable estimate of expected term in accordance with SAB 110. SAB 110 was effective for the Company on January 1, 2008.

In ~~the~~December ~~normal course of business~~2007, the ~~Company~~EITF ~~contracts~~ratified ~~with~~the ~~third-party~~consensus ~~clinical~~on ~~research~~EITF ~~organizations~~Issue ~~to perform various clinical trial activities~~No. ~~The~~ 07-1, ~~Company~~Accounting ~~recognizes research and development expenses~~ for ~~these~~Collaborative ~~contracted~~Arrangements ~~activities~~Related ~~based~~to ~~upon~~the aDevelopment ~~variety of factors, including actual~~ and ~~estimated~~Commercialization ~~patient~~of ~~enrollment~~Intellectual ~~rates,~~Property ~~clinical~~(“EITF ~~site initiation activities, labor hours and other activity~~07-~~based factors~~1”). ~~The~~EITF ~~Company~~07-1 ~~matches~~concludes ~~the~~that ~~recording~~transactions ofwith ~~expenses~~third inparties ~~the~~(that ~~financial~~is, ~~statements~~revenue togenerated ~~the actual services received~~ and ~~efforts~~costs incurred ~~expended.~~by Asparticipants ~~such,~~from ~~expense~~transactions ~~accruals~~with ~~related~~parties tooutside ~~clinical trials are recognized based on the estimate~~ of the ~~degree of~~ ~~completion of the event or events as specified in the specific clinical study or trial contract.~~

Acquired In-Process Research and Development

Acquired in-process research and development relates to in-licensed technology, intellectual property and know-how. The nature of the remaining efforts for completion of research and development activities surrounding rhIGF-1 generally include completion of clinical trials, completion of manufacturing validation, interpretation of clinical and preclinical data and obtaining marketing approval from the FDA and other foreign regulatory bodies, the cost, length and success of which are extremely difficult to determine. Numerous risks and uncertainties exist with timely and successful completion of development projects, including clinical trial results, manufacturing process development results, ongoing feedback from regulatory authorities, including obtaining marketing approval, and those risks and uncertainties set forth below under the heading, “Risk Factors.” In addition, products under development may never be successfully commercialized due to the uncertainties associated with the pricing of new pharmaceuticals, the cost of sales to produce these products in a commercial setting, changes in the reimbursement environment, or the introduction of new competitive products. As a result of the uncertainties noted above, the Company charges in-licensed intellectual property and licenses for unapproved products to acquired in-process research and development.

Comprehensive Loss

Comprehensive loss is comprised of net loss and unrealized gains/losses on available-for-sale securities in accordance with SFAS No. 130, Reporting Comprehensive Income. The following table presents the calculation of comprehensive loss (in thousands):

	Three months endedMarch 31,
	2005			2004
Net loss allocable to common stockholders, as reported	$	(9,108	)	$	(7,690	)
Change in unrealized gains (losses) on marketable securities		11			21
Comprehensive loss	$	(9,097	)	$	(7,669	)

~~TERCICA~~ collaborative arrangement) should be reported gross or net on the appropriate line item in each participant’s respective financial statements pursuant to the guidance of EITF 99-19. EITF 07-1 is effective for fiscal years beginning after December 15, ~~INC~~2008, and requires retrospective application if practicable. The Company does not expect that the adoption of EITF 07-1 will have an impact on its financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (A“SFAS ~~DEVELOPMENT~~No. 161”), ~~STAGE~~an ~~COMPANY~~amendment of SFAS No. 133. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. These enhanced disclosures will discuss (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008, with earlier adoption allowed. The Company has not completed the process of evaluating the impact on its financial position or results of operations that will result from adopting SFAS No. 161.

~~NOTES~~In TOMay ~~THE~~2008, ~~CONDENSED~~the ~~FINANCIAL~~FASB ~~STATEMENTS~~issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (~~continued~~“SFAS No. 162”). This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for non-governmental entities. SFAS No. 162 is effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, the meaning of “Present Fairly in Conformity with GAAP”. The Company has not completed the process of evaluating the impact on its financial position or results of operations that will result from adopting SFAS No. 162.

~~(Unaudited)~~3. Proposed Acquisition by Affiliates of Ipsen, S.A.

~~Recent~~On ~~Accounting~~June 4, ~~Pronouncement~~2008, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Beaufour Ipsen Pharma, a société par actions simplifiée organized under the laws of France (“Parent”) a wholly owned subsidiary of Ipsen, S.A. (“Ipsen”) and Tribeca Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”) pursuant to which Parent would acquire all of the shares of Tercica common stock that Ipsen and its affiliates do not currently own at a price of $9.00 per share in cash. Ipsen and Suraypharm, each of which are affiliates of Parent and Merger Sub, beneficially owned 42.7% of the Company’s outstanding common stock as of June 30, 2008 (including shares of the Company’s common stock issuable upon the exercise and conversion of the then-outstanding warrant and convertible notes issued to Ipsen, but excluding shares subject to limited voting agreements that Ipsen and its affiliates entered into with certain of our other stockholders). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company, with the Company as the surviving corporation of the merger (the “Merger”). As a result of the Merger, the Company will become a wholly-owned subsidiary of Parent and its affiliates. The completion of the Merger is conditioned upon, among other things, the adoption of the Merger Agreement by the Company’s stockholders and the satisfaction or waiver of other closing conditions. Although the Merger is expected to close in the third or fourth quarter of 2008, there can be no assurances that the Merger will be completed within such time frame, or at all. See Part II, Item 1A — “Risk Related to the Merger.”

OnAt ~~December 16, 2004,~~ the ~~FASB issued an amendment to SFAS No. 123, Share-Based Payment, (“SFAS No. 123R”), which is~~ effective ~~for~~time ~~public~~of ~~companies in periods beginning after June 15, 2005. On April 14, 2005,~~ the ~~SEC adopted a rule amendment that delayed the compliance dates for SFAS No. 123R such that the Company is allowed to implement the proposed standard no later than the quarter that begins January 1~~Merger, ~~2006. SFAS No. 123R addresses the accounting for transactions in which an enterprise receives employee services in exchange for equity~~each ~~instruments~~outstanding ofshare ~~the enterprise or liabilities that are based on the fair value~~ of the ~~enterprise~~Company’s ~~equity~~common ~~instruments~~stock or(other ~~that~~than ~~may~~shares beheld ~~settled~~ by the ~~issuance~~Parent ~~of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25,~~ and ~~requires~~its ~~instead~~affiliates ~~that~~or ~~such~~by ~~transactions~~stockholders bewho ~~accounted~~have ~~for~~validly ~~using~~exercised aappraisal ~~fair-value-based~~rights) ~~method.~~will Companies are required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be ~~used~~converted ~~for~~into ~~valuing share-based payments,~~ the ~~amortization~~right ~~method for compensation cost and the transition method~~ to bereceive ~~used at the date of adoption~~$9.00 ~~The~~per transition methods include modified prospective and modified retrospective adoption options. Under the modified prospective method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share~~-based~~ ~~payments~~in granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. The modified retrospective method includes the requirements of the modified prospective method described abovecash, ~~but also permits entities to restate based on the amounts previously recognized~~ ~~under~~without ~~SFAS No. 123 for purposes of pro forma disclosures~~interest, either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company is currently evaluating option valuation methodologies and assumptions and therefore has not fully assessed the impact of adopting SFAS No. 123R. The Company has not yet determined the method of adoption or the effect of adopting SFAS 123R, and has not determined whether the adoption will result in amounts that are similar to ~~the current pro forma disclosures under SFAS 123. Current estimates of option values using the Black-Scholes method may not~~ be ~~indicative~~paid ofupon ~~results~~completion ~~from valuation methodologies ultimately adopted by the Company. The Company expects to continue to grant stock-based compensation to employees, and believes that the adoption~~ of the ~~new standard will most likely have a material impact on the Company’s results of operations~~Merger.

2The Merger Agreement may be terminated in certain circumstances, including in the event that the Merger is not completed by January 1, 2009. ~~Net~~The ~~Loss~~Merger ~~Per~~Agreement ~~Share~~requires the Company to pay Parent a termination fee in the amount of $11,000,000 if the Merger Agreement is terminated by either the Company or Parent in connection with a change in the Company’s Board of Directors’ recommendation that the Company’s stockholders adopt the Merger Agreement, or if the Merger Agreement is terminated, there exist certain proposals or offers to acquire Tercica’s equity interests or assets by persons unaffiliated with Ipsen (“Takeover Proposals”), and within 12 months following the termination, Tercica enters into a contract providing for the implementation of a Takeover Proposal or otherwise consummates a Takeover Proposal.

~~Basic~~Upon ~~net~~execution ~~loss~~of ~~per~~the ~~share~~Merger ~~allocable~~Agreement toon ~~common~~June 4, ~~stockholders~~2008, isIpsen ~~calculated~~irrevocably byagreed ~~dividing~~to promptly ~~the~~convert ~~net~~all ~~loss~~three ~~allocable~~of toits ~~common~~outstanding ~~stockholders~~convertible bynotes ~~the~~(see ~~weighted~~Note 6, Long-~~average number~~term ofDebt) ~~common~~into shares ~~outstanding~~of ~~for~~ the ~~period,~~Company’s ~~without consideration for~~ common stock ~~equivalents.~~and ~~Diluted~~to ~~net~~exercise ~~loss~~its ~~per~~outstanding ~~share~~warrant ~~allocable~~ to ~~common~~purchase ~~stockholders~~shares isof ~~computed by dividing~~ the ~~net~~Company’s ~~loss allocable to~~ common ~~stockholders~~stock. ~~by the~~On ~~weighted-average~~July 22, ~~number~~2008, ofIpsen ~~common~~fully ~~share~~converted ~~equivalents~~all ~~outstanding~~three ~~for~~of ~~the~~its ~~period~~convertible ~~determined~~notes ~~using~~into ~~the~~shares ~~treasury-stock method. For purposes~~ of ~~this calculation, common stock subject to repurchase by~~ the Company,’s ~~preferred stock, options and warrants are considered to be~~ common stock ~~equivalents~~ and ~~are~~exercised ~~only~~its ~~included~~warrant into ~~the~~purchase ~~calculation~~shares of ~~diluted~~the ~~net~~Company’s ~~loss~~common ~~per~~stock ~~share~~(see ~~when~~Note ~~their~~11, ~~effect~~Subsequent ~~is dilutive~~Events).

(In thousands, except share and per share data)	Three months ended March 31,
	2005			2004
Historical
Numerator:
Net loss allocable to common stockholders	$	(9,108	)	$	(7,690	)
Denominator:
Weighted-average common shares outstanding		28,174,965			5,328,661
Less: Weighted-average unvested common shares subject to repurchase		(46,210	)		(92,902	)
Denominator for basic and diluted net loss per share allocable to common stockholders		28,128,755			5,235,759
Basic and diluted net loss per share allocable to common stockholders	$	(0.32	)	$	(1.47	)

The following is a summary of transaction related costs, recorded in general and administrative expenses, incurred in connection with the Merger for the three months ended June 30, 2008 (in thousands). There were no costs incurred prior to April 1, 2008:


	Three Months Ended June 30, 2008
Transaction related costs:
Financial advisor	$	756
Legal fees		551
Special committee		71
Accounting fees		30

	$	1,408

~~TERCICA, INC~~4. Balance Sheet Details

(A DEVELOPMENT STAGE COMPANY)


	June 30, 2008			December 31, 2007
	(in thousands)
Accounts receivable, net:
Receivables	$	3,325		$	1,651
Less: allowance for prompt payment discounts		(66	)		(44	)

	$	3,259		$	1,607

Inventories:
Raw materials	$	3,491		$	2,453
Work-in-process		17,388			8,662
Finished goods		5,421			2,776

	$	26,300		$	13,891

Property and equipment, net:
Office equipment	$	387		$	373
Furniture and fixtures		682			674
Computer equipment and software		2,962			2,919
Manufacturing equipment		1,338			1,305
Leasehold improvements		1,524			1,527
Construction in progress		5			—

		6,898			6,798
Less: accumulated depreciation and amortization		(4,669	)		(3,775	)

	$	2,229		$	3,023

Accrued expenses:
Accrued compensation and related liabilities	$	3,479		$	4,885
Accrued professional fees		1,960			1,259
Accrued contract manufacturing expenses		5,311			3,704
Clinical trial costs		396			248
Other accrued liabilities		2,714			1,443

	$	13,860		$	11,539

~~NOTES~~5. Comprehensive TOLoss ~~THE CONDENSED FINANCIAL STATEMENTS (continued)~~

~~(Unaudited)~~Comprehensive loss is comprised of net loss and unrealized gains/losses on available-for-sale securities in accordance with SFAS No. 130, Reporting Comprehensive Income. The following table presents the calculation of comprehensive loss, net of tax:

	Three months endedMarch 31,
	Three Months EndedJune 30,						Six Months EndedJune 30,
	2005		2004
	2008			2007			2008			2007
Historical outstanding dilutive securities not included in diluted net loss per share allocable to common stockholders calculation
Net loss, as reported	$	(11,406	)	$	(12,807	)	$	(28,876	)	$	(25,201	)
Options to purchase common stock	2,592,761		1,712,222
Change in unrealized losses on available-for-sale securities, net of taxes		(37	)		(7	)		(22	)		(8	)
Comprehensive loss	$	(11,443	)	$	(12,814	)	$	(28,898	)	$	(25,209	)

3. Cash, Cash Equivalents and Short-Term Investments

The following is a summary of available-for-sale securities (in thousands):

	March 31, 2005
	AmortizedCost		GrossUnrealizedLosses			FairValue
Available-for-sale debt securities maturing within 1 year:
Auction market preferred	$	12,400	$	—		$	12,400
Commercial paper		3,023		(7	)		3,016
Corporate bonds		26,231		(3	)		26,228
Federal agency bonds		24,254		(33	)		24,221
Municipal bonds		24,385		(17	)		24,368
Total available-for-sale debt securities	$	90,293	$	(60	)	$	90,233
	December 31, 2004
	AmortizedCost		GrossUnrealizedLosses			FairValue
Available-for-sale debt securities maturing within 1 year:
Corporate bonds	$	5,815	$	(14	)	$	5,801
Commercial paper		9,346		(2	)		9,344
Federal agency bonds		19,759		(26	)		19,733
Municipal bonds		9,753		(30	)		9,723
Total available-for-sale debt securities	$	44,673	$	(72	)	$	44,601

The Company’s financial instruments are classified as follows (in thousands):

	March 31,2005		December 31,2004
Cash	$	2,660	$	7,400
Cash equivalents		21,664		6,726
Cash and cash equivalents		24,324		14,126
Short-term investments		67,779		37,875
Long-term restricted cash		790		—
Total	$	92,893	$	52,001

There were no gross unrealized gains or realized gains or losses on the sale of available-for-sale securities for both periods presented.

4. Senior Credit Facility

On January 21, 2005, the Company entered into a Loan Agreement (the “Loan Agreement”) with Venture Leasing & Lending IV, Inc. (“VLL”) under which the Company has the option to draw down funds in the aggregate principal amount of up to $15,000,000. The Company paid a $75,000 fee as part of this Loan Agreement and issued to VLL 75,000 shares of its common stock, which are held in escrow, subject to certain conditions. The $75,000 fee will be refunded to the Company if it borrows a minimum of $1.0 million under this facility. The 75,000 shares of common stock issued were recorded at fair market value and are being amortized over the initial 3 ½ month loan commitment period. The option to draw funding under this Loan Agreement is subject to additional issuances of up to a maximum of 112,500 shares of the Company’s common stock. Any funding drawn down will have a three-year

~~TERCICA, INC~~6. Long-Term Debt

In October 2006, the Company issued to Ipsen a convertible note in the principal amount of $25,037,000 (Athe ~~DEVELOPMENT~~“First ~~STAGE~~Convertible ~~COMPANY~~Note”). The First Convertible Note accrued interest at a rate of 2.5% per year, compounded quarterly, and was convertible into the Company’s common stock at a conversion price of $7.41 per share, subject to adjustment, which represented 3,526,373 shares at June 30, 2008.

~~NOTES~~In TOSeptember ~~THE~~2007, ~~CONDENSED~~the ~~FINANCIAL~~Company ~~STATEMENTS~~issued ~~(continued)~~two additional convertible notes to Ipsen. The “Second Convertible Note” was payable in Euros in the principal amounts of €30,000,000, or $41,640,000 on the date of issuance. The “Third Convertible Note” was payable in U.S. dollars in the principal amount of $15,000,000. The Second and Third Convertible Notes each accrued interest at a rate of 2.5% per year, compounded quarterly, and were convertible into the Company’s common stock at a conversion price of €5.92 per share for the Second Convertible Note and $7.41 per share for the Third Convertible Note, which represented 5,167,865 and 2,064,356 shares, respectively, at June 30, 2008.

At the time of execution of the Merger Agreement, Ipsen delivered a letter to the Company pursuant to which Ipsen irrevocably agreed to convert the Convertible Notes in full promptly following the execution of the Merger Agreement. On July 22, 2008, Ipsen fully converted the Convertible Notes into shares of the Company’s common stock (~~Unaudited~~see Note 11, Subsequent Events).

~~term~~The ~~from~~entire ~~the~~principal ~~date~~balance ofand ~~funding.~~accrued ~~Any~~interest ~~borrowings~~under all ~~are~~the ~~subject~~Convertible toNotes ~~cash~~was ~~payments~~due ofand ~~principal~~payable ~~and interest~~on atthe anlater ~~interest~~to ~~rate~~occur of ~~7.5% per annum~~October 13, as2011 ~~well as a terminal interest payment at~~ or the ~~end~~second ofanniversary ~~the three-year term equal to 9.2%~~ of the ~~aggregate~~date ~~principal~~on ~~amount~~which ~~borrowed~~Ipsen ~~during~~(or ~~the~~subsequent ~~term~~holders of the ~~loan.~~Convertible ~~Under~~Notes) notified the ~~terms~~Company ofthat ~~the~~it ~~Loan~~would ~~Agreement~~not ~~and~~convert anthe ~~intellectual~~Convertible ~~property~~Notes ~~security~~in ~~agreement~~full, ~~the~~subject ~~Company~~to ~~would~~Ipsen’s ~~grant~~right to ~~VLL~~declare aall ~~first~~amounts ~~priority~~outstanding ~~security~~under ~~interest on certain assets, including limited intellectual property assets, in~~ the ~~event~~Convertible ~~any~~Notes ~~borrowings~~immediately ~~occur.~~due ~~The~~and ~~Company~~payable ~~may~~under ~~terminate~~certain ~~this facility at any time without penalty as long as no borrowings have been drawn down from the facility~~circumstances.

InBecause ~~April~~the ~~2005~~Second Convertible Note carried a conversion price per share stated in a foreign currency, the conversion feature constitutes a derivative liability. The Company ~~exercised~~initially estimated the ~~option~~fair tovalue ~~extend~~of the ~~period~~derivative toliability ~~allow~~associated itwith tothe ~~draw~~Second ~~funds~~Convertible ~~under~~Note ~~this~~at ~~facility.~~€9,220,000 ~~The~~or ~~Company~~$12,797,000 ~~extended~~on the ~~loan commitment~~ date ~~from~~of ~~April~~issuance, 30September 17, ~~2005~~2007. toThis ~~December~~amount ~~31,~~was ~~2005~~accounted byfor ~~issuing~~as ~~37,500~~a reduction ~~shares~~in the initial carrying value of ~~common~~the ~~stock~~Second toConvertible ~~VLL~~Note and is separately accounted for as a derivative liability and changes in ~~May~~estimated ~~2005~~fair value are recorded in “Change in estimated fair value of embedded derivative” in the condensed statement of operations for each period. ~~The~~This 37discount on the Second Convertible Note,~~500~~ ~~shares~~as a result of ~~common~~this ~~stock~~bifurcation, ~~issued~~was ~~will~~being beaccreted ~~recorded~~to atinterest ~~fair~~expense ~~market~~over four years using the effective interest method. The carrying value ~~and~~of the ~~amortized~~Second ~~over~~Convertible Note on the ~~remaining~~date ~~eight-month~~of ~~loan commitment~~issue ~~period~~was €20,780,000, or approximately $28,843,000, which is net of the discount. At June 30, 2008 the carrying value was €22,841,000, or $36,087,000, which approximates fair value.

5.The ~~Lease~~Convertible ~~Agreement~~Notes including accrued interest, consisted of the following (in thousands):

In March 2005, the Company entered into a new lease agreement for a facility in Brisbane, California. The term of the lease is 75 months. This agreement includes scheduled rent increases over the lease term and rent abatement for the first 15 months. In addition, the landlord may contribute up to $1,046,000 towards facility improvements. The Company will recognize rent expense on a straight-line basis over the term that the facility is physically utilized, taking into account the scheduled rent increases, rent abatement, rent holidays and the leasehold improvement allowance. Under the lease agreement, the Company provided the landlord with letters of credit amounting to $790,000, which are collateralized for the same amount by cash, cash equivalents and short-term investments held in a Company bank account. The Company has recorded the collateralized bank account balance as restricted cash.


	June 30, 2008		December 31, 2007
Convertible notes	$	77,514	$	72,610
Embedded derivative liability		13		14,081

Total	$	77,527	$	86,691

~~Under~~As ~~this~~of ~~lease~~June 30, ~~agreement~~2008, the ~~future~~Company ~~minimum~~accrued ~~lease~~$1,093,000 ~~commitment~~of ~~for~~cumulative ~~the~~interest ~~years~~expense ~~ending~~on ~~December~~the First ~~31,~~Convertible ~~2005~~Note, ~~2006~~of which $162,000 ~~2007~~and $323,000 ~~2008~~were recorded as interest expense in the three and ~~2009~~six ~~are~~months ~~$55~~ended June 30,~~000~~ 2008, ~~$83~~respectively. The amount payable under the First Convertible Note on October 13,~~000,~~ 2011 would have been $~~677~~28,362,000, ~~$711,000~~including ~~and~~cumulative interest of $~~745~~3,~~000~~325, ~~respectively~~000.

6As of June 30, 2008, the Company recorded valuation adjustment gain of $14,068,000 representing a decrease in value of the embedded derivative liability associated with the Second Convertible Note. ~~Litigation~~This gain is included in “Change in estimated fair value of embedded derivative” in the condensed statements of operations. The gain recorded was due to a shortened estimated remaining life of the Second Convertible Note which also changed other key inputs to the valuation of the embedded derivative liability reducing the fair value of the embedded derivative liability. The Company accrued $889,000 of cumulative interest expense on the Second Convertible Note, of which $296,000 and $578,000 were recorded as interest expense in the three and six months ended June 30, 2008, respectively. The

On December 20, 2004, the Company initiated patent infringement proceedings against Avecia Limited and Insmed Incorporated as co-defendants in the High Court of Justice (Chancery Division Patents Court) in the United Kingdom. On December 23, 2004, the Company, with Genentech, initiated patent infringement proceedings against Insmed Incorporated in the U.S. District Court for the Northern District of California. The Company initiated these litigations because the Company believes that Insmed and Avecia are infringing on the Company’s patents that cover Insmed’s product’s use and manufacture.

The Company cannot predict the outcome of this litigation against Avecia and Insmed in the United Kingdom or the outcome of the litigation against Insmed in the United States. Moreover, the Company cannot predict the cost of such litigation, which may require a substantial diversion of financial assets and other resources and consequently prevent the Company from allocating sufficient resources to the development of the Company’s rhIGF-1 programs, and which may have a material adverse effect on the Company’s business. In addition, if the outcome of the litigation in the United Kingdom is not favorable to the Company, the Company is likely to be found liable for the opposing parties’ costs incurred in connection with the litigation, and the Company could be found liable for an award of additional damages to the opposing parties if the court decides that the Company’s claims of patent infringement are without sufficient merit or not pursued in good faith. If in the Company’s litigation in the United States, the court decides Insmed prevails, and Insmed establishes by clear and convincing evidence that the case is exceptional (e.g., the Company’s claims of patent infringement were not pursued in good faith), the Company could be liable for an award of the opposing party’s costs and legal fees incurred in connection with the litigation and/or an award of other damages. Any such award or awards to the opposing party or parties could substantially increase the Company’s costs and exacerbate the negative impact that an unfavorable outcome in the case(s) could have on the Company’s business. Further, it is not uncommon in cases of this kind for a defendant to assert counterclaims, which could significantly increase the Company’s costs, potential liability for damages, and other risks arising from these lawsuits, and a court could find the Company liable for any such damages caused by Genentech as well.

Insmed and Avecia have challenged the validity of European Patent No. 0 571 417 in the Company’s litigation in the United Kingdom, and it is likely that Insmed will challenge the validity of U.S. Patent Nos. 5,187,151, 6,331,414 and/or 5,258,287 in the Company’s litigation in the United States. Even if the Company voluntarily drops these claims of patent infringement in the Company’s litigation in the United States and/or the United Kingdom, the opposing party or parties may pursue counterclaims for a declaratory judgment of invalidity against the asserted patent or patents in such action(s). If in the Company’s litigation in the United States the court awards a declaratory judgment finding invalid one or more of the claims of U.S. Patent No. 5,187,151, one or more of the claims of U.S. Patent No. 5,258,287, and/or one or more of the claims of U.S. Patent No. 6,331,414, and if the court’s finding of

~~TERCICA~~ Company accrued $2,199,000 ~~INC~~of cumulative non-cash accretion charges, of which $749,000 and $1,446,000 were recorded as amortization expense for the three and six months ended June 30, 2008, respectively. The amount payable under the Second Convertible Note on October 13, 2011 would have been €33,206,000, including cumulative interest of €3,206,000.

(AAs ~~DEVELOPMENT~~of ~~STAGE~~June 30, ~~COMPANY)~~2008, the Company accrued $297,000 of cumulative interest expense on the Third Convertible Note, of which $95,000 and $189,000 were recorded as interest expense in the three and six months ended June 30, 2008, respectively. The amount payable under the Third Convertible Note on October 13, 2011 would have been $16,603,000, including cumulative interest of $1,603,000.

~~NOTES~~Valuation TOof ~~THE~~Second ~~CONDENSED~~Convertible ~~FINANCIAL~~Note ~~STATEMENTS~~and ~~(continued)~~Related Derivative

~~(Unaudited)~~The embedded derivative liability related to the Second Convertible Note has been valued using the Black-Scholes-Merton valuation model. The valuations are based on the information pertinent as of the respective valuation dates.

~~invalidity~~The ininputs ~~such~~for ~~declaratory~~valuation ~~judgment~~analysis isinclude ~~upheld in whole or in part on appeal or if no appeal is taken,~~ the ~~Company~~market ~~would~~value be unable to exclude others from using the affected claim or claims in the United States, which may decrease the Company’s ability to generate significant revenue from their rhIGF-1 programs and/or render any further development and commercialization of ~~rhIGF-1 commercially infeasible for~~ the Company~~. If in the Company~~’s ~~litigation~~common ~~in the United Kingdom~~stock, ~~the~~exercise ~~court~~price ~~awards a declaratory judgment finding invalid one or more~~ of the ~~claims~~conversion ~~of European Patent No. 0 571 417~~option, ~~and~~volatility ifof the ~~court~~Company’s ~~finding~~common ~~of invalidity in such declaratory judgment is upheld in whole or in part on appeal or if no appeal is taken~~stock, the ~~Company~~expected ~~would~~life ~~be unable to exclude others from using the affected claim or claims in the United Kingdom,~~ and ~~any such finding of invalidity may have a similar adverse impact on~~ the enforceability of the affected claim or claims in one or more of the other European countries in which European Patent No. 0 571 417 would otherwise be in force, which may decrease the Company’s ability to generate significant revenue from their rhIGFrisk-1free ~~programs~~interest ~~and/or render any further development and commercialization of rhIGF-1 commercially infeasible for the Company~~rate.

On February 18, 2005, Insmed filed a Motion to Dismiss, or in the Alternative, for Summary Judgment, in the Company and Genentech’s litigation against Insmed in U.S. District Court. The motion was made on grounds that the Court lacked subject matter jurisdiction for the Company and Genentech’s claims against Insmed for the infringement of U.S. Pat. Nos. 5,187,151, 6,331,414 and/or 5,258,287. On April 15, 2005, the U.S. District Court issued an order that granted Insmed’s Motion to Dismiss and dismissed the Company’s and Genentech’s First Amended Complaint, with leave for the Company and Genentech to file an amended complaint within 30 days of the Court’s order. In addition, the Court’s order denied the summary judgment aspects of Insmed’s motion.

On April 22, 2005, the Company and Genentech filed a Second Amended Complaint against Insmed and Celtrix Pharmaceuticals, Inc. in U.S. District Court. The Second Amended Complaint reiterates the Company’s claims alleging that the activities of Insmed will infringe U.S. Pat. Nos. 5,187,151; 6,331,414; and 5,258,287; introduces new claims alleging that the activities of Celtrix, a predecessor of Insmed, infringed U.S. Pat. Nos. 5,187,151 and 5,258,287 and alleges that Insmed bears liability for such infringing activities of Celtrix. The Case Management Conference in this matter is scheduled for June 10, 2005. Both sides have been served with discovery requests.

~~ITEM~~The 2.key ~~MANAGEMENT’S~~inputs ~~DISCUSSION~~for ~~AND~~the ~~ANALYSIS~~valuation OFanalysis ~~FINANCIAL~~were ~~CONDITION~~as ~~AND~~follows: ~~RESULTS OF OPERATIONS.~~

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statement of the plans and objectives of management for future operations, any statements concerning proposed new products or licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” or “continue” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth below, and for the reasons described elsewhere in this report. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.


	June 30, 2008			December 31, 2007
Market value of Company’s common stock(1)	€	5.59		€	4.60
Volatility		11.8	%		60.3	%
Risk free interest rate		1.6	%		3.3	%
Exercise price of the conversion option	€	5.92		€	5.92
Expected life		0.1 years			3.8 years

~~Overview~~(1) Represents the Euro equivalent of the Company’s U.S. dollar common stock price.

WeSee ~~are~~“Note a11 ~~biopharmaceutical~~– ~~company~~Subsequent ~~focused~~Events” ~~on the development and commercialization of new therapeutics~~ for ~~the~~more ~~treatment~~information ofregarding ~~short stature and other related metabolic disorders. Our current product candidate is Increlex, recombinant human insulin-like growth factor-1, or rhIGF-1. We licensed~~ the ~~rights~~Convertible ~~of Genentech to develop, manufacture and commercialize rhIGF-1 products for a broad range of indications, including short stature, worldwide~~Notes. Our initial focus is on developing Increlex as a replacement therapy for primary IGF-1 deficiency, or Primary IGFD. We define the indication Primary IGFD to mean a child who has a height standard deviation score, or Height SDS, and an IGF-1 standard deviation score, or IGF-1 SDS, of less than minus two, and the indication Severe Primary IGFD to mean a child who has a Height SDS and IGF-1 SDS of minus three or less, in each case in the presence of normal or elevated levels of growth hormone. We submitted a New Drug Application, or NDA, to the FDA in February 2005 seeking approval of long-term rhIGF-1 replacement therapy for Severe Primary IGFD, based on Phase III clinical trial data. Our NDA was accepted for filing and granted priority review by the FDA in April 2005. We have initiated one late-stage clinical trial for the use of rhIGF-1 in Primary IGFD and plan to initiate another.

~~Tercica, Inc~~7. Stockholders’ ~~was formed~~Equity in December 2001 as a Delaware corporation. In March 2002, Tercica, Inc. acquired an immaterial amount of assets, including intellectual property rights, from Tercica Limited, a New Zealand company that had been formed in October 2000. Tercica Limited then made a liquidating distribution to its stockholders in March 2002. Tercica Limited and Tercica, Inc. shared a common business strategy and overlapping stockholders. As such, our financial statements include the activities of Tercica Limited, as the predecessor to Tercica, Inc., from October 1, 2000.

InAmended ~~April 2002, we licensed from Genentech intellectual property to develop~~ and ~~commercialize~~Restated ~~rhIGF-1~~2004 ~~for~~Stock aPlan broad range of indications, including short stature and diabetes in the United States. In December 2002, we entered into a development and commercial supply contract for the manufacture of bulk rhIGF-1 drug substance with Cambrex Bio Science Baltimore, Inc., or Cambrex Baltimore. In July 2003, we signed an international license and collaboration agreement with Genentech obtaining its rights to develop and commercialize rhIGF-1 products outside of the United States for all indications other than diseases and conditions of the central nervous system. In addition, we must enter into a written agreement with another company if we desire to commercialize Increlex for the treatment of diabetes outside of the United States.

AsOn ~~of March 31~~May 20, ~~2005~~2008, weat ~~had~~the ~~approximately~~Company’s ~~$92.1~~2008 ~~million~~Annual inMeeting ~~cash,~~of ~~cash~~Stockholders ~~equivalents~~(the ~~and~~“2008 ~~short-term~~Annual ~~investments.~~Meeting”), Wethe ~~have~~Company’s ~~funded our operations since~~stockholders ~~inception~~approved ~~through~~ the ~~private~~Company’s ~~placement~~Amended ofand ~~equity~~Restated ~~securities~~2004 ~~and~~Stock ~~public~~Plan ~~offerings~~(the of“Amended ~~common~~2004 ~~stock~~Plan”). InThe ~~2002,~~Amended we2004 ~~raised~~Plan ~~$20.0~~was ~~million~~adopted ~~through~~by the ~~sale~~Board of ~~shares~~Directors of ~~our~~the ~~Series~~Company A(the ~~preferred~~“Board”) ~~stock.~~on InFebruary 26, ~~2003~~2008, wesubject ~~raised $43.8 million through the sale of~~to ~~shares~~stockholder ~~of our Series B preferred stock. On March 22~~approval, ~~2004,~~became weeffective ~~completed~~upon ~~our~~stockholder ~~initial~~approval ~~public~~at ~~offering~~the of2008 ~~common~~Annual ~~stock~~Meeting ~~in which we raised net cash proceeds of approximately $43.1 million~~ and ~~received~~effected ~~an additional $6.9 million of net cash proceeds on April 2, 2004 in connection with~~ the ~~underwriters’~~following ~~exercise~~changes ~~of their option~~ to ~~purchase~~the ~~additional~~2004 ~~shares.~~Stock OnPlan, ~~February~~as 11amended, ~~2005,~~as wefollows: ~~completed our follow-on public offering of common stock in which we raised net cash proceeds of approximately $51.2 million.~~

On• ~~January~~increased ~~21,~~the ~~2005,~~limitation weby ~~entered into a loan Agreement with Venture Leasing & Lending IV, Inc., or VLL, under~~ which ~~we have~~ the ~~option~~annual toshare ~~draw~~reserve ~~down~~of ~~funds in~~ the ~~aggregate~~Amended ~~principal~~2004 ~~amount~~Plan ofmay up to $15,000,000. We paid a $75,000 fee as part of this loan agreement and issued to VLL 75,000 shares of our common stock, which are held in escrow, subject to certain conditions. The $75,000 fee will be ~~refunded~~automatically toincreased useach ifyear wefrom ~~borrow a minimum of $~~1~~.0 million under this facility. The 75~~,250,000 shares ~~of common stock issued were recorded at fair market value and are being amortized over the initial 3 ½ month loan commitment period. The option~~ to ~~draw funding under this loan agreement is subject to additional issuances of up to~~ a maximum of ~~112~~1,~~500~~750,000 shares ~~of our common stock. Any funding drawn down will have a three-year term from the date of funding. Any borrowings are subject to cash payments of~~ ;

•

limited the maximum number of shares that may be issued upon exercise of incentive stock options under the Amended 2004 Plan to 50,000,000 shares;

•

permits shares used to pay the exercise price of a stock award under the Amended 2004 Plan or to satisfy the tax withholding obligations related to a stock award to become available for issuance under the Amended 2004 Plan;

•

revised the formula grants in effect for continuing outside directors at each annual meeting of stockholders, beginning with the 2008 Annual Meeting, as follows:

•

increased the number of options granted automatically to the Chairman of the Board at each annual meeting of stockholders from 22,500 shares to 26,668 shares;

•

increased the number of options granted automatically to all outside directors except the Chairman of the Board at each annual meeting of stockholders from 11,250 shares to 13,334 shares;

•

automatically grant restricted stock units covering 6,666 shares to the Chairman of the Board at each annual meeting of stockholders; and

•

automatically grant restricted stock units covering 3,333 shares to all outside directors except the Chairman of the Board at each annual meeting of stockholders;

•

extend the termination date of the Amended 2004 Plan to February 25, 2018; and

•

effect various technical amendments to facilitate administration of the Amended 2004 Plan, and maintain its compliance with applicable law and regulations.

Ipsen Warrant

Concurrently with the issuance of the First Convertible Note on October 13, 2006, the Company issued a warrant to purchase the Company’s common stock to Ipsen (the “Ipsen Warrant”), which was exercisable for such number of shares of the Company’s common stock equal to the greater of (i) 4,948,795 shares of the Company’s common stock (the “Baseline Amount”) or (ii) the Baseline Amount plus a variable amount of shares of the Company’s common stock, which variable amount fluctuated throughout the term of the Ipsen Warrant. The number of shares of the Company’s common stock issuable upon exercise of the Ipsen Warrant as of the date of issue, was 5,026,712, with a fair value of $13,622,000, estimated using the Black-Scholes-Merton valuation model, which was recorded to additional paid-in capital. The number of shares of the Company’s common stock issuable upon exercise of the Ipsen Warrant as of June 30, 2008 was 4,948,795. The exercise term of the Ipsen Warrant was five years beginning on October 13, 2006, and the warrant was exercisable, in full or in part, at an exercise price of $7.41 per share. At the time of the execution of the Merger Agreement, Ipsen delivered a letter to the Company pursuant to which Ipsen irrevocably agreed to promptly and fully exercise the Ipsen Warrant. On July 22, 2008, Ipsen exercised the Ipsen Warrant in full (See Note 11, Subsequent Events).

~~principal and interest at an interest rate of 7~~8.5% per annum, as well as a terminal interest payment at the end of the three year term equal to 9.2% of the aggregate principal amount borrowed during the term of the loan. Under the terms of the loan agreement and an intellectual property security agreement, we would grant to VLL a first priority security interest on certain assets, including limited intellectual property assets, in the event any borrowings occur. We may terminate this facility at any time without penalty as long as no borrowings have been drawn down from the facility. In April 2005, we exercised our option to extend the period to allow us to draw funds under this facility. We extended the loan commitment date from April 30, 2005 to December 31, 2005 by issuing 37,500 shares of our common stock to VLL in May 2005. The 37,500 shares of our common stock will be recorded at fair market value and amortized over the remaining eight Stock-~~month~~Based ~~loan~~Compensation ~~commitment period.~~

~~Revenues~~Stock-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as expense over the remaining requisite service period. Total stock-based compensation expense of $1,577,000 and $1,635,000 was recorded during the three months ended June 30, 2008 and 2007, respectively, and $3,045,000 and $3,136,000 was recorded during the six months ended June 30, 2008 and 2007, respectively.

WeStock ~~have~~Options ~~not generated any operating revenues since our inception and do not expect to generate any revenue from the sale of our current product candidate, Increlex, until at least late 2005, if at all.~~

~~Research~~The ~~and~~fair ~~Development~~value ~~Expenses~~of each option grant is estimated at the grant date using the Black-Scholes-Merton valuation model with the following weighted-average assumptions:

Research and development expenses consist primarily of contract manufacturing expenses, clinical activities, regulatory activities, payroll and related costs and non-cash stock compensation. Our research and development activities are primarily focused on validating our manufacturing process at our contract manufacturer, using that process to make drug product suitable for clinical use and commercial sale and development activities related to Severe Primary IGFD and Primary IGFD. Because we licensed non-clinical, clinical and manufacturing data and know-how related to rhIGF-1 from Genentech in 2002, we did not incur significant development expenses prior to 2002. However, we expect to fund our own development activities and will continue to incur significant costs in the future. During 2003, our research and development activities were primarily focused on two projects: the transfer of our rhIGF-1 manufacturing process and the development project for Primary IGFD. At the end of 2003, we began to manage the development project for Severe Primary IGFD as a separate project from the development project for Primary IGFD and completed the technology transfer of our manufacturing process to our contract manufacturer. Our primary focus in research and development in 2004 was associated with the establishment and validation of our rhIGF-1 manufacturing process at our contract manufacturer and preparations for the anticipated NDA filing in Severe Primary IGFD. With our NDA submitted to the FDA in February 2005, we expect the remainder of 2005 to be focused on the preparation for pre-approval inspections at our contract manufacturer, the completion of our development project for Severe Primary IGFD and increased activities associated with our development project for Primary IGFD. In 2005, we expect that our project costs will be focused on FDA inspection preparation activities at our contract manufacturers and costs related to clinical trials in Primary IGFD. Our projects or intended projects may be subject to change from time to time as we evaluate our research and development priorities and available resources.


	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Expected volatility	67.1	%	61.0	%	63.2	%	63.0	%
Expected term (years)	6.0		6.0		6.2		6.2
Risk-free interest rate	3.2	%	5.0	%	3.0	%	4.6	%
Dividend yield	—		—		—		—

~~Selling~~The Company’s computation of expected volatility for the three and six months ended June 30, ~~General~~2008 and ~~Administrative~~2007 ~~Expenses~~is based on an average of the historical volatility of the Company’s stock and the historical volatility of a peer-group of similar companies. The Company’s computation of expected term in the three and six months ended June 30, 2008 and 2007 utilizes the simplified method in accordance with SAB 107, as modified by SAB 110. The risk-free interest rate for periods within the contractual life of the option is based on treasury constant maturities rates in effect at the time of grant. The Company recognizes stock-based compensation expense for the fair values of these awards on a straight-line basis over the requisite service period of each of these awards.

~~Selling,~~As ~~general and administrative expenses consist primarily~~ of ~~payroll and~~June 30, ~~related costs~~2008, ~~non-cash~~unrecognized stock-based compensation, ~~facility~~expense ~~costs,~~related insurance, information technology, legal fees and accounting services. Other costs include sales and marketing activities such as pre-launch planning and medical education activities. During 2004, we continued to ~~expand~~stock ~~our~~options ~~corporate~~of ~~staffing and infrastructure and initiated planning for sales and marketing activities. We expect selling~~$11,878,000 ~~general~~was ~~and~~expected ~~administrative expenses in 2005~~ to ~~increase~~be ~~due~~recognized toover ~~associated costs with the~~a ~~annualized effect of 2004 personnel additions, legal expenses, personnel additions in 2005, increased pre~~weighted-~~launch~~average ~~activities~~period ~~and the activities associated with the implementation~~ of ~~Section~~2.6 ~~404 of the Sarbanes-Oxley Act of 2002~~years.

~~Critical~~Restricted ~~Accounting~~Stock ~~Policies~~Units ~~and the Use of Estimates~~

~~The~~In ~~preparation~~March of2008, ~~our~~the ~~financial~~Company ~~statements~~began into ~~conformity~~grant ~~with~~restricted ~~accounting principles~~stock ~~generally~~units ~~accepted~~(“RSUs”) into ~~the~~eligible ~~United States~~employees, orexecutives ~~GAAP,~~and ~~requires~~outside ~~management~~directors. toEach ~~make~~RSU ~~estimates~~represents ~~and~~a ~~assumptions~~right ~~that~~to ~~affect~~receive one share of the ~~amounts~~Company’s common ~~reported~~stock (subject to adjustment for certain specified changes in ~~our~~the ~~financial~~capital ~~statements~~structure ~~and~~of ~~accompanying~~the ~~notes~~Company) upon the completion of a specific period of continued service. ~~Actual~~The ~~results~~Company ~~could~~also ~~differ~~provides ~~materially~~eligible ~~from~~grantees ~~those~~with the opportunity to defer the ~~estimates~~delivery of shares.

The ~~items~~Company invalues ~~our~~the ~~financial~~RSUs ~~statements~~at ~~requiring~~the market price of the Company’s common stock on the date of grant. The Company ~~significant~~recognizes ~~estimates~~non-cash ~~and~~compensation ~~judgments~~expense ~~are~~for asthe ~~follows:~~fair values of these RSUs on a straight-line basis over the requisite service period of these awards, which is generally four years.

~~Stock~~A ~~Compensation~~summary of RSU activity is as follows:

We account for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, Financial Accounting Standards Board, or FASB, Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB No. 25, and related interpretations and have adopted the disclosure-only provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation.


	Shares		Weighted-Average Grant Date Fair Value
	(In thousands)
Nonvested at December 31, 2007	—			—
Granted	257			5.96
Vested	—			—
Forfeited	(6	)		6.13

Nonvested at June 30, 2008	251		$	5.96

InThe ~~December~~weighted-average ~~2002,~~grant ~~the~~date ~~FASB~~fair ~~issued~~value ~~SFAS~~of ~~No.~~RSUs ~~148,~~granted ~~Accounting~~during ~~for~~the ~~Stock-Based~~six ~~Compensation—Transition~~months ~~and~~ended June 30, ~~Disclosure.~~2008 ~~SFAS~~was No$5. ~~148 amends SFAS No~~96. ~~123~~As ~~to provide alternative methods~~ of ~~transition~~June 30, ~~for~~2008, ~~a voluntary~~unrecognized ~~change to the fair value based method of accounting for~~ stock-based ~~employee~~ compensation. Weexpense ~~have~~related ~~elected~~ to ~~continue~~non-vested toRSUs ~~follow~~of ~~the~~$1,367,000 ~~intrinsic~~was ~~value~~expected ~~method~~to ofbe ~~accounting~~recognized asover ~~prescribed~~a byweighted-average ~~APB~~period Noof 3.5 25years. ~~The~~Stock-based ~~information regarding net loss as~~compensation ~~required~~expense byrelated ~~SFAS~~to ~~No.~~RSUs ~~123~~was ~~has~~approximately ~~been~~$78,000 ~~determined~~and as$73,000 ~~if we had accounted~~ for ~~our~~the ~~employee~~three ~~stock~~and ~~options~~six ~~under~~months ~~the~~ended ~~fair~~June 30, ~~value~~2008, ~~method of that statement~~respectively.

Stock ~~compensation expense, which is a non~~-~~cash~~Based ~~charge,~~Award ~~results~~Modification from stock option grants at exercise prices below the reassessed fair value of the underlying common stock resulting in our recording stock compensation associated with these grants. Stock compensation expense is amortized over the vesting period of the underlying option, generally four years. From inception through January 31, 2004, we recorded deferred stock compensation of $10.9 million. At March 31, 2005, we had a total of $5.6 million of deferred stock compensation remaining to be amortized over the vesting period of the stock options of approximately three years. In the quarter ended March 31, 2005, we reversed $0.2 million of previously recognized stock compensation due to the forfeiture of unvested stock options from employee terminations. We have not recorded any additional deferred stock compensation subsequent to January 31, 2004.

~~The~~In ~~total~~June ~~unamortized~~2008, ~~deferred~~the ~~stock~~Company ~~compensation~~modified ~~recorded~~an ~~for~~employee’s ~~all~~stock-based ~~option~~awards. ~~grants~~The ~~through~~term ~~January~~of ~~31,~~this ~~2004,~~employee’s ~~net~~modification ofincludes the ~~amounts~~accelerated ~~reversed~~vesting of ~~associated~~stock-based ~~with~~awards ~~forfeited~~outstanding on June 21, 2008. The employee’s stock-based ~~options~~awards will beaccelerate ~~amortized~~vest asif ~~follows:~~the $2proposed Merger occurs prior to June 21, 2009.5 ~~million for~~Since the ~~year~~proposed ~~ending~~Merger ~~December~~had 31not closed as of June 30, ~~2005;~~2008, ~~$2.4~~no additional ~~million~~compensation ~~for~~expense has been recognized to date. If the ~~year~~proposed ~~ending~~Merger ~~December~~is 31completed, ~~2006;~~additional ~~and~~compensation ~~$1.3~~expense ~~million~~related ~~for~~to the ~~year~~accelerated ~~ending~~vesting ~~December~~of 31stock-based awards outstanding on June 21, ~~2007~~2008 would be recognized in the Company’s financial statements.

~~Clinical~~9. Net ~~Trial~~Loss ~~Expenses~~Per Share

InBasic ~~the~~net ~~normal~~loss ~~course~~per ofshare ~~business,~~is wecalculated ~~contract~~by ~~with~~dividing ~~third~~the net loss by the weighted-~~party~~average ~~clinical~~number ~~research~~of ~~organizations~~common toshares ~~perform~~outstanding ~~various~~for ~~clinical~~the ~~trial~~period, ~~activities~~without consideration for common stock equivalents. WeDiluted ~~recognize~~net loss per ~~research~~share ~~and~~is ~~development~~computed ~~expenses~~by ~~for~~dividing ~~these~~the ~~contracted~~net ~~activities~~loss ~~based~~by ~~upon~~the aweighted-average ~~variety~~number of ~~factors,~~common ~~including~~share ~~actual~~equivalents ~~and~~outstanding ~~estimated~~for ~~patient~~the ~~enrollment~~period ~~rates,~~determined ~~clinical~~using ~~site~~the ~~initiation~~treasury-stock ~~activities,~~method ~~labor~~for ~~hours~~warrants and ~~other~~options ~~activity~~and the as-~~based~~if ~~factors.~~converted Wemethod ~~match~~for the Convertible Notes the ~~recording~~Company ofissued ~~expenses~~to inIpsen. ~~our~~For ~~financial~~purposes ~~statements~~of tothis ~~the~~calculation, ~~actual~~common ~~services~~stock ~~received~~subject ~~and~~to ~~efforts~~repurchase ~~expended.~~by Asthe ~~such~~Company, ~~expense~~preferred ~~accruals~~stock, ~~related~~options, toRSUs ~~clinical~~and ~~trials~~warrants are ~~recognized~~considered ~~based~~to onbe ~~our~~common ~~estimate~~stock ofequivalents ~~the~~and ~~degree~~are ofonly ~~completion~~included ofin the calculation ~~event~~of ordiluted ~~events as~~net ~~specified~~loss inper ~~each~~share ~~clinical~~when ~~study~~their oreffect ~~trial~~is ~~contract~~dilutive.

Acquired In-Process Research and Development


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(In thousands, except per share data)
Numerator:
Net loss	$	(11,406	)	$	(12,807	)	$	(28,876	)	$	(25,201	)

Denominator:
Weighted-average common shares outstanding used to compute basic loss per share		51,624			50,178			51,597			50,161

Denominator for basic and diluted net loss per share		51,624			50,178			51,597			50,161

Basic and diluted net loss per share	$	(0.22	)	$	(0.26	)	$	(0.56	)	$	(0.50	)

Acquired in-process research and development relates to in-licensed technology, intellectual property and know-how. The nature of the efforts for completion of research and development activities generally include completion of clinical trials, completion of manufacturing validation, interpretation of clinical and preclinical data and obtaining marketing approval from the FDA and other foreign regulatory bodies, the cost, length and success of which are extremely difficult to determine. Numerous risks and uncertainties exist with timely completion of development projects, including clinical trial results, manufacturing process development results, and ongoing feedback from regulatory authorities, including obtaining marketing approval. In addition, products under development may never be successfully commercialized due to the uncertainties associated with the pricing of new pharmaceuticals, the cost of sales to produce these products in a commercial setting, changes in the reimbursement environment, or the introduction of new competitive products. As a result of the uncertainties noted above, we charge in-licensed intellectual property and licenses for unapproved products to acquired in-process research and development.


	Six months ended June 30,
	2008	2007
	(In thousands)
Outstanding dilutive securities not included in diluted net loss per share
Options to purchase common stock and restricted stock units	6,763	5,405
Convertible note	10,759	3,439
Warrants	5,209	5,226

	22,731	14,070

~~Recent~~10. Fair ~~Accounting~~Value ~~Development~~ of Financial Instruments

OnFinancial ~~December~~instruments ~~16,~~are ~~2004,~~presented ~~the~~at ~~FASB~~fair ~~issued~~value. anFair ~~amendment~~value ~~to SFAS~~is ~~No.~~defined ~~123,~~as ~~Share-Based~~the ~~Payment,~~price ~~(“SFAS~~at ~~No. 123R”),~~ which isan ~~effective~~asset ~~for~~could ~~public~~be ~~companies~~exchanged in ~~periods beginning after June 15, 2005. On April 14, 2005, the SEC adopted~~ a ~~rule~~current ~~amendment that delayed the compliance dates for SFAS~~transaction ~~No.~~between ~~123R such that we are allowed to implement the proposed standard no later than the quarter that begins January 1~~knowledgeable, ~~2006.~~willing ~~SFAS No~~parties. ~~123R~~A ~~addresses~~liability’s ~~the accounting for transactions in which an enterprise receives employee services in exchange for equity instruments of the enterprise or liabilities that are based on the~~ fair value ofis ~~the~~defined ~~enterprise’s~~as ~~equity~~the ~~instruments~~amount or that ~~may~~would be ~~settled~~paid byto ~~the~~transfer ~~issuance of such equity instruments. SFAS No. 123R eliminates~~ the ~~ability~~liability to ~~account for share-based compensation transactions using APB Opinion No. 25, and requires instead that such transactions be accounted for using~~ a ~~fair-value-based~~new ~~method. Companies are required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. Under SFAS No. 123R~~obligor, wenot ~~must determine~~ the ~~appropriate~~amount ~~fair~~that ~~value~~would ~~model to~~ be ~~used~~paid ~~for valuing share-based payments, the amortization method for compensation cost and the transition method~~ to besettle ~~used at~~ the ~~date~~liability ~~of adoption. The transition methods include modified prospective and modified retrospective adoption options. Under the modified prospective method, compensation cost is recognized beginning~~ with the ~~effective~~ ~~date (a) based on the requirements of SFAS No~~creditor. ~~123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No.~~Where ~~123R that remain unvested on the effective date. The modified retrospective method includes the requirements of the modified prospective method described above~~available, ~~but~~fair ~~also~~value ~~permits~~is ~~entities to restate~~ based on ~~the~~observable ~~amounts~~market ~~previously~~prices ~~recognized~~or ~~under SFAS~~parameters ~~No.~~or ~~123~~derived ~~for~~from ~~purposes~~such ofprices ~~pro~~or ~~forma~~parameters. ~~disclosures,~~Where ~~either~~observable ~~(a)~~prices ~~all prior periods presented~~ or ~~(b)~~inputs ~~prior interim periods of the year of adoption. We~~ are ~~currently~~not ~~evaluating~~available, ~~option~~ valuation ~~methodologies~~models ~~and~~are ~~assumptions and therefore have not fully assessed the impact of adopting SFAS No~~applied. ~~123R.~~These Wevaluation ~~have~~techniques ~~not~~involve ~~yet~~some ~~determined~~level ~~the method~~ of management ~~adoption~~estimation orand ~~the effect of adopting SFAS 123R~~judgment, ~~and we have not determined whether~~ the ~~adoption~~degree ~~will~~of ~~result~~which inis ~~amounts~~dependent ~~that~~on ~~are similar to~~ the ~~current~~price ~~pro~~transparency ~~forma disclosures~~for ~~under SFAS 123. Current estimates of option values using~~ the ~~Black-Scholes~~instruments ~~method~~or ~~may~~market ~~not be indicative of results from valuation methodologies ultimately adopted by us. We expect to continue to grant stock-based compensation to employees,~~ and ~~believe that~~ the ~~adoption~~instrument’s ~~of the new standard will most likely have a material impact on our results of operations~~complexity.

Beginning January 1, 2008, assets and liabilities recorded at fair value in the condensed balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical level – defined by SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities – are as follows:

•

Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Fair valued assets that are generally included in this category are cash equivalents comprised of money market funds, and restricted cash.

~~Results~~• Level 2 - Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of ~~Operations~~the instrument’s anticipated life.

~~Three~~Fair ~~Months~~valued ~~Ended~~assets and ~~March~~liabilities 31that are generally included in this category are corporate bonds, ~~2005~~commercial paper, federal agency bonds, asset-backed securities and ~~2004~~embedded derivative liabilities.

~~Research~~• ~~and~~Level ~~Development~~3 ~~Expenses.~~- ~~Research~~Inputs ~~and~~reflect ~~development~~management’s ~~expenses~~best ~~decreased~~estimate toof ~~$4.9~~what ~~million~~market ~~for~~participants ~~the~~would ~~quarter~~use ~~ended March~~in ~~31,~~pricing ~~2005,~~the ~~from~~asset ~~$5.7~~or ~~million~~liability ~~for~~at the ~~same~~measurement ~~period in 2004~~date. ~~The~~Consideration ~~$4.9~~is ~~million~~given into ~~expenses~~the ~~were~~risk ~~comprised~~inherent ofin ~~internal~~the ~~personnel~~valuation ~~costs~~technique ofand ~~$2.4~~the ~~million,~~risk ~~project~~inherent ~~costs~~in ~~associated with~~ the ~~establishment~~inputs ~~and validation of our manufacturing process at our contract manufacturer totaling $1.5 million and costs related~~ to ~~our~~the ~~development projects for Primary IGFD and Severe Primary IGFD totaling $1~~model.~~0 million.~~

InFair ~~the~~valued ~~quarter~~liabilities ~~ended~~that ~~March~~are ~~31,~~generally ~~2005,~~included ~~project costs for the establishment and validation of our rhIGF-1 manufacturing process decreased by $1.4 million from the same period~~ in ~~2004,~~this ~~primarily~~category ~~due~~are toembedded ~~decreased~~derivative ~~production and validation activities at Cambrex Baltimore~~liabilities. The costs associated with our development projects for Primary IGFD and Severe Primary IGFD for the quarter ended March 31, 2005 increased by $0.2 million from the same period in 2004. The Primary IGFD and Severe Primary IGFD project costs related primarily to NDA filing preparations for Severe Primary IGFD, clinical trials in Primary IGFD, the conduct of several small studies and the analyses of clinical trial data. Personnel costs for the quarter ended March 31, 2005 increased by $0.4 million from the same period in 2004. In 2005, we expect that our project costs will be focused on inspection preparation activities at our contract manufacturers and costs related to clinical trials in Primary IGFD.

~~Selling,~~Fair ~~General~~Value ~~and~~on ~~Administrative Expenses. Selling, general and administrative expenses increased to $4.2 million for the quarter ended March 31, 2005, from $1.9 million for the same period in 2004. The~~a ~~increase~~Recurring ofBasis $2.3 million was attributable to increased personnel costs of $0.9 million and increased corporate administration expenses such as legal, consulting, insurance, audit and other expenses of $1.4 million. We expect selling, general and administrative expenses in 2005 to increase due to associated costs with the annualized effect of 2004 personnel additions, legal expenses, personnel additions in 2005, increased pre-launch activities and the activities associated with the implementation of Section 404 of the Sarbanes-Oxley Act of 2002.

~~Acquired~~Assets ~~In-Process Research~~ and ~~Development.~~liabilities ~~Acquired~~measured ~~in-process~~at ~~research~~fair ~~and~~value ~~development~~on ~~expense~~a ~~was~~recurring ~~$0.3~~basis ~~million~~are categorized in the ~~quarter~~tables ~~ended~~below ~~March~~based ~~31,~~upon ~~2004. We did not incur acquired in-process research and development expenses in~~ the ~~comparable~~lowest ~~quarter~~level inof ~~2005.~~significant ~~The~~input ~~costs~~to ~~in 2004 resulted from~~ the ~~execution~~valuations as of aJune 30, ~~patent~~2008 ~~license.~~(in thousands):

Interest expense. Interest expense was $0.5 million for the quarter ended March 31, 2005. There was no interest expense in the comparable quarter in 2004. In January 2005, we entered into a loan agreement with Venture Leasing & Lending IV, Inc. (“VLL”), under which we issued 75,000 shares of our common stock to VLL. The common stock was valued at $720,000 on the date of issuance, and is being amortized over the period of the initial loan commitment, through April 30, 2005, as interest expense.


	Fair value		Fair value measurements using
	June 30, 2008		Level 1		Level 2		Level 3
Assets
Cash equivalents	$	57,746	$	45,066	$	12,680	$	—
Short-term investments		11,394		—		11,394		—
Restricted cash		540		540		—		—
Total assets	$	69,680	$	45,606	$	24,074	$	—
Liabilities
Total liabilities – Embedded derivative	$	13	$	—	$	—	$	13

~~Interest and Other Income, net~~11. Subsequent ~~Interest~~Events and other income, net, increased to $0.4 million for the quarter ended March 31, 2005, from $0.1 million for the same period in 2004. The increase was due to interest on higher average cash, cash equivalents and short-term investment balances as a result of the cash proceeds received from our initial public offering in March 2004 and our follow-on public offering in February 2005.

~~Liquidity~~On July 11, 2008 (the “Genentech Closing”), the Company completed a subsequent closing of the transactions contemplated by that certain Common Stock Purchase Agreement (the “Genentech Purchase Agreement”), dated July 6, 2007, by and ~~Capital~~between ~~Resources~~the Company and Genentech, Inc. (“Genentech”), which was entered into in connection with the Combination Product Development and Commercialization Agreement, dated July 6, 2007, between the Company and Genentech. At the Genentech Closing, pursuant to the terms of the Genentech Purchase Agreement, the Company issued 590,580 shares (the “Genentech Shares”) of its common stock to Genentech at a price per share of $6.773, for an aggregate cash purchase price of $4,000,000.

~~Sources~~On July 22, 2008, the Company, Ipsen and Suraypharm entered into a Common Stock Purchase Agreement (the “Ipsen Purchase Agreement”) pursuant to which the Company sold to Ipsen 410,831 shares of ~~Liquidity~~its common stock (the “Ipsen Shares”), for an aggregate cash purchase price of $3,665,000. The Ipsen Shares were issued and sold to Ipsen at a price of $8.92, which equals the consolidated closing bid price of the Company’s common stock as reported by NASDAQ on July 21, 2008. Under the terms of the Affiliation Agreement the Company entered into with Ipsen and Suraypharm in October 2006, Suraypharm has a right of first offer to purchase up to its pro rata portion of new equity securities offered by the Company (subject to certain exceptions). Ipsen, as Suraypharm’s designated affiliate, acquired the Ipsen Shares in exercise of Suraypharm’s pro rata right under the Affiliation Agreement with respect to the sale and issuance of the Genentech Shares on July 11, 2008.

As of March 31, 2005, we had an accumulated deficit of $128.6 million, which was primarily comprised of $85.6 million of accumulated net losses and $44.2 million of a non-cash deemed dividend related to the beneficial conversion feature of convertible preferred stock. We have funded our operations and growth from inception with net cash proceeds of $66.4 million in private equity financings and $101.2 million from our public offerings of common stock.

Cash Flow

Cash, cash equivalents and short-term investments totaled $92.1 million at March 31, 2005, compared to $52.0 million at December 31, 2004. The increase was primarily due to net proceeds of $51.2 million from the issuance of common stock in our follow-on public offering, partially offset by cash used in operating activities of $10.9 million. The increase in net cash used in operating activities was due to increased personnel and infrastructure costs and our development projects for Severe Primary IGFD and Primary IGFD.

Net cash used in investing activities totaled $30.0 million in the quarter ended March 31, 2005, compared to $19.6 million in the same period in 2004. Net cash used in investing activities represent purchases, sales and maturities of investments and purchases of

~~property~~Also ~~and~~on ~~equipment.~~July 22, ~~Net~~2008, ~~purchases of short-term investments were $29.8 million in~~ the ~~quarter~~Company ~~ended~~issued ~~March 31, 2005,~~ an ~~increase~~aggregate of $10.3,774,806 ~~million~~shares ~~from~~of ~~the~~its ~~same~~common ~~period~~stock in connection ~~2004.~~with ~~The~~the ~~increase~~election inby ~~net~~Ipsen ~~purchases of short-term investments was due~~ to ~~timing~~convert ofin ~~maturities,~~full ~~sales~~the ~~and~~entire ~~purchases~~outstanding ofprincipal ~~short-term investments. Purchases of property~~ and ~~equipment~~accrued ~~were~~interest ~~$0.3~~under ~~million and $0.2 million in~~ the ~~quarters~~following ~~ended~~convertible ~~March~~notes: ~~31, 2005 and 2004, respectively.~~

~~Net~~• ~~cash~~the ~~provided~~First byConvertible ~~financing~~Note, ~~activities~~having ~~for~~an ~~the~~outstanding ~~quarter~~principal ~~ended~~and ~~March~~accrued ~~31,~~interest ~~2005~~balance ~~was~~of $~~51.1 million~~26,170,000 ~~compared~~at toJuly ~~$43.2~~22, ~~million~~2008, ~~for~~which ~~the~~was ~~same~~converted ~~period~~ in ~~2004.~~full ~~Net~~at ~~cash~~a ~~provided~~conversion byprice ~~financing~~per ~~activities~~share ~~primarily~~of ~~relate~~$7.41, ~~to net~~for ~~proceeds~~a ~~received~~total ~~from~~of ~~our~~3,531,687 ~~public~~shares ~~offerings~~ of ~~common stock in~~ the ~~quarters~~Company’s ~~ended~~common ~~March 31, 2005 and 2004, respectively.~~ stock;

~~Senior~~• ~~Credit~~the ~~Facility~~Second Convertible Note, having an outstanding principal and accrued interest balance of €30,640,000 at July 22, 2008, which was converted in full at a conversion price per share of €5.92 for a total of 5,175,652 shares of the Company’s common stock; and

On• ~~January 21, 2005, we entered into a loan agreement with VLL under which we have~~ the ~~option~~Third toConvertible ~~draw~~Note, ~~down~~having ~~funds~~an inoutstanding ~~the~~principal ~~aggregate~~and ~~principal~~accrued ~~amount~~interest balance of ~~up to~~ $15,~~000~~320,000. Weat ~~paid~~July ~~a $75~~22,~~000~~ ~~fee as part of this loan agreement and issued VLL 75~~2008,~~000~~ ~~shares of our common stock,~~ which ~~are~~was ~~held~~converted in ~~escrow,~~full ~~subject to certain conditions. The $75,000 fee will be refunded to us if we borrow a minimum of $1.0 million under this facility. The 75,000 shares of common stock issued were valued~~ at ~~fair market value, which are being amortized over the initial 3 ½ month loan commitment period. The option to draw funding under this loan agreement is subject to additional issuances of up to~~ a ~~maximum~~conversion ofprice ~~112,500~~per ~~shares~~share of ~~our common stock. Any funding drawn down will have a three-year term from the date of funding. Any borrowings are subject to cash payments of principal and interest at an interest rate of~~ $7.~~5% per annum~~41, asfor ~~well as~~ a ~~terminal~~total ~~interest payment at the end~~ of ~~the three-year term equal to 9.~~2~~% of the aggregate principal amount borrowed during the term of the loan. Under the terms of the loan agreement and an intellectual property security agreement~~, ~~we would grant to VLL a first priority security interest on certain assets~~067,467 including limited intellectual property assets, in the event any borrowings occur. We may terminate this facility at any time without penalty as long as no borrowings have been drawn down from the facility. In April 2005, we exercised our option to extend the period to allow us to draw funds under this facility. We extended the loan commitment date from April 30, 2005 to December 31, 2005 by issuing 37,500 shares of ~~our~~the ~~common~~Company’s ~~stock to VLL in May 2005. The 37,500 shares of~~ common stock ~~issued will be valued at fair market value, and amortized over the remaining eight-month loan commitment period~~.

~~Litigation~~Additionally, on July 22, 2008, the Company issued 4,948,795 shares of its common stock (the “Warrant Shares”) to Ipsen upon the exercise in full of the Ipsen Warrant. The Warrant Shares issued to Ipsen upon exercise of the Ipsen Warrant were issued at a cash exercise price per share of $7.41, for total cash proceeds to the Company of $36,671,000.

OnIpsen ~~December~~had ~~20,~~irrevocably ~~2004,~~agreed weto convert ~~initiated~~the ~~patent~~Convertible ~~infringement~~Notes ~~proceedings against Avecia Limited~~ and ~~Insmed~~exercise ~~Incorporated~~the asIpsen ~~co-defendants~~Warrant in ~~the~~full ~~High Court of Justice (Chancery Division Patents Court)~~ in ~~the~~connection ~~United Kingdom. On December 23, 2004, we,~~ with ~~Genentech, initiated patent infringement proceedings against Insmed Incorporated in~~ the ~~U.S.~~execution ~~District~~and ~~Court~~delivery ~~for~~of the ~~Northern~~Merger ~~District of California~~Agreement. ~~We initiated these litigations because we believe that Insmed and Avecia are infringing on our patents that cover Insmed’s product’s use and manufacture.~~

WeOn ~~cannot~~July ~~predict~~30, ~~the outcome of our litigation against Avecia and Insmed in the United Kingdom or the outcome of our litigation against Insmed in the United States. Moreover~~2008, ~~we cannot predict~~ the ~~cost~~Company ~~of such litigation, which may require a substantial diversion of our financial assets~~ and ~~other~~Lonza ~~resources and consequently prevent us from allocating sufficient resources to the development of our rhIGF-1 programs~~Hopkinton, ~~and which may have a material adverse effect on our business~~Inc. In(“Lonza ~~addition,~~Hopkinton”) ifentered ~~the outcome of our litigation in the United Kingdom is not~~into ~~favorable~~a toManufacturing ~~us,~~Services weAgreement ~~are likely to be found liable for~~ (the ~~opposing~~“New ~~parties’~~Lonza ~~costs~~Manufacturing ~~incurred~~Agreement”) ~~in connection with the litigation, and we could be found liable~~ for ~~an award of additional damages to~~ the ~~opposing~~manufacture parties if the court decides that our claims of patent infringement are without sufficient merit or not pursued in good faith. If in our litigation in the United States, the court decides Insmed prevails, and ~~Insmed~~supply ~~establishes by clear and convincing evidence that the case is exceptional (e.g., our claims~~ of ~~patent~~bulk ~~infringement~~recombinant ~~were~~human ~~not~~insulin-like ~~pursued~~growth infactor-1 ~~good faith~~(“IGF-1”), weused ~~could be liable for an award of the opposing party’s costs and legal fees incurred~~ in ~~connection with~~ the ~~litigation~~manufacture ~~and/or an award~~ of ~~other~~Increlex®, ~~damages.~~which ~~Any such~~New ~~award~~Lonza orManufacturing ~~awards~~Agreement ~~to the opposing party or parties could substantially increase our costs and exacerbate the negative impact that an unfavorable outcome in the case(s) could have on our business. Further, it~~ is ~~not~~effective ~~uncommon~~retroactive ~~in cases of this kind for a defendant~~ to ~~assert~~July ~~counterclaims~~21, which could significantly increase our costs, potential liability for damages, and other risks arising from these lawsuits, and a court could find us liable for any such damages caused by Genentech as well2008.

~~Insmed~~The ~~and~~New ~~Avecia~~Lonza ~~have~~Manufacturing ~~challenged~~Agreement ~~the~~supersedes ~~validity~~and ofreplaces ~~European Patent No. 0 571 417~~ in ~~our~~its ~~litigation~~entirety inthat ~~the~~certain ~~United Kingdom~~Agreement, ~~and~~dated itMay is14, ~~likely~~2007, ~~that~~by ~~Insmed~~and ~~will~~between ~~challenge~~ the ~~validity~~Company ~~of U.S. Patent Nos. 5,187,151, 6,331,414~~ and~~/or~~ ~~5,258,287~~Lonza inHopkinton ~~our~~pursuant ~~litigation~~to inwhich ~~the~~Lonza ~~United~~Hopkinton ~~States.~~was ~~Even~~originally ifretained weas ~~voluntarily drop our~~the ~~claims~~Company’s ofcontract ~~patent~~manufacturer ~~infringement~~for inbulk ~~our~~IGF-1 ~~litigation in the United States~~ and~~/or~~ ~~the~~pursuant ~~United~~to ~~Kingdom,~~which the ~~opposing party or~~ parties ~~may~~effected ~~pursue counterclaims for~~ a ~~declaratory~~technology ~~judgment~~transfer of ~~invalidity~~Tercica’s ~~against~~manufacturing ~~the~~process ~~asserted~~for ~~patent~~bulk orIGF-1 ~~patents~~to inLonza ~~such action(~~Hopkinton’s~~). If~~ infacility ~~our litigation~~ in ~~the~~Hopkinton, ~~United~~Massachusetts. ~~States~~The ~~the~~New ~~court~~Lonza Manufacturing ~~awards~~Agreement acarries ~~declaratory~~an ~~judgment~~initial ~~finding~~term ~~invalid one or more~~ of ~~the~~eight ~~claims of U.S. Patent No. 5~~years,~~187,151,~~ ~~one~~subject orto ~~more~~renewal offor ~~the claims of U.S. Patent No. 5,258,287, and/or~~ one or more ofadditional ~~the~~terms ~~claims~~ of ~~U.S.~~ ~~Patent~~five ~~No.~~years 6each,~~331,414,~~ ~~and~~provided if the ~~court’s~~parties ~~finding~~agree ofto ~~invalidity~~any in such ~~declaratory~~renewal ~~judgment is upheld in whole or in part on appeal or if~~ no ~~appeal~~later isthan ~~taken,~~two weyears ~~would~~prior ~~be unable~~ to ~~exclude~~the ~~others~~expiration ~~from~~of ~~using~~ the ~~affected claim or claims in~~initial ~~the~~term ~~United States, which may decrease our ability to generate significant revenue from our rhIGF-1 programs and/~~or ~~render~~ any ~~further~~renewal ~~development and commercialization of rhIGF-1 commercially infeasible for us~~term. IfLonza inHopkinton ~~our~~and ~~litigation in~~ the ~~United Kingdom,~~Company ~~the~~are ~~court~~each ~~awards~~able ato ~~declaratory~~terminate ~~judgment~~the ~~finding~~New ~~invalid~~Lonza ~~one~~Manufacturing orAgreement ~~more~~for ofconvenience ~~the~~upon ~~claims~~three ofyears’ ~~European~~prior ~~Patent~~written ~~No. 0 571 417~~notice, ~~and~~as ifwell ~~the~~as ~~court’s~~for ~~finding~~cause. of

~~invalidity~~Report in such declaratory judgment is upheld in whole or in part on appeal or if no appeal is taken, we would be unable to exclude others from using the affected claim or claims in the United Kingdom, and any such finding of ~~invalidity~~Independent ~~may~~Registered ~~have~~Public aAccounting ~~similar~~Firm adverse impact on the enforceability of the affected claim or claims in one or more of the other European countries in which European Patent No. 0 571 417 would otherwise be in force, which may decrease our ability to generate significant revenue from our rhIGF-1 programs and/or render any further development and commercialization of rhIGF-1 commercially infeasible for us.

~~On February 18, 2005, Insmed filed a Motion to Dismiss, or in the Alternative, for Summary Judgment, in our and Genentech’s litigation against Insmed in U.S. District Court.~~ The ~~motion~~Board ~~was made on grounds that the Court lacked subject matter jurisdiction for our and Genentech’s claims against Insmed for the infringement~~ of ~~U.S.~~Directors ~~Pat. Nos. 5,187,151, 6,331,414~~ and~~/or~~ ~~5,258,287.~~Stockholders On April 15, 2005, the U.S. District Court issued an order that granted Insmed’s Motion to Dismiss and dismissed our and Genentech’s First Amended Complaint, with leave for us and Genentech to file an amended complaint within 30 days of ~~the Court’s order. In addition, the Court’s order denied the summary judgment aspects of Insmed’s motion.~~

~~On April 22~~Tercica, ~~2005, we and Genentech filed a Second Amended Complaint against Insmed and Celtrix Pharmaceuticals,~~ Inc. in U.S. District Court. The Second Amended Complaint reiterates our claims alleging that the activities of Insmed will infringe U.S. Pat. Nos. 5,187,151; 6,331,414; and 5,258,287; introduces new claims alleging that the activities of Celtrix, a predecessor of Insmed, infringed U.S. Pat. Nos. 5,187,151 and 5,258,287 and alleges that Insmed bears liability for such infringing activities of Celtrix. The Case Management Conference in this matter is scheduled for June 10, 2005. Both sides have been served with discovery requests.

~~Contractual~~We ~~Obligations~~have reviewed the condensed balance sheet of Tercica, Inc. as of June 30, 2008, and ~~Commercial~~the ~~Commitments~~related condensed statements of operations for the three and six month periods ended June 30, 2008 and 2007, and the condensed statements of cash flows for the six month periods ended June 30, 2008 and 2007. These financial statements are the responsibility of the Company’s management.

~~Our~~We ~~contractual~~conducted ~~obligations~~our asreview in accordance with the standards of ~~March~~the ~~31,~~Public ~~2005~~Company ~~were~~Accounting asOversight ~~follows~~Board (inUnited ~~thousands~~States):. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

	Payments due by period
	Total		Less than1 year		1-3 years		3-5 years		More than 5 years
Operating lease commitments	$	3,754	$	71	$	977	$	1,486	$	1,220

Based on our review, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

~~Our~~We ~~commitments~~have ~~for~~previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance ~~operating~~sheet ~~leases~~of ~~include~~Tercica, ~~leases~~Inc. as of December 31, 2007, and the related statements of operations, stockholders’ equity, and cash flows for ~~real~~the ~~estate~~year ~~covering~~then ~~our~~ended ~~present~~not presented herein and ~~future~~in ~~facility~~our report dated February 27, 2008, we expressed an unqualified opinion on those financial statements and ~~office~~included ~~equipment~~explanatory paragraphs for the Company’s change in its method of accounting for stock-based compensation in accordance with guidance provided in Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 2007, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

In/s/ ~~March~~ERNST & ~~2005,~~YOUNG weLLP entered into a new lease agreement for a facility in Brisbane, California. The term of the lease is 75 months, and rent is abated for the first 15 months. The minimum lease commitment for this lease has been included in the table above.

WePalo ~~have contractual payment obligations~~Alto, ~~the~~California timing of which is contingent on future events. Under our license agreements with Genentech, aggregate payments of up to $1.5 million would be due if milestones relating to the initial product approvals of rhIGF-1 for Severe Primary IGFD in the United States and Europe are achieved. Additional milestone payments would be due for subsequent indication approvals, including for approvals of products consisting of rhIGF-1 or IGF binding protein 3, in the United States or in Europe.

~~Under our agreement with Cambrex Baltimore~~August 4, we2008 are obligated to reimburse Cambrex Baltimore on a time and materials and per batch basis in connection with the establishment and validation of our rhIGF-1 manufacturing process. We estimate that our remaining fiscal 2005 purchase commitment to Cambrex Baltimore as of March 31, 2005 is approximately $3.1 million for the remainder of 2005.

Operating Capital and Capital Expenditure Requirements

We believe that our cash, cash equivalents and short-term investments as of March 31, 2005 of $92.1 million and proceeds available under our senior credit facility will be sufficient to meet our projected operating and capital expenditure requirements through at least the end of 2006 based on our current business plan. We plan to make significant expenditures to support our marketing, sales, regulatory and clinical trial activities. As of March 31, 2005, the establishment and validation of our rhIGF-1 manufacturing process and the development projects for Severe Primary IGFD were substantially complete, and we filed our NDA for Severe Primary IGFD in February 2005. In October 2004, we initiated a Phase III clinical trial for Primary IGFD and expect to initiate additional clinical trials. Our projects may be subject to change from time to time as we evaluate our research and development priorities and available resources. These projects may also yield varying results that could delay, limit or change the timing of a project’s advancement through various stages of product development and significantly impact the costs to be incurred in bringing a project to completion. As a result, the costs to complete such projects, as well as the timing of net cash outflows, are not reasonably estimable.

Our future capital needs and the adequacy of our available funds will depend on many factors, including:

• the costs, timing and scope of domestic and international regulatory approvals for rhIGF-1;

•ITEM ~~our~~2. ~~ability~~MANAGEMENT’S toDISCUSSION ~~market~~AND ~~and~~ANALYSIS ~~sell~~OF ~~rhIGF-1~~FINANCIAL ~~that~~CONDITION ~~generates~~AND ~~significant~~RESULTS ~~revenues;~~OF OPERATIONS.

•This report includes “forward-looking statements” within the ~~commercial~~meaning ~~readiness~~of Section 27A of ~~our~~the ~~rhIGF~~Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-1looking ~~manufacturing~~statements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statement of the plans and objectives of management for future operations, atany ~~Cambrex~~statements ~~Baltimore~~concerning proposed new products or licensing or collaborative arrangements, any statements regarding product development, clinical trial timelines, commercialization and/or regulatory approvals, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” or “continue” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the ~~success~~Risk Factors set forth under Part II, Item 1A below, and for the reasons described elsewhere in this report. All forward-looking statements and reasons why results may differ included in this report are made as of ~~our~~the ~~cGMP~~date ~~production~~hereof, ~~activities;~~and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.

•Overview ~~the success of drug product manufacturing and results of stability and product comparability studies performed at third-party contractors;~~

•We ~~the~~are ~~rate~~a ofbiopharmaceutical ~~progress~~company developing and ~~cost~~marketing a portfolio of ~~our~~endocrine ~~future~~products. ~~clinical~~We ~~trials~~currently have the following products and ~~other~~product ~~research~~candidates in our commercialization and development ~~activities;~~portfolio:

• Increlex® (recombinant human insulin-like growth factor-1), which is approved for marketing in the ~~pace~~United ofStates. ~~expansion~~the ofEuropean ~~administrative~~Union, ~~expenses;~~Israel and Taiwan;

• Somatuline® Depot (extended release lanreotide), which is approved for marketing in both the ~~status~~United ofStates ~~competing~~and ~~products.~~Canada; and

~~Due~~• toTwo ~~the~~product ~~significant~~candidates ~~risks~~containing ~~and~~different ~~uncertainties~~combinations ~~inherent~~of inGenentech ~~the~~Inc’s ~~manufacturing,~~recombinant ~~clinical~~human ~~development~~growth ~~and regulatory approval processes~~hormone, ~~the~~or ~~costs~~rhGH ~~to complete~~(Nutropin ~~our~~AQ®), ~~projects~~and ~~through~~recombinant ~~product~~human ~~commercialization~~insulin-like ~~are~~growth ~~not~~factor-1, ~~accurately~~or ~~predictable.~~rhIGF-1 ~~Results from regulatory review~~(i.e., ~~manufacturing~~Increlex®). ~~operations~~One ~~and~~product ~~clinical~~candidate ~~trials~~is ~~may~~for ~~not~~the betreatment ~~favorable.~~of ~~Further,~~short ~~data~~stature ~~from~~associated ~~clinical~~with ~~trials~~low isinsulin-like ~~subject~~growth tofactor-1, ~~varying interpretation~~or IGF-1, levels and ~~may~~the beother ~~deemed~~product ~~insufficient~~candidate byis for the ~~regulatory~~treatment ~~bodies~~of ~~reviewing~~adult ~~applications~~growth ~~for~~hormone ~~marketing~~deficiency, ~~approvals~~or AGHD. AsIn ~~such~~January 2008, ~~our~~we ~~development~~initiated ~~projects~~dosing ~~are~~patients ~~subject~~with toNutropin ~~risks,~~AQ® ~~uncertainties~~ and ~~changes~~Increlex® ~~that~~in ~~may~~a ~~significantly~~Phase ~~impact~~II ~~cost~~study ~~projections and~~for ~~timelines.~~the Astreatment aof ~~result,~~short ~~our~~stature ~~capital~~associated ~~requirements~~with ~~may~~low ~~increase~~IGF-1 ~~in future periods~~levels.

Increlex® . We ~~expect~~market ~~that~~Increlex® weas ~~will~~a ~~require~~long-term ~~and~~replacement ~~attempt~~therapy tofor ~~raise~~the ~~additional~~treatment ~~funds~~of ~~through~~short ~~equity~~stature in children with severe primary insulin-like growth factor-1 deficiency, or ~~debt~~severe Primary ~~financings~~IGFD, ~~collaborative~~and ~~arrangements~~for children with ~~corporate~~growth ~~partners~~hormone orgene ~~from~~deletion ~~other~~who ~~sources~~have developed neutralizing antibodies to growth hormone. We ~~have~~commenced nomarketing ~~commitments~~Increlex® ~~for~~in ~~any~~the United States in ~~additional~~January ~~financings~~2006. We are currently conducting a Phase IIIb clinical trial for the use of Increlex® for the treatment of short stature in children with Primary IGFD, a less severe and ~~additional~~more prevalent ~~funding~~form ~~may~~of ~~not~~insulin-like begrowth ~~available~~factor-1 deficiency, or IGFD. Patient enrollment for this trial was completed in July 2007, and we expect to ~~finance~~present ~~our~~data ~~operations~~from ~~when~~this ~~needed~~trial orat a medical conference in the fourth quarter of 2008. In a meeting held on ~~acceptable~~July 30, ~~terms~~2008 with the U.S. ~~Additional~~Food ~~funding~~and ~~may~~Drug ~~also~~Administration, ~~result~~or FDA, preliminary data from this trial was discussed. These preliminary data suggest that the trial will meet its primary endpoint of statistically significant increase in first-year ~~dilution~~height velocity compared to ~~our~~the ~~stockholders~~observation-only group. As part of these discussions, however, the FDA requested additional long-term clinical data as part of the process for seeking approval from the FDA for marketing Increlex® for the treatment of short stature in children with Primary IGFD. Based on the FDA’s request, we plan to review the regulatory strategy for Increlex® for the treatment of short stature in children with Primary IGFD.

In August 2007, the European Commission granted marketing authorization for Increlex^® in the European Union for the long-term treatment of growth failure in children and adolescents with severe Primary IGFD. Pursuant to our worldwide strategic collaboration with Ipsen that was completed in October 2006, we granted to Ipsen and its affiliates the exclusive right under our patents and know-how to develop and commercialize Increlex^® in all countries of the world except the United States, Japan, Canada, and for a certain period of time, Taiwan and certain countries of the Middle East and North Africa for all indications, other than treatment of central nervous system and diabetes indications. Ipsen has launched Increlex^® in Austria, Germany, Great Britain, Spain, Sweden, Portugal, Italy, France, Denmark, the Netherlands, Norway, Poland and the Czech Republic, and expects to launch Increlex^® in additional European countries during 2008.

Increlex^® generated net product revenues of $4.6 million and $8.0 million in the three and six months ended June 30, 2008, respectively. Net product revenues include supply revenues for Increlex^® shipped to Ipsen of $0.4 million and $0.7 million in the three and six months ended June 30, 2008 but excludes royalties paid to us by Ipsen on sales made by Ipsen in their territories.

~~Risk~~Somatuline® ~~Factors~~Depot. Pursuant to our worldwide strategic collaboration with Ipsen, we have the exclusive right under Ipsen’s patents and know-how to develop and commercialize Somatuline® Depot in the United States and in Canada for all indications other than opthalmic indications. In territories outside the United States, including Canada, the product is known as Somatuline® Autogel®. On August 30, 2007, Ipsen received notice of approval from the Food & Drug Administration (“FDA”) for marketing Somatuline® Depot in the United States for the long-term treatment of acromegaly in patients who have had an inadequate response to surgery and/or radiotherapy, or for whom surgery and/or radiotherapy is not an option. Acromegaly is a hormonal disorder that results from excess production of growth hormone typically due to a tumor in the pituitary gland, resulting in overproduction of IGF-1. In July 2006, Somatuline® Autogel® was approved for marketing by Health Canada for the same indication. Somatuline® Autogel® has received provincial formulary listings for reimbursement approval in the provinces of Quebec, Nova Scotia, Newfoundland and Labrador, New Brunswick, Saskatchewan, and for Alberta Blue Cross and we are awaiting reimbursement approval in the province of Ontario. At present, we have contracted sales and marketing operations in Canada to a third party. We launched Somatuline® Depot in November 2007 in the United States.

WeSomatuline® ~~have~~Depot ~~identified~~generated ~~the~~net ~~following~~product ~~additional~~revenues ~~risks and uncertainties that may have a material adverse effect on our business, financial condition or results~~ of ~~operations~~$1.6 ~~Investors~~million ~~should~~and ~~carefully consider the risks described below before making an investment decision~~$2.6 ~~The~~million ~~risks~~in ~~described below are not~~ the ~~only~~three ~~ones~~and wesix ~~face.~~months ~~Additional~~ended ~~risks~~June 30, not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks2008, ~~and investors may lose all or part of their investment~~respectively.

~~Risks~~Growth ~~Related~~hormone/IGF-1 Combination Product Candidates. In July 2007, we entered into a combination product development and commercialization agreement with Genentech that governs the development, manufacture and worldwide commercialization of two product candidates containing Nutropin AQ®, Genentech’s rhGH, and Increlex®, for the treatment of all indications except those of the central nervous system. In January 2008, we began dosing the first patients in a Phase II clinical study evaluating the combination of the Nutropin AQ® and Increlex® for the treatment of short stature associated with low IGF-1 levels. The primary objective of this trial is to ~~Our~~assess ~~Business~~the efficacy, measured as first-year height velocity, and safety of three different combination regimens of Nutropin AQ® and Increlex® compared to Nutropin AQ® alone in the treatment of short stature associated with low IGF-1 levels. Although the goal of the program is to develop a co-mixture of Nutropin AQ® and Increlex® administered as a single injection, the patients enrolled in this trial have received separate injections of each of Nutropin AQ® and Increlex®.

WeAs ~~are~~of aJune 30, ~~development~~2008, ~~stage~~we ~~company~~had ~~with~~approximately a$71.4 million in cash, cash equivalents and short-term investments. We have generated limited ~~operating~~revenues from product sales to date and we have funded our operations since inception primarily through the private placements of equity securities and public offerings of our common ~~history~~stock, as well as through our collaboration with Ipsen. Since our inception we have incurred substantial net losses and ~~may~~we ~~not~~expect beto ~~able~~incur substantial net losses for the foreseeable future as we attempt to ~~commercialize~~develop, ~~any~~market ~~products~~and sell Increlex® and Somatuline® Depot, ~~generate~~and ~~revenue~~as we attempt to develop growth hormone/IGF-1 combination products under our combination product collaboration with Genentech. We are unable to predict the extent of any future losses or ~~attain~~when ~~profitability~~we will become profitable, if ever.

WeProposed ~~are a development stage company focused on the development and commercialization of Increlex™ for the treatment of short stature and other endocrine disorders. From our inception~~Acquisition inby ~~October~~Affiliates ~~2000 through March 31, 2005, we have accumulated a deficit~~ of ~~$128.6~~Ipsen million. We have not generated and may not be able to generate any revenue from operations and may not be able to attain profitability. We incurred a net loss of $9.1 million during the quarter ended March 31, 2005. We expect to incur substantial net losses, in the aggregate and on a per share basis, for the foreseeable future as we attempt to develop and commercialize Increlex for Severe Primary IGFD and Primary IGFD. We are unable to predict the extent of these future net losses, or when we may attain profitability, if at all. These net losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity and net current assets.

WeOn ~~anticipate~~June 4, ~~that~~2008, ~~for~~we entered into an Agreement and Plan of Merger, or the ~~foreseeable~~Merger ~~future~~Agreement, with Beaufour ~~our~~Ipsen ~~ability~~Pharma, toa ~~generate~~société ~~revenues~~par actions simplifiée organized under the laws of France, or Parent, a wholly owned subsidiary of Ipsen, and ~~achieve~~Tribeca ~~profitability~~Acquisition ~~will~~Corporation, bea ~~solely~~Delaware corporation ~~dependent~~and ona wholly-owned subsidiary of Parent, or Merger Sub pursuant to which Parent would acquire all of the ~~successful~~shares ~~commercialization~~of Tercica common stock that Ipsen and its affiliates do not currently own at a price of ~~Increlex~~$9.00 ~~for~~per ~~the~~share ~~treatment~~in cash. Ipsen and Suraypharm, each of ~~Severe~~which ~~Primary~~are ~~IGFD~~affiliates of Parent and ~~Primary~~Merger ~~IGFD~~Sub, beneficially owned 42.6% ~~There~~of isour nooutstanding ~~assurance~~common westock ~~will~~as beof ~~able~~July to31, ~~obtain~~2008 (including shares of our common stock issued upon exercise of a warrant and conversion of three ~~governmental~~convertible ~~regulatory~~notes, ~~approval~~issued to ~~market~~Ipsen, ~~Increlex~~but inexcluding ~~the~~shares ~~United~~subject ~~States~~to orlimited ~~Western~~voting ~~Europe~~agreements ~~for~~that ~~these~~Ipsen ~~indications~~and orits ~~any~~affiliates entered into with certain of our other ~~indication~~stockholders). IfThe weMerger ~~are~~Agreement ~~unable~~provides that, upon the terms and subject to ~~generate~~the conditions ~~significant~~set ~~revenue~~forth ~~from~~in ~~Increlex~~the Merger Agreement, Merger Sub will merge with and into us, we will be the surviving corporation of the merger, or ~~attain~~the ~~profitability~~Merger. As a result of the Merger, we will ~~not~~become bea ~~able~~wholly-owned ~~to sustain~~subsidiary ~~our~~of ~~operations~~Parent and its affiliates.

IfAt wethe doeffective ~~not~~time ~~receive~~of ~~a regulatory~~the ~~marketing~~Merger, ~~approval~~each outstanding share of ~~Increlex~~our ~~for~~common ~~Severe~~stock ~~Primary~~(other ~~IGFD,~~than ~~our~~shares ~~business~~held by the Parent and its affiliates or by stockholders who have validly exercised appraisal rights) will be ~~harmed~~converted into the right to receive $9.00 per share in cash, without interest, to be paid upon completion of the Merger.

WeThe ~~need~~Merger ~~FDA~~Agreement ~~approval~~and tothe ~~market~~Merger ~~Increlex~~were ~~for~~unanimously ~~therapeutic~~approved ~~uses~~by inour Board of Directors following the ~~United~~unanimous ~~States.~~recommendation Weby ~~are~~a ~~currently~~special ~~developing~~committee ~~Increlex~~of our ~~for~~Board ~~the~~of ~~treatment~~Directors comprised of ~~Severe Primary~~three ~~IGFD~~independent non-employee directors. The special committee was advised by independent legal and ~~Primary~~financial ~~IGFD~~advisors. WeThe ~~submitted~~obligations anof ~~NDA~~the inparties to consummate the ~~United~~Merger ~~States~~are ~~for~~conditioned ~~marketing~~upon, ~~Increlex~~among ~~for~~other things, the ~~treatment~~adoption of ~~Severe~~the ~~Primary~~Merger ~~IGFD~~Agreement by our stockholders and other closing conditions. Although the Merger is expected to close in ~~February~~the ~~2005,~~third ~~which~~or ~~was~~fourth ~~accepted~~quarter ~~for~~of ~~filing~~2008, ~~and~~there ~~granted~~can ~~priority~~be ~~review~~no byassurances that the ~~FDA~~Merger inwill ~~April~~be ~~2005~~completed within such time frame, or at all. ~~The~~For ~~FDA~~more ~~has substantial~~information ~~discretion~~on inthe risks and uncertainties related to the ~~approval~~Merger, ~~process~~see ~~and~~Part ~~may:~~II, Item 1A – “Risk Related to the Merger.”

•The ~~decide~~Merger ~~after~~Agreement ~~review~~may ofbe ~~our~~terminated ~~NDA~~in certain circumstances, including in the event that ~~our~~the ~~data~~Merger is ~~insufficient~~not completed by January 1, 2009. The Merger Agreement requires us to ~~allow~~pay ~~approval~~Parent a termination fee in the amount of ~~Increlex~~$11.0 ~~for~~million ~~Severe~~if ~~Primary~~the ~~IGFD;~~Merger ~~and/or~~Agreement is terminated under certain circumstances, as described in more detail in “Note 3— Proposed Acquisition by Affiliates of Ipsen S.A.” in the notes to our condensed financial statements.

•In ~~limit~~connection ~~our~~with ~~approval~~the execution of the Merger Agreement certain officers and~~/or~~ ~~restrict~~members of our ~~marketing~~Board ~~labeling~~of Directors entered into voting agreements pursuant to awhich ~~small~~they ~~subset~~have agreed to, among other things, vote in favor of ~~patients~~the ~~with~~adoption ~~Severe~~of ~~Primary~~the ~~IGFD~~Merger Agreement.

We cannot predict the size of the subset of patients with Severe Primary IGFD to which the FDA may limit any marketing approval and labeling for Increlex. If we fail to obtain the FDA’s approval for the marketing of Increlex for this indication, we will not be able to commercialize Increlex in the near term, and our business will be harmed.

In the protocol for the Phase III clinical trial that we are using to support our NDA filing for Severe Primary IGFD, the disease being treated was identified as growth hormone insensitivity syndrome, or GHIS. Everywhere in this report where we discuss existing Phase III clinical trial results for rhIGF-1, such results were from children identified at the time as having GHIS. However, there are varying academic and clinical terminologies that describe children with GHIS and IGF-1 deficiency. We believe that the disease described by the term Severe Primary IGFD is substantially equivalent to the disease described by the term GHIS, relates to approximately the same number of pediatric patients and accurately describes the pediatric patient population for which we will be filing our NDA and seeking regulatory marketing approval.

If the FDA disagrees with us and determines that Severe Primary IGFD is not substantially equivalent to GHIS and/or that the number of children with GHIS are less than those with Severe Primary IGFD, the FDA may:

• determine that our data do not support an NDA filing for Severe Primary IGFD;

• may not approve our NDA for the treatment of Severe Primary IGFD; and/or

• may limit our approval and/or restrict our marketing labeling to a small subset of patients with Severe Primary IGFD.

Even if the FDA agrees with us that Severe Primary IGFD is substantially equivalent to GHIS, the FDA may:

• still determine that our data do not support an NDA filing for Severe Primary IGFD or GHIS;

•In ~~not~~addition, ~~approve~~Parent obtained agreements from certain of its affiliates holding our ~~NDA~~common ~~for~~stock that each of them shall vote, or cause to be voted, any shares of our common stock issued and outstanding on the ~~treatment~~date of ~~Severe~~the ~~Primary~~execution ~~IGFD~~of the Merger Agreement that are beneficially owned by such affiliate or ~~GHIS;~~over which such affiliate has voting power, in favor of adoption and/ approval of the Merger Agreement. The Merger agreement provides that Parent shall enforce its rights under these voting agreements to ensure that these stockholders vote or cause to be voted the common stock beneficially owned by them to which they have the power in favor of the adoption of the Merger Agreement.

•Critical ~~limit~~Accounting ~~our~~Policies ~~approval~~ and~~/or~~ ~~restrict~~the ~~our~~Use ~~marketing labeling to a small subset~~ of ~~patients with Severe Primary IGFD.~~Estimates

~~Since~~Our management’s discussion and analysis of our ~~marketing~~financial ~~approval~~condition and results of operations are based on our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for ~~Severe~~interim ~~Primary~~financial ~~IGFD~~information. isThe ~~key~~preparation toof our ~~business~~financial ~~plan~~statements requires management to make estimates and ~~development~~assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. During 2008, we adopted the new accounting standard Statement of ~~Increlex~~Financial Accounting Standards No. 157, ~~any~~Fair Value Measurements, or SFAS No. 157, related to the fair value measurements of our assets and liabilities as described more fully below. Other than the ~~FDA’s~~adoption ~~determinations~~of SFAS No. 157, ~~requirements~~there orhave ~~labeling~~been ~~restrictions~~no significant ~~discussed~~changes ~~above~~in ~~would~~our ~~substantially~~significant ~~harm~~accounting policies during the six months ended June 30, 2008 as compared to the significant accounting policies described in our ~~business~~Annual Report on Form 10-K for the year ended December 31, 2007. For a discussion of these critical accounting policies, please see the discussion in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

The ~~means~~items ~~by which the FDA could restrict our marketing labeling could include, for example, requiring us to include~~ in our ~~Increlex~~condensed ~~labeling~~financial ~~additional specific~~statements ~~diagnostic tests to establish the diagnosis of Severe Primary IGFD and/or~~ requiring ~~that~~significant ~~children~~estimates ~~must fail to respond to treatment with growth hormone prior to being treated with Increlex. Such requirements would add additional cost~~ and ~~complexity~~ injudgments ~~making~~are ~~the~~as ~~diagnosis~~follows: ~~of Severe Primary IGFD and substantially limit the number of patients for whom Increlex is prescribed, which would substantially harm our business.~~

~~The~~Revenue ~~regulatory~~Recognition review and marketing approval process in the United States, which includes evaluation of preclinical studies and clinical trials of our rhIGF-1 for Severe Primary IGFD, as well as the evaluation of our manufacturing process and our contract manufacturers’ facilities, is lengthy, expensive and uncertain. Securing FDA approval for Increlex for Severe Primary IGFD will require the submission of extensive preclinical and clinical data and supporting information to the FDA to establish Increlex’s safety and effectiveness for this indication, as well as for any additional indications for which we seek marketing approval. We have limited experience in filing and pursuing applications necessary to gain FDA approvals.

We ~~have~~recognize ~~completed~~revenue from the ~~manufacturing~~sale of ~~the~~our ~~conformance~~products ~~lots~~and inlicense ~~our~~and ~~process~~collaboration ~~validation~~agreements pursuant ~~campaign.~~to IfStaff ~~the~~Accounting ~~FDA~~Bulletin isNo. 104, ~~not~~Revenue ~~satisfied~~Recognition, ~~with~~and ~~our~~Emerging ~~validation~~Issues ~~data~~Task Force, ~~we may~~or ~~need~~EITF. toIssue ~~expend~~00-21 ~~additional~~Revenue ~~resources~~Arrangements towith ~~conduct~~Multiple ~~further~~Deliverables, ~~studies~~or toEITF ~~obtain~~00-21. ~~manufacturing~~Multiple ~~data~~element ~~that~~agreements ~~the~~entered ~~FDA~~into ~~believes~~are evaluated isunder ~~sufficient.~~the ~~Depending~~provision onof ~~the~~EITF ~~extent~~00-21. ofWe ~~these~~evaluate ~~additional~~whether ~~studies,~~there ~~approval~~is ofstand-alone ~~our~~value ~~NDA~~for orthe ~~other~~delivered ~~applications~~elements ~~may~~and beobjective ~~delayed~~and ~~by several~~reliable ~~years,~~evidence orof ~~may~~fair ~~require~~value usto allocate revenue to ~~expend~~each ~~more~~element ~~resources~~in ~~than~~multiple weelement ~~have~~agreements. ~~planned~~When orthe delivered ~~are~~element ~~available.~~does Itnot ishave ~~also~~stand-alone ~~possible~~value ~~that~~or ~~additional~~there ~~studies~~is ~~may~~insufficient ~~not~~evidence ~~suffice~~of tofair ~~make~~value ~~our~~for ~~NDA~~the orundelivered ~~other~~element(s), ~~applications~~we ~~approvable.~~recognize Ifthe ~~any~~consideration offor ~~these~~the ~~outcomes~~combined ~~occur,~~unit weof ~~may~~accounting ~~be forced~~in tothe ~~abandon~~same ~~our~~manner ~~NDA~~as orthe ~~other~~revenue ~~applications~~is recognized for the ~~approval~~final deliverable, which ~~might~~is ~~cause~~generally usratably toover ~~cease~~the ~~operations~~longest period of involvement.

Product revenues. We ~~will~~recognize ~~need~~revenue from toproduct ~~file~~sales ~~similar~~when ~~applications~~there ~~with~~is ~~regulatory~~persuasive ~~authorities~~evidence inthat ~~foreign~~an ~~countries~~arrangement toexists, ~~market~~title ~~Increlex~~passes, ~~for~~the ~~any~~price ~~indications~~is infixed ~~those~~or ~~countries~~determinable and collectibility is reasonably assured. We record provisions for discounts to customers and rebates to government ~~have~~agencies ~~not~~and ~~yet~~international ~~filed~~distributors, awhich ~~regulatory~~are ~~application~~based inon ~~Europe~~contractual terms and regulatory requirements. IfThe werebates ~~fail~~and discounts may require management judgment to ~~obtain~~estimate ~~European~~percentage ~~approval,~~of ~~the~~eligible ~~geographic~~sales ~~market~~to these customers. Our product returns policy only allows for ~~Increlex~~the ~~would~~return beof ~~limited.~~product Ifdamaged ~~such~~in ~~approval~~transit, isproduct ~~delayed~~shipped in error by us, itor ~~would~~discontinued, ~~postpone~~withdrawn or recalled merchandise. To date, product returns have been de minimis and based on our ~~ability~~historical experience as well as the specialized nature of our products, we historically have not provided a reserve for product returns. We will continue to ~~generate~~monitor ~~revenues~~returns in ~~Europe.~~the future and will reassess the need to estimate a product returns reserve if the returns experience increases.

IfLicense ~~another~~revenues. ~~party~~License ~~obtains~~revenue ~~orphan~~generally ~~drug~~includes upfront and/ continuing licensing fees and milestone payments. Nonrefundable upfront fees that require our continuing involvement in manufacturing or other commercialization efforts by us are recognized as revenue ratably over the contractual term. Fees associated with substantive milestones, which are ~~pediatric~~contingent ~~exclusivity~~upon ~~for~~future ~~rhIGF-1~~events for ~~children~~which ~~with~~there ~~IGFD~~is reasonable uncertainty as to their achievement at the time the agreement was entered into, weare ~~may~~recognized beas ~~precluded~~revenue ~~from~~when ~~commercializing~~these ~~Increlex~~milestones, as defined in ~~that~~the ~~indication~~contract, are achieved.

~~Under~~Royalty ~~the~~revenues. ~~Orphan~~We ~~Drug~~recognize ~~Act,~~royalty ~~the~~revenues ~~FDA~~from ~~may~~sales ~~grant~~of ~~orphan~~Increlex® ~~drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals~~ in ~~the~~Ipsen’s ~~United~~territory ~~States.~~on ~~The company that obtains the first FDA approval for~~ a ~~designated~~sliding ~~orphan~~scale ~~drug~~from ~~for~~15% ato ~~rare~~25% ~~disease receives marketing exclusivity for use~~ of ~~that~~net ~~drug for the designated condition for a period of seven years~~sales. IfRoyalties aare ~~competitor~~recognized ~~obtains~~as ~~approval~~earned ~~before~~in usaccordance ofwith the ~~same~~contract ~~drug~~terms asand ~~defined~~when bycollectibility ~~the FDA, or if our drug~~ is ~~determined to be contained within that drug, for the same indication, we would be blocked from obtaining~~reasonably ~~approval for our product for seven years, unless our product can be shown to be clinically superior~~assured. In addition, more than one product may be approved by the FDA for the same orphan indication or disease as long as the products are different drugs. As a result, if our product is approved and receives orphan drug status, the FDA can still approve other drugs for use in treating the same indication or disease covered by our product, which could create a more competitive market for us.

InInventories some cases, pediatric exclusivity can provide an additional six months of market exclusivity. Under Section 505a of the Federal Food, Drug, and Cosmetic Act, six months of market exclusivity may be granted in exchange for the voluntary completion of pediatric studies in accordance with an FDA-issued “Written Request.” The FDA may issue a Written Request for studies on unapproved or approved indications, where it determines that information relating to the use of a drug in a pediatric population, or part of the pediatric population, may produce health benefits in that population. We have not requested or received a Written Request for such pediatric studies, although we may ask the FDA to issue a Written Request for such studies in the future. To receive the six-month pediatric market exclusivity, we would have to receive a Written Request from the FDA, conduct the requested studies, and submit reports of the studies in accordance with a written agreement with the FDA or, if there is no written agreement, in accordance with commonly accepted scientific principles. There is no guarantee that FDA will issue a Written Request for such studies or accept the reports of the studies. Although we intend to file for pediatric exclusivity where appropriate, we have not yet sought pediatric exclusivity for any indication.

~~Increlex~~Inventories ~~has received~~are ~~from~~stated at the ~~FDA~~lower ~~orphan~~of ~~drug~~cost ~~designation~~or ~~for~~market. Cost is determined using the ~~treatment~~first-in, first-out basis. The valuation of ~~GHIS.~~inventory Werequires ~~believe~~management ~~that~~to ~~the~~estimate ~~disease~~obsolete ~~described~~or byexcess ~~the~~inventory ~~term~~based ~~Severe~~on ~~Primary~~analysis ~~IGFD~~of isfuture ~~substantially~~demand ~~equivalent~~for our products. Due to the ~~disease~~nature ~~described~~of byour ~~the~~business ~~term~~and ~~GHIS~~our target market, ~~relates~~levels toof ~~approximately~~inventory ~~the~~in ~~same~~the ~~number~~distribution ofchannel, ~~pediatric~~changes ~~patients,~~in demand due to price changes from competitors and ~~accurately~~introduction ~~describes~~of ~~the~~new ~~pediatric~~products ~~patient~~are ~~population~~not significant factors when estimating our excess or obsolete inventory for ~~which~~Increlex® webut ~~have~~can ~~filed~~be ~~our~~significant ~~NDA~~factors ~~and~~in ~~are~~estimating ~~seeking~~excess ~~regulatory~~or ~~marketing~~obsolete ~~approval~~inventories for Somatuline® Depot. ~~However,~~If ~~with~~inventory ~~respect~~costs exceed expected market value due to obsolescence ~~orphan~~or ~~drug~~lack ~~designation~~of demand, ~~the~~inventory ~~FDA~~write-downs may ~~determine~~be ~~that Severe~~recorded ~~Primary~~as ~~IGFD~~deemed isnecessary ~~not~~by ~~substantially~~management ~~equivalent~~for tothe ~~GHIS~~difference between the cost and~~/or~~ ~~that~~the market value in the ~~number~~period that impairment is first recognized. Inventories may include products manufactured at facilities awaiting regulatory approval and are capitalized based on our judgment of ~~children~~probable ~~who~~near ~~have~~term ~~GHIS~~regulatory isapproval. ~~less~~In ~~than~~addition, ~~those~~inventories ~~with~~include employee stock-based compensation expenses capitalized under SFAS No. 123R.

~~Severe~~In ~~Primary IGFD. Accordingly~~general, ~~even~~the ifprocess ~~we were to receive an FDA marketing approval~~ for ~~Severe~~evaluating ~~Primary~~whether ~~IGFD,~~there ~~our~~exists ~~orphan~~excess ~~drug~~or ~~marketing~~obsolete ~~designation~~inventory ~~and exclusivity~~is ~~may~~not ~~be limited to~~ a ~~small~~complex process ~~subset~~and ofdoes ~~children~~not ~~with~~require ~~Severe~~significant ~~Primary~~management ~~IGFD~~judgment. WeThe ~~cannot~~factors ~~predict~~considered ~~the~~in ~~size~~evaluating ofwhether ~~the~~there ~~subset~~exists ofexcess ~~children~~or ~~with~~obsolete ~~Severe~~inventory ~~Primary~~are: IGFD to which our orphan drug marketing exclusivity may be limited. If we do not obtain orphan drug marketing exclusivity for Severe Primary IGFD, we could face competition for these patients, and our business would be harmed.

We• are aware of a drug being developed by Insmed Incorporated, which we believe is a combination product containing rhIGF-1, that is in development for the treatment of GHIS. In January 2005, Insmed announced that it had filed an NDA for its combination product for the GHIS indication. In March 2005, Insmed announced that the FDA had accepted Insmed’s NDA for filing, and in April 2005, Insmed announced that the FDA had granted its NDA filing priority review, which could lead to FDA approval of Insmed’s product by July 3, 2005. This product has received an orphan drug designation from the FDA, and in Europe, the European Medicines Agency, or EMEA, for the treatment of GHIS. The FDA and EMEA could determine that this other product is the same drug as our ~~product~~forecast ~~or that our product is contained within this other product and is used for the same indication. If the FDA or EMEA make this determination and Insmed’s product is approved first, the approval~~ of ~~Increlex~~future ~~for either Severe Primary IGFD or Primary IGFD could be blocked for up to seven and one-half years in the United States~~demand, ~~and ten years in Europe,~~ which ~~could~~ ~~force us to curtail or cease our operations. Even if our product~~ is ~~approved~~updated ~~first,~~on wea ~~may~~quarterly not be able to benefit from the orphan drug marketing exclusivity if Insmed’s product is determined by the FDA or EMEA to be clinically superior because products that are clinically superior may be approved for marketing by the FDA and EMEA notwithstanding our initial approval and our initial orphan drug marketing exclusivity. basis;

If• ~~there~~the ~~are~~expiration ~~fewer~~date ~~children~~for ~~with~~each ~~Severe~~lot Primary IGFD or Primary IGFD than we estimate, we may not generate sufficient revenues to continue development of other products or to continue operations, or we may not be able to complete our clinical trials. manufactured;

If• ~~there~~any ~~are~~noncancelable ~~fewer~~open ~~children~~purchase ~~with~~orders ~~Severe~~associated Primary IGFD or Primary IGFD than we estimate, we may not generate sufficient revenues to continue development of other indications or products and may cease operations. We estimate that the number of children in the United States with short stature is approximately one million, of which approximately 380,000 are referred to pediatric endocrinologists for evaluation. We believe that approximately 30,000 of these children have Primary IGFD, of which approximately 6,000 have Severe Primary IGFD. Our estimate of the size of the patient population is based on published studies as well as internal data, including our ~~interpretation~~commercial ofsupply ~~a study conducted as part of Genentech’s National Cooperative Growth Study program~~agreements. This study reported results of the evaluation of the hormonal basis of short stature in approximately 6,450 children referred to pediatric endocrinologists over a four-year period. We believe that the aggregate numbers of children in Western Europe with Primary IGFD and Severe Primary IGFD are substantially equivalent to the numbers in the United States. If the results of Genentech’s study or our interpretation of and extrapolation from the study do not accurately reflect the number of children with Primary IGFD or Severe Primary IGFD, our assessment of the market may be incorrect, making it difficult or impossible for us to meet our revenue goals or to enroll a sufficient number of patients in our clinical trials on a timely basis, or at all.

In May 2007, we began to transfer our manufacturing process to new facilities and as such, there will be a period of time where we will need to cease production of Increlex® ~~may~~until ~~fail~~the new manufacturing facilities are fully validated, approved by the FDA and operational. We are increasing our inventory levels in an effort to ~~achieve~~ensure ~~market~~that ~~acceptance~~we have adequate supplies to meet future demand and therefore our long-term Increlex® sales forecast will become more critical in management’s evaluation of excess Increlex® inventories throughout 2008. Once the transfer of manufacturing facilities is complete, ~~which~~we ~~could~~will ~~harm~~have more flexibility in the manufacturing schedule to ensure inventory supply is in line with a shorter forward demand forecast for Increlex®. As of June 30, 2008, we had total inventories of $26.3 million. Total inventories of $26.3 million included work-in-process inventory of $5.5 million at our ~~business~~new fill and finish manufacturing agent, that will be available to us as finished goods only upon a successful approval of manufacturing process transfer by the FDA. The FDA requires that when technical processes are transferred to a new manufacturer, a certain number of conformance lots must be produced using the new manufacturers facilities and evaluated for process consistency.

~~rhIGF-1~~Valuation ~~has~~of ~~never~~Derivative ~~been~~Instruments commercialized in the United States or Western Europe for any indication. Even if approved for sale by the appropriate regulatory authorities, physicians may not prescribe Increlex, in which event we may be unable to generate significant revenue or become profitable.

~~Acceptance~~We issued a convertible note denominated in Euros in September 2007 and valued certain features embedded therein as derivative liabilities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities or SFAS No. 133. We estimate the fair value of ~~Increlex~~our ~~will~~derivative ~~depend~~liabilities each quarter using the Black-Scholes-Merton valuation model. This model is complex and requires significant judgments in the estimation of fair values based on acertain assumptions. ~~number~~Factors affecting the amount of ~~factors~~these ~~including:~~liabilities include changes the market value of our common stock, changes in Euro to U.S. dollar currency exchange rates and other assumptions. Changes in value are recorded as non-cash valuation adjustments within change in estimated fair value of embedded derivative in our condensed statement of operations. The embedded derivative liability does not qualify for hedge accounting under SFAS No. 133 and therefore, subsequent changes in fair value are recorded as non-cash valuation adjustments within change in estimated fair value of embedded derivative in our condensed statements of operations.

•On ~~acceptance~~July 22, of2008, ~~Increlex~~the convertible note denominated in Euros was converted in full by ~~physicians~~Ipsen ~~and~~into ~~patients~~shares of our common stock as adescribed ~~safe~~in ~~and~~more ~~effective~~detail ~~treatment;~~in “Note 11—Subsequent Events” in the notes to our condensed financial statements.

•Recent ~~adequate~~Accounting ~~reimbursement~~Pronouncements ~~by third parties;~~

•In ~~relative~~the ~~convenience~~first quarter of 2008, we adopted SFAS No. 157 for financial assets and ~~ease~~liabilities. ofThis ~~administration~~standard ofdoes ~~Increlex;~~not apply measurements related to share-based payments, nor does it apply to measurements related to inventory.

•SFAS ~~prevalence~~No. 157 ~~and~~discusses ~~severity~~valuation techniques, such as the market approach (comparable market prices), the income approach (present value of ~~side~~future ~~effects;~~income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

• ~~competitive~~Level ~~product~~1: ~~approvals~~Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

~~Reimbursement~~• ~~may~~Level ~~not~~2: beInputs ~~available~~(other than quoted prices included Level 1) are either directly or indirectly observable for ~~Increlex,~~the ~~which~~asset ~~could~~or ~~diminish~~liability ~~our~~through ~~sales~~correlation with market data at the measurement date and ~~impact~~for ~~our~~the ~~ability~~duration toof ~~achieve~~the ~~profitability~~instrument’s anticipated life.

~~Market~~• ~~acceptance,~~Level ~~our~~3: ~~sales~~Inputs ofreflect ~~Increlex~~management’s ~~and~~best ~~our profitability~~estimate ~~will~~of ~~depend~~what onmarket ~~reimbursement~~participants ~~policies~~would ~~and~~use ~~health~~in ~~care~~pricing ~~reform~~the ~~measures.~~asset ~~The~~or ~~levels~~liability at ~~which government authorities and third-party payors, such as private health insurers and health maintenance organizations, reimburse~~ the ~~price patients~~measurement ~~pay for our product will affect the commercialization of Increlex~~date. WeConsideration ~~believe~~is ~~that~~given ~~Increlex will be reimbursed~~ to athe ~~similar~~risk ~~extent~~inherent ~~that~~in ~~growth~~the ~~hormone~~valuation ~~therapy~~technique isand ~~reimbursed.~~the Ifrisk ~~our~~inherent ~~assumption regarding reimbursement for Increlex is incorrect, our expected revenues may be substantially reduced. We cannot be sure that reimbursement~~ in the ~~United~~inputs ~~States~~to ~~or elsewhere will be available for Increlex. If~~ the ~~FDA approves Increlex for Severe Primary IGFD, only prescriptions for that~~ model.

The impact of adoption of SFAS No. 157 is discussed in Note 10, “Fair Value of Financial Instruments” in the notes to our condensed financial statements. The fair values of our short-term investments and derivative liabilities are based on Level 2 inputs that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities, or SFAS No. 159, which permits entities to elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This election is irrevocable. SFAS No. 159 was effective in the first quarter of fiscal 2008. We did not elect to apply the fair value option to any of our financial instruments.

~~indication~~In ~~may~~June be2007, ~~reimbursable~~the FASB ratified EITF Issue No. 07-3, ~~Also~~Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities , weor ~~cannot~~EITF beNo. 07-3. ~~sure~~EITF No. 07-3 requires that ~~reimbursement~~nonrefundable ~~amounts~~advance ~~will~~payments ~~not~~for ~~reduce~~goods ~~the~~or ~~demand~~services ~~for,~~that will be used or ~~the~~rendered for future ~~price~~research ~~of,~~and ~~Increlex.~~development Weactivities ~~have~~be ~~not~~deferred ~~commenced~~and ~~efforts~~capitalized toand ~~have~~recognized ~~Increlex~~as ~~reimbursed~~an byexpense ~~governments~~as the goods are delivered or ~~third-party~~the ~~payors~~related services are performed. IfEITF ~~reimbursement~~No. 07-3 is ~~not~~effective, ~~available~~on ora isprospective ~~available~~basis, ~~only~~for tofiscal ~~limited~~years ~~levels~~beginning after December 15, we2007. ~~may~~The adoption of EITF No. 07-3 did not behave ~~able~~any toimpact ~~commercialize~~on ~~Increlex~~our financial position or results of operations.

WeIn December ~~believe~~2007, ~~that~~ the ~~price~~SEC ~~per~~issued ~~patient~~SAB ofNo. 110. ~~Increlex~~SAB ~~therapy~~No. 110 ~~for~~expresses the ~~treatment~~ views of ~~Primary~~the ~~IGFD~~staff ~~will~~regarding ~~not~~the beuse ~~less~~of ~~than~~the ~~approximately~~simplified ~~$20~~method,~~000~~ ~~per~~as ~~year.~~discussed ~~However,~~in weSAB ~~have~~No. 107, ~~not~~in ~~yet~~developing ~~determined~~an ~~what~~estimate of the ~~actual~~expected ~~price~~term ~~per~~of ~~patient~~“plain vanilla” ~~will~~share beoptions in accordance with SFAS No. 123R. InSAB ~~addition,~~110 itallows ispublic ~~possible~~companies ~~that~~which ~~the~~do ~~children~~no ~~receiving~~have ~~Increlex~~historically ~~therapy~~sufficient ~~during~~experience ~~the~~to ~~first few~~provide ~~years~~a ofreasonable ~~our~~estimate ~~launch~~to ~~are~~continue ~~younger~~use ~~and/or~~of ~~smaller~~the ~~than~~simplified ~~those~~method ~~children~~for ~~receiving~~estimating the expected ~~drug~~term inof ~~ensuing~~“plain ~~years~~vanilla” share option grants after December 31, ~~and~~2007. We currently uses the ~~price~~simplified ~~per~~method ~~patient~~to ~~could~~estimate bethe ~~less~~expected ~~than~~term infor ~~subsequent~~share ~~years.~~option Ifgrants ~~our~~as ~~assumptions~~it ~~regarding~~does ~~the~~not ~~price~~have ~~per~~enough ~~patient~~historical ofexperience ~~Increlex~~to ~~therapy~~provide ~~for~~a ~~the~~reasonable ~~treatment~~estimate. ofWe ~~Primary~~will ~~IGFD~~continue ~~are~~to ~~incorrect,~~use the ~~market~~simplified ~~opportunity~~method ~~for~~until ~~Increlex~~it ~~therapy~~has ~~for~~enough ~~the~~historical ~~treatment~~experience to provide a reasonable estimate of ~~Primary~~expected ~~IGFD~~term ~~may~~in beaccordance ~~substantially~~with ~~reduced~~SAB No. 110. SAB No. 110 was effective for us on January 1, 2008.

In ~~recent~~December ~~years~~2007, ~~officials~~the ~~have~~EITF ~~made~~ratified ~~numerous proposals to change~~ the ~~health~~consensus ~~care~~on ~~system~~EITF inIssue ~~the United States~~No. 07-1, ~~These~~Accounting ~~proposals~~for ~~include~~Collaborative Arrangements ~~measures~~Related ~~that~~to ~~would limit~~the orDevelopment ~~prohibit~~and ~~payments~~Commercialization ~~for~~of ~~certain~~Intellectual ~~medical~~Property, ~~treatments~~ or ~~subject~~EITF ~~the~~07-1. ~~pricing~~EITF of07-1 ~~drugs~~concludes tothat ~~government~~transactions ~~control.~~with Inthird ~~addition,~~parties in(that ~~many~~is, ~~foreign~~revenue ~~countries,~~generated ~~particularly~~and ~~the~~costs ~~countries~~incurred ofby ~~the~~participants ~~European~~from ~~Union,~~transactions ~~the~~with parties ~~pricing~~outside of ~~prescription~~the ~~drugs~~collaborative isarrangement) ~~subject to~~should ~~government~~be ~~control.~~reported Ifgross ~~our~~or ~~product~~net ~~becomes~~on ~~subject~~the toappropriate ~~government~~line ~~legislation~~item ~~that~~in ~~limits~~each orparticipant’s ~~prohibits~~respective ~~payment~~financial ~~for~~statements ~~Increlex,~~pursuant orto ~~that subjects~~ the ~~price~~guidance of ~~our~~EITF ~~product~~99-19. toEITF ~~governmental~~07-1 ~~control,~~is weeffective ~~may~~for ~~not~~fiscal beyears beginning ~~able~~after toDecember 15, ~~generate revenues~~2008, ~~attain profitability~~and orrequires ~~commercialize~~retrospective ~~our~~application ~~product~~if practicable. ~~Because~~We ~~these~~do ~~initiatives~~not ~~are~~expect ~~subject~~that ~~to substantial political debate, which we cannot predict,~~ the ~~trading~~adoption ~~price~~ of ~~biotechnology~~EITF ~~stocks,~~07-1 ~~including~~will ~~ours,~~have ~~may~~an ~~become~~impact ~~more~~on ~~volatile~~our asfinancial ~~this~~position ~~debate~~or ~~proceeds~~results of operations.

AsIn aMarch ~~result~~2008, ofthe ~~legislative~~FASB ~~proposals~~issued ~~and~~SFAS ~~the~~No. 161, ~~trend~~Disclosures ~~towards managed~~about ~~health~~Derivative ~~care~~Instruments inand ~~the~~Hedging ~~United States~~Activities, ~~third-party~~or ~~payors~~SFAS ~~are~~No. 161, ~~increasingly~~an amendment ~~attempting~~of toSFAS ~~contain~~No. 133. ~~health~~SFAS ~~care~~No. 161 ~~costs~~requires byenhanced ~~limiting~~disclosures ~~both~~about ~~coverage~~an ~~and~~entity’s ~~the~~derivative ~~level~~and ofhedging ~~reimbursement of new drugs~~activities. ~~They~~These ~~may~~enhanced ~~also~~disclosures ~~refuse~~will todiscuss ~~provide~~(a) how ~~any~~and ~~coverage~~why ofan entity uses ofderivative instruments, ~~approved~~(b) how ~~products~~derivative ~~for~~instruments ~~medical~~and ~~indications~~related ~~other~~hedged ~~than~~items ~~those~~are accounted for ~~which~~under ~~the~~SFAS ~~FDA~~No. 133 ~~has~~and ~~granted~~its ~~market~~related ~~approvals.~~interpretations, Asand a(c) how ~~result,~~derivative ~~significant~~instruments ~~uncertainty~~and ~~exists~~related ashedged toitems ~~whether~~affect an entity’s financial position, financial performance, and ~~how~~cash ~~much~~flows. ~~third-party~~SFAS ~~payors~~No. 161 ~~will~~is ~~reimburse~~effective ~~patients~~for financial statements issued for ~~their~~fiscal ~~use~~years ofbeginning ~~newly approved~~after ~~drugs~~November 15, ~~which~~2008, inwith ~~turn,~~earlier ~~will~~adoption ~~put~~allowed. ~~pressure~~We onhave not completed the ~~pricing~~process of ~~drugs~~evaluating the impact on our financial position or results of operations from adoption of SFAS No. 161.

IfIn weMay ~~are~~2008, ~~unable~~the toFASB ~~establish~~issued ~~with~~SFAS ~~the~~No. 162, The ~~FDA~~Hierarchy ~~that~~of ~~our~~Generally ~~rhIGF-1~~Accepted Accounting Principles, or SFAS No. 162. This standard is ~~comparable~~intended to ~~that~~improve ~~produced~~financial reporting by ~~Genentech~~identifying a consistent framework, ~~our~~or ~~ability~~hierarchy, for selecting accounting principles to ~~commercialize~~be ~~rhIGF~~used in preparing financial statements that are presented in conformity with GAAP for non-1governmental ~~may~~entities. beSFAS ~~delayed~~No. 162 is effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, the meaning of “Present Fairly in Conformity with GAAP”. The Company has not completed the process of evaluating the impact on its financial position or ~~prevented~~results of operations that will result from adopting SFAS No. 162.

Until January 2004, all of our clinical trials were conducted using rhIGF-1 manufactured and released by Genentech. In order to obtain FDA approval of Increlex, we submitted a comprehensive assessment program to demonstrate structural and functional comparability between the Genentech-manufactured rhIGF-1 and Increlex as part of our NDA. If the FDA determines that this approach is insufficient to assess whether the manufacturing changes have affected the final product safety, identity, purity or potency of Increlex compared to the rhIGF-1 used in the existing clinical studies, then the FDA could require us to conduct additional clinical trials in order to demonstrate comparability as part of the Increlex approval process. Any additional clinical trial would require us to incur significant expenses and significantly delay or prevent the commercialization of Increlex.

The differences between the production of the Genentech-manufactured rhIGF-1 and Increlex include:

• relocation of the manufacturing facility for bulk rhIGF-1 product from Genentech to Cambrex Bio Science Baltimore, Inc.;

• use of a new master cell bank derived from the Genentech master cell bank;

• change of some of the raw material suppliers;

• change of the final vial size, configuration and site of manufacture;

• process changes;

• analytical methods changes;

• equipment used; and

• a solvent used in the purification process.

Our comparability assessment required the evaluation of a number of technical parameters, such as the impurity profile and stability. Any of these factors could affect the comparability of the Genentech-manufactured rhIGF-1 and Increlex and, as a result, delay or prevent our ability to commercialize Increlex.

If our contract manufacturers’ facilities and operations do not achieve a satisfactory cGMP inspection or if our contract manufacturers’ facilities become unavailable, we may be unable to sell Increlex.

The facilities used by and operations of our contract manufacturers to manufacture Increlex must undergo an inspection by the FDA for compliance with cGMP regulations before Increlex can be approved. Currently, Cambrex Baltimore is our sole provider of bulk rhIGF-1. We have no alternative manufacturing facilities or plans for additional facilities at this time. Cambrex Baltimore has

~~never~~Results ~~commercially manufactured rhIGF-1 for any party, including us. We do not know if the Cambrex Baltimore facilities or their operations required for the commercial manufacture~~ of ~~Increlex~~Operations will receive a satisfactory cGMP inspection. In the event these facilities or operations do not receive a satisfactory cGMP inspection for the manufacture of our product, we may need to fund additional modifications to our manufacturing process, conduct additional validation studies, or find alternative manufacturing facilities, any of which would result in significant cost to us as well as a delay of up to several years in or prevent us from obtaining an approval for Increlex. In addition, Cambrex Baltimore, and any alternative contract manufacturer we may utilize, will be subject to ongoing periodic inspection by the FDA and corresponding state and foreign agencies for compliance with GMP regulations and similar foreign standards. We do not have direct control over our contract manufacturers’ compliance with these regulations and standards.

If Cambrex Baltimore’s facilities become unavailable to us for any reason, including failure to comply with cGMP regulations, damage from any event, including fire, flood, earthquake, or terrorism or if they fail to perform under our agreement with them, we may be delayed or unable to complete validation of Increlex or manufacture Increlex. This could delay or prevent the approval of our NDA and our clinical trials, or delay or otherwise adversely affect revenues. If the damage to any of these facilities is extensive, or, for any reason, they do not operate in compliance with cGMP or are unable or refuse to perform under our agreements, we will need to find alternative facilities. The number of contract manufacturers with the expertise and facilities to manufacture rhIGF-1 bulk drug substance on a commercial scale in accordance with cGMP regulations is extremely limited, and it would take a significant amount of time and expense to arrange for alternative manufacturers. If we need to change to other commercial manufacturers, these manufacturers’ facilities and processes, prior to our use, would likely have to undergo cGMP compliance inspections. In addition, we would need to transfer and validate the processes and analytical methods necessary for the production and testing of rhIGF-1 to these new manufacturers.


	Three months ended June 30,					Six months ended June 30,
	2007		2008			2007		2008
	(in thousands)
Net product sales	$	2,048	$	6,214		$	3,139	$	10,562
Period over period increase				4,166					7,423
License revenue		194		194			388		388
Period over period increase				—					—
Royalty revenue		—		104			—		169
Period over period increase				104					169
Cost of sales		1,131		3,565			1,632		6,706
Period over period increase				2,434					5,074
Manufacturing start-up costs		742		1,749			840		3,293
Period over period increase				1,007					2,453
Research and development expenses		4,101		5,403			9,013		11,512
Period over period increase				1,302					2,499
Selling, general and administrative expenses		10,282		15,514			19,833		27,889
Period over period increase				5,232					8,056
Amortization of intangible assets		—		703			—		1,405
Period over period increase				703					1,405
Interest expense		190		1,331			378		2,596
Period over period increase				1,141					2,218
Change in estimated fair value of embedded derivative		—		9,743			—		11,700
Period over period increase				9,743					11,700
Interest and other income, net		1,397		609			2,968		1,716
Period over period (decrease)				(788	)				(1,252	)
Provision for income taxes		—		5			—		10
Period over period increase				5					10

~~Any~~Net ofRevenues these factors could delay or suspend clinical trials, regulatory submissions, regulatory approvals or commercialization of Increlex, entail higher costs and result in our being unable to effectively commercialize Increlex. Furthermore, if Cambrex Baltimore fails to deliver commercial quantities of bulk drug substance or finished product on a timely basis and at commercially reasonable prices, and we are unable to promptly find one or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volume and on a timely basis, we will likely be unable to meet demand for Increlex, and we would lose potential revenues.

~~Delays~~Net inrevenues ~~performing~~consisted ~~testing~~of ~~and~~net ~~characterization~~product ~~work~~sales onof Increlex® ~~may~~and ~~delay~~Somatuline® orDepot, ~~prevent~~amortized license revenue associated with our ~~NDA~~Increlex® ~~approval~~license and collaboration agreement with Ipsen, and royalty revenue from Ipsen for sales of Increlex® in the European Union.

WeNet ~~have~~Product ~~contracted~~Sales with AAI Development Services, a division of aaiPharma Inc., or AAI, to perform some of the testing and characterization work on Increlex. AAI has publicly disclosed that it has financial difficulties, a substantially new management team, is pursuing asset sales and seeking Chapter 11 bankruptcy protection. If there are business interruptions at AAI resulting from its financial condition, or for any other reason, we may need to reassign all or a portion of AAI’s work to an alternative contractor, and our NDA approval may be delayed or prevented.

WeNet ~~face~~product ~~significant~~sales ~~competition~~consist ~~from~~of gross Increlex® ~~large~~ ~~pharmaceutical~~sales less provisions for discounts to customers, ~~biotechnology~~rebates to government agencies and other ~~companies~~adjustments. ~~that~~The ~~could~~increase ~~harm~~in ~~our~~net ~~business~~product sales in the three and six months ended June 30, 2008 compared to the same periods ended June 30, 2007 was primarily due to growth in Increlex® sales and launch of Somatuline® Depot in the United States.

~~The~~Increlex® ~~biotechnology~~net ~~industry~~product issales ~~intensely~~of ~~competitive~~$4.6 and $8.0 million for the three and ~~characterized~~six months ended June 30, 2008 increased by ~~rapid~~$2.6 ~~technological~~million ~~progress~~and $4.9 Inmillion ~~each~~for ofthe ~~our~~three ~~potential~~and ~~product~~six ~~areas~~months ended June 30, we2008, ~~face significant~~respectively, ~~competition~~as ~~from~~compared ~~large~~to ~~pharmaceutical,~~the ~~biotechnology~~same ~~and~~periods ~~other~~in ~~companies~~2007. ~~Most~~The growth of Increlex® ~~these~~net ~~companies~~product ~~have~~sales ~~substantially~~was ~~greater~~primarily ~~capital~~due ~~resources~~to continued expansion of our patient base. In the fourth quarter of 2007, ~~research~~we ~~and~~began ~~development~~shipment ~~staffs~~of Increlex® to Ipsen for commercial distribution in the European Union, ~~facilities~~which added $0.4 million and ~~experience~~$0.7 atmillion ~~conducting~~to ~~clinical~~net ~~trials~~product sales in the three and ~~obtaining~~ ~~regulatory~~six ~~approvals~~months ended June 30, 2008, respectively. In ~~addition,~~the ~~many~~same ofperiods ~~these~~in 2007, ~~companies~~we ~~have~~did ~~greater~~not ~~experience~~record ~~and~~any ~~expertise~~Increlex® insales ~~developing~~for ~~and~~shipments ~~commercializing~~to ~~products~~Ipsen.

Since Increlex is under development, we cannot predict the relative competitive position of Increlex if it is approved for use. However, we expect that the following factors will determine our ability to compete effectively: safety and efficacy; product price; ease of administration; and marketing and sales capability.

We believe that many of our competitors spend significantly more on research and development-related activities than we do. Our competitors may discover new treatments, drugs or therapies or develop existing technologies to compete with Increlex. Our commercial opportunities will be reduced or eliminated if these competing products are more effective, have fewer or less severe side effects, are more convenient or are less expensive than Increlex.

There is no drug in the United States or Europe approved as a replacement therapy for the treatment of Severe Primary IGFD, Primary IGFD or Adult IGFD. In January 2005, Insmed announced that it had filed an NDA for its combination product for the treatment of GHIS. In March 2005, Insmed announced that the FDA had accepted Insmed’s NDA for filing, and in April 2005, Insmed announced that the FDA had granted its NDA filing priority review, which could lead to FDA approval of Insmed’s product by July 3, 2005. In addition, we are aware that Chiron Corporation has developed a process to manufacture rhIGF-1 using yeast expression and has intellectual property with respect to that process. We use bacterial expression, which differs from yeast expression, to manufacture Increlex.

~~Growth~~In ~~hormone~~November ~~may~~2007, ~~also~~we belaunched aSomatuline® ~~competitive~~Depot ~~product~~in ~~for~~ the ~~treatment~~United ofStates, ~~some~~which ~~patients~~added ~~with~~$1.6 ~~Primary~~million ~~IGFD~~and ~~or Adult IGFD~~$2.6 ~~Higher~~million ~~doses~~to ofnet ~~growth~~product ~~hormone~~sales ~~may be effective~~ in ~~patients~~the ~~with~~three ~~Primary IGFD~~ and ~~Adult~~six ~~Primary~~months ~~IGFD~~ended ~~that are resistant to lower doses of growth hormone. The major suppliers of commercially available growth hormone are Genentech.~~June 30, ~~Eli Lilly and Company~~2008, ~~Novo Nordisk A/S, Pfizer Inc~~respectively. ~~and Serono S.A.~~ In ~~2003, Eli Lilly and Company received FDA approval for its growth hormone, Humatrope, for~~ the ~~treatment~~same ofperiods ~~children~~in ~~with idiopathic short stature~~2007, ~~or ISS. Children with Primary IGFD~~we ~~may~~did benot ~~diagnosed~~record asany ~~having~~Somatuline® ~~ISS,~~Depot ~~which~~sales ~~may~~in ~~cause growth hormone to be competitive with Increlex. We believe that Novo Nordisk is conducting or has completed clinical trials for~~ the ~~use~~United ~~of its growth hormone in IGF-1 deficient patients~~States.

InWe ~~addition,~~expect weboth ~~believe~~Increlex® ~~that Bristol-Meyers Squibb Company, Genentech, Inc.,~~and ~~Merck~~Somatuline® &Depot ~~Co.,~~net ~~Inc.,~~product ~~Novo~~sales ~~Nordisk~~to ~~A/S~~increase ~~and~~over ~~Pfizer Inc. have previously conducted research and development of orally available small molecules that cause~~ the ~~release~~next ofseveral ~~growth~~quarters. ~~hormone~~However, ~~known~~we asdo ~~growth hormone secretagogues. We are~~ not ~~aware~~expect ofnet ~~any~~Increlex® product ~~continued~~sales ~~clinical~~to ~~development~~increase ofat ~~these~~the ~~molecules~~same byrate ~~these~~on ~~companies.~~a Weperiod ~~believe~~over ~~that~~period ~~Rejuvenon~~basis ~~Corporation~~as ~~has~~we ~~licensed~~experienced ~~certain~~in ~~rights~~the tothree ~~Novo~~and ~~Nordisk’s~~six ~~growth~~months ~~hormone~~ended ~~secretagogues~~June 30, ~~and~~2008 isas ~~actively~~compared ~~developing~~to ~~one~~the ofsame ~~these~~periods ~~compounds for use~~ in ~~cancer~~ ~~cachexia, a wasting disorder affecting some cancer patients~~2007.

~~Many~~License ~~companies~~Revenue are seeking to develop products and therapies for the treatment of diabetes. These competitors include multinational pharmaceutical companies, specialized biotechnology firms, and universities and other research institutions. Insmed has also conducted clinical trials using a product that contains rhIGF-1 for the treatment of diabetes. It is possible that there are other products currently in development or that exist on the market that may compete directly with Increlex.

~~Competitors~~License ~~could~~revenue ~~develop~~represents amortization of the upfront license payment in connection with our Increlex® license and ~~gain~~collaboration ~~FDA~~agreement ~~approval~~with Ipsen which was $0.2 million and $0.4 million for both of the three and six months ended June 30, 2008 and 2007, respectively. We are amortizing the upfront payment, received in October 2006 of ~~rhIGF-1~~€10.0 million, ~~which~~or ~~could~~$12.4 ~~adversely~~million, ~~affect~~over ~~our~~a ~~competitive~~period ~~position~~of approximately 16 years based on the expected term of the license under this agreement. At present, we do not anticipate any significant additional licensing or milestone payments related to or for Increlex® in future periods.

~~Although~~Under wethe ~~are~~terms ~~not aware~~ of ~~any~~our ~~other~~combination ~~company~~product ~~currently~~collaboration ~~marketing~~with ~~rhIGF-1 in the United States for any human therapeutic indication~~Genentech, ~~rhIGF-1~~we ~~manufactured by other parties~~ may bereceive ~~approved~~certain ~~for~~milestone ~~use~~payments in the ~~United States in the~~ future.; Inhowever, ~~the~~we ~~event there~~ are ~~other~~unable ~~rhIGF-1 products approved by the FDA~~ to ~~treat~~predict ~~indications other than those covered by Increlex, physicians may elect to prescribe a competitor’s rhIGF-1 to treat~~ the ~~indications~~timing ~~for~~or ~~which Increlex receives approval. This is commonly referred to as off-label use. While under FDA regulations a competitor is not allowed to promote off-label use of its product,~~ the ~~FDA~~likelihood ~~does not regulate the practice~~ of medicine and as a result cannot direct physicians as to what rhIGF-1 to prescribe to their patients. As a result, we would have limited ability to prevent off-label use of a competitor’s rhIGF-1 to treat any ~~diseases for which we have received FDA approval even if it violates our method of use patents and/or we have orphan drug exclusivity for the use of rhIGF-1 to treat~~ such ~~diseases~~payments.

IfRoyalty weRevenue ~~fail to protect our intellectual property rights, competitors may develop competing products, and our business will suffer.~~

lfWe werecorded ~~are~~royalty ~~not~~revenue ~~able~~of to$0.1 ~~protect~~million ~~our~~and ~~proprietary~~$0.2 ~~technology, trade~~million ~~secrets~~in the three and ~~know-how,~~six ~~our~~months ~~competitors~~ended June 30, ~~may~~2008, ~~use~~respectively, ~~our~~from ~~inventions~~sales toof ~~develop~~Increlex® ~~competing~~in ~~products.~~the WeEuropean ~~have~~Union ~~licensed~~by ~~intellectual~~Ipsen. ~~property~~In ~~rights,~~the ~~including~~same ~~patent~~periods ~~rights~~in 2007, ~~relating~~we todid ~~rhIGF-1~~not ~~technologies~~record ~~from~~royalties ~~Genentech.~~on ~~However,~~sales ~~these~~of ~~patents~~Increlex® ~~may~~in ~~not protect~~the usEuropean ~~against~~Union ~~our~~by ~~competitors~~Ipsen. ~~Patent~~We ~~litigation~~expect isour ~~very~~royalty ~~expensive,~~revenues ~~and~~to weincrease ~~therefore~~over ~~may~~the benext ~~unable~~several toquarters ~~pursue~~as ~~patent~~Ipsen ~~litigation~~continues to expand its ~~conclusion~~Increlex® ~~because~~distribution ~~currently~~in wethe doEuropean ~~not generate revenues~~Union.

WeCost ~~do not have patent composition coverage on the rhIGF-1 protein alone. Although we have licensed from Genentech its rights to its methods~~ of ~~use~~Sales and manufacturing patents, it may be more difficult to establish infringement of such patents as compared to a patent directed to the rhIGF-1 protein composition alone. Our licensed patents may not be sufficient to prevent others from competing with us. We cannot rely solely on our patents to be successful. The standards that the U.S. Patent and Trademark Office and foreign patent offices use to grant patents, and the standards that United States and foreign courts use to interpret patents, are not the same and are not always applied predictably or uniformly and can change, particularly as new technologies develop. As such, the degree of patent protection obtained in the United States may differ substantially from that obtained in various foreign countries. In some instances, patents have issued in the United States while substantially less or no protection has been obtained in Europe or other countries. Our United States Patent No. 6,331,414 B1 licensed from Genentech is directed to methods for bacterial expression of rhIGF-1 and expires in 2018. We have no equivalent European patent. The European Patent Office has determined that the claims of Genentech’s corresponding European patent application are not patentable under European patent law in view of public disclosures made before the application was filed.

WeOur ~~are~~cost ~~uncertain~~ of sales represents the ~~level~~cost of ~~protection~~production, ifroyalties ~~any,~~owed ~~that~~to ~~will be provided by~~ our ~~licensed~~licensors, ~~patents~~fixed ifand variable wedistribution ~~attempt~~shipping ~~to enforce them,~~ and ~~they~~handling ~~are~~costs, ~~challenged~~inventory inwrite-downs/write-offs ~~court~~based ~~where~~on our ~~competitors~~review ~~may~~of ~~raise defenses such as invalidity~~obsolete, ~~unenforceability or possession of a valid license. For example~~excess, weexpired ~~initiated~~inventory ~~patent infringement proceedings against Avecia Limited~~ and ~~Insmed Incorporated~~failed indrug ~~the~~substance ~~United~~batches, ~~Kingdom~~as ~~and~~well ~~against~~as ~~Insmed~~other ~~Incorporated~~costs inrelated ~~the United States~~ to ~~enforce~~production ~~patent~~activities. ~~rights~~Prior weto regulatory ~~licensed~~approval ~~from~~of ~~Genentech.~~Increlex® ~~The~~in ~~United~~August ~~States action~~2005, ~~among~~drug ~~other~~supply ~~things,~~production ~~alleges~~costs ~~infringement~~were ofcharged ~~United~~to ~~States~~research ~~Patent~~and Nodevelopment. ~~6,311,414~~Beginning ~~B1 identified~~in ~~above. If~~ the ~~court~~fourth ~~finds~~quarter ~~any~~ of ~~the patents at issue in those litigations~~2005, ~~including~~with ~~United~~the ~~States~~marketing ~~Patent~~approval of ~~No.~~Increlex® ~~6,311,414~~by ~~B1,~~the ~~to be invalid or unenforceable~~FDA, we ~~would~~began becapitalizing ~~prevented~~these ~~from~~production ~~enforcing~~costs ~~such~~to ~~patents~~inventory ~~against~~and ~~third~~began ~~parties in the future, thus preventing us from using the affected patents~~ to ~~exclude~~charge ~~others~~cost ~~from competing with us. In addition, the type and extent~~ of ~~patent~~sales ~~claims that will be issued to us~~ in the ~~future~~first ~~are~~quarter ~~uncertain.~~of ~~Any~~2006 ~~patents~~as ~~that~~units ~~are~~of ~~issued~~Increlex® ~~may~~were ~~not contain claims that will permit us to stop competitors from using similar technology~~sold.

Cost of sales for the three and six months ended June 30, 2008 increased $2.4 million and $5.1 million, respectively, over the same periods in 2007. The increase in 2008 was primarily due to higher sales volume as more Increlex^® units were sold and we commenced marketing of Somatuline^® Depot, and increased absorption of personnel and other costs. In the three and six months ended June 30, 2008, the cost of Increlex^® sales were $2.9 million and $5.7 million, respectively, and the cost of Somatuline^® Depot sales were $0.6 million and $1.0 million, respectively.

Cost of sales as a percentage of net product sales in the three months ended June 30, 2008 was lower than in the same period in 2007 primarily due to raw material expense associated with failed drug substance batches in the second quarter of 2007 partially offset by higher absorption of personnel and other costs recorded to cost of sales in the second quarter of 2008.

We expect cost of sales as a percentage of net product sales to decrease in future periods as fixed costs are absorbed over larger production volumes, as our sales mix changes over time and as manufacturing equipment related depreciation costs cease in the third quarter of 2008. The depreciation of manufacturing equipment is related to equipment owned by us at Lonza Baltimore. This facility will cease Increlex^® production in the third quarter of 2008 and the cost of new manufacturing equipment will be owned by our contract manufacturer.

Although we expect cost of sales as a percentage of net product sales to decrease in future periods, there can be no assurances that cost of sales as a percentage of net product sales will decrease due to uncertainties inherent in the manufacturing process.

Manufacturing Start-up Costs

Manufacturing start-up costs consisted primarily of costs associated with the transfer of our manufacturing operations to alternate sites. We commenced transfer of our fill and finish operations in November 2006 and the transfer of Increlex^® drug substance production in May 2007. The increases in the three and six months ended June 30, 2008 were primarily due to the increases in manufacturing activities at both facilities in the first and second quarters of 2008 compared to the first and second quarters of 2007. Substantially all the transfer activities for fill and finish operations have been incurred and the majority of costs borne by us associated with drug substance transfer have also been incurred. Project activity will continue throughout 2008, and there will be costs that will continue through the end of 2008 associated with engineering and validation runs as we prepare for FDA approval of both transfer sites.

InResearch ~~addition to the patented technology licensed from Genentech, we also rely on unpatented technology, trade secrets~~ and ~~confidential~~Development ~~information,~~Expenses such as the proprietary information we use to manufacture Increlex. We may not be able to effectively protect our rights to this technology or information. Other parties may independently develop substantially equivalent information and techniques or otherwise gain access to or disclose this technology. We generally require each of our employees, consultants, collaborators, and certain contractors to execute a confidentiality agreement at the commencement of an employment, consulting or collaborative relationship with us. However, these agreements may not provide effective protection of this technology or information or, in the event of unauthorized use or disclosure, they may not provide adequate remedies.

WeResearch ~~may~~and ~~incur~~development expenses consisted primarily of costs associated with clinical, regulatory, manufacturing development and acquired rights to ~~substantial~~technology or products in development. Clinical and regulatory activities included the preparation, implementation, and management of our clinical trials and clinical assay development, as well as regulatory compliance, data management and biostatistics. The costs associated with conducting clinical trials and post-marketing expenses, which include Phase IV and investigator-sponsored trials and product registries, are included in research and development expenses. Manufacturing development activities included pre-regulatory approval activities associated with technology transfer, pharmaceutical development, process and development and validation, quality control and assurance, analytical services, as awell ~~result~~as ofpreparations for ~~patent~~current ~~infringement~~good ~~litigation~~manufacturing practices, or ~~other~~cGMP, ~~proceedings~~and ~~relating~~regulatory inspections. In addition to ~~patent~~these ~~and~~manufacturing ~~other~~development ~~intellectual~~and ~~property~~clinical ~~rights~~activities, ~~and~~license wepayments ~~may~~for bepatents ~~unable~~and know-how to ~~protect~~develop ~~our~~and ~~intellectual~~commercialize ~~property~~products, ~~rights~~are also recorded as research and development expense.

InThe ~~December~~$5.4 ~~2004,~~million weand ~~initiated~~$11.5 ~~patent~~million ~~infringement~~in ~~proceedings against~~research ~~Avecia Limited~~ and ~~Insmed~~development ~~Incorporated~~expenses infor the ~~United~~three ~~Kingdom~~ and ~~against~~six ~~Insmed~~months inended ~~the~~June 30, ~~United~~2008, ~~States~~respectively, towere ~~enforce~~comprised ~~patent~~of ~~rights~~personnel weand ~~licensed~~related ~~from~~costs ~~Genentech~~of $3.1 Wemillion ~~cannot~~and ~~predict~~$6.5 ~~the~~million, ~~outcome~~respectively, ofthird-party ~~such~~contract ~~litigation.~~costs ~~Either~~related orto ~~both~~our ofclinical ~~those actions could require~~activities afor ~~substantial~~Increlex® ~~diversion~~Primary ofIGFD ~~financial~~ and ~~personnel~~severe ~~resources~~Primary inIGFD ~~support~~ of ~~such~~$1.2 ~~actions~~million and ~~expose~~$2.7 usmillion, torespectively, ~~liability~~clinical ~~for~~activities ~~costs~~associated orwith ~~other~~growth ~~awards~~hormone/IGF-1 ofcombination ~~damages.~~product ~~Declaratory~~candidates ~~judgments~~ of $0.8 ~~invalidity~~million ~~against~~and ~~our~~$1.7 ~~patents~~million, ~~asserted~~respectively, inand ~~such~~Somatuline® ~~actions~~Depot ~~could~~clinical ~~prevent us~~activities ~~from~~in ~~using~~acromegaly ~~the~~of ~~affected~~$0.3 ~~patents~~million toand ~~exclude~~$0.6 ~~others~~million, ~~from competing with us~~respectively.

InDuring ~~addition,~~the athree ~~third~~and ~~party~~six ~~may~~months ~~claim~~ended ~~that~~June 30, we2008, ~~are~~research ~~using its inventions covered by its patents~~ and ~~may~~development ~~initiate~~expenses increased ~~litigation~~as compared to ~~stop~~the ussame ~~from~~periods ~~engaging~~ in ~~our~~2007 ~~operations~~primarily ~~and~~due ~~activities.~~to ~~Although~~an noincrease in third party ~~has~~contractor ~~claimed that~~costs weof ~~are~~$1.0 ~~infringing~~million onand ~~their~~$1.7 ~~patents~~million, ~~patent lawsuits are costly~~ and ~~could~~payroll ~~affect~~related ~~our~~costs ~~results~~ of ~~operations~~$0.3 ~~and~~million ~~divert the attention of managerial~~ and ~~technical personnel~~$0.8 ~~There~~million, isrespectively aThe ~~risk~~increases ~~that~~in ~~a court would decide that we are infringing the~~ third -party’s contractor ~~patents~~costs ~~and~~in ~~would~~2008 ~~order~~were usprimarily due to ~~stop~~increases ~~the~~in clinical activities ~~covered~~associated bywith ~~the~~growth ~~patents.~~hormone/IGF-1 Incombination ~~addition,~~product ~~there~~candidates isas awell ~~risk~~as ~~that a court will order us to pay~~ the ~~other~~Increlex® ~~party damages for having infringed the other party’s patents. The biotechnology~~product ~~industry has produced a proliferation of patents~~registry, ~~and~~partially itoffset ~~is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation~~ by ~~the~~decreases ~~courts, and~~in ~~the~~activities ~~interpretation~~associated iswith ~~not~~our ~~always~~European ~~uniform.~~marketing Ifauthorization ~~we are sued for patent infringement~~application, ~~we would need to demonstrate that our products~~ or ~~methods of use do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do so~~MAA. ~~Proving~~The ~~invalidity,~~increases in ~~particular,~~payroll isrelated ~~difficult~~costs ~~since~~in it2008 ~~requires~~were aprimarily ~~showing~~due ofto ~~clear~~increased ~~and~~personnel ~~convincing~~compared ~~evidence~~ to ~~overcome the presumption of validity enjoyed by issued patents~~2007.

We ~~are~~expect ~~aware~~our ofresearch aand ~~U.S.~~development ~~patent~~expenses ~~of Chiron Corporation related~~ to ~~processes~~increase ~~of manufacturing~~for ~~rhIGF-1~~the inremainder ~~yeast host cells, to fusion proteins, DNA, and yeast host cells useful in such processes~~ of ~~manufacturing~~2008 ~~rhIGF-1 in yeast host cells, and to rhIGF-1 made~~ as ~~a product of such processes. While~~ we ~~use bacterial expression,~~ ~~not~~undertake ~~yeast~~clinical ~~expression,~~development inactivities ~~our process~~ for ~~manufacturing~~ Increlex®, weSomatuline® ~~cannot~~Depot ~~predict whether our activities relating to the development~~ and ~~commercialization~~growth ofhormone/IGF-1 ~~Increlex~~combination ~~in the United States will be found to infringe Chiron’s patent in the event~~product ~~Chiron~~candidates ~~brings~~and ~~patent~~other ~~infringement~~projects. ~~proceedings~~Our ~~against~~projects ~~us.~~or Weintended projects may ~~not~~ be ~~able~~subject to ~~obtain~~change afrom ~~license~~time to ~~Chiron’s~~time ~~patent~~as ~~under commercially reasonable terms, if at all. If~~ we ~~are~~evaluate ~~unable to obtain a license to Chiron’s patent, and if in any patent infringement proceeding Chiron brings against us the court decides that~~ our ~~activities~~research ~~relating to the development~~ and commercialization of Increlex in the United States infringe Chiron’s patent, the court may award damages and/or injunctive relief to Chiron. Any such damages, injunctive relief and/or other remedies the court may award could render any further development ~~and~~priorities ~~commercialization of Increlex commercially infeasible for us or otherwise curtail or cease any further development~~ and ~~commercialization~~available ~~of Increlex~~resources.

~~We cannot~~Selling, beGeneral ~~certain~~and ~~that~~Administrative ~~others~~Expenses have not filed patent applications for technology covered by our licensor’s issued patents or our pending applications or our licensor’s pending applications or that we or our licensors were the first to invent the technology because:

•Selling, ~~some~~general ~~patent~~and ~~applications~~administrative inexpenses ~~the~~consisted ~~United~~primarily ~~States~~of ~~may~~payroll beand ~~maintained~~related incosts ~~secrecy~~associated ~~until~~with ~~the~~sales, ~~patents~~marketing ~~are~~and ~~issued~~medical science personnel, corporate administration and executive management, commercial activities including cost of compassionate-use free drug, professional services including legal and accounting services, medical education and other administrative costs.

•We ~~patent~~incurred ~~applications~~$15.5 million and $27.9 million in ~~the~~selling, ~~United~~general ~~States~~and administrative expenses for the three and ~~many~~six ~~foreign~~months ~~jurisdictions~~ended ~~are~~June 30, ~~typically~~2008, respectively. ~~not~~Excluding ~~published~~$1.4 ~~until~~million 18of expenses associated with the Merger, selling, general and administrative expenses for the three and six months ~~after~~ended ~~filing~~June 30, 2008 were comprised of payroll and related costs of $7.8 million and $14.9 million, respectively, sales and marketing activities, including cost of compassionate-use free drug, of $3.3 million and $6.6 million, respectively, medical education activities of $1.7 million and $2.4 million, respectively, legal, accounting and other professional services of $1.0 million and $2.0 million, respectively, and other general administrative activities of $0.3 million and $0.6 million, respectively.

•Excluding ~~publications~~the $1.4 million of expenses recorded in the ~~scientific~~second ~~literature~~quarter ~~often~~of ~~lag~~2008 ~~behind~~associated ~~actual~~with ~~discoveries~~the Merger, during the three and six months ended June 30, 2008, selling, general and administrative expenses increased $3.8 million and $6.7 million, respectively, as compared to the ~~filing~~same periods in 2007 primarily due to an increase in payroll and related costs of ~~patents~~$1.4 ~~relating~~million and $2.1 million, respectively, increase in medical education expense of $1.2 million and $1.9 million, respectively, increase in sales and marketing expenses of $1.0 million and $2.9 million, respectively, and an increase in other general administrative activities of $0.2 million for the three months ended June 30, 2008 and a decrease of $0.2 million for the six months ended June 30, 2008. The expenses associated with the Merger were due to advisor, ~~those~~legal ~~discoveries~~and accounting service fees. The increase in sales and marketing activities was primarily related to increased costs associated with product promotions, costs in support of the launch of Somatuline® Depot in the U.S. and Canada as well as additional physician focused programs in support of Increlex®. The increase in payroll and related expenses was primarily due to additional sales and medical science personnel. The increase in medical education expenses were primarily related to increases in activities in support of Increlex® and Somatuline® Depot.

~~Patent~~We ~~applications~~expect ~~may~~total ~~have~~selling, ~~been~~general ~~filed~~ and ~~may be filed in the future~~administrative ~~covering~~expenses ~~technology similar~~ to ~~ours.~~increase ~~Any~~modestly, ~~such~~excluding ~~patent~~the ~~application~~costs ~~may~~associated ~~have~~with ~~priority over our patent applications and could further require us to obtain rights to issued patents covering such technologies. In~~ the ~~event that another party has filed a U.S. patent application on inventions similar to ours~~Merger, wefor ~~may have to participate in an interference proceeding declared by~~ the ~~U.S.~~remainder ~~Patent~~of ~~and~~2008 ~~Trademark~~compared ~~Office~~ to ~~determine~~those ~~priority~~recorded ~~of invention~~ in the ~~United~~three ~~States. The costs of these proceedings could be substantial,~~ and itsix ismonths ~~possible~~ended ~~that such efforts would be unsuccessful~~June 30, ~~resulting~~2008. inWe aexpect ~~loss~~to ofincur ~~our~~additional ~~United~~expenses ~~States~~associated ~~patent position~~ with ~~respect to such inventions~~the Merger.

~~Some~~Amortization of ~~our~~Intangible ~~competitors~~Assets may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could harm our business.

IfAmortization weof ~~lose~~intangible ~~our~~assets ~~licenses~~of ~~from~~$0.7 million and $1.4 million in the three and six months ended June 30, 2008, respectively, represents expense recorded on a straight-line basis of milestone payments made to Ipsen and to Genentech in connection with the U.S. marketing approval of Somatuline® Depot and marketing approval of Increlex® in the European Union, werespectively. ~~may~~Refer beto ~~unable~~“Ipsen Collaboration,” under “—Liquidity and Capital Resources” below for further information on these milestone payments. We began amortization of these assets in November 2007 and expect to ~~continue~~recognize ~~our~~the ~~business~~straight-line expense of $2.8 million annually through October 2022. There was no amortization of intangibles expense recorded for the same periods in 2007.

WeInterest ~~have~~Expense licensed intellectual property rights and technology from Genentech, under our U.S. and International License and Collaboration agreements with Genentech. Under each agreement, Genentech has the right to terminate our license if we are in material breach of our obligations under that agreement and fail to cure that breach. Under the terms of the agreements, we are obligated, among other things, to use reasonable business efforts to meet specified milestones, including filing for regulatory approval in the United States for an IGFD indication by December 31, 2005, which we have accomplished, and for either a diabetes indication or a substitute indication by December 31, 2006. Additionally, we are obligated to file for regulatory approval in either the European Union or Japan for an IGFD indication by December 31, 2007. If we fail to use reasonable business efforts to meet our development milestones for either agreement, Genentech may terminate that agreement. If either agreement were terminated, then we would lose our rights to utilize the technology and intellectual property covered by that agreement to develop, manufacture and commercialize Increlex for any indication. This may prevent us from continuing our business.

WeInterest ~~are~~expense ~~subject~~of to$1.3 ~~Genentech’s~~million ~~option~~and ~~rights~~$2.6 ~~with~~million ~~respect~~for to the ~~commercialization~~three ofand ~~Increlex~~six ~~for~~months ~~all~~ended ~~diabetes~~June 30, 2008, respectively, increased $1.1 million and ~~non-orphan~~$2.2 million ~~indications~~as compared to the same periods in 2007, respectively. The increase in 2008 was primarily due to the ~~United~~timing ~~States~~of issuance of two convertible notes to Ipsen in September 2007. The first convertible note was issued to Ipsen in October 2006.

~~Under~~We ~~our~~expect ~~U.S.~~interest ~~License~~expense ~~and~~to ~~Collaboration~~decrease ~~Agreement~~significantly ~~with~~as ~~Genentech,~~Ipsen ~~Genentech~~exercised ~~has~~ the ~~option~~three toconvertible ~~elect~~notes toin ~~jointly~~full ~~commercialize~~on ~~rhIGF-1~~July 22, ~~for~~2008 ~~all diabetes and~~as ~~non-orphan~~described ~~indications~~ in ~~the~~more ~~United~~detail ~~States.~~below ~~Orphan indications are designated by the FDA~~ under ~~the~~“Ipsen ~~Orphan~~Collaboration” ~~Drug Act,~~ and ~~are generally rare diseases or conditions that affect fewer than 200,000 individuals~~ in ~~the~~“Note ~~United~~11—Subsequent ~~States.~~Events” ~~With respect to those non-orphan and diabetes indications~~ in the ~~United~~notes ~~States, once Genentech has exercised its option~~ to ~~jointly~~our ~~develop~~condensed ~~and~~financial ~~commercialize, Genentech has the final decision on disputes relating to development and commercialization of such indications~~statements. ~~Our~~ ~~ability to sublicense the development and commercialization of such products requires the consent of Genentech.~~

WeChange doin ~~not~~Estimated ~~know~~Fair ~~whether~~Value ~~our~~of ~~planned~~Embedded ~~clinical~~Derivative ~~trials will begin on time, or at all, or will be completed on schedule, or at all.~~

Change of estimated fair value of embedded derivative of $13.7 million and $11.7 million in the three and six months ended June, 30 2008, respectively, was largely due to a decrease in the fair value of the embedded derivative conversion option related to a convertible note we issued to Ipsen in September 2007. This convertible note was denominated in Euros and the conversion option was considered an embedded derivative. The fair value of the embedded conversion option is estimated at the end of each reporting period and changes in value are recorded, which resulted in a gain of $9.8 million and $14.1 million in the three and six months ended June 30, 2008, respectively. The gain recorded was due to a shortened estimated remaining life of this convertible note which also changed other key inputs to the valuation of the embedded derivative liability reducing the fair value of the embedded derivative liability. Further, this convertible note is revalued to U.S. dollars at the end of each reporting period, which resulted in a charge of $9,000 and $2.4 million in the three and six months ended June 30, 2008, respectively. There were no such charges or benefits recorded for the same periods in 2007.

On July 22, 2008, Ipsen exercised the convertible notes and, as such, we will not record further adjustments related to the Euro denominated convertible note or associated embedded derivative as described in more detail in “Note 11—Subsequent Events” in the notes to our condensed financial statements.

Interest and Other Income, net

Interest and other income, net of $0.6 million and $1.7 million for the three and six months ended June 30, 2008, respectively, decreased $0.8 million and $1.3 million as compared to the same periods in 2007. The decreases were primarily due to interest income on lower average cash, cash equivalents and short-term investment balances during 2008 as well as lower interest rates. The lower cash balances in 2008 were primarily due to net cash used in operations.

Assuming we do not raise additional funds during 2008, we expect a modest increase in net interest and other income for the remainder of 2008 as we will have higher balances of cash and short-term investments primarily due to cash received in connection with the exercise of a warrant by Ipsen, offset by our use of those higher cash and short-term investments to fund our operations.

Provision for Income Taxes

The provision for income taxes recorded in the three and six months ended June 30, 2008, represent French foreign income taxes paid on royalties paid to us by Ipsen under our Increlex^® license and collaboration agreement with Ipsen. There were no income taxes paid for the same periods in 2007 as Ipsen began selling Increlex^® in the fourth quarter of 2007. We did not record domestic provisions for income taxes in the three and six months ended June 30, 2008 and 2007 because we have incurred operating losses to date.

Liquidity and Capital Resources

Sources of Liquidity

As of June 30, 2008, we had approximately $71.4 million in cash, cash equivalents and short-term investments. We had an accumulated deficit of $318.1 million, which was primarily comprised of $274.0 million of accumulated net losses and $44.1 million of a non-cash deemed dividend related to the beneficial conversion feature of convertible preferred stock. We have funded our operations and growth from inception through June 30, 2008 primarily from issuance of equity, convertible notes and the receipt of up-front and milestone payments under our collaboration with Ipsen. Through June 30, 2008, we had received net cash proceeds of $283.2 million from equity issuances including equity sold to Ipsen and Genentech. We have issued three convertible notes to Ipsen

from which we received net cash proceeds of $15.0 million, net of the balance which was used to make milestone payments to Ipsen related to the Somatuline^® license and collaboration agreement. In addition, we have received $31.7 million from Ipsen, net of withholding taxes, for milestone payments related to the Increlex^® license and collaboration agreement.

On July 11, 2008, we received $4.0 million from Genentech in connection with the issuance of additional shares of our common stock, and on July 22, 2008, we received $40.4 million from Ipsen in connection with the exercise of a warrant and the issuance of additional shares of our common stock. These events are described in more detail below in “Ipsen Collaboration,” “Genentech Combination Product Collaboration” and in “Note 11—Subsequent Events” in the notes to our condensed financial statements.

Ipsen Collaboration

On October 13, 2006, we completed the initial closing of the transactions contemplated by the stock purchase and master transaction agreement we entered into with Ipsen in July 2006. At the closing, we issued 12,527,245 shares of our common stock to an affiliate of Ipsen for an aggregate purchase price of $77.3 million and issued to Ipsen a convertible note in the principal amount of $25.0 million and a warrant to purchase a minimum of 4,948,795 shares of our common stock, which warrant was exercisable at any time during the five-year period after the initial closing and carried an initial exercise price equal to $7.41 per share. Under the stock purchase and master transaction agreement with Ipsen, we issued a second convertible note and a third convertible note to Ipsen in connection with our Somatuline^® license and collaboration agreement as described below. Each of the convertible notes that we issued to Ipsen had a maturity date on the later of October 13, 2011 or two years from the date of notification of non-convert and carried a coupon of 2.5% per annum from the date of issuance, compounded quarterly, and was convertible into shares of our common stock at an initial conversion price per share equal to $7.41 per share (or €5.92 per share with respect to the second convertible note). On July 22, 2008, Ipsen converted the convertible notes and exercised the warrant in full as described in more detail below.

On July 22, 2008, we entered into a common stock purchase agreement, or the Ipsen Purchase Agreement, with Ipsen and Suraypharm (an affiliate of Ipsen) pursuant to which we sold to Ipsen 410,831 shares of our common stock, or the Ipsen Shares, for an aggregate cash purchase price of $3.7 million. The Ipsen Shares were issued and sold to Ipsen at a price per share of $8.92, which equals the consolidated closing bid price of our common stock as reported by NASDAQ on July 21, 2008. Under the terms of the affiliation agreement we entered into with Ipsen and Suraypharm in October 2006, Suraypharm has a right of first offer to purchase up to its pro rata portion of new equity securities offered by us (subject to certain exceptions). Ipsen, as Suraypharm’s designated affiliate, acquired the Ipsen Shares in exercise of Suraypharm’s pro rata right under the Affiliation Agreement with respect to the sale and issuance of 590,580 shares of our common stock to Genentech on July 11, 2008 as described below.

Also on July 22, 2008, we issued an aggregate of 10,774,806 shares of our common stock in connection with the election by Ipsen to convert in full the entire outstanding principal and accrued interest under the convertible notes, as follows:

•

First Senior Convertible Promissory Note, dated October 13, 2006 with an outstanding principal and accrued interest balance of $26.2 million at July 22, 2008, was converted at a conversion price per share of $7.41, for a total of 3,531,687 shares of our common stock;

•

Second Senior Convertible Promissory Note, dated September 17, 2007 with an outstanding principal and accrued interest balance of €30.6 million at July 22, 2008, was converted at a conversion price per share of €5.92, for a total of 5,175,652 shares of our common stock; and

•

Third Senior Convertible Promissory Note, dated September 17, 2007 with an outstanding principal and accrued interest balance of $15.3 million at July 22, 2008, was converted at a conversion price per share of $7.41, for a total of 2,067,467 shares of our common stock.

Further, on July 22, 2008, we also issued 4,948,795 shares of our common stock, or Warrant Shares, to Ipsen upon the exercise in full of its warrant dated October 13, 2006. The Warrant Shares were issued to Ipsen upon exercise of its warrant at a cash exercise price per share of $7.41, for total cash proceeds to us of $36.7 million.

After giving effect to the conversion of the convertible notes, the exercise of the warrant and the acquisition of the Ipsen Shares, as of July 31, 2008, Ipsen and its affiliates beneficially owned 42.6% of our common stock (not including shares subject to limited voting agreements that Ipsen and its affiliates entered into with certain of our other stockholders).

Pursuant to the licensing agreements we entered into with Ipsen (and/or affiliates thereof) in connection with the initial closing under the stock purchase and master transaction agreement, we granted to Ipsen and its affiliates exclusive rights to develop and commercialize Increlex^® in all countries of the world except the United States, Japan, Canada, and for a certain period of time, Taiwan and certain countries of the Middle East and North Africa, and Ipsen granted to us exclusive rights to develop and commercialize Somatuline^® Depot in the United States and Canada. Further, we and Ipsen granted to each other product development rights and

agreed to share the costs for improvements to, or new indications for, Somatuline^® Depot and Increlex^®. In addition, we and Ipsen agreed to rights of first negotiation for our respective endocrine pipelines. In August 2007, the European Commission granted marketing authorization for Increlex^® in the European Union for the long-term treatment of growth failure in children and adolescents with severe Primary IGFD. Under the license and collaboration agreement with respect to Increlex^®, Ipsen made an upfront cash payment to us of €9.5 million, or $11.8 million, after tax withholding in October 2006, and paid us an additional milestone of approximately of €14.3 million, or $19.3 million, after tax withholding, in September 2007 for receiving marketing authorization for Increlex^® in the European Union for the targeted product label. Ipsen is our marketing partner for Increlex^® in the European Union. In November 2007, Increlex^® was launched by Ipsen in Ipsen’s territory. We are entitled to royalties on Increlex^® sales made in Ipsen’s territory on a sliding scale from 15% to 25% of the average net sales price, in addition to a supply price of 20% of net sales of Increlex^®.

Under the license and collaboration agreement with respect to Somatuline^® Depot, we made an upfront payment of $25.0 million to Ipsen in October 2006, which was financed through the issuance by us of the first convertible note to Ipsen at the initial closing under the stock purchase and master transaction agreement. In August 2007, we received marketing approval for Somatuline^® Depot in the United States for the targeted product label (and the second closing under the stock purchase and master transaction agreement was consummated). Following receipt of the marketing approval, we made a milestone payment of €30.0 million, or $41.6 million, to Ipsen, which was financed through the issuance by us of the second convertible note to Ipsen at the second closing. The milestone payment was capitalized as an intangible asset and will be amortized over the useful life of the asset. At the second closing, we also issued the third convertible note to Ipsen and Ipsen delivered $15.0 million to us, which will be used by us for working capital. We launched Somatuline^® Depot in the United States in November 2007. We pay royalties to Ipsen, on a sliding scale from 15% to 25% of net sales, in addition to a supply price of 20% of the average net sales price of Somatuline^® Depot.

There can be no assurance that we will achieve the anticipated benefits of our collaboration with Ipsen or that the Merger will be completed. The completion of the Merger is conditioned upon, among other things, the adoption of the Merger Agreement by our stockholders and the satisfaction or waiver of other closing conditions. Therefore, the Merger may not be completed or may not be completed in a timely manner. For more information on these and other risks and uncertainties related to our collaboration with Ipsen, see the sections entitled “Risks Related to the Merger,” “Risks Related to Our Business” and “Risks Related to Our Common Stock” under Part II, Item 1A below.

Genentech Combination Product Collaboration

Effective as of July 6, 2007, we and Genentech entered into a combination product development and commercialization agreement which governs the worldwide development and commercialization of two combination product candidates containing Genentech’s rhGH, Nutropin AQ^®, and our rhIGF-1, Increlex^®, for the treatment of all indications except those of the central nervous system. Initially, we will be responsible for the development and commercialization of all combination product candidates under the combination product agreement and have agreed to pay Genentech a royalty on net sales of combination products covered by Genentech’s (or the parties’ joint) patents, subject to certain opt in rights granted to Genentech as described in Note 8, “Combination Product Development and Commercialization Agreement” in the Notes to Financial Statements of Part II, Item 8 of the Form 10-K filed for the year ended December 31, 2007. Upon opting in, Genentech would become obligated to reimburse us for a portion of the development costs incurred since July 9, 2007, and thereafter we and Genentech would share future costs and all operating profits and losses, and no royalties will be owed to Genentech. Genentech would receive such profit share in lieu of its royalty payment. Under the combination product agreement, we may receive a cash milestone payment in certain circumstances and we may be entitled to royalties on net sales of certain combination products. In addition, we issued 708,591 shares of common stock to Genentech at price per share of $5.645 pursuant to a stock purchase agreement we entered into with Genentech in July 2007, or the Genentech Purchase Agreement, resulting in gross cash proceeds of approximately $4.0 million during 2007.

On July 11, 2008 and as described in more detail in “Note 11—Subsequent Events” in the notes to our condensed financial statements, we received a cash payment in connection with this combination product agreement and issued 590,580 shares of our common stock to Genentech at price per share of $6.773 pursuant to the Genentech Purchase Agreement, resulting in an additional gross cash proceeds of approximately $4.0 million. We may issue up to an additional 1,052,632 shares of common stock (or up to a maximum of $5.0 million of shares of common stock) to Genentech pursuant to the Genentech Purchase Agreement. However, there can be no assurance that we will receive all or any remaining portion of the anticipated proceeds, including the reimbursement of development costs, the cash milestone payment and additional proceeds from the sale of shares of our common stock to Genentech, nor can there be an assurance that we would achieve the anticipated benefits of our combination product agreement with Genentech. Please refer to Note 8, “Combination Product Development and Commercialization Agreement,” in the Notes to Financial Statements of the Form 10-K filed for the year ended December 31, 2007 for more detail on the terms of the combination product agreement and stock purchase agreement.

Committed Equity Financing Facility

Under the terms of a committed equity financing facility, or CEFF, we entered into with Kingsbridge Capital Limited, or Kingsbridge, Kingsbridge committed to purchase a maximum of approximately 6,000,000 newly issued shares of our common stock over a three-year period beginning in October 2005, for cash up to an aggregate of $75.0 million, subject to certain conditions. We may draw down under the CEFF in tranches of up to the lesser of $7.0 million or 2% of our market capitalization at the time of the

draw down of such tranche, subject to certain conditions. The common stock to be issued for each draw down will be issued and priced over an eight-day pricing period at discounts ranging from 6% to 10% from the volume weighted average price of our common stock during the pricing period. During the term of the CEFF, Kingsbridge may not short our stock, nor may it enter into any derivative transaction directly related to our stock. The minimum acceptable purchase price, prior to the application of the appropriate discount for any shares to be sold to Kingsbridge during the eight-day pricing period, is determined by the greater of $3.00 or 90% of our closing share price on the trading day immediately prior to the commencement of each draw down. In connection with the CEFF, we issued a warrant to Kingsbridge to purchase up to 260,000 shares of our common stock at an exercise price of $13.12 per share. We intend to exercise our right to draw down amounts under the CEFF, if and to the extent available, at such times as we have a need for additional capital and when we believe that sales of our common stock under the CEFF provide an appropriate means of raising capital. However, we are not obligated to sell any of the $75.0 million of common stock available under the CEFF, and there are no minimum commitments or minimum use penalties. Under the terms of an affiliation agreement we entered into pursuant to our collaboration with Ipsen, we have only a limited ability to raise capital through the sale of our equity securities, including pursuant to the CEFF, without first obtaining Ipsen’s approval.

Cash Flow


	Six months ended June 30,
	2008			2007
	(In thousands)
Net cash provided by (used for):
Operating activities	$	(42,989	)	$	(28,034	)
Investing activities		29,973			13,683
Financing activities		685			209

Net change in cash and cash equivalents	$	(12,331	)	$	(14,135	)

Cash, cash equivalents and short-term investments totaled $71.4 million at June 30, 2008, compared to $113.5 million at December 31, 2007. The net decrease in cash, cash equivalents and short-term investments in 2008 was primarily due to cash used in operating activities of $43.0 million offset by cash provided by net sales of short-term investments as discussed below.

Operating Activities

Net cash used in operating activities totaled $43.0 million in the six month period ended June 30, 2008. Cash used in operating activities during 2008 was primarily driven by our net losses from operations of $28.9 million, increases in inventory of $12.3 million, adjusted for the non-cash stock-based compensation charge of $3.0 million related to SFAS No. 123R and a net non-cash benefit of $11.7 million related to the Euro-denominated convertible note we issued to Ipsen. The increase in inventories was primarily due to the manufacture of Increlex^® and purchases of Somatuline^® Depot that were partially funded by an increase in accrued expenses and accounts payable which totaled $5.1 million.

Investing Activities

Net cash provided by investing activities totaled $30.0 million in the six month period ended June 30, 2008. Cash provided by investing activities represented net proceeds from purchase, sales and maturities of investments.

Financing Activities

Net cash provided by financing activities totaled $0.7 million in the six month period ended June 30, 2008. Cash provided by financing activities was primarily due to issuances of common stock under our equity compensation plans.

We expect capital outlays and operating expenditures to increase over the next several years as we expand our operations. We believe that our cash, cash equivalents and short-term investments as of June 30, 2008, together with cash received subsequent to June 30, 2008, as described above, will be sufficient to meet our projected operating and capital expenditure requirements through at least June 30, 2009, based on our current business plan and if the Merger is not completed. If the merger agreement is terminated under certain circumstances, we may be obligated to pay to Beaufour Ipsen Pharma, an affiliate of Ipsen, a termination fee of $11.0 million. Further, if the Merger is not completed, our future capital needs and the adequacy of our available funds will depend on many factors, including:

•

changes to our business plan;

•

our ability to market and sell sufficient quantities of Increlex^® and Somatuline^® Depot at the anticipated level;

•

the commercial status of the Increlex^® bulk drug manufacturing operations at Lonza Baltimore Inc. and Lonza Hopkinton Inc., including the success of our cGMP production activities;

•

the success of Increlex^® final drug product manufacturing;

•

the costs, timing and scope of additional regulatory approvals for Increlex^®use in Primary IGFD and/or other regions;

•

Ipsen’s ability to supply Somatuline^® Depot to us in sufficient quantities;

•

the costs, timing and scope of additional regulatory approvals for Somatuline^® Depot;

•

Ipsen’s ability to market and sell sufficient quantities of Increlex^® in the licensed territories at the anticipated level;

•

the status of competing products;

•

the rate of progress and cost of our future clinical trials and other research and development activities, including research and development activities and clinical trial costs in connection with our growth hormone/IGF-1 combination product candidates; and

•

the pace of expansion of administrative and legal expenses.

Due to the significant risks and uncertainties inherent in the manufacturing, clinical development and regulatory approval processes, the costs to complete our projects through product commercialization are not accurately predictable. Results from regulatory review, manufacturing operations and clinical trials may not be favorable. Further, data from clinical trials is subject to varying interpretation, and may be deemed insufficient by the regulatory bodies reviewing applications for marketing approvals. As such, our development projects are subject to risks, uncertainties and changes that may significantly impact cost projections and timelines. As a result, our capital requirements may increase in future periods.

We expect that we will require and will attempt to raise additional funds through equity or debt financings, collaborative arrangements with corporate partners or from other sources, including potentially the CEFF, if the Merger is not completed. However, there can be no assurance that additional financing will be available when needed, or, if available, that the terms will be favorable. In addition, under the terms of an affiliation agreement we entered into pursuant to our collaboration with Ipsen, we have only a limited ability to raise capital through the sale of our equity without first obtaining Ipsen’s approval. Although we have entered into the Genentech Purchase Agreement pursuant to which we may issue up to an additional 1,052,632 shares of common stock (or up to a maximum of $5.0 million of shares of common stock) to Genentech, such issuance is subject to various conditions, including the achievement of a regulatory approval milestone, and there can be no assurance that we will receive additional funds from Genentech pursuant to the Genentech Purchase Agreement. If additional funds are not available, we may be forced to curtail or cease operations.

Contractual Obligations and Commercial Commitments

During the six-month period ended June 30, 2008, there were no material changes to our contractual obligation and commercial commitment disclosures as set forth under the caption, “Contractual Obligations and Commercial Commitments” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2007 with the exception of the contingent obligation to pay Lehman Brothers Inc., the financial advisor to the Special Committee of the Board of Directors in connection with the Merger, a financial advisory fee of approximately $3.4 million which is contingent upon closing of the Merger. Additionally, we may increase the financial advisory fee by up to $2.0 million at our discretion if, in the judgment of the Special Committee of our Board of Directors, Lehman Brothers’ role, the importance of Lehman Brothers’ expertise, the outcome of the transaction, Lehman Brothers’ contribution to the results obtained, and the intensity and duration of Lehman Brothers’ efforts, warrants such an increase.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2008, there were no material changes to our disclosures to market risk from the disclosures set forth under the caption, “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2007. For more information on the conversion of our convertible notes, see “Note 11 – Subsequent Events” in the notes to our condensed financial statements.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of June 30, 2008, our Chief Executive Officer and Chief Financial Officer, with the participation of our management, have concluded that our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) of the Securities Exchange Act of 1934) were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our disclosure controls and procedures provide our Chief Executive Officer and Chief Financial Officer reasonable assurances that our disclosure controls and procedures will achieve their objectives. However, company management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within our company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.

PART II – OTHER INFORMATION

ITEM 1A.

RISK FACTORS.

We have identified the following additional risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment.

We have marked with an asterisk (*) those risks described below that reflect substantive changes from the risks described under “Item 1A. Risk Factors” included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2008. In addition, the risks described under, and the caption entitled, “We may not have the ability to raise the funds necessary to finance the repayment of the convertible notes we issued to Ipsen, which could adversely affect our cash position and harm our business,” included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2008 have been removed.

Risks Related to the Merger

If the merger is not completed, or not completed in a timely manner, our business would be significantly harmed, and our stock price would likely decline significantly.*

The completion of the merger is conditioned upon, among other things, the adoption of the merger agreement by our stockholders and the satisfaction or waiver of other closing conditions. Therefore, the merger may not be completed or may not be completed in a timely manner. If the merger agreement is terminated, the market price of our common stock will likely decline. In addition, our stock price may decline as a result of the fact that we have incurred and will continue to incur significant expenses related to the merger prior to its closing that will not be recovered if the merger is not completed. As of June 30, 2008, we had incurred a total of approximately $1.4 million in expenses related to the merger and expect to incur a total of approximately $4.9 million in expenses related to the merger, not including the potential increase to the financial advisory fee payable to Lehman Brothers of up to $2.0 million if, in the judgment of the Special Committee of our Board of Directors, the circumstances warrant such an increase. If the merger agreement is terminated under certain circumstances, we may be obligated to pay to Beaufour Ipsen Pharma, an affiliate of Ipsen, a termination fee of $11.0 million. As a consequence of the failure of the merger to be completed, as well as of some or all of these potential effects of the termination of the merger agreement, our business could be harmed. Concerns about our viability are likely to increase, thereby likely making it more difficult to retain employees, maintain existing business and strategic relationships, including with Ipsen, and to effectively pursue new business development opportunities.

The fact that there is a merger pending could harm our business, revenue and results of operations.*

While the merger is pending, it creates uncertainty about our future, and we are subject to a number of risks that may harm our business, revenue and results of operations, including:

•

the diversion of management and employee attention;

•

the unavoidable disruption to our business relationships, including relationships with suppliers and manufacturers, which may detract from our ability to grow revenues and minimize costs;

•

the possible loss of strategic relationships or business development opportunities;

•

the incurrence of significant expenses related to the merger prior to its closing;

•

our weakened ability to respond effectively to competitive pressures, industry developments and future opportunities;

•

the possible loss of employees; and

•

the inability to hire new employees.

Risks Related to Our Business

We have a limited operating history and may not be able to successfully market and sell products, generate significant revenues or attain profitability.*

We have a limited operating history. Through June 30, 2008, we had an accumulated deficit of $318.1 million. We incurred a net loss of $28.9 million during the six months ended June 30, 2008. We may not be able to generate significant revenues from operations and may not be able to attain profitability. We expect to incur substantial net losses, in the aggregate and on a per share basis, for the foreseeable future as we attempt to develop, market and sell Increlex^® for severe Primary Insulin-like Growth Factor Deficiency (IGFD) and Primary IGFD and Somatuline^® Depot for acromegaly, and as we attempt to develop growth hormone/IGF-1 combination product candidates under our Combination Product Agreement with Genentech. We are unable to predict the extent of these future net losses, or when we may attain profitability, if at all. These net losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity and net current assets.

We anticipate that for the foreseeable future our ability to generate revenues and achieve profitability will be dependent on the successful commercialization by us and Ipsen of Increlex^® for the treatment of severe Primary IGFD and Primary IGFD, as well as on the successful commercialization by us of Somatuline^® Depot for acromegaly in the United States and Canada. There is no assurance that we will be able to obtain or maintain governmental regulatory approvals to market our products in the United States or rest of the world for these or any other indications. If we are unable to generate significant revenue from Increlex^® or Somatuline^® Depot, or attain profitability, we will not be able to sustain our operations.

If there are fewer children with severe Primary IGFD or Primary IGFD than we estimate, our ability to generate revenues sufficient to fund our development and commercialization efforts may be curtailed.

We estimate that the number of children in the United States with short stature is approximately 1,000,000, of which approximately 380,000 are referred to pediatric endocrinologists for evaluation. We believe that approximately 30,000 of these children have Primary IGFD, of which approximately 6,000 have severe Primary IGFD. Our estimate of the size of the patient population is based on published studies as well as internal data, including our interpretation of a study conducted as part of Genentech’s National Cooperative Growth Study program. This study reported results of the evaluation of the hormonal basis of short stature in approximately 6,450 children referred to pediatric endocrinologists over a four-year period. We believe that the aggregate numbers of children in Western Europe with Primary IGFD and severe Primary IGFD are substantially equivalent to the numbers in the United States. If the results of Genentech’s study or our interpretation and extrapolation of data from the study do not accurately reflect the number of children with Primary IGFD or severe Primary IGFD, our assessment of the market may be incorrect, making it difficult or impossible for us to meet our revenue goals or to receive royalties from our collaboration with Ipsen to the extent that we currently anticipate.

Our products may fail to achieve market acceptance, which could harm our business.

Prior to our January 2006 commercial launch of Increlex^® (recombinant human insulin-like growth factor-1) in the United States for the treatment of severe Primary IGFD, rhIGF-1 had never been commercialized in the United States or Europe for any indication. Even though the FDA has approved Increlex^® for sale in the United States, and Somatuline^® Depot has received marketing approval in Canada and the United States, physicians may choose not to prescribe these products, and third-party payers may choose not to pay for them. Accordingly, we may be unable to generate significant revenue or become profitable.

Acceptance of our products will depend on a number of factors including:

•

acceptance of our products by physicians and patients as safe and effective treatments;

•

reimbursement adoption;

•

product price;

•

the effectiveness of our and collaboration partners’ sales and marketing efforts;

•

storage requirements and ease of administration;

•

dosing regimen;

•

safety and efficacy;

•

prevalence and severity of side effects; and

•

competitive products.

If we do not receive additional regulatory marketing approvals for Increlex^® in Primary IGFD, our business will be harmed.*

We are currently developing Increlex^® for the treatment of Primary IGFD. The FDA has substantial discretion in the approval process and may decide that the data from our clinical trial is insufficient to allow approval of Increlex^® for Primary IGFD. For instance, in a meeting held on July 30, 2008 with the FDA, preliminary data from our Phase IIIb clinical trial for the use of Increlex^® for the treatment of Primary IGFD was discussed. As part of these discussions, the FDA requested additional long-term clinical data as part of the process for seeking approval from the FDA for marketing Increlex^® for the treatment of Primary IGFD. Based on the

FDA’s request, we plan to review the regulatory strategy for Increlex^® for Primary IGFD. If we do not receive regulatory marketing approval in the United States for Primary IGFD, our business will be harmed. We will also need to file applications with regulatory authorities in foreign countries to market Increlex^® for Primary IGFD. There is no assurance that we will receive marketing approvals in any foreign countries for Primary IGFD.

We may not realize the anticipated benefits from our collaboration with Ipsen.

While we have entered into the Merger Agreement with Beaufour Ipsen Pharma, an affiliate of Ipsen, the completion of the Merger is subject to a number of conditions. In the event that the Merger is not completed, we will continue to be subject to a number of risks with respect to our collaboration with Ipsen. Even though Somatuline^® Depot (extended release lanreotide) has received marketing approval from the FDA, the approval may not be maintained. We may also elect not to, or we may be unable to develop or obtain FDA approval of Somatuline^® Depot for indications other than acromegaly, such as neuroendocrine tumors. Further, Ipsen may be unable to maintain the supply of the product. In addition, revenues from sales of Somatuline^® Depot in the United States and Canada may not meet our expectations, including as a result of competing products or unavailable or limited reimbursement by third-party payers. Under the license and collaboration agreement with respect to Somatuline^® Depot, Ipsen may terminate the agreement in a particular country if we fail to meet certain minimum sales and promotional requirements with respect to that country. It is also possible that Ipsen will not be successful in marketing and selling Increlex^® in the licensed territories, or may be delayed in doing so, in which case we would not receive royalties on the timeframe and to the extent that we currently anticipate. We also may not be able to successfully develop additional products or improvements to, or new indications for, Somatuline^® Depot and/or Increlex^® or share the costs of such developments in a manner that is commercially feasible for us. In addition to cross-licensing agreements for Somatuline^® Depot and Increlex^®, we and Ipsen have granted to each other a right of first negotiation for products in our respective endocrine pipelines and have agreed on a framework for joint clinical development and subsequent commercialization of endocrine products on a worldwide basis. However, the development of Ipsen’s endocrine pipeline may not advance at the rate we currently expect, or at all, and in any event, we cannot assure you that we will be able to reach an agreement with Ipsen on reasonable terms, or at all, for any of these endocrine pipeline products. The license and collaboration agreements would also be terminable by Ipsen under certain circumstances, including certain change of control transactions. In any such or similar events, we may not realize the anticipated benefits from our collaboration with Ipsen.

There can be no assurance that we will receive all or any remaining portion of the anticipated proceeds from our collaboration with Ipsen, nor can there be an assurance that we would achieve the anticipated benefits of our collaboration with Ipsen.

We may not realize the anticipated benefits from our growth hormone/IGF-1 combination product candidates or from the related agreement with Genentech.

Our two growth hormone/IGF-1 combination product candidates may not enter clinical trials or receive U.S. or other countries’ regulatory approval, in a timely manner, for the labels that we anticipate, or at all. We may encounter development difficulties that delay, increase the costs of, or preclude any further progress of either or both of our growth hormone/IGF-1 combination product candidates. In addition, the FDA and other countries’ regulatory authorities have substantial discretion in the approval process. They may decide that our pre-clinical data, chemistry, manufacturing and controls data, and/or clinical data are insufficient to warrant timely, or any, entry into Phase I, Phase II or Phase III clinical trials, and/or that the data from our Phase III clinical trials are insufficient to allow marketing approval of our growth hormone/IGF-1 combination product candidates for their target labels. If we do not receive regulatory marketing approvals for the target labels, our business will be harmed.

Even if our combination product candidates were to receive such regulatory marketing approvals, the approvals may not be maintained. In addition, revenues from worldwide sales of these two product candidates may not meet our expectations, including, as a result of competing products or unavailable or limited reimbursement by third-party payers. We also may not be able to successfully develop improvements to, or new indications for, our combination product candidates or receive financial consideration from sub-licensees in a manner that is commercially feasible for us. In connection with our agreement with Genentech for our combination product candidates, Genentech may opt into the programs and obtain a share of the financial benefit going forward. In any such or similar events, we may not realize the anticipated benefits from our combination product candidates. There can be no assurance that we will receive all or any remaining portion of the anticipated proceeds from our agreement with Genentech, nor can there be an assurance that we would achieve the anticipated benefits from our agreement with Genentech.

Clinical development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials.

To gain approval to market a product for treatment of a specific disease, we must provide the FDA and foreign regulatory authorities with clinical data that demonstrate the safety and statistically significant efficacy of that product for the treatment of the disease. Clinical development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. For example, we are seeking to develop our growth hormone/IGF-1 combination product candidates for short stature, Adult Growth Hormone Deficiency (AGHD), and potentially other metabolic disorders, but we may determine that such trials are prohibitively expensive and ultimately may not proceed with such trials. A number of companies in the pharmaceutical industry,

including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Success in pre-clinical testing or in early clinical trials does not ensure that later clinical trials will be successful. If a clinical trial failed to demonstrate safety and statistically significant efficacy, we would likely abandon the development of that product, which could harm our business.

We do not know whether our planned clinical trials will begin on time, or at all, or will be completed on schedule, or at all.*

The commencement or completion of any of our clinical trials may be delayed or halted for numerous reasons, including, but not limited to, the following:

• the FDA or other regulatory authorities ~~either~~ do not approve an investigational new drug application or a clinical trial protocol, or they place a clinical trial on clinical hold;

• patients do not enroll in clinical trials at the rate we expect or they withdraw at a greater rate than expected;

•

patients experience adverse side effects;

•

patients develop medical problems that are not related to our products or product candidates;

•

third-party clinical investigators do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices, or other third-party organizations do not perform data collection and analysis in a timely or accurate manner;

•

contract laboratories fail to follow good laboratory practices;

•

suppliers, supply partners, and/or contract manufacturers fail to follow good manufacturing practices;

•

interim results of the clinical trial are inconclusive or negative;

• ~~sufficient~~clinical ~~quantities~~trial ofdrug ~~the~~supplies ~~trial~~are ~~drug~~not ~~may~~available, are not beavailable in sufficient quantities, are not available in the preferred formulation, or available drug ~~may~~becomes ~~become~~ unusable;

•

our trial design, although approved, is inadequate to demonstrate safety and/or efficacy;

• re-evaluation of our corporate strategies and priorities; ~~and~~

•

limited financial resources.

In addition, we may choose to cancel, change or delay certain planned clinical trials, or replace one or more planned clinical trials with alternative clinical trials. Our clinical trials or intended clinical trials may be subject to further change from time -to -time as we evaluate our research and development priorities and available resources. Our development costs will increase if we need to perform more or larger clinical trials than planned. Significant delays for our current or planned clinical trials may harm the commercial prospects for ~~Increlex and~~ our ~~prospects for profitability~~products.

27Reimbursement for our products may be slow, not available at the levels we expect, or not available at all, resulting in our expected revenues being delayed or substantially reduced.

Market acceptance, our sales of Increlex^® and Somatuline^® Depot , and our profitability will depend on reimbursement policies and health care reform measures. The levels at which government authorities and third-party payers, such as private health insurers and health maintenance organizations, reimburse the price patients pay for our products, and the timing of reimbursement decisions by these payers, will affect the commercialization of our products. If our assumptions regarding the timing of reimbursement decisions and level of reimbursement, or regarding the age, dosage or price per patient for Increlex^® are incorrect, our expected revenues, including potential royalties from our collaboration with Ipsen, may be delayed or substantially reduced. Since Increlex^® is approved by the FDA for severe Primary IGFD and Somatuline^® Depot is approved by the FDA for the treatment of acromegaly, only prescriptions for those indications may be reimbursable. Also, we cannot be certain that the formulary status our products ultimately receive by payers will not limit the ability of patients to afford our products and therefore reduce the demand for, or the price of, our products. If reimbursement is not available or is available only to limited levels, we may not be able to market and sell our products and our revenues may be delayed or substantially reduced. Even if a patient receives reimbursement approval, the patient may still choose not to begin, or to discontinue, treatment with either of our drugs.

We believe that the annual wholesale acquisition cost, at present, of Increlex^® therapy for the treatment of severe Primary IGFD for a 24 kilogram child at a 120mcg/kg twice daily dose at 100% compliance is approximately $36,000 per year. The actual cost per year per patient for Increlex^® will depend on the price charged by wholesalers and distributors that purchase from Tercica, and will vary by the weight of the child, the treatment dose prescribed and the level of compliance. If our assumptions regarding the revenue per patient of Increlex^® therapy for the treatment of severe Primary IGFD and Primary IGFD are incorrect, our expected revenues and the market opportunity for Increlex^® therapy for the treatment of severe Primary IGFD and Primary IGFD may be substantially reduced.

~~Clinical~~We ~~development~~believe that the annual wholesale acquisition cost, at present, of Somatuline® Depot therapy for the treatment of acromegaly is aapproximately ~~long~~$28,800 ~~expensive~~at 100% compliance of the 90 microgram dose. The actual cost per year will depend on the price charged by wholesalers and ~~uncertain~~distributors ~~process~~that purchase from Tercica, and ~~delay~~will orvary ~~failure~~by ~~can occur~~the attreatment ~~any~~dose ~~stage~~prescribed and the level of ~~any~~compliance. If our assumptions regarding the average treatment dose per patients or revenue per patient for the treatment of acromegaly are incorrect, our ~~clinical~~expected ~~trials~~revenues and the market opportunity for Somatuline® Depot for the treatment of acromegaly may be substantially reduced.

ToIn ~~gain~~recent ~~approval~~years, toofficials ~~market~~have amade ~~product~~numerous ~~for~~proposals ~~treatment~~to ofchange athe ~~specific~~health ~~disease,~~care wesystem ~~must~~in ~~provide~~ the ~~FDA~~United ~~and~~States. ~~foreign~~These ~~regulatory~~proposals ~~authorities~~include ~~with~~measures ~~clinical data~~ that would ~~demonstrate~~limit ~~the~~or ~~safety~~prohibit ~~and~~payments ~~statistically~~for ~~significant~~certain ~~efficacy~~medical oftreatments ~~that~~or ~~product~~subject ~~for~~ the ~~treatment~~pricing of ~~the~~drugs ~~disease.~~to ~~Clinical~~government ~~development~~control. isIn ~~a long~~addition, ~~expensive~~in ~~and~~many ~~uncertain~~foreign ~~process~~countries, ~~and~~particularly ~~delay~~in orCanada ~~failure~~and ~~can~~the ~~occur~~countries atof ~~any~~the ~~stage~~European ofUnion, ~~any~~the pricing of prescription ~~our~~drugs ~~clinical~~is ~~trials.~~subject Ato ~~number~~government ofcontrol. ~~companies~~If inour ~~the~~products ~~pharmaceutical~~become ~~industry,~~subject ~~including~~to ~~biotechnology companies,~~government ~~have~~legislation ~~suffered~~that ~~significant~~limits ~~setbacks~~or inprohibits ~~advanced~~payment ~~clinical~~for ~~trials~~our products, ~~even~~or ~~after~~that ~~promising~~subjects ~~results~~the inprice ~~earlier~~of ~~trials.~~our ~~Success~~products into ~~preclinical~~governmental ~~testing~~control, ~~and~~we ~~early~~may ~~clinical~~not ~~trials~~be ~~does~~able to ~~not~~generate ~~ensure~~revenues, ~~that~~attain ~~later~~profitability ~~clinical~~or ~~trials~~market ~~will~~and besell ~~successful~~our products. IfBecause ~~a clinical~~these ~~trial~~initiatives ~~failed~~are subject to ~~demonstrate~~substantial ~~safety~~political ~~and statistically significant efficacy~~debate, which we ~~would~~cannot ~~likely~~predict, ~~abandon~~ the ~~development~~trading price of ~~that~~biotechnology ~~product~~stocks, ~~which~~including ~~could~~ours, ~~harm our business and~~ may ~~result~~become inmore volatile aas ~~precipitous~~this ~~decline~~debate ~~in our stock price~~proceeds.

As a result of legislative proposals and the trend towards managed health care in the United States, third-party payers are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new drugs. They may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted market approvals, or require patients to pay co-insurance for our products. As a result, significant uncertainty exists as to whether and how much third-party payers will reimburse patients for their use of newly approved drugs, which, in turn, could put pressure on the pricing of drugs and/or the adoption of new products based on reimbursement policies.

We are dependent on our collaboration with Ipsen for the development and commercialization of Increlex^® outside of the United States, Canada and Japan, and for a certain period of time, certain countries of the Middle East and North Africa and Taiwan. We may also be dependent upon additional collaborative arrangements in the future. These collaborative arrangements may place the development and commercialization of our product candidates outside of our control, may require us to relinquish important rights or may otherwise be on terms unfavorable to us.

•

we may not be able to control the amount and timing of resources that our collaborators devote to the development or commercialization of product candidates or to their marketing and distribution, which could adversely affect our ability to obtain milestone and royalty payments;

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collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

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disputes may arise between us and our collaborators that result in the delay or termination of the research, development or commercialization of our product candidates or that result in costly litigation or arbitration that diverts management’s attention and resources;

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our collaborators may experience financial difficulties;

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collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to expose us to potential litigation, jeopardize or lessen the value of our proprietary information, or weaken or destroy our intellectual property rights;

•

business combinations or significant changes in a collaborator’s business strategy may also adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement;

•

a collaborator could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors; and

•

the collaborations may be terminated or allowed to expire, which would delay product development and commercialization efforts.

We face significant competition from large pharmaceutical, biotechnology and other companies that could harm our business.

The biotechnology industry is intensely competitive and characterized by rapid technological progress. In each of our potential product areas, we face significant competition from large pharmaceutical, biotechnology and other companies. Most of these companies have substantially greater capital resources, research and development staffs, facilities and experience at conducting clinical trials and obtaining regulatory approvals. In addition, many of these companies have greater experience, expertise and resources in developing and commercializing products.

We cannot predict the relative competitive positions of Increlex^®, Somatuline^® Depot and any growth hormone/IGF-1 combination product candidates that we may develop. However, we expect that the factors set forth under—Risks Related to Our Business—Our products may fail to achieve market acceptance, which could harm our business,” among others, including manufacturing cost containment, will determine our ability to compete effectively.

Many of our competitors spend significantly more on research and development-related activities than we do. Our competitors may discover new treatments, drugs or therapies or develop existing technologies to compete with our products. Our commercial opportunities will be reduced or eliminated if these competing products are more effective, have fewer or less severe side effects, are more convenient or are less expensive than our products.

Growth hormone products compete with Increlex^® for the treatment of severe Primary IGFD. If Increlex^® receives regulatory approval for the treatment of patients with Primary IGFD, growth hormone products will also compete with Increlex^® for the treatment of patients in that indication. The major suppliers of commercially available growth hormone products in the United States are Genentech Inc., Eli Lilly and Company, Teva Pharmaceutical Industries Ltd., Novo Nordisk A/S, Pfizer Inc and Merck-Serono International S.A. Investigators from a Novo Nordisk clinical trial in 2003 presented initial data that demonstrated growth hormone was effective in a population that included children with Primary IGFD.

In addition, children with Primary IGFD may be diagnosed as having idiopathic short stature, or ISS. Eli Lilly and Genentech have received FDA approval for their respective growth hormone products for the treatment of children with ISS in the United States. Moreover, biosimilar growth hormone products, including Omnitrope™ marketed by Sandoz, Accretropin™ by Cangene, and Valtropin^® by LG Life Sciences have been approved in the United States and may be approved in other countries. Accordingly, we expect that several growth hormone products will compete directly with Increlex^® for the treatment of children with Primary IGFD. We are also aware that several companies are developing long-acting formulations of growth hormone for the treatment of short stature including Altus Pharmaceuticals and LG Life Sciences.

In addition, we are aware that Novartis AG has developed a process to manufacture rhIGF-1 using yeast expression and has intellectual property with respect to that process. We use bacterial expression, which differs from yeast expression, to manufacture Increlex^®.

We believe that Bristol-Myers Squibb Company; Genentech; Merck & Co., Inc.; Novo Nordisk and Pfizer have conducted research and development of orally available small molecules that cause the release of growth hormone, known as growth hormone secretagogues. We believe that Sapphire Therapeutics, Inc. has licensed certain rights to Novo Nordisk’s growth hormone secretagogues and that Elixir Pharmaceuticals Inc. has licensed certain rights to Bristol-Myers Squibb Company’s growth hormone secretagogues and that both companies are actively developing these compounds for use in various indications including cancer cachexia, a wasting disorder affecting some cancer patients. These products work by increasing the levels of rhIGF-1 and, if approved, could potentially compete with Increlex^®.

If our growth hormone/IGF-1 combination products are approved for commercial sale, they would compete across all their approved indications with all then existing, biosimilar and long acting growth hormone products, growth hormone secretagogue products, IGF-1 products, including Increlex^®, and other products.

In the United States and Canada, Somatuline^® Depot competes directly with Sandostatin LAR^® Depot and Somavert^® for the treatment of acromegaly. Sandostatin LAR^® Depot is a somatostatin analogue and has the same mechanism of action as Somatuline^® Depot. Sandostatin LAR^® Depot is indicated for long-term maintenance therapy in patients with acromegaly and in the treatment of symptoms related to carcinoid syndrome and vasoactive intestinal peptide tumors. Somavert^®, a growth hormone antagonist, and Sandostatin LAR^® Depot are marketed by Pfizer and Novartis, respectively, in the United States and Canada. Moreover, a subset of patients with acromegaly can be treated with radiotherapy and dopaminergic agonists. These therapies are commercially available in the United States and Canada and also compete with Somatuline^® Depot for the treatment of patients with acromegaly.

We are aware that Ambrilia Biopharma Inc., QLT Inc., Indevus Pharmaceuticals Inc. and Camurus AB are conducting research and development programs with long-acting versions of octreotide for the treatment of acromegaly. Octreotide is the generic name of the active molecule in Sandostatin and Sandostatin LAR^® Depot. We are also aware that Novartis is developing pasireotide (SOM 230), DeveloGen AG is developing Somatoprin (DG 3173), and that Ipsen is developing dopastatin for the treatment of acromegaly and other hormone secreting tumors. If approved, these therapies would compete with Somatuline^® Depot in these indications. It is possible that there are other products currently in development or that exist on the market that may compete directly with Increlex^® or Somatuline^® Depot.

We rely solely on single-source third parties in the manufacture, testing, storage and distribution of Increlex^®.

We source all of our Increlex^® fill-finish manufacturing and testing and final product storage and distribution operations, as well as all of our bulk manufacturing, testing, and shipping operations, through single-source third-party suppliers and contractors. Single-source suppliers are the only approved suppliers currently available to us, and could only be replaced by qualification of new sites for the same operations.

If our contract facilities, contractors or suppliers become unavailable to us for any reason, including as a result of the failure to comply with cGMP regulations, manufacturing problems or other operational failures, such as equipment failures or unplanned facility shutdowns required to comply with cGMP, damage from any event, including fire, flood, earthquake or terrorism, business restructuring or insolvency, or if they fail to perform under our agreements with them, such as failing to deliver commercial quantities of bulk drug substance or finished product on a timely basis and at commercially reasonable prices, we may be delayed in manufacturing Increlex^® or may be unable to maintain validation of Increlex^® . This could delay or prevent the supply of commercial and clinical product, or delay or otherwise adversely affect revenues. If the damage to any of these facilities is extensive, or, for any reason, they do not operate in compliance with cGMP or are unable or refuse to perform under our licenses and/or agreements, we will need to find alternative facilities. Further, we are responsible for the manufacture and supply of Increlex^® to Ipsen (through our contract manufacturer) for Ipsen’s clinical development and commercial needs. In the event we fail to meet Ipsen’s supply obligations, Ipsen would have the right to exercise its option to manufacture Increlex^® on its own or to engage a third-party manufacturer to do so. The number of contract manufacturers with the expertise and facilities to manufacture rhIGF-1 bulk drug substance on a commercial scale in accordance with cGMP regulations is extremely limited, and it would take a significant amount of time and expense to arrange for alternative manufacturers. If we need to change to other commercial manufacturers, these manufacturers’ facilities and processes, prior to our use, would likely have to undergo pre-approval and/or cGMP compliance inspections. In addition, we would need to transfer and validate the processes and analytical methods necessary for the production and testing of rhIGF-1 to these new manufacturers.

Our inability to timely transfer to an alternate single-source manufacturer to fill-finish Increlex^® could adversely affect our commercial supply and ability to grow revenues.

We currently source all of our Increlex^® fill-finish manufacturing and portions of release testing through a single-source third-party supplier. This supplier is the only FDA-approved manufacturer currently available to us, and could only be replaced by qualification of a new site for the same operations. We have negotiated a short-term commercial agreement with this fill-finish manufacturer and during the term of this agreement, we are attempting to move our process to Hospira Worldwide, Inc., or Hospira. It will take a significant amount of time and expense to complete the transfer to Hospira and validate Hospira as an alternative manufacturer. For us to complete the transfer to Hospira, Hospira’s facilities and processes, prior to our use, may need to undergo pre-approval and/or cGMP compliance inspections. In addition, we need to transfer and validate the processes and certain analytical methods necessary for the production and testing of Increlex^® by Hospira. If we are not able to complete the transfer of fill-finish manufacturing to Hospira, our ability to obtain commercial supplies of Increlex^® and our revenue growth could be adversely affected. A delay in this transfer may also result in a shortage of Increlex^® and a loss of revenues.

Our inability to timely transfer or to complete the transfer at all to an alternate single-source manufacturer for bulk Increlex^® could significantly adversely affect our commercial supply and ability to grow revenues.

We currently source all of our Increlex^® bulk manufacturing and portions of release testing through a single-source third-party supplier, Lonza Baltimore, Inc. This supplier is the only FDA-approved manufacturer currently available to us, and could only be replaced by qualification of a new manufacturing site for the same operations. We have negotiated a short-term commercial agreement with Lonza Baltimore, and during the term of this agreement, we are attempting to move our bulk manufacturing process from Lonza Baltimore to Lonza Hopkinton, Inc. It will take a significant amount of time and expense to complete the transfer to and validate the Lonza Hopkinton manufacturing facility. For us to change to this new bulk manufacturing site, Lonza Hopkinton’s facilities and processes, prior to our use, will need to undergo pre-approval and/or cGMP compliance inspections. In addition, we need to transfer and validate the processes and certain analytical methods necessary for the production and testing of bulk Increlex^® by Lonza Hopkinton. A delay in this transfer could result in a shortage of bulk Increlex^® and a significant loss of revenues. If we are not able to complete this transfer, our ability to supply Increlex^® will be impaired and our business will suffer irreparable harm.

If our contract manufacturers’ and/or Ipsen’s facilities and operations do not maintain satisfactory cGMP compliance, we may be unable to market and sell Increlex^® and/or Somatuline^® Depot.

The facilities and operations of our contract manufacturers to manufacture and test Increlex^®, and of Ipsen to manufacture and test Somatuline^® Depot, must undergo continuing inspections by the FDA for compliance with cGMP regulations in order to maintain their respective approvals. Currently, Lonza Baltimore is our sole provider of bulk rhIGF-1, and Ipsen is our sole provider of Somatuline^® Depot. Other than with respect to our agreement with Lonza Hopkinton, we have no alternative manufacturing facilities or plans for additional facilities at this time. We do not know if the Lonza Baltimore or Ipsen’s facilities or their operations required for the commercial manufacture of Increlex^® and Somatuline^® Depot will continue to receive satisfactory cGMP inspections, and we do not know whether Lonza Hopkinton will receive a satisfactory cGMP inspection. In the event these facilities or operations do not receive, or continue to receive, satisfactory cGMP inspections for the manufacture of our products, or for the operation of their

facilities in general, we may need to invest in significant compliance improvement programs, fund additional modifications to our manufacturing processes, conduct additional validation studies, or find alternative manufacturing facilities, any of which would result in significant cost to us as well as result in a delay or prevention of commercialization, and may result in our failure to obtain or maintain approvals. In addition, Lonza Baltimore, Lonza Hopkinton, Ipsen and any alternative contract manufacturer we may utilize, will be subject to ongoing periodic inspection by the FDA and corresponding state and foreign agencies for compliance with cGMP regulations and similar foreign standards. We do not have direct control over Ipsen’s or our contract manufacturers’ compliance with these regulations and standards. Any of these factors could delay or suspend clinical trials, regulatory submissions or regulatory approvals, entail higher costs and result in us being unable to effectively market and sell our products or maintain our products in the marketplace, which would adversely affect our ability to generate revenues.

We rely in certain cases on single-source and sole-source materials suppliers to manufacture Increlex^®.

Certain specific components and raw materials used to manufacture Increlex^® at our third-party manufacturers are obtained and made available through either single-source or sole-source suppliers. Single-source suppliers are the only approved suppliers currently available to us, and could only be supplemented by qualification of new sources for the material required. Sole-source suppliers are the only source of supply available to us, and could only be replaced through qualification of an alternate material after demonstrating suitability. Supply interruption of these materials could result in a significant delay to our manufacturing schedules and ability to supply product, and any replacement supplier would likely be required to undergo lengthy regulatory approval procedures prior to product distribution. Limits or termination of supply of these materials could significantly impact our ability to manufacture Increlex^®, cause significant supply delays while we qualified, at significant expense, new suppliers or new materials, and would consequently cause harm to our business, including as a result, our failure to meet our supply obligations to Ipsen.

Difficulties or delays in product manufacturing due to advance scheduling requirements, capacity constraints and/or manufacturing lot failures at our third-party manufacturers or Ipsen could harm our operating results and financial performance and jeopardize our orphan drug marketing exclusivity.

The manufacture of Increlex^® requires successful coordination among all of our suppliers, contractors, service-providers, manufacturers and us. Coordination failures with these different elements of our supply chain, or with Ipsen’s supply of Somatuline^® Depot to us, could require us to delay sales of our products and/or impair our ability to distribute and supply Increlex^® to Ipsen. Furthermore, uncertainties in estimating future demand for new products such as Increlex^® and Somatuline^® Depot may result in manufacture of surplus inventory requiring us to record charges for any expired, unused product, or may result in inadequate manufacturing of product inventory, causing delays to shipments or no shipments at all. Additionally, our reliance on third-party manufacturing requires long lead times from order to delivery of product, and may be hampered by available capacity at those manufacturers, making our ability to supply product supplies in excess of our forecast extremely difficult. As a consequence, we may have inadequate capacity to meet unexpected demand, which could negatively affect our operating results and our ability to meet our supply obligations to Ipsen. If we are unable to supply our products to all the patients that need them, the FDA could rescind our orphan drug marketing exclusivity to enable competitors to serve the affected markets. Further, our operating results and financial performance may suffer if we experience more than anticipated manufacturing lot failures or delivery delays.

If product is lost or damaged during manufacturing, storage or shipment, our business may suffer.*

We rely entirely on third-party contractors for the manufacturing, shipping and storage of our products. If product in filled, finished, or other form, or its active ingredient, is lost or damaged while in the possession of our third-party contractors, we may not have adequate rights to seek indemnification from our third-party contractors or their insurance companies for the replacement cost of the lost or damaged goods. Our agreement with the third-party contractor responsible for the loss or damage may waive their liability altogether or limit their liability to an amount well below the replacement cost of the lost or damaged goods. In addition, our insurance policies may not provide coverage or may provide inadequate coverage for the lost or damaged goods, or we may decide not to file an insurance claim in order to avoid increasing the cost of or cancellation of our insurance and/or to avoid the negative impact such claim could have on our prospective ability to insure our business operations at a commercially reasonable cost or at all. If we cannot recover the replacement cost of the lost or damaged goods from the responsible third-party contractor or their insurance companies, or our insurance companies, our financial performance may be negatively affected and our business may suffer. In addition, such losses or damages could delay or prevent us from manufacturing and supplying commercial or clinical product in the time frames or in the quantities that we anticipate will be required for the support of our or our collaborators’ product sales or product development activities, all of which would harm the development and commercial potential of our product.

Claims and concerns may arise regarding the safety and efficacy of our products, which could require us to perform additional clinical trials, could slow penetration into the marketplace, or cause reduced sales or product withdrawal after introduction.

Increlex^® was approved in the United States for the treatment of severe Primary IGFD based on long-term and extensive studies and clinical trials conducted to demonstrate product safety and efficacy. Somatuline^® Depot was approved in Canada and the United States for the treatment of acromegaly on a similar basis. Discovery of previously unknown problems with the raw materials, product or manufacturing processes, such as loss of sterility, contamination, new data suggesting an unacceptable safety risk or previously

unidentified side effects or an unfavorable risk-benefit ratio for these products, could result in a voluntary or mandated withdrawal of the products from the marketplace, either temporarily or permanently. Studies may result in data or evidence suggesting another product is safer, better tolerated, or more efficacious than our products, which could lead to reduced sales and royalties. Additionally, discovery of unknown problems with our products or manufacturing processes for our products could negatively impact the established safety and efficacy profile and result in possible reduced sales or product withdrawal. Such outcomes could negatively and materially affect our product sales, royalty stream, operating results, and financial condition.

If other companies overcome our U.S. orphan drug marketing exclusivity for Increlex^® or Somatuline^® Depot, or obtain marketing authorization in Europe for the treatment of severe Primary IGFD, they will be able to compete with us, and our revenues will be diminished.

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States. The company that obtains the first FDA approval for a designated orphan drug for a rare disease receives marketing exclusivity for use of that drug for the designated condition for a period of seven years from the date of approval. The orphan drug rules are similar in the European Union and marketing exclusivity is for a period of ten years from the date of approval.

The FDA has granted Increlex^® orphan drug marketing exclusivity for the long-term treatment of patients with severe Primary IGFD and has granted Somatuline^® Depot orphan drug marketing exclusivity for the long-term treatment of acromegaly. In the European Union, the European Medicines Agency (EMEA) has granted Increlex orphan drug marketing exclusivity for the long-term treatment of patients with severe Primary IGFD. Although Increlex^® and Somatuline^® Depot have received marketing exclusivity, the FDA and EMEA can still approve different drugs for use in treating the same indication or disease covered by our products, which would create a more competitive market for us.

Furthermore, drugs considered to be the same as Increlex^® or Somatuline^® Depot that demonstrate clinical superiority or provide a major contribution to patient care may be approved for marketing by the FDA and EMEA notwithstanding the grant of orphan drug marketing exclusivity. If other companies are able to overcome our U.S. orphan drug exclusivity, they will be able to compete with us, and our revenues will be diminished.

We will not be able to sell our products if we are not able to maintain our regulatory approvals due to changes to existing regulatory requirements.

Our products and manufacturing processes are subject to continued review and ongoing regulation by the FDA and foreign regulatory authorities post approval, including, for example, changes to manufacturing process standards or good manufacturing practices, changes to product labeling, revisions to existing requirements or new requirements for manufacturing practices, or changing interpretations regarding regulatory guidance. Such changes in the regulatory environment and requirements could occur at any time during commercialization. Changes in the regulatory environment or requirements could adversely affect our ability to maintain our approval or require us to expend significant resources to maintain our approvals, which could result in the possible withdrawal of our products from the marketplace, which would harm our business and negatively impact our financial performance.

Competitors could develop and gain FDA approval of products containing rhIGF-1 or lanreotide, which could adversely affect our competitive position.

In the future, rhIGF-1 or lanreotide manufactured by other parties may be approved for use in the United States. For example, we are aware that Novartis AG (through the acquisition of Chiron Corporation) has developed a process to manufacture rhIGF-1 using yeast expression and has intellectual property with respect to that process. In the event there are other rhIGF-1 products approved by the FDA to treat indications other than those covered by Increlex^® , physicians may elect to prescribe a competitor’s product containing rhIGF-1 to treat the indications for which Increlex^® has received and may receive approval. This is commonly referred to as off-label use. While under FDA regulations a competitor is not allowed to promote off-label use of its product, the FDA does not regulate the practice of medicine and as a result cannot direct physicians as to which product containing rhIGF-1 to prescribe to their patients. In addition, a competitor could gain FDA approval of a product containing lanreotide for the treatment of an indication other than indication(s) covered by Somatuline^® Depot, which would enable physicians to prescribe the competitor’s product for the indication(s) covered by Somatuline^® Depot. As a result, we would have limited ability to prevent off-label use of a competitor’s product containing rhIGF-1 or lanreotide to treat any diseases for which we have received FDA approval, even if it violates our method of use patents and/or we have orphan drug exclusivity for the use of rhIGF-1 or lanreotide to treat such diseases.

Competitors could challenge our patents and file an Abbreviated New Drug Application, or ANDA, or a 505(b)(2) new drug application for an IGF-1 or Somatuline^® Depot product and adversely affect the competitive position of each.

Products approved for commercial marketing by the FDA are subject to the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984, or “Hatch-Waxman Act.” The Hatch-Waxman Act provides companies with marketing exclusivity for varying time periods during which generic or modified versions of a drug may not be marketed and allows companies to apply to extend patent protection for up to five additional years. It also provides a means for approving generic versions of a drug once the marketing exclusivity period has ended and all relevant patents have expired. The period of exclusive marketing, however, may be

shortened if a patent is successfully challenged and defeated. Competitors with a generic IGF-1 or Somatuline^® Depot product or a modified version of IGF-1 or Somatuline^® Depot may attempt to file an ANDA or a 505(b)(2) NDA and challenge our patents and marketing exclusivity. Such applications would have to certify that one of the patents in the Increlex^® or Somatuline^® Depot NDA is invalid or not infringed by the manufacture, use, or sale of the product described in that ANDA or 505(b)(2) application under the Hatch-Waxman Act. If successful, a competitor could come to market at an earlier time than expected. We can provide no assurances that we can prevail in a challenge or litigation related to our patents or exclusivity.

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

We are subject to various health care “fraud and abuse” laws, such as the Federal False Claims Act, the federal anti-kickback statute and other state and federal laws and regulations. Pharmaceutical companies have faced lawsuits and investigations pertaining to violations of these laws and regulations. We cannot guarantee that measures that we have taken to prevent such violations, including our corporate compliance program, will protect us from future violations, lawsuits or investigations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

If we fail or are unable to protect or defend our intellectual property rights, competitors may develop competing products, and our business will suffer.

If we are not able to protect our proprietary technology, trade secrets and know-how, our competitors may use our inventions to develop competing products. We have licensed intellectual property rights, including patent rights, relating to rhIGF-1, our growth hormone/IGF-1 combination product candidates, and Somatuline^® Depot technologies from Genentech and Ipsen, respectively. However, these patents may not protect us against our competitors. Patent litigation is very expensive, and we therefore may be unable to pursue patent litigation to its conclusion because currently we do not generate meaningful revenues.

We do not have composition of matter patent coverage on the rhIGF-1 protein alone. Although we have licensed from Genentech its rights to its methods of use and manufacturing patents, it may be more difficult to establish infringement of such patents as compared to a patent directed to the rhIGF-1 protein alone. Our licensed patents may not be sufficient to prevent others from competing with us. We cannot rely solely on our patents to be successful. The standards that the U.S. Patent and Trademark Office and foreign patent offices use to grant patents, and the standards that U.S. and foreign courts use to interpret patents, are not the same and are not always applied predictably or uniformly and can change, particularly as new technologies develop. As such, the degree of patent protection obtained in the United States may differ substantially from that obtained in various foreign countries. In some instances, patents have issued in the United States while substantially less or no protection has been obtained in Europe or other countries. Our U.S. Patent No. 6,331,414 B1 licensed from Genentech is directed to methods for bacterial expression of rhIGF-1 and expires in 2018. We have no equivalent European patent. The European Patent Office has determined that the claims of Genentech’s corresponding European patent application are not patentable under European patent law in view of public disclosures made before the application was filed.

We do not have composition of matter patent coverage on the lanreotide molecule (the active pharmaceutical ingredient of Somatuline^® Depot) alone. We have licensed from Ipsen its rights to formulation and method of use patents for Somatuline^® Depot that expire between 2015 and 2019. However, there can be no assurance that we have patent rights sufficient to prevent others from competing with us.

We do not have composition of matter patent coverage on either the growth hormone or the IGF-1 component of our growth hormone/IGF-1 combination product candidates. Our U.S. Patent No. 5,374,620 and our equivalent European Patent No. 0 536 226 B1, both of which are licensed from Genentech, are composition of matter patents covering combinations of growth hormone and IGF-1 and expire in 2009 and 2011, respectively. Therefore, it is likely that these patents will expire before we are able to launch any growth hormone/IGF-1 combination product in the U.S. or in European markets. We have also licensed from Genentech certain method of use patents for our growth hormone/IGF-1 combination product candidates that expire between 2009 and 2014. Our U.S. Patent No. 6,331,414 B1 licensed from Genentech will provide protection in the United States for our process of manufacturing IGF-1 for our growth hormone/IGF-1 combination product candidates until it expires in 2018. We have no equivalent patent protection for our process of manufacturing IGF-1 in Europe.

If we attempt to enforce against a competitor the patent rights we have licensed from Ipsen or the patent rights we have licensed from Genentech, and if such patents are challenged in court by defenses the competitor may raise, such as invalidity, unenforceability or possession of a valid license, we may fail to stop the competitor and we may lose the ability to assert the affected patents against other competitors as well. If we assert the patents we licensed from Ipsen or the patents we licensed from Genentech in an infringement proceeding against a competitor, and if the court were to find in favor of any defense of invalidity or unenforceability raised by the competitor against the asserted patents, we would be unable to use the affected patents to exclude others from competing with Somatuline^® Depot or Increlex^®. In addition, the type and extent of patent claims that will be issued to us in the future are uncertain. Any patents that are issued may not contain claims that will permit us to stop competitors from using technology similar to our Increlex^®, or any growth hormone/IGF-1 combination product or Somatuline^® Depot technologies.

In addition to the patented technology licensed from Genentech and Ipsen, we also rely on unpatented technology, trade secrets and confidential information, such as the proprietary information we use to manufacture Increlex^®. We may not be able to effectively protect our rights to this technology or information. Other parties may independently develop substantially equivalent information and techniques or otherwise gain access to or disclose this technology. We generally require each of our employees, consultants, collaborators, and certain contractors to execute a confidentiality agreement at the commencement of an employment, consulting or collaborative relationship with us. However, these agreements may not provide effective protection of this technology or information or, in the event of unauthorized use or disclosure, they may not provide adequate remedies.

We may incur substantial costs as a result of patent infringement litigation or other proceedings relating to patent and other intellectual property rights, and we may be unable to protect our intellectual property rights.

A third-party may claim that we are using its inventions covered by its patents and may initiate litigation to stop us from engaging in our operations and activities. Although no third party has claimed that we are infringing on their patents, patent lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we are infringing the third party’s patents and would order us to stop the activities covered by the patents. In addition, there is a risk that a court will order us to pay the other party damages for having infringed the other party’s patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods of use do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do so. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.

We are aware of a U.S. patent of Novartis related to processes of manufacturing rhIGF-1 in yeast host cells, to fusion proteins, DNA, and yeast host cells useful in such processes of manufacturing rhIGF-1 in yeast host cells, and to rhIGF-1 made as a product of such processes. While we use bacterial expression, not yeast expression, in our process for manufacturing Increlex^®, we cannot predict whether our activities relating to the development and commercialization of Increlex^® in the United States will be found to infringe Novartis’s patent in the event Novartis brings patent infringement proceedings against us. We may not be able to obtain a license to Novartis’s patent under commercially reasonable terms, if at all. If we are unable to obtain a license to Novartis’s patent, and if in any patent infringement proceeding Novartis brings against us the court decides that our activities relating to the development and commercialization of Increlex^® in the United States infringe Novartis’s patent, the court may award damages and/or injunctive relief to Novartis. Any such damages, injunctive relief and/or other remedies the court may award could render any further development and commercialization of Increlex^® commercially infeasible for us or otherwise curtail or cease any further development and commercialization of Increlex^®.

We cannot be certain that others have not filed patent applications for technology covered by the issued patents of any of our licensors, or by our pending applications or by the pending applications of any of our licensors, or that we or any of our licensors were the first to invent the technology because:

•

some patent applications in the United States may be maintained in secrecy until the patents are issued,

•

patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, and

•

publications in the scientific literature often lag behind actual discoveries and the filing of patents relating to those discoveries.

Patent applications may have been filed and may be filed in the future covering technology similar to ours. Any such patent application may have priority over our patent applications and could further require us to obtain rights to issued patents covering such technologies. In the event that another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our U.S. patent position with respect to such inventions.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could harm our business.

Ipsen may seek to influence our business in a manner that is contrary to our goals or strategies or to the interests of our other stockholders.*

While we have entered into the Merger Agreement with Beaufour Ipsen Pharma, an affiliate of Ipsen, the completion of the Merger is subject to a number of conditions. In the event that the Merger is not completed, we will continue to be subject to a number of risks related to our relationship with Ipsen. As of July 31, 2008, Ipsen and its affiliates beneficially owned approximately 42.6% of our common stock (not including shares subject to limited voting agreements that Ipsen and its affiliates entered into with certain of our other stockholders). Based on its significant ownership position through certain protective provisions, Ipsen has the ability to significantly influence the outcome of certain actions by our Board of Directors and those requiring the approval of our stockholders. Accordingly, our other stockholders may be unable to prevent actions taken by Ipsen. Ipsen was also granted a preemptive right to purchase its pro rata portion of new securities that we may offer in the future to maintain its percentage ownership interest. In addition, under the terms of our affiliation agreement with Ipsen, so long as Ipsen holds at least 15% of the outstanding shares of our common stock, Ipsen is entitled to nominate two out of the nine directors on our Board of Directors. In the event that Ipsen holds at least 10% of the outstanding shares of our common stock, but less than 15%, it would be entitled to nominate one director to our Board of Directors. Our affiliation agreement with Ipsen also provides that in the event Ipsen holds at least 60% of the outstanding shares of our common stock, Ipsen is entitled to nominate an unlimited number of directors to our Board of Directors (and under our charter documents, holders of at least 60% of the outstanding shares of our common stock may remove any director or the entire Board of Directors without cause). For so long as Ipsen holds at least 15% of the outstanding shares of our common stock, Ipsen is also entitled to nominate additional independent director nominees, who must be independent of Ipsen, starting with one in 2008 and up to four after our 2009 annual meeting of stockholders. Our certificate of incorporation was also amended in connection with our collaboration with Ipsen to waive the corporate opportunity provisions under Delaware law and the corporate opportunity doctrine with respect to opportunities of which Ipsen and Ipsen’s designees to our Board of Directors may become aware as a result of their affiliation with us. Additionally, our certificate of incorporation provides that any person purchasing or acquiring an interest in shares of our common stock shall be deemed to have consented to these provisions of our certificate of incorporation. This deemed consent might restrict the ability to challenge transactions carried out in compliance with these provisions. We make no assurances that Ipsen will not seek to influence our business in a manner that is contrary to our goals or strategies or the interests of other stockholders. Moreover, persons who are directors and/or officers of Ipsen and who also serve on our Board of Directors may decline to take action in a manner that might be favorable to us but adverse to Ipsen. Currently, one of our directors, Christophe Jean, also serves as the Chief Operating Officer of Ipsen.

If we lose our licenses from Genentech or Ipsen, we may be unable to continue our business.*

We have licensed intellectual property rights and technology from Genentech and from Ipsen. Under our license and collaboration agreements with Genentech and Ipsen, each of Genentech and Ipsen have the right to terminate our licenses if we are in material breach of our obligations under our agreements with them and fail to cure that breach. Under the terms of the agreements, we are obligated, among other things, to use reasonable business efforts to meet specified milestones. If any of these agreements are terminated, then we would lose our rights to utilize the technology and intellectual property covered by that agreement’s license to develop, manufacture, market and sell Increlex^®, to develop, market and sell Somatuline^® Depot, or to develop, manufacture, market and sell our growth hormone/IGF-1 combination product candidates. This may prevent us from continuing our business.

We are subject to Genentech’s option rights with respect to the commercialization of Increlex^® for all diabetes and non-orphan indications in the United States; Ipsen’s right of first negotiation to develop and commercialize other endocrine products subsequently acquired or owned by us; and Genentech’s option rights with respect to our growth hormone/IGF-1 combination product candidates.

Under our U.S. license and collaboration agreement with Genentech for Increlex^®, Genentech has the option to elect to jointly commercialize rhIGF-1 for all diabetes and non-orphan indications in the United States. Orphan indications are designated by the FDA under the Orphan Drug Act, and are generally rare diseases or conditions that affect fewer than 200,000 individuals in the United States. With respect to those non-orphan and diabetes indications in the United States, once Genentech has exercised its option to jointly develop and commercialize, Genentech has the final decision on disputes relating to the development and commercialization of such indications. Our ability to sublicense the development and commercialization of such products requires the consent of Genentech. Under a letter agreement of July 2007, we and Genentech amended the U.S. license and collaboration agreement to provide that until such time as we initiate the development of rhIGF-1 for diabetes (or a substitute indication mutually agreed to by us and Genentech that has a potential market of greater than $250 million and is not an indication for the central nervous system), Genentech may elect to initiate such development for diabetes or, upon our and Genentech’s mutual agreement, the development of a substitute indication that has a potential market size of greater than $250 million and is not an indication of the central nervous system. In addition, if we elect to discontinue the development of rhIGF-1 for diabetes or a substitute indication selected by us with Genentech’s consent, Genentech has the right to assume development of such indication. In the event that Genentech initiates the development of rhIGF-1 for any such indication before we do or assumes the development of rhIGF-1 for any such indication after such development is discontinued by us, our rights under the agreement for such indication would terminate and Genentech would be granted a non-exclusive license under our rhIGF-1 intellectual property and technology to manufacture, use and sell rhIGF-1 products for diabetes, or if applicable the substitute indication, subject to an obligation to pay us milestone payments and/or royalties to be negotiated by Genentech and us in good faith on sales of these products.

Under our license and collaboration agreement with Ipsen with respect to Increlex^®, Ipsen has a right of first negotiation to develop and commercialize, in Ipsen’s territory, other products subsequently acquired or owned by us in the field of endocrinology. Accordingly, we may not receive a reasonable return on our investment if we develop new endocrinology products. In its territory, Ipsen also has the exclusive right to sublicense our growth hormone/IGF-1 combination product candidates. Accordingly, we have limited ability to sublicense these candidates to other parties.

Under our development and commercialization agreement with Genentech with respect to our growth hormone/IGF-1 combination product candidates, Genentech has a right to opt into our development and commercialization for all of the indications licensed to us under the agreement. If Genentech opts in, it would still have the right to subsequently elect to opt out of such development and commercialization of such combination product candidates and products, but only for all of the indications licensed to us under the agreement. Following an opt-in by Genentech, Genentech would control the joint development and commercialization of the combination product candidates and products for all of the indications licensed to us under the agreement other than AGHD and short stature indications and could assume control of the joint development and/or commercialization of products for the treatment of AGHD. Upon opt-in, Genentech may also choose to exercise a commercial option to acquire the right for the deciding vote on all commercialization matters pertaining to short stature indications; however, we would remain the lead commercialization party for short stature indications. Because of Genentech’s ability to control the timing and extent of such joint development and commercialization activities and our obligation to co-fund such activities, Genentech may induce us to bear an excessive financial burden in support of or to opt out of the joint development and commercialization of our combination product candidates and/or products for AGHD and certain other indications. In addition, our ability to sublicense the development and commercialization of our growth hormone/IGF-1 combination product candidates requires the consent of Genentech.

Accordingly, because of these various option, limits on sublicensing, and right of first negotiation rights, we may not receive a reasonable return on our investment for developing and/or commercializing Increlex^® or our growth hormone/IGF-1 combination product candidates.

If third-party clinical research organizations do not perform in an acceptable and timely manner, our clinical trials could be delayed or unsuccessful.

We do not have the ability to conduct all of our clinical trials independently. We rely on clinical investigators, third-party clinical research organizations and consultants to perform a substantial portion of these functions. If we cannot locate acceptable contractors to run our clinical trials or enter into favorable agreements with them, or if these contractors do not successfully carry out their contractual duties, satisfy FDA requirements for the conduct of clinical trials, or meet expected deadlines, we ~~will~~may be unable to obtain or maintain required approvals and ~~will~~may be unable to ~~commercialize~~market and ~~Increlex~~sell our products on a timely basis, if at all.

If we are unable to establish a direct sales force in the United States, our business may be harmed.

We currently do not have a sales organization. If Increlex is approved by the FDA for Severe Primary IGFD, we intend to market that therapy directly to pediatric endocrinologists in the United States through our own sales force. We will need to incur significant additional expenses and commit significant additional management resources to establish this sales force. We may not be able to establish these capabilities despite these additional expenditures. If we elect to rely on third parties to sell Increlex in the United States, we may receive less revenue and incur greater costs than if we sold it directly. In addition, we may have little or no control over the sales efforts of those third parties. In the event we are unable to sell Increlex, either directly or through third parties, our business would be harmed.

We may need others to market and commercialize Increlex in Europe.

We may need others to market and commercialize Increlex in Europe. If we decide to sell Increlex in Europe through a third party, we will need to enter into marketing arrangements with them. We may not be able to enter into marketing arrangements with third parties on favorable terms, or at all. In addition, these arrangements could result in lower levels of income to us than if we marketed Increlex entirely on our own. In the event that we are unable to enter into a marketing arrangement for Increlex in Europe, we may not be able to develop an effective sales force to successfully commercialize our product in Europe. If we fail to enter into marketing arrangements for our product and are unable to develop an effective international sales force, our revenues could be limited.

If we fail to identify and in-license other patent rights, products or product candidates, we may be unable to grow our revenues.

We do not conduct any ~~preclinical~~discovery ~~laboratory~~ research. Our strategy is to in-license products or product candidates and further develop them for commercialization. The market for acquiring and in-licensing patent rights, products and product candidates is intensely competitive. If we are not successful in identifying and in-licensing other patent rights, products or product candidates, we may be unable to grow our revenues with sales from ~~new~~additional products. If Further, under the ~~FDA~~terms ~~approves~~of ~~Increlex~~our ~~for~~collaboration ~~Severe~~with ~~Primary~~Ipsen, ~~IGFD~~Ipsen ~~only~~has certain approval rights with respect to our entering into material contracts or transactions, ~~only~~making ~~prescriptions~~capital ~~for~~expenditures ~~that~~or ~~indication~~acquiring certain assets. Accordingly, Ipsen may beprevent ~~reimbursable~~us from in-licensing products or product candidates. In ~~this~~addition, ~~event~~under the terms of our collaboration, Ipsen wehas ~~would~~a ~~need~~right of first negotiation to ~~invest~~develop ~~significant~~and ~~resources~~commercialize, toin ~~obtain~~Ipsen’s ~~new~~territory, products subsequently acquired or owned by us in the field of endocrinology. Under our combination product ~~candidates~~agreement with Genentech, Genentech has certain opt-in rights with respect to our development and commercialization of combination products and, with respect to certain combination products, to become the lead party for the planning, development and/or commercialization of such combination products.

In addition, we may need additional intellectual property from other third parties to ~~commercialize~~market ~~Increlex~~and ~~for~~sell ~~certain~~our ~~diabetes indications~~ products. We cannot be ~~sure~~certain that we will be able to obtain a license to any third-party technology we may require to conduct our business.

IfThe committed equity financing facility that we ~~fail~~entered into with Kingsbridge Capital Limited may not be available to ~~obtain~~us ~~the~~if ~~capital~~we ~~necessary~~elect to ~~fund~~make ~~our operations~~a draw down, weand ~~will~~may berequire ~~unable~~us to ~~execute~~pay ~~our~~certain ~~business~~liquidated ~~plan~~damages.

WeIn ~~believe~~October ~~that~~2005, ~~our~~we ~~cash,~~entered ~~cash~~into ~~equivalents~~a ~~and~~committed ~~short-term~~equity ~~investments~~financing asfacility, ofor ~~March~~CEFF, 31with Kingsbridge Capital Limited, ~~2005~~or ofKingsbridge, ~~$92.1~~which ~~million~~entitles us to sell and ~~proceeds~~obligates ~~available~~Kingsbridge ~~under~~to ~~our~~purchase, ~~senior~~from ~~credit~~time ~~facility~~to ~~will~~time beover ~~sufficient~~a toperiod ~~meet~~of ~~our~~three ~~projected~~years, ~~operating and~~newly ~~capital~~issued ~~expenditure~~shares ~~requirements~~of ~~through~~our atcommon ~~least~~stock ~~the~~for ~~end~~cash consideration of ~~2006~~up ~~based~~to onan ~~our~~aggregate ~~current~~of ~~business plan~~$75.0 Wemillion, ~~expect~~subject ~~capital~~to ~~outlays~~certain conditions and ~~operating~~restrictions. Kingsbridge ~~expenditures~~will not be obligated to ~~increase~~purchase ~~over~~shares under the ~~next~~CEFF ~~several~~unless ~~years~~certain asconditions weare ~~expand~~met, ~~our~~which ~~operations.~~include:

~~Our~~• ~~future~~a ~~capital~~minimum ~~needs~~price ~~and~~for ~~the adequacy of~~ our ~~available~~common ~~funds will depend on many factors, including:~~ stock;

• the ~~costs,~~accuracy ~~timing and scope~~ of ~~domestic~~representations and ~~international~~warranties ~~regulatory~~made ~~approvals~~to ~~for rhIGF-1~~Kingsbridge;

28• compliance with laws;

• ~~our~~continued ~~ability~~effectiveness toof ~~market~~the registration statement, filed by us with the U.S. Securities and ~~sell~~Exchange ~~rhIGF-1~~Commission, or SEC, for the resale of the shares of common stock issuable in connection with the CEFF and the shares of common stock underlying the warrant we issued to Kingsbridge in connection with the entering into of the CEFF; and

• the ~~commercial~~continued ~~readiness~~listing of our ~~rhIGF-1~~stock ~~manufacturing~~on ~~operations at Cambrex Baltimore, including~~ the ~~success~~NASDAQ ofGlobal ~~our cGMP production activities;~~Market.

•In addition, Kingsbridge is permitted to terminate the ~~success~~CEFF ofif ~~drug~~it ~~product~~determines ~~manufacturing~~that a material and ~~results~~adverse ofevent ~~stability~~has ~~and~~occurred ~~product~~affecting ~~comparability~~our ~~studies~~business, ~~performed~~operations, properties or financial condition. If we are unable to access funds through the CEFF, or if the CEFF is terminated by Kingsbridge, we may be unable to access capital on favorable terms or at ~~third-party~~all. ~~contractors;~~

•The terms of the ~~rate~~CEFF require us to pay certain liquidated damages in the event that the registration statement filed by us with the SEC is not available for the resale of ~~progress~~securities purchased by Kingsbridge under the CEFF or upon exercise of the warrant we issued to Kingsbridge. Except for certain periods of ineffectiveness permitted under the CEFF, we are obligated to pay to Kingsbridge an amount equal to the number of shares purchased under the CEFF and ~~cost~~held by Kingsbridge at the date the registration statement becomes unavailable, multiplied by any positive difference in price between the volume weighted average price on the trading day prior to such period of unavailability and the volume weighted average price on the first trading day after the period of unavailability. In addition, we are entitled in certain circumstances to deliver a “blackout” notice to Kingsbridge to suspend the use of the registration statement and prohibit Kingsbridge from selling shares under the registration statement. If we deliver a blackout notice in the 15 trading days following a settlement of a draw down, then we must make a blackout payment to Kingsbridge as liquidated damages, or issue Kingsbridge additional shares in lieu of this payment, calculated by means of a varying percentage of an amount based on the number of shares purchased and held by Kingsbridge and the change in the market price of our ~~future~~common ~~clinical~~stock ~~trials~~during the period in which the use of the registration statement is suspended. If the trading price of our common stock declines during a suspension of the registration statement, the blackout payment could be significant and ~~other~~could ~~research~~adversely affect our liquidity and ~~development~~our ~~activities;~~ability to raise capital. In addition, under the terms of an affiliation agreement we entered into pursuant to our collaboration with Ipsen, we have only a limited ability to raise capital through the sale of our equity securities, including pursuant to the CEFF, without first obtaining Ipsen’s approval.

•If we fail to obtain the ~~pace~~capital ofnecessary ~~expansion~~to offund ~~administrative~~our ~~expenses;~~operations, ~~and~~we will be unable to execute our business plan. *

•We ~~the~~believe ~~status~~that our cash, cash equivalents and short-term investments as of ~~competing~~June 30, ~~products~~2008 will be sufficient to meet our projected operating and capital expenditure requirements through at least June 30, 2009 based on our current business plan. However, our future capital needs and the adequacy of our available funds will depend on many factors, including:

We• ~~have~~changes no committed sources of capital and do not know whether additional financing will be available when needed, or, if available, that the terms will be favorable. If additional funds are not available, we may be forced to ~~curtail~~our orbusiness ~~cease operations.~~ plan;

If• weour ~~are~~ability ~~unable~~ to ~~manage~~market ~~our~~and ~~expected~~sell ~~growth,~~sufficient wequantities ~~may~~of ~~not~~Increlex® beand ~~able~~Somatuline® toDepot ~~implement~~at ~~our~~the ~~business~~anticipated ~~plan.~~ level;

~~Our~~• ~~ability~~the tocommercial ~~implement~~status ~~our business plan requires an effective planning and management process. As~~ of ~~March 31, 2005, we had 63 full-time employees, and we may need to hire additional employees in~~ the ~~near~~Increlex® ~~term.~~bulk ~~Our~~drug ~~offices~~manufacturing ~~are~~operations ~~located~~at inLonza ~~the~~Baltimore ~~San Francisco Bay area where competition for personnel with biopharmaceutical skills is intense~~Inc. ~~If we fail to identify, attract, retain~~ and ~~motivate~~Lonza ~~these~~Hopkinton ~~highly skilled personnel~~Inc., weincluding ~~may~~the besuccess ~~unable~~of ~~to continue~~ our ~~development~~cGMP ~~and~~production ~~commercialization~~ activities. ;

We• ~~expect that our anticipated future growth will place a significant strain on our management, systems and resources. In particular, to fulfill our strategy to commercialize Increlex in~~ the ~~United~~success ~~States, we may need to hire a significant number~~ of ~~additional~~Increlex® ~~employees.~~final Todrug ~~manage~~product the anticipated growth of our operations, we will need to increase management resources and implement new financial and management controls, reporting systems and procedures. If we are unable to manage our growth, we could be unable to execute our business strategy. manufacturing;

•

the costs, timing and scope of additional regulatory approvals for Increlex^® use in Primary IGFD and/or other regions;

•

Ipsen’s ability to supply Somatuline^® Depot to us in sufficient quantities;

•

the costs, timing and scope of additional regulatory approvals for Somatuline^® Depot;

•

Ipsen’s ability to market and sell sufficient quantities of Increlex^® in the licensed territories at the anticipated level;

•

the status of competing products;

•

the pace of expansion of administrative and legal expenses.

We expect capital outlays and operating expenditures to increase over the next several years as we expand our operations. We expect that we may require and attempt to raise additional funds through equity or debt financings, collaborative arrangements with corporate partners or from other sources, including potentially the CEFF. However, there can be no assurance that additional financing will be available when needed, or, if available, that the terms will be favorable. In addition, under the terms of an affiliation agreement we entered into pursuant to our collaboration with Ipsen, we have only a limited ability to raise capital through the sale of our equity without first obtaining Ipsen’s approval. Although we have entered into a stock purchase agreement with Genentech pursuant to which we may issue up to an additional 1,052,632 shares of common stock (or up to a maximum of $5.0 million of shares of common stock) to Genentech, such issuance is subject to various conditions, including the achievement of a regulatory approval milestone, and there can be no assurance that we will receive additional funds from Genentech pursuant to the stock purchase agreement. Further, we must first obtain Ipsen’s approval to issue shares of common stock to Genentech under our stock purchase agreement with Genentech at a price per share less than $4.75, which we may not be able to obtain. If additional funds are not available, we may be forced to curtail or cease operations.

If we are unable to manage our expected growth, we may not be able to implement our business plan. *

Our ability to implement our business plan requires an effective planning and management process. As of June 30, 2008, we had 141 full-time employees, and we expect to hire additional employees in the near term. Our offices are located in the San Francisco Bay area where competition for personnel with biopharmaceutical skills is intense. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.

We believe that our anticipated future growth may strain our management, systems and resources. To manage the anticipated growth of our operations, we may need to increase management resources and implement additional financial and management controls, reporting systems and procedures. If we are unable to manage our growth, we may be unable to execute our business strategy.

If product liability lawsuits are brought against us, we may incur substantial liabilities.

One potential risk of using growth factors like rhIGF-1 is that it may increase the likelihood of developing cancer or, if patients already have cancer, that the cancer may develop more rapidly. Increlex® may also increase the risk that diabetic patients may develop or worsen an existing retinopathy, which could lead to the need for additional therapy such as laser treatment of the eyes or result in blindness. WeIn ~~have~~our Phase III ~~results~~clinical ~~from~~trials ~~the~~for ~~treatment~~severe ~~of 71 children with Severe~~ Primary IGFD, ~~with~~the ~~rhIGF-1~~data ~~replacement therapy for an average~~ of ~~3.9~~ ~~years,~~which ~~with~~we ~~some~~submitted ~~patients~~to ~~being treated for as long as 11.5 years. None of~~ the 71FDA ~~children~~in ~~discontinued~~our ~~rhIGF-1 treatment due to safety concerns. However~~NDA, some patients experienced hypoglycemia, or low blood glucose levels. ~~Hearing~~Other ~~deficits~~side ~~and~~effects noted in some patients include hearing deficits, enlargement of the tonsils ~~were~~and ~~also~~intracranial ~~noted in some patients~~hypertension.

~~There~~Somatuline® ~~may~~Depot ~~also~~is bea ~~other~~member ~~adverse~~of ~~events~~a ~~associated~~class ~~with~~of ~~the~~products ~~use~~known ofas ~~Increlex~~somatostatin analogs, which ~~may~~have ~~result~~the inpotential ~~product~~to ~~liability~~cause ~~suits~~gallstones ~~being~~and ~~brought~~other ~~against~~disorders usassociated with obstruction of the biliary tract, including pancreatitis. ~~While~~These weproducts ~~have~~also ~~licensed~~alter the ~~rights~~balance tobetween ~~develop~~the ~~and~~counter-regulatory ~~commercialize~~hormones ~~rhIGF-1~~insulin, inglucagon ~~certain~~and ~~indications~~growth hormone, we ~~are~~which ~~not~~may ~~indemnified~~result byin ~~any~~hypoglycemia ~~third~~or ~~party~~hyperglycemia, ~~including~~and ~~our~~suppress ~~contract~~secretion ~~manufacturers~~of thyroid stimulating hormone, ~~for~~which ~~any~~may ~~liabilities~~result ~~arising~~in ~~out~~hypothyrodism. ofCardiac ~~the~~conduction ~~development~~abnormalities orhave ~~use~~also occurred during treatment with this class of ~~rhIGF-1~~drugs.

~~Whether~~There ormay ~~not~~also webe ~~are~~other ~~ultimately~~adverse ~~successful~~events inassociated ~~defending~~with ~~product~~the ~~liability~~use ~~litigation~~of Increlex® or Somatuline® Depot, ~~such~~and ~~litigation~~adverse ~~would~~events ~~consume~~may ~~substantial~~arise ~~amounts~~that ofare related to our ~~financial and~~growth ~~managerial~~hormone/IGF-1 ~~resources,~~combination ~~and~~product ~~might~~candidates, which may result in ~~adverse~~product ~~publicity~~liability orsuits ~~reduced~~being ~~acceptance~~brought ofagainst ~~Increlex~~us. inWhile we have licensed the ~~market~~rights to develop, ~~all~~market ofand ~~which~~sell ~~would~~Increlex®, ~~impair~~Somatuline® Depot and our ~~business.~~growth Wehormone/IGF-1 ~~have~~combination ~~obtained~~product ~~clinical~~candidates ~~trial~~in ~~insurance~~certain ~~and~~indications, ~~product~~with ~~liability~~the ~~insurance;~~exception ~~however,~~of wecertain ~~may~~liabilities ~~not be~~covered ~~able~~up to ~~maintain~~certain ~~our~~limits ~~clinical~~by ~~trial~~our insurance orpolicies, ~~product~~we ~~liability~~are ~~insurance~~not atindemnified anby any ~~acceptable~~third ~~cost~~party, ifincluding atour ~~all~~contract manufacturers, for any liabilities that we bear and ~~this~~that ~~insurance~~arise ~~may~~out ~~not~~of ~~provide~~our ~~adequate~~development ~~coverage~~or ~~against~~use ~~potential~~of ~~claims~~any of these products or ~~losses~~product candidates.

Whether or not we are ultimately successful in defending product liability litigation, such litigation would consume substantial amounts of our financial and managerial resources, and might result in adverse publicity or reduced acceptance of our products in the market, or product candidates in development, all of which would impair our business. We have obtained clinical trial insurance and product liability insurance; however, we may not be able to maintain our clinical trial insurance or product liability insurance at an acceptable cost, if at all, and this insurance may not provide adequate coverage against potential claims or losses.

In addition, we are contractually obligated to indemnify certain contract manufacturers for certain liabilities that they would otherwise bear and that arise from use of our products or product candidates. Because such contractually assumed liabilities are not covered by any of our insurance policies, the negative financial impact of any such liability could hinder or prevent us from continuing our business.

Budgetary or cash constraints may force us to delay our efforts to develop certain research and development programs in favor of developing others, which may prevent us from meeting our stated timetables and completing these projects through to product commercialization.

Because we are ana ~~emerging~~ company with limited financial resources, and because research, development and ~~development~~commercialization isactivities anare ~~expensive~~costly ~~process~~processes, we must regularly ~~assess~~prioritize the most efficient allocation of our ~~research~~financial ~~and development~~ resources. ~~Accordingly~~For example, we may choose to delay or abandon our research and development efforts for the treatment of a particular indication or project to allocate those resources to another indication or project, or to commercialization activities, which could cause us to fall behind our initial timetables for development. As a result, we may not be able to fully realize the value of some of our product candidates in a timely manner, since they will be delayed in reaching the market, or may not reach the market at all.

2946

We must implement additional finance and accounting systems, procedures and controls as we grow our business and organization ~~and to satisfy new reporting requirements~~.

As a public reporting company, we must comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the ~~Securities and Exchange Commission~~SEC, including expanded disclosures and accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, and other requirements ~~will~~have increased ~~increase~~ our costs and ~~require~~required additional management resources. We ~~recently~~ have ~~been~~upgraded ~~upgrading~~ our finance and accounting systems, procedures and controls and will need to continue to implement additional ~~finance and accounting systems,~~ procedures and controls as we grow our business and organization ~~and to satisfy new reporting requirements~~. ~~Compliance~~ ~~with~~ Section 404 ~~will~~requires ~~apply~~annual inmanagement ~~2005,~~assessments ~~and~~of ~~404~~the ~~reporting~~effectiveness ~~will~~of ~~first occur in~~ our ~~Form~~internal ~~10-K~~control ~~for~~over ~~our~~financial ~~fiscal~~reporting ~~year~~and ~~ending~~an ~~December~~opinion ~~31,~~by ~~2005.~~our Ifindependent weregistered ~~are~~public ~~unable~~accountants toon ~~complete~~ the ~~required~~effectiveness ~~assessment as to the adequacy~~ of ~~our~~ internal ~~control~~controls ~~reporting~~over orfinancial ifreporting. If our independent registered public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal ~~controls~~control over financial reporting ~~as of December 31~~, ~~2005,~~ investors could lose confidence in the reliability of our internal ~~controls~~control over financial reporting, which could adversely affect our stock price.

If we are unable to attract and retain additional qualified personnel, our ability to ~~commercialize~~market ~~Increlex~~and sell our products and develop other product candidates will be harmed.*

Our success depends on our continued ability to attract and retain highly qualified management and scientific personnel and on our ability to develop relationships with leading academic scientists and clinicians. We are highly dependent on our current management and key commercial, medical, scientific ~~and technical personnel~~, ~~including:~~regulatory ~~Dr. John A. Scarlett, our President~~ and ~~Chief~~pharmaceutical ~~Executive~~operations ~~Officer; Dr. Ross G. Clark~~personnel, ~~our~~whose ~~Chief~~knowledge ~~Technical~~of ~~Officer; Timothy P. Lynch,~~ our ~~Chief~~industry ~~Financial Officer~~ and ~~Treasurer;~~technical ~~Dr.~~expertise ~~Thorsten von~~would ~~Stein,~~be ~~our~~extremely ~~Chief~~difficult ~~Medical~~to ~~Officer; Stephen N~~replace. ~~Rosenfield,~~We ~~our~~have at-will ~~General~~employment ~~Counsel~~contracts ~~and~~with ~~Secretary;~~all ~~and~~of ~~Chris Rivera,~~ our ~~Senior~~executive ~~Vice~~officers. ~~President~~They ofmay ~~Commercial~~terminate ~~Operations,~~their ~~whose~~employment ~~knowledge~~without ofcause ~~our~~or ~~industry~~good reason and ~~technical~~without ~~expertise~~notice ~~would be extremely difficult~~ to ~~replace~~us.

We have at will employment contracts with all of our executive officers. All of our executive officers may terminate their employment without cause or good reason and, without notice to us, except for Mr. Lynch. Mr. Lynch may terminate his employment with two weeks notice to us..

Risks Related to Our Common Stock

If our ~~officers,~~results ~~directors~~do ~~and~~not ~~largest~~meet ~~stockholders choose to act together, they are able to control~~ our ~~management~~ and ~~operations,~~analysts’ ~~acting~~forecasts ~~in their best interests~~ and ~~not~~expectations, ~~necessarily~~our stock ~~those~~price ofcould ~~other stockholders~~decline.

AsAnalysts ofwho ~~April~~cover ~~15,~~our ~~2005,~~business ~~our~~and ~~directors,~~operations ~~executive~~provide ~~officers~~valuations ~~and~~regarding ~~principal~~our ~~stockholders~~stock price and ~~their~~make recommendations ~~affiliates~~whether ~~beneficially~~to ~~owned approximately~~buy, ~~64.7%~~hold ofor sell our ~~common~~ stock. Our ~~greater~~stock ~~than~~price ~~five~~may ~~percent~~be ~~beneficial~~dependent ~~owners~~upon ~~include~~such ~~entities~~valuations ~~affiliated~~and ~~with~~recommendations. ~~MPM~~Analysts’ ~~Capital,~~valuations ~~which~~and ~~beneficially~~recommendations ~~owned~~are ~~22.4%;~~based ~~entities~~primarily ~~affiliated~~on ~~with~~our ~~Prospect~~reported ~~Management~~results ~~Co.~~and ~~II,~~our ~~LLC,~~and ~~which~~their ~~beneficially owned~~forecasts ~~12.1%;~~and ~~MedImmune,~~expectations ~~Inc.,~~concerning ~~which~~our ~~beneficially~~future ~~owned~~results ~~9.5%;~~regarding, ~~and~~for ~~entities~~example, ~~affiliated~~expenses, ~~with~~revenues, ~~Rho~~clinical ~~Ventures~~trials, ~~which~~regulatory ~~beneficially~~marketing ~~owned~~approvals 9and competition.~~5%.~~ Our ~~directors,~~future ~~executive~~results ~~officers~~are ~~and~~subject ~~principal~~to ~~stockholders~~substantial uncertainty, and ~~their~~we ~~affiliates~~may ~~collectively~~fail ~~have~~to ~~the~~meet ~~ability~~or toexceed ~~determine~~our ~~the~~and ~~election~~analysts’ forecasts and expectations as a result of ~~all~~a number of ~~our~~factors, ~~directors~~including ~~and~~those todiscussed ~~determine~~under the ~~outcome~~section ofentitled ~~most~~“Risks ~~corporate~~Related ~~actions~~to ~~requiring~~Our ~~stockholder~~Business” ~~approval~~above. ~~They~~If ~~may~~our ~~exercise~~results ~~this~~do ~~ability~~not inmeet aour ~~manner~~and ~~that~~analysts’ ~~advances~~forecasts and ~~their~~expectations, ~~best~~our ~~interests~~stock ~~and~~price ~~not~~could ~~necessarily~~decline ~~those~~as a result of ~~other stockholders~~analysts lowering their valuations and recommendations or otherwise.

~~Anti-takeover~~If ~~provisions in~~ our ~~charter~~ ~~documents~~officers, directors and ~~under~~largest ~~Delaware~~stockholders ~~law~~choose ~~may~~to ~~make~~act antogether, ~~acquisition~~they ofare usable to control our management and operations, ~~which~~acting ~~may~~in betheir ~~beneficial~~best tointerests ~~our~~and ~~stockholders,~~not ~~more~~necessarily ~~difficult~~those of other stockholders. *

~~Provisions~~As of July 31, 2008, our ~~amended~~directors, executive officers and ~~restated~~principal ~~certificate~~stockholders and their affiliates beneficially owned approximately 68.3% of our ~~incorporation~~common stock. Our greater than five percent beneficial owners include Ipsen and ~~bylaws~~its affiliates, aswhich ~~well~~beneficially asowned ~~provisions~~42.6% (not including shares subject to limited voting agreements that Ipsen and its affiliates entered into with certain of our ~~Delaware~~other ~~law~~stockholders); entities affiliated with MPM BioVentures III LLC, ~~could~~which ~~make~~beneficially itowned ~~more~~13.3%; ~~difficult~~entities ~~for~~affiliated awith Prospect Management Co. II, LLC, which beneficially owned 5.9%; and entities affiliated with Rho Capital Partners, ~~third~~which ~~party~~beneficially toowned ~~acquire~~5.8%. usOur directors, ~~even~~executive ifofficers ~~doing~~and soprincipal ~~would~~stockholders ~~benefit~~and their affiliates collectively have the ability to determine the election of all of our ~~stockholders~~directors and to determine the outcome of most corporate actions requiring stockholder approval. ~~These~~They ~~provisions:~~may exercise this ability in a manner that advances their best interests and not necessarily those of other stockholders.

•Our ~~establish~~collaboration awith ~~classified~~Ipsen ~~board~~limits ofour ~~directors~~ability soto ~~that~~enter ~~not~~into ~~all~~transactions ~~members~~and ofto ~~our~~pursue ~~board~~opportunities ~~may~~in beconflict ~~elected~~with atIpsen, ~~one~~which ~~time;~~could cause the price of our common stock to decline.

•Under ~~authorize~~ the ~~issuance~~terms of ~~“blank~~an ~~check”~~affiliation ~~preferred~~agreement ~~stock~~we ~~that~~entered ~~could~~into bepursuant ~~issued~~to by our ~~board~~collaboration with Ipsen, the approval of ~~directors~~Ipsen tois ~~increase~~required ~~the~~for ~~number~~us ofto ~~outstanding~~take certain ~~shares~~actions, ~~and~~including, ~~hinder~~but anot ~~takeover~~limited ~~attempt;~~to:

•

entering into most material transactions or agreements;

•

merging or consolidating with other entities;

•

establishing or approving an operating budget with anticipated research and development spending in excess of $25.0 million per year, plus potential additional amounts for new Ipsen projects under the license and collaboration agreement we entered into with respect to Somatuline^® Depot;

•

subject to limited exceptions, incurring any indebtedness other than certain permitted indebtedness (provided that our total permitted indebtedness may not exceed $2.5 million if our ratio of net indebtedness to EBITDA exceeds 1:1);

•

incurring capital expenditures of more than $2.0 million in any given year;

•

making any investment, other than certain permitted investments;

•

entering into any transaction that results in competition with Ipsen;

•

declaring or paying any cash dividends;

•

taking any action with respect to takeover defense measures, including with respect to our stockholder rights plan; and

•

issuing or selling shares of our capital stock, other than issuances or sales after October 13, 2008 that may not exceed $25.0 million in any three-year period, and other limited exceptions.

These provisions could continue indefinitely and may limit our ability to enter into transactions otherwise viewed as beneficial to us, which could cause the price of our common stock to decline.

Our stockholder rights plan and anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult.*

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These provisions include, among others, provisions that:

•

authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares and hinder a takeover attempt;

•

limit who may call a special meeting of stockholders;

•

prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

• establish advance notice requirements for nominations for election to our ~~board~~Board of ~~directors~~Directors or for proposing matters that can be acted upon at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law, which prohibits business combinations between us and one or more significant stockholders unless specified conditions are met, may discourage, delay or prevent a third party from acquiring us.

We have adopted a rights agreement under which certain stockholders have the right to purchase shares of a new series of preferred stock at an exercise price of $40.00 per one one-hundredth of a share of such preferred stock, subject to adjustment, if a person or group of persons acquires more than a certain percentage of our common stock. In connection with the execution and delivery of the merger agreement with affiliates of Ipsen, we entered into an amendment to the rights agreement in order to, among other things, prevent the merger agreement, the merger contemplated by the merger agreement or the consummation of any other transactions contemplated by the merger agreement from triggering the distribution and/or exercise of the rights under the rights agreement. If the merger contemplated by the merger agreement is not completed, the rights plan could make it more difficult for a person to acquire a majority of our outstanding voting stock. The rights plan could also reduce the price that investors might be willing to pay for shares of our common stock and result in the market price being lower than it would be without the rights plan. In addition if the merger is not completed, the existence of the rights plan itself may deter a potential acquirer from acquiring us. As a result, either by operation of the rights plan or by its potential deterrent effect, mergers or other business combinations (other than the merger) that our stockholders may consider in their best interests may not occur.

The committed equity financing facility that we entered into with Kingsbridge may result in dilution to our stockholders.

Pursuant to the CEFF, Kingsbridge committed to purchase, subject to certain conditions and at our election, up to $75.0 million of our common stock. Should we sell shares to Kingsbridge under the CEFF, or issue shares in lieu of any “blackout” payment, it will have a dilutive effect on the holdings of our current stockholders, and may result in downward pressure on the price of our common stock. If we draw down amounts under the CEFF, we will issue shares to Kingsbridge at a discount of up to ten percent from the volume weighted average price of our common stock. If we draw down amounts under the CEFF when our share price is decreasing, we will need to issue more shares to raise the same amount than if our stock price was higher. Issuances in the face of a declining share price will have an even greater dilutive effect than if our share price were stable or increasing, and may further decrease our share price.

Our stock price may be volatile, and an investment in our stock could decline in value.

The trading price of our common stock has fluctuated significantly since our initial public offering in March 2004, and is likely to remain volatile in the future. The trading price of our common stock could be subject to wide fluctuations in response to many events or factors, including the following:

•

announcements by us, Ipsen, Genentech, our suppliers and key third-party vendors, or our competitors of regulatory developments, product development agreements, clinical trial results, clinical trial enrollment, regulatory filings, new products and product launches, significant acquisitions, strategic partnerships or joint ventures;

•

estimates of our business potential and earnings prospects;

• ~~announcements~~deviations byfrom usanalysts’ orprojections ~~our~~regarding ~~competitors~~business ~~of new clinical trial results~~potential, ~~regulatory~~costs ~~filings~~ and/or ~~developments,~~earnings ~~new products, significant acquisitions, strategic partnerships or joint ventures~~prospects;

•48 ~~if Insmed’s Somatokine® receives orphan drug exclusivity over Increlex;~~

•Table deviationsof from analysts’ projections regarding business potential and earnings prospects;Contents

• andevelopments ~~assessment~~with ofrespect to our ~~management~~collaboration with Ipsen;

•

quarterly variations in our operating results;

•

significant developments in the businesses of biotechnology companies;

•

changes in financial estimates by securities analysts;

•

changes in market valuations or financial results of biotechnology companies;

•

additions or departures of key personnel;

•

changes in the structure of healthcare payment or reimbursement systems, regulations or policies;

•

activities of short sellers and risk arbitrageurs;

• future sales of our common stock, including potential sales of a substantial number of shares by Ipsen and its affiliates, or the perception that such sales are likely to occur;

•

general economic, industry and market conditions; and

•

volume fluctuations, which are particularly common among highly volatile securities of biotechnology companies.

In addition, the stock market has experienced volatility that has particularly affected the market prices of equity securities of many biotechnology companies, which often has been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. If the market price of our common stock declines in value, you may not realize any return on your investment in us and may lose some or all of your investment.

If our results do not meet analysts’ forecasts and expectations, our stock price could decline.

Analysts who cover our business and operations provide valuations regarding our stock price and make recommendations whether to buy, hold or sell our stock. Our stock price may be dependent upon such valuations and recommendations. Analysts’ valuations and recommendations are based primarily on our reported results and their forecasts and expectations concerning our future results regarding, for example, expenses, revenues, clinical trials, regulatory marketing approvals and competition. Our future results are subject to substantial uncertainty, and we may fail to meet or exceed analysts’ forecasts and expectations as a result of a number of factors, including those discussed under the section “Risks Related to Our Business.” If our results do not meet analysts’ forecasts and expectations, our stock price could decline as a result of analysts lowering their valuations and recommendations or otherwise.

We are at risk of securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology companies have experienced greater than average stock price volatility in recent years. If we faced such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

Substantial sales of shares may impact the market price of our common stock.*

If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options or pursuant to the CEFF, and the shares issued or issuable to Genentech and Ipsen and its affiliates, the market price of our common stock may decline. In addition, the perceived risk of dilution from sales or issuances of our common stock to or by Kingsbridge or Ipsen may cause holders of our common stock to sell their shares, or it may encourage short selling by market participants, which could contribute to a decline in our stock price. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.

As of July 31, 2008, we had 68,464,752 outstanding shares of common stock. As of July 31, 2008, we had 6,749,580 shares subject to outstanding options and restricted stock units granted under our equity compensation plans.

We have filed a registration statement covering shares of common stock issuable upon exercise of options and other grants pursuant to our stock plans. In September 2005, we filed a shelf registration statement pursuant to which we may, from time-to-time, sell shares of our common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or more offerings. In November 2005, we also filed a registration statement for the resale of the shares of common stock issuable in connection with the CEFF and the shares of common stock underlying the warrant we issued to Kingsbridge in connection with our entering into the CEFF. Moreover, we have agreed that, upon Ipsen’s request, we would file one or more registration statements in order to permit Ipsen and its affiliates to offer and sell a substantial number of shares of our common stock, including the 29,180,778 shares we issued to Ipsen and an affiliate of Ipsen. In addition, certain holders of shares of our common stock that are parties to our amended and restated investors’ rights agreement, including Genentech, are entitled to registration rights.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On May 20, 2008, our 2008 Annual Meeting of Stockholders was held at our corporate offices located at 2000 Sierra Point Parkway, Brisbane, California. During this meeting, our stockholders voted on the following three proposals:

(a) Proposal to elect three directors to hold office until the 2009 Annual Meeting of Stockholders:


	Votes
Nominee	For	Withheld
Ross G. Clark, Ph.D.	43,144,186	503,726
Faheem Hasnain	42,906,903	741,009
David L. Mahoney	40,979,092	2,668,820

~~equity-related~~Alexander ~~securities~~Barkas, inPh.D. ~~the future at a time~~ and ~~price~~Mark ~~that~~Leschly, wewill ~~deem~~each ~~appropriate.~~continue ~~We are unable~~ to ~~predict~~serve ~~the effect that sales may have~~ on ~~the~~our ~~prevailing~~Board ~~market~~of ~~price~~Directors ofuntil our 2009 ~~common~~Annual ~~stock.~~Meeting As of ~~March~~Stockholders ~~31,~~and ~~2005,~~until wehis ~~had~~or ~~31,578,517~~her ~~outstanding~~successor ~~shares~~is ofelected ~~common~~and ~~stock.~~has ~~Of these shares~~qualified, ~~the~~or ~~13,225,000~~until ~~shares~~his ~~sold~~or inher ~~our~~earlier ~~public~~death, ~~offerings~~resignation ~~that~~or ~~were~~removal. ~~outstanding~~John asA. ~~of March 31~~Scarlett, ~~2005 were freely tradable without restriction or further registration~~M.D., ~~other~~Karin ~~than~~Eastham ~~shares~~and ~~purchased~~Christophe ~~by our officers~~Jean, ~~directors~~will oreach ~~other~~continue ~~“affiliates”~~to ~~within~~serve ~~the~~on ~~meaning~~our Board of ~~Rule~~Directors ~~144~~until ~~under~~our ~~the~~2010 ~~Securities~~Annual ~~Act~~Meeting of ~~1933.~~Stockholders ~~The~~and ~~remaining 18,353,517~~until ~~shares~~his ~~outstanding~~successor asis ofelected ~~March~~and 31has qualified, ~~2005~~or ~~are~~until ~~now~~his ~~freely~~earlier ~~tradable~~death, ~~subject~~resignation toor ~~volume limitations, certain restrictions on sales by affiliates and vesting in the case of early exercised options~~removal.

We(b) ~~have~~Proposal ~~filed~~to aratify ~~registration~~the ~~statement~~selection ~~covering~~by ~~shares~~the ofAudit ~~common~~Committee ~~stock issuable~~of ~~upon~~our ~~exercise~~Board of ~~options~~Directors ~~and~~of ~~other~~Ernst & ~~grants~~Young ~~pursuant~~LLP toas our ~~stock~~independent ~~plans.~~registered ~~The~~public ~~holders~~accounting offirm ~~17,285,928~~for ~~shares~~the offiscal ~~our~~year ~~common~~ending ~~stock outstanding as of March~~ December 31, 2008: ~~2005 are entitled to registration rights.~~


For	Votes Against	Abstain	Broker Non Vote
43,586,019	59,793	2,100	0


For	Votes Against	Abstain & NonVotes	Broker Non Vote
30,694,963	10,046,682	2,975	2,903,292

ITEM 5.

OTHER INFORMATION.

On May 19, 2008, the Compensation Committee of our Board of Directors approved an amendment to the employment letter agreement (the “Employment Agreement Amendment”) of Thorsten von Stein, Ph.D., M.D., our Chief Medical Officer and Senior Vice President of Clinical and Regulatory Affairs, to provide that in the event that Dr. von Stein is terminated without cause or terminates his own employment for good reason within 12 months following a change of control, as these terms are defined in his employment agreement, Dr. von Stein will, subject to his entering into an effective release of claims in our favor, be entitled to receive a lump-sum severance payment equal to one year of his base salary in effect as of his termination date and the vesting of his stock options and restricted stock unit awards will be accelerated in full. Prior to the Employment Agreement Amendment, Dr. von Stein was entitled to a lump-sum severance payment equal to six months of his base salary and the accelerated vesting of 50% of his stock options and restricted stock unit awards, in the event that he is terminated without cause or terminates his own employment for good reason within 12 months following a change of control. The foregoing is only a brief description of the Employment Agreement Amendment, does not purport to be complete and is qualified in its entirety by reference to the Employment Agreement Amendment that is filed as Exhibit 10.9DD to this quarterly report on Form 10-Q.

ITEM 6.

EXHIBITS.


Exhibit Number		Description

2.1		Agreement and Plan of Merger by and among Beaufour Ibsen Pharma, Tribeca Acquisition Sub and the Registrant, dated as of June 4, 2008(1)

3.1		Amended and Restated Certificate of Incorporation(2)

3.2		Amended and Restated Bylaws, as amended(3)

3.3		Certificate of Designation of Series A Junior Participating Preferred Stock(4)

3.4		Certificate of Amendment of Amended and Restated Certificate of Incorporation(4)

3.5		Certificate of Amendment of Amended and Restated Certificate of Incorporation(3)

4.1		Form of Specimen Stock Certificate(5)

4.2		Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5

4.3		Warrant issued to Kingsbridge Capital Limited, dated October 14, 2005(6)

4.4		Warrant issued to Ipsen, S.A., dated October 13, 2006(5)

Item 3. Qualitative and Quantitative Disclosures About Market Risk


Exhibit Number		Description

4.5A		First Senior Convertible Promissory Note issued to Ipsen, S.A., dated October 13, 2006(5)

4.5B		Second Senior Convertible Promissory Note issued to Ipsen, S.A., dated September 17, 2007(7)

4.5C		Third Senior Convertible Promissory Note issued to Ipsen, S.A., dated September 17, 2007(7)

4.6A		Rights Agreement, dated as of October 13, 2006, between the Registrant and Computershare Trust Company, N.A., as Rights Agent(5)

4.6B		Form of Right Certificate(5)

4.6C		Amendment No. 1 to Rights Agreement, dated as of June 4, 2008, by and between Computershare Trust Company, N.A. and the Registrant(8)

10.3A		Amended and Restated 2004 Stock Plan(9)

10.7H		Letter Agreement, dated February 12, 2008, between Genentech, Inc. and the Registrant

10.9T		Non-Employee Director Compensation Arrangements(10)

10.9BB		Amendment to Key Employment Agreement for Ross G. Clark, dated June 20, 2008

10.9CC		Amendment to Employment Letter Agreement with Andrew Grethlein, dated May 21, 2008

10.9DD		Amendment to Employment Letter Agreement with Thorsten von Stein, dated May 21, 2008

10.14H		Common Stock Purchase Agreement, dated as of July 22, 2008, between the Registrant, Ipsen, S.A. and Suraypharm(11)

15.1		Letter regarding Unaudited Interim Financial Information

31.1		Certification of Chief Executive Officer of Tercica, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a)

31.2		Certification of Chief Financial Officer of Tercica, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a)

32.1		Certification by the Chief Executive Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)

32.2		Certification by the Chief Financial Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)

~~Our~~(1) ~~market~~Incorporated ~~risk~~by ~~disclosures~~reference ~~set~~to ~~forth~~the insimilarly ~~Item~~described 7Aexhibit ofincluded ~~our~~with ~~Annual~~the Registrant’s Current Report on Form 108-K ~~for~~(File ~~the~~No. ~~year~~000-50461) ~~ended~~filed ~~December~~on ~~31,~~June ~~2004~~4, ~~has not changed significantly~~2008.

~~Item~~(2) 4Incorporated by reference to the similarly described exhibit included with the Registrant’s quarterly report on Form 10-Q (File No. ~~Controls~~000-50461) ~~and~~filed ~~Procedures~~on May 13, 2004.

~~Evaluation~~(3) ofIncorporated ~~disclosure~~by ~~controls~~reference ~~and~~to ~~procedures~~the similarly described exhibit included with the Registrant’s Current Report on Form 8-K (File No. 000-50461) filed on May 25, 2007.

~~Based~~(4) onIncorporated ~~their~~by ~~evaluation~~reference asto ofthe ~~March~~similarly ~~31,~~described ~~2005,~~exhibit ~~our~~included ~~Chief Executive Officer and Chief Financial Officer,~~ with the ~~participation~~Registrant’s ofCurrent ~~management,~~Report ~~have~~on ~~concluded~~Form ~~that~~8-K ~~our disclosure controls and procedures~~ (asFile ~~defined~~No. ~~in Rules 13a–15(e~~000-50461) ~~and~~filed ~~15d–15(e)~~on ofOctober the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in periodic reports that we file or submit under the Securities and Exchange Act of 1934 is recorded18, ~~processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms~~2006.

~~Changes~~(5) inIncorporated ~~internal~~by ~~control~~reference ~~over~~to ~~financial~~the ~~reporting~~similarly described exhibit included with the Registrant’s quarterly report on Form 10-Q (File No. 000-50461) filed on November 3, 2006.

~~There~~(6) ~~were~~Incorporated noby ~~changes~~reference into ~~our~~the ~~internal~~similarly ~~control~~described ~~over~~exhibit ~~financial~~included ~~reporting~~with ~~during~~ the ~~quarter~~Registrant’s ~~ended~~quarterly ~~March~~report ~~31,~~on ~~2005~~Form ~~that~~10-Q ~~have materially~~(File ~~affected,~~No. or000-50461) ~~are~~filed ~~reasonably~~on ~~likely~~November ~~to materially affect~~4, ~~our internal control over financial reporting~~2005.

~~Limitations~~(7) onIncorporated by reference to the ~~effectiveness~~similarly ofdescribed ~~controls~~exhibit included with the Registrant’s Current Report on Form 8-K (File No. 000-50461) filed on September 18, 2007.

~~Our~~(8) ~~disclosure~~Incorporated ~~controls~~by ~~and~~reference procedures provide our Chief Executive Officer and Chief Financial Officer reasonable assurances that our disclosure controls and procedures will achieve their objectives. However, company management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to ~~their~~Exhibit ~~corresponding costs~~4.1 ~~Because~~included ofwith the ~~limitations~~Registrant’s inCurrent ~~all~~Report ~~control~~on ~~systems,~~Form no8-K ~~evaluation~~(File ~~of controls can provide complete assurance that all control issues and instances of error, if any, within our company are detected~~No. ~~These inherent limitations include the realities that judgments in decision~~000-~~making~~50461) ~~can~~filed beon ~~faulty,~~June ~~and that breakdowns can occur due to human error or mistake. Additionally~~4, ~~controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization~~2008. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.

33(9) Incorporated by reference to the similarly described exhibit included with the Registrant’s Current Report on Form 8-K (File No. 000-50461) filed on May 21, 2008.

~~Part~~(10) IIIncorporated –by ~~Other~~reference ~~Information~~to the information under the heading “Executive Compensation—Compensation of Directors” in the Registrant’s definitive proxy statement filed pursuant to Regulation 14A (File No. 000-50461) on April 25, 2008.

~~Item~~(11) 1.Incorporated ~~Legal~~by ~~Proceedings~~reference to the similarly described exhibit included with the Registrant’s Current Report on Form 8-K (File No. 000-50461) filed on July 24, 2008.

~~On December~~52 20, 2004, we initiated patent infringement proceedings against Avecia Limited and Insmed Incorporated as co-defendants in the High Court of Justice (Chancery Division Patents Court) in the United Kingdom. On December 23, 2004, we, with Genentech, initiated patent infringement proceedings against Insmed Incorporated in the U.S. District Court for the Northern District of California. We initiated these litigations because we believe that Insmed and Avecia are infringing on our patents that cover Insmed’s product’s use and manufacture.

We cannot predict the outcome of our litigation against Avecia and Insmed in the United Kingdom or the outcome of our litigation against Insmed in the United States. Moreover, we cannot predict the cost of such litigation, which may require a substantial diversion of our financial assets and other resources and consequently prevent us from allocating sufficient resources to the development of our rhIGF-1 programs, and which may have a material adverse effect on our business. In addition, if the outcome of our litigation in the United Kingdom is not favorable to us, we are likely to be found liable for the opposing parties’ costs incurred in connection with the litigation, and we could be found liable for an award of additional damages to the opposing parties if the court decides that our claims of patent infringement are without sufficient merit or not pursued in good faith. If in our litigation in the United States, the court decides Insmed prevails, and Insmed establishes by clear and convincing evidence that the case is exceptional (e.g., our claims of patent infringement were not pursued in good faith), we could be liable for an award of the opposing party’s costs and legal fees incurred in connection with the litigation and/or an award of other damages. Any such award or awards to the opposing party or parties could substantially increase our costs and exacerbate the negative impact that an unfavorable outcome in the case(s) could have on our business. Further, it is not uncommon in cases of this kind for a defendant to assert counterclaims, which could significantly increase our costs, potential liability for damages, and other risks arising from these lawsuits, and a court could find us liable for any such damages caused by Genentech as well.

Insmed and Avecia have challenged the validity of European Patent No. 0 571 417 in our litigation in the United Kingdom, and it is likely that Insmed will challenge the validity of U.S. Patent Nos. 5,187,151, 6,331,414 and/or 5,258,287 in our litigation in the United States. Even if we voluntarily drop our claims of patent infringement in our litigation in the United States and/or the United Kingdom, the opposing party or parties may pursue counterclaims for a declaratory judgment of invalidity against the asserted patent or patents in such action(s). If in our litigation in the United States the court awards a declaratory judgment finding invalid one or more of the claims of U.S. Patent No. 5,187,151, one or more of the claims of U.S. Patent No. 5,258,287, and/or one or more of the claims of U.S. Patent No. 6,331,414, and if the court’s finding of invalidity in such declaratory judgment is upheld in whole or in part on appeal or if no appeal is taken, we would be unable to exclude others from using the affected claim or claims in the United States, which may decrease our ability to generate significant revenue from our rhIGF-1 programs and/or render any further development and commercialization of rhIGF-1 commercially infeasible for us. If in our litigation in the United Kingdom, the court awards a declaratory judgment finding invalid one or more of the claims of European Patent No. 0 571 417, and if the court’s finding of invalidity in such declaratory judgment is upheld in whole or in part on appeal or if no appeal is taken, we would be unable to exclude others from using the affected claim or claims in the United Kingdom, and any such finding of invalidity may have a similar adverse impact on the enforceability of the affected claim or claims in one or more of the other European countries in which European Patent No. 0 571 417 would otherwise be in force, which may decrease our ability to generate significant revenue from our rhIGF-1 programs and/or render any further development and commercialization of rhIGF-1 commercially infeasible for us.

On February 18, 2005, Insmed filed a Motion to Dismiss, or in the Alternative, for Summary Judgment, in our and Genentech’s litigation against Insmed in U.S. District Court. The motion was made on grounds that the Court lacked subject matter jurisdiction for our and Genentech’s claims against Insmed for the infringement of U.S. Pat. Nos. 5,187,151, 6,331,414 and/or 5,258,287. On April 15, 2005, the U.S. District Court issued an order that granted Insmed’s Motion to Dismiss and dismissed our and Genentech’s First Amended Complaint, with leave for us and Genentech to file an amended complaint within 30 days of the Court’s order. In addition, the Court’s order denied the summary judgment aspects of Insmed’s motion.

On April 22, 2005, we and Genentech filed a Second Amended Complaint against Insmed and Celtrix Pharmaceuticals, Inc. in U.S. District Court. The Second Amended Complaint reiterates our claims alleging that the activities of Insmed will infringe U.S. Pat. Nos. 5,187,151; 6,331,414; and 5,258,287; introduces new claims alleging that the activities of Celtrix, a predecessor of Insmed, infringed U.S. Pat. Nos. 5,187,151 and 5,258,287 and alleges that Insmed bears liability for such infringing activities of Celtrix. The Case Management Conference in this matter is scheduled for June 10, 2005. Both sides have been served with discovery requests.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On March 22, 2004, we completed our initial public offering of 5,500,000 shares of our common stock at a public offering price of $9 per share. On April 2, 2004, we received net cash proceeds from the issuance of 825,000 shares of common stock in connection with the underwriters’ exercise of the over-allotment option. The shares of common stock sold in the offering were registered under

the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (File No. 333-108729) that was declared effective by the SEC on March 16, 2004. The aggregate purchase price of the offering was $56,925,000. The net offering proceeds to us after deducting total expenses and underwriting discounts and commissions were $50,021,000. None of the expenses were paid, directly or indirectly, to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates.

We are using, and intend to continue to use, these proceeds for general corporate purposes, including research and development expenses, manufacturing expenses, clinical trials and selling, general and administrative expenses. No such payments were made to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors as compensation for Board or Board committee service.

The amount and timing of our actual expenditures may vary significantly depending on numerous factors, such as the progress of our product development and commercialization efforts and the amount of cash used by our operations.

Item 5. Other Information

Thomas Silberg, our Chief Operating Officer, has resigned his employment with us effective June 30, 2005. We have entered into a severance agreement with Mr. Silberg, the key terms of which are as follows: six months of salary after June 30, 2005; up to a maximum of five months of additional salary if Mr. Silberg hasn’t accepted full-time employment with another employer prior to May 31, 2006; on June 30, 2005, the vesting of Mr. Silberg’s unvested options for the purchase of 106,252 shares of our common stock will be accelerated; from June 30, 2005, Mr. Silberg will have until June 30, 2006 to exercise any of his 87,499 vested and 106,252 accelerated vested options to purchase our common stock; full COBRA dental benefits will be paid by us until the earlier of May 31, 2006 or the date that Mr. Silberg is able to obtain coverage for equivalent benefits from another employer; and we have waived our right to be repaid for Mr. Silberg’s $50,000 signing bonus that would be repayable to us under the terms of his offer letter agreement with us even though Mr. Silberg did not remain employed with us for 18 months.

Item 6. Exhibits

3.1		Certificate of Incorporation (1)
3.2		By-laws (2)
4.1		Form of Specimen Stock Certificate (2)
10.6F		Lease Agreement dated March 7, 2005 between 2000 Sierra Point, LLC and the Registrant (3)
10.9S		Executive Officer Compensation Arrangements (4)
10.9U		Employment letter to Christopher E. Rivera, dated March 31, 2005*
10.12A		Loan Agreement, dated January 21, 2005, between Venture Lending & Leasing IV, Inc. and the Registrant (5)
10.12B		Common Stock Purchase Agreement, dated January 21, 2005, between Venture Lending & Leasing IV, LLC and the Registrant (5)
31.1		Certification of Chief Executive Officer of Tercica, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a).
31.2		Certification of Chief Financial Officer of Tercica, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a).
32.1		Certification by the Chief Executive Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
32.2		Certification by the Chief Financial Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

* Management contract or compensation plan or arrangement.

(1) Incorporated by reference to the Registrant’s quarterly report on Form 10-Q (File No. 000-50461) filed on May 13, 2004.

(2) Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-108729), and amendments thereto, declared effective on March 16, 2004.

(3) Incorporated by reference to the Registrant’s annual report on Form 10-K (File No. 000-50461) filed on March 24, 2005.

(4) Incorporated by reference to the information under the heading, “Item 1.01. Entry into a Material Definitive Agreement” in the Registrant’s current reports on Form 8-K (File No. 000-50461) filed on February 28, 2005 and March 18, 2005.

(5) Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No 333-122224) and amendments thereto, declared effective on February 7, 2005.

SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: ~~May 16~~August 5, ~~2005~~2008

TERCICA, INC. (Registrant) /s/ ~~Timothy~~Ajay P.Bansal ~~Lynch~~Ajay ~~Timothy~~BansalChief ~~P. Lynch Chief~~ Financial Officer (Authorized Officer and Principal ~~Accounting and~~ Financial Officer)

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