As filed with the Securities and Exchange Commission on February 13, 2009

Registration No. 333-

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

Under the Securities Act of 1933

OSCIENT PHARMACEUTICALS CORPORATION

(Exact name of registrant as specified in its charter)

Massachusetts

2834

04-2297484

(State or other jurisdiction

of incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification No.)

GUARDIAN II ACQUISITION CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

2834

20-5239620

(State or other jurisdiction

of incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification No.)

1000 Winter Street, Suite 2200

Waltham, Massachusetts 02451

(781) 398-2300

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

Philippe Maitre

Chief Financial Officer

Oscient Pharmaceuticals Corporation

1000 Winter Street, Suite 2200

Waltham, Massachusetts 02451

(781) 398-2300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies of all communications, including communications sent to agent for service, should be sent to:


Robert L. Spadafora, Esq.		Patrick O’Brien, Esq.
Oscient Pharmaceuticals Corporation		Ropes & Gray LLP
1000 Winter Street, Suite 2200		One International Place
Waltham, Massachusetts 02451		Boston, Massachusetts 02110
Phone: (781) 398-2548		Phone: (617) 951-7000
Fax: (781) 398-2530		Fax: (617) 951-7050

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b2 of the Exchange Act.


Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer ¨		Smaller reporting company x

CALCULATION OF REGISTRATION FEE



Title of Each Class of Securities to be Registered	Amount to be Registered	Proposed Maximum Offering Price Per Security	Proposed Maximum Aggregate Offering Price	Amount of Registration Fee
12.50% Convertible Guaranteed Senior Notes due 2011	$17,534,491	100%(1)	$17,534,491(1)	$689.11
12.50% Convertible Guaranteed Senior Notes due 2011 (2)	$4,621,650	100%(1)	$4,621,650(1)	$181.63
Guarantees of 12.50% Convertible Guaranteed Senior Notes due 2011 (3)	—	—	—	— (3)
Common Stock, $0.10 par value per share (4)(5)	20,141,947(4)	—	—	— (5)
Common Stock, $0.10 par value per share (6)	3,622,829(6)	$0.215(7)	$778,908(7)	$30.61
Total	—	—	—	$901.35

(1)	Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(c) under the Securities Act of 1933. The calculation is based on a bona fide estimate of the maximum offering price.

(2)	We are registering an additional amount of 12.50% Convertible Senior Notes due 2011 issuable if the registrant elects for each interest period to make payments of additional interest in kind (“PIK Notes”) by increasing the principal amount of the new or issuing notes.

(3)	Pursuant to Rule 457(n), there is no additional filing fee with respect to the note guarantees.

(4)

The number of shares of common stock registered hereunder is based upon the number of shares of common stock issuable upon conversion of the 12.50% Convertible Guaranteed Senior Notes due 2011 and the PIK Notes at the initial conversion rate of $1.10 per share. Pursuant to Rule 416 under the Securities Act, this registration statement shall also cover such indeterminate number of additional shares of common stock as are required for issuance upon a stock split, stock dividend, or other antidilution event or transaction that results in an increase in the number of shares issuable upon conversion of the 12.50% Convertible Guaranteed Senior Notes due 2011.

(5)

Pursuant to Rule 457(i), there is no additional filing fee with respect to the shares of common stock issuable upon conversion of the 12.50% Convertible Guaranteed Senior Notes due 2011 and PIK Notes because the notes are being registered at the same time and no additional consideration will be received in connection with the note guarantees or the exercise of the conversion privilege.

(6)	The shares of common stock that are being registered hereunder represent shares that could be issued if the registrant elects under the voluntary conversion terms of the 12.50% Convertible Guaranteed Senior Notes due 2011 to make payments of additional interest in common shares instead of cash.

(7)	Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(c) under the Securities Act of 1933. The maximum price per share information is based on the average of the high and low sale price on February 10, 2009.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction in which the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED FEBRUARY 13, 2009

PROSPECTUS

LOGO

$22,156,142 Principal Amount of 12.50%

Convertible Guaranteed Senior Notes Due 2011, the Related Note Guarantees and 23,764,776 Shares of Common Stock Issuable on Conversion of the 2011 Notes

This prospectus relates to the offer and sale from time to time by the persons listed under “Selling Securityholders” in this prospectus of up to $22,156,142 principal amount of our 12.50% Convertible Guaranteed Senior Notes Due 2011 and the related note guarantees as described herein, such notes and guarantee referred to herein as the “2011 notes”, and 23,764,776 shares of our common stock issuable upon conversion of the 2011 notes. We will not receive any of the proceeds from the sale of the 2011 notes or the sale of the common stock by the selling securityholders.

The 2011 notes mature on January 15, 2011. The 2011 notes will be convertible, at the option of the holder, at anytime on or prior to maturity, into shares of our common stock at an initial conversion rate of 909.0909 shares per $1,000 principal amount of 2011 notes (equal to a conversion price of $1.10 per share). The conversion rate is subject to adjustment. There will be no limitation as to the principal amount of the 2011 notes you can convert at any time.

The 2011 notes will accrue interest at a rate of 12.50% per annum. We may elect to pay interest on the 2011 notes in cash or in kind by increasing the principal amount of the 2011 notes or issuing additional 2011 notes (“PIK interest”). If we elect to pay PIK interest, we will increase the principal amount of the 2011 notes or issue additional 2011 notes in an amount equal to the amount of PIK interest for the applicable interest payment period to the holders of the 2011 notes on the relevant record date (in integral multiples of $1,000). The notes will be guaranteed by our subsidiary Guardian II Acquisition Corporation, or Guardian II, and Guardian II’s guarantee will be secured on a second priority lien basis by substantially all of its assets. The security granted in favor of the guarantee will be subject to standstill and turnover provisions. The security may be released in certain circumstances. The security will also be subject to contractual and legal limitations under applicable law.

We will have the right to automatically convert the 2011 notes on or prior to January 15, 2011 if the closing price of our common shares has exceeded 130% of the conversion price then in effect for at least 20 trading days during any consecutive 30 trading day period ending within five trading days prior to the notice of automatic conversion. In addition, you may require us to repurchase the notes if certain “fundamental change” events occur cash at 100% of the principal amount, plus accrued and unpaid interest, to but excluding the fundamental change repurchase date. Prior to October 15, 2010, the 2011 notes are not redeemable. On or after October 15, 2010, we may redeem some or all of the notes for cash at 100% of the principal amount of the 2011 notes to be redeemed, plus accrued and unpaid interest, to but excluding the redemption date.

Our common shares are traded on the NASDAQ Global Market under the symbol “OSCI.” On February 12, 2009, the last reported sale price of our common shares on the NASDAQ Global Market was $0.19 per share. The 2011 notes will not be listed on the NASDAQ Global Market or any national securities exchange.

Investing in the notes and shares of Oscient common stock involves a high degree of risk.

You should carefully read and consider the “Risk Factors” beginning on page 9.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is , 2009

TABLE OF CONTENTS


		Page
Summary		1
Risk Factors		9
Note Regarding Forward-Looking Statements		43
Use of Proceeds		43
Dividend Policy		43
Market Price of Securities and Related Matters		44
Ratio of Earnings to Fixed Charges		45
Selected Financial Data and Pro Forma Financials		46
Management’s Discussion and Analysis of Financial Condition and Results of Operations		54
Business		86
Management		108
Executive Compensation		113
Certain Relationships and Related Transactions		124
Security Ownership of Certain Beneficial Owners and Management		126
Selling Security Holders		132
Description of the 2011 Notes		134
Description of Capital Stock		163
Material United States Federal Income Tax Consequences		165
Plan of Distribution		172
Legal Matters		174
Experts		174
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure		174
Where You Can Find More Information		175
Financial Statements and Supplementary Data		F-1

You should rely only on the information contained in this prospectus. We have not authorized anyone to give you information different from that contained in this prospectus. The selling security holders are offering to sell, and seeking offers to buy, the securities only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is complete and accurate only as of the date on the front cover of this prospectus, regardless of when this prospectus is delivered or when any sale of our securities occurs. Our business, financial condition, results of operations and prospects may have changed since that date.

Note Regarding Trademarks

Our logo, trademarks and service marks are the property of Oscient. FACTIVE is a trademark of LG Life Sciences, Ltd. ANTARA is a trademark of Oscient. Other trademarks or service marks appearing in this prospectus are the property of their respective holders.

PROSPECTUS SUMMARY

This summary provides an overview of selected information and does not contain all the information you should consider. Before making an investment decision, you should carefully read the entire prospectus, including the section entitled “Risk Factors,” and the documents incorporated by reference into this prospectus. Unless otherwise stated, all references to “us,” “our,” “Oscient,” “we,” the “Company” and similar designations refer to Oscient Pharmaceuticals Corporation and its consolidated subsidiaries unless the context otherwise requires.

Our Company

Overview

We are a commercial-stage pharmaceutical company marketing two U.S. Food and Drug Administration (FDA)-approved products to community-based primary care physicians through our national primary care sales force, ANTARA^® (fenofibrate) capsules, a cardiovascular product, approved by the FDA for the adjunct treatment of hypercholesterolemia (high blood cholesterol) and hypertriglyceridemia (high triglycerides) in combination with a healthy diet and FACTIVE^® (gemifloxacin mesylate) tablets, an antibiotic approved by the FDA for the five-day treatment of acute bacterial exacerbations of chronic bronchitis (AECB) and the five-day treatment of community-acquired pneumonia of mild to moderate severity (CAP).

We market ANTARA and FACTIVE in the U.S. through our national sales force, which focuses on primary care physicians who predominantly treat older patients and those with co-morbid conditions that may benefit from our products. With FACTIVE, our strategy outside of the U.S. has been to grant commercialization rights to third parties in order to leverage the additional resources that a pharmaceutical marketing partner with expertise in such countries can provide. Pfizer, S.A. de C.V. (Pfizer Mexico) is currently commercializing FACTIVE in Mexico and Menarini International Operation Luxembourg SA (Menarini) has licensed the drug for sale in Europe.

We have explored partnering and other strategic opportunities for the continued development of our late-stage antibiotic candidate, Ramoplanin, for the treatment of Clostridium difficile-associated disease.

Our goal is to increase the sales of our existing products and to gain access to new products via transactions, including acquisition, in-licensing and co-promotion for the U.S. marketplace in order to leverage our existing commercial infrastructure. Our review of potential additions to our portfolio of marketed products is focused on those products which are commonly prescribed by those primary care physicians that we currently visit during the marketing of ANTARA and FACTIVE. As we currently direct our sales effort largely at those primary care physicians that treat older patients with co-morbities, a range of therapeutic categories can be considered for our portfolio, including cardiovascular, diabetes, metabolic, anti-infectives among others.

ANTARA

ANTARA is approved by the FDA to treat hypercholesterolemia and hypertriglyceridemia in combination with a healthy diet. On August 18, 2006, we acquired rights to ANTARA in the U.S. from Reliant Pharmaceuticals Inc. for $78.0 million plus a $4.3 million payment for ANTARA inventory. In connection with this acquisition, we were assigned rights to and assumed obligations under an exclusive license to the U.S. rights to ANTARA from Ethypharm, S.A.

In 2008, total U.S. sales of fenofibrate products were approximately $2.3 billion, a 16% increase over 2007 sales. The fenofibrate market has experienced a 15% average annual growth in sales since 2004 with growth in 2008 over 2007 slowing to 10%. Prior to our acquisition, in the 12 months ended June 30, 2006, ANTARA generated approximately $35 million in sales. Comparatively, in the 12 months ended September 30, 2008, ANTARA generated $68 million in net sales.

Since we began marketing ANTARA on August 18, 2006, net revenues from the drug totaled $124 million through September 30, 2008.

It is estimated that nearly 37 million Americans have total cholesterol values above recommended levels and heart disease remains the number one cause of death in the U.S. Abnormal cholesterol and lipid levels, known as dyslipidemia, can lead to the development of atherosclerosis, a dangerous hardening of blood vessels and a major risk factor for the development of coronary heart disease.

ANTARA is a once-daily formulation of fenofibrate approved for use in combination with a diet restricted in saturated fat and cholesterol to reduce elevated low-density lipoprotein cholesterol (LDL or “bad” cholesterol), triglyceride and apolipoprotein B (free floating fats in the blood) levels and to increase high-density lipoprotein cholesterol (HDL or “good” cholesterol) in adult patients with high cholesterol or an abnormal concentration of lipids in the blood. ANTARA received FDA approval in November 2004 and is approved and marketed in 43 mg and 130 mg doses.

In a clinical trial conducted in 2004, ANTARA was studied in the Triglyceride Reduction in Metabolic Syndrome study, known as TRIMS, to measure the impact of ANTARA on cholesterol levels in patients with multiple cardiovascular risk factors and to assess the use of ANTARA without regard to meals. Of the 146 patients studied, 70% had hypertension and 32% had diabetes. The double-blind, placebo-controlled trial measured levels of total cholesterol, triglycerides, HDLs and LDLs, as well as other types of cholesterol, during eight weeks of therapy. In the study, ANTARA demonstrated the ability to reduce triglyceride and increase HDL cholesterol levels after two weeks of therapy. At the end of therapy, patients treated with ANTARA had a statistically significant 37% reduction in their triglyceride levels and a statistically significant 14% increase in their HDL levels.

FACTIVE

In April 2003, FACTIVE, a fluoroquinolone antibiotic, was approved by the FDA for the five-day treatment of AECB (acute bacterial exacerbations of chronic bronchitis) and seven-day treatment of CAP (community acquired pneumonia) of mild to moderate severity. On May 1, 2007, the FDA approved FACTIVE for the five-day treatment of CAP. We license the rights to gemifloxacin, the active ingredient in FACTIVE tablets, from LG Life Sciences. We launched FACTIVE in the U.S. in September 2004. In fiscal year 2007, FACTIVE generated $21.4 million in net revenues. For the twelve months ended December 31, 2005, 2006 and 2007, FACTIVE generated $20.5 million, $22.1 million and $21.4 million in net revenues, respectively. For the nine months ended September 30, 2008, FACTIVE generated $11.3 million in net revenues.

Chronic bronchitis is a health problem associated with significant morbidity and mortality. It is estimated that chronic bronchitis affects more than 9 million adults in the U.S. Patients with chronic bronchitis are prone to frequent exacerbations, characterized by increased cough and other symptoms of respiratory distress. Studies have estimated that 1 to 4 exacerbations occur each year in patients with chronic bronchitis; studies estimate that two-thirds are caused by bacteria. These exacerbations are estimated to account for approximately 12 million physician visits per year in the U.S.

CAP is a common and serious illness in the U.S. Of the 4 to 5 million reported cases per year, nearly 1 million cases occur in patients over the age of 65. CAP cases result in approximately 10 million physician visits and as many as 1 million hospitalizations annually. Antibiotics are the mainstay of treatment for most patients with pneumonia, and where possible, antibiotic treatment should be specific to the pathogen responsible for the infection and individualized.

Over the last decade, resistance to penicillins and macrolides has increased significantly, and in many cases, fluoroquinolones are now recommended as first-line therapy due to their efficacy against a wide range of

respiratory pathogens, including many antibiotic resistant strains. The most recent treatment guidelines from the Infectious Diseases Society of America and the American Thoracic Society recommend fluoroquinolones as a first-line treatment for certain higher-risk patients with CAP and as therapy for treating patients with pneumonia in geographic regions of the U.S. with high levels of macrolide-resistant Streptococcus pneumoniae.

Clinical Candidate

Given our strategic decision to concentrate our financial resources on building our commercial business, we have worked to out-license, co-develop or sell our rights to our late-stage antibiotic candidate Ramoplanin to a partner.

In October 2001, we in-licensed U.S. and Canadian rights to Ramoplanin from Vicuron Pharmaceuticals Inc., or Vicuron, now a wholly-owned subsidiary of Pfizer Inc., and on February 3, 2006, acquired worldwide rights from Vicuron. Ramoplanin is a novel glycolipodepsipeptide antibiotic. In July 2004, we completed a Phase II trial to assess the safety and efficacy of two doses of Ramoplanin versus vancomycin in the treatment of Clostridium difficile-associated disease (CDAD) the most commonly recognized microbial cause of diarrhea, resulting from high rates of colonization in hospitalized patients and the frequent use of antimicrobials. While the study did not meet its primary endpoint, non-inferiority at the test-of-cure visit, the response rates for all three arms were comparable.

Based on the results we observed in our Phase II trial, we had discussions with the FDA on the design of a Phase III program. In December 2005, we agreed with the FDA to a Special Protocol Assessment regarding the specific components of a Phase III program that, if completed successfully, would support regulatory approval of Ramoplanin for the indication. Oscient has not initiated the Phase III program and expects that clinical development for Ramoplanin will advance only under the direction of a development partner. Because the Special Protocol Assessment was agreed to by the FDA in 2005, we cannot guarantee that the FDA will continue to regard it as binding on the agency if and when a prospective partner re-initiates the Ramoplanin clinical development process.

Financial

As of September 30, 2008, we had approximately $29.0 million in total cash, cash equivalents and restricted cash. Of that total, approximately $4.2 million consists of restricted cash related to letters of credit on our facilities. We believe our existing funds, anticipated cash used in operations and our ability to continue to manage expenses, after certain cost reduction measures discussed below are in effect, will be sufficient to support our current plans and obligations into the third quarter of 2009. On February 11, 2009 we announced plans to substantially reduce the size of our sales and marketing teams as well as our headquarter staff.

As of September 30, 2008, we have approximately $310.9 million (including accrued interest and excluding unamortized bond discount of $36.9 million in debt outstanding). We have taken recent steps to re-calibrate our financial structure. On November 25, 2008, we completed an exchange offer in which we issued an aggregate principal amount of $85,184,000 12.50% Convertible Guaranteed Senior Notes due 2011 and 21,310,549 shares of our common stock in exchange for an aggregate principal amount of $212,979,000 of our 3.50% Convertible Senior Notes due 2011. On January 28, 2009 we entered into an amendment with the holders of approximately $16.8 million of the $17.0 million outstanding principal and accrued interest of the Company’s 5% Convertible Promissory Note due in 2009 to extend the maturity date of such notes from February 6, 2009 to December 1, 2009 and, among other things, provide these holders the option, at their discretion, to convert into our 2011 notes. The holders of the 5% Convertible Promissory Note due 2009 are the selling security holders in this prospectus.

In the next several months, we will need to raise additional capital and/or refinance our existing debt due in December 2009 to fund our operations, repay our debt that is maturing at such time, fund other potential commercial or development opportunities, support our sales and marketing activities. We intend to seek to pursue privately raising additional capital from investors through equity financing, the incurrence of indebtedness, or a combination of equity and debt. If we cannot obtain adequate financing on acceptable terms when such financing is required, we may have to further scale back our operations or take other measures to significantly reduce our expenses which will have a material adverse effect on our business. We expect that in connection with their audit of our financial statements for the year ended December 31, 2008, our auditors will include a going concern explanatory paragraph in their audit opinion. A going concern explanatory paragraph is included when the auditor concludes there is substantial doubt about the company’s ability to continue as a going concern for at least 12 months following the audited balance sheet date. If we are unable to refinance or repay our indebtedness as it becomes due, we may be unable to continue operations.

Guarantor

Our wholly-owned subsidiary Guardian II Acquisition Corporation, or Guardian II, is incorporated in Delaware. Guardian II’s assets include certain license rights to sell ANTARA capsules in the U.S. and the associated intellectual property rights, ANTARA inventory and the accounts receivable from sales of ANTARA.

Corporate Information

Oscient is incorporated in The Commonwealth of Massachusetts. Our principal executive offices are located at 1000 Winter Street, Suite 2200, Waltham, MA 02451. Our telephone number at this location is (781) 398-2300. Our sales and marketing functions are located in Skillman, NJ. Our website is located at “http://www.oscient.com”. The content on our website and on websites linked from it are for informational purposes and not incorporated into or a part of this prospectus nor intended to be used in connection with the exchange offer.

The Notes

This prospectus covers the resale of up to $22,156,142 aggregate principal amount of our 12.50% Convertible Guaranteed Senior Notes due 2011 and the shares of our common stock issuable upon conversion of the notes. For a more complete description of the 2011 notes, see “Description of 2011 Notes” in this prospectus. Throughout this summary we refer to the 12.50% Convertible Guaranteed Senior Notes due 2011 as the “2011 notes”.

Securities

Up to $22,156,142 in principal amount of our 12.50% Convertible Guaranteed Senior Notes due 2011.

Issuer

Oscient Pharmaceuticals Corporation, a Massachusetts corporation.

Maturity

January 15, 2011.

Interest

Interest on the 2011 notes will be payable at a rate of 12.50% per year, payable semiannually on April 15 and October 15 of each year, commencing April 15, 2009, except that the final interest payment date will be January 15, 2011.

We may elect to pay interest on the 2011 notes in cash or by increasing the principal amount of the 2011 notes or by issuing additional 2011 notes (“PIK interest”) in an amount equal to the amount of interest for the applicable interest payment period. PIK interest will be paid in $1,000 minimum denominations and in integral multiples thereof (with fractional interest paid in cash).

Conversion rights

The 2011 notes will be convertible, at the option of the holder, at anytime on or prior to maturity, into shares of our common stock at an initial conversion rate of 909.0909 shares per $1,000 principal amount of 2011 notes (equal to a conversion price of approximately $1.10 per share).

The conversion rate is subject to adjustment. There will be no limitation as to the principal amount of the 2011 notes you can convert at any time.

Auto-conversion

We will have the right to automatically convert some or all of the 2011 notes (an “automatic conversion”) on or prior to January 15, 2011 if the closing price of our common shares has exceeded 130% of the conversion price then in effect for at least 20 trading days during any consecutive 30 trading day period ending within five trading days prior to the notice of automatic conversion (an “automatic conversion price”).

Additional interest upon automatic conversion

If we elect to automatically convert some or all of your 2011 notes on or prior to November 25, 2009, we will pay additional interest to holders of 2011 notes being converted. This additional interest will be equal to the amount of interest that would have been payable on the 2011 notes from the last day interest was paid on the 2011 notes,

through and including November 25, 2009. Additional interest, if any, will be paid in cash or, solely at our option, in our common shares or a combination of cash and our common shares. If we pay additional interest upon an automatic conversion with our common shares, such shares will be valued at 90% of the automatic conversion price that is in effect at that time.

Additional interest upon voluntary conversion

If you elect to voluntarily convert some or all of your 2011 notes on or prior November 25, 2010, we will pay additional interest to holders of 2011 notes being converted. This additional interest will be equal to the amount of interest that would have been payable on the 2011 notes from the last day interest was paid on the 2011 notes, through and including November 25, 2010. Additional interest, if any, will be paid in cash or, solely at our option, in our common shares or a combination of cash and our common shares. If we pay additional interest upon a voluntary conversion with our common shares, such shares will be valued at the conversion price that is in effect at that time.

Repurchase or redemption at holder’s option upon a fundamental change

You may require us to repurchase your 2011 notes upon a fundamental change, as described in “Description of 2011 Notes,” in cash at 100% of the principal amount, plus accrued and unpaid interest, to but excluding the fundamental change repurchase date.

Conversion rate adjustment upon a fundamental change

In the event of a fundamental change, we may be required to increase the conversion rate for the 2011 notes surrendered for conversion in connection with the fundamental change. See “Description of 2011 Notes—Conversion rate adjustment on a fundamental change.” In no event will the conversion rate exceed 2,255.51 shares per $1,000 principal amount of 2011 notes (subject to adjustment).

Optional redemption

Prior to October 15, 2010, the 2011 notes are not redeemable.

On or after October 15, 2010, we may redeem some or all of the 2011 notes for cash at 100% of the principal amount of the 2011 notes to be redeemed, plus accrued and unpaid interest, to but excluding the redemption date.

Secured Guarantee

The 2011 notes will be guaranteed by our subsidiary Guardian II and this guarantee will be secured by a second priority lien on substantially all of the assets of Guardian II. The second priority lien is subject to the first priority lien on substantially all of the assets of Guardian II which is held by Paul Royalty Fund Holdings II, LP (“PRF”), an affiliate of Paul Capital Partners, or Paul Capital, and secures our and Guardian II’s payment obligations to Paul Capital. Guardian II’s assets include certain license rights to sell ANTARA capsules in the U.S. and the associated intellectual property rights, ANTARA inventory and the accounts receivable from sales of ANTARA.

Ranking

The 2011 notes will be Oscient’s unsecured obligations guaranteed by our subsidiary Guardian II and this guarantee will be secured by a second priority lien on substantially all of the assets of Guardian II.

The 2011 notes will:

•

rank senior in right of payment to any of our future indebtedness that by its terms is junior or subordinated in right of payment to the 2011 notes;

•

rank equally in right of payment with our currently outstanding 2011 notes;

•

rank equally in right of payment with all of our existing and future senior unsecured indebtedness but, to the extent of the value of the second priority lien on substantially all of the assets of our subsidiary Guardian II, effectively senior to all of Oscient’s existing and future unsecured senior indebtedness (including existing 2011 notes not tendered in the exchange offer and our 5% Convertible Promissory Notes due 2009). See “Description of 2011 Notes—Ranking”;

•

be effectively subordinated in right of payment to Guardian II’s indebtedness to Paul Capital under the $20.0 million aggregate principal amount 12% senior secured note due August 2010 and the interest accrued to date thereon (the “Paul Capital Note”) and our and Guardian II’s payment obligations to Paul Capital under the amended revenue interests assignment agreement as described herein. See “Description of 2011 Notes—Ranking.”

Intercreditor Agreement

The trustee under the indenture governing the 2011 notes and Paul Capital have entered into an intercreditor agreement as to the relative priorities of their relative security interests in Guardian II’s assets securing the guarantee of the 2011 notes and Guardian II’s indebtedness to Paul Capital under the Paul Capital Note and our and Guardian II’s payment obligations to Paul Capital under the revenue interests assignment agreement. See “Description of 2011 Notes—Intercreditor Agreement.”

Limitations on indebtedness and liens

The 2011 notes indenture provides that the Company may not incur additional indebtedness in excess of $50 million (“Permitted Indebtedness”) from the earlier of (i) the date that is one year from the date on which our common stock has traded at a price which exceeds the 2011 notes conversion price then in effect for at least 20 trading days during any consecutive 30 trading day period and (ii) the first anniversary of the maturity date of the 2011 notes. Any indebtedness incurred to finance 2011 product acquisitions or in connection with refinancing Permitted Indebtedness, our existing indebtedness or obligations or the 2011 notes would not be counted toward the aforementioned limit. See “Description of 2011 Notes—General.”

Extension of cure period for event of default for late SEC reports

If we fail to timely file our annual or quarterly reports with the SEC in accordance with the 2011 notes indenture or to comply with the requirements of Section 314(a)(1) of the Trust Indenture Act, which we refer to as a “filing failure,” we may elect to pay the holders an extension fee which will accrue at a rate of 1.00% per annum of the aggregate principal amount of 2011 notes then outstanding. The extension fee will accrue on the 2011 notes from the date that is 60 days after notice of the filing failure is given by holders to, but excluding, the earlier of the date on which we make the filings that gave rise to the filing failure and the date that is 180 days after the date such notice was given by holders.

RISK FACTORS

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

You should carefully consider the risks described below and all other information contained in this prospectus before you decide to invest in our 2011 notes or shares of our common stock. Some of the following risks relate principally to our business and the industry in which we operate. Other risks relate principally to the securities markets and ownership of our securities. Additional risks and uncertainties not presently known to us, or risks that we currently consider immaterial, may also impair our operations or results. If any of the following risks actually occurs, we may not be able to conduct our business as currently planned, and our financial condition and operating results could be seriously harmed. In that case, the market price of our common stock, the 2011 notes, and you could lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

The following are significant factors known to us that could materially adversely affect our business, financial condition, or operating results. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

We will need to monitor our expenses and raise additional funds in the near future or refinance our existing debt due in December 2009 to fund our operations, repay our debt and support sales and marketing activities and if sufficient funds are not available or we are unable to refinance our debt, it will have a material affect on our business.

Based on the recent extension of the maturity date of approximately $16.8 million of the $17.0 million outstanding principal and accrued interest of our 5% Convertible Promissory Note now due on December 1, 2009, we believe our existing funds, anticipated cash used in operations and our ability to continue to manage expenses after certain cost reduction measures discussed below are in effect will be sufficient to support our current plans and obligations into the third quarter of 2009. On February 11, 2009 we announced plans to substantially reduce the size of our sales and marketing teams as well as our headquarter staff. Our revenue will likely decline as a result of this decrease. In the next several months, we will need to raise additional capital and/or refinance our existing debt due in December 2009 to fund our operations, repay our debt that is maturing at such time, fund other potential commercial or development opportunities and support our sales and marketing activities. We intend to pursue privately raising additional capital from investors through equity financing, the incurrence of indebtedness or a combination of equity and debt. Additional financing may not be available to us when needed, or, if available, may not be available on favorable terms. If we cannot obtain adequate financing on acceptable terms when such financing is required or lower our expenses as expected through certain cost reduction measures, we may have to further scale back our operations or take other measures to significantly reduce our expenses which will have a material adverse effect on our business. We expect that in connection with their audit of our financial statements for the year ended December 31, 2008, our auditors will include a going concern explanatory paragraph in their audit opinion. A going concern explanatory paragraph is included when the auditor concludes there is substantial doubt about our ability to continue as a going concern for at least 12 months following the balance sheet date. If we are unable to refinance or repay our indebtedness as it becomes due, we may be unable to continue operations.

We have a history of significant operating losses and expect losses to continue for some time.

We have a history of significant operating losses and expect losses to continue for some time. We expect to continue to have net losses in the near future and we had an accumulated deficit of approximately $499 million as of September 30, 2008. These losses are primarily a result of costs incurred in research and development, including our clinical trials and product acquisitions, from sales and marketing, and from general and

administrative costs associated with our operations and product sales. These costs have exceeded our revenues which to date have been generated principally from sales of ANTARA and FACTIVE, sublicensing agreements, and our legacy collaborations, government grants and sequencing services.

We anticipate that we will incur additional losses in the current year and in future years. These losses are expected to continue, principally due to the expenses in the sales and marketing area, as we seek to grow sales of ANTARA capsules and FACTIVE tablets and as we seek to acquire additional approved products or product candidates.

Failure to regain compliance with The NASDAQ Global Market continued listing requirements may result in our common stock being delisted from The NASDAQ Global Market.

Our common stock is currently listed on The NASDAQ Global Market under the symbol “OSCI”. Currently, we are not compliant with the continued listing requirements of the NASDAQ Global Market. In the event that we do not regain compliance and/or fail to satisfy any of the additional listing requirements, our common stock may be delisted from The NASDAQ Global Market.

On October 3, 2008, we received a notification from The NASDAQ Listings Qualifications of The NASDAQ Stock Market LLC (“NASDAQ”) that, as of October 2, 2008, the Company’s market value of publicly held shares (“MVPHS”) had closed below the minimum $15 million threshold set forth in Marketplace Rule 4450(b)(3) for the previous thirty (30) consecutive business days, a requirement for continued listing. For NASDAQ purposes, MVPHS is the market value of the Company’s publicly held shares, which is calculated by subtracting all shares held by officers, directors or beneficial owners of 10% or more of an issuer’s common stock from the issuer’s total shares outstanding.

On October 23, 2008 we received notification from NASDAQ that, given the current extraordinary market conditions, NASDAQ has suspended the enforcement of the rules requiring a MVPHS and a minimum $1 closing bid price (“Rule Suspension”). On December 23, 2008 we received a second notification from NASDAQ that the Rule Suspension period had been extended an additional ninety (90) days and that the minimum bid price and MVPHS requirements will be reinstated on April 20, 2009. As a result of the Rule Suspension, all companies presently in the compliance process will remain at that same stage of the process; however, companies can regain compliance during the Rule Suspension period. NASDAQ will not take any action to delist any security for these concerns during the Rule Suspension period, which will remain in effect through Friday, April 17, 2009. These rules will be reinstated on Monday, April 20, 2009. Under the Rule Suspension, we believe that we will now have until approximately July 6, 2009 to regain compliance by evidencing a minimum $15 million MVPHS for ten (10) consecutive business days. If we do not regain compliance with the MVPHS requirement by July 6, 2009, we will receive written notification of delisting from NASDAQ and at that time will be entitled to request a hearing before a NASDAQ Listing Qualifications Panel (“Panel”) to present our plan to regain compliance with the MVPHS requirement.

If our efforts to regain compliance are successful and the MVPHS exceeds $15 million for ten (10) consecutive business days before July 6, 2009, we will regain compliance with respect to the MVPHS requirement. In the event we do not regain compliance, we may appeal the staff determination to the Panel. In the event that we fail to regain compliance and are unsuccessful in an appeal to the Panel, our securities will be delisted from The NASDAQ Global Market. In the event that our securities are delisted from The NASDAQ Global Market, we may not be able to meet the requirements necessary for our common stock (i) to transfer to, or list on, a U.S. national securities exchange, including The NASDAQ Capital Market or (ii) be approved for listing on a U.S. system of automated dissemination of quotations. If such event in (i) or (ii) above occurred, holders of our 2011 notes have the right to require us to repurchase for cash the outstanding principal amount of the existing 2011 notes, as applicable, plus accrued and unpaid interest through such date. After the exchange on November 25, 2008, there were $87.2 million of 12.50% Notes due 2011, $12.7 million of 3.50% Notes due

2011 and $0.8 million of 3 ½% Notes due 2011. We may not have sufficient cash or be able raise sufficient additional capital to repay the existing 2011 notes as applicable, if requested to be repurchased by the holders.

Our business is very dependent on the commercial success of ANTARA and FACTIVE.

ANTARA capsules and FACTIVE tablets are currently our only commercial products and we expect that they will likely account for substantially all of our product revenues until we are able to acquire and successfully market additional FDA approved products through acquisitions, in-licensing or co-promotion agreements.

ANTARA is approved by the FDA to treat hypercholesterolemia (high blood cholesterol) and hypertriglyceridemia (high triglycerides) in combination with a healthy diet. FACTIVE tablets have FDA marketing approval for the treatment of community-acquired pneumonia of mild to moderate severity (CAP), and acute bacterial exacerbations of chronic bronchitis (AECB).

The commercial success of ANTARA and FACTIVE will depend upon their continued acceptance by regulators, physicians, patients and other key decision-makers as a safe, therapeutic and cost-effective alternative to other products used, or currently being developed, to treat CAP and AECB, in the case of FACTIVE tablets, or hypercholesterolemia and hypertriglyceridemia, in the case of ANTARA capsules. In addition, if concerns should arise about the safety or efficacy of our products, regardless of whether or not such concerns have a basis in generally accepted science or peer-reviewed scientific research, such concerns could adversely affect the market for these products. Furthermore, regulatory authorities may withdraw the approval of our products, or require the addition of restrictive safety labeling statements, to our products.

On July 7, 2008, we received notice from the FDA directing that the prescribing information for all fluoroquinolone products, including FACTIVE, be revised to include a Boxed Warning relating to the risk of tendonitis and tendon rupture associated with the use of fluoroquinolone product. Warnings regarding the risk of tendon related adverse events were already included in the prescribing information, as part of a class labeling, for all fluoroquinolones. The FDA has cautioned that such risk is increased in patients over the age of 60 and in those on concomitant corticosteroid therapy, as well as kidney, heart and lung transplant recipients. The FDA has also required that all manufacturers of fluoroquinolones submit a Medication Guide. The FDA has approved our changes to the package insert and Medication Guide as required by FDA to ensure patient safety and improve physician understanding of the risk-benefit profile for fluoroquinolone products, including FACTIVE. We have also submitted a proposed Risk Evaluation and Mitigation Strategy (“REMS”) as required by FDA of all sponsors of fluoroquinolone products to ensure patients’ safe and effective use of such products. We are working with the FDA to finalize certain details of the REMS.

We cannot predict what further action, if any, the FDA may take, including, among others things, further label restrictions in the fluoroquinolone class or even the removal of indications or products from the market. Any of these events could prevent us from achieving or maintaining market acceptance of our products or could substantially increase the costs and expenses of commercializing our products, which in turn could delay or prevent us from generating significant revenues from their sales. If ANTARA and FACTIVE are not commercially successful, we will have to find additional sources of funding or curtail or cease operations.

Lupin Limited’s and Orchid Healthcare’s Paragraph IV certifications under the Hatch-Waxman Act related to ANTARA and FACTIVE respectively could have a material adverse effect on our financial condition and results of operations, as it could result in the introduction of a generic products prior to the expiration of the patents covering ANTARA and FACTIVE, as well as in significant legal expenses and diversion of management time.

approval to market a generic version of ANTARA prior to the August 2020 expiration date of U.S. Patent No. 7,101,574 (the “‘574 Patent”). The ‘574 Patent, which is owned by Ethypharm, exclusively licensed to Oscient and listed in the FDA Orange Book for ANTARA relates to pharmaceutical compositions containing fenofibrate and methods of preparing the same. Lupin’s certification notice alleges that the ‘574 Patent”, is invalid and/or will not be infringed by Lupin’s commercial manufacture, use or sale of the drug product described in Lupin’s ANDA. The ‘574 Patent will expire in 2020.

In response to the filing of Lupin’s ANDA, on January 14, 2009, we, along with our wholly owned subsidiary Guardian II Acquisition Corporation and licensor Ethypharm, filed a lawsuit in the United States District Court for the District of Maryland against Lupin and its subsidiary Lupin Pharmaceuticals, Inc., for infringement of the ‘574 Patent. We and our licensor Ethypharm have agreed to equally share the costs incurred during such litigation. In accordance with the Hatch-Waxman Act, as a result of having filed a timely lawsuit against Lupin, FDA approval of Lupin’s ANDA will be stayed until the earlier of thirty months from the date of receipt of the Paragraph IV certification notice, or the date of a District Court decision finding that the ‘574 Patent is either invalid, unenforceable or not infringed by the drug product which is the subject of Lupin’s ANDA. If the litigation is still ongoing after thirty months, the termination of the stay could result in the introduction of one or more generic products to ANTARA prior to resolution of the litigation.

On May 30, 2008 we received notice of a Paragraph IV certification from Orchid Healthcare, a Division of Orchid Chemicals & Pharmaceuticals Ltd. (“Orchid”), notifying us of their filing of an ANDA for a generic version of FACTIVE. The certification alleges that eight of the nine FDA Orange Book listed patents are invalid and/or will not be infringed by Orchid’s manufacture, importation, use, or sale of the product for which the ANDA was submitted. The certification does not, however include a Paragraph IV certification with respect to U.S. Patent No. 5,633,262 which is listed in the Orange Book and expires in June 2015. We are continuing to evaluate whether to commence litigation in response to Orchid’s Paragraph IV certification.

Any legal action taken to defend our patent rights relating to ANTARA or FACTIVE will likely be costly, time consuming and distracting to management, could have a material adverse effect on our business, and could result in a finding that either Orchid’s or Lupin’s proposed generic product does not infringe the claims of our patents or that our patents are invalid and/or unenforceable. An adverse outcome in any such legal action could result in one or more generic versions of ANTARA or FACTIVE being launched before the expiration of the patents covering the products. Since ANTARA and FACTIVE are currently our only marketed products, the introduction of a generic version of either ANTARA or FACTIVE could have a material adverse affect on our ability to successfully execute our business strategy, to maximize the value of our products and therefore could have a material negative impact on our financial condition and results of operations.

If third parties challenge the validity of the patents or proprietary rights of our marketed products or assert that we have infringed their patents or proprietary rights, we may become involved in intellectual property disputes and litigation that would be costly, time consuming, and prevent the commercialization of ANTARA, FACTIVE and/or any other products that we acquire.

The intellectual property rights of pharmaceutical companies, including us, are generally uncertain and involve complex legal, scientific and factual questions. Our success in developing and commercializing pharmaceutical products may depend, in part, on our ability to operate without infringing on the intellectual property rights of others and to prevent others from infringing on our intellectual property rights. There has been substantial litigation regarding patents and other intellectual property rights in the pharmaceutical industry. For example, third parties seeking to market generic versions of branded pharmaceutical products often file an Abbreviated New Drug Application (“ANDA”) with the FDA, wherein such ANDA contains a certification by the applicant that the patents protecting the branded pharmaceutical product are invalid, unenforceable and/or not infringed, a so-called Paragraph IV certification.

As further discussed under, “Lupin Limited’s and Orchid Healthcare’s Paragraph IV certifications under the Hatch-Waxman Act related to ANTARA and FACTIVE respectively could have a material adverse effect on our financial condition and results of operations, as it could result in the introduction of a generic products prior tithe expiration of the patents covering ANTARA and FACTIVE, as well as in significant legal expenses and diversion of management time.”

If additional ANDA filings are made referencing either ANTARA or FACTIVE, we may need to defend and/or assert our patents, including filing lawsuits alleging patent infringement. If we were unsuccessful in such a proceeding and the FDA approved a generic version of any one or both of our products, such an outcome would have a material adverse effect on our business.

We may also become party to patent litigation or proceedings at the U.S. Patent and Trademark Office or a foreign patent office to determine our patent rights with respect to third parties which may include competitors in the pharmaceutical industry. Interference proceedings in the U.S. Patent and Trademark Office or opposition proceedings in a foreign patent office may be necessary to establish which party was the first to discover such intellectual property. The cost to us of any patent litigation or similar proceeding could be substantial, and it may absorb significant management time.

We do not expect to maintain separate insurance to cover intellectual property infringement. Our general liability insurance policy does not cover our infringement of the intellectual property rights of others. If infringement litigation against us is resolved unfavorably, we may be enjoined from manufacturing or selling certain of our products or services and be liable for damages. In certain cases, a license may be available, although we may not be able to obtain such a license on commercially acceptable terms, or at all. Even if we were able to obtain such a license to a third party’s intellectual property, the license may be non-exclusive and thereby accessible to our competitors. We may be forced to reformulate, rebrand or rename our products to avoid infringing the intellectual property rights of third parties, which, if possible, could be costly and time-consuming. The commercialization of our products or product candidates may be delayed or discontinued as a result of patent infringement claims against us or due to our failure to license necessary intellectual property, which could adversely affect our business.

We are aware of United States patents that are controlled by third parties that may be construed to encompass ANTARA. However, we believe that, if these patents were asserted against us, we would have valid defenses that ANTARA does not infringe any valid claims of these patents or that the patents would be found to be unenforceable. Nonetheless, in order to successfully challenge the validity of any United States patent, we would need to overcome the presumption of validity which is accorded to issued patents in the United States. If any of these patents were found to be valid and enforceable and we were found to infringe any of them, or any other patent rights of third parties, we would be required to pay damages, cease the sale of ANTARA or pay additional royalties on manufacture and sales of ANTARA. If we are unable to market or sell ANTARA, or if we are obligated to pay significant damages or additional royalties, our earnings attributable to ANTARA would be reduced and our business would be materially adversely affected. Even if we prevail, the cost to us of any patent litigation would likely be substantial, and it may absorb significant management time. If the other party in any such litigation has substantially greater resources than us, we may be forced, due to cost constraints, to seek to settle any such litigation on terms less favorable to us than we might be able to obtain if we had greater resources.

Our debt obligations expose us to risks that could adversely affect our business, operating results and financial condition.

We have a substantial level of debt. As of September 30, 2008, we had approximately $310.9 million of indebtedness outstanding (including accrued interest and excluding a bond discount of approximately $36.9 million), which includes approximately $41.3 million in revenue interest that entitles Paul Capital to receive a

royalty on the sales of both ANTARA and FACTIVE. Approximately $16.7 million of outstanding indebtedness will mature on December 1, 2009, approximately $22.7 million of outstanding indebtedness will mature in 2010 or may be extended at our option to 2012 through issuance of warrants and approximately $230.2 million of indebtedness will mature in 2011. On November 25, 2008 we completed an exchange offer in which $213.0 million of our 3.5% Notes due 2011 for $85.2 million of our 12.50% Notes due 2011 plus 21,310,549 common shares. The level and nature of our indebtedness, among other things, could:

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make it difficult for us to make payments on our outstanding debt from time to time or to refinance it;

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make it difficult for us to obtain any necessary financing in the future for working capital, capital expenditures, debt service, product and company acquisitions or general corporate purposes;

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limit our flexibility in planning for or reacting to changes in our business including life cycle management;

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reduce funds available for use in our operations;

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impair our ability to incur additional debt because of financial and other restrictive covenants;

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make us more vulnerable in the event of a downturn in our business;

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place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources;

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restrict the operations of our business as a result of provisions in the Revenue Interests Agreement with Paul Capital that restrict our ability to (i) amend, waive any rights under, or terminate any material license agreements, including the agreements relating to the ANTARA and FACTIVE products, (ii) enter into any new agreement or amend or fail to exercise any of our material rights under existing agreements that would materially adversely affect Paul Capital’s royalty interest, and (iii) sell any material assets related to ANTARA or FACTIVE products; or

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impair our ability to merge or otherwise effect the sale of the Company due to the right of the holders of certain of our indebtedness to accelerate the maturity date of the indebtedness in the event of a change of control of the Company.

We will need to raise additional capital to pay our indebtedness as it comes due. If we are unable to obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our indebtedness, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause defaults under any indebtedness we may incur in the future. Any default under our indebtedness would have a material adverse effect on our business, operating results and financial condition. If we are unable to refinance or repay our indebtedness as it becomes due, we may become insolvent and be unable to continue operations.

We may have incurred a significant U.S. federal income tax liability as a result of the exchange offer completed in November 2008.

As a result of the exchange offer completed in November 2008, we realized cancellation of indebtedness (“COD”) income. COD income must generally be included in gross income for U.S. federal income tax purposes. An exception is available if we were insolvent for U.S. federal income tax purposes (i.e., our liabilities exceed the fair market value of our assets) immediately prior to the exchange. To the extent that we were not insolvent, we expect that the amount of our net operating losses (“NOL”) and other tax attributes will offset the amount of recognized COD income for regular U.S. federal income tax purposes. The use of NOLs is limited for alternative minimum tax (“AMT”) purposes and as a consequence we may have incurred an AMT liability with respect to the COD income recognized on the exchange if we were not insolvent for U.S. federal income tax purposes.

NOL and other tax attributes may be limited in the event of certain cumulative changes of the ownership interest of significant shareholders in excess of 50% over a three-year period. The Company has not finalized its analysis of NOLs or its determination regarding insolvency for U.S. federal income tax purposes. If the Company was not insolvent immediately prior to the exchange or, to the extent that it was not insolvent, did not have sufficient NOLs or other tax attributes available to offset the recognized COD income, the Company may have a significant U.S. federal income tax liability, which would have a material effect on our business.

Future fundraising could adversely affect the value of the conversion right of our convertible securities and dilute the ownership interests of our shareholders.

In order to raise additional funds, we may issue equity or convertible debt securities in the future. Depending upon the market price of our shares at the time of any transaction, we may be required to sell a significant percentage of the authorized and unissued shares of our common stock in order to fund our operating plans, potentially requiring a shareholder vote, which we may not be able to obtain. In addition, we may have to sell securities at a discount to the prevailing market price, which could adversely affect the value of the conversion right of any outstanding convertible securities and result in further dilution to our shareholders.

Our products and product candidates face significant competition in the marketplace.

ANTARA

ANTARA is a fenofibrate product approved by the FDA to treat hypercholesterolemia and hypertriglyceridemia in combination with a healthy diet. The marketing of current and additional branded versions of fenofibrate by competitors could reduce our net sales of ANTARA and adversely impact our revenues. The primary competition for ANTARA in the fenofibrate market is TriCor^® 145 mg, a product manufactured by Abbott Laboratories, which accounted for approximately 88% of U.S. fenofibrate sales for the three-month period ended December 31, 2008.

In addition to TriCor, there are several other branded fenofibrate products which compete with ANTARA. ANTARA competes with Triglide^®, a 160 mg fenofibrate product and Fenoglide^®, a 120mg branded fenofibrate product, both of which are marketed by Sciele Pharma, Inc., a wholly owned subsidiary of Shionogi & Co. Ltd. Triglide and Fenoglide accounted for approximately 2% of U.S. fenofibrate sales for the three-month period ended December 31, 2008. ANTARA also competes with Lipofen^®, a 150 mg fenofibrate product, which is marketed by Kowa Pharmaceuticals America, Inc. Additionally, Abbott Laboratories has developed a new product, TriLipix^TM, which was approved by the FDA in December 2008 and its active ingredient is fenofibric acid, the active metabolite of fenofibrate.

As described under “Lupin Limited’s and Orchid Healthcare’s Paragraph IV certifications under the Hatch-Waxman Act related to ANTARA and FACTIVE respectively could have a material adverse effect on our financial condition and results of operations, as it could result in the introduction of a generic products prior to the expiration of the patents covering ANTARA and FACTIVE, as well as in significant legal expenses and diversion of management time,” we received notice of Paragraph IV certification from Lupin Limited (“Lupin”), notifying us of the filing of an Abbreviated New Drug Application (“ANDA”) with the FDA for a generic version of ANTARA. Upon final FDA approval of Lupin’s ANDA, the drug product which is the subject of that ANDA would have a material adverse impact on the sales of ANTARA.

or sold) and Par Pharmaceuticals and Impax Labs received FDA approval for similar generic products in October 2007 and March 2008, respectively. In addition, Solvay S.A., Abbott Laboratories’ partner announced on January 23, 2008, that Teva had filed an ANDA with a Paragraph IV certification seeking the approval of a generic version of TriCor 145 mg. Additionally, Biovail Corporation announced on September 3, 2008 that it also has filed an ANDA seeking approval for a generic version of TriCor 145 mg. If a generic version of Abbott Laboratories’ TriCor 145 mg product is approved by the FDA, the percentage of total revenues attributable to generic fenofibrate products would likely increase and continue to impact the sales of ANTARA. There are also several other FDA-approved products and products in development for similar indications as ANTARA which could compete with ANTARA, including statins, omega-3 fatty acids (including Lovaza^® marketed by GlaxoSmithKline), niacin, (including Niaspan^® marketed by Abbott), ezetimibe and fixed-dose combination products.

The growth of any of these competitive branded products, the approval of Lupin’s ANDA, the marketing of generic fenofibrate products or the FDA approval and subsequent marketing of products with similar indications including combination therapy products currently in development, could result in a decrease in ANTARA sales, place pressure on the price at which we are able to sell ANTARA, reduce our profit margins, reduce our net sales of ANTARA and adversely impact our revenues.

FACTIVE

FACTIVE tablets are approved for the treatment of community-acquired pneumonia of mild to moderate severity and acute bacterial exacerbations of chronic bronchitis. There are several classes of antibiotics that are primary competitors for the treatment of these indications, including other fluoroquinolones (levofloxacin, ciprofloxacin and moxifloxacin), macrolides (clarithromycin and azithromycin), cephalosporins (cefdinir) and penicillins (amoxicillin/clavulanate potassium).

Many generic antibiotics are also currently prescribed to treat these infections. Moreover, a number of the antibiotic products that are competitors of FACTIVE tablets have composition of matter patents which have expired or will expire at dates ranging from 2003 to 2016. As these competitors lose patent protection, their manufacturers will likely decrease their promotional efforts. However, manufacturers of generic drugs will likely begin to produce some of these competing products and this could result in pressure on the price at which we are able to sell FACTIVE tablets and reduce our profit margins.

In addition, as described under “Lupin Limited’s and Orchid Healthcare’s Paragraph IV certifications under the Hatch-Waxman Act related to ANTARA and FACTIVE respectively could have a material adverse effect on our financial condition and results of operations, as it could result in the introduction of a generic products prior to the expiration of the patents covering ANTARA and FACTIVE, as well as in significant legal expenses and diversion of management time,” Orchid has recently filed an ANDA seeking approval to market a generic version of FACTIVE. The final FDA approval of Orchid’s ANDA, the drug product which is the subject of that ANDA, would have a material adverse impact on the sales of FACTIVE.

Ramoplanin

We have completed Phase II clinical trials studying the use of Ramoplanin for the treatment of Clostridium difficile-associated disease (“CDAD”). We are aware of two products currently utilized in the marketplace for the treatment of this indication: Vancocin^® pulvules (vancomycin), a product marketed by ViroPharma Inc., and metronidazole, a generic product. We are also aware of several companies with products in development for the treatment of CDAD, as well as the potential approval of generic vancomycin. Due to strategic and financial considerations, we have suspended the clinical development of Ramoplanin pending identification of a partner, licensee, or buyer for the product candidate.

Many of our competitors have substantially greater capital resources and human resources than us. Furthermore, many of those competitors are more experienced than us in drug discovery, clinical development and commercialization, and in obtaining regulatory approvals. As a result, those competitors may discover, develop and commercialize pharmaceutical products or services before us. In addition, our competitors may discover, develop and commercialize products or services that are more effective than, or otherwise render non-competitive or obsolete, the products or services that we or our collaborators are seeking to develop and commercialize. Moreover, these competitors may obtain patent protection or other intellectual property rights that would limit our rights or the ability of our collaborators to develop or commercialize pharmaceutical products or services.

Our failure to in-license, co-promote or acquire and develop additional product candidates or approved products will negatively affect our business.

As part of our business strategy, we intend to acquire, develop and commercialize additional product candidates or approved products. The success of this strategy depends upon our ability to identify, select and acquire products that meet our criteria. We may not be able to acquire the rights to additional product candidates and approved products on terms that we find acceptable, or at all. The acquisition of rights to additional products would likely require us to make significant up-front cash payments, which could adversely affect our liquidity and/or may require us to raise additional capital and/or secure external sources of financing. We may seek funding for product acquisitions through equity or debt offerings, through royalty-based financings or by a combination of these methods, such as the financing we completed with Paul Capital to fund the ANTARA acquisition. There is no assurance that we will be able to raise the funds necessary to complete any product acquisitions on acceptable terms or at all. In addition, as announced on February 11, 2009 the reduction in our sales force to conserve capital will negatively impact our ability to acquire new products. If we raise funds it could dilute shareholders, or if we use existing resources it could adversely affect our liquidity and accelerate our need to raise additional capital.

New product candidates acquired or in-licensed by us may require additional research and development efforts prior to commercial sale, including extensive preclinical and/or clinical testing and approval by the FDA and corresponding foreign regulatory authorities. All product candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be safe, effective or approved by regulatory authorities. In addition, it is uncertain whether any approved products that we develop or acquire will be:

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manufactured or produced economically;

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successfully commercialized; or

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widely accepted in the marketplace.

We, as well as our partners, are subject to numerous complex regulatory requirements and failure to comply with these regulations, or the cost of compliance with these regulations, may harm our business.

Virtually all aspects of our and our partners’ activities are subject to regulation by numerous governmental authorities in the U.S., Europe, Canada, Mexico and elsewhere. These regulations govern or affect the testing, manufacture, safety, effectiveness, labeling, storage, record-keeping, approval, distribution, advertising and promotion of ANTARA, FACTIVE, Ramoplanin and any other product candidates we may acquire, as well as safe working conditions and the experimental use of animals. We are required to report any serious and unexpected adverse experiences with our products to the FDA and other similar regulatory authorities in other jurisdictions. Noncompliance by us or our commercial partners with any applicable regulatory requirements or failure to obtain adequate documentation from any governmental agency can result in refusal of the government

to approve products for marketing, criminal prosecution and fines, recall or seizure of products, injunctions, total or partial suspension of production, “whistleblower” lawsuits, prohibitions or limitations on the commercial sale of products or refusal to allow the entering into of federal and state supply contracts. These enforcement actions would detract from management’s ability to focus on our daily business and would have an adverse effect on the way we conduct our daily business, which could severely impact future profitability. Our corporate compliance program cannot fully ensure that we are in compliance with all applicable laws and regulations, and a failure to comply with such regulations by us or our commercial partners could harm our business.

For instance, we, along with many other pharmaceutical companies, received correspondence in 2007 from the FDA stating that it had some concerns over the reliability of studies conducted by MDS Pharma Services between 2000 and 2004. The predecessor owner of the rights to ANTARA, Reliant Pharmaceuticals, had engaged MDS Pharma to perform certain bioequivalence studies for ANTARA, including some studies that were submitted in support of the original approval of ANTARA. The FDA suggested that we take one of the following steps to assess the accuracy of such data: conduct an independent audit of the trials to verify the data, re-assay samples or repeat the studies. The FDA also stated that it has not detected any signals or any evidence that the products mentioned in its correspondence pose a safety risk or that there has been any impact on efficacy. On May 30, 2007, we responded to the FDA informing the FDA that we do not believe that these steps are necessary because the FDA audited the pivotal MDS Pharma study at issue prior to its approval of ANTARA, and further because there are other non-MDS Pharma data that support the safety and effectiveness of ANTARA. To date, the FDA has not responded to our response. As a result, the outcome of this issue is uncertain, and we cannot predict whether this issue will have a material impact on our results of operations.

New legal and regulatory requirements could make it more difficult for us to obtain expanded or new product approvals, and could limit or make more burdensome our ability to commercialize our approved products.

Numerous proposals have been made in recent years to impose new requirements on drug approvals, expand post-approval requirements, and restrict sales and promotional activities. Without limiting the generality of the foregoing, Congress has recently enacted, and the President has signed into law, the Food and Drug Administration Amendments Act of 2007 (“FDAAA”). The recently enacted amendments authorize the FDA, among other things, to require submission of REMS with new drug applications, or post-approval upon the discovery of new safety information, to monitor and address potential safety issues for products upon approval. The FDAAA also grants the FDA the authority to mandate labeling changes in certain circumstances and establishes new requirements for registering and disclosing the results of clinical trials. For example, as discussed under “Our business is very dependent on the commercial success of ANTARA and FACTIVE” the FDA has informed us, along with the other sponsors of all marketed fluoroquinolone products of the need to have a Boxed Warning with respect to tendonitis and tendon rupture in certain patients. The FDA has also informed us that, based on new safety information, we (along with other sponsors of marketed fluoroquinolone products) must submit a proposed Medication Guide and a proposed REMS to ensure patients’ safe and effective use of all fluoroquinolones, including FACTIVE. Such changes may increase our costs and adversely affect our operations.

Additional measures have also been enacted to address the perceived shortcomings in the FDA’s handling of drug safety issues, and to limit pharmaceutical company sales and promotional practices. The implementation of the recently enacted amendments or other proposed legal or regulatory changes may make it more difficult or burdensome for us to obtain extended or new product approvals, and our current approvals may be restricted or subject to onerous post-approval requirements.

Failure to comply with or changes to the regulatory requirements that are applicable to ANTARA, FACTIVE or our product candidates may result in a variety of consequences, including the following:

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restrictions on our products or manufacturing processes;

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notice of violation letters regarding promotional and marketing materials and activities;

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withdrawal of the product from the market;

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voluntary or mandatory recall of the product;

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fines against us or our partners;

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suspension or withdrawal of regulatory approvals for ANTARA, FACTIVE or a product candidate which subsequently receives regulatory approval;

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suspension or termination of any clinical trials of a product candidate;

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refusal to permit import or export of our products;

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refusal to approve pending applications or supplements to approved applications that we or our partners submit;

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denial of permission to file an application or supplement in a jurisdiction;

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product seizure; and

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injunctions or the imposition of civil or criminal penalties against us or our partners.

If we market or distribute products in a manner that violates federal or state healthcare fraud and abuse, marketing disclosure or drug pedigree laws, we may be subject to civil or criminal penalties.

In addition to FDA and related regulatory requirements, we are subject to health care “fraud and abuse” laws, such as the federal False Claims Act, the anti-kickback provisions of the federal Social Security Act, and other state and federal laws and regulations. Federal and state anti-kickback laws prohibit, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid, or other federally or state financed health care programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, patients, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing, or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Numerous pharmaceutical companies have been investigated, prosecuted or entered into settlement agreements in connection with a variety of allegedly impermissible promotional and marketing activities, such as allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; promoting uses that the FDA has not approved (i.e., off-label uses) that caused claims to be submitted to Medicaid for non-covered off-label uses; and submitting inflated best price information to the Medicaid Drug Rebate Program.

The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines, and imprisonment. Even if we are not determined to have violated these laws, government

investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which would also harm our financial condition. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws.

In recent years, several states and localities, including California, the District of Columbia, Maine, Massachusetts, Minnesota, Nevada, New Mexico, Texas, Vermont, and West Virginia, have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs that comply with the PhRMA Code and OIG Guidelines with respect to interactions with health care providers, and/or file periodic reports with the state or make periodic public disclosures on sales, marketing, pricing, clinical trials, and other activities. Similar legislation is being considered by Congress and other states. Many of these requirements are new and uncertain, and the penalties for failure to comply with these requirements are unclear. We are not aware of any companies against which fines or penalties have been assessed under these special state reporting and disclosure laws to date. Nonetheless, while we have established a compliance program, we may face enforcement, fines and other penalties, and could receive adverse publicity if this program is found not to be in full compliance with these laws.

In recent years, some states have passed or have proposed laws and regulations obligating pharmaceutical manufacturers and distributors to provide prescription drug pedigrees that are intended to protect the safety of the drug supply channel. For example, the Florida Prescription Drug Pedigree laws and regulations that became effective in July 2006 imposed obligations upon us to deliver prescription drug pedigrees to various categories of customers. Also, effective January 1, 2011, California will require the implementation of costly track and trace chain of custody technologies. At the federal level, a bill was recently introduced that would establish national standards for the drug supply chain (H.R. 5839). Overall, compliance with these pedigree laws requires implementation of extensive tracking systems as well as heightened documentation and coordination with distributors and customers. While we fully intend to comply with these laws, there is uncertainty around the interpretation of the recently passed laws, future changes in legislation and government enforcement of these laws. Failure to comply could result in fines or penalties, as well as loss of business that could have a material adverse effect on our business.

We depend on third parties to manufacture and distribute our products and product candidates.

We do not have the internal capability to manufacture pharmaceutical products. Under our agreement with LG Life Sciences, LG Life Sciences manufactures the active pharmaceutical ingredient (API) of FACTIVE and is our only source of supply. We use Patheon Inc. (Patheon) to produce the finished FACTIVE tablets and it is currently our only source of FACTIVE tablets. Currently, our only source of supply of bulk capsules of ANTARA is Ethypharm which manufactures the bulk capsules in France and is able to receive ANTARA API from two vendors in Spain and Italy. Further, we have an agreement with Anderson Packaging, Inc. to package finished ANTARA capsules and FACTIVE tablets.

If Ethypharm, LG Life Sciences, Patheon or Catalent Pharma Solutions experience any significant difficulties in their respective manufacturing processes for our products, including the API or finished product, or is found otherwise not to be in compliance with applicable legal and regulatory requirements, we could experience significant interruptions in the supply of ANTARA and FACTIVE. Our inability to coordinate the efforts of our third party manufacturing partners, or the lack of capacity available at our third party manufacturing partners, could impair our ability to supply ANTARA and FACTIVE at required levels. Such an interruption could cause us to incur substantial costs and our ability to generate revenue from ANTARA and FACTIVE may be adversely affected. We may not be able to enter into alternative supply arrangements at commercially acceptable rates, if at all. Also, if we change the source or location of supply or modify the manufacturing process, regulatory authorities will require us to demonstrate that the new process or source meets applicable legal and regulatory requirements and that the product manufactured by the new source or from the

modified process is equivalent to the product used in the clinical trials that supported FDA approval. Due to these regulatory requirements, we could incur substantial expenses and/or experience significant interruptions in the supply of ANTARA and FACTIVE if we decided to transfer the manufacture of our products to one or more suppliers in an effort to deal with such difficulties.

As the ANTARA bulk capsules and FACTIVE API are manufactured in France and South Korea, respectively, we must ship our products to the United States for finishing, packaging and labeling, and manufacturing in the case for FACTIVE. While in transit, our API and product, each shipment of which is of significant value, could be lost or damaged. Moreover, at any time after shipment to the United States, our API or finished product could be lost or damaged as our FACTIVE API is stored at Patheon and our ANTARA and FACTIVE finished product is stored at our third party logistics provider, Integrated Commercialization Solutions, Inc. (“ICS”). Appropriate risk mitigation steps have been taken and insurance is in place. However, depending on when in the process the API or finished product is lost or damaged, we may have limited recourse for recovery against our manufacturers or insurers. As a result, our financial performance could be impacted by any such loss or damage to our API or finished product.

We may also experience interruption or significant delay in the supply of ANTARA and FACTIVE due to natural disasters, acts of war or terrorism, shipping embargoes, labor unrest or political instability in France or South Korea. In any such event, the supply of our products stored at Ethypharm or LG Life Sciences could also be impacted.

Pursuant to our acquisition of worldwide rights to Ramoplanin from Vicuron, a wholly-owned subsidiary of Pfizer Inc., we are responsible for the manufacture of both the active pharmaceutical ingredient and finished dosage form of Ramoplanin. Although we plan to seek a partner for Ramoplanin, a contract manufacturer or the partner would be required to produce both the active pharmaceutical ingredient and the final dosage form to support related manufacturing activities. If there is a significant delay in securing a qualified supplier on commercially favorable terms, we could experience a supply shortage of Ramoplanin bulk drug, possibly affecting our ability to consummate partnering arrangements for the commercialization of Ramoplanin.

Moreover, while we may choose to manufacture products in the future, we have no experience in the manufacture of pharmaceutical products for clinical trials or commercial purposes. If we decide to manufacture products, it would be subject to the regulatory requirements described above. In addition, we would require substantial additional capital and would be subject to delays or difficulties encountered in manufacturing pharmaceutical products.

We depend on third parties to assist in the management and execution of our product supply chain for ANTARA capsules and FACTIVE tablets.

We do not have the internal capability to perform product supply chain services including warehousing, inventory management, storage and distribution of commercial and sample quantities of ANTARA capsules and FACTIVE tablets. We have an exclusive arrangement with ICS to perform such supply chain services with respect to commercial product through the second quarter of 2010.

We cannot be certain that ICS will be able to perform uninterrupted supply chain services. If ICS were unable to perform their services for any period, we may incur substantial loss of sales to wholesalers and other purchasers of our products. If we are forced to find an alternative supply chain service provider for ANTARA and FACTIVE, in addition to loss of sales, we may also incur costs in establishing a new arrangement.

Wholesalers, pharmacies and hospitals may not maintain adequate inventory for the distribution for our products.

We sell ANTARA and FACTIVE to wholesale drug distributors who generally sell products to retail pharmacies and other institutional customers. We do not promote ANTARA and FACTIVE to these wholesalers, and they do not determine such products prescription demand. However, approximately 93% of our product shipments during the three-month period ended September 30, 2008 was to only three wholesalers. Our ability to commercialize ANTARA and/or FACTIVE will depend, in part, on the extent to which we maintain adequate distribution of ANTARA capsules and FACTIVE tablets via wholesalers, pharmacies and hospitals, as well as other customers. Although a majority of the larger wholesalers and retailers distribute and stock ANTARA and FACTIVE, they may be reluctant to do so in the future if demand is not established. Further, it is possible that wholesalers could decide to change their policies or fees, or both, at some time in the future. This could result in their refusal to distribute smaller volume products, or cause higher product distribution costs, lower margins or the need to find alternative methods of distributing products. Such alternative methods may not exist or may not be economically viable. If we do not maintain adequate distribution of ANTARA capsules or FACTIVE tablets, the commercialization of ANTARA and/or FACTIVE and our anticipated revenues and results of operations could be adversely affected.

Under our financing arrangement with Paul Capital, upon the occurrence of certain events, Paul Capital may require us to repurchase the right to receive revenues that we assigned to it, repay the outstanding principal and interest on the note or may foreclose on certain assets that secure our obligations to Paul Capital. Any exercise by Paul Capital of its right to cause us to repurchase the assigned right, repay the note or any foreclosure by Paul Capital could adversely affect our results of operations and our financial condition.

On August 18, 2006, we and our subsidiary Guardian II Acquisition Corporation, or Guardian II, entered into a revenue interests assignment agreement with Paul Royalty Fund Holdings II, LP, an affiliate of Paul Capital Partners (“PRF”), pursuant to which we assigned to PRF the right to receive a portion of our net revenues from FACTIVE tablets and Guardian II assigned to PRF the right to receive a portion of its net revenue from ANTARA capsules. To secure its obligations to PRF, Guardian II also granted PRF a security interest in substantially all of its assets, including the U.S. rights to ANTARA.

Under our arrangement with PRF, upon the occurrence of certain events (the “Put Events”), including if we experience a change of control, undergo certain bankruptcy events of us or our subsidiary, transfer any or substantially all of our rights in ANTARA or FACTIVE, transfer all or substantially all of our assets, breach certain of the covenants, representations or warranties under the Revenue Interests Assignment Agreement, or sales of ANTARA are suspended due to an injunction or if we elect to suspend sales of ANTARA as a result of a lawsuit filed by certain third parties, PRF may (i) require us to repurchase the rights we assigned to it at the price in cash which equals the greater of (a) 200% of cumulative payments made by PRF under the Revenue Interests Assignment Agreement less the cumulative royalties previously paid to Paul Capital; or (b) the amount which will provide Paul Capital, when taken together with the royalties previously paid, a 22% internal rate of return (the “Put/Call Price”) in effect on the date such right is exercised or (ii) foreclose on the ANTARA assets that secure our obligations to Paul Capital. Except in the case of certain bankruptcy events, if PRF exercises its right to cause us to repurchase the rights we assigned to it, PRF may not foreclose unless we fail to pay the Put/Call Price as required. In the event of a Put Event, the outstanding principal and interest in the $20 million note will become immediately due and payable to PRF.

On November 5, 2008 we entered into a first amendment to the Revenue Interests Assignment Agreement. The amendment provides, among other things, that PRF consented to the grant by Guardian II of a second-ranking security interest in and to the assets of Guardian II to secure Guardian II’s guarantee of the new notes that were issued in our November 2008 exchange. The amendment provides that any acceleration or failure to

pay the new notes to be issued in the exchange offer, would be considered a Put Event and would trigger PRF’s right to cause us to repurchase the right we assigned to it as described above.

If PRF were to exercise its right to cause us to repurchase the right we assigned to it, there can be no assurance that we would have sufficient funds available to pay the Put/Call Price in effect at that time. Even if we have sufficient funds available, we may have to use funds that we planned to use for other purposes and our results of operations and financial condition could be adversely affected. If PRF were to foreclose on the ANTARA assets that secure our obligations to PRF, our results of operations and financial condition could also be adversely affected. PRF’s right to cause us to repurchase the rights we assigned to it is triggered by, among other things, a change in control, transfer of any of our interests in ANTARA or transfer of all or substantially all of our assets, the existence of that right could discourage us or a potential acquirer from entering into a business transaction that would result in the occurrence of any of those events.

The development and commercialization of our products may be terminated or delayed, and the costs of development and commercialization may increase, if third parties upon whom we rely to support the development and commercialization of our products do not fulfill their obligations.

In addition to using third parties to fulfill our manufacturing, distribution and supply chain services, our development and commercialization strategy entails entering into arrangements with corporate collaborators, contract research organizations, licensors, licensees and others to conduct development work, manage our clinical trials and market and sell our products outside of the United States. We do not have the expertise or the resources to conduct such activities on our own and, as a result, we are particularly dependent on third parties in these areas. For instance, we have entered into exclusive arrangements granting rights to Pfizer, S.A. de C.V, Abbott Laboratories, Ltd. and Menarini International Operation Luxembourg S.A. to develop and sell FACTIVE in Mexico, Canada and Europe, respectively. We had previously entered into an exclusive arrangement granting rights to Abbott Laboratories, Ltd. (“Abbott Canada”) to develop and sell FACTIVE in Canada, however our agreement with Abbott Canada was terminated in December 2008, and Abbott Canada ceased all development and commercialization of FACTIVE in Canada. FACTIVE sales in Canada accounted for approximately 4% of all FACTIVE revenues recorded by the Company in the two years ended September 30, 2008.

We may not be able to maintain our existing arrangements with respect to the commercialization of our existing products, ANTARA and FACTIVE, or establish and maintain arrangements or partnerships to develop and commercialize Ramoplanin or any additional product candidates or products we may acquire on terms that are acceptable to us. Any current or future arrangements for development and commercialization may not be successful. If we are not able to establish or maintain agreements relating to our current products, Ramoplanin, our other product candidates or any additional products we may acquire on terms which we deem favorable, our results of operations would be materially adversely affected.

Third parties may not perform their obligations as expected. The amount and timing of resources that third parties devote to developing and commercializing our products are not within our control. Furthermore, our interests may differ from those of third parties that commercialize our products. Disagreements that may arise with these third parties could delay or lead to the termination of the development or commercialization of our product candidates, or result in litigation or arbitration, which would be time consuming and expensive.

If any third party that supports the development or commercialization of our products breaches or terminates its agreement with us, or fails to conduct its activities in a timely and regulatory compliant manner, such breach, termination or failure could:

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delay or otherwise adversely impact the development or commercialization of ANTARA capsules, FACTIVE tablets, Ramoplanin, or any additional product candidates that we may acquire or develop;

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require us to undertake unforeseen additional responsibilities or devote unforeseen additional resources to the development or commercialization of our products; or

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result in the termination of the development or commercialization of our products.

We bear substantial responsibilities under our license agreements for ANTARA and FACTIVE and our sublicense agreements to Pfizer, S.A. de C.V., Abbott Laboratories, Ltd. and Menarini International Operation Luxembourg S.A., and there can be no assurance that we will successfully fulfill our responsibilities.

ANTARA

Our exclusive rights to ANTARA are licensed to us by Ethypharm, S.A. (Ethypharm). If we breach the obligations in any of our license agreements relating to ANTARA including the development, license and supply agreement with Ethypharm, the licensor may be entitled to terminate the agreement. Further, in order to maintain our exclusive rights, we must achieve certain minimum annual sales of ANTARA until February 2012 or make payments to Ethypharm to compensate for the difference. Ethypharm also has a right of first refusal on any divestiture of our rights to ANTARA.

We believe that we are currently in compliance with our obligations under the Ethypharm agreement, but there can be no assurance that we will be able to remain in compliance or that we will be able to meet the milestones required for extension of the agreement. As of September 30, 2008, we recorded approximately $605,000 related to a minimum royalty obligation to Ethypharm for the period February 2006 to January 2007. Moreover, Ethypharm’s right of first refusal on a divestiture of our rights to ANTARA may adversely affect our ability to effect a change of control or sale of our assets.

In accordance with the terms of our asset purchase agreement with Reliant Pharmaceuticals, Inc. (Reliant) whereby we acquired ANTARA, we assumed certain of Reliant’s liabilities related to ANTARA, including obligations to make certain royalty and milestone payments on sales of ANTARA. Under the terms of one of the licenses we assumed related to ANTARA not including the Ethypharm license, we are obligated to make certain royalty payments to a third party licensor based on sales of ANTARA, which royalty payments are subject to a low single digit increase in the event of a change in control of the Company. We have engaged the third party licensor to renegotiate the terms of that license and have suspended further royalty payments to such third party licensor while the terms of such license are being renegotiated. This decision could lead to litigation and have a material impact on our operations and sales of ANTARA.

FACTIVE

We have an exclusive license from LG Life Sciences to develop and market FACTIVE in North America, France, Germany, the United Kingdom, Luxembourg, Ireland, Italy, Spain, Portugal, Belgium, the Netherlands, Austria, Greece, Sweden, Denmark, Finland, Norway, Iceland, Switzerland, Andorra, Monaco, San Marino, Vatican City, Poland, Czech Republic, Slovakia, Slovenia, Hungary, Estonia, Latvia, Lithuania, Liechtenstein, Malta, Cyprus, Romania, Bulgaria, Croatia, Serbia and Montenegro, Bosnia and Herzegovina, Albania and the Former Yugoslav Republic of Macedonia. Under this agreement, we are responsible, at our expense and through consultation with LG Life Sciences, for the clinical and commercial development of FACTIVE in the countries covered by the license, including the conduct of clinical trials, the filing of drug approval applications with the FDA and other applicable regulatory authorities and the marketing, distribution and sale of FACTIVE in our territory. The agreement with LG Life Sciences also required that we achieve a minimum gross sales level of $30 million from our licensed territories over a 12-month period of time starting in approximately the third quarter of 2007 to the third quarter of 2008 which, if not met, LG Life Sciences could elect to terminate the agreement and have the technology be returned to LG Life Sciences. After LG Life Sciences’ review of our financial information it has accepted our analysis and concluded that it will not terminate the agreement based on the minimum gross sales level of $30 million. We believe that we are currently in compliance with our obligations under the agreement with LG Life Sciences, but there can be no assurance that we will be able to remain in compliance and meet all of our obligations due to the limitations on our resources and the challenges inherent in the commercialization of new products as described above in “Our product and product candidates face significant competition in the marketplace.”

LG Life Sciences has the obligation under the agreement to diligently maintain its patents and the patents of third parties to which it has rights that, in each case relating to gemifloxacin, the active ingredient in FACTIVE tablets. We have the right, at our expense, to control any litigation relating to suits brought by a third party alleging that the manufacture, use or sale of gemifloxacin in its licensed field in the territories covered by the license infringes upon our rights. We also have the primary right to pursue actions for infringement of any patent licensed from LG Life Sciences under the license agreement within the territories covered by the license. If we elect not to pursue any infringement action, LG Life Sciences has the right to pursue it. The costs of any infringement actions are first paid out of any damages recovered. If we are the plaintiff, the remainder of the damages are retained by us, subject to our royalty obligations to LG Life Sciences. If LG Life Sciences is the plaintiff, the remainder of the damages are divided evenly between us and LG Life Sciences, subject to our royalty obligations to LG Life Sciences. The costs of pursuing any such action could substantially diminish our resources. To date, we have no pending litigation relating to FACTIVE.

In February 2006, we entered into a Sublicensing and Distribution Agreement with Pfizer, S.A. de C.V. (Pfizer Mexico) whereby we sublicensed our rights to commercialize FACTIVE tablets in Mexico to Pfizer Mexico. Under this agreement, we are obligated to exclusively supply all active pharmaceutical ingredient for FACTIVE required by Pfizer Mexico in Mexico. The agreement with Pfizer Mexico may be terminated by either party upon the occurrence of certain termination events, including Pfizer Mexico’s right to terminate at any time after August 2007, the first anniversary of launch of FACTIVE tablets in Mexico upon six-months prior written notice.

In August 2006, we entered into a Supply, Development and Marketing Agreement with Abbott Laboratories, Ltd. (Abbott Canada), the Canadian affiliate of Abbott. Under this agreement, we are obligated to exclusively supply all finished packaged FACTIVE product required by Abbott Canada. The agreement also provides that we can terminate the agreement at any time with prior notice to Abbott Canada and Abbott Canada can terminate with prior notice to us after November 30, 2008. On December 18, 2008 the agreement with Abbott Canada was terminated.

In December 2006, we entered into a License, Supply and Marketing Agreement with Menarini International Operation Luxembourg S.A. (Menarini), whereby we sublicensed our rights to sell FACTIVE tablets in Europe to Menarini. Under the terms of our agreement with Menarini, Menarini is also obligated to exclusively purchase from us, and we must exclusively supply, all API for FACTIVE to be sold in Europe for the earlier to occur of the expiration of the life of certain patents covering the product or expiration of data exclusivity. Our agreement with Menarini may be terminated by either party upon the occurrence of certain termination events, including Menarini’s right to terminate if the European regulatory authorities do not recommend approval of FACTIVE at various stages of the approval process with a package insert, or label, that meets certain requirements as to the safety, dosing and indications for which FACTIVE may be prescribed. Menarini may also terminate the agreement if it does not receive approval for reimbursement from European Union member countries that is above a certain minimum price per tablet.

We believe that, together with our manufacturing partners, we will be able to meet such supply and other obligations under these sublicense and supply agreements but can make no assurances that we will be able to remain in compliance with such responsibilities, which would result in our breach of such agreement.

Our intellectual property protection and other protections may be inadequate to protect our products.

Our success will depend, in part, on our ability to obtain commercially valuable patent claims and protect our intellectual property. The degree of protection afforded by a patent varies on a country-by-country and a product-by-product basis and depends upon many factors, including the scope of the patent’s claims, the availability of regulatory-related patent term extensions, the validity and enforceability of the patent and the availability of legal remedies in a particular country. We currently own or license approximately 56 issued U.S. patents, approximately 40 pending U.S. patent applications, approximately 60 issued foreign patents and

approximately 109 pending foreign patent applications. We are not currently involved in any litigation, settlement negotiations, or other legal action regarding patent issues and we are not aware of any patent litigation threatened against us. Our patent position involves complex legal and factual questions, and legal standards relating to the issuance, scope, validity and enforceability of claims in the applicable technology fields are still evolving. Therefore, the degree of future protection for our proprietary rights is uncertain.

Under our Development, License and Supply Agreement with Ethypharm, S.A. (Ethypharm), we assumed all of the rights and obligations related to the development, manufacturing, marketing and sale of ANTARA in the United States. This license includes one issued U.S. patent and several pending patent applications. In conjunction with the financing of our acquisition of ANTARA, we entered into a Security Agreement with Paul Royalty Fund Holdings II, LP, an affiliate of Paul Capital Partners, or Paul Capital, under which our wholly-owned subsidiary granted Paul Capital a security interest in substantially all of its assets, including all rights to the ANTARA intellectual property, in order to secure its performance under the financing agreements with Paul Capital. In connection with the issuance of the 2011 notes, Guardian II and the collateral agent for the 2011 note holders will enter into a Security Agreement under which Guardian II will grant the collateral agent a second priority security interest in substantially all of the assets of Guardian II to secure Guardian II’s guarantee of our obligations with respect to the 2011 notes. The patents and applications include claims that relate to pharmaceutical compositions containing fenofibrate using the drug delivery technologies incorporated in ANTARA, methods of their use and treatment, and methods of preparing the same. The patent issued to Ethypharm which is listed in the FDA Orange Book is set to expire in 2020.

As discussed under, “Lupin Limited’s and Orchid Healthcare’s Paragraph IV certifications under the Hatch-Waxman Act related to ANTARA and FACTIVE respectively could have a material adverse effect on our financial condition and results of operations, as it could result in the introduction of a generic products prior to the expiration of the patents covering ANTARA and FACTIVE, as well as in significant legal expenses and diversion of management time,” we received notice of a Paragraph IV certification from Lupin Limited (“Lupin”), notifying us of the filing of an ANDA with the FDA for a generic version of ANTARA. We received the certification as the holder of the New Drug Application for ANTARA. Lupin’s certification notice alleges that U.S. Patent No. 7,101,574 (the “‘574 Patent”), owned by Ethypharm, exclusively licensed to Oscient and listed in the FDA Orange Book for ANTARA, is invalid and/or will not be infringed by Lupin’s commercial manufacture, use or sale of the drug product described in Lupin’s ANDA. The ‘574 Patent will expire in 2020.

In accordance with the Hatch-Waxman Act, as a result of having filed a timely lawsuit against Lupin, FDA approval of Lupin’s ANDA will be stayed until the earlier of thirty months from the date of receipt of the Paragraph IV certification notice, or the date of a District Court decision finding that the ‘574 Patent is either invalid, unenforceable or not infringed by the drug product which is the subject of Lupin’s ANDA.

Under our license agreement with LG Life Sciences, we obtained an exclusive license to develop and market gemifloxacin in certain territories. This license covers 18 issued U.S. patents and a broad portfolio of corresponding foreign patents and pending patent applications. These patents include claims that relate to the chemical composition of FACTIVE, methods of manufacturing and its use for the prophylaxis and treatment of bacterial infections. We have received a Notice of Final Determination from the U.S. Patent and Trademark Office on our patent term extension application for U.S. Patent No. 5,776,944 extending its patent term 659 days to April 4, 2017. The principal U.S. patents for FACTIVE are currently set to expire at various dates, ranging from 2015 to 2019. As discussed under, “Lupin Limited’s and Orchid Healthcare’s Paragraph IV certifications under the Hatch-Waxman Act related to ANTARA and FACTIVE respectively could have a material adverse effect on our financial condition and results of operations, as it could result in the introduction of a generic

products prior to the expiration of the patents covering ANTARA and FACTIVE, as well as in significant legal expenses and diversion of management time,” we received notice of a Paragraph IV certification from Orchid Healthcare, a Division of Orchid Chemicals & Pharmaceuticals Ltd. (“Orchid”), notifying us of their filing of an ANDA for a generic version of FACTIVE. The certification alleges that eight of the nine FDA Orange Book listed patents are invalid and/or will not be infringed by Orchid’s manufacture, importation, use, or sale of the product for which the ANDA was submitted. The certification does not, however include a Paragraph IV certification with respect to U.S. Patent No. 5,633,262 which is listed in the Orange Book and expires in June 2015. We are continuing to evaluate whether to commence litigation in response to Orchid’s Paragraph IV certification. In the event Orchid elects to amend its ANDA to include a Paragraph IV certification with respect to the ninth patent, U.S. Patent No. 5,633,262, we believe that we will be entitled to an automatic thirty-month stay of FDA approval of the ANDA if either we and/or LG Life Sciences initiate a timely patent infringement lawsuit against Orchid, however, we are not guaranteed the benefit of such a thirty month stay. Patent infringement litigation against Orchid could be a substantial cost and there are no assurances that we would be successful.

We may depend, in part, on the ability of our licensors to successfully obtain, maintain and enforce patent protection for our licensed intellectual property. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

On January 8, 2008 the United States Patent and Trademark Office (USPTO) issued us U.S. Patent No. 7,317,001 relating to the treatment of Clostridium difficile-associated disease (CDAD) using Ramoplanin. We received a patent term adjustment of 565 days thus extending the term through December 20, 2024. In addition to the recently issued patent, we have an additional patent which includes claims relating to methods of manufacturing Ramoplanin. We also have several applications pending relating to additional novel uses of Ramoplanin as well as formulations containing Ramoplanin. The patent covering the chemical composition of Ramoplanin has expired. To provide additional protection for Ramoplanin, we rely on proprietary know-how relating to maximizing yields in the manufacture of Ramoplanin, and intend to rely on the five years of data exclusivity we believe we would receive under the Hatch-Waxman Act in the U.S. and the ten years of market exclusivity in Europe available through the European Medicines Agency (EMEA), because Ramoplanin would be a new chemical entity not previously marketed commercially.

We also have the exclusive right to use FACTIVE trademarks, trade names, domain names and logos in conjunction with the use or sale of the product in the territories covered by the license. We acquired exclusive rights to ANTARA trademarks, trade names, domain names and logos. After becoming aware that Antara Biosciences, Inc. filed trademark applications with the USPTO for the ANTARA and ANTARA BIOSCIENCES marks in connection with biotechnology related goods and services we filed a complaint in Federal District Court alleging, among other things, trademark infringement seeking to enjoin ANTARA BIOSCIENCES from using the ANTARA mark. We have reached a settlement with ANTARA BIOSCIENCES whereby they have agreed to abandon their ANTARA trademark applications and cease using the ANTARA marks. Accordingly we have dismissed our complaint before the Federal District Court.

The risks and uncertainties that we will face with respect to our patents and other proprietary rights include the following:

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the pending patent applications that we have filed or to which we have exclusive rights may not result in issued patents, may result in issued patents with narrower claims than anticipated or may take longer than expected to result in issued patents;

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the claims of any patents which are issued may be limited from those in the patent applications and may not provide meaningful protection;

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U.S. Patents may be subject to reexamination or reissue proceedings before the USPTO, and foreign patents may be subject to comparable proceedings in corresponding patent offices;

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we may not be able to develop additional proprietary technologies that are patentable;

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the patents licensed or issued to us or our partners may not provide a competitive advantage;

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other companies, such as Lupin or Orchid, may challenge patents licensed or issued to us or our partners;

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patents issued to other companies may harm our ability to do business;

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the April 30, 2007 U.S. Supreme Court decision in KSR International Co. vs. Teleflex, Inc. may raise the standard for patentability for both patent applications and holders, thus making it more difficult to either obtain patents or withstand challenges to patentability based on a determination of obviousness;

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other companies may independently develop similar or alternative technologies or duplicate our technologies; and

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the patents may be narrow in scope and accordingly other companies may design around technologies we have licensed or developed.

International patent protection is uncertain.

Patent law outside the United States is uncertain and is currently undergoing review and revision in many countries. Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may participate in opposition proceedings to determine the validity of our or our competitors’ foreign patents, which could result in substantial costs and diversion of our efforts.

On December 2, 2008, we and our licensor, Ethypharm, S.A. (Ethypharm), received notice of a Paragraph IV certification from Lupin Limited (“Lupin”), notifying us of the filing of an ANDA with the FDA seeking approval to market a generic version of ANTARA prior to the August 2020 expiration date of U.S. Patent No. 7,101,574 (the “‘574 Patent”). The ‘574 Patent, which is owned by Ethypharm, exclusively licensed to Oscient and listed in the FDA Orange Book for ANTARA relates to pharmaceutical compositions containing fenofibrate and methods of preparing the same. Lupin’s certification notice alleges that the ‘574 Patent”, is invalid and/or will not be infringed by Lupin’s commercial manufacture, use or sale of the drug product described in Lupin’s ANDA. The ‘574 is set to expire in 2020.

and/or will not be infringed by Orchid’s manufacture, importation, use, or sale of the product for which the ANDA was submitted. The certification does not, however include a Paragraph IV certification with respect to U.S. Patent No. 5,633,262 which is listed in the Orange Book and expires in June 2015. We are continuing to evaluate whether to commence litigation in response to Orchid’s Paragraph IV certification.

Our proprietary position may depend on our ability to protect our proprietary confidential information and trade secrets.

We rely upon certain proprietary confidential information, trademarks, unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. We generally protect this information with confidentiality agreements that provide that all confidential information developed or made known to others during the course of the employment, consulting or business relationship shall be kept confidential except in specified circumstances. Agreements with employees provide that all inventions conceived by an individual while employed by us are our exclusive property. We cannot guarantee, however, that these agreements will be honored, that we will have adequate remedies for breach if they are not honored or that our proprietary confidential information and trade secrets will not otherwise become known or be independently discovered by competitors.

Seasonal fluctuations in demand for FACTIVE, and even possibly ANTARA, may cause our operating results to vary significantly from quarter to quarter.

We expect demand for FACTIVE to be highest between December 1 and March 31 as the incidence of respiratory tract infections, including CAP and AECB, tends to increase during the winter months. In addition, fluctuations in the duration and severity of the annual respiratory tract infection season may cause our product sales to vary from year to year. Due to these seasonal fluctuations in demand, our results in one quarter may not be indicative of the results for any other quarter or for the entire year. Although not related to seasonal weather changes, wholesaler buying patterns may fluctuate for ANTARA during the year and possibly increase toward year end and decrease early in the year. There can be no assurance that the demand for our products or the wholesaler buying pattern will not change.

Clinical trials are costly, time consuming and unpredictable, and we have limited experience conducting and managing necessary preclinical and clinical trials for product candidates.

To obtain FDA approval to market a new drug product or to expand the approved uses of an existing product, we or our partners must demonstrate proof of safety and efficacy in humans. To meet these requirements, we or our partners will have to conduct extensive testing, including potentially preclinical testing and “adequate and well- controlled” clinical trials. Conducting clinical trials is a lengthy, time-consuming and expensive process. The length of time required to conduct required studies may vary substantially according to the type, complexity, novelty and intended use of the product candidate, and often can be several years or more per trial. Delays associated with products for which clinical trials are required may cause us to incur additional operating expenses.

The Phase II trial for our product candidate, Ramoplanin, to assess the safety and efficacy of treating Clostridium difficile-associated disease, or CDAD, was completed in 2004 but did not meet its primary endpoint.

Prior clinical and preclinical trials for Ramoplanin were conducted by Vicuron and its licensees, from whom we acquired rights to Ramoplanin. In December 2005 we agreed with the FDA to a Special Protocol Assessment regarding specific components of a Phase III program that, if completed successfully, would support regulatory approval for the indication. However, due to the nature of Special Protocol Assessments and the fact that our Special Protocol Assessment was agreed to by the FDA in 2005, we can give no assurance that as clinical trials proceed or as part of an NDA review process, if any, the FDA will not determine that a previously approved Special Protocol Assessment for a particular protocol is no longer valid. Additionally, in October 2007, the FDA issued draft guidance on the use of non-inferiority studies to support approval of antibiotics. Under this draft guidance, the FDA recommends that for some antibiotic indications, sponsor companies carefully consider study designs other than non-inferiority, such as placebo-controlled trials demonstrating the superiority of a drug candidate to placebo. While the indications identified by the FDA in the draft guidance are not indications which we are currently pursuing, the draft guidance does not articulate clear standards or policies for demonstrating the safety and efficacy of antibiotics generally. The lack of clear guidance from the FDA creates uncertainties about the standards for the approval of antibiotics and could delay or ultimately prevent commercialization of new antibiotic product candidates such as Ramoplanin or additional indications for FACTIVE. If the trials or the filings are delayed or not approved by the FDA, our business may be adversely affected. Currently, we have suspended the clinical development program for Ramoplanin pending identification of a partner, licensee, or buyer for the product.

If we choose to pursue additional indications or expand the label for ANTARA or FACTIVE, or are required to conduct additional clinical trials, we may not be able to demonstrate the safety and efficacy of FACTIVE or ANTARA for those indications to the satisfaction of the FDA, or other regulatory authorities. We may also be required to demonstrate that our proposed products represent an improved form of treatment over existing therapies and we may be unable to do so without conducting further clinical studies. Negative, inconclusive or inconsistent clinical trial results could prevent regulatory approval, increase the cost and timing of regulatory approval or require additional studies or a filing for a narrower indication or label expansion.

In addition, the cost of human clinical trials varies dramatically based on a number of factors, including the order and timing of clinical indications pursued, the extent of development and financial support from alliance partners, the number of patients required for enrollment, the difficulty of obtaining clinical supplies of the product candidate, and the difficulty in obtaining sufficient patient populations and clinicians.

We have limited experience in conducting and managing the preclinical and clinical trials necessary to obtain regulatory marketing approvals. We may not be able to obtain the approvals necessary to conduct clinical studies. Also, the results of our clinical trials may not be consistent with the results obtained in preclinical studies or the results obtained in later phases of clinical trials may not be consistent with those obtained in earlier phases. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after experiencing promising results in early animal and human testing.

Even if a product gains regulatory approval, the product and the manufacturer of the product will be subject to continuing regulatory review, including the requirement to conduct post-approval clinical studies, post-approval adverse event reporting requirements and, potentially, a REMS. We may be restricted or prohibited from marketing or manufacturing a product, even after obtaining product approval, if previously unknown problems with the product or its manufacture are subsequently discovered.

We could experience delays in clinical development which could delay anticipated product launches.

The speed with which we are able to complete clinical trials for future product candidates, when and if we, or any third party with whom we partner, elects to commence Phase III development of Ramoplanin, and our applications for marketing approval will depend on several factors, including the following:

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the rate of patient enrollment, which is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the nature of the protocol;

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fluctuations in the disease incidence for patients available to enroll in our trials;

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compliance of patients and investigators with the protocol and applicable regulations;

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prior regulatory agency review and approval of our applications and procedures;

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Institutional Review Board (IRB) review and monitoring;

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analysis of data obtained from preclinical and clinical activities which are susceptible to varying interpretations, which interpretations could delay, limit or prevent regulatory approval;

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changes in the policies of regulatory authorities for drug approval during the period of product development including the FDA’s recent draft guidance released in October 2007 relating to Antibacterial Drug Products: Use of Noninferiority Studies to Support Approval; and

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the availability of skilled and experienced staff to conduct and monitor clinical studies, to accurately collect data and to prepare the appropriate regulatory applications.

We depend on key personnel, including members of our direct sales force, in a highly competitive market for such skilled personnel.

We are highly dependent on the principal members of our senior management and key scientific, sales and technical personnel. The loss of any of our personnel could have a material adverse effect on our ability to achieve our goals. We currently maintain employment agreements with the following executive officers: Steven M. Rauscher, President and Chief Executive Officer; Philippe M. Maitre, Executive Vice President and Chief Financial Officer; and Mark A. Glickman, Senior Vice President, Sales and Marketing. The term of each employment agreement continues until it is terminated by the officer or Oscient.

Our future success is dependent upon our ability to attract and retain additional qualified sales and marketing, clinical development, scientific and managerial personnel. Like others in our industry, we may face, and in the past we have faced from time to time, difficulties in attracting and retaining certain employees with the requisite expertise and qualifications. We believe that our historical recruiting periods and employee turnover rates are similar to those of others in our industry; however, we cannot be certain that we will not encounter greater difficulties in the future.

With routine employee turnover, we also face the risk of being unable to enforce our rights under non-compete and non-solicitation provisions as well as confidentiality obligations that protect the Company. We also need to guard against the same obligations that our employees or our potential employees have with their former employers, otherwise we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers and disputes may arise as to rights in related or resulting know-how and inventions. Litigation may be necessary to defend against these claims, which may result in substantial costs, be a distraction to management, require payment of money claims, and result in a loss of valuable intellectual property or personnel.

Failure to obtain or maintain regulatory approvals in foreign jurisdictions will prevent us from marketing FACTIVE abroad.

We have entered into commercialization relationships with Pfizer Mexico and Menarini whereby we sublicensed our rights to sell FACTIVE tablets in Mexico to Pfizer Mexico and in Europe to Menarini. We had previously sublicensed our rights to commercialize FACTIVE tablets in Canada to Abbott Laboratories, Inc. (Abbott Canada) whereby Abbott Canada was responsible for the development and commercialization of FACTIVE in Canada, however our license agreement with Abbott Canada was terminated in December 2008, and Abbott Canada has ceased all development and commercialization activities relating to FACTIVE in Canada. Obtaining foreign approvals may require additional trials and expense. Further, in order to market FACTIVE in Europe, we or our distribution partners may need to obtain multiple regulatory approvals. For instance, in the

first quarter of 2008, Menarini, submitted a regulatory filing seeking approval of FACTIVE in Europe. Menarini is seeking approval of FACTIVE for the treatment of community-acquired pneumonia and acute bacterial exacerbations of chronic bronchitis. The regulatory review time in Europe is approximately twelve (12) months. Menarini may not be able to obtain regulatory approval for FACTIVE, which could delay or prevent us from receiving revenue from sales of FACTIVE in Europe, and/or may require additional expenditures.

If our partners are unsuccessful in their efforts to obtain and/or expand their respective marketing approvals, the revenues that we expect to obtain from the sales of FACTIVE could be significantly limited.

We rely on operational data obtained from third party vendors which could be inaccurate.

We rely on prescription and wholesaler data obtained from industry-accepted, third-party data sources. These third-party data projections may not accurately reflect actual prescriptions or trade levels of inventory. If this data turns out to be inaccurate or unreliable and our controls are not effective, there could be an adverse effect on our ability to properly manage inventory and our financial performance.

RISKS RELATED TO OUR INDUSTRY

Health care insurers, the government and other payers may not pay for our products or may impose limits on reimbursement.

Our ability to commercialize ANTARA capsules, FACTIVE tablets, Ramoplanin and our future products will depend, in part, on the extent to which reimbursement for such products will be available from third-party payers, such as Medicare, Medicaid, health maintenance organizations, health insurers and other public and private payers. We cannot assure you that third-party payers will pay for such products or will establish and maintain price levels sufficient for realization of an appropriate return on our investment in product development. If government and private payers do not cover our products or do not reimburse for use of our products at adequate reimbursement levels, our products may fail to achieve market acceptance and our results of operations may be materially adversely affected. Under the Medicare Part D outpatient prescription drug benefit, Medicare beneficiaries (primarily the elderly over 65 and the disabled) may enroll in private drug plans. There are multiple types of Part D plans and numerous plan sponsors, each with its own formulary and product access requirements. The plans have considerable discretion in establishing formularies and tiered co-pay structures and in placing prior authorization and other restrictions on the utilization of specific products. In addition, Part D plan sponsors are permitted and encouraged to negotiate rebates with manufacturers. The profitability of our products may depend on the extent to which they enjoy preferred status on the formularies of a significant portion of the largest Part D prescription drug plans. Our ability to obtain such preferred status on favorable economic terms cannot be assured. Additionally, the Part D program has been the subject of much controversy since its enactment in 2003, and significant amendments, including an amendment to authorize the Federal Government to directly negotiate drug prices with manufacturers, are possible. Such amendments could adversely affect our anticipated revenues and results of operations, possibly materially.

Most state Medicaid programs have established preferred drug lists, or PDLs, and the process, criteria and timeframe for obtaining placement on the PDL varies from state to state. Under the Medicaid drug rebate program, a manufacturer must pay a rebate for Medicaid utilization of a product. The rebate for an innovator product is based on the greater of (i) 15.1% of the product’s average manufacturer price (AMP) or (ii) the difference between the product’s AMP and the best price offered by the manufacturer, plus an inflation adjustment if AMP increases faster than inflation. In addition, many states have established supplemental rebate programs as a condition for including a drug product on a PDL. The profitability of our products may depend on the extent to which they appear on the PDLs of a significant number of state Medicaid programs and the amount of the rebates that must be paid to such states. In addition, there is significant fiscal pressure on the Medicaid program, and amendments to lower the pharmaceutical costs of the program and/or lower manufacturers’ rebate liability are possible. Such amendments could adversely affect our anticipated revenues and results of operations, possibly materially.

As a part of the effort to control the costs of prescription drugs, many health maintenance organizations and other third-party payers use formularies, or lists of drugs for which coverage is provided under their benefit plans. Each payer that maintains a drug formulary makes its own determination as to whether a drug will be included in the formulary and whether particular drugs in a therapeutic class will have preferred status over other drugs in the same class. This determination often involves an assessment of the clinical appropriateness of the drug and sometimes the cost of the drug in comparison to alternative products. We cannot assure you that ANTARA capsules, FACTIVE tablets, Ramoplanin or any of our future products will be added to payers’ formularies, whether our products will have preferred status over alternative therapies, nor whether the formulary decisions will be made in a timely manner. We may also decide to enter into discount or formulary fee arrangements with payers, which could result in our receiving lower or discounted prices for our products.

If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, we could be forced to pay substantial damage awards.

The use of any of our product candidates in clinical trials, and the sale of any approved products, might expose us to product liability claims. We currently maintain, and we expect that we will continue to maintain, product liability insurance coverage in the amount of $10.0 million per occurrence and $10.0 million in the aggregate. Such insurance coverage might not protect us against all of the claims to which we might become subject. We might not be able to maintain adequate insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against potential losses. In the event a claim is brought against us, we might be required to pay legal and other expenses to defend the claim, as well as uncovered damage awards resulting from a claim brought successfully against us. Furthermore, whether or not we are ultimately successful in defending any such claims, we might be required to direct financial and managerial resources to such defense and adverse publicity could result, all of which could harm our business.

In addition, a product recall or excessive warranty claims (in any such case, whether arising from manufacturing deficiencies, labeling errors or other safety or regulatory reasons) could have an adverse effect on our product sales or require a change in the indications for which our products may be used.

RISKS RELATED TO THE NOTES

The value of the guarantee and the collateral securing the 2011 notes may not be sufficient to satisfy obligations under the 2011 notes.

The 2011 notes will be guaranteed by our subsidiary Guardian II and this guarantee will be secured by a second priority lien on the collateral described in this prospectus. The collateral also secures, on a first priority lien basis, our obligations under the $20.0 million aggregate principal amount 12% senior secured note due August 2010 and interest accrued thereon (the “Paul Capital Note”) and our and Guardian II’s obligations to Paul Capital under the revenue interests assignment agreement. In the event of foreclosure on the collateral, the proceeds from the sale of the collateral securing indebtedness under the 2011 notes may not be sufficient to satisfy the 2011 notes because proceeds from a sale of the collateral would be distributed first to satisfy indebtedness under the Paul Capital Note and ours and Guardian II’s payment obligation under the revenue interests assignment agreement. Only after all of Guardian II’s obligations under the first priority lien have been satisfied will proceeds from the sale of collateral be available to holders of the 2011 notes.

No appraisals of any collateral have been prepared in connection with this exchange offer. The value of the collateral and the amount to be received upon a sale of the collateral will depend upon many factors including, among others, the condition of the collateral and our industry, the ability to sell the collateral in an orderly sale, the condition of the international, national and local economies, the availability of buyers, the availability of credit to a buyer and similar factors. The book value of the collateral should not be relied on as a measure of realizable value for such assets. A substantial portion of the collateral consists of certain license rights to sell ANTARA and by their nature, such portions of the collateral may be illiquid and may have no readily ascertainable market value. As discussed in “Risk Factor” – “Lupin Limited’s and Orchid Healthcare’s Paragraph IV certifications under the

Hatch-Waxman Act related to ANTARA and FACTIVE respectively could have a material adverse effect on our financial condition and results of operations, as it could result in the introduction of a generic products prior to the expiration of the patents covering ANTARA and FACTIVE, as well as in significant legal expenses and diversion of management time,” in the event of foreclosure on the collateral, the value of such collateral and the amount of any proceeds distributed following a sale of such collateral, could be materially impaired by the pending litigation or introduction of generic versions of ANTARA. In addition, a significant portion of the collateral includes assets that may only be usable, and thus retain value, as part of our existing operating businesses. Accordingly, any such sale of the collateral separate from the sale of certain operating businesses may not be feasible or of significant value.

There is no market for the 2011 notes, an active trading market for the 2011 notes may not develop, you may not be able to sell the 2011 notes at a price acceptable to you, and the 2011 notes are not fungible with the 2011 notes which were exchanged in November 2011.

There is no public market for the 2011 notes and we do not intend to apply for listing of the 2011 notes on any national exchange or quotation system. We cannot assure you of the liquidity of any markets that may develop for the 2011 notes, your ability to sell the 2011 notes or the price at which you may be able to sell the 2011 notes. In addition, we do not know whether an active trading market will ever develop for the 2011 notes. While the 2011 notes are issued under the same indenture as the 2011 notes which were exchanged in November 2008 (the “prior 2011 notes”) and generally have the same stated economic terms as the prior 2011 notes, the tax characteristics of the 2011 notes are as described in “Material United States Federal Income Tax Consequences” and will differ from the tax characteristics of the prior 2011 notes. In addition, it is anticipated that the 2011 notes will have a different CUSIP than the prior 2011 notes. On account of the foregoing, holders of 2011 notes should be aware that the 2011 notes are not fungible with the prior 2011 notes. If a market for the 2011 notes were to develop, the 2011 notes could trade at prices that may be higher or lower than the principal amount. Additionally, there is a risk that the liquidity of, and the trading market for, the 2011 notes will be limited if few 2011 notes are issued. If only a limited number of 2011 notes are outstanding, it may be more difficult for a market to develop in the 2011 notes and any market that does develop may be less liquid than would be the case if more 2011 notes were outstanding. The liquidity of the trading market for the 2011 notes, if any, and the market price quoted for the 2011 notes may be adversely affected by changes in interest rates for comparable securities, by changes in our financial performance or prospects and by declines in the price of our common shares, as well as by declines in the prices of securities, or the financial performance or prospects of similar companies.

If you hold 2011 notes, you will not be entitled to any rights with respect to our common stock, but you will be subject to all changes made with respect to our common stock.

If you hold 2011 notes, you will not be entitled to any rights with respect to our common stock (including voting rights and rights to receive any dividends or other distributions on our common stock), but you will be subject to all changes affecting the common stock. You will have rights with respect to our common stock only if and when your notes are converted. For example, in the event that an amendment is proposed to our articles of organization or by-laws requiring stockholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to delivery of the common stock to you, you will not be entitled to vote on the amendment, although you will nevertheless be subject to any changes in the powers, preferences or special rights of our common stock.

We may be unable to repay or repurchase the 2011 notes or our other indebtedness.

At maturity, the entire outstanding principal amount of the 2011 notes will become due and payable. In addition, if a fundamental change, as defined under “Description of the 2011 Notes—Repurchase of the 2011 notes at the option of holders upon a fundamental change,” occurs, you may require us to repurchase all or a portion of your 2011 notes. We may not have sufficient funds or may be unable to arrange for additional

financing to pay the repurchase price of the 2011 notes or the principal amount due at maturity. Any future borrowing arrangements or debt agreements to which we become a party may contain restrictions on or prohibitions against our redemption or repurchase of the 2011 notes. If we are prohibited from redeeming or repurchasing the 2011 notes, we could try to obtain the consent of lenders under those arrangements, or we could attempt to refinance the borrowings that contain the restrictions. If we do not obtain the necessary consents or refinance the borrowings, we will be unable to repurchase the 2011 notes. Such a failure would constitute an event of default under the 2011 notes indenture which could, in turn, constitute a default under the terms of our other indebtedness.

The price of our common stock, and therefore the price of the 2011 notes, may fluctuate significantly, which may make it difficult for holders to resell the 2011 notes or the common stock issuable upon conversion of the 2011 notes when desired or at attractive prices.

The market price of our convertible notes will be affected significantly by the market price of our common stock. The market price of our common stock is subject to significant fluctuations in response to the factors in this section and other factors, including:

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the revenues that we may derive from the sale of ANTARA capsules and FACTIVE tablets, as compared to analyst estimates;

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our ability to enter into transactions to acquire, license or co-promote additional products;

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whether we will be able to successfully integrate any additional products that we acquire, license or co-promote into our sales and marketing efforts;

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the timing of the achievement of our development milestones and other payments under our strategic alliance agreements;

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termination of, or an adverse development in, our strategic alliances;

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our ability to defend our products from generic attack;

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conditions and publicity regarding the biopharmaceutical industry generally;

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our ability to continue to be listed on The NASDAQ Global Markets;

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price and volume fluctuations in the stock market at large which do not relate to our operating performance;

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variations in our rates of product returns, allowances and rebates and discounts;

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the results of any clinical trials that we may conduct and the pace of our progress in those clinical trials;

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the results of clinical trials conducted by potential partners for Ramoplanin or products developed from any of our legacy alliances and the pace of our progress in those clinical trials;

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our ability to obtain financing to meet future operating cash flow requirements;

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sales of shares of our common stock in the public market and low trading volume of our common stock; and

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comments by securities analysts, or our failure to meet market expectations, including our projected financial performance.

Over the two-year period ending December 31, 2008, the closing price of our common stock as reported on the NASDAQ Global Market ranged from a high of $7.74 to a low of $0.18. The stock market has from time to

time experienced extreme price and volume fluctuations that are unrelated to the operating performance of particular companies. In the past, companies that have experienced volatility have sometimes been the subject of securities class action litigation. If litigation were instituted on this basis, it could result in substantial costs and a diversion of management’s attention and resources. These broad market fluctuations may adversely affect the price of our securities, regardless of our operating performance. Because the 2011 notes are convertible into shares of our common stock, volatility of or depressed prices for our common stock could have a similar effect on the trading price of the 2011 notes. A decline in our common stock price may cause the value of the 2011 notes to decline. Holders who receive common stock upon conversion of the 2011 notes also will be subject to the risk of volatility and depressed prices of our common stock.

We may issue additional equity securities and thereby materially and adversely affect the price of our common stock.

Sales of substantial amounts of shares of our common stock in the public market after this offering, or the perception that those sales may occur, could cause the market price of our common stock to decline. The 2011 notes indenture does not restrict our ability to issue additional shares of common stock or other securities convertible into or exchangeable for our common stock. We have used and may continue to use our common stock or securities convertible into or exchangeable for our common stock to acquire technology, product rights or businesses, or for other purposes. Our authorized capital stock consists of 175,000,000 shares of common stock, par value $0.10 per share, which includes 625,000 shares of common stock designated as series B restricted common stock. As of February 6, 2009, we had approximately 37,209,398 shares of common stock outstanding and no shares of series B restricted stock outstanding. If we issue additional equity securities, the price of our common stock and, in turn, the price of the 2011 notes may be materially and adversely affected.

Conversion of our convertible notes will dilute the ownership interests of existing stockholders.

The conversion of some or all of our convertible notes will dilute the ownership interest of our existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of our convertible notes may encourage short selling by market participants because the conversion of notes could depress the price of our common stock and short selling by 2011 Note holders engaging in hedging transactions which could further depress the price of our common stock.

The 2011 notes indenture provides restrictions on our ability to incur additional debt which could prevent our ability to raise additional capital.

The 2011 notes indenture provides only limited restrictions on our ability to incur additional debt and does not limit our ability to take other actions that could negatively impact holders of the 2011 notes.

The 2011 notes indenture provides that we may not incur additional indebtedness in excess of $50 million (“Permitted Indebtedness”) from the earlier of (i) the date that is one year from the date on which our common stock has traded at a price which exceeds the conversion price then in effect for at least 20 trading days during any consecutive 30 trading day period and (ii) the first anniversary of the maturity date of the 2011 notes; provided that, any indebtedness incurred to finance new product acquisition or in connection with any refinancing of Permitted Indebtedness, our existing indebtedness including existing 2011 notes not tendered in our exchange offer, our obligations to PRF under the Paul Capital Note, revenue interests assignment agreement and our obligations under the amended 5% Convertible Promissory Notes due 2009 which these notes are being issued and the 2011 notes shall not be counted toward the aforementioned limit. The 2011 notes indenture otherwise does not limit the amount or kind of debt that may be incurred by us or any of our subsidiaries and we are not otherwise limited from incurring additional indebtedness, including senior indebtedness or secured debt. In addition, the limited covenants applicable to the 2011 notes do not restrict our ability to pay dividends, issue or repurchase stock or other securities or require us to achieve or maintain any minimum financial results relating to our financial position or results of operations. Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the 2011 notes could have the effect of diminishing our ability to make payments on the 2011 notes when due. In addition, the indenture for the 2011 notes does not afford protection to holders of the notes in the event of a fundamental change except to the extent described under “Description of the 2011 Notes—Conversion rate adjustment on a fundamental change” and “Description of the 2011 Notes—Repurchase of the 2011 notes at the option of holders upon a fundamental change.”

The conversion rate adjustment that may be made in connection with a transaction constituting a fundamental change may not adequately compensate you for the lost option value of your 2011 notes as a result of such fundamental change.

In connection with a fundamental change, we may be required to increase the conversion rate for the 2011 notes surrendered for conversion. The conversion rate adjustment is described under “Description of the 2011 Notes—Conversion rate adjustment on a fundamental change.” The conversion rate adjustment is designed to compensate you for the lost option value of your notes as a result of certain fundamental changes; such increases are only an approximation of such lost value and may not adequately compensate you for such loss. In addition, even if a fundamental change occurs, in some cases there may be no such conversion rate adjustment. See “Description of the 2011 Notes—Conversion rate adjustment on a fundamental change.”

If we automatically convert the 2011 notes, there is a risk of fluctuation in the price of our common stock from the date we elect to automatically convert the 2011 notes to the automatic conversion date.

We may elect to automatically convert the 2011 notes on or prior to maturity if the closing price of our common stock has exceeded 130% of the conversion price of the 2011 notes then in effect for at least 20 trading days during any 30 consecutive trading day period ending within five trading days prior to the notice of automatic conversion. However, there is a risk of fluctuation in the price of our common stock between the time when we may first elect to automatically convert the 2011 notes and the automatic conversion date. This period must be at least 20 days and not more than 30 days prior to the automatic conversion date. As a result of any such fluctuation in the price of our common stock, the aggregate conversion value you actually receive upon any automatic conversion of the 2011 notes may be less than the principal amount of the 2011 notes.

Rating agencies may provide unsolicited ratings on the 2011 notes that could cause the market value or liquidity of the 2011 notes to decline.

We have not requested a rating of the 2011 notes from any rating agency and believe it is unlikely that the 2011 notes will be rated. However, if one or more rating agencies rate the 2011 notes and assign the notes a rating lower than the rating expected by investors, or reduces their rating in the future, the market price or liquidity of the 2011 notes and our common stock could be harmed.

Your right to recover amounts under the second priority lien will be junior to amounts recovered in respect of the first priority liens and rank equally with the outstanding $87.2 million of existing 12.50% Convertible Guaranteed Senior Notes Due 2011.

The second priority liens will rank behind all of the first priority liens. Additionally, your rights to recover amounts as a second lien holder will rank equally and be without preference to the holders of our presently existing 12.50% Convertible Guaranteed Senior Notes due 2011. Upon any distribution to our creditors in a bankruptcy, liquidation, reorganization or similar proceedings, the beneficiaries of the first priority liens will be entitled to be paid in full before any payment will be made on the second priority liens.

The 2011 notes will only be guaranteed by our subsidiary Guardian II and are not secured by any assets of the Company.

The 2011 notes will be guaranteed by our subsidiary Guardian II and this guarantee will be secured by a second priority lien on substantially all of the assets of Guardian II. The 2011 notes are not secured by any assets of the Company. The Company may acquire assets in the future and the holders of the 2011 notes would have no security interests in any such assets. The Company may also in the future secure other indebtedness with its assets or assets that it may acquire and the holders of the 2011 notes would not have any security interest therein.

We are permitted to incur additional indebtedness which will be secured by the second priority lien and is on parity with the 2011 notes.

Pursuant to the Intercreditor Agreement which governs the rights between the first and second lien holders, we are permitted to incur additional indebtedness which will be secured by the second priority lien and will be on parity with the 2011 notes. Approximately $213 million in aggregate principal amount, or 94.4% of the total outstanding amount of the 3.50% Convertible Senior Notes due 2011 was tendered in the exchange offer and accordingly, we issued approximately $87.2 million in aggregate principal amount of our 12.50% Convertible Guaranteed Senior Notes due 2011 as part of our exchange offer completed on November 25, 2008. In addition, we issued under the 2011 notes indenture a 2011 note in a principal amount of $2,000,000 to Paul Capital which was not be registered. We are permitted to incur indebtedness under the Intercreditor Agreement up to an additional $53 million, thus totaling $140,000,000. To the extent we issue additional indebtedness on parity with the 2011 notes that is secured by the same assets as the 2011 notes, this will reduce the proceeds available to satisfy the obligations under the 2011 notes. See “Description of the 2011 Notes—Intercreditor Agreement.”

Federal and state statutes allow courts, under specific circumstances, to void guarantees and require holders of the 2011 notes to return payments received from guarantors.

Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor, if the guarantor at the time it incurred the indebtedness evidenced by its guarantee:

•

received less than reasonably equivalent value or fair consideration for the incurrence of its guarantee and was insolvent or rendered insolvent by reason of such incurrence;

•

was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or

•

intended to incur, or believed that it would incur, debts beyond its ability to pay those debts as they mature.

The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:

•

the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;

•

the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

•

it could not pay its debts as they become due.

We cannot assure you as to what standard a court would apply in determining whether a guarantor would be considered to be insolvent. If a court determined that a guarantor was insolvent after giving effect to the guarantee, it could void the guarantee of the 2011 notes by Guardian II and require you to return any payments received from Guardian II.

The Intercreditor agreement will substantially limit the rights of the holders of the 2011 notes with respect to the collateral securing the 2011 notes and holders of the 2011 notes will not control decisions regarding collateral.

The rights of the holders of the 2011 notes with respect to the collateral securing the guarantee on the 2011 notes will be substantially limited pursuant to the terms of the provisions of the Intercreditor agreement. Under the Intercreditor Agreement, at any time the obligations that have the benefit of the first priority liens are outstanding, any actions that may be taken in respect of the collateral, including the ability to cause the commencement of enforcement proceedings against the collateral and to control the conduct of such proceedings, the approval of amendments to, releases of collateral from the lien of, and waivers of past defaults under, the collateral documents, will be at the direction of the holders of the obligations secured by the first priority liens. The trustee and the collateral agent, on behalf of the holders of the 2011 notes, will not have the ability to control or direct such actions, even if the rights of the holders of the 2011 notes are adversely affected. Additional releases of collateral from the second priority lien securing the 2011 notes are permitted under some circumstances.

The holders of the first priority liens will control substantially all matters related to the collateral securing the guarantee. They may cause the security agent to dispose of, release, or foreclose on, or take other actions with respect to, the collateral with which noteholders may disagree or that may be contrary to the interests of noteholders.

Bankruptcy laws may limit your ability to realize value from the collateral.

The right of the collateral agent to repossess and dispose of the collateral upon the occurrence of an event of default under the indenture governing the 2011 notes is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy case were to be commenced by or against us before the collateral agent repossessed and disposed of the collateral. Upon the commencement of a case under the bankruptcy code, a secured creditor such as the collateral agent is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from such debtor, without bankruptcy court approval,

which may not be given. Moreover, the bankruptcy code permits the debtor to continue to retain and use collateral even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor’s interest in the collateral as of the commencement of the bankruptcy case and may include cash payments or the granting of additional security if and at such times as the bankruptcy court in its discretion determines that the value of the secured creditor’s interest in the collateral is declining during the pendency of the bankruptcy case. A bankruptcy court may determine that a secured creditor may not require compensation for a diminution in the value of its collateral if the value of the collateral exceeds the debt it secures.

In view of the lack of a precise definition of the term “adequate protection” and the broad discretionary power of a bankruptcy court, it is impossible to predict:

•

how long payments under the 2011 notes could be delayed following commencement of a bankruptcy case;

•

whether or when the collateral agent could repossess or dispose of the collateral;

•

the value of the collateral at the time of the bankruptcy petition; or

•

whether or to what extent holders of the 2011 notes would be compensated for any delay in payment or loss of value of the collateral through the requirement of “adequate protection.”

In addition, the intercreditor agreement provides that, in the event of a bankruptcy, the trustee, as the collateral agent for the 2011 notes, may not object to a number of important matters following the filing of a bankruptcy petition so long as any first lien debt is outstanding. After such a filing, the value of the collateral securing the 2011 notes could materially deteriorate and you would be unable to raise an objection. The right of the holders of obligations secured by first priority liens on the collateral to foreclose upon and sell the collateral upon the occurrence of an event of default also would be subject to limitations under applicable bankruptcy laws if we or any of our subsidiaries become subject to a bankruptcy proceeding.

Any disposition of the collateral during a bankruptcy case would also require permission from the bankruptcy court. Furthermore, in the event a bankruptcy court determines the value of the collateral is not sufficient to repay all amounts due on first priority lien debt and, thereafter, the 2011 notes, the holders of the 2011 notes would hold a secured claim to the extent of the value of the collateral to which the holders of the 2011 notes are entitled and unsecured claims with respect to such shortfall. The bankruptcy code only permits the payment and accrual of post-petition interest, costs and attorney’s fees to a secured creditor during a debtor’s bankruptcy case to the extent the value of its collateral is determined by the bankruptcy court to exceed the aggregate outstanding principal amount of the obligations secured by the collateral.

Rights of holders of 2011 notes in the collateral may be adversely affected by the failure to perfect security interests in certain collateral.

The security interests in the collateral securing the guarantee on the 2011 notes includes assets, both tangible and intangible, whether now owned by Guardian II or acquired by Guardian II in the future. Applicable law requires that certain property and rights acquired after the grant of a general security interest can only be perfected at the time such property and rights are acquired and identified. There can be no assurance that the trustee and the collateral agent will monitor, or that we will inform the future acquisition of property and rights that constitute collateral, and that the necessary action will be taken to properly perfect the security interest in such after acquired collateral.

Adjustments to the conversion rate of the 2011 notes may result in a taxable distribution to you.

Although to date we have never paid cash dividends on our common stock, if in the future we pay a cash dividend on our common stock and there is a resulting adjustment to the conversion price, a note holder could be deemed to have received a taxable dividend subject to U.S. federal income tax without the receipt of any cash. Other adjustments in the conversion ratio (or failures to make such adjustments) that have the effect of increasing your proportionate interest in our assets or earnings may have the same result. Any such deemed dividends would be taxable as described in “Material United States Federal Income Tax Consequences.”

You will be required to pay U.S. federal income tax on the 2011 notes even if we do not pay cash interest.

Because the 2011 notes provide us with the option to pay interest either (i) in cash or (ii) by (A) increasing the principal amount of the 2011 notes or (B) issuing additional 2011 notes, the 2011 notes will be treated as issued with original issue discount, or OID, for U.S. federal income tax purposes. Holders of 2011 notes will be required to include the OID in gross income on a constant yield to maturity basis, regardless of whether the interest is paid currently in cash. It is generally expected that the amount of OID includible in a holder’s gross income will correspond to the stated interest payments provided by the 2011 notes. See “Material United States Federal Income Tax Consequences.”

The Internal Revenue Service may challenge the status of the 2011 notes as debt for U.S. federal income tax purposes.

The status of the 2011 notes as debt for U.S. federal income tax purposes depends upon a number of factors. While we intend to take the position that the 2011 notes are debt for this purpose, there can be no assurance that the Internal Revenue Service will not successfully challenge this position. If the 2011 notes were not treated as debt for U.S. federal income tax purposes, the tax consequences to the holders of 2011 notes could be materially different from that described below in “Material United States Federal Income Tax Considerations.”

RISKS RELATED TO THE SECURITIES MARKET

Our stock price is highly volatile.

The market price of our stock has been and is likely to continue to be highly volatile due to the risks and uncertainties described herein, as well as other factors, including:

•

the revenues that we may derive from the sale of ANTARA capsules and FACTIVE tablets, as compared to analyst estimates or to our own guidance;

•

our ability to enter into transactions to acquire, license or co-promote additional products;

•

our ability to defend our products from generic attack and litigation relating to such matters;

•

whether we will be able to successfully integrate any additional products that we acquire, license or co-promote into our sales and marketing efforts;

•

the timing of the achievement of development milestones and other payments under our strategic alliance agreements;

•

termination of, or an adverse development in, our strategic alliances;

•

conditions and publicity regarding the pharmaceutical industry generally;

•

our ability to continue to be listed on The NASDAQ Global Market;

•

price and volume fluctuations in the stock market at large which do not relate to our operating performance;

•

variations in our rates of product returns, allowances and rebates and discounts;

•

sales of shares of our common stock in the public market;

•

comments by securities analysts, or our failure to meet market expectations, including our projected financial performance;

•

our ability to obtain financing necessary to meet future operating cash flow requirements;

•

the results of any clinical trials that we may conduct and the pace of our progress in those clinical trials; and

•

the results of clinical trials conducted by partners for Ramoplanin or products developed from any of our legacy alliances and the pace of progress in those clinical trials.

Over the two-year period ending September 30, 2008 the closing price of our stock as reported on The NASDAQ Global Market ranged from a high of $9.12 to a low of $0.72. The stock market has from time to time experienced extreme price and volume fluctuations that are unrelated to the operating performance of particular companies. In the past, companies that have experienced volatility have sometimes been the subject of securities class action litigation. If litigation were instituted on this basis, it could result in substantial costs and a diversion of management’s attention and resources. These broad market fluctuations may adversely affect the price of our securities, regardless of our operating performance.

Multiple factors beyond our control may cause fluctuations in our operating results and may cause our stock price to fall.

Our revenues and results of operations may fluctuate significantly, depending on a variety of factors, including the following:

•

the pace of our commercialization of ANTARA capsules and FACTIVE tablets, and in the case of FACTIVE, seasonal fluctuations in the duration and severity of the annual respiratory tract infection season;

•

the level of acceptance by physicians and third party payers of ANTARA and FACTIVE;

•

expenses related to, and the results of, litigation and other proceedings relating to intellectual property rights including the Lupin litigation;

•

our success in concluding transactions to acquire additional approved products and product candidates, and the pace of our commercialization of such additional products;

•

the introduction of new products and services by our competitors;

•

regulatory actions;

•

the progress of any future clinical trials for our products; and

•

the progress of any clinical trials conducted by partners for Ramoplanin or products developed through our legacy alliances.

We will not be able to control many of these factors. In addition, if our revenues in a particular period do not meet expectations, we may not be able to adjust our expenditures in that period, which could cause our business to suffer and may cause our stock price to fall. We believe that period-to-period comparisons of our financial results will not necessarily be meaningful. You should not rely on these comparisons as an indication of our future performance. If our operating results in any future period fall below the expectations of securities analysts and investors, our stock price may fall, possibly by a significant amount.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained herein related to our anticipated revenue increases for the fiscal year December 31, 2008 and the relative contributions of ANTARA and FACTIVE to such revenues, our anticipated cash utilization and the sufficiency of our cash resources, our discount and rebate programs for ANTARA and FACTIVE, the possible partnering or other strategic opportunities for the continued development of Ramoplanin, our plans to work with the FDA to implement any necessary changes to the FACTIVE labeling, the potential marketing approval of FACTIVE in Europe, the possibility of acquiring a third product, our ability to raise additional funds and/or refinance our maturing and existing debt and to fund operations, as well as other statements related to the progress and timing of product development, present or future licensing, collaborative or financing arrangements or that otherwise relate to future periods, are forward-looking statements. These statements represent, among other things, the expectations, beliefs, plans and objectives of management and assumptions underlying or judgments concerning the future financial performance and other matters discussed in this prospectus. The words “may,” “will,” “should,” “plan,” “believe,” “estimate,” “intend,” “anticipate,” “project,” and “expect” and similar expressions are intended to identify forward-looking statements. All forward-looking statements involve certain risks, estimates, assumptions, and uncertainties with respect to future revenues, cash flows, expenses and the cost of capital, among other things.

Some of the important risk factors that could cause our actual results to differ materially from those expressed in our forward-looking statements are included under the heading “Risk Factors” in this prospectus. We encourage you to read these risks carefully. We caution investors not to place significant reliance on the forward-looking statements contained in this prospectus. These statements, like all statements in this prospectus, speak only as of the date of this prospectus (unless another date is indicated) and we undertake no obligation to update or revise forward-looking statements.

USE OF PROCEEDS

The selling securityholders will receive all of the proceeds from the sale of the 2011 notes and the common stock offered by this prospectus. We will not receive any proceeds.

DIVIDEND POLICY

We have not paid any dividends since our inception and presently anticipate that all earnings, if any, will be retained for development of our business and that no dividends on our common stock will be declared in the foreseeable future. Any future dividends will be subject to the discretion of our Board of Directors and will depend upon, among other things, future earnings, the operating and financial condition of our company, our capital requirements and general business conditions.

MARKET PRICE OF COMMON STOCK AND RELATED MATTERS

Our common stock is traded on the NASDAQ Global Market under the symbol “OSCI”. As of September 30, 2008, there were approximately 1,342 shareholders of record of our common stock. The table below sets forth the range of high and low sale prices for each fiscal quarter during 2006 and 2007 and through December 31, 2008, as reported by the NASDAQ Global Market.


	High		Low
Year ended December 31, 2006 (1)
First Quarter	$	22.48	$	14.16
Second Quarter	$	16.32	$	6.16
Third Quarter	$	11.60	$	4.40
Fourth Quarter	$	9.44	$	4.15

Year ended December 31, 2007
First Quarter	$	5.50	$	4.10
Second Quarter	$	7.78	$	4.45
Third Quarter	$	4.75	$	2.48
Fourth Quarter	$	3.27	$	1.16

Year ended December 31, 2008
First Quarter	$	2.30	$	1.06
Second Quarter	$	2.84	$	1.38
Third Quarter	$	1.53	$	0.70
Fourth Quarter	$	1.15	$	0.15

Year ended December 31, 2009
First Quarter (through February 12, 2009)	$	0.30	$	0.16

(1)	High and low sale prices adjusted to reflect one-for-eight reverse stock split effected on November 15, 2006.

The last reported sales price of our common stock on The NASDAQ Global Market on February 12, 2009 was $0.19.

RATIO OF EARNINGS TO FIXED CHARGES

The following table sets forth our historical deficiency of earnings available to cover fixed charges for each of our most recent fiscal years and the periods ended September 30, 2008 and 2007.


	Nine months ended September 30,						Year ended December 31,
	2008			2007			2007			2006			2005			2004			2003
							(in thousands)
Deficiency of earnings available to cover fixed charges (1)(2)	$	(53,229	)	$	(15,182	)	$	(29,469	)	$	(78,298	)	$	(88,628	)	$	(93,479	)	$	(29,388	)

(1)	Earnings were inadequate to cover fixed charges. We needed additional earnings, as indicated by the deficiency of earnings available to cover fixed charges for each of the periods presented above, to achieve a ratio of earnings to fixed charges of 1.0x.

(2)	The deficiency of earnings available to cover fixed charges is computed by subtracting fixed charges from earnings before income taxes and minority interest plus fixed charges. Fixed charges consist of interest expense plus that portion of net rental expense deemed representative of interest.

SELECTED HISTORICAL FINANCIAL DATA

AND PRO FORMA FINANCIAL STATEMENTS

Selected Historical Financial Data

The following table presents our selected historical financial data. You should read carefully the financial statements included in this prospectus, including the notes to the financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected financial data in this section are not intended to replace the financial statements. We derived the statement of operations data for the years ended December 31, 2007, 2006 and 2005 and the balance sheet data as of December 31, 2007 and 2006 from our audited financial statements, which are included elsewhere in this prospectus. We derived the statement of operations data for the years ended December 31, 2004 and 2003 and the balance sheet data as of December 31, 2005, 2004 and 2003 from our audited financial statements which are not included herein. The consolidated statement of operations data for the nine months ended September 30, 2008 and 2007 and the consolidated balance sheet data as of September 30, 2008 and 2007 are derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus and in the opinion of the Company’s management, includes all adjustments necessary for a fair presentation of results for the interim periods. Historical results are not necessarily indicative of future results. See the notes to the financial statements for an explanation of the method used to determine the number of shares used in computing basic and diluted net loss per common share.


	For the Nine Months Ended September 30,						For the Year Ended December 31,
	2008			2007			2007			2006(3)			2005			2004(4)			2003
	(in thousands, except per share data)
	(unaudited)
Statement of Operations Data:
Revenues:
Product sales	$	60,156		$	53,262		$	78,458		$	38,244		$	20,458		$	4,067			—
Co-promotion		—			—			—			6,890			2,954			—			—
Biopharmaceutical/other		282			1,418			1,511			1,018			197			2,546			7,009

Total revenues (1)		60,438			54,680			79,969			46,152			23,609			6,613			7,009
Costs of product sales and operating expenses		89,895			86,823			117,965			118,071			112,281			97,229			39,943

Loss from operations		(29,457	)		(32,143	)		(37,996	)		(71,919	)		(88,672	)		(90,616	)		(32,934	)
Net other (expense) income		(23,457	)		17,284			8,527			(6,379	)		44			(2,863	)		3,546

(Loss) income from continuing operations before income tax		(52,914	)		(14,859	)		(29,469	)		(78,298	)		(88,628	)		(93,479	)		(29,388	)
Provision for income tax		(315	)		(323	)		(384	)		(179	)		—			—			—

Net (loss) income from continuing operations		(53,229	)		(15,182	)		(29,853	)		(78,477	)		(88,628	)		(93,479	)		(29,388	)
Income (loss) from discontinued operations		—			—			—			—			35			208			(401	)

Net (loss) income	$	(53,229	)	$	(15,182	)	$	(29,853	)	$	(78,477	)	$	(88,593	)	$	(93,271	)	$	(29,789	)

Net (loss) income per common share: basic and diluted (2)	$	(3.86	)	$	(1.12	)	$	(2.19	)	$	(6.58	)	$	(9.26	)	$	(10.61	)	$	(9.06	)

Weighted average common shares outstanding: basic (2)		13,776			13,591			13,601			11,925			9,569			8,794			3,286

Weighted average common shares outstanding: diluted (2)		13,776			13,591			13,601			11,925			9,569			8,794			3,286

Balance Sheet Data:
Cash and cash equivalents, restricted cash, and long and short-term marketable securities	$	28,976		$	61,246		$	52,466		$	44,808		$	80,044		$	176,628		$	28,665
Working capital		(11,376	)		49,023			42,011			40,444			77,750			156,021			18,897
Total assets		234,659			282,427			274,184			279,407			241,095			340,560			40,516
Long-term liabilities		258,714			265,747			269,179			250,977			191,289			193,397			292
Shareholders’ (deficit) equity		(80,706	)		(14,714	)		(28,715	)		(1,996	)		28,101			114,400			29,940
Net book value per common share (2)	$	(5.66	)	$	(1.06	)	$	(2.07	)	$	(0.15	)	$	2.91		$	12.07		$	7.61

(1)	Does not include revenue from discontinued operations related to our genomics business.

(2)	Adjusted to account for the effect of the 1-for-8 reverse stock split effectuated on November 15, 2006.

(3)	We acquired the ANTARA assets on August 18, 2006.

(4)	We completed a merger with Genesoft on February 6, 2004.

Unaudited Pro Forma Financial Statements

Exchange of 2011 Notes

On November 25, 2008, the Company completed an exchange offer (the “Exchange Offer”) in which the Company issued an aggregate principal amount of $85,184,000 12.50% Convertible Guaranteed Senior Notes due 2011 (the “12.50% Notes due 2011”) and 21,310,549 shares of the Company’s common stock were issued in exchange for an aggregate principal amount of $212,979,000 in aggregate principal amount of the Company’s 3.50% Convertible Senior Notes due 2011 (the “3.50% Notes due 2011”).

The Company applied guidance as set forth in Emerging Issues Task Force (“EITF”) Issue No. 02-4 “Determining Whether a Debtor’s Modification or Exchange of Debt Instruments is within the Scope of FASB Statement No. 15” and Statement of Financial Accounting Standards No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings” (“SFAS No. 15”), Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS No. 133”), EITF Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” and EITF Issue No. 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”. The Exchange Offer is being accounted for as a troubled debt restructuring in accordance with EITF Issue No. 02-4 and SFAS No. 15. As a result, the carrying value of the 12.50% Notes due 2011 will be equal to the sum of all future cash flows on the notes due, including interest payments. Accordingly, all future interest expense and debt issuance costs will be accrued upon the date of the Exchange Offer as a reduction to the gain on extinguishment of the 3.5% Notes due 2011 and no future interest or amortization expense associated with the 12.50% Notes due 2011 will be recognized. The 12.50% Notes due 2011 contain other features which may be considered embedded derivatives which would require separate accounting. The Company will evaluate these features in connection with the preparation of its consolidated financial statements as of and for the year ended December 31, 2008.

On November 25, 2008 the Company, along with its wholly-owned subsidiary, Guardian II Acquisition Corporation (“Guardian II”) amended the Revenue Interests Assignment Agreement (the “Amendment”) with Paul Royalty Fund Holdings II (“PRF”), an affiliate of Paul Capital Partners. The Amendment was entered into in order to secure PRF’s consent to the grant of the Second Priority Lien. The Company has applied the guidance of SFAS No. 15 and has reduced the gain on the Exchange Offer for the direct costs incurred as part of the Amendment. The costs of the amendment included in the gain on restructuring consist of $2,595,000 as the principal and interest on the $2,000,000 note, $225,000 to record the fair value of 500,000 common shares issued and $65,000 to record the incremental fair value of the re-pricing of 288,018 common share warrants held by PRF. The Amendment also contains other contingent payments that may be made to PRF in the future dependent upon the occurrence of certain events. These costs will be expensed at the time they become probable.

Modification of 2009 Notes

In order to extend the February 6, 2009 maturity date to December 1, 2009, on January 28, 2009, the Company entered into the first amendment (the “2009 Amendment”) to its Note Amendment and Exchange Agreement dated November 17, 2003 with the holders of approximately $13,150,000 million of the $13,300,000 million outstanding principal of the Company’s 5% Convertible Promissory Notes due in 2009. In return, the Company agreed to lower the conversion price at which such holders may convert such notes into shares of the Company’s common stock to $1.10 from $53.13 (the “New 2009 Notes”). Additionally, the Amendment also provides these holders the option, at their election, to exchange the New 2009 Notes for the Company’s 12.50%

Notes dues 2011 in a principal amount equal to the principal amount of the New 2009 Notes plus accrued interest thereon. The 12.50% Notes due 2011 will have the same terms and security interest and be issued under the same indenture as the notes issued in the Company’s exchange offer completed on November 25, 2008, as described above. The holders that did not enter into the 2009 Amendment were paid in full at the original maturity date of the notes. There can be no assurances that the New 2009 Notes will be exchanged into the 12.50% Notes due 2011.

The following tables include summary unaudited pro forma combined financial information as if both (i) the Exchange Offer had been completed and (ii) the New 2009 Notes had been converted into the 12.50% Notes due 2011 as of January 1, 2007 for statement of operations purposes and as of September 30, 2008 for the balance sheet. The unaudited pro forma combined financial information of the Company is based on estimates and assumptions which have been made solely for purposes of developing such pro forma information. The estimated pro forma adjustments arising from the Exchange Offer are derived from the preliminary accounting of the Exchange Offer. The final accounting for the Exchange Offer has not yet been completed. The Company is still evaluating the guidance set forth in EITF Issue No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” and EITF Issue No. 06-6, “Debtor’s Accounting for Modification (or Exchange) of Convertible Debt Instruments” in order to determine whether the 2009 Amendment should be accounted for as a debt modification or an extinguishment. As a result, the following unaudited pro forma combined financial information of the Company does not reflect the application of this guidance. Additionally, as the final accounting analysis has not yet been completed no pro forma adjustments have been presented for any embedded derivatives of the 12.50% Notes dues 2011 or the New 2009 Notes nor the income tax impact of the Exchange Offer or the exchange of the New 2009 Notes for the 12.50% Notes due 2011. These embedded derivatives may include the related conversion features, the additional interest due upon certain conversions of the debt to common stock and the ability of the New 2009 Notes to be exchanged for the 12.50% Notes due 2011. The accounting for these embedded derivatives, income taxes and the 2009 Amendment, when finalized, could have a significant impact on the Company actual financial results as compared to the following unaudited pro forma combined financial information.

The pro forma data are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have occurred if the Exchange Offer and the New 2009 Notes had been consummated as of January 1, 2007 for the statements of operations purposes, or September 30, 2008, for balance sheet purposes. The unaudited pro forma combined financial statements and related notes thereto should be read in conjunction with the Company’s historical consolidated financial statements of and related notes thereto beginning on page F-1, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 53. See the section entitled “Where You Can Find More Information” on page i.

OSCIENT PHARMACEUTICALS CORPORATION

UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEETS

(in thousands, except per share data)


	Historical September 30, 2008(A)			Pro Forma Adjustments
	2008(A)			November 2008 Debt Exchange			January 2009 Note Modification			Pro Forma
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	24,778		$	(8,677	)(1)		—	(8)	$	16,101
Notes receivable		—									—
Accounts receivable		8,447									8,447
Inventories, net		7,397									7,397
Prepaid expenses and other current assets		4,653			(318	)(1)					4,335

Total current assets		45,275			(8,995	)		—			36,280
Property and Equipment, at cost:
Manufacturing and computer equipment		4,435									4,435
Equipment and furniture		654									654
Leasehold improvements		183									183

		5,272									5,272
Less—Accumulated depreciation		4,603									4,603

		669									669
Restricted cash		4,198									4,198
Other assets		4,454			(3,716	)(2)					738
Intangible assets, net		104,072									104,072
Goodwill		75,991									75,991

Total Assets	$	234,659		$	(12,711	)				$	221,948

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities:
Short-term obligations	$	13,337		$	—		$	(13,150	)(7)	$	187
Accounts payable		12,612									12,612
Accrued expenses and other current liabilities		27,156			(3,514	)(1)		(3,403	)(7)		20,239
Current portion of accrued facilities impairment charge		3,182									3,182
Deferred revenue		364									364

Total current liabilities		56,651			(3,514	)		(16,553	)		36,584
Long-term liabilities:
Long-term obligations, net of current maturities		248,989			(65,058	)(2)		16,553	(7)		200,484
Noncurrent portion of accrued facilities impairment charge		5,269									5,269
Other long-term liabilities		4,456			(4	)(2)					4,452
Deferred revenue		—									—
Shareholders’ Deficit:
Common stock		1,425			2,181	(3)					3,606
Series B restricted common stock		—									—
Additional paid-in-capital		416,856			7,912	(3)					424,768
Accumulated deficit		(498,987	)		45,772	(3)					(453,215	)

Total shareholders’ deficit		(80,706	)		55,865			—			(24,841	)

Total Liabilities and Shareholders’ Deficit	$	234,659		$	(12,711	)	$	0		$	221,948

(A)	As reported in the Company’s Form 10-Q as filed with the Securities and Exchange Commission.

OSCIENT PHARMACEUTICALS CORPORATION

UNAUDITED CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)


	Historical for the year-ended December 31, 2007(A)			Pro Forma Adjustments						Pro Forma
	Historical for the year-ended December 31, 2007(A)			November 2008 Debt Exchange			January 2009 Note Modification			Pro Forma
Revenues (net):
Product sales	$	78,458		$	—					$	78,458
Other		1,511									1,511

Total net revenues		79,969			—						79,969
Costs and expenses:
Cost of product sales		31,269									31,269
Research and development		5,845									5,845
Selling and marketing		66,278									66,278
General and administrative		14,573							(8)		14,573

Total costs and expenses		117,965			—						117,965

Loss from operations		(37,996	)		—						(37,996	)
Other income (expense):
Interest income		2,541									2,541
Interest expense		(28,206	)		14,805	(4)		(1,150	)(9)		(14,551	)
Gain on disposition of investment		231									231
Gain on exchange of convertible notes		30,824			(30,824	)(5)					—
Gain on derivative		3,023			(2,854	)(6)					169
Other income		114									114

Net other income (expense)		8,527			(18,873	)		(1,150	)		(11,496	)

Loss from operations before income tax		(29,469	)		(18,873	)		(1,150	)		(49,492	)
Provision for income tax		(384	)								(384	)

Net loss	$	(29,853	)	$	(18,873	)	$	(1,150	)	$	(49,876	)

Net loss per common share:
Basic and diluted	$	(2.19	)							$	(1.41	)

Weighted average common shares outstanding:
Basic and diluted		13,600,787			21,810,549	(3)		—			35,411,336

(A)	As reported in the Company’s Form 10-K as filed with the Securities and Exchange Commission.

OSCIENT PHARMACEUTICALS CORPORATION

UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS

(in thousands, except per share data)


	Historical Nine-Months Ended September 30, 2008(A)			Pro Forma Adjustments						Pro Forma
	Historical Nine-Months Ended September 30, 2008(A)			November 2008 Debt Exchange			January 2009 Note Modification			Pro Forma
Revenues (net):
Product sales	$	60,156		$	—		$	—		$	60,156
Other revenues		282									282

Total net revenues		60,438			—			—			60,438
Costs and expenses:
Costs of product sales		20,445									20,445
Research and development		2,544									2,544
Selling and Marketing		56,205									56,205
General and administrative		10,701							(8)		10,701

Total costs and expenses		89,895			—			—			89,895

Loss from operations		(29,457	)		—			—			(29,457	)
Other (expense) income:
Interest income		615									615
Interest expense		(24,648	)		15,402	(4)		(968	)(9)		(10,214	)
Gain on disposition of investment		412									412
Gain on exchange of convertible notes		—									—
Gain on derivative related to long term debt		151			(60	)(6)					91
Other income		13									13

Net other (expense) income		(23,457	)		15,342			(968	)		(9,083	)

(Loss) income before income tax		(52,914	)		15,342			(968	)		(38,540	)
Provision for income tax		(315	)			(7)					(315	)

Net (loss) income	$	(53,229	)	$	15,341	(7)	$	(968	)	$	(38,855	)

Net loss per common share: basic	$	(3.86	)							$	(1.09	)

Net loss per common share: diluted	$	(3.86	)							$	(1.09	)

Weighted average common shares outstanding: basic and diluted		13,776,278			21,810,549	(3)					35,568,827

(A)	As reported in the Company’s Form 10-Q as filed with the Securities and Exchange Commission

OSCIENT PHARMACEUTICALS CORPORATION

NOTES TO UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS

(1)

The $8,677,000 adjustment to cash and the $318,000 adjustment to prepaid expenses and other current assets is comprised the following two components:

As part of the Exchange Offer, holders of the 3.50% Notes due 2011 will receive accrued and unpaid interest on any notes accepted in the Exchange Offer. A pro forma adjustment of $3,514,000 has been made to reflect the payment of all accrued and unpaid interest on the 3.50% Notes due 2011 as of September 30, 2008.

A pro forma adjustment of $5,481,000 has been made to reflect the payment of estimated fees and expenses of the transaction as if the transaction ($318,000 of which represented a prepayment as of September 30, 2008) closed on September 30, 2008. These costs will be netted against the gain on extinguishment of debt recognized in connection with the Exchange Offer.

(2)

The Exchange Offer is being accounted for as a troubled debt restructuring in accordance with EITF No. 02-4 and SFAS No. 15. As a result, a gain has been recognized resulting from the difference between the carrying value of the 3.50% Notes due 2011 that were exchanged (including related unamortized debt issuance costs and embedded derivatives) and the sum of carrying value of the new debt (which will be equal to the sum of all future cash flows on the notes, including interest payments) related debt issuance costs, and the common stock issued in the Exchange Offer. Such gain is calculated as follows:


Write-off of carrying value of 3.50% Notes due 2011 exchanged	$	178,167,000
Decreases to gain:
Value of equity issued in exchange		9,803,000
Carrying value of 12.50% Notes due 2011		110,514,000
Write-off of unamortized deferred financing fees		3,716,000
Amendment of RIAA		2,885,000
Exchange transaction costs		5,481,000
Increases to gain:
Write-off of fair value of derivative		4,000

Gain on exchange	$	45,772,000

The gain on exchange is not included as an adjustment to the consolidated pro forma statement of operations because it is not considered to have a continuing impact on the Company’s results.

No pro forma adjustments have been presented for any embedded derivatives in either the 12.50% Notes due 2011 or the new 2009 Notes nor the income tax impact of the Exchange Offer or the exchange of the new 2009 Notes for the 12.50% notes due 2011. These embedded derivatives may include the related conversion features, the additional interest due upon certain conversions of the debt to common stock and the ability of the New 2009 Notes to be exchanged for the 12.50% Notes due 2011. The accounting for these embedded derivatives, income taxes and the 2009 Amendment when finalized, could have a significant impact on the Company’s actual financial results as compared to the actual unaudited pro forma combined unaudited financial information. The final accounting for the Exchange Offer, including any embedded derivatives and the income tax impact, will not be completed until the final analysis of the terms are known and independent valuations of any embedded derivatives are completed. The fair value of any embedded derivatives in the 12.50% Notes due 2011 will also offset the gain when the Company finalizes the accounting for the transaction.

(3)

Adjustment of $10,093,000 to record the fair value of 21,310,549 common shares issued in the exchange transaction, 500,000 shares issued in the amendment of the RIAA, and the incremental fair value of the 288,018 re-priced common share warrants held by PRF as a result of the amendment to the RIAA. No adjustments have been made to reflect common shares issued to settle fractional 12.50% 2011 Notes due 2011 as part of the exchange offer. The adjustment is calculated based on the closing price of the Company’s common stock as of November 25, 2008, of $0.46.

(4)

Adjustments of $15,402,000 and $14,805,000 for the nine-months ended September 30, 2008 and year ended December 31, 2007, respectively to reduce interest expense associated with the exchange of 3.50% Notes due 2011. In accordance with SFAS No. 15, the Company will not recognize any expense for the future interest to be paid on the 12.50% Notes due 2011.

(5)

Adjustment of $30,824,000 to eliminate the gain on the exchange of the 3.5% Notes due 2011 which occurred in May 2007.

(5)

Adjustment of $30,824,000 to eliminate the gain on the exchange of the 3.5% Notes due 2011 which occurred in May 2007.

(6)

Adjustment of $60,000 and $2,854,000 for the nine-months ended September 30, 2008 and year-ended December 31, 2007 respectively to reduce the gain on the make-whole derivative associated with the 3.50% Notes due 2011 that were exchanged. The Company did not include a pro forma adjustments for any embedded derivatives associated with the 12.50% Notes due 2011.

(7)

Adjustment to reflect the assumed exchange of $13,150,000 of the New 2009 Notes from February 6, 2009 as amended on January 28, 2009 plus $3,403,000 of accrued interest for $16,553,000 of the 12.50% Notes due 2011.

(8)

Adjustment to reflect $ in estimated costs associated with the amendment of the 5% Convertible Promissory Notes due 2009.

(9)

Adjustment of $968,000 and $1,150,000 for nine months ended September 30, 2008 and the year ended December 31, 2007 to increase interest expense associated with the assumed conversion of the New 2009 Notes.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and their notes appearing elsewhere in this prospectus. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this prospectus, particularly under the heading “Risk Factors.”

Overview

Oscient Pharmaceuticals Corporation (“we”, “us”, the “Company” or “Oscient”) is a commercial-stage pharmaceutical company marketing Food and Drug Administration (FDA)-approved products in the United States. Our strategy is to grow the sales of our existing products and to gain access to new products via transactions, including acquisition, in-licensing and co-promotion. We have developed a commercial infrastructure, including a national sales force calling on targeted primary care physicians, cardiologists, endocrinologists and pulmonologists in the United States.

We currently market two products: ANTARA^® (fenofibrate) capsules, a cardiovascular product, and FACTIVE^® (gemifloxacin mesylate) tablets, a fluoroquinolone antibiotic. ANTARA is approved by the FDA to treat hypercholesterolemia (high blood cholesterol) and hypertriglyceridemia (high triglycerides) in combination with a healthy diet. We license the rights to ANTARA from Ethypharm, S.A. of France (Ethypharm) and began promoting ANTARA in late August 2006. FACTIVE is indicated for the treatment of community-acquired pneumonia of mild to moderate severity (“CAP”) and acute bacterial exacerbations of chronic bronchitis (“AECB”). We license the rights to gemifloxacin, the active ingredient in FACTIVE tablets, from LG Life Sciences of the Republic of Korea (“LG Life Sciences”) and launched FACTIVE in the U.S. market in September 2004.

We have incurred significant operating losses in the past. As of September 30, 2008, we had an accumulated deficit of approximately $499 million. We expect to incur additional operating losses until we achieve a level of product sales sufficient to cover our operating and other expenses.

Notice of Delisting

On October 23, 2008, we received notification from NASDAQ that given the current extraordinary market conditions, NASDAQ has suspended the enforcement of the rules requiring a MVPHS and a minimum $1 closing bid price, effective immediately (“Rule Suspension”). On December 23, 2008 we received a second notification from NASDAQ that the Rule Suspension period had been extended and additional ninety (90) days and that the minimum bid price and MVPHS requirements will be reinstated on April 20, 2009. As a result of the Rule Suspension, all companies presently in the compliance process will remain at that same stage of the process; however, companies can regain compliance during the Rule Suspension period. NASDAQ will not take any action to delist any security for these concerns during the Rule Suspension period, which will remain in effect through Friday, April 17, 2009. These rules will be reinstated on Monday, April 20, 2009. Under the Rule

Suspension, we believe we will now have until approximately July 6, 2009 to regain compliance by evidencing a minimum $15 million MVPHS for ten (10) consecutive business days. If we do not regain compliance with the MVPHS requirement by July 6, 2009, we will receive written notification of delisting from NASDAQ and at that time will be entitled to request a hearing before a NASDAQ Listing Qualifications Panel (“Panel”) to present our plan to regain compliance with the MVPHS requirement.

If our efforts to regain compliance are successful and the MVPHS exceeds $15 million for ten (10) consecutive business days before July 6, 2009, as a result of the Rule Suspension, we will regain compliance with respect to the MVPHS requirement. In the event we do not regain compliance, we may appeal the staff determination to the Panel. In the event that we fail to regain compliance and are unsuccessful in an appeal to the Panel, our securities will be delisted from The NASDAQ Global Market. In the event that our securities are delisted from The NASDAQ Global Market, we may not be able to meet the requirements necessary for our common stock (i) to transfer to, or list on, a U.S. national securities exchange, including The NASDAQ Capital Market or (ii) be approved for listing on a U.S. system of automated dissemination of quotations. If such event in (i) or (ii) above occurred, holders of our existing 2011 notes would have the right to require us to repurchase for cash the outstanding principal amount of the existing 2011 notes as applicable, plus accrued and unpaid interest through such date. After the exchange on November 25, 2008, there was approximately $12.7 million principal amount of 3.50% Convertible Senior Notes due 2011 and $87.2 million principal amount of 12.50% Convertible Guaranteed Senior Notes 2011 and $0.8 million principal amount of the 3¹/2% Convertible Senior Notes due 2011. We may not have sufficient cash or be able to raise additional capital to repay the existing 2011 notes as applicable, if requested to be repurchased by the holders.

ANTARA

We were assigned rights to an exclusive license from Ethypharm, S.A. (“Ethypharm”). Pursuant to the Ethypharm license, in order to maintain the exclusivity of our rights, we must achieve minimum annual sales in the United States until February 2012 or alternatively Ethypharm may elect to convert our exclusive license to a non-exclusive; however we would then have the option to compensate Ethypharm for any shortfall to maintain the exclusive license. As of September 30, 2008, we have recorded approximately $605,000 related to the potential minimum royalty obligation to Ethypharm. During the term of the agreement with Ethypharm, we are obligated to pay a royalty on net sales of ANTARA in the U.S., including a royalty on other fenofibrate monotherapy products in formulations and dosage forms that may be substantially similar or identical to ANTARA developed by us. The license term expires in February 2020 and, absent notice of termination by either party, automatically renews for consecutive periods of two (2) years each. Under the terms of the agreement, at our option, Ethypharm is obligated to either manufacture and deliver to us finished fenofibrate product or deliver active pharmaceutical ingredient (API) to us for encapsulation and packaging. Ethypharm also has a right of first refusal on any divestiture of the ANTARA rights by us. Additional Oscient obligations under the Ethypharm agreement include funding a portion of the API safety stock that Ethypharm is required to maintain.

In addition, under the terms of one of the licenses we assumed related to ANTARA, not including the Ethypharm license, we are obligated to make certain royalty payments to a third party licensor based on sales of ANTARA, which royalty payments are subject to a low single digit increase in the event of a change in control of the Company. The third party license also limits our ability to co-promote ANTARA with companies other than contract sales organizations or similar companies. We have engaged the third party licensor to renegotiate the terms of that license and have suspended further royalty payments while the terms of such license are being renegotiated.

Pursuant to the terms of our acquisition of ANTARA from Reliant, we also acquired the New Drug Application (“NDA”), and the Investigational New Drug application (“IND”), covering the ANTARA products in the United States, clinical data, inventory, the ANTARA^® trademark in the United States and certain related contracts and licenses covering intellectual property rights related to the ANTARA products. We also assumed certain of Reliant’s liabilities relating to the ANTARA products.

We are not required to pay Reliant a royalty on the sale of the ANTARA products; however, we are required to pay a low single-digit royalty to Reliant for a specified time period on net sales of any line extensions and improvements to the ANTARA products that we develop, which include any product containing fenofibrate as its API. We currently do not pay royalties to Reliant. We also agreed that we would not, at any time prior to August 2016, develop or sell any product in the United States that is a combination of fenofibrate and an omega-3 compound without the prior written consent of Reliant. On December 19, 2007, Reliant was acquired by GlaxoSmithKline.

ANTARA capsules are covered by a U.S. patent relating to formulations containing fenofibrate and methods of preparing the same that extends through August 2020. In addition, Ethypharm has filed additional patent applications which relate to the formulation and we were assigned a patent application which was filed by Reliant relating to methods of treatment. If issued, we believe these patents may provide ANTARA additional patent protection. On December 2, 2008, we received notice of a Paragraph IV certification from Lupin Limited (“Lupin”), notifying us of the filing of an ANDA with the FDA for a generic version of ANTARA. We received the certification as the holder of the New Drug Application for ANTARA. Lupin’s certification notice alleges that U.S. Patent No. 7,101,574 (the “‘574 Patent”), owned by Ethypharm, exclusively licensed to Oscient and listed in the FDA Orange Book for ANTARA, is invalid and/or will not be infringed by Lupin’s commercial manufacture, use or sale of the drug product described in Lupin’s ANDA. The ‘574 Patent is set to expire in 2020.

In response to the filing of Lupin’s ANDA, on January 14, 2009, we, along with our wholly owned subsidiary Guardian II Acquisition Corporation and our licensor Ethypharm, filed a lawsuit in the United States District Court for the District of Maryland against Lupin and its subsidiary Lupin Pharmaceuticals, Inc. for infringement of the ‘574 Patent.

FACTIVE

Overview

FACTIVE was approved by the FDA in 2003 for the treatment of community-acquired pneumonia of mild to moderate severity (“CAP”), and acute bacterial exacerbations of chronic bronchitis (“AECB”).

We license from LG Life Sciences of the Republic of Korea (“LG Life Sciences”) the right to develop and commercialize FACTIVE (gemifloxacin) tablets, a novel fluoroquinolone antibiotic, in North America, France,

Germany, the United Kingdom, Luxembourg, Ireland, Italy, Spain, Portugal, Belgium, the Netherlands, Austria, Greece, Sweden, Denmark, Finland, Norway, Iceland, Switzerland, Andorra, Monaco, San Marino, Vatican City, Poland, Czech Republic, Slovakia, Slovenia, Hungary, Estonia, Latvia, Lithuania, Liechtenstein, Malta, Cyprus, Romania, Bulgaria, Croatia, Serbia and Montenegro, Bosnia and Herzegovina, Albania and the Former Yugoslav Republic of Macedonia. The term of the agreement with respect to each country extends at least through the life of the patents covering gemifloxacin in such country.

In the United States, the last of the issued patents for composition of matter expires in 2018. The patent term could extend further in countries outside of the U.S. depending upon several factors, including whether we obtain patent extensions and the timing of our commercial sale of the product in a particular country. On May 30, 2008, we received notice of a Paragraph IV certification from Orchid Healthcare, a Division of Orchid Chemicals & Pharmaceuticals Ltd. (“Orchid”) notifying us of the filing of an Abbreviated New Drug Application (“ANDA”) with the FDA to market a generic version of FACTIVE in the U.S. As part of its ANDA filing Orchid submitted a Paragraph IV certification alleging that eight of the nine FDA Orange Book listed patents relating to FACTIVE are invalid and/or will not be infringed by Orchid’s manufacture, importation, use, or sale of the generic version of the product. Orchid has not, however, included a Paragraph IV certification with respect to U.S. Patent No. 5,633,262, which is also listed in the Orange Book and expires in June 2015. Accordingly the FDA cannot finally approve Orchid’s ANDA until the expiry of U.S. Patent No. 5,633,262 in June 2015. We have not commenced a lawsuit against Orchid relating to these eight patents and are continuing to evaluate whether to commence litigation in response to Orchid’s Paragraph IV certification. In the event Orchid elects to amend its ANDA to include a Paragraph IV certification with respect to the ninth patent, U.S. Patent No. 5,633,262, we believe that we will be entitled to an automatic thirty-month stay of FDA approval of the ANDA if either we and/or LG Life Sciences initiate a timely patent infringement lawsuit against Orchid at that time.

Under the terms of the agreement, LG Life Sciences has agreed to supply and we are obligated to purchase from LG Life Sciences all of our anticipated commercial requirements for the FACTIVE API. LG Life Sciences currently supplies the FACTIVE API from its manufacturing facility in South Korea.

The agreement with LG Life Sciences also requires that we achieve a minimum gross sales level of $30 million from our licensed territories over a 12-month period of time starting in approximately the third quarter of 2007 to the third quarter of 2008 which, if not met, LG Life Sciences could elect to terminate the agreement and have the technology be returned to LG Life Sciences. We believe that we have achieved the minimum gross sales threshold level. After LG Life Sciences’ review of our financial information during the fourth quarter of 2008, it has accepted our analysis and concluded that it will not terminate the agreement based on the minimum gross sales level of $30 million. Under this agreement, we are responsible, at our expense and through consultation with LG Life Sciences, for the clinical and commercial development of gemifloxacin in the countries covered by the license, including conducting clinical trials, filing drug approval applications with the FDA and other applicable regulatory authorities and marketing, distributing and selling of gemifloxacin in our territory.

We are obligated to pay a royalty on sales of FACTIVE in North America and the territories covered by the license in Europe. These royalty obligations expire with respect to each country covered by the agreement on the later of (i) the expiration of the patents covering FACTIVE in such country or (ii) the expiration of data exclusivity in Mexico, Canada or the European Union respectively, or 2014 in the U.S. We are also obligated to make aggregate milestone payments of up to $40 million to LG Life Sciences (including milestone payments required by the amendments described below) upon achievement of additional regulatory approvals and sales thresholds.

On March 31, 2005, we amended our license and option agreement with LG Life Sciences which included a payment and additional milestones as well as a reduction of future royalties payable to LG Life Sciences at certain FACTIVE revenue levels in territories covered by the agreement. We further amended our agreement with LG Life Sciences on February 3, 2006, pursuant to which LG Life Sciences agreed to a reduction of future

royalties payable for sales of FACTIVE tablets in Mexico and Canada and the termination of LG Life Sciences’ co-promotion rights in these countries. The modified agreement also calls for additional milestone payments to be made to LG Life Sciences upon consummation of sublicense agreements in Mexico and Canada (which payments were made to LG Life Science in February 2006 and August 2006, respectively) as well as upon receipt of regulatory approval of FACTIVE in each of such countries. Additionally, on December 27, 2006, we amended our agreement with LG Life Sciences to reduce future royalties payable to LG Life Sciences for sales of FACTIVE tablets in Europe and to provide for a reduction in the supply price for the API for FACTIVE for product to be sold in Europe. In lieu of milestone payments previously agreed to by the parties, this amendment also requires us to pay LG Life Sciences a portion of any milestone or license fee payments we receive from our European partner.

Commercialization and Development

With respect to additional development initiatives, we completed a clinical trial designed to demonstrate that a five-day course of FACTIVE for the treatment of mild to moderate CAP is as effective as the previously approved seven-day course of treatment. On September 21, 2006, we received an approvable letter from the FDA for the supplemental New Drug Application (“sNDA”) seeking approval for the five-day treatment of CAP with FACTIVE tablets. In accordance with the letter, we provided clarification and additional interpretation regarding certain data included in the application to assist the FDA in its evaluation. On May 1, 2007, the FDA approved FACTIVE for the five-day treatment of CAP.

As part of the FACTIVE development program, several studies relating to acute bacterial sinusitis (“ABS”) were completed, and, in November 2005, we filed an sNDA for ABS. In September 2006, the FDA’s Anti-Infective Drugs Advisory Committee voted not to recommend approval of this sNDA. In November 2006, we voluntarily withdrew our sNDA seeking approval of the ABS indication.

On February 6, 2006, we entered into a Sublicensing and Distribution Agreement with Pfizer, S.A. de C.V. (“Pfizer Mexico”), pursuant to which we sublicensed our rights to sell FACTIVE tablets in Mexico to Pfizer Mexico. In exchange for those rights, Pfizer Mexico has paid us an up-front payment and has agreed to pay us milestone payments upon obtaining certain regulatory approvals and sales goals as well as royalties on future sales. The up-front payment has been recognized as revenue over the term of our continuing obligations under the agreement. These royalty rates are subject to reduction upon expiration of certain patents in Mexico for FACTIVE or if a generic form of gemifloxacin has a material impact on Pfizer Mexico’s sales volumes in Mexico. Pfizer Mexico is obligated to exclusively purchase from us, and we must exclusively supply, all API for FACTIVE. The agreement with Pfizer Mexico may be terminated by either party upon the occurrence of certain termination events, including Pfizer Mexico’s right to terminate at any time after August 2007, the first anniversary of launch of FACTIVE tablets in Mexico upon six months prior written notice. Upon termination, Pfizer Mexico is obligated to assign any and all rights to regulatory approvals in Mexico to us or our designee. Pfizer Mexico is currently marketing FACTIVE-5 in Mexico for the treatment of CAP, AECB and ABS. On December 9, 2008 Pfizer Mexico received regulatory approval to market FACTIVE tablets for the Uncomplicated Urinary Tract Infections (uUTI) indication with a 3 day course of treatment, from COFEPRIS, the pharmaceutical regulatory agency of Mexico.

On August 9, 2006, we granted the commercialization rights to FACTIVE tablets in Canada to Abbott Laboratories, Ltd. (Abbott Canada), the Canadian affiliate of Abbott. In exchange for those rights, Abbott Canada agreed to a transfer price on product purchases and to make certain payments to us upon achievement of certain regulatory and sales milestones. FACTIVE is currently approved in Canada for the five-day treatment of AECB. We subsequently amended the agreement on January 31, 2008 whereby Abbott Canada’s development and commercialization obligations were substantially reduced. Our license agreement with Abbott Canada was terminated in December 2008, and Abbott Canada has ceased all development and commercialization of FACTIVE in Canada.

We entered into a License, Supply and Marketing Agreement with Menarini International Operation Luxembourg S.A. (“Menarini”), a wholly-owned subsidiary of Menarini Industrie Farmaceutiche Riunite S.r.l. dated December 28, 2006, whereby we sublicensed our rights to sell FACTIVE tablets in the European Union to Menarini. Under the terms of our agreement with Menarini, Menarini is responsible for obtaining regulatory approval for FACTIVE in the European Union. We have agreed to reimburse Menarini for expenses associated with such regulatory development up to an agreed limit. Menarini has paid us an up-front payment and agreed to pay us milestone payments upon obtaining certain regulatory and reimbursement approvals and upon achieving certain annual net sales goals, which could total up to $23 million if all the milestones are achieved. Menarini will pay us a transfer price on purchases of the API for FACTIVE, which is determined based on a percentage of quarterly sales of FACTIVE by Menarini in Europe. Menarini is also obligated to exclusively purchase from us, and we must exclusively supply, all API for FACTIVE to be sold in Europe for the earlier of (i) the expiration of the life of certain patents covering the product or (ii) expiration of data exclusivity. Our agreement with Menarini may be terminated by either party upon the occurrence of certain termination events, including Menarini’s right to terminate if the European regulatory authorities do not recommend approval of FACTIVE at various stages of the approval process with a package insert, or label, that meets certain requirements as to the safety, dosing and indications for which FACTIVE may be prescribed. Menarini may also terminate the agreement if it does not receive approval for reimbursement from European Union member countries that is above a certain minimum price per tablet. Upon termination, Menarini is obligated to assign any and all rights to regulatory approvals in the European Union to us or our designee. In the first quarter of 2008, Menarini submitted a regulatory filing seeking approval of FACTIVE in Europe for the treatment of community-acquired pneumonia and acute bacterial exacerbations of chronic bronchitis.

On July 7, 2008, we received notice from the FDA directing that the prescribing information for all fluoroquinolone products, including FACTIVE, be revised to include a Boxed Warning relating to the risk of tendonitis and tendon rupture associated with the use of fluoroquinolone products. Warnings regarding the risk of tendon related adverse events were already included in the prescribing information, as part of a class labeling, for all fluoroquinolones. The FDA has cautioned that such risk is increased in patients over the age of 60 and in those on concomitant corticosteroid therapy, as well as kidney, heart and lung transplant recipients. The FDA has also required that all manufacturers of fluoroquinolones submit a Medication Guide. The FDA has approved our changes to the package insert and Medication Guide as required by FDA to ensure patient safety and improve physician understanding of the risk-benefit profile for fluoroquinolone products, including FACTIVE. We have also submitted a proposed Risk Evaluation and Mitigation Strategy (“REMS”) as required by FDA of all sponsors of fluoroquinolone products to ensure patients’ safe and effective use of such products. We are working with the FDA to finalize certain details of REMS.

Research and Development Programs

FACTIVE

As a condition to the approval to sell FACTIVE tablets, the FDA required, as a post-marketing study commitment, that we conduct a prospective, randomized study examining the activity of FACTIVE tablets (5,000 patients) versus an active comparator (2,500 patients) in patients with AECB and CAP. This study included patients of different ethnicities to gain safety information in populations not substantially represented in the existing clinical trial program. This Phase IV trial was initiated in the fall of 2004 and was completed in February 2007. The final report of the utilization study was submitted to the FDA in March of 2008. In the future, we need only to provide the FDA with annual reports containing safety information.

Additionally, in April 2005, we completed a Phase III trial examining the potential use of FACTIVE tablets for the five-day treatment of mild to moderate CAP. Based on the results of this study, in November 2005 we submitted an sNDA to the FDA for approval to promote the five-day treatment of FACTIVE tablets for this indication. On September 21, 2006, we received an approvable letter from the FDA for the sNDA seeking

approval for the five-day treatment of CAP with FACTIVE tablets. In accordance with the letter, we provided clarification and additional interpretation regarding certain data included in the application to assist the FDA in its evaluation. On May 1, 2007, the FDA approved FACTIVE for the five-day treatment of CAP.

Ramoplanin

We have a novel, late-stage investigational antibiotic candidate, Ramoplanin, for the treatment of Clostridium difficile-associated disease, or CDAD. In October 2001, we in-licensed Ramoplanin from Vicuron Pharmaceuticals Inc. (“Vicuron”), a wholly-owned subsidiary of Pfizer Inc., and on February 3, 2006, acquired worldwide rights from Vicuron, assuming full rights to the manufacturing, development and commercialization of Ramoplanin.

In December 2005, we agreed with the FDA to a Special Protocol Assessment (“SPA”) regarding the specific components of a Phase III program that, if completed successfully, would support regulatory approval for the indication. With the acquisition of ANTARA, we have made the strategic decision to concentrate our financial resources on building revenues for our products promoted to community-based physicians in the United States and are currently seeking to out-license, co-develop or sell our rights to Ramoplanin to a partner. Because the Special Protocol Assessment was agreed to by the FDA in 2005, we cannot guarantee that the FDA will continue to regard it as binding on the agency if and when we or a prospective partner re-initiates the Ramoplanin clinical development process.

Critical Accounting Policies & Estimates

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements for the year ended December 31, 2007 which are included in our Annual Report on Form 10-K. Our preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting policies include the following:

Revenue Recognition

Our principal source of revenue is the sale of ANTARA capsules and FACTIVE tablets. ANTARA revenue results are anticipated to be non-seasonal, although the wholesaler buying patterns tend to increase toward the end of the fiscal year. We expect demand for FACTIVE to be highest from December to March as the incidence of respiratory tract infections, including CAP and AECB, tends to increase during the winter months. In addition, fluctuations in the severity of the annual respiratory tract infection season may cause our product sales to vary from year to year. Due to these seasonal fluctuations in demand for FACTIVE, our results in any particular quarter may not be indicative of the results for any other quarter or for the entire year.

Product Sales

We follow the provisions of Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition (a replacement of SAB 101)” (SAB No. 104) and recognize revenue from product sales upon delivery of product to wholesalers, when persuasive evidence of an arrangement exists, the fee is fixed or determinable, title to product and associated risk of loss has passed to the wholesaler and collectability of the related receivable is reasonably

assured. All revenues from product sales are recorded net of applicable allowances for sales returns, rebates, special promotional programs, and discounts. For arrangements where the risk of loss has not passed to wholesalers or pharmacies, we defer the recognition of revenue by recording deferred revenue until such time that risk of loss has passed. The cost of ANTARA and FACTIVE associated with amounts recorded as deferred revenue is recorded in inventory until such time as risk of loss has passed.

Other Revenues

Other revenues primarily consist of sublicensing revenues related to FACTIVE. We recognize revenue in accordance with SAB No. 104 and Emerging Issues Task Force (EITF) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF No. 00-21). In accordance with EITF No. 00-21, the up-front license payments related to the various sublicense agreements will be recognized as revenue over the term of our continuing obligations under the arrangements which range from eighteen months to thirty-three months. Substantive milestones achieved are recognized as revenue when earned and when payment is reasonably assured, if we have completed our remaining obligations under the arrangement. If we have further obligations, milestone payments are recognized as revenue if we have sufficient evidence of fair value for our remaining obligations otherwise the milestone payment is recognized as revenue over the remaining performance period. Incremental direct costs associated with sublicense agreements are expensed in the period in which the expense is incurred.

Sales Rebates, Discounts and Incentives

In the U.S., we sell ANTARA and FACTIVE to pharmaceutical wholesalers for further distribution through pharmacies to the ultimate consumers of the product. When we deliver our product, we reduce the amount of gross revenue recognized from such product sales based primarily on estimates of four categories of discounts and allowances that suggest that all or part of the revenue should not be recognized at the time of the delivery—product returns, cash discounts, rebates, and special promotional programs.

Product Returns

Factors that are considered in our estimate of future ANTARA and FACTIVE product returns include an analysis of the amount of product in the wholesaler and pharmacy channel, review of consumer consumption data as reported by external information management companies, actual and historical return rates for expired lots, the remaining time to expiration of our product, and our forecast of future sales of our product. Consistent with industry practice, we offer contractual return rights that allow our customers to return product within six months prior to, and twelve months subsequent to, the expiration date of our product. ANTARA capsules and FACTIVE tablets each have a 36-month expiration period from the date of manufacturing. As of September 30, 2008 and December 31, 2007, our product return reserve was approximately $4,040,000 and $3,169,000, respectively. This reserve is evaluated on a quarterly basis, assessing each of the factors described above, and adjusted accordingly. Based on the factors noted above, we believe our estimate of product returns is reasonable, and changes, if any, from this estimate would not have a material impact to our financial statements.

Cash Discounts

Our standard invoice includes a contractual cash 2% discount, net 30 days terms. Based on historical experience, we estimate that most of our customers deduct a 2% discount from their balance. The cash discount reserve is presented as an allowance against trade receivables in the consolidated balance sheets. As of September 30, 2008 and December 31, 2007, the balance of the cash discounts reserve was approximately $150,000 and $343,000, respectively.

Rebates

The liability for commercial managed care rebates is calculated based on historical and current rebate redemption and utilization rates with respect to each commercial contract. The liability for Medicaid rebates is calculated based on historical and current rebate redemption and utilization rates contractually submitted by each state. As of September 30, 2008 and December 31, 2007, the balance of the accrual for managed care and Medicaid rebates for ANTARA and FACTIVE in total was approximately $4,908,000 and $4,263,000, respectively. This reserve is evaluated on a quarterly basis, assessing each of the factors described above and adjusted accordingly. Considering the estimates made by us, as well as estimates reflected in third party utilization reports that are used in evaluating the required liability balance, we believe our estimates are reasonable.

Special Promotional Programs

From time to time, we offer certain promotional incentives to our customers for both ANTARA and FACTIVE and will continue this practice in the future. Such programs include: sample cards to retail consumers, certain product incentives to pharmacy customers, and other sales stocking allowances. We account for these programs in accordance with EITF No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer” (EITF No. 01-09). Examples of programs utilized to date are as follows:

Voucher Rebate Programs for ANTARA

Since acquiring ANTARA in August 2006, we have initiated four voucher rebate programs for ANTARA whereby we offered a point-of-sale rebate to retail consumers. The liabilities we recorded for the current voucher rebate programs were estimated based upon the actual redemption rates on our similar completed programs. This reserve is evaluated on a quarterly basis, assessing each of the factors described above and adjusted accordingly. The first program expired on December 31, 2006, the second program expired on September 30, 2007, the third program expires on February 28, 2009 and the fourth program expires on March 31, 2010. As of September 30, 2008 and December 31, 2007, the balance of the liabilities for these voucher programs totaled approximately $845,000 and $491,000, respectively.

Voucher Rebate Programs for FACTIVE

We periodically initiate voucher rebate programs for FACTIVE whereby we offer point-of-sale rebates to retail consumers. The liabilities we record for these voucher rebate programs are estimated based upon the historical rebate redemption rates for similar completed programs. This reserve is evaluated on a quarterly basis, assessing each of the factors described above and adjusted accordingly. In October 2007, we initiated a voucher rebate program whereby we offered a point-of-sale rebate to retail customers. This program ended April 30, 2008. In April 2008 and July 2008, we initiated additional voucher rebate programs whereby we offered a point-of-sale rebate to retail consumers. These programs expire on October 15, 2008 and April 30, 2009, respectively. As of September 30, 2008 and December 31, 2007, the balance of the liabilities for these voucher programs totaled approximately $1,038,000 and $1,396,000, respectively.

Long-Lived Assets

We follow the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). Under SFAS No. 144, long-lived assets and identifiable intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indicators of impairment exist, recoverability of assets to be held and used is assessed by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Recoverability measurement and

estimating the undiscounted cash flows are each done at the lowest possible level for which there are identifiable assets. If the aggregate undiscounted cash flows are less than the carrying value of the asset, then the resulting impairment charge to be recorded is calculated based on the amount by which the carrying amount of the asset exceeds its fair value. Any write-downs are recorded as permanent reductions in the carrying amount of the asset.

As of September 30, 2008, we did not believe that any of our long-lived assets, goodwill, and other intangible assets were impaired. However during the fourth quarter of 2008, events and circumstances, primarily a reduction in projected long-term cash flows, indicated that the ANTARA and FACTIVE intangible assets could become impaired. Our estimate of undiscounted cash flows performed during the quarter ended December 31, 2008 indicated that the carrying amount of the ANTARA intangible assets were expected to be recovered and therefore the assets are not impaired. Our estimate of undiscounted cash flows performed during the quarter ended December 31, 2008 indicated that the carrying amount of the FACTIVE intangible assets were not expected to be recovered and therefore the assets are impaired. Our estimate of undiscounted cash flows is based upon several significant assumptions including, but not limited to, estimated domestic sales levels, our strategic plans to control costs and the ability to significantly penetrate international markets. The Company is currently in the process of determining the amount of the impairment charge to be recorded in the statement of operations for the quarter and year ended December 31, 2008.

We also follow the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” (SFAS No. 142). Under SFAS No. 142, goodwill and purchased intangible assets with indefinite lives are not amortized but are reviewed periodically for impairment. We perform an annual evaluation of goodwill at the end of each fiscal year to test for impairment or more frequently if events or circumstances indicate that goodwill may be impaired. Because we have a single operating segment, which is our sole reporting unit, we perform this test by comparing the fair value of the entity as measured by the quoted market price of our common stock with our book value, including goodwill, which at present is a deficit. If the fair value exceeds the book value, goodwill is not impaired. If the book value exceeds the fair value, then we would calculate the potential impairment loss by comparing the implied fair value of goodwill with the book value. If the implied fair value of goodwill is less than the book value, then an impairment charge would be recorded.

Stock-Based Compensation

Effective January 1, 2006, we adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (SFAS No. 123R) using the modified prospective transition method. SFAS No. 123R requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values. Such amounts have been reduced by our estimate of forfeitures on all unvested awards. Stock-based compensation expense primarily relates to stock options, restricted stock, and stock issued under our employee stock purchase plan (“ESPP”).

The fair value of each stock option award is estimated on the grant date using the Black-Scholes-Merton option-pricing model based on the assumptions of volatility, risk-free interest rates, expected life of the option, and dividends (if any). The expected life of the stock options granted was estimated based on the historical exercise patterns over the option lives while considering employee exercise strategy and cancellation behavior. The expected life of options used for the nine-month period ended September 30, 2008 ranged from 5.59 to 5.84 years. The expected volatility is determined based on historical volatility data of our common stock from the period of time beginning with our merger with Genesoft in February 2004 and other factors through the month of grant. Our expected volatility for the nine-month period ended September 30, 2008 was between 60.86% and 65.48%. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. Our risk-free interest rate for the nine-month period ended September 30, 2008 was between 2.71% and 3.61%. We have not paid and do not expect to pay any dividends; as a result, our dividend yield is assumed to be 0%.

Our policy is to recognize compensation cost for awards with service conditions and graded vesting using the straight-line method. Additionally, our policy is to issue authorized but previously unissued shares to satisfy share option exercises, the issuance of restricted stock and stock issued under the ESPP. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. In addition, the requisite service period is generally equal to the vesting term. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. We have applied an annual forfeiture rate of 21.39% to all unvested options as of September 30, 2008. This analysis is re-evaluated annually and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

Stock compensation expense recorded in the nine-month periods ended September 30, 2008 and 2007 was $1,044,000 and $2,043,000 respectively. The compensation expense under SFAS No. 123R is recorded in cost of product sales, research and development expense, selling and marketing expense, and general and administrative expense based on the specific allocation of employees receiving the equity awards.

As of September 30, 2008, we estimate there is approximately $2,470,000 of total unrecognized compensation cost related to unvested share based awards. These costs are expected to be recognized over a weighted average remaining requisite service period of 1.43 years. We expect approximately 838,000 in unvested options to vest at some point in the future. The value of options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.

Recent Accounting Pronouncements

Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133

In March 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS No. 161). SFAS No. 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 “Accounting for Derivatives and Hedging Activities” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently in the process of studying the impact of this standard on our financial accounting and reporting.

Business Combinations

In December 2007, the FASB issued Statement No. 141R, “Business Combinations” (SFAS No. 141R). SFAS No. 141R improves consistency and comparability of information about the nature and effect of a business combination by establishing principles and requirements for how an acquirer (a) recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to all business combination transactions for which the acquisition date is on or after January 1, 2009. The impact of our adoption of SFAS No. 141R will depend upon the nature and terms of business combinations, if any, that we consummate on or after January 1, 2009.

Accounting for Collaborative Arrangements

In November 2007, EITF issued EITF Issue No. 07-01 “Accounting for Collaborative Arrangements” (EITF No. 07-01). EITF No. 07-01 requires collaborators to present the results of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable generally accepted accounting principles (GAAP) or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. Further, EITF No. 07-01 clarified that the determination of whether transactions within a collaborative arrangement are part of a vendor-customer (or analogous) relationship subject to Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer”. EITF No. 07-01 is effective for fiscal years beginning after December 15, 2008. We have not yet completed our evaluation of EIFT No. 07-01, but do not currently believe that it will have a material impact on our results of operations, financial position or cash flows.

Accounting for Convertible Debt Instruments that may be Settled Upon Conversion

In May 2008, the FASB issued Staff Position No. APB 14-1 “Accounting for Convertible Debt Instruments that may be Settled in Cash Upon Conversion” (FSP APB14-1). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. Further, FSP ABP 14-1 clarifies the appropriate economics of the conversion options as borrowing costs and their potential dilutive effects in earnings per share. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008. We have not yet completed our evaluation of FSP APB 14-1, but we do not currently believe that it will have a material impact on our results of operations, financial position or cash flows.

Results of operations

Three-Month Period Ended September 30, 2008 and September 30, 2007

Revenues

Total revenues increased 40% to approximately $21,787,000 for the three-month period ended September 30, 2008 from approximately $15,568,000 for the three-month period ended September 30, 2007.

Product sales increased 40% to approximately $21,695,000 for the three-month period ended September 30, 2008 from approximately $15,457,000 for the three-month period ended September 30, 2007 due to higher volume of ANTARA shipments during the quarter of approximately $5,297,000 and by a slight increase in shipments of FACTIVE of approximately $941,000 due to the retail stocking program that was initiated in July 2008, and concluded during the third quarter.

Other revenues decreased 17% to approximately $92,000 for the three-month period ended September 30, 2008 from approximately $111,000 for the three-month period ended September 30, 2007. In the three-month periods ended September 30, 2007 and 2008, other revenue was comprised of amortization of upfront license fees previously received from each of Pfizer Mexico and Menarini, respectively. The Company does not believe that other revenues will be a significant contributor to revenues in the future.

Costs and Expenses

Total costs and expenses decreased 5% to approximately $28,899,000 for the three-month period ended September 30, 2008 from approximately $30,404,000 for the three-month period ended September 30, 2007.

Cost of product sales decreased 11% to approximately $7,082,000 for the three-month period ended September 30, 2008 from approximately $7,929,000 for the three-month period ended September 30, 2007 primarily resulting from a write-down of obsolete inventory in the third quarter of 2007. Our overall gross product margin at September 30, 2008 and 2007, including amortization of intangible assets was 68% and 49%, respectively. The increase in margin is the result of an increase in shipment of ANTARA capsules which have a higher gross margin than FACTIVE. Included in the cost of product sales is approximately $1,192,000 of amortization of intangibles assets associated with FACTIVE for each of the three-month periods ended September 30, 2008 and 2007, respectively, as well as approximately $1,085,000 of amortization of intangible assets associated with ANTARA for each of the three-month periods ended September 30, 2008 and 2007, respectively.

Research and development expenses decreased 54% to approximately $680,000 for the three-month period ended September 30, 2008 from approximately $1,476,000 for the three-month period ended September 30, 2007. Research and development expenses primarily consist of salaries and related expenses for regulatory personnel. Other research and development expenses include fees paid to consultants and outside service providers. The decrease is primarily due to higher direct project costs in the three-months ended September 30, 2007 pertaining to FACTIVE development costs in association with our License, Supply, and Marketing Agreement with Menarini. As of September 30, 2008, there were no ongoing clinical trials and we do not believe there will be significant costs associated with clinical trials in the immediate future.

Selling and marketing expenses increased 4% to approximately $18,263,000 for the three-month period ended September 30, 2008 from approximately $17,632,000 for the three-month period ended September 30, 2007. This increase is a result of increased costs relating to publication and physician meetings as they relate to the promotion of ANTARA and FACTIVE of approximately $835,000, increased costs associated with travel and meeting expenses of approximately $462,000 associated with marketing and promoting ANTARA and FACTIVE as well as regional and national sales and training programs, higher payroll related expenses of approximately $119,000 due to lower territory vacancies in 2008, as well as higher consulting expenses of approximately $148,000 related to market data analysis. These increases were offset by decreased expenses associated with special promotional programs for ANTARA and FACTIVE of approximately $574,000, decreased samples expense of approximately $453,000, and decreases in other sales and marketing expenses of approximately $94,000. We are currently examining ways to reprioritize and reduce our expenses in subsequent quarters.

General and administrative expenses decreased 15% to approximately $2,874,000 for the three-month period ended September 30, 2008 from approximately $3,367,000 for the three-month period ended September 30, 2007. The decrease is a result of decreases in payroll related expenses of approximately $761,000, decrease in stock-based compensation of approximately $166,000, decreases in legal fees of approximately $276,000, and decrease in other general and administrative expenses of approximately $70,000. These decreases were partially offset by increases in consulting costs of approximately $533,000 associated with business development activities and increases in audit fees of approximately $247,000.

Other Income and Expense

Interest income decreased 86% to approximately $111,000 for the three-month period ended September 30, 2008 from approximately $771,000 for the three-month period ended September 30, 2007 reflecting lower cash balances and lower interest rate yields from investments during the quarter ended September 30, 2008.

Interest expense increased 2% to approximately $7,961,000 for the three-month period ended September 30, 2008 from approximately $7,818,000 for the three-month period ended September 30, 2007 due to higher costs related to non-cash interest expense of approximately $53,000, higher interest expense related to financing with

Paul Capital of approximately $124,000 offset by lower interest expense related to convertible debt balances of approximately $34,000. For the three-month period ended September 30, 2008, interest expense primarily consisted of the following:


3.50% Convertible senior promissory notes	$	1,982
Accretion of bond discount		3,128
5% Convertible promissory notes		206
Revenue interest assignment		1,473
12% Senior secured note		660
Amortization of deferred financing costs		389
Other		123

	$	7,961

Gain on derivatives related to long-term debt decreased 98% to approximately $37,000 for the three-month period ended September 30, 2008 from approximately $2,406,000 for the three-month period ended September 30, 2007. This is a non-cash gain resulting from changes in the fair value of the interest make-whole derivative included in our 3.50% convertible senior notes due 2011 which were issued in May 2007 of approximately $16,000 and approximately $21,000 related to a non-cash gain from changes in the fair value of the derivative related to the financing associated with the acquisition of ANTARA issued in August 2006.

Nine-Month Periods Ended September 30, 2008 and September 30, 2007

Revenues

Total revenues increased 11% to approximately $60,438,000 for the nine-month period ended September 30, 2008 from approximately $54,680,000 for the nine-month period ended September 30, 2007.

Product sales increased 13% to approximately $60,156,000 for the nine-month period ended September 30, 2008 from $53,262,000 for the nine-month period ended September 30, 2007 due to higher ANTARA sales of approximately $9,886,000, offset by lower FACTIVE sales of approximately $2,992,000 due to lower gross shipments in connection with emphasis in sales focus and promotional efforts toward ANTARA in 2008.

Other revenues decreased 80% to $282,000 for the nine-month period ended September 30, 2008 from $1,418,000 for the nine-month period ended September 30, 2007. During 2007, the Company received a milestone payment of $1,000,000 from Abbott Canada relating to regulatory approval of FACTIVE in Canada and amortization of upfront license fees from each of Pfizer Mexico and Menarini, respectively. During the nine-month period ended September 30, 2008, the Company did not receive any milestone payments. The Company does not believe that other revenues will be a significant contributor to revenues in the future.

Costs and Expenses

Total costs and expenses increased 4% to approximately $89,895,000 for the nine-month period ended September 30, 2008 from approximately $86,823,000 for the nine-month period ended September 30, 2007.

Cost of product sales decreased 12% to approximately $20,445,000 for the nine-month period ended September 30, 2008 from $23,274,000 for the nine-month period ended September 30, 2007. Our overall gross product margin, including amortization of intangible assets, was approximately 66% and 56% for the nine-month periods ended September 30, 2008 and 2007, respectively. The increase in gross margin is the result of an increase in shipments for ANTARA capsules, which have a higher gross margin than FACTIVE. Included in the cost of product sales is approximately $3,575,000 of amortization of intangibles assets associated with FACTIVE

for each of the nine-month periods ended September 30, 2008 and 2007, respectively, as well as approximately $3,256,000 of amortization of intangible assets associated with ANTARA for each of the nine-month periods ended September 30, 2008 and 2007, respectively.

Research and development expenses decreased 40% to approximately $2,544,000 for the nine-month period ended September 30, 2008 from approximately $4,273,000 for the nine-month period ended September 30, 2007. This decrease is primarily due to completion of the enrollment of the 7,500 patients in February 2007 in a FACTIVE post-marketing trial. The Company’s total costs related to this trial were completed by the end of the second quarter of 2007. Research and development expenses primarily consist of salaries and related expenses for regulatory personnel. Other research and development expenses include fees paid to consultants and outside service providers. As of September 30, 2008, there were no ongoing clinical trials and we do not believe there will be significant costs associated with clinical trials in the immediate future.

Selling and marketing expenses increased 14% to approximately $56,205,000 for the nine-month period ended September 30, 2008 from approximately $49,436,000 for the nine-month period ended September 30, 2007. This increase is primarily a result of increased costs relating to publication and physician meetings as they relate to the promotion of ANTARA and FACTIVE of approximately $3,856,000, increased costs associated with travel and meeting expenses of approximately $2,259,000 associated with marketing and promoting ANTARA and FACTIVE as well as regional and national sales and training programs, higher payroll related expenses of approximately $48,000 due to lower territory vacancies in 2008, higher consulting expenses of approximately $529,000 related to market data analysis, as well as higher samples expenses of approximately $218,000. These increases were offset by decreased expenses associated with special promotional programs for ANTARA and FACTIVE of approximately $281,000 and decreases in other sales and marketing expenses of approximately $140,000.

General and administrative expenses increased 9% to approximately $10,701,000 for the nine-month period ended September 30, 2008 from approximately $9,840,000 for the nine-month period ended September 30, 2007. The increase is a result of financial advisory and consulting fees of approximately $1,292,000, increased legal fees of approximately $340,000, and increased accounting fees of approximately $358,000, all related to business development activities. These increases were offset by a decrease in payroll related expenses of approximately $772,000, and stock based compensation expense of approximately $357,000.

Other Income and Expense

Interest income decreased 69% to approximately $615,000 for the nine-month period ended September 30, 2008 from approximately $1,982,000 for the nine-month period ended September 30, 2007 reflecting lower overall cash balances and lower interest rate yields on investments.

Interest expense increased 32% to approximately $24,648,000 for the nine-month period ended September 30, 2008 from approximately $18,665,000 for the nine-month period ended September 30, 2007 due to higher costs related to non-cash interest expense of approximately $4,519,000, higher interest expense related to financing with Paul Capital of approximately $836,000 and higher interest expense related to higher convertible debt balances of approximately $628,000. For the nine-month period ended September 30, 2008, interest expense primarily consisted of the following:


3.50% Convertible senior promissory notes	$	5,911
Accretion of bond discount		9,318
5% Convertible promissory notes		610
Revenue interest assignment		5,298
12% Senior secured note		1,962
Amortization of deferred financing costs		1,167
Other		382

	$	24,648

Gain on disposition of investment increased 78% to approximately $412,000 for the nine-month period ended September 30, 2008 from approximately $231,000 for the nine-month period ended September 30, 2007 due to additional proceeds related to Agencourt Bioscience Corporation which was acquired by Beckman Coulter.

We recorded a one-time non-cash gain on exchange of convertible notes of approximately $30.8 million for the nine-month period ended September 30, 2007 resulting from the issuance of approximately $225.7 million of 3.5% convertible senior notes due 2011 in connection with the exchange and tender of approximately $151.9 million of our previously-outstanding 3¹/2% senior convertible promissory notes due 2011 and the exchange and tender of approximately $9.0 million of our previously-outstanding 5% convertible promissory notes due 2009.

Gain on derivatives related to long-term debt decreased 95% to approximately $151,000 for the nine-month period ended September 30, 2008 from approximately $2,800,000 for the nine-month period ended September 30, 2007. This is a non-cash gain resulting from changes in the fair value of the interest make-whole derivative included in our 3.50% convertible senior notes due 2011 which were issued in May 2007 of approximately $63,000 and approximately $88,000 related to a non-cash gain from changes in the fair value of the derivative related to the financing associated with the acquisition of ANTARA issued in August 2006.

Years Ended December 31, 2007 and 2006

Revenues

Total net revenues increased 73% to $79,969,000 for the year ended December 31, 2007 from $46,152,000 for the year ended December 31, 2006.

Net product sales increased 105% to $78,458,000 for the year ended December 31, 2007 from $38,244,000 for the year ended December 31, 2006. This increase was primarily due to the promotion of ANTARA, which was acquired in August 2006, which resulted in a net increase of approximately $41,793,000, partially offset by lower FACTIVE sales of approximately $1,579,000 due to higher returns as a result in the shift of product

demand from seven-day course of treatment to five-day course of treatment and returns associated with the initial stocking of FACTIVE.

Co-promotion revenue decreased 100% for the year ended December 31, 2007 from $6,890,000 for the year ended December 31, 2006 due to the termination of the co-promotion arrangement with Auxilium in August 2006.

Other revenues increased 48% to $1,511,000 for the year ended December 31, 2007 from $1,018,000 for the year ended December 31, 2006, primarily due to recognition of a milestone achievement of $1,000,000 from Abbott Laboratories, Ltd., (Abbott Canada) the Canadian Affiliate of Abbott, relating to the approval to sell FACTIVE tablets in Canada as well as the amortization of upfront license fees from our agreements with Pfizer Mexico and Menarini. We do not believe that other revenues will be a significant contributor to revenues in the future.

Costs and Expenses

Total costs and expenses decreased slightly to $117,965,000 for the year ended December 31, 2007 from $118,071,000 for the year ended December 31, 2006.

Cost of product sales increased 59% to approximately $31,269,000 in 2007 from $19,613,000 in 2006 as a result of increased product costs of approximately $11,656,000 associated with an increase in shipments of ANTARA capsules. Our overall gross product margin for the year ended December 31, 2007 and 2006 was 60% and 49%, respectively. The increase in gross margin is the result of an increase in shipments for ANTARA capsules offset by higher returns of FACTIVE tablets associated with the combination of the shift in product demand from seven day course of treatment to five day course of treatment and returns associated with initial stocking of FACTIVE. Additionally, in 2007, we recorded approximately $1,296,000 of obsolete inventory related to the initial product obtained upon the acquisition of ANTARA and also recorded approximately $471,000 related to a minimum royalty obligation to Ethypharm. In addition, included in the cost of product sales is approximately $4,767,000 of amortization of intangible assets associated with FACTIVE for each of the years ended December 31, 2007 and 2006 and approximately $4,341,000 and $1,447,000, respectively, of amortization of intangible assets associated with ANTARA for each of the years ended December 31, 2007 and 2006.

Research and development expenses decreased 53% to $5,845,000 in 2007 from $12,406,000 in 2006. This decrease is primarily due to the completion of the FACTIVE five-day treatment of CAP trial in 2006 and the completion of the enrollment of the 7,500 patients in the FACTIVE post-marketing trials in February 2007. Our total costs related to this clinical trial were completed by the end of the second quarter of 2007. At December 31, 2007, there was no clinical trial accrual balance remaining and we do not believe there will be significant costs associated with clinical trials in the immediate future.

Selling and marketing expenses decreased slightly to $66,278,000 in 2007 from $69,211,000 in 2006. This decrease is a result of decreases in co-promotion expenses relative to our arrangement with Auxilium which terminated in 2006 of approximately $2,482,000 along with overall cost control efforts during the year ended December 31, 2007 resulting in lower conference and meeting expenses of approximately $667,000, and lower publication, media, and market research costs of approximately $712,000. The decrease was also attributable to decreases in payroll and payroll-related costs of approximately $610,000 and stock-based compensation costs of approximately $263,000, offset by increases in other selling and marketing expenses of approximately $683,000 and costs associated with travel and entertainment of approximately $1,118,000 related to sales personnel.

General and administrative expenses decreased 13% to approximately $14,573,000 in 2007 from approximately $16,841,000 in 2006. This decrease is a result of a decrease in technology license fees of

approximately $1,250,000, as well as overall cost control efforts during 2007 which resulted in decreases in payroll and payroll related costs of approximately $317,000, decreases in stock-based compensation expense of approximately $788,000, as well as decreases in other general and administrative expenses of approximately $573,000. These decreases were partially offset by an increase in legal fees and settlement costs associated with a legal dispute.

Other Income and Expense

Interest income decreased 15% to approximately $2,541,000 in 2007 from approximately $2,995,000 in 2006 reflecting higher yields on cash balances in 2007, offset by lower overall cash balances in 2007.

Interest expense significantly increased 155% to approximately $28,206,000 in 2007 from approximately $11,056,000 in 2006. For the year ended 2007, interest expense imputed using the effective interest rate method primarily consisted of approximately $10,645,000 related to financing with Paul Capital, approximately $7,649,000 due to accretion of the bond discount associated with newly exchanged debt, approximately $5,331,000 related to approximately $225,666,000 of 3.50% convertible senior notes, resulting from the exchange of previously-outstanding 3¹/2% convertible promissory notes, exchange of previously outstanding 5% convertible promissory notes and issuance of 2011 Notes in May of 2007. Additionally, interest expense included approximately $1,787,000 related to approximately $152,750,000 of 3¹/2 % senior convertible promissory notes issued in the second quarter of 2004, of which approximately $829,000 remains after the debt exchange completed in May 2007, approximately $954,000 related to approximately $22,310,000 of 5% convertible promissory notes assumed in the Genesoft merger, of which approximately $13,300,000 remains after the debt exchange completed in May 2007, approximately $1,325,000 related to amortization of deferred financing costs, as well as approximately $515,000 of non-cash interest expense related to the facility lease liability.

Gain on disposition of investment for year ended December 31, 2007 of approximately $231,000 resulted from milestones achieved by Agencourt Biosciences. The gain on disposition of investment of approximately $1,617,000 for year ended December 31, 2006 resulted from the sale of our investment in Agencourt Biosciences.

We recorded a one-time non cash gain on exchange of convertible notes of approximately $30,824,000 in the year ended December 31, 2007 resulting from the issuance of approximately $225,666,000 of 3.50% convertible senior notes due 2011 in connection with the exchange and tender of approximately $151,921,000 of our previously-outstanding 3¹/2% senior convertible promissory notes due 2011 and the exchange and tender of approximately $9,010,000 of our previously outstanding 5% convertible promissory notes due 2009. The gain arose due to the fact that fair value of the previously outstanding 3¹/2% senior convertible promissory notes exceeded that of the newly issued 3.50% convertible senior notes.

Gain on derivative related to convertible notes was approximately $3,023,000 for the year ended December 31, 2007. This gain consists of a non-cash gain resulting from changes in the fair value of the interest make-whole derivative included in our 3.50% convertible senior notes due 2011 which were issued in May 2007 of approximately $3,004,000 and also approximately $19,000, related to a gain from changes in the fair value of derivative related to the financing associated with the acquisition of ANTARA issued in August 2006.

Years Ended December 31, 2006 and 2005

Revenues

Total net revenues increased 95% to $46,152,000 for the year ended December 31, 2006 from $23,609,000 for the year ended December 31, 2005.

Net product sales increased 87% to $38,244,000 for the year ended December 31, 2006 from $20,458,000 for the year ended December 31, 2005. This increase was primarily related to the acquisition of ANTARA 130 mg (fenofibrate) capsules in August 2006 which resulted in approximately $16,778,000 in net product sales and increased shipments of FACTIVE tablets of approximately $1,008,000.

Co-promotion revenue increased 133% to $6,890,000 for the year ended December 31, 2006 from $2,954,000 for the year ended December 31, 2005, primarily due to the initiation of our co-promotion of TESTIM in May 2005, higher gross profits related to increased TESTIM prescriptions in 2006 and also due to a $1,800,000 payment from Auxilium Pharmaceuticals in August 2006 in connection with the termination of the co-promotion arrangement.

Other revenues increased significantly to $1,018,000 for the year ended December 31, 2006 from $197,000 for the year ended December 31, 2005, primarily due to the recognition of revenues in connection with various milestone achievements related to Pfizer Mexico upon the regulatory approval to distribute and sell FACTIVE tablets in Mexico and an up-front payment from Pfizer Mexico which is recognized over the term of our obligation under the agreement. We expect our revenues related to both the biopharmaceutical alliances and genomics services to be minimal in the future.

Costs and Expenses

Total costs and expenses increased 5% to $118,071,000 for the year ended December 31, 2006 from $112,281,000 in 2005, primarily due to cost of product sales associated with the acquisition of ANTARA during 2006.

Cost of product sales increased 100% to approximately $19,613,000 in 2006 from $9,830,000 in 2006 as a result of increased product costs of approximately $5,040,000 associated with an increase in shipments of ANTARA capsules as a result of our product acquisition of ANTARA in August 2006. Our overall gross product margin for the year ended December 31, 2006 and 2005 was 49% and 52%, respectively. The primary reason for the decrease in margin was due to approximately $1,700,000 associated with obsolete inventory in 2006 and costs associated with the write-up of inventory to fair value of ANTARA product obtained during the acquisition of the product line. In addition, included in the cost of product sales is approximately $4,767,000 of amortization of intangible assets associated with FACTIVE for each of the years ended December 31, 2006 and 2005 and approximately $1,610,000 of amortization of intangible assets associated with ANTARA for the year ended December 31, 2006.

Research and development expenses decreased 14% to $12,406,000 in 2006 from $14,432,000 in 2005. Research and development activities include clinical trials, other clinical development, technology transfer and process optimization for manufacturing. These research and development expenses primarily consist of salaries and related expenses for personnel and the cost of materials used in research and development. Other research and development expenses include fees paid to consultants and outside service providers. The decrease is due to the completion of the FACTIVE five-day clinical trial and also a decrease in the costs primarily related to external costs and materials associated with the FACTIVE post-marketing study as the trial approaches near completion in the first half of 2007. We expect research and development expense to continue to decrease in 2007 as the FACTIVE post-marketing study is expected to be completed in the first half of 2007.

Selling and marketing expenses decreased 8% to $69,211,000 in 2006 from $74,931,000 in 2005. This decrease was primarily due to expenses in 2005 being unusually high related to hiring additional sales and marketing personnel costs of $5,751,000, increased other marketing, advertising and promotional costs of approximately $3,081,000 to support the marketing efforts for FACTIVE, offset by increased marketing costs associated with the promotion of ANTARA in August 2006 of approximately $943,000 and increased costs in

2006 of $2,169,000 associated with the promotion of TESTIM which began in the second quarter of 2005 and was terminated in August 2006.

General and administrative expenses increased 29% to $16,841,000 in 2006 from $13,088,000 in 2005 primarily due to an increase in general and administrative payroll and related costs of approximately $1,472,000, an increase in stock based compensation due to the adoption of SFAS No. 123R of approximately $2,267,000, an increase in legal fees of approximately $400,000 and an increase in general and administrative expenses of approximately $58,000 offset by a decrease in technology license fees of approximately $444,000.

Other Income and Expense

Interest income decreased 12% to approximately $2,995,000 in 2006 from approximately $3,400,000 in 2005 reflecting higher yields on cash balances in 2006, offset by lower overall cash balances in 2006.

Interest expense significantly increased 36% to approximately $11,056,000 in 2006 from approximately $8,126,000 in 2005. In 2006, interest expense primarily consisted of approximately $5,346,000 related to the issuance of $153 million of senior convertible notes in the second quarter of 2004, $2,987,000 related to financing with Paul Capital, approximately $1,241,000 related to the issuance of $22.0 million of convertible notes in connection with the GeneSoft merger, $827,000 related to amortization of deferred financing costs along with approximately $640,000 related to non-cash interest expense related to the facility lease liability.

For the year ended December 31, 2005, we recorded a gain from the sale of intellectual property of $2,500,000, from the sale of intellectual property related to the genomic sequence of an undisclosed pathogen to Wyeth.

For the year ended December 31, 2006, we recorded a gain on the disposition of an investment of approximately $1,617,000 in exchange for our shares in Agencourt Personal Genomics Bioscience related to the merger with Applera Corporation. For the year ended December 31, 2005 we recorded a gain on the disposition of marketable securities of approximately $2,162,000 in exchange for our ownership of common stock of Agencourt Bioscience Corporation, which was acquired by Beckman Coulter in a cash transaction.

Liquidity and Capital Resources

Our primary sources of cash have been from the sale of debt and equity securities, including royalty-based financing arrangements, product discovery alliances, and the sale of ANTARA capsules and FACTIVE tablets.

As of September 30, 2008, we had total cash, cash equivalents, and restricted cash of approximately $28,976,000, which includes approximately $4,198,000 in restricted cash. We believe our existing funds, anticipated cash used in operations and our ability to continue to manage expenses after certain cost reduction measures discussed below are in effect will be sufficient to support our current plans and obligations into the third quarter of 2009. On February 11, 2009 we announced plans to substantially reduce the size of our sales and marketing teams as well as our headquarter staff.

reduce our expenses which will have a material adverse effect on our business. We expect that in connection with its audit of our financial statements for the year ended December 31, 2008, our auditors will include a going concern explanatory paragraph in their audit opinion. A going concern explanatory paragraph is included when the auditor concludes there is substantial doubt about our ability to continue as a going concern for at least 12 month following the audited balance sheet date. If we are unable to refinance or repay our indebtedness as it becomes due, we may be unable to continue operations.

Cash Flows

Our operating activities used cash of approximately $24,361,000 and $25,152,000 for the nine-month periods ended September 30, 2008 and 2007, respectively.

Cash used in our operating activities for nine-month period ended September 30, 2008 was primarily a result of our net loss of approximately $53,229,000 along with non-cash items such as depreciation and amortization expenses of approximately $7,135,000, non-cash interest expense of approximately $10,867,000, stock-based compensation expense of approximately $1,044,000, a non-cash gain from the change in fair value of a derivative of approximately $151,000, a gain on disposition of investment of approximately $412,000 and provision for excess and obsolete inventories of approximately $344,000. Additionally, cash used in our operating activities includes, decreases in accrued facilities impairment liability of approximately $1,847,000 related to payments made in connection with our South San Francisco facility, decreases in deferred revenue of approximately $273,000 as a result of recognizing Menarini revenues received from an up-front license payment, and increases in prepaid expenses and other current assets of approximately $1,767,000 primarily resulting from increases in costs associated with the refinancing of current debt. These uses of cash were partially offset by decreases in accounts receivable of approximately $6,585,000 resulting from higher collections on customer balances as of September 30, 2008, increases in accounts payable of approximately $2,349,000 as a result of timing of vendor payments, decreases in inventory of approximately $1,318,000 resulting from tighter inventory management controls, increases in accrued other long-term liabilities of approximately $1,307,000 primarily resulting from the accrual of interest on the $20,000,000 Note Purchase Agreement with Paul Capital, and increases in accrued expenses and other liabilities of approximately $2,369,000 primarily pertaining to reserves on FACTIVE and ANTARA voucher rebate programs.

Cash used in our operating activities for the nine-month period ended September 30, 2007 was primarily a result of our net loss of approximately $15,182,000 along with non-cash items such as a non-cash gain on exchange of convertible note of approximately $30,824,000, non-cash depreciation and amortization expenses of approximately $7,427,000, non-cash interest expenses of approximately $6,348,000, a non-cash gain from the change in the fair value of a derivative of approximately $2,800,000, stock-based compensation of approximately $2,043,000, and provision for excess and obsolete inventories of approximately $779,000. Additionally, cash used in our operating activities includes decreases in accounts payable of approximately $2,440,000 as a result of timing of vendor payments, decreases in accrued facilities impairment charges of approximately $2,000,000 related to our San Francisco facility, recovery of bad debt of approximately $172,000, a gain on disposition of investment of approximately $231,000, as well as decreases in deferred revenue of approximately $137,000 as a result of the amortization of upfront license fees from our agreements with Pfizer Mexico and Menarini. These uses of cash were partially offset by increases in accrued expenses and other liabilities of approximately $3,841,000 relating to timing of vendor invoices, decreases in inventory of approximately $3,620,000 as a result of increased sales of ANTARA, decreases in accounts receivable of approximately $1,966,000 resulting from higher collections on customer balances including the receipt of approximately $1.0 million from Menarini related to the FACTIVE European transaction, and decreases in prepaid expenses and other current assets of approximately $618,000, as well as increases in other long-term liabilities of approximately $1,992,000 related to accrued interest on long-term debt.

Our investing activities provided cash of approximately $697,000 and $2,155,000 for the nine-month period ended September 30, 2008 and 2007, respectively. Cash provided by our investing activities for the nine-month

period ended September 30, 2008 was primarily related to proceeds from repayment of notes receivable of approximately $486,000 and proceeds from the disposition of investment of approximately $412,000, offset by purchases of property and equipment of approximately $166,000 and increases in other assets of approximately $35,000. Cash provided by our investing activities for the nine-month period ended September 30, 2007 was primarily related to a decrease of approximately $2,482,000 in restricted cash, proceeds from notes receivable of approximately $632,000 and proceeds from the disposition of investment of approximately $231,000. These cash proceeds were partially offset by an increase in other assets of approximately $1,143,000.

Our financing activities provided cash of approximately $174,000 and $41,917,000 for the nine-month periods ended September 30, 2008 and 2007, respectively. Cash provided by our financing activities for the nine-month period ended September 30, 2008 was primarily due to proceeds from the issuance of 77,078 shares of stock under the employee stock purchase plan of approximately $193,000 offset by payments on long-term obligations of approximately $19,000. Cash provided by our financing activities for the nine-month period ended September 30, 2007 was primarily due to the net proceeds from the issuance of notes from the debt exchange transaction of approximately $41,524,000, exercise of 4,980 stock options for approximately $17,000, and proceeds from the issuance of 95,045 shares of stock under the employee stock purchase plan of approximately $404,000, offset by payments on long-term obligation of approximately $28,000.

Our operating activities used cash of approximately $34,661,000, $63,635,000 and $96,880,000 in 2007, 2006 and 2005, respectively.

Cash used in our operating activities for 2007 was primarily a result of our net loss of approximately $29,853,000 along with non-cash items such as a non-cash gain on exchange of convertible note of approximately $30,824,000, non-cash depreciation and amortization expenses of approximately $9,847,000, non-cash interest expenses of approximately $9,623,000, a non-cash gain from the change in the fair value of derivatives of approximately $3,023,000, stock-based compensation of approximately $2,713,000, and provision for excess and obsolete inventories of approximately $793,000. Additionally, cash used in our operating activities includes an increase of approximately $2,922,000 in accounts receivable due to higher shipments of ANTARA capsules and FACTIVE tablets and an increase in prepaid and other current assets of approximately $96,000 along with decreases in accounts payable of approximately $141,000 as a result of timing of vendor payments, decreases in accrued facilities impairment charges of approximately $2,618,000 related to our west coast facility, recovery of bad debt of approximately $172,000, a gain on disposition of investment of approximately $231,000, as well as decreases in deferred revenue of approximately $750,000 as a result of the amortization of upfront license fees from our agreements with Pfizer Mexico and Menarini.

These uses of cash were partially offset by increases in accrued expenses and other liabilities of approximately $4,915,000 relating to timing of vendor invoices, decreases in inventory of approximately $4,386,000 as a result of increased sales of ANTARA, as well as increases in other long-term liabilities of approximately $3,692,000 related to accrued interest on long-term debt.

Cash used in our operating activities for 2006 was primarily a result of our net loss of approximately $78,477,000, adjusted for the gains of approximately $1,617,000 on the disposition of investment, an increase in inventories of approximately $1,796,000 due to increased demand of ANTARA capsules and FACTIVE tablets, and an increase in accounts receivable of approximately $6,080,000 as a result of the acquisition of ANTARA, as well as decreases in accrued facilities impairment charge of approximately $2,826,000 related to our west coast facility.

These uses of cash were partially offset by decreases in prepaid expenses and other current assets of approximately $2,134,000 resulting from decreases in net samples inventory and decreased costs associated with the utilization of a contracted third party sales organization, as well as, increases in accounts payable of approximately $3,955,000 primarily resulting from the acquisition of ANTARA, including royalties payable on

the net sales of ANTARA and FACTIVE sold in the U.S. and accounts payable and other accrued expenses acquired as part of the ANTARA acquisition. Additional offsets include increases in accrued expenses and other current liabilities of approximately $3,335,000 resulting primarily from increases in sales reserves and allowances and royalty interest payable as a result of the acquisition of ANTARA, increases in deferred revenue of approximately $1,386,000 pertaining to up-front license fees in relation to sublicense agreements with Pfizer Mexico, Abbott Canada, and Menarini, increases in other long-term liabilities of approximately $1,869,000 resulting from accrued interest on the $22.0 million convertible note and the $20.0 million note payable to Paul Capital, as well as non-cash items such as depreciation and amortization expenses which includes amortization of intangible assets, stock based compensation, and non-cash interest expense of approximately $12,502,000 as well as provision for excess and obsolete inventories and provision for accounts receivables of approximately $1,980,000.

Cash used in our operating activities for 2005 was primarily a result of our net loss of approximately $88,593,000, adjusted for the gains of approximately $2,162,000 on the disposition of investment, an increase in inventories of approximately $7,129,000 due to increased demand of FACTIVE tablets, and an increase in accounts receivable of approximately $1,983,000 resulting from the co-promotion agreement with Auxilium, as well as decreases in accounts payable of approximately $2,633,000 resulting from timing of payables processing, accrued expenses and other liabilities of approximately $6,762,000 resulting primarily from decreases in costs associated with the GeneSoft merger and decreases in costs associated with the utilization of a contracted third party sales organization, deferred revenue of approximately $1,302,000 related to our initial stocking incentive program, and accrued facilities impairment charge of approximately $2,947,000 related to our west coast facility.

These uses of cash were partially offset by decreases in prepaid expenses and other current assets of approximately $6,597,000 primarily resulting from the expiration of our contract with a contracted third party sales representative provider and decreases in accrued other long-term liabilities of approximately $993,000 resulting from accrued interest on the $22.0 million convertible note, as well as non-cash items such as depreciation and amortization expenses including amortization of intangible assets, stock based compensation, non-cash interest expense of approximately $7,974,000 as well as provision for excess and obsolete inventories of approximately $1,067,000.

Our investing activities provided cash of approximately $3,906,000 in 2007, used cash of approximately $68,119,000 in 2006 and provided cash of approximately $96,758,000 in 2005.

Our investing activities provided cash of approximately $3,906,000 in 2007 primarily related to a decrease of approximately $2,414,000 in restricted cash, proceeds from notes receivable of approximately $1,373,000 and proceeds from the disposition of investment of approximately $231,000. These cash proceeds were partially offset by an increase in other assets of approximately $63,000.

Cash used in our investing activities in 2006 were primarily related to the acquisition of ANTARA of approximately $77,563,000, and increases in other assets of approximately $329,000 and net purchases of property and equipment of approximately $263,000. These uses of cash were partially offset by proceeds from maturities of marketable securities of approximately $2,696,000, decreases in restricted cash associated with interest payments on debt of approximately $5,118,000, proceeds from the disposition of an investment of approximately $1,617,000 and net proceeds from notes receivable of approximately $604,000.

Cash provided by our investing activities in 2005 were primarily related to proceeds from maturities of marketable securities of approximately $94,694,000, proceeds related to the disposition of Agencourt stock upon its acquisition by Beckman Coulter of approximately $2,387,000, a decrease of restricted cash of approximately $5,246,000 related to the payment of convertible note interest, a decrease in other assets of approximately $471,000, proceeds from sales of fixed assets of approximately $294,000 and proceeds from notes receivable of approximately $440,000. Cash provided from investing activities was partially offset by the issuance of notes

receivable of approximately $2,740,000 related to a deposit required in order to lease vehicles for the sales representatives, purchases of marketable securities of approximately $2,706,000 and purchases of property and equipment of approximately $1,328,000.

Our financing activities provided cash of approximately $40,827,000 in 2007 primarily due to the net proceeds from the issuance of 2011 Notes in May 2007 of approximately $40,444,000, exercise of 4,980 stock options for approximately $17,000, and proceeds from the issuance of 95,045 shares of stock under the employee stock purchase plan of approximately $404,000, offset by payments on long-term obligation of approximately $38,000.

Our financing activities provided cash of approximately $104,332,000 in 2006. This was primarily due to the issuance of 2,254,402 shares of common stock in connection with the completion of a private placement which generated net proceeds of approximately $33,477,000; proceeds of $20,000,000 from the issuance of a note in connection with the financing of the ANTARA acquisition; proceeds of $40,000,000 from an assignment of revenue interest in connection with the financing of the ANTARA acquisition and net proceeds of approximately $9,958,000 from the issuance of 1,388,889 shares of common stock in connection with financing the acquisition of ANTARA. In addition, we received approximately $166,000 from the exercise of 89,456 stock options and proceeds of approximately $740,000 from the issuance of 78,987 shares of stock under the employee stock purchase plan, offset by payments made on capital lease obligations of approximately $9,000.

Our financing activities in 2005 provided cash of approximately $997,000, primarily due to proceeds from exercise of stock options of approximately $871,000 and proceeds from the issuance of shares under the employee stock purchase plan of approximately $417,000, offset by payments of long-term obligations of approximately $291,000.

At December 31, 2007, we had net operating loss carryforwards of approximately $457,708,000 and $319,468,000 available to reduce federal and state taxable income, if any, respectively. The net operating loss and tax credit carryforwards expire in 2008 through 2026. In addition, we also had tax research credit carryforwards of approximately $17,343,000 to reduce federal and state income tax, if any. Net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain cumulative changes in ownership interests of significant shareholders over a three-year period in excess of 50%. This potential limitation may result in the expiration of some of our carryforwards prior to utilization. Additionally, certain of our losses have already begun to expire.

Our Outstanding Debt Obligations and Equity Financings

5% convertible five-year promissory notes due December 1, 2009

On February 6, 2004, in connection with our merger with Genesoft, we issued approximately $22,310,000 in principal amount of our 5% convertible five-year promissory notes due February 6, 2009 (the “2009 Notes”) pursuant to a Note Amendment and Exchange Agreement dated November 17, 2003. Following the exchange offer completed in May 2007 described below, there are approximately $13,300,000 principal amount of the 2009 Notes outstanding at September 30, 2008 which have been classified as short-term obligations on the consolidated balance sheets. On January 28, 2009, we entered into a first amendment (the “2009 Amendment”) to the Note Amendment and Exchange Agreement dated November 17, 2003 with the holders of approximately $16.8 million of the $17.0 million outstanding principal and accrued interest of our 5% Convertible Promissory Notes due in 2009. The 2009 Amendment extends for these holders the maturity date of the 2009 Notes from February 6, 2009 to December 1, 2009 and lowers the conversion price at which such holders may convert such notes into shares of our common stock to $1.10. The Amendment also provides these holders the option, at their election, to exchange their 2009 Notes for our 12.50% Convertible Guaranteed Senior Notes dues 2011 in a principal amount equal to the principal amount of the New 2009 Notes plus accrued interest thereon. The 12.50%

Convertible Guaranteed Senior Notes due 2011 will have the same terms and security interest and be issued under the same indenture as the notes issued in our exchange offer completed on November 25, 2008, as described below.

3¹/2% Senior Convertible Promissory Notes and 3.50% Convertible Senior Notes due 2011

On June 26, 2004, we issued $152,750,000 in principal amount of our 3¹/2% senior convertible promissory notes due in April 2011 (the “Original 2011 Notes”). Following the exchange offer completed in May 2007 described below, there are approximately $829,000 principal amount of the Original 2011 Notes outstanding at September 30, 2008. These notes are convertible into our common stock at the option of the holders at a conversion price of $53.14 per share. We may not redeem the outstanding Original 2011 Notes at our election before May 10, 2010. After this date, we can redeem all or a part of the Original 2011 Notes for cash at a price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest. The holders’ right of repurchase under the Original 2011 Notes along with other terms thereof are described below.

In May 2007, we completed (i) an exchange offer with certain holders of the Original 2011 Notes in which we exchanged $151,921,000 aggregate principal amount of our new 3.50% Convertible Senior Notes due 2011 for $151,921,000 aggregate principal amount of our then outstanding Original 2011 Notes; and (ii) an exchange offer with holders of the 2009 Notes in which we exchanged approximately $10,574,000 aggregate principal and accrued interest amount of our then outstanding 2009 Notes for approximately $13,746,000 aggregate principal amounts of the Existing Notes. We also issued an additional $60,000,000 of 3.50% Convertible Senior Notes due 2011 to the public for cash at a public offering price of 77.5% of principal resulting in $46,500,000 in gross proceeds to us. Debt issuance costs of approximately $6,057,000 related to the issuance are being amortized to interest expense, on a straight-line basis over the 48 month period to maturity of the notes.

The 3.50% Convertible Senior Notes due 2011 are initially convertible into approximately 16,718,000 common shares at a conversion rate of 74.074 of our common shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $13.50 per common share. The 3.50% Convertible Senior Notes due 2011 are convertible at any time by the holder. In the event of a “fundamental change,” holders of the Original 2011 Notes and the 3.50% Convertible Senior Notes due 2011 have the right to require us to repurchase all or any portion of their notes at a price equal to 100% of the principal amount plus accrued and unpaid interest. Under the indenture for the Original 2011 Notes and the 3.50% Convertible Senior Notes due 2011, a fundamental change will be deemed to occur if (i) a change of control transaction occurs in which substantially all of our common stock is exchanged either for consideration other than common stock that is listed on a U.S. national securities exchange or is exchanged for consideration other than common stock that is approved for quotation on a U.S. system of automated dissemination of quotations of securities or (ii) our common stock is neither listed for trading on a U.S. national securities exchange nor approved for listing on any U.S. system of automated dissemination of quotations of securities prices.

Before May 10, 2010, we may not redeem the 3.50% Convertible Senior Notes due 2011. On or after May 10, 2010, we may redeem any or all of the 3.50% Convertible Senior Notes due 2011 at 100% of the principal amount, plus accrued and unpaid interest. In addition, we may automatically convert some or all of the 3.50% Convertible Senior Notes due 2011 on or prior to the maturity date if the closing price of our common shares has exceeded 130% of the conversion price then in effect for at least 20 trading days during any consecutive 30 trading day period ending within five trading days prior to the notice of auto-conversion (the “auto-conversion feature”). If a holder elects to voluntary convert their 3.50% Convertible Senior Notes due 2011 or we elect to automatically convert some or all of the 3.50% Convertible Senior Notes due 2011 on or prior to May 10, 2010, we will pay additional interest to holders of such notes being converted. This additional interest will be equal to the amount of interest that would have been payable on the 3.50% Convertible Senior Notes due 2011 from the last day interest was paid, through and including May 10, 2010. Additional interest, if any, will be paid in cash or in our common shares, at our option. If we pay additional interest upon a voluntary conversion with our common shares, such shares will be

valued at the conversion price that is in effect at that time. If we pay additional interest upon an automatic conversion with our common shares, such shares will be valued at 90% of the automatic conversion price that is in effect at that time. These additional interest payments which may be issued upon conversion is considered an embedded derivative and requires separate accounting from the host debt. As of September 30, 2008, the fair value of the derivative is approximately $4,000 which reflects a change in the fair value of approximately $63,000 which is included as a gain on derivative in the consolidated statements of operations.

For the nine-month period ended September 30, 2008, we incurred approximately $5,911,000 in interest expense on our convertible debt, which is payable on a semi-annual basis. Additionally, we amortized approximately $9,318,000 as non-cash interest expense related to the accretion of the bond discount and approximately $1,136,000 in new debt issuance costs.

12.50% Convertible Guaranteed Senior Notes due 2011

On November 25, 2008, we completed an exchange offer in which we issued an aggregate principal amount of $85,184,000 12.50% Convertible Guaranteed Senior Notes due 2011 and 21,310,549 shares of our common stock in exchange for $212,979,000 in aggregate principal amount of our 3.50% Convertible Senior Notes due 2011. The 12.50% Convertible Guaranteed Senior Notes due 2011 are issued under an indenture dated as of November 25, 2008, which we and our wholly-owned subsidiary Guardian II Acquisition Corporation (“Guardian II”) entered into with U.S. Bank National Association, as trustee, which governs the terms of the 12.50% Notes due 2011. The 12.50% Notes due 2011 will mature on January 15, 2011. Interest on the 12.50% Notes due 2011 is payable at a rate of 12.50% per year, semiannually on April 15 and October 15 of each year, commencing April 15, 2009, except that the final interest payment date will be payable January 15, 2011. We may elect to pay interest on the 12.50% Convertible Guaranteed Senior Notes due 2011 in cash or by increasing the principal amount thereof or by issuing 12.50% Convertible Guaranteed Senior Notes due 2011 in an amount equal to the amount of interest for the applicable interest payment period.

The 12.50% Notes due 2011 are guaranteed by Guardian II and this guarantee is secured by a second priority lien on substantially all of the assets of Guardian II. The second priority lien is subject to the first priority lien on substantially all of the assets of Guardian II which is held by Paul Royalty Fund Holdings II (“PRF”) and secures our and Guardian II’s payment obligations to PRF under the First Lien Obligations (as defined below).

The 12.50% Notes due 2011 are convertible, at the option of the holder, at anytime on or prior to maturity, into shares of our common stock at an initial conversion rate of 909.0909 shares per $1,000 principal amount of 12.50% Convertible Guaranteed Senior Notes due 2011 (equal to a conversion price of approximately $1.10 per share). If a holder of 12.50% Convertible Guaranteed Senior Notes due 2011 elects to voluntarily convert some or all of its notes on or prior to November 25, 2010, we will pay additional interest to such holder. This additional interest will be equal to the amount of interest that would have been payable on the notes from the last day interest was paid on through and including November 25, 2010. Additional interest, if any, will be paid in cash or, solely at our option, in common shares or a combination of cash and common shares. If we pay additional interest upon a voluntary conversion with our common shares, such shares will be valued at the conversion price that is in effect at that time.

We have the right to automatically convert some or all of the 12.50% Convertible Guaranteed Senior Notes due 2011 on or prior to January 15, 2011 if the closing price of our common shares has exceeded 130% of the conversion price then in effect for at least 20 trading days during any consecutive 30 trading day period ending within five trading days prior to the notice of automatic conversion. If we elect to automatically convert some or all of the notes on or prior to November 25, 2009, we will pay additional interest to holders being converted. This additional interest will be equal to the amount of interest that would have been payable on the 12.50% Convertible Guaranteed Senior Notes due 2011 from the last day interest was paid on the notes, through and including November 25, 2009. Additional interest, if any, will be paid in cash or, solely at our option, in common

shares or a combination of cash and common shares. If we pay additional interest upon an automatic conversion with our common shares, such shares will be valued at 90% of the automatic conversion price that is in effect at that time.

Prior to October 15, 2010, the 12.50% Convertible Guaranteed Senior Notes due 2011 are not redeemable. On or after October 15, 2010, we may redeem some or all of the 12.50% Notes due 2011 for cash at 100% of the principal amount of the 12.50% Notes due 2011 to be redeemed, plus accrued and unpaid interest, to but excluding the redemption date.

In the event of a “fundamental change,” holders of the 12.50% Convertible Guaranteed Senior Notes due 2011 have the same right as holders of the 3.50% Convertible Senior Notes due 2011 to require us to repurchase all or any portion of their notes at a price equal to 100% of the principal amount plus accrued and unpaid interest. Under the Indenture the definition of “fundamental change” is the same as under the indenture which governs the 3.50% Convertible Senior Notes due 2011.

The Indenture also provides that we may not incur additional indebtedness in excess of $50 million (“Permitted Indebtedness”) from the earlier of (i) the date that is one year from the date on which our common stock has traded at a price which exceeds the conversion price then in effect for at least 20 trading days during any consecutive 30 trading day period, and (ii) the first anniversary of the maturity date of the 12.50% Convertible Guaranteed Senior Notes due 2011. Any indebtedness incurred to finance new product acquisitions or in connection with refinancing Permitted Indebtedness, our existing indebtedness or obligations or the 12.50% Convertible Guaranteed Senior Notes due 2011 would not be counted toward the aforementioned limit.

If an event of default occurs under the Indenture, the Trustee or the holders of at least 25% in principal amount of the notes may declare 100% of the principal of and accrued and unpaid interest on all the notes to be due and payable immediately. An event of default under the Indenture includes, without limitation, and subject to applicable cure periods:

•

default in the payment when due of principal or interest on the notes under the Indenture;

•

a failure to comply with any agreements contained in the notes issued under the Indenture, the Indenture or any agreements, including, without limitation, the Security Agreement (as defined below), executed in connection with granting, or that otherwise evidence, the second priority lien on the assets of Guardian II;

•

default by we or its subsidiaries in the payment of the principal or interest on any loan agreement or other instrument under which there may be outstanding, or by which there may be evidenced any, debt for money borrowed in excess of $20.0 million in the aggregate; and

•

certain events involving we or Guardian II’s bankruptcy, insolvency, or reorganization.

Other Financial Arrangements

To finance the acquisition of ANTARA in August 2006, we, together with Guardian II entered into several financing agreements with Paul Royalty Fund Holdings II, LP, (“PRF”) an affiliate of Paul Capital Partners, including the Revenue Interests Assignment Agreement, the Note Purchase Agreement and the Common Stock and Warrant Purchase Agreement, in consideration for an aggregate amount of $70 million.

Under the Revenue Interests Assignment Agreement (the “Revenue Agreement”), we sold PRF the right to receive specified royalties on our net sales in the United States (and the net sales of our affiliates and licensees) of FACTIVE tablets and Guardian II sold to PRF the right to receive specified royalties on Guardian II’s net sales in the United States (and the net sales of its respective affiliates and licensees) of the ANTARA capsules, in each case until December 31, 2016 in exchange for an aggregate of $40 million from PRF. The royalty payable to

PRF on net sales of ANTARA and FACTIVE are tiered as follows: 9% for the first $75 million in annual net revenues, 6% for annual net revenues in excess of $75 million, but less than $150 million, and 2% for annual net revenues which exceed $150 million. Once the cumulative royalty payments to PRF exceed $100 million, the royalties become nominal. In November of 2008, we entered into an amendment to the Revenue Agreement which is discussed in detail below under the subheading “Amendment to Revenue Interests Assignment Agreement.”

In connection with the Revenue Agreement, we recorded a liability, referred to as the revenue interest liability, of approximately $40 million in accordance with EITF No. 88-18, “Sales of Future Revenues” (EITF No. 88-18). We impute interest expense associated with this liability using the effective interest rate method and have recorded a corresponding accrued interest liability. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the life of the arrangement. The interest rate on this liability may vary during the term of the agreement depending on a number of factors, including the level of ANTARA and FACTIVE sales. Payments made to Paul Capital as a result of ANTARA and FACTIVE sales levels will reduce the accrued interest liability and the principal amount of the revenue interest liability. We currently estimate that the imputed interest rate associated with this liability will be approximately 19.58%. We recorded approximately $5,298,000 and $4,575,000 in interest expense related to this agreement in the nine-month periods ended September 30, 2008 and 2007, respectively. Through September 30, 2008, there have been no principal payments made to Paul Capital as a result of ANTARA or FACTIVE sales.

In the event of (i) a change of control of Oscient or Guardian II, (ii) a bankruptcy of Oscient or Guardian II, (iii) a transfer by Oscient or any of its subsidiaries of substantially all of either ANTARA or FACTIVE, (iv) subject to a cure period, breach of certain material covenants and representations in the Revenue Agreement or (v) in the event the sale of ANTARA is suspended due to a court issued injunction or we elect to suspend sales of ANTARA, in each case as a result of a lawsuit by certain third parties (each a “Put Event”), PRF has the right to require Oscient and Guardian II to repurchase from PRF its royalty interest at a price in cash which equals the greater of (a) 200% of cumulative payments made by PRF under the Revenue Agreement less the cumulative royalties previously paid to PRF; or (b) the amount which will provide Paul Capital, when taken together with the royalties previously paid, a 22% internal rate of return (the “Put/Call Price”). During the term of the agreement through September 30, 2008, we and Guardian II have paid approximately $14,262,000 in royalty payments to Paul Capital. Upon a bankruptcy event, the terms of the Revenue Agreement require Oscient and Guardian II to repurchase the PRF royalty interest at the Put/Call Price. In the event of a change of control of Oscient, we have the right to repurchase the PRF royalty interest for an amount equal to the Put/Call Price. We have determined that Paul Capital’s put option and our call option meet the criteria to be considered an embedded derivative and should be accounted for as such. We recorded a net liability of $1,005,000 related to the put/call option to reflect its estimated fair value as of the date of the agreement, in accordance with SFAS No. 133. This liability is revalued on a quarterly basis to reflect any changes in the fair value and any gain or loss resulting from the revaluation will be recorded in earnings. As of September 30, 2008, the fair value of the derivative is approximately $898,000 which reflects a change in the fair value of approximately $88,000 which has been recorded as a gain on derivative in the consolidated statements of operations.

During the first two fiscal years immediately following the fiscal year in which combined annual net sales of ANTARA and FACTIVE are equal to or greater than $125 million, Oscient and Guardian II have the right, but not the obligation, to reduce the royalty percentages due under the Revenue Agreement to PRF by 50% by paying PRF a price in cash which will provide Paul Capital, when taken together with the royalties previously paid, a 22% internal rate of return. During the first two fiscal years immediately following the fiscal year in which combined annual net sales of ANTARA and FACTIVE are equal to or greater than $250 million, Oscient and Guardian II have the right, but not the obligation, to repurchase the PRF royalty interest at a price in cash which will provide Paul Capital, when taken together with the royalties previously paid, a 22% internal rate of return.

Guardian II entered into a Note Purchase Agreement, (the “Note Purchase Agreement”), with PRF pursuant to which Guardian II issued and sold a $20,000,000 aggregate principal amount of 12% senior secured note, (“the

Note”), due on the fourth anniversary of the closing date, subject to Guardian II’s option to extend the maturity to the sixth anniversary of the closing date, provided (i) there are no defaults under the Note at the time, and (ii) we issue to PRF, at the time of the exercise of such option, a warrant for a number of shares of common stock equal to 10% of the principal balance plus accrued interest divided by $6.94, with an exercise price of $6.94 per share. If we exercise such option, the number of shares subject to the warrant issuable to PRF would be between 288,018 shares and 367,529 shares, depending upon the amount, if any, of the interest payable on the Note we elect to have added to the principal of the Note rather than paid in cash as described below.

Interest is payable semi-annually in arrears on the last day of each of March and September. Guardian II has the option to pay interest in cash or to have 50% of the interest paid in cash and 50% of the interest added to principal. In the event of a change of control of Oscient or on or after the second anniversary of the closing, Oscient and Guardian II may at its option prepay all or any part of the Note at a premium which declines over time. In the event of default, with “event of default” defined as a continuing Put Event under the Revenue Agreement as described in more detail above, the outstanding principal and interest in the Note will become immediately due and payable. From inception of the Note Purchase Agreement, we exercised our option to add interest expense payable to the principal of the Note. As of September 30, 2008, the amount added to the principal was approximately $2,675,000. This amount is recorded as other long-term liabilities on the consolidated balance sheets.

Subject to the Revenue Agreement and the Note Purchase Agreement, without the prior written consent of Paul Capital, Oscient and Guardian II have agreed not to (i) amend, waive any rights under, or terminate any material license agreements, including the agreements relating to the ANTARA and FACTIVE products, (ii) enter into any new agreement or amend or fail to exercise any of its material rights under existing agreements that would have a material adverse effect on Paul Capital’s royalty interest, and (iii) sell any material assets related to ANTARA or FACTIVE.

Pursuant to the terms of the Revenue Agreement and the Note Purchase Agreement, Guardian II and PRF entered into a Security Agreement, (the “Security Agreement”), under which Guardian II granted to PRF a security interest in and to substantially all assets owned by Guardian II (including rights to the ANTARA products) in order to secure its performance under each of the Revenue Agreement, the Note Purchase Agreement and the Note. To the extent the indebtedness under certain of our pre-existing debt obligations is refinanced or replaced and such replacement or refinancing indebtedness is secured, we have agreed to equally and ratably secure our obligations under the Revenue Agreement.

As part of the financing, we and PRF also entered into a Common Stock and Warrant Purchase Agreement, (the “Stock and Warrant Purchase Agreement”), pursuant to which, in exchange for $10 million, Oscient sold to PRF 1,388,889 shares (the “Shares”) of the Common Stock, at a price of $7.20 per share (the “Private Placement”) and issued PRF a warrant (the “Warrant”) to purchase 288,018 shares of Common Stock (the “Warrant Shares”) at an exercise price of $6.94 per share. The exercise price has subsequently been amended to be $0.45 per shares as discussed below. The Warrant is exercisable for seven years from the date of closing. The Warrant contains a net share settlement feature and penalties if Oscient does not deliver the applicable amount of Warrant Shares within three trading days of exercise of a Warrant by Paul Capital. The Warrant also contains provisions providing that, at Paul Capital’s election, Oscient must re-purchase the Warrant from PRF upon a sale of the Company in which the consideration for such sale is solely cash. The warrant has not been exercised as of September 30, 2008. We agreed, pursuant to the Stock and Warrant Purchase Agreement, to elect one person designated by PRF to our Board of Directors following the closing and to continue to nominate one person designated by PRF for election to our Board of Directors by our shareholders. The director designated by PRF shall resign and we shall no longer be required to nominate a director designated by PRF upon the later of the following events: (1) if PRF ceases to own at least five percent of our Common Stock or securities convertible into our Common Stock; (2) if we owe PRF less than $5,000,000 under the Note pursuant to the Note Purchase Agreement; (3) the cumulative payments to PRF made by us under the terms of the Revenue Agreement first exceed 250% of the consideration paid to us by PRF; or (4) if the

amounts due by us pursuant to the Revenue Agreement cease to be due. If at any time PRF’s designee is not elected to our Board of Directors, PRF’s designee will have a right to participate in all meetings of our Board of Directors in a non-voting observer capacity.

Amendment to Revenue Interests Assignment Agreement

On November 25, 2008 the First Amendment (the “Amendment”) by and among us, Guardian II and PRF dated November 5, 2008 to the Revenue Interests Assignment Agreement dated as of July 21, 2006 and restated August 18, 2006 became effective in accordance with its terms upon the completion of the Exchange Offer. The Amendment was entered into in order to secure PRF’s consent to the grant by Guardian II of a second-ranking security interest in and to the assets of Guardian II to secure Guardian II’s guarantee of the 12.50% Convertible Senior Guaranteed Notes due 2011.

In accordance with the terms of the Amendment we issued PRF (i) a $2.0 million aggregate principal amount note (the “2008 PRF Note”) with terms substantially identical to our 12.50% Notes due 2011 issued in the Exchange Offer, and (ii) 500,000 shares (the “Shares”) of our common stock. We also granted certain registration rights to PRF with respect to the 2008 PRF Note and the Shares. Additionally, we agreed to amend the exercise price of the Common Stock Purchase Warrant dated August 18, 2006 issued to PRF to purchase 288,018 shares of our common stock to be $0.45, the closing price of our common stock on the NASDAQ Global Market on the date immediately preceding the closing of the Exchange Offer.

Under the terms of the Amendment, in the event that the sum of the net sales of ANTARA and FACTIVE in the U.S. and the gross margin received by us from sales of FACTIVE outside of the U.S. (for which the definition of net revenues has been expanded to include in this Amendment) is less than 85% of certain specified annual sales thresholds, then PRF will be entitled to (i) an increase from 9% to 12% in the applicable royalty percentage payable on the first $75 million of sales of such products in the applicable year, and (ii) an increase from 6% to 8% in the applicable royalty percentage payable on net sales of such products in excess of $75 million and less than $150 million in the applicable year. The specified sales thresholds are $115 million in 2009, $135 million in 2010, $150 million in 2011 and $175 million thereafter through the term. Furthermore, the Amendment provides that in the event that we fail to achieve the specified sales threshold in any applicable year, the increased applicable royalty percentage shall also be payable on the net sales of any future drug products acquired or in-licensed by us or our subsidiaries. The increase in the applicable percentage payable on net sales shall be limited to a maximum payment to PRF of $2.25 million per year and $15 million during the term of the Revenue Agreement, and in no event shall such payment exceed the amount which PRF would have received in the applicable year had the specified sales threshold for that year been achieved.

The Amendment also provides that in the event that we or our subsidiaries acquire or in-licenses additional drug products, we shall make a one-time milestone payment to PRF of $1.25 million on the second anniversary of our first commercial sale of any such product.

Under the terms of the Amendment, in the event that PRF and we determine that the fair market value of the collateral in which PRF has been granted a security interest by Guardian II is less than the Put/Call Price (see Note 7b below under the heading “Contractual Obligations”), we will elect, in our sole discretion, to either grant PRF a security interest in 25% of each additional drug product acquired or in-licensed by us or our subsidiaries, or pay PRF $1.5 million on the second year anniversary of our first commercial sale of each such product.

The Amendment also provides that any acceleration or failure to pay the 12.50% Convertible Guaranteed Senior notes due 2011 shall be considered a Put Event (see Note 7b below under the heading “Contractual Obligations”).

We issued to PRF (i) a $2.0 million aggregate principal amount note which is substantially identical to the 12.50% Convertible Guaranteed Senior notes due 2011, and (ii) 500,000 shares of our common stock. We also granted certain registration rights to PRF with respect to the note and the shares. Additionally, we agreed to amend the exercise price of the Common Stock Purchase Warrant dated August 18, 2006 issued to PRF to purchase 288,018 shares of our common stock to be equal to the closing price of our Common Stock on the NASDAQ Global Market on November 24, 2008, the date immediately preceding the closing of our November 2008 exchange offer.

Contractual Obligations

Our major outstanding contractual obligations relate to our convertible promissory notes, our facility leases and our financing agreements with Paul Royalty Fund Holdings II, LP, through which we funded our acquisition of ANTARA. The following table summarizes our significant contractual obligations as of December 31, 2007 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands).


	2008			2009			2010			2011			2012		Thereafter		Total
Operating leases	$	5,544		$	5,822		$	6,014		$	2,005		$	469	$	19	$	19,873
Sublease contracted income		(2,795	)		(746	)		(716	)		(122	)		—		—		(4,379	)
Current sublease forecasts (a)		—			(500	)		(563	)		(96	)		—		—		(1,159	)

		2,749			4,576			4,735			1,787			469		19		14,335
Convertible promissory notes, including interest (b, c, f)		7,927			24,952			7,927			228,803			—		—		269,609
Term Loan (d)		1,321			1,402			26,625			—			—		—		29,348

Total forecasted contractual obligations	$	11,997		$	30,930		$	39,287		$	230,590		$	469	$	19	$	313,292

(a)	The current market reflects lower demand and cost for space, as well as shorter term leases.

(b)

Upon the closing of the convertible debt exchange in May 2007, we exchanged approximately $9.0 million of GeneSoft promissory notes plus accrued interest of approximately $1.6 million for approximately $13.7 million of 3.5% senior convertible promissory notes due in April 2011. Approximately $13.3 million plus accrued interest of the original GeneSoft promissory notes remain outstanding as of September 30, 2008 and are due February 9, 2009.

(c)

In the quarter ended June 30, 2007, we issued $60 million in principal amount of 3.5% senior convertible promissory notes due in April 2011 and also refinanced approximately $151.9 million in principal amount of 3¹/2% senior convertible promissory notes due in April 2011. These notes are convertible into shares of our common stock at the option of the holders at a conversion price of $13.50 per share. In connection with the issuance, we recorded deferred financing costs of approximately $6.1 million which is being amortized to interest expense on a straight-line basis over the period the notes are outstanding.

(d)

Pursuant to the financing of our acquisition of ANTARA, our wholly owned subsidiary, Guardian II Acquisition Corporation, entered into a Note Purchase Agreement with PRF pursuant to which Guardian II issued and sold a $20.0 million aggregate principal amount of 12% senior secured note due on the fourth anniversary of the closing date, subject to Guardian II’s option to extend the maturity to the sixth anniversary of the closing date. Interest is payable semi-annually in arrears on the last day of each of March and September. Guardian II has the option to pay interest in cash or to have 50% of the interest paid in cash and 50% of the interest added to principal.

(e)	The above contractual obligation table excludes amounts payable to PRF in relation to the Revenue Interests Agreement.

(f)	See above section or “Our Outstanding Debt Obligations and Equity Financings” for a description of the November 2008 Exchange Offer, November 2008 amendment to the Revenue Interests Assignment Agreement and the January 2009 Amendment to the 2009 notes.

In addition to the amounts reflected in the table above, in the future, we may owe royalties and other contingent payments to our collaborators and licensors, based on the achievement of product sales and specified other objectives and milestones, including a minimum annual product purchase commitment to Ethypharm pursuant to the ANTARA license agreement.

In October 2008, we entered into an amended sublease agreement with one of our tenants. This amended sublease extends the tenant’s term by two years to February 2011 and also subleases additional space from January 2009 until February 2011. Future contracted sublease income will be $1,009,000, $1,081,000 and $184,000 in 2009, 2010, and 2011, respectively.

BUSINESS

We are a commercial-stage pharmaceutical company marketing Food and Drug Administration (FDA)-approved products in the United States. Our strategy is to grow the sales of our existing products and to gain access to new products via transactions, including acquisition, in-licensing and co-promotion. We have developed a commercial infrastructure, including a national sales force calling on targeted primary care physicians, cardiologists, endocrinologists and pulmonologists in the United States.

We currently market two products: ANTARA^® (fenofibrate) capsules, a cardiovascular product, and FACTIVE^® (gemifloxacin mesylate) tablets, a fluoroquinolone antibiotic. ANTARA is approved by the FDA to treat hypercholesterolemia (high blood cholesterol) and hypertriglyceridemia (high triglycerides) in combination with a healthy diet. We license the rights to ANTARA from Ethypharm, S.A. of France (Ethypharm) and began promoting ANTARA in late August 2006. In 2007, ANTARA generated approximately $59 million in net revenues. FACTIVE is indicated for the treatment of community-acquired pneumonia (CAP) of mild to moderate severity and acute bacterial exacerbations of chronic bronchitis, or AECB. We license the rights to gemifloxacin, the active ingredient in FACTIVE tablets, from LG Life Sciences of the Republic of Korea (LG Life Sciences) and launched FACTIVE in the U.S. market in September 2004. In fiscal 2007, FACTIVE generated approximately $21 million in net revenues.

Additionally, we have a novel, late-stage antibiotic candidate, Ramoplanin for the treatment of Clostridium difficile-associated disease (CDAD). We have made the strategic decision to concentrate our financial resources on building our revenues for products promoted to community-based physicians in the United States and are seeking to out-license, co-develop or sell the rights to Ramoplanin to a partner.

Our goal is to increase the sales of our existing products and to gain access to new primary care products via transactions, including acquisition, in-licensing and co-promotion for the U.S. marketplace in order to leverage our existing sales force and commercial infrastructure. Our review of potential additions to our portfolio of marketed products is focused on those products which are commonly prescribed by those primary care physicians that we currently visit during the marketing of ANTARA and FACTIVE. As we currently direct our sales effort largely at those primary care physicians that treat older patients with co-morbities, a range of therapeutic categories can be considered for our portfolio, including cardiovascular, diabetes, metabolic, anti-infectives among others.

We have been pursuing privately raising additional capital from investors through equity financing, the incurrence of indebtedness, or a combination of equity and debt. We plan to use the additional capital if raised to fund operations and repay approximately $17 million of indebtedness which comes due in December 2009, for operating cash and to execute our business strategy. There can be no assurance that we will be able to raise additional capital in the future.

ANTARA

The Fenofibrate and Cholesterol-Treatment Markets

Nearly 37 million Americans have total cholesterol values above recommended levels and heart disease remains the number one cause of death in the U.S. Abnormal cholesterol and lipid levels, known as dyslipidemia, can lead to the development of atherosclerosis, a dangerous hardening of blood vessels and a primary cause of coronary heart disease. Managing cholesterol levels is a complex undertaking and several therapeutic options are available to treat different types of abnormalities. Statins are the standard of care for lowering high levels of LDL-C (low density lipoprotein cholesterol). Fenofibrate products have demonstrated their utility in managing “atherogenic dyslipidemia” or “mixed dyslipidemia” (also known as lipid abnormalities) which are characterized by high triglycerides, low HDL-C (high density lipoprotein cholesterol), high levels of remnant-like particle

cholesterol and a high proportion of cholesterol carried by small, dense LDL particles. Other drugs commonly used to treat lipid abnormalities include niacin and omega-3 fatty acids.

ANTARA’s sales accounted for approximately 5% of the U.S. fenofibrate sales for the three-month period ending September 30, 2008.

Indications and Efficacy

ANTARA is a once-daily formulation of fenofibrate approved for use in combination with a diet restricted in saturated fat and cholesterol to reduce elevated LDL-C (“bad” cholesterol), triglyceride and apolipoprotein B (free floating fats in the blood) levels and to increase HDL-C (“good” cholesterol) in adult patients with high cholesterol or an abnormal concentration of lipids in the blood. Fenofibrate products work primarily to lower triglycerides and increase HDL-C. ANTARA received FDA approval in November 2004 and is approved and marketed in 43 mg and 130 mg doses. The predominantly prescribed dose is 130 mg while the 43 mg dose is generally used for titration and in patients with impaired renal function. ANTARA was approved based in part on demonstrating its bioequivalence to Abbott Laboratories’ fenofibrate product TriCor^®, meaning that, under FDA guidelines, the bioequivalence of the two products does not differ significantly when the two products are given under similar conditions. ANTARA was also studied in the Triglyceride Reduction in Metabolic Syndrome study, known as TRIMS, to measure the impact of ANTARA on cholesterol levels in patients with multiple cardiovascular risk factors and to assess the use of ANTARA without regard to meals.

In the treatment of hypercholesterolemia, ANTARA is approved as adjunctive therapy to diet to reduce elevated LDL-C, total cholesterol (total-C), triglycerides and apolipoprotein B (apo B) and to increase HDL-C in adult patients with primary hypercholesterolemia or mixed dyslipidemia. The effects of fenofibrate at a dose equivalent to 130 mg ANTARA per day were assessed in four randomized, placebo-controlled, double-blind, parallel-group studies. Fenofibrate therapy lowered LDL-C, total-C, and the LDL-C/HDL-C ratio. In these studies, fenofibrate therapy also lowered triglycerides, raised HDL-C and significantly reduced apo B as compared with placebo.

ANTARA is also indicated as an adjunctive therapy to diet for the treatment of hypertriglyceridemia, which affects an estimated 10% of American men over the age of 30 and 10% of American women over the age of 55. In clinical studies, the effects of fenofibrate on serum triglycerides were studied in two randomized, double-blind, placebo-controlled clinical trials of 147 hypertriglyceridemic patients for eight weeks. In patients with hypertriglyceridemia, treatment with fenofibrate at dosages equivalent to 130 mg ANTARA per day effectively decreased very low density lipoprotein (VLDL) triglycerides and VLDL cholesterol.

Mechanism of Action: ANTARA increases lipolysis and elimination of triglyceride-rich particles from plasma by activating lipoprotein lipase and reducing production of apoprotein C-III (an inhibitor of lipoprotein lipase activity). The resulting decrease in triglycerides produces an alteration in the size and composition of LDL from small, dense particles (which are thought to be atherogenic due to their susceptibility to oxidation), to large, buoyant particles. These larger particles have a greater affinity for cholesterol receptors and are catabolized rapidly. ANTARA also activates PPAR-alpha, which induces an increase in the synthesis of apoproteins A-I, A-II and HDL-cholesterol.

Competitive Advantages: The TRIMS study produced exclusive clinical data for ANTARA. In the study, ANTARA was evaluated in patients with elevated triglyceride levels and multiple cardiovascular risk factors. Of the 146 patients studied, 70% had hypertension and 32% had diabetes. The double-blind, placebo-controlled trial measured levels of total cholesterol, triglycerides, HDLs and LDLs, as well as other types of cholesterol, during eight weeks of therapy. In the study, ANTARA demonstrated the ability to reduce triglyceride and increase

HDL-C levels after two weeks of therapy. At the end of therapy, patients treated with ANTARA had a statistically significant 37% reduction in their triglyceride levels and a statistically significant 14% increase in their HDL levels. ANTARA is distributed in 130 mg and 43 mg capsule formulations, as compared to the 145 mg and 48 mg tablet formulations of TriCor, which is marketed by Abbott Laboratories.

License Agreement

On August 18, 2006, we acquired rights to ANTARA in the United States from Reliant Pharmaceuticals Inc. (Reliant) for $78.0 million plus approximately $4.3 million for ANTARA inventory, excluding estimated transaction costs. Under the terms of our acquisition of ANTARA we were assigned rights to an exclusive license from Ethypharm, S.A. (Ethypharm). Pursuant to the Ethypharm license, in order to maintain the exclusivity of our rights, we must achieve minimum annual sales in the United States until February 2012 or alternatively Ethypharm may elect to convert our exclusive license to a non-exclusive; however we would then have the option to compensate Ethypharm for any shortfall to maintain the exclusive license. As of September 30, 2008, we have recorded approximately $605,000 related to the potential minimum royalty obligation to Ethypharm. During the term of the agreement with Ethypharm, we are obligated to pay a royalty on net sales of ANTARA in the U.S., including a royalty on other fenofibrate monotherapy products in formulations and dosage forms that may be substantially similar or identical to ANTARA developed by us. The license term expires in February 2020 and, absent notice of termination by either party, automatically renews for consecutive periods of two (2) years each. Under the terms of the agreement, at our option, Ethypharm is obligated to either manufacture and deliver to us finished fenofibrate product or deliver active pharmaceutical ingredient (API) to us for encapsulation and packaging. Ethypharm also has a right of first refusal on any divestiture of the ANTARA rights by us. Additional Oscient obligations under the Ethypharm agreement include funding a portion of the active pharmaceutical ingredient safety stock that Ethypharm is required to maintain.

Pursuant to the terms of our acquisition of ANTARA from Reliant, we also acquired the New Drug Application, or NDA and the Investigational New Drug application, or IND, covering the ANTARA products in the United States, clinical data, inventory, the ANTARA^® trademark in the United States and certain related contracts and licenses covering intellectual property rights related to the ANTARA products. We also assumed certain of Reliant’s liabilities relating to the ANTARA products.

In accordance with the terms of our asset purchase agreement with Reliant Pharmaceuticals, Inc. (Reliant) whereby we acquired ANTARA, we assumed certain of Reliant’s liabilities related to ANTARA, including obligations to make certain royalty and milestone payments on sales of ANTARA. Under the terms of one of the third party licenses we assumed related to ANTARA not including the Ethypharm license, we are obligated to make certain royalty payments to a third party based on sales of ANTARA, which royalty payments are subject to a low single digit increase in the event of a change in control of the Company. The third party license also limits our ability to co-promote ANTARA with companies other than contract sales organizations or similar companies. We have engaged the third party licensor to renegotiate the terms of that license and have suspended further royalty payments while the terms of such license are being renegotiated.

We are not required to pay Reliant a royalty on the sale of the ANTARA products; however, we are required to pay a low single-digit royalty to Reliant for a specified time period on net sales of any line extensions and improvements to the ANTARA products that we develop, which include any product containing fenofibrate as the API. We currently do not pay royalties to Reliant. We also agreed that we would not, at any time prior to August 2016, develop or sell any product in the United States that is a combination of fenofibrate and an omega-3 compound without the prior written consent of Reliant. On December 19, 2007, Reliant was acquired by GlaxoSmithKline.

FACTIVE

Infectious Diseases Market

Infectious diseases represent the second leading cause of death worldwide accounting for over 14 million deaths each year, with lower respiratory tract infections alone causing 3.9 million deaths annually. Bacterial infections are the ninth leading cause of death in the U.S. Sales of antibiotics in the U.S. totaled approximately $15 billion in 2008. Within the antibiotic market, fluoroquinolones, a product class with close to $3.9 billion in annual sales in the U.S. in 2007, have been gaining market share at the expense of older classes of antibiotics, according to Wolters Kluwer, a leading provider of pharmaceutical market data. This is a trend that is expected to continue as resistance to older antibiotic classes increases.

The principal classes of antibiotics include beta-lactams, fluoroquinolones, macrolides, tetracyclines, aminoglycosides, glycopeptides and trimethoprim combinations. Bacterial resistance to existing antibiotics has increased in recent years, leading to bacterial infection recurrences, treatment failures and higher costs. These factors have fueled a growing need for more effective products in existing antibiotic classes, as well as for products with new mechanisms of action.

Acute Bacterial Exacerbations of Chronic Bronchitis: Chronic bronchitis is a health problem associated with significant morbidity and mortality. It is estimated that chronic bronchitis affects approximately 9 million adults in the United States. Patients with chronic bronchitis are prone to frequent exacerbations, characterized by increased cough and other symptoms of respiratory distress. Longitudinal studies have estimated that 1 to 4 exacerbations occur each year in patients with chronic bronchitis; studies estimate that two-thirds are caused by bacteria. Exacerbations are estimated to account for approximately 12 million physician visits per year in the U.S. Antibiotic therapy, the standard treatment for acute bacterial exacerbations of chronic bronchitis, or AECB, is typically effective in reducing the course of illness for patients. Fluoroquinolones are frequently used to treat AECB due to their activity versus Haemophilus influenzae and Moraxella catarrhalis, two of the most common causes of these infections. Newer fluoroquinolones have enhanced activity versus Streptococcus pneumoniae, or S. pneumoniae, another common cause of these infections.

Community-Acquired Pneumonia: Community-acquired pneumonia, or CAP, is a common and serious illness in the United States. Of the estimated 4 to 5 million cases per year of CAP, nearly 1 million cases occur in patients over the age of 65. CAP cases result in approximately 10 million physician visits and as many as 1 million hospitalizations annually. Antibiotics are the mainstay of treatment for most patients with pneumonia, and where possible, antibiotic treatment should be specific to the pathogen responsible for the infection on a case by case basis. However, since the responsible pathogen is not identified in a high proportion of patients with CAP, physicians usually take an empiric approach to treatment in the first instance. Over the last decade, resistance to penicillins and macrolides has increased significantly, and in many cases, fluoroquinolones are now recommended as a first line of therapy due to their efficacy against a wide range of respiratory pathogens, including many antibiotic resistant strains. The most recent treatment guidelines from the Infectious Diseases Society of America and the American Thoracic Society recommend fluoroquinolones as a first-line treatment for certain higher-risk patients with CAP and as therapy for treating patients with pneumonia in geographic regions of the U.S. with high levels of macrolide-resistant S. pneumoniae.

Indications and Efficacy

FACTIVE is a member of the fluoroquinolone class of antibiotics. In April 2003, FACTIVE was approved by the FDA for the five-day treatment of AECB and seven-day treatment of CAP of mild to moderate severity. In July 2003, FACTIVE was also approved by the FDA to treat CAP caused by multi-drug resistant S. pneumoniae, a growing clinical concern. Multi-drug resistant S. pneumoniae, or MDRSP, is defined as S. pneumoniae resistant to two or more of the following antibiotics: penicillin, second-generation cephalosporins (such as cefuroxime), macrolides, tetracyclines, and trimethoprim/sulfamethoxazole. In May 2007, FACTIVE was approved by the FDA for the five-day treatment of CAP.

FACTIVE has potent in vitro activity against a wide range of Gram-positive, Gram-negative and atypical pathogens, including key respiratory pathogens, such as S. pneumoniae, H. influenzae and M. catarrhalis. FACTIVE is bactericidal at clinically achievable concentrations. Gemifloxacin, the active ingredient in FACTIVE, has minimum inhibitory concentrations, or MICs, as low as 0.032 µg/ml for S. pneumoniae. In clinical trials, FACTIVE has been administered to approximately 8,000 patients and had a good overall safety and tolerability profile. FACTIVE has been the subject of over 200 scientific publications and has been mentioned in nearly 300 scientific articles. Among the research published are data from a study involving 438 subjects indicating that a statistically significant higher percentage of patients treated with FACTIVE (71%) remained free of AECB recurrences than those treated with a comparator agent (58.5%) over a six-month period following treatment.

Mechanism of Action: FACTIVE tablets act by inhibiting bacterial DNA synthesis through the inhibition of both DNA gyrase and topoisomerase IV, two enzymes essential for bacterial growth and survival. Strains of S. pneumoniae showing mutations in both DNA gyrase and topoisomerase IV (double mutants) are resistant to most fluoroquinolones. Since gemifloxacin has the ability to inhibit both target enzymes at therapeutically relevant drug levels, some of these S. pneumoniae double mutants remain susceptible to FACTIVE. FACTIVE is also active against many strains of S. pneumoniae that are resistant to other classes of antibiotics.

Clinical Efficacy: The clinical development program for FACTIVE included 19 Phase III trials in respiratory tract infections. FACTIVE was studied for the treatment of acute bacterial exacerbations of chronic bronchitis in three pivotal, non-inferiority, double-blind, randomized, active-controlled clinical trials using 320 mg once daily for five-days. In these principal Phase III AECB studies, FACTIVE given once daily for five-days was at least as effective as the comparators given for seven-days, with clinical response rates in the FACTIVE arms ranging from 85.4% to 93.6%. FACTIVE was also studied for the treatment of CAP in three double-blind, randomized, active-controlled clinical studies, one open, active-controlled study, and two uncontrolled studies. The results of these studies showed that gemifloxacin was effective in the treatment of mild to moderate CAP.

Safety and Tolerability: FACTIVE tablets have been studied in approximately 8,000 patients in clinical trials and we estimate that to date, approximately 920,000 prescriptions have been dispensed for FACTIVE since its launch in September 2004. In clinical trials, the incidence of adverse events reported for FACTIVE tablets was low and comparable to comparator drugs, namely beta-lactam antibiotics, macrolides and other fluoroquinolones. Most adverse events were described as mild to moderate. The most common adverse events reported in FACTIVE clinical trials were diarrhea, rash and nausea. In clinical trials across all durations of therapy, rash was reported in 2.8% of patients receiving gemifloxacin and was more commonly observed in patients with treatment durations greater than seven-days and patients less than 40 years of age, particularly females. In clinical trials conducted in 3,696 patients treated with five-days of FACTIVE therapy, the rate of rash reported was 1.1% vs. 0.7% for comparator antibiotics. Since the launch of the drug, the post-marketing adverse events reported have been consistent with those observed in the clinical development program, and with the fluoroquinolone class as a whole.

Competitive Advantages: We believe the competitive advantages of FACTIVE tablets include:

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FACTIVE has been shown in in vitro studies to be active against many bacterial isolates resistant to other classes of antibiotics.

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FACTIVE is the most active fluoroquinolone against S. pneumoniae, one of the most prevalent pathogens found in lower respiratory tract infections, compared to the currently marketed fluoroquinolones (MIC90 0.032 µg/mL).

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FACTIVE has a dual mechanism of action in bacteria, targeting two enzymes essential for bacterial growth and survival at therapeutically relevant drug levels, and as a result we believe FACTIVE has low potential for generating bacterial resistance.

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FACTIVE can be dosed once daily, with short courses of therapy (five-days) for both AECB and CAP.

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FACTIVE is effective in the treatment of CAP due to penicillin-resistant S. pneumoniae and due to MDRSP. In clinical trials, of 22 patients with MDRSP treated with FACTIVE for seven-days, 19 (87%) achieved both clinical and bacteriological success at follow-up.

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FACTIVE achieves high concentration levels in lung and bronchial tissues and in secretions.

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FACTIVE has composition of matter patent protection which extends into 2018, longer than the composition of matter patent protection for any currently marketed fluoroquinolone or other antibiotic widely used to treat respiratory tract infections.

Post-Marketing Commitments: As a post-marketing commitment to the FDA, we completed a Phase IV trial of FACTIVE. This prospective, randomized study examined the activity of FACTIVE tablets (5,000 patients) versus an active comparator (2,500 patients) in treating patients with mild to moderate CAP or AECB. The study included patients of different ethnicities so that safety information in populations not substantially represented in the existing clinical trial program could be collected, specifically as it relates to rash. This Phase IV trial was initiated in the fall of 2004 and was completed in February 2007. The final report of the utilization study was submitted to the FDA in March of 2008. In the future, we need only to provide the FDA with annual reports containing safety information.

Recent developments: On July 7, 2008, we received notice from the FDA directing that the prescribing information for all fluoroquinolone products, including FACTIVE, be revised to include a Boxed Warning relating to the risk of tendonitis and tendon rupture associated with the use of fluoroquinolone product. Warnings regarding the risk of tendon related adverse events were already included in the prescribing information, as part of a class labeling, for all fluoroquinolones. The FDA has cautioned that such risk is increased in patients over the age of 60 and in those on concomitant corticosteroid therapy, as well as kidney, heart and lung transplant recipients. The FDA has also required that all manufacturers of fluoroquinolones submit a Medication Guide. The FDA has approved our changes to the package insert and Medication Guide as required by FDA to ensure patient safety and improve physician understanding of the risk-benefit profile for fluoroquinolone products, including FACTIVE. We have also submitted a proposed Risk Evaluation and Mitigation Strategy (“REMS”) as required by FDA of all sponsors of fluoroquinolone products to ensure patients’ safe and effective use of such products. We are working with the FDA to finalize certain details of the REMS.

Additional Development of FACTIVE

Five-Day Treatment of CAP: We completed a clinical trial to demonstrate that a five-day course of FACTIVE for the treatment of mild to moderate CAP is as effective as the previously approved seven-day course of treatment. On September 21, 2006, we received an approvable letter from the FDA for the supplemental New Drug Application (sNDA) seeking approval for the five-day treatment of CAP with FACTIVE tablets. In accordance with the letter, we provided clarification and additional interpretation regarding certain data included in the application to assist the FDA in its evaluation. On May 1, 2007, the FDA approved FACTIVE for the five-day treatment of CAP.

In the five-day CAP clinical trial, a five-day course of therapy with FACTIVE was shown to be as effective as the FDA-approved seven-day course of treatment, with both arms displaying excellent clinical response rates. Further, data showed that the bacteriological and radiologic success rates with five-days of therapy were also non-inferior to the success rates with seven-days of therapy. The multicenter, randomized, double-blind study enrolled 510 patients with CAP, with 469 patients comprising the per protocol group. Investigators measured clinical and bacteriological response at end of therapy as well as clinical, bacteriological and radiologic response at follow-up (two to three weeks post therapy). Clinical response at follow-up, the primary endpoint, in the per protocol group was 95% for the five-day treatment arm and 92% for the seven-day treatment arm (95% CI: -1.48, 7.42), demonstrating non-inferiority between the two groups. Further, clinical response at end of therapy in the per protocol group was 96% for the five-day group and 96% for the seven-day group (95% CI: -3.85, 3.42). The study also yielded encouraging results for bacteriological response. Bacteriological response in the per protocol

population was 91% for the five-day and seven-day groups at follow-up (95% CI: -6.89, 7.93) and 94% for the five-day group and 96% for the seven-day group (95% CI: -8.27, 3.25) at end of therapy. The study demonstrated radiologic response at follow-up in the per protocol population of 98% for the five-day arm and 93% for the seven-day arm (95% CI: 0.35, 7.91). FACTIVE was well-tolerated in the study, with a low withdrawal rate due to adverse events: 1.2% for the five-day group and 2.0% for the seven-day group. The most common adverse event reported was a laboratory finding of elevated liver enzymes (increased ALT and increased AST). Analysis of all ALT/AST values demonstrated that the elevations were significantly associated with baseline ALT levels (elevated in many patients) with no significance or association with a particular treatment group. There was also no evidence of symptomatic hepatic events. In addition, the rate of drug-related rash in both treatment groups was low: 0.4% for the five-day arm and 2.8% for the seven-day arm. There were no withdrawals due to rash.

Acute Bacterial Sinusitis: As part of the FACTIVE development program, several studies relating to acute bacterial sinusitis, or ABS, were completed, and, in November 2005, we filed an sNDA for ABS. In September 2006, the FDA’s Anti-Infective Drugs Advisory Committee voted not to recommend approval of this sNDA. In November 2006, we voluntarily withdrew our sNDA seeking approval of the ABS indication.

FACTIVE IV: An intravenous formulation of gemifloxacin has also been studied. If we elect to further pursue such a formulation, additional formulation development will be necessary before initiating a bioequivalence study.

License Agreement with LG Life Sciences

We license the rights to gemifloxacin, the active ingredient in FACTIVE tablets, from LG Life Sciences. We have the rights to commercialize gemifloxacin in North America, France, Germany, the United Kingdom, Luxembourg, Ireland, Italy, Spain, Portugal, Belgium, the Netherlands, Austria, Greece, Sweden, Denmark, Finland, Norway, Iceland, Switzerland, Andorra, Monaco, San Marino, Vatican City, Poland, Czech Republic, Slovakia, Slovenia, Hungary, Estonia, Latvia, Lithuania, Liechtenstein, Malta, Cyprus, Romania, Bulgaria, Croatia, Serbia and Montenegro, Bosnia and Herzegovina, Albania and the Former Yugoslav Republic of Macedonia. The term of the agreement with respect to each country extends at least through the life of the patents covering gemifloxacin in such country. In the United States, the last of the currently issued patents for composition of matter expires in 2018. The patent term could extend further in countries outside of the U.S. depending upon several factors, including whether we obtain patent extensions and the timing of our commercial sale of the product in a particular country.

Under the terms of the agreement, LG Life Sciences has agreed to supply and we are obligated to purchase from LG Life Sciences all of our anticipated commercial requirements for the FACTIVE active pharmaceutical ingredient, or API. LG Life Sciences currently supplies the FACTIVE API from its manufacturing facility in South Korea.

The agreement with LG Life Sciences also requires that we achieve a minimum gross sales level of $30 million from our licensed territories over a 12-month period of time starting in approximately the third quarter of 2007 to the third quarter of 2008 which, if not met, LG Life Sciences could elect to terminate the agreement and have the technology be returned to LG Life Sciences. We believe that we have achieved the minimum gross sales threshold level. After LG Life Sciences’ review of our financial information during the fourth quarter of 2008, it has accepted our analysis and concluded that it will not terminate the agreement based on the minimum gross sales level of $30 million. Under this agreement, we are responsible, at our expense and through consultation with LG Life Sciences, for the clinical and commercial development of gemifloxacin in the countries covered by the license, including the conduct of clinical trials, the filing of drug approval applications with the FDA and other applicable regulatory authorities and the marketing, distribution and sale of gemifloxacin in our territory.

later of (i) the expiration of the patents covering FACTIVE in such country or (ii) the expiration of data exclusivity in Mexico, Canada or the European Union respectively, or 2014 in the U.S. We are also obligated to make aggregate milestone payments of up to approximately $40 million (not including payments to LG Life Sciences previously made pursuant to up-front obligations or achievements of certain milestones) including milestone payments required by the amendments described below upon achievement of additional regulatory approvals and sales thresholds.

Collaborations and Partnerships for FACTIVE

Pfizer, S.A. de C.V. On February 6, 2006, we entered into a Sublicensing and Distribution Agreement with Pfizer, S.A. de C.V. (Pfizer Mexico), pursuant to which we sublicensed our rights to market FACTIVE tablets in Mexico to Pfizer Mexico. In exchange for those rights, Pfizer Mexico has made an up-front payment and has agreed to pay milestone payments upon obtaining certain regulatory approvals and sales goals, as well as royalties on future sales. The up-front payment is being recognized as revenue over the term of our continuing obligations under the agreement. These royalty rates are subject to reduction upon expiration of certain patents in Mexico for FACTIVE or if a generic form of gemifloxacin has a material impact on Pfizer Mexico’s sales volumes in Mexico. Pfizer Mexico is obligated to exclusively purchase from us, and we must exclusively supply, all API for FACTIVE. The agreement with Pfizer Mexico may be terminated by either party upon the occurrence of certain termination events, including Pfizer Mexico’s right to terminate at any time after August 2007, the first anniversary of launch of FACTIVE tablets in Mexico upon six-months prior written notice. Upon termination, Pfizer Mexico is obligated to assign any and all rights to regulatory approvals in Mexico to us or our designee.

In October 2006, Pfizer Mexico launched its promotion and marketing of FACTIVE-5 in Mexico for the five-day treatment of acute bacterial exacerbations of chronic bronchitis (AECB), acute bacterial sinusitis (ABS) and community-acquired pneumonia (CAP). On December 9, 2008 Pfizer Mexico received regulatory approval to market FACTIVE tablets for the Uncomplicated Urinary Tract Infections (uUTI) indication with a 3 day course of treatment, from COFEPRIS, the pharmaceutical regulatory agency of Mexico.

Abbott Laboratories Ltd. On August 9, 2006, we granted the commercialization rights to FACTIVE tablets in Canada to Abbott Laboratories, Ltd. (Abbott Canada), the Canadian affiliate of Abbott. In exchange for those rights, Abbott Canada agreed to a transfer price on product purchases and to make certain payments to us upon achievement of certain regulatory and sales milestones. FACTIVE tablets are currently approved in Canada for the five-day treatment of AECB. Our license agreement with Abbott Canada was terminated in December 2008, and Abbott Canada has ceased all development and commercialization of Factive in Canada of FACTIVE revenues in 2008.

Menarini International Operation Luxembourg SA. We entered into a License, Supply and Marketing Agreement with Menarini International Operation Luxembourg SA (Menarini), a wholly-owned subsidiary of Menarini Industrie Farmaceutiche Riunite S.r.l. dated December 28, 2006, whereby we sublicensed our rights to sell FACTIVE tablets in the European Union to Menarini. Under the terms of our agreement, Menarini is responsible for obtaining regulatory approval for FACTIVE in the European Union, and Oscient has agreed to reimburse Menarini for expenses associated with such regulatory development up to an agreed limit. Menarini has also paid us an up-front payment which is being recognized over the term of our continuing obligations under the agreement of approximately thirty-three months. Menarini has also agreed to pay us milestone payments upon obtaining certain regulatory and reimbursement approvals and upon achieving certain annual net sales goals, which could total up to $23.0 million, if all the milestones are achieved. Menarini will pay us a transfer price on purchases of the active pharmaceutical ingredient, or API, for FACTIVE, which is determined based on a percentage of quarterly sales of FACTIVE by Menarini in Europe. Menarini is also obligated to exclusively purchase from us, and we must exclusively supply, all API for FACTIVE to be sold in Europe for the earlier of (i) the expiration of the life of certain patents covering the product or (ii) expiration of data exclusivity. Our agreement with Menarini may be terminated by either party upon the occurrence of certain termination events,

including Menarini’s right to terminate if the European regulatory authorities do not recommend approval of FACTIVE at various stages of the approval process with a package insert, or label, that meets certain requirements as to the safety, dosing and indications for which FACTIVE may be prescribed. Menarini may also terminate the agreement if it does not receive approval for reimbursement from European member countries that is above a certain minimum price per tablet. Upon termination, Menarini is obligated to assign any and all rights to regulatory approvals in the European Union to Oscient or its designee. In the first quarter of 2008, Menarini submitted a regulatory filing seeking approval of FACTIVE in Europe for the treatment of community-acquired pneumonia and acute bacterial exacerbations of chronic bronchitis.

Ramoplanin

Clostridium difficile-Associated Disease (CDAD)

CDAD, a serious form of colitis caused by toxins produced by the Gram-positive bacterium Clostridium difficile (C. difficile), is the most commonly recognized microbial cause of diarrhea, resulting from high rates of colonization in hospitalized patients and the frequent use of antimicrobials. About 3% of healthy adults and 16 to 35% of hospital patients are colonized with C. difficile either prior to or during admission. Because it is a spore-forming bacterium, C. difficile is readily spread from person to person, especially in the hospital and nursing home environment. Under certain conditions, such as extended antibiotic therapy and gastrointestinal surgery, C. difficile can colonize the gut and release toxins, leading to bowel inflammation and severe diarrhea. Severe cases can occur and involve the development of fulminant colitis (severe inflammation of the colon); such occurrences can be life threatening, especially in elderly or immunocompromised populations.

Over 400,000 patients are treated in U.S. hospitals each year for CDAD. CDAD is associated with an average increased hospital stay of 3.6 days and an average increase in hospital costs of over $3,600 per patient. It is estimated that the annual increase in hospital costs attributable to CDAD exceeds $1 billion in the U.S.

Two studies published in The New England Journal of Medicine in December 2005 describe a new strain of C. difficile, one that produces 16 to 23 times more toxins in vitro than do other strains, thus potentially contributing to its virulence. The very high incidence and mortality rates are of particular concern with this new strain. Data support the concept that this highly virulent strain is causing epidemic disease at certain locations and is associated with more frequent and more severe disease.

Current therapies for the treatment of CDAD include oral metronidazole and oral vancomycin. However, approximately 15 to 20% of patients will experience a relapse of symptoms. The use of oral vancomycin has been associated with the emergence of vancomycin-resistant organisms, including vancomycin-resistant enterococci, or VRE. Resistance has also been reported for metronidazole.

Ramoplanin Overview

In October 2001, we in-licensed U.S. and Canadian rights to Ramoplanin from Vicuron Pharmaceuticals Inc., or Vicuron, a wholly-owned subsidiary of Pfizer Inc., and on February 3, 2006, acquired worldwide rights from Vicuron, assuming full control of Ramoplanin manufacturing, development and commercialization. Ramoplanin is a novel glycolipodepsipeptide antibiotic produced by fermentation of the bacteria Actinoplanes, with activity against Gram-positive aerobic and anaerobic microorganisms. In preclinical studies, Ramoplanin has been shown to be bactericidal against most Gram-positive species, including methicillin-resistant staphylococci, VRE and C. difficile, including the recent epidemic strains. Ramoplanin inhibits the bacterial cell wall peptidoglycan biosynthesis with a mechanism different from that of vancomycin, teicoplanin or other cell wall-synthesis inhibitors. No evidence of cross-resistance between Ramoplanin and other glycopeptide antibiotics has been observed in vitro to date. Ramoplanin has a unique profile that may make it particularly well-suited for killing bacteria in the GI tract.

In 2004, we completed a Phase II trial to assess the safety and efficacy of Ramoplanin in the treatment of CDAD. The open-label study enrolled 87 patients in 24 U.S. sites. The trial compared two doses of Ramoplanin (200 mg and 400 mg twice daily) to vancomycin (125 mg four times daily). Both agents were administered for ten days, during which data on Ramoplanin was collected to measure safety and efficacy. The primary endpoint of the study was response rate at the test-of-cure visit, 7 to 14 days post-therapy. For this trial, the response rates were 60% for Ramoplanin 200 mg, 71% for Ramoplanin 400 mg, and 78% for vancomycin 125 mg in the clinically evaluable population. While the study did not meet its primary endpoint, non-inferiority at the test-of-cure visit, the response rates for all three arms were comparable. A potentially more clinically relevant endpoint, response at the end of therapy, was also assessed. At the end of therapy, the response rates were 83% for Ramoplanin 200 mg, 85% for Ramoplanin 400 mg and 86% for vancomycin 125 mg.

In December 2005, we agreed with the FDA to a Special Protocol Assessment regarding the specific components of a Phase III program that, if completed successfully, would support regulatory approval for the indication. Because the Special Protocol Assessment was agreed to by the FDA in 2005, we cannot guarantee that the FDA will continue to regard it as binding on the agency if and when we or a prospective partner re-initiates the Ramoplanin clinical development process. On January 8, 2008, the United States Patent and Trademark Office (USPTO) issued us a patent relating to methods of use of Ramoplanin for the treatment of CDAD.

Potential Benefits:

We believe the potential benefits of Ramoplanin include:

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Ramoplanin belongs to a novel class of antibiotics and there have been no observed cases of bacterial resistance or cross-resistance with other antibiotics to date.

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Ramoplanin is orally administered, but not absorbed into the bloodstream, so it concentrates and exerts its killing effects in the GI tract.

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Its bactericidal effect may result in lower potential for bacteria to develop resistance.

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Ramoplanin has a Gram-positive spectrum of activity and low potency against Gram-negative anaerobes that normally colonize the GI tract making it less likely that its use will result in the overgrowth of other opportunistic organisms or in the elimination of normal, healthy bacteria.

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Along with its activity against C. difficile, Ramoplanin has demonstrated in vitro activity against methicillin-resistant Staphylococcus aureus (MRSA) and VRE. Both organisms are associated with causing serious infections.

Acquisition of Expanded Rights: In exchange for the assignment of the rights for Ramoplanin under the acquisition agreement with Pfizer, we made a one-time, up-front payment to Pfizer and agreed to make additional milestone payments for regulatory filings and approvals in various countries. We will also pay mid-single-digit to low double-digit royalties to Pfizer on net sales of Ramoplanin dependent upon the territory.

With the acquisition of ANTARA, we have made the strategic decision to concentrate our financial resources on building our revenues for products promoted to community-based physicians in the United States and have worked to out-license, co-develop or sell our rights to Ramoplanin to a partner. There can be no assurance that we will be able to license or divest Ramoplanin or to partner the development of Ramoplanin on acceptable terms, or at all.

SALES AND MARKETING

We market ANTARA and FACTIVE through our sales and marketing organization in the U.S., which is currently comprised of approximately 170 field sales personnel, including 150 sales representatives, as well as district managers and regional sales directors. On February 11, 2009 we announced plans to substantially reduce

the size of our sales and marketing teams as well as our headquarter staff. Sales and marketing functions are located at our New Jersey office. Our sales representatives focus on community-based physicians and opinion leaders who are potential high prescribers of fluoroquinolones and/or fenofibrate products. We have also built a team of professionals with experience in insurance and government reimbursement, medical affairs and marketing. Our strategy is to continue to leverage our existing commercial infrastructure through the acquisition, in-license or co-promotion of additional marketed products to market to community-based physicians in the United States. Our strategy includes granting commercialization rights to FACTIVE tablets in territories outside of the U.S. to third parties to leverage the additional resources that a pharmaceutical marketing partner with expertise in such countries can provide. Thus, we have partnered with following entities:

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On February 6, 2006, we sublicensed our rights to sell FACTIVE tablets in Mexico to Pfizer, S.A. de C.V. (Pfizer Mexico), the largest pharmaceutical company in Mexico. Pfizer Mexico is commercializing FACTIVE for community-acquired pneumonia, acute bacterial exacerbations of chronic bronchitis and acute bacterial sinusitis with three national field sales forces and one specialty field sales force. On December 9, 2008 Pfizer Mexico received regulatory approval to market FACTIVE table for Uncomplicated Urinary Tract Infections (uUTI) indication with a 3 day course of treatment, from COFEPRIS, the pharmaceutical regulatory agency of Mexico.

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On December 27, 2006, we sublicensed our rights to sell FACTIVE tablets in Europe to Menarini International Operation Luxembourg SA (Menarini), the second largest primary care pharmaceutical company in Europe. Menarini is responsible for obtaining regulatory approval for FACTIVE in Europe and will leverage its regulatory and marketing experience to pursue approval and launch of FACTIVE in Europe. In the first quarter of 2008, Menarini submitted a regulatory filing seeking approval of FACTIVE in Europe for the treatment of community-acquired pneumonia and acute bacterial exacerbations of chronic bronchitis.

COMPETITION

The pharmaceutical industry generally is characterized by rapidly evolving technology and intense competition. Our competitors include pharmaceutical and biotechnology companies both in the United States and abroad. Many of our competitors have substantially greater capital resources, facilities and human resources than we do.

Competition with respect to our products and product candidates is and will be based on, among other things:

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our sales and marketing expertise;

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our clinical trial results and post marketing experience;

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our ability to obtain appropriate regulatory approvals for our product candidates in a cost-efficient and timely manner and subsequently remain in regulatory compliance;

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our ability to secure adequate reimbursement for our products from public and private healthcare payors;

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our ability to attract and retain qualified personnel;

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our ability to obtain patent protection and defend our patent challenges from generics including Lupin and Orchid;

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our ability to in-license product candidates for clinical development;

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our ability to gain access to new products via co-promotion or in-license agreements or product acquisitions;

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our ability to secure sufficient capital resources to fund our clinical development and sales and marketing operations; and

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our ability to secure sufficient capital resources to execute transactions to gain access to new products.

Because we rely primarily on in-licensing, co-promotion and acquisitions of products and product candidates to expand our portfolio, it is important to note that we may also face increasing competition for in-licensing, co-promotion and acquisition opportunities from leading pharmaceutical and biotechnology companies. We cannot be certain that we will be able to in-license product opportunities in the future or acquire new products.

ANTARA

ANTARA is a fenofibrate product approved by the FDA to treat hypercholesterolemia and hypertriglyceridemia in combination with a healthy diet. The marketing of current and additional branded versions of fenofibrate could reduce our net sales of ANTARA and adversely impact our revenues. Currently, the primary competition for ANTARA in the fenofibrate market is TriCor 145 mg, a product manufactured by Abbott Laboratories, which accounted for approximately 89% of U.S. fenofibrate sales for the three-month period ended September 30, 2008.

In addition to TriCor, there are several other branded fenofibrate products which compete with ANTARA. ANTARA competes with Triglide^®, a 160 mg fenofibrate product and Fenoglide^®, a 120 mg branded fenofibrate product, both which are marketed by Sciele Pharma, Inc., a wholly owned subsidiary of Shionogi & Co. Ltd. Triglide and Fenoglide accounted for approximately 2% of U.S. fenofibrate sales for the three-month period ended September 30, 2008. ANTARA also competes with Lipofen^®, a 150 mg fenofibrate product, which is marketed by Kowa Pharmaceuticals America, Inc. Additionally, Abbott Laboratories has developed a new product, TriLipix ^TM, which the FDA approved in December 2008 whose active ingredient is fenofibric acid, the active metabolite of fenofibrate.

As described in “Risk Factor”—“Lupin Limited’s and Orchid Healthcare’s Paragraph IV certifications under the Hatch-Waxman Act related to ANTARA and FACTIVE respectively could have a material adverse effect on our financial condition and results of operations, as it could result in the introduction of a generic products prior to the expiration of the patents covering ANTARA and FACTIVE, as well as in significant legal expenses and diversion of management time,” we received notice of a Paragraph IV certification from Lupin Limited (“Lupin”), notifying us of the filing of an Abbreviated New Drug Application (“ANDA”) with the FDA for a generic version of ANTARA. The final FDA approval of Lupin’s ANDA, the drug product which is the subject of that ANDA would have a material adverse impact on the sales of ANTARA.

Additionally, several generic versions of fenofibrate in varying doses are also available for the treatment of dyslipidemias. Revenues from these products accounted for approximately 4% of total U.S. sales of fenofibrate sales in the third quarter of 2008. In May 2005, Teva Pharmaceutical Industries, Ltd. (“Teva”) obtained FDA approval to market a generic version of Abbott Laboratories’ 160 mg TriCor tablet (which is no longer marketed or sold) and Par Pharmaceuticals and Impax Labs received FDA approval for similar generic products in October 2007 and March 2008, respectively. In addition, Solvay S.A., Abbott Laboratories’ partner announced on January 23, 2008, that Teva had filed an ANDA with a Paragraph IV certification seeking the approval of a generic version of TriCor 145 mg. Additionally, Biovail Corporation announced on September 3, 2008 that it also has filed an ANDA seeking approval for a generic version of TriCor 145 mg. If a generic version of Abbott Laboratories’ TriCor 145 mg product is approved by the FDA, the percentage of total revenues attributable to generic fenofibrate products would likely increase. There are also several other FDA-approved products and products in development for similar indications as ANTARA which could compete with ANTARA, including statins, omega-3 fatty acids (including Lovaza^® marketed by GlaxoSmithKline), niacin (including Niaspan^® marketed by Abbott), ezetimibe and fixed-dose combination products.

The growth of any of these branded products, the FDA approval of Lupin’s ANDA and subsequent launch of a generic version of ANTARA or the marketing of generic fenofibrate products could result in a decrease in ANTARA sales, create pressure on the price at which we are able to sell ANTARA, reduce our profit margins, reduce our net sales of ANTARA and adversely impact our revenues.

FACTIVE

FACTIVE tablets are approved for the treatment of community-acquired pneumonia of mild to moderate severity and acute bacterial exacerbations of chronic bronchitis. There are several classes of antibiotics that are primary competitors for the treatment of these indications, including other fluoroquinolones (levofloxacin, ciprofloxacin and moxifloxacin), macrolides (clarithromycin and azithromycin) and penicillins (amoxicillin/clavulanate potassium).

Many generic antibiotics are also currently prescribed to treat these infections. Moreover, a number of the antibiotic products that are competitors of FACTIVE tablets have composition of matter patents which have gone or will be going off patent at dates ranging from 2003 to 2016. As these competitors lose patent protection, their manufacturers will likely decrease their promotional efforts. However, makers of generic drugs will likely begin to produce some of these competing products and this could result in pressure on the price at which we are able to sell FACTIVE tablets and reduce our profit margins.

In addition, as described in “Risk Factor”—“Lupin Limited’s and Orchid Healthcare’s Paragraph IV certifications under the Hatch-Waxman Act related to ANTARA and FACTIVE respectively could have a material adverse effect on our financial condition and results of operations, as it could result in the introduction of a generic products prior to the expiration of the patents covering ANTARA and FACTIVE, as well as in significant legal expenses and diversion of management time.” Orchid has recently filed an ANDA seeking approval to market a generic version of FACTIVE. Upon final FDA approval of Orchid’s ANDA, the drug product which is the subject of that ANDA would have a material adverse impact on the sales of FACTIVE.

Ramoplanin

We have completed Phase II clinical trials studying Ramoplanin for the treatment of CDAD. We are aware of two products currently utilized in the marketplace: Vancocin^® pulvules (vancomycin), a product marketed by ViroPharma Inc., and metronidazole, a generic product, for treatment of this indication. We are also aware of several other companies with products in development for the treatment of CDAD. Due to strategic and financial considerations, we have suspended the clinical development of Ramoplanin pending identification of a partner, licensee, or buyer for the product.

GOVERNMENT REGULATION

Regulation by governmental entities in the United States and other countries will be a significant factor in the development, manufacturing, distribution and marketing of any product candidates that we develop or commercialize. The extent to which such regulation may apply to us and our licensees will vary depending on the nature of the product. Virtually all of our pharmaceutical products, including expanded uses of our pharmaceutical products, will require regulatory approval by governmental agencies prior to commercialization. In particular, the FDA in the United States and similar health authorities in foreign countries subject human therapeutic and vaccine products to rigorous preclinical and clinical testing, and require review and approval of extensive data in order to permit commercial marketing.

Virtually all aspects of our activities are regulated by federal and state statutes and regulations, and government agencies. The research, development, manufacturing, processing, packaging, labeling, distribution, sale, advertising, promotion, import and export of our products, and disposal of waste products arising from these activities, are subject to regulation by one or more federal agencies and their state equivalents, including the FDA, the Consumer Product Safety Commission, the Occupational Safety and Health Administration and the Environmental Protection Agency, as well as by state and local governments and governmental authorities in those foreign countries in which we or our partners operate.

Noncompliance with applicable regulatory policies or requirements of the FDA or other governmental authorities could subject us to enforcement actions, such as suspensions of product distribution, seizure of products, product recalls, civil monetary and other penalties, criminal prosecution and penalties, injunctions, “whistleblower” lawsuits, failure to approve pending drug product applications or total or partial suspension of product marketing approvals. Similar civil or criminal penalties could be imposed by other government agencies or the agencies of the states and localities in which our products are manufactured, sold or distributed, and could have ramifications for our contracts with government agencies. These enforcement actions would detract from management’s ability to focus on our daily business and would have an adverse effect on the way we conduct our daily business, which could severely impact future profitability.

Product Approval

For innovative, or non-generic, new drugs, an FDA-approved new drug application, or NDA, is required before the drugs may be marketed in the United States. The NDA must contain data to demonstrate that the drug is safe and effective for its labeled uses, and that it will be manufactured to appropriate quality standards. In order to demonstrate safety and effectiveness, an NDA typically must include or reference preclinical data from animal and laboratory testing and clinical data from controlled trials in humans. For a new chemical entity, this generally means that lengthy, uncertain and rigorous pre-clinical and clinical testing must be conducted. For compounds that have a record of prior or current use, it may be possible to utilize existing data or medical literature and limited new testing to support an NDA. Any preclinical laboratory and animal testing must comply with FDA’s good laboratory practice and other requirements. Clinical testing in human subjects must be conducted in accordance with FDA’s good clinical practice and other requirements. In order to initiate a clinical trial, the sponsor must submit an investigational new drug application, or IND, to the FDA or meet one of the narrow exemptions that exist from the IND requirement. Clinical research must also be reviewed and approved by independent institutional review boards, or IRBs, at the sites where the research will take place, and the study subjects must provide informed consent. The FDA also regulates and typically inspects manufacturing facilities, equipment and processes used in the manufacturing of pharmaceutical products before granting approval to market any drug. Each NDA submission requires a substantial user fee payment, unless a waiver or exemption applies. FDA has committed generally to review and make a decision concerning approval on an NDA within 10 months, and on a new priority drug within six months. However, final FDA action on the NDA can take substantially longer, and where novel issues are presented there may be review and recommendation by an independent FDA advisory committee. The FDA can also refuse to file and review an NDA it deems incomplete or not properly reviewable.

Clinical trial programs in humans generally follow a three-phase process. Typically, Phase I studies are conducted in small numbers of healthy volunteers or, on occasion, in patients afflicted with the target disease, to determine the metabolic and pharmacological action of the product candidate in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness. In Phase II, studies are generally conducted in larger groups of patients having the target disease or condition in order to validate clinical endpoints, and to obtain preliminary data on the effectiveness of the product candidate and optimal dosing. This phase also helps determine further the safety profile of the product candidate. In Phase III, large-scale clinical trials are generally conducted in hundreds of patients having the target disease or condition to provide sufficient data for the statistical proof of effectiveness and safety of the product candidate as required by U.S. and foreign regulatory agencies. Federal law and the state of Maine require that clinical trial sponsors register most Phase II and Phase III studies and post results of such studies on a publicly funded internet website. Failure to comply with these requirements can result in civil and criminal penalties and, at the federal level, can render our products misbranded. We believe we are in compliance in all respects with federal clinical trial registration laws and are in the process of bringing the company into compliance with applicable Maine law.

Before proceeding with a study, sponsors may seek a written agreement from the FDA regarding the design, size, and conduct of a clinical trial. This is known as a Special Protocol Assessment, or SPA. Among other

things, Special Protocol Assessments can cover clinical studies for pivotal trials whose data will form the primary basis to establish a product’s efficacy. Where the FDA agrees to a Special Protocol Assessment, the agreement may not be changed by either the sponsor or the FDA except if the sponsor and the FDA agree to a change, or a senior FDA official determines that a substantial scientific issue essential to determining the safety or effectiveness of the product was identified after the testing began. Special Protocol Assessments thus help establish up-front agreement with the FDA about the adequacy of the design of a clinical trial to support a regulatory approval, but the agreement is not binding if new circumstances arise. There is no guarantee that a study will ultimately be adequate to support an approval even if the study is subject to a Special Protocol Assessment.

The FDA can, and does, reject new drug applications, require additional clinical trials, grant approvals on only a restricted basis even when product candidates performed well in clinical trials, or require further studies as a condition of approval. In addition, the Food and Drug Administration Amendments Act of 2007 (FDAAA) permits the agency to require new drug applicants to submit a REMS with the NDA if the agency determines that a REMS is necessary to ensure that the benefits of the drug outweigh the risks.

Generic drugs are approved through an abbreviated process based on the submission to FDA of an abbreviated new drug application, or ANDA. The ANDA must seek approval of a drug product that has the same active ingredient(s), dosage form, strength, route of administration, and labeling as a so-called “reference listed drug” approved under an NDA, although some limited exceptions may be permitted. The ANDA also generally contains limited clinical data to demonstrate that the product covered by the ANDA is absorbed in the body at the same rate and to the same extent as the reference listed drug. This is known as bioequivalence. In addition, the ANDA must contain information regarding the manufacturing processes and facilities that will be used to ensure product quality, and must contain certifications to patents listed with the FDA for the reference listed drug. Special procedures apply when an ANDA contains certifications stating that a listed patent is invalid or not infringed, and if the owner of the patent or the NDA for the reference listed drug brings a patent infringement suit within a specified time (45 days), an automatic stay bars FDA approval of the ANDA for a specified period of time pending resolution of the suit or other action by the court. The amount of testing and effort that is required to prepare and submit an ANDA is generally substantially less than that required for an NDA.

In addition to the NDA and ANDA procedures, there is an additional approval mechanism known as a 505(b)(2) application. A 505(b)(2) application is a form of an NDA where the applicant does not have a right to reference all or some of the data being relied upon for approval. Under current regulations and FDA policies, 505(b)(2) applications can be used where the applicant is relying in part on published literature or on findings of safety or effectiveness in another company’s NDA. This might be done, for example, where the applicant is seeking approval for a new use for a drug that has already been approved for a different use or for a different formulation of the same drug that is already approved for the same use. FDA’s interpretation of the 505(b)(2) pathway is controversial and has not been tested in the courts.

In European Union countries (where our partner, Menarini is currently attempting to gain marketing approval for certain indications of FACTIVE) and in Canada, regulatory requirements and approval processes are similar in principle to those in the United States and can be at least as rigorous, costly and uncertain. Additionally, depending on the type of drug for which an applicant is requesting approval, there are currently two potential tracks for marketing approval in European Union countries: the centralized procedure and a de-centralized process which requires requesting approval on a country-by-country basis. These review mechanisms may ultimately lead to approval in all European Union countries, but each method grants all participating countries some decision making authority in product approval.

Post-Approval Requirements

Products on the market are subject to continual review by the FDA. If previously unknown problems are discovered or if there is a failure to comply with applicable regulatory requirements, the FDA may restrict the

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marketing of an approved product, cause the withdrawal of the product from the market, or under certain circumstances seek recalls, seizures, injunctions or criminal sanctions. For example, the FDA may require a change in labeling for an approved marketing application or additional studies for any marketed drug product if new information reveals questions about a drug’s safety or effectiveness. In addition, changes to the product, the manufacturing methods or locations, or labeling are subject to additional FDA approval, which may or may not be received, and which may be subject to a lengthy FDA review process.

Manufacturing facilities that produce drugs are subject to extensive regulation both by the FDA, state and local governments, and foreign regulatory authorities. These laws and regulations require, among other things, that our facilities and the facilities of third parties, such as LG Life Sciences, Ethypharm, S.A. (Ethypharm), Patheon Pharmaceuticals Inc. (our third party finished-product manufacturer for FACTIVE tablets) and Catalent Pharma Solutions (our third party packager of ANTARA capsules), be registered with the FDA and other regulatory authorities, comply with current good manufacturing practices requirements, and pass periodic inspections by the FDA and other regulators. Facilities in foreign countries may be subject to inspection by the FDA, local regulators or both. Current good manufacturing practices, or cGMP, require extensive recordkeeping, quality control, documentation and auditing to ensure that products meet applicable specifications. Failure to comply with these requirements can result in warning letters, requirements of remedial action, and, in the case of more serious failures, suspension of manufacturing, seizure, injunctions or recall of product and fines and other penalties. Compliance with these requirements can be time consuming, costly and can result in delays in product approval or product sales.

In addition to cGMP requirements, certain of our products must also be packaged with child-resistant and senior friendly packaging under the Poison Prevention Packaging Act and Consumer Product Safety Commission regulations. Products that do not comply with these requirements can be considered misbranded and subject to seizure, recall, monetary fines, and other penalties.

The distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states. States require the registration of manufacturers and distributors who provide pharmaceuticals, including in certain states even if these manufacturers or distributors have no place of business within the state but satisfy other nexus requirements, for example, the shipment of products into such state. States also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that are requiring manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Both the PDMA and state laws limit the distribution of prescription drug product samples to licensed practitioners and impose other requirements to ensure accountability in the distribution of samples.

Other reporting and recordkeeping requirements also apply for marketed drugs, including for most products requirements to review and report cases of adverse events. Product advertising and promotion are subject to FDA and state regulation, including requirements that promotional claims conform to any applicable FDA approval, and be appropriately balanced and substantiated. We are also subject to various federal and state laws pertaining to health care “fraud and abuse,” including the anti-kickback provisions of the Social Security Act, the False Claims Act, the Veterans Healthcare Act, and the implementing regulations and policies of the United States Health and Human Services Office of Inspector General and United States Department of Justice, as well as similar state laws. Anti-kickback laws make it illegal for a prescription drug manufacturer or marketer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase, recommendation or prescription of a particular drug, covered by a federal healthcare program, unless one of several narrow safe harbors or other exceptions applies. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented, for payment to third-party government payors, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Many states

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have their own versions of the False Claims Act, some of which apply regardless of whether the relevant payors are government or private.

Similar laws apply in other countries, including anti-bribery prohibitions in the European Union and member countries of the European Union.

Other Regulatory and Compliance Requirements

Under the laws of the United States, the countries of the European Union and other nations, we and the institutions where we sponsor research are subject to obligations to ensure the protection of personal information of human subjects participating in our clinical trials. In the United States, these laws include the privacy provisions of the Health Insurance Portability and Accountability Act, or HIPAA, the implementing regulations of the United States Department of Health and Human Services, and state medical records privacy laws. We have instituted procedures that we believe will enable us to comply with these requirements and the contractual requirements of our data sources. The laws and regulations in this area are evolving and further regulation, if adopted, could affect the timing and the cost of future clinical development activities.

We are subject to the United States Foreign Corrupt Practices Act, which prohibits corporations and individuals from engaging in specified activities to obtain or retain business or to influence a person working in an official capacity. Under this act, it is illegal to pay, offer to pay, or authorize the payment of anything of value to any foreign government official, government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business has been and will continue to be subject to various other laws and regulations.

Pricing and Third-Party Reimbursement

In the United States and elsewhere, sales of therapeutic and other pharmaceutical products are dependent in part on the availability of reimbursement to the consumer from third party payors, such as government and private insurance plans. Increasingly, third party payors are challenging the prices charged for medical products and services. As a result, in the future, reimbursement to the consumer could become unavailable or could be insufficient to allow us to sell our products on a competitive and profitable basis, either because our products are deemed to be not cost effective or for some other reason. For example, in some foreign markets, pricing reimbursement or profitability of therapeutic and other pharmaceutical products is subject to governmental control. In Canada this practice has led to lower priced products than in the United States. As a result, importation of products from Canada into the United States may result in reduced product revenues. In the United States there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing reimbursement controls. For example, Congress may give the federal government authority to negotiate drug prices for the Medicare Part D outpatient prescription drug benefit. Currently under Part D, prices are negotiated by the manufacturer with individual Part D plan sponsors or their administrators. Medicare Part B provides separate reimbursement for a limited universe of prescription drugs (primarily physician administered drugs). Currently, reimbursement for most Part B drugs is set at 106% of average sales price (which a manufacturer must report quarterly). Congress may consider proposals to reduce reimbursement for Part B drugs.

In many foreign markets, including the countries in the European Union, pricing of pharmaceutical products is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing controls. While we cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and results.

Through the commercialization of ANTARA and FACTIVE, we became a participant in the Medicaid rebate program established by the Omnibus Budget Reconciliation Act of 1990, and most recently amended

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under the Deficit Reduction Act of 2005. Under the Medicaid rebate program, we pay a rebate for each unit of our product reimbursed by Medicaid. The amount of the rebate for each product is set by law as a minimum of 15.1% of the average manufacturer price, or AMP, of that product, or if it is greater, the difference between AMP and the best price available from us to any commercial customer. The rebate amount also includes an inflation adjustment if AMP increases faster than inflation. The rebate amount is recomputed each quarter based on our reports of our current average manufacturer price and best price for each of our products to the Centers for Medicare & Medicaid Services, or CMS. In order to meet the requirements of the Deficit Reduction Act of 2005, the AMP for each product must now be reported to CMS monthly in addition to quarterly, and CMS will publish the monthly AMP data on its website.

Participation in the Medicaid rebate program requires participation in the Public Health Service, or PHS, pharmaceutical pricing program. The PHS pricing program extends discounts comparable to the Medicaid rebate to a variety of community health clinics and other entities that receive health services grants from the PHS, as well as hospitals that serve a disproportionate share of low-income Medicare and Medicaid beneficiaries.

ANTARA and FACTIVE are available to authorized users of the Federal Supply Schedule of the General Services Administration. Since 1993, as a result of the Veterans Health Care Act of 1992, or VHC Act, federal law has required that product prices for purchases by the Veterans Administration, the Department of Defense, Coast Guard, and the PHS, including the Indian Health Service, be discounted by a minimum of 24% off the non-federal average manufacturer price, or non-FAMP. Our computation and report of non-FAMP is used in establishing the price, and the accuracy of the reported non-FAMP may be audited by the government under applicable federal procurement laws.

PATENTS AND PROPRIETARY TECHNOLOGY

Our success will depend, in part, on our ability to obtain commercially valuable patent claims and protect our intellectual property. We currently own or license approximately 56 issued U.S. patents, approximately 40 pending U.S. patent applications, approximately 60 issued foreign patents and approximately 109 pending foreign patent applications. These patents and patent applications primarily relate to (1) the chemical composition, use, and method of manufacturing FACTIVE, (2) pharmaceutical compositions, methods of their use and treatment, and methods of manufacturing ANTARA, (3) anti-infective compounds and their uses, and (4) the field of human and pathogen genetics. Our material patents are as follows:

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U.S. Patent No. 5,633,262 granted May 27, 1997, relating to quinoline carboxylic acid derivatives having 7-(4-amino-methyl-3-oxime) pyrrolidine substituent; licensed from LG Life Sciences; expiring June 15, 2015;

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U.S. Patent No. 5,776,944 granted July 7, 1998, relating to 7-(4-aminomethyl-3- methyloxyiminopyrroplidin-1-yl)-1-cyclopropyl-6-fluoro-4-oxo-1,4-dihydro-1, 8-naphthyridine-3- carboxylic acid; licensed from LG Life Sciences; expiring April 4, 2017;

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U.S. Patent No. 5,869,670 granted February 9, 1999, relating to 7-(4-aminomethyl-3- methyloxyiminopyrrolidin-1-yl)-1-cyclopropyl-6-fluoro-4-oxo-1,4-dihydro-1, 8-naphthyridine-3- carboxylic acid; licensed from LG Life Sciences; expiring June 15, 2015;

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U.S. Patent No. 5,962,468 granted October 5, 1999, relating to 7-(4-aminomethyl-3- methyloxyiminopyrrolidin-1-yl)-1-cyclopropyl-6-fluoro-4-oxo-1,4-dihydro-1, 8-naphthyridine-3 carboxylic acid; licensed from LG Life Sciences; expiring June 15, 2015;

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U.S. Patent No. 6,340,689 granted January 22, 2002, relating to methods of using quinolone compounds against atypical upper respiratory pathogenic bacteria; licensed from LG Life Sciences; expiring September 14, 2019;

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U.S. Patent No. 6,262,071 granted July 17, 2001, relating to methods of using antimicrobial compounds against pathogenic Mycoplasma bacteria; licensed from LG Life Sciences; expiring September 21, 2019;

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U.S. Patent No. 6,331,550 granted December 18, 2001, relating to methods of using quinolone compounds against anaerobic pathogenic bacteria; licensed from LG Life Sciences; expiring September 21, 2019;

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U.S. Patent No. 6,455,540 granted September 24, 2002, relating to methods of use of quinolone compounds against anaerobic pathogenic bacteria; licensed from LG Life Sciences; expiring September 21, 2019;

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U.S. Patent No. 6,723,734 granted April 20, 2004, relating to the salt of naphythyridine carboxylic acid derivative; licensed from LG Life Sciences; expiring March 20, 2018;

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U.S. Patent No. 6,803,376 granted October 12, 2004, relating to methods of use of quinolone compounds against pneumococcal pathogenic bacteria; licensed from LG Life Sciences; expiring September 21, 2019;

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U.S. Patent No. 7,101,574 granted September 5, 2006, relating to pharmaceutical compositions containing fenofibrate and methods of preparing the same; licensed from Ethypharm, S.A.; expiring August 20, 2020; and

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U.S. Patent No. 7,317,001 granted January 8, 2008, relating to methods of use of Ramoplanin for the treatment of Clostridium difficile-Associated Disease (CDAD); expiring December 20, 2024.

With the exception of the patent infringement lawsuit against Lupin and its subsidiary Lupin Pharmaceuticals, Inc. pending in the United States District Court for the District of Maryland described herein, we are not currently involved in any litigation, settlement negotiations, or other legal action regarding patent issues and we are not aware of any patent litigation threatened against us except for the Orchid Healthcare Paragraph IV matter described further below. Our patent position involves complex legal and factual questions, and legal standards relating to the issuance, scope, validity and enforceability of claims in the applicable technology fields are still evolving. Therefore, the degree of future protection for our proprietary rights is uncertain.

Under our development, license and supply agreement with Ethypharm, S.A. (Ethypharm), we assumed all of the rights and obligations related to the development, manufacturing, marketing and sale of ANTARA in the United States. This license includes one issued U.S. patent and several pending patent applications. In conjunction with the financing of our acquisition of ANTARA, we entered into a Security Agreement with Paul Royalty Fund Holdings II, LP, an affiliate of Paul Capital Partners, or Paul Capital, under which our wholly-owned subsidiary, Guardian II Acquisition Corporation granted Paul Capital a security interest in substantially all of its assets, including all rights to ANTARA intellectual property, in order to secure its performance under the financing agreements with Paul Capital. These patents and applications include claims that relate to pharmaceutical compositions containing fenofibrate using the drug delivery technologies incorporated in ANTARA, methods of their use and treatment, and methods of preparing the same. The patent issued to Ethypharm which is listed in the FDA Orange Book is set to expire in 2020.

On December 2, 2008, we received notice of a Paragraph IV certification from Lupin Limited (“Lupin”), notifying us of the filing of an ANDA with the FDA for a generic version of ANTARA. We received the certification as the holder of the New Drug Application for ANTARA. Lupin’s certification notice alleges that U.S. Patent No. 7,101,574 (the “‘574 Patent”), owned by Ethypharm, exclusively licensed to Oscient and listed in the FDA Orange Book for ANTARA, is invalid and/or will not be infringed by Lupin’s commercial manufacture, use or sale of the drug product described in Lupin’s ANDA. The ‘574 Patent will expire in 2020.

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Under our license agreement with LG Life Sciences, we obtained an exclusive license to develop and market gemifloxacin in certain territories. This license covers 18 issued U.S. patents and a broad portfolio of corresponding foreign patents and pending patent applications. These patents include claims that relate to the chemical composition of FACTIVE, methods of manufacturing and its use for the prophylaxis and treatment of bacterial infections. We have received a Notice of Final Determination from the U.S. Patent and Trademark Office on our patent term extension application for U.S. Patent No. 5,776,944 extending its patent term 659 days to April 4, 2017. The principal U.S. patents are currently set to expire at various dates, ranging from 2015 to 2019.

On May 30, 2008 we received notice of a Paragraph IV certification from Orchid Healthcare, a Division of Orchid Chemicals & Pharmaceuticals Ltd. (“Orchid”), notifying us of the filing of an ANDA with the FDA for a generic version of FACTIVE. Orchid’s notice sets forth allegations that eight of the nine FDA Orange Book listed patents are invalid and/or will not be infringed by Orchid’s manufacture, importation, use, or sale of the product for which the ANDA was submitted. The notice does not, however, include a Paragraph IV certification with respect to U.S. Patent No. 5,633,262, which is also listed in the FDA Orange Book. Accordingly, the FDA cannot finally approve Orchid’s ANDA until the expiry of U.S. Patent No. 5,633,262 in June 2015.

We have not commenced a lawsuit against Orchid relating to these eight patents and are continuing to evaluate whether to commence litigation in response to Orchid’s Paragraph IV certification. In the event Orchid elects to amend its ANDA to include a Paragraph IV certification with respect to the ninth patent, U.S. Patent No. 5,633,262, we believe that we will be entitled to an automatic thirty-month stay of FDA approval of the ANDA if either we and/or LG Life Sciences initiate a timely patent infringement lawsuit against Orchid, which could be a substantial cost and there are no assurances that we would be successful.

The patents relating to Ramoplanin include claims relating to methods of manufacturing Ramoplanin as well as methods of increasing the yield of the active compound. On January 8, 2008, the United States Patent and Trademark Office (USPTO) issued us a U.S. patent relating to methods of use of Ramoplanin for the treatment of Clostridium difficile-associated disease, or CDAD. We also have applications pending relating to various novel uses of Ramoplanin as well as a formulation containing Ramoplanin. The patent covering the chemical composition of Ramoplanin has expired. To provide additional protection for Ramoplanin, we rely on proprietary know-how relating to maximizing yields in the manufacture of Ramoplanin, and intend to rely on the five years of data exclusivity we believe we would receive under the Hatch-Waxman Act in the U.S. and the ten years of market exclusivity in Europe available through the European Medicines Agency (EMEA), because Ramoplanin would be a new chemical entity not previously marketed commercially.

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alleging, among other things, trademark infringement seeking to enjoin ANTARA BIOSCIENCES from using the ANTARA mark. We have reached a settlement with ANTARA BIOSCIENCES whereby they have agreed to abandon their ANTARA trademark applications and cease using the ANTARA marks. Accordingly we have dismissed our complaint before the Federal District Court.

We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. We generally protect this information with confidentiality agreements that provide that all confidential information developed or made known to others during the course of the employment, consulting or business relationship shall be kept confidential except in specified circumstances. Agreements with employees provide that all inventions conceived by the individual while employed by us are our exclusive property. We cannot guarantee, however, that these agreements will be honored, that we will have adequate remedies for breach if they are not honored or that our trade secrets will not otherwise become known or be independently discovered by competitors.

Manufacturing

Currently, our source of supply of bulk capsules of ANTARA is Ethypharm, S.A. (Ethypharm), which produces the capsules at its facilities in France. Ethypharm is able to receive ANTARA API from two vendors in Spain and Italy. We also have an agreement with Catalent Pharma Solutions (formerly Cardinal Health) to package finished ANTARA capsules.

Under the terms of our agreement with LG Life Sciences, LG Life Sciences has agreed to supply and we are obligated to purchase from LG Life Sciences all of our anticipated commercial requirements for FACTIVE API. LG Life Sciences supplies the FACTIVE API from its manufacturing facility in South Korea. Patheon Pharmaceuticals Inc. currently manufactures the finished tablets. With respect to our sublicense of commercialization rights to FACTIVE in ex-US territories:

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Pfizer Mexico must purchase all of its commercial requirements in Mexico for FACTIVE API from us, but has the option to receive FACTIVE product from us or to fill and finish the final tabletted FACTIVE product at its manufacturing facilities in Mexico. We have transferred the required technology to Pfizer Mexico so that it can start its fill and finish activities;

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With respect to the anticipated commercialization of FACTIVE in Europe, Menarini must purchase all of its requirements for FACTIVE active pharmaceutical ingredient from us, but may request that we supply finished FACTIVE product to it for an interim period of time while the technology transfer process is completed.

Pursuant to our acquisition of worldwide rights to Ramoplanin from Pfizer (formerly Vicuron), we are responsible for the manufacture of both the active pharmaceutical ingredient and finished dosage form of Ramoplanin. Although we plan to seek a partner for Ramoplanin, a contract manufacturer or the partner would be required to produce both the active pharmaceutical ingredient and the final dosage form to support related manufacturing activities.

Human Resources

As of February 13, 2009, we had 214 full-time equivalent employees. On February 11, 2009 we announced plans to substantially reduce the size of our sales and marketing teams as well as our headquarter staff. None of our employees are covered by a collective bargaining agreement, and we consider our relations with our employees to be good.

Properties

Our executive offices are located at 1000 Winter Street, Suite 2200, Waltham, Massachusetts. We lease approximately 36,000 square feet of space at our Winter Street facility and our lease expires on March 31, 2012.

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During 2007, we incurred aggregate rental costs, excluding maintenance and utilities, for our Corporate headquarter Waltham facility of approximately $833,000. Additionally, in 2006 we incurred approximately $1.8 million in rental costs which included obligations under a lease for approximately 81,000 square feet of space at our former executive offices located at 100 Beaver Street, Waltham, Massachusetts, which expired on November 15, 2006. We subleased approximately 47,000 square feet at our former Beaver Street facility, and we received approximately $1.6 million in sublease income in 2006.

In 2007, we expanded our commercial sales and marketing capabilities by adding offices in New Jersey. Our commercial sales and marketing offices are located at 23 Orchard Road, Suite B103, Skillman, New Jersey. We lease approximately 10,000 square feet of space at the Orchard Road facility and our lease term, which extends five years, began on February 11, 2008 and expire in 2013.

We also maintain a west coast lease at 7300 Shoreline Court, South San Francisco, California, for approximately 68,000 square feet of laboratory and administrative space. The remaining average yearly base rent for the west coast facility is approximately $4.7 million. The lease for this facility expires on February 28, 2011 and we have subleased to third parties approximately 61,300 square feet of the facility through various dates ranging from December 31, 2008 to February 28, 2011. In 2007, we received approximately $2.6 million in sublease income from the west coast subleases.

Legal Proceedings

ANTARA Paragraph IV Litigation

On December 2, 2008, we and our licensor, Ethypharm, S.A. (Ethypharm) received notice of a Paragraph IV certification from Lupin Limited (“Lupin”), notifying us of the filing of an ANDA with the FDA seeking approval to market a generic version of ANTARA prior to the August 2020 expiration date of U.S. Patent No. 7,101,574 (the “‘574 Patent”). The ‘574 Patent, which is owned by Ethypharm, exclusively licensed to Oscient and listed in the FDA Orange Book for ANTARA relates to pharmaceutical compositions containing fenofibrate and methods of preparing the same Lupin’s certification notice alleges the ‘574 Patent, is invalid and/or will not be infringed by Lupin’s commercial manufacture, use or sale of the drug product described in Lupin’s ANDA. The ‘574 Patent will expire in 2020. The Paragraph IV certification sets forth allegations that the ‘574 Patent will not be infringed by Lupin’s manufacture, use or sale of the product for which their ANDA was submitted.

On January 14, 2009, we, along with our wholly owned subsidiary Guardian II Acquisition Corporation and our licensor Ethypharm, filed a lawsuit in the United States District Court for the District of Maryland against Lupin and its subsidiary Lupin Pharmaceuticals, Inc., for infringement of the ‘574 Patent. We have agreed to share the costs incurred during the litigation with our licensor Ethypharm. In accordance with the Hatch-Waxman Act, as a result of having filed a timely lawsuit against Lupin, FDA approval of Lupin’s ANDA will be stayed until the earlier of thirty months from the date of receipt of the Paragraph IV certification notice, or the date of a District Court decision finding that the ‘574 Patent is either invalid, unenforceable or not infringed by the drug product which is the subject of Lupin’s ANDA. If the litigation is still ongoing after thirty months, the termination of the stay could result in the introduction of one or more generic products to ANTARA prior to resolution of the litigation.

Other Litigation

From time to time we are involved in legal actions in the normal course of business, some of which seek monetary damages, including claims for punitive damages. These actions, when finally concluded and determined, will not, in our opinion, have a material adverse effect on our financial position, results of operations or cash flows.

We believe that we have obtained adequate insurance or, where appropriate, have established adequate reserves in connection with these legal proceedings.

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MANAGEMENT

Executive Officers and Directors

The table below lists our Executive Officers and Directors and their ages and positions as of November 4, 2008:


Name	Age	Position(s)
Steven M. Rauscher	55	President, Chief Executive Officer, and Director
Philippe M. Maitre	52	Executive Vice President, Chief Financial Officer
Mark Glickman	43	Senior Vice President of Sales and Marketing
David K. Stone (1)(2)(4)	52	Chairman of the Board and Director
John R. Leone (4)	61	Director
Gregory B. Brown, M.D. (2)(3)	55	Director
Robert J. Hennessey (1)(2)	67	Director
William R. Mattson (3)(4)	62	Director
Williams S. Reardon (1)	62	Director
Norbert G. Riedel Ph.D. (2)(3)	51	Director

(1)	Member of Audit Committee

(2)	Member of Nominating and Corporate Governance Committee

(3)	Member of Compensation Committee

(4)	Member of Compliance Committee

Mr. Rauscher became the Chief Executive Officer and President of Oscient in October 2000 and served as Chairman from May 2003 to February 2004. For more than 18 years, Mr. Rauscher was employed by Abbott Laboratories, holding various positions including Vice President of Sales for the U.S. Pharmaceutical Products Division, Vice President of Business Development for the International Products Division, and Vice President of Corporate Licensing. Following Abbott, he was Chief Executive Officer and a director of Americas Doctor, Inc., a company that provides clinical research and marketing services to the pharmaceutical industry, since 1995. Mr. Rauscher is a member of the Board of Directors of Acorda Pharmaceuticals and Target Discovery, Inc.

Mr. Maitre was appointed Senior Vice President and Chief Financial Officer of the Company in May 2006 and promoted to Executive Vice President in February 2008. Mr. Maitre worked for 18 years at Sanofi-Aventis and predecessor companies, serving most recently as Deputy CFO and Corporate Controller. Mr. Maitre then served as Chief Financial Officer of PPD, Inc. from 2000 to 2002, as President and Chief Executive Officer of ANOSYS Inc. from 2003 to 2005 and subsequently as a consultant to various biopharmaceutical companies until his employment by the Company.

Mr. Glickman was appointed Vice President of Sales in August 2007 and promoted to Senior Vice President of Sales and Marketing in July 2008. Mr. Glickman held various positions at Kos Pharmaceuticals from 2001 to 2007 including Vice President of Sales. Following Kos Pharmaceuticals, Mr. Glickman was the Vice President of Sales of Bayer Healthcare’s Diabetes Care Division for the first half of 2007. Mr. Glickman was also previously employed by Bristol-Myers Squibb as a District sales manager and senior marketing manager.

Mr. Stone is the Founder and Managing Director of Liberty Tree Advisors, LLC, a consulting and private placement firm focusing on emerging life sciences companies. He was a Managing Director, Partner and Venture Advisor at Flagship Ventures, an early-stage venture capital firm, from 2000 to 2007. From 1989 to 1999, Mr. Stone was at Cowen & Company, where he followed the biopharmaceutical industry, holding the position of Managing Director from 1994 to 1999. Mr. Stone began his career in biotechnology in 1983 as a Project

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Manager and later Communications Director at Genetics Institute (now part of Wyeth Pharmaceuticals). He earned a B.S. in Microbiology from Colorado State University and an MBA from Harvard Business School.

Mr. Leone, a Partner at Paul Capital Healthcare, has over 30 years of pharmaceutical industry experience. Most recently, he was President and Chief Executive Officer of Cambrex Corporation, a life sciences company committed to accelerating the discovery and commercialization of human therapeutics. Previously, Mr. Leone was at Aventis, where he served as Senior Vice President and Chief Operating Officer of U.S. Commercial Operations. Among other initiatives, Mr. Leone spearheaded the successful integration of Aventis’ predecessor companies, Rhone-Poulenc Rorer and Hoechst Marion Roussel. His industry experience also includes both domestic and international management roles with Pfizer and Wyeth. Mr. Leone currently serves on the board of directors of Viropharma and Forticell Bioscience. Mr. Leone received his B.S. degree in Engineering from the U.S. Military Academy at West Point and his M.B.A. from the University of Colorado.

Dr. Brown joined the Oscient Board in August 2006. He is a founder and Managing Director of Cowen Healthcare Royalty Partners, an alternative asset management practice affiliated with Cowen Group, Inc. From 2006 to 2007, Dr. Brown served as an independent consultant at Compo Capital Advisors, LLC. Dr. Brown was previously a Partner at Paul Capital Partners from 2003 to 2006. Dr. Brown also worked at Adams, Harkness & Hill from 1997 to 2002, where he served as the co-head of investment banking, and at Vector Securities International from 1992 to 1997. Before receiving his business degree, Dr. Brown was a practicing thoracic and vascular surgeon. He earned his MBA from Harvard Business School, his M.D. from SUNY Upstate Medical Center, and his AB from Yale College.

Mr. Hennessey served as Chief Executive Officer and President of Oscient Pharmaceuticals from March 1993 until October 2000 and Chairman of the Board from May 1994 through May 2003. Mr. Hennessey served as interim Chief Executive Officer of Penwest Pharmaceuticals from February 15, 2005 to December 15, 2005. Mr. Hennessey currently serves on the board of directors of Penwest Pharmaceuticals and, until January 31, 2008, Repligen Corporation. Prior to joining Oscient in 1993, Mr. Hennessey had significant pharmaceutical industry experience, holding positions in Strategic Planning and Business Development for Sterling Drug, Abbott Laboratories, SmithKline and Merck Sharp & Dohme.

Mr. Mattson has served on Oscient’s Board since June 2006. Mr. Mattson is Chairman Emeritus of The Mattson Jack Group, a healthcare consulting firm he established in 1986. Previously, Mr. Mattson worked for Monsanto and its subsidiary Searle Pharmaceuticals from 1983-1986 as Director of Marketing Development and Area Vice President. From 1970 to 1983, Mr. Mattson worked in various general management and business development roles at Abbott Laboratories. Mr. Mattson is a member of the St. Louis College of Pharmacy Board of Trustees.

Mr. Reardon is retired from PricewaterhouseCoopers LLP where he was employed from June 1973 to July 2002. Until his retirement, Mr. Reardon was a business assurance (audit) partner at PWC’s Boston office and leader of its Life Sciences Industry Practice for New England and the Eastern United States. From 1998 to 2000, Mr. Reardon served on the Board of the Emerging Companies Section of the Biotechnology Industry Organization. He also served on the Board of Directors of the Massachusetts Biotechnology Council from 2000 until his retirement from PWC. Mr. Reardon is currently a Board Member at Idera Pharmaceuticals, Inc., and Synta Pharmaceuticals, Inc., serving as Audit Committee Chairman of each.

Dr. Riedel is currently Chief Scientific Officer and Corporate Vice President for Baxter International Inc., a manufacturer of health care products, specialty therapeutics and medical instruments. From 1998 until March 2001, Dr. Riedel served as President of the Recombinant Strategic Business Unit for Baxter Bioscience, a division of Baxter International. Prior to joining Baxter in 1998, Dr. Riedel served as Head of Global Biotechnology for Hoechst Marion Roussel, Inc.

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Our Board of Directors

Our directors are elected at the annual meeting of shareholders and hold office (subject to the By-laws) until the next annual meeting of shareholders and until their successors are elected and qualified. The Board of Directors has determined that each of Messrs. Reardon, Riedel, Stone, Mattson and Hennessey is independent within the meaning of Rule 4200 of the NASDAQ Stock Market, Inc. (“NASDAQ”) listing standards as currently in effect and on the date of our annual meeting of shareholders.

Committees of the Board of Directors

The Board of Directors has four standing committees. Each committee operates pursuant to a written charter. The Board may also establish other committees to assist in the discharge of its responsibilities.

Audit Committee

We have an Audit Committee established in accordance with applicable rules. The Audit Committee of the Board of Directors currently consists of Messrs. Reardon, Hennessey and Stone. In the opinion of the Board of Directors, each of the members of the Audit Committee is independent within the meaning of Rules 4200 and 4350 of the NASDAQ listing standards (as currently in effect and on the date of our annual meeting of stockholders). The Board of Directors has determined that Mr. Reardon, the Chairman of the Audit Committee, possesses the attributes of an audit committee financial expert under the rules of the SEC and the NASDAQ, and has, therefore, designated him as the Audit Committee financial expert. The Audit Committee held six meetings during the last fiscal year, one of which was a joint meeting with the Compliance Committee. The Board of Directors has adopted an Audit Committee Charter. A copy of the charter is available on the Company’s website (www.oscient.com).

Compensation Committee

The Board of Directors has a compensation committee, which currently consists of Dr. Riedel (Chairman), Mr. Brown and Mr. Mattson. All members of the Compensation Committee are independent directors, and none of them are present or past employees or officers of ours or any of our subsidiaries. No member of the Compensation Committee has had any relationship with us requiring disclosure under Item 404 of Regulation S-K under the Exchange Act. None of our executive officers has served on the Board or Compensation Committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served on our Board or compensation committee. The Compensation Committee held six meetings during the last fiscal year. In fiscal 2007, the Compensation Committee retained W.T. Haigh and Company as a compensation consultant to assist it benchmarking our compensation against industry standards, as described in more detail in the Compensation Discussion and Analysis above.

The Compensation Committee’s primary purpose and responsibilities include the following:

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Review and approve corporate goals and objectives relating to CEO and other executive officer compensation, evaluate the CEO’s and other executive officers’ performance in light of those goals and objectives and, either as a committee or together with the other independent directors, determine and approve the CEO’s and other executive officers’ compensation level (encompassing base pay, management incentive plans, stock, benefits and perquisites);

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Make recommendations to the Board regarding director compensation;

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Make recommendations to the Board regarding the adoption of employee incentive compensation plans and equity-based plans;

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Oversee administration of our equity-based plans;

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Review and approve management proposals for annual employee salary planning; and

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Perform periodic review of major employee benefit plans.

The Board of Directors has adopted a Compensation Committee Charter. A copy of the charter is available on the Company’s website (www.oscient.com).

Nominating and Corporate Governance Committee

We have a Nominating and Corporate Governance Committee composed of independent members within the meaning of rule 4200 of the NASDAQ listing standards, which currently consists of Mr. Stone (Chairman), Dr. Riedel and Mr. Brown. The Nominating and Corporate Governance Committee did not hold any meetings during the last fiscal year.

The Board of Directors has adopted a Nominating and Corporate Governance Committee Charter. A copy of the charter is available on the Company’s website (www.oscient.com). Under the charter, the responsibilities of the Nominating and Corporate Governance Committee include:

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identifying and evaluating individuals qualified to become members of the Board; and

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recommending nominees for the annual meeting of stockholders.

The Nominating and Corporate Governance Committee will consider director candidates recommended by our stockholders. Recommendations with regard to nominees for election to the Board of Directors may be submitted by any stockholder entitled to vote for the election of directors in writing, received by the Clerk of the Company at least 120 days prior to the date on which we first mailed our proxy materials for the prior year’s annual meeting of stockholders, or, if we did not have an annual meeting of stockholders in the prior year, 90 days prior to the date of the annual meeting. Each notice of nomination must set forth (i) the name, age, business address and, if known, residence address of each nominee, (ii) the principal occupation or employment of each such nominee, and (iii) the number of shares of our common stock which are beneficially owned by each such nominee. All such notices should be sent to: Oscient Pharmaceuticals, 1000 Winter Street, Suite 2200, Waltham, MA 02451, Attn: Clerk.

The Nominating and Corporate Governance Committee has established certain minimum qualifications for Board members, including:

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the ability of the prospective nominee to represent the interests of our stockholders;

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the prospective nominee’s standards of integrity, commitment and independence of thought and judgment;

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the prospective nominee’s ability to dedicate sufficient time, energy and attention to the diligent performance of his or her duties, including consideration of his or her service on other corporate boards;

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the prospective nominee’s ability to contribute to the range of talent, skill and expertise present on the Board; and

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the extent to which the prospective nominee helps the Board reflect the diversity of our stockholders, employees, customers and communities.

The Nominating and Corporate Governance Committee also considers the ability of the nominee to meet the applicable requirements of SEC regulations, state law and our Articles of Organization and By-laws.

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The Nominating and Corporate Governance Committee has established a process for identifying and evaluating nominees for director. The Committee will annually assess the qualifications, expertise, performance and willingness to serve of existing directors. If at this time or at any other time during the year the Board of Directors determines a need to add a new director with specific qualifications or to fill a vacancy on the Board, the Nominating and Corporate Governance Committee will then initiate the search, working with staff support and seeking input from other directors and senior management, considering nominees previously submitted by stockholders, and, if deemed necessary or appropriate, hiring a search firm. An initial slate of candidates satisfying the specific qualifications, if any, and otherwise qualifying for membership on the Board will then be identified and presented to the independent directors. The independent directors will then prioritize the candidates and determine if other directors or senior management have relationships with the preferred candidates and can initiate contact. If not, contact would be initiated by a search firm. To the extent feasible, all of the members of the Nominating and Corporate Governance Committee and the CEO will interview the prospective candidate(s). Evaluations and recommendations of the interviewers will be submitted to the whole Board for final evaluation. The Board will meet to consider such information and to select candidates for appointment to the Board at the annual meeting. Nominees recommended by a stockholder will be evaluated on the same basis as other nominees.

Compliance Committee

We established a Compliance Committee of the Board of Directors in July 2005. The Compliance Committee currently consists of three Board members: Messrs. Leone, Mattson and Stone. The Compliance Committee had four meetings in 2008 and one joint meeting with the Audit Committee.

The Board of Directors has adopted the Compliance Committee Charter. A copy of the charter is available on the Company’s website (www.oscient.com). Under the charter, the responsibilities of the Compliance Committee include:

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review the adequacy of our internal controls, policies, procedures and programs regarding (i) product safety and quality, (ii) the development, manufacturing, marketing, distribution and sale of our products, and (iii) our compliance with related legal and regulatory requirements; and

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oversee the work of our senior compliance executives and other relevant members of senior management and receive reports from such officers about material issues and/or matters related to our compliance with such laws and regulations.

The Compliance Committee does not have oversight responsibility for financial matters, including financial statements and systems of internal control over financial reporting, which are monitored by the Audit Committee.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Objectives of Compensation Program

Our goal is to attract, retain, motivate, and reward our employees through the use of competitive compensation plans that serve to closely align employee interests with that of the Company and the long-term interests of our stockholders. Competitive and labor market dynamics as well as financial position influence our compensation philosophy. We strive to retain and reward the highest caliber management team by offering competitive compensation plans, which are comparable to those offered by our competitors, and promote performance-based compensation. To more closely align the interests of employees with those of the stockholders, we employ equity-based employee awards.

Overview of Compensation and Process

We strive to attract and retain the necessary executive talent, reward annual performance and provide incentives to reward performance that is intended to create long-term stockholder value. The amount of each element of compensation is determined by or under the direction of our Compensation Committee, which considers the following factors in determining the amount of salary and other benefits to pay each executive:

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performance against corporate and individual goals for the previous year;

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difficulty of achieving desired results in the coming year;

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value of his or her unique skills and capabilities to support long-term performance of the Company;

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performance of their general management responsibilities; and

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contribution as a member of the executive management team.

Our compensation policy strives to provide a balance between short and long-term compensation in order to attract and retain talent and provide incentives to maximize long-term value for our company and our stockholders. The compensation of the executive officer team consists of a combination of salary, annual cash incentives, equity grants, contributions to or accruals under benefit plans and participation in various other plans generally available to all employees, such as our 401(k) plan which the Company elected to suspend matching contributions after December 27, 2008. We provide cash compensation in the form of base salary to meet competitive salary norms and annual cash incentive payments to reward performance against specific annual corporate goals. We provide equity awards to reward performance against specific objectives and long-term strategic goals and help align the interest of our executive officers with those of our stockholders. Equity awards are determined by performance and competitive market practice with respect to equity awards granted to executives as a percentage of common shares outstanding.

Each year we review the compensation paid to all employees, including executive officers, to ensure that the key elements and overall compensation remain competitive with prevailing industry benchmark data of similarly situated companies and remain aligned with stockholder interests. In fiscal 2008, the Compensation Committee determined that the compensation paid to the Company’s executive officers would remain unchanged to conserve the Company’s financial resources, with the exception of Mr. Glickman as discussed below.

Compensation Components

The components of our compensation program are described in more detail below:

Base Salary

Base salaries for our named executive officers are established based on their responsibilities, experience, performance and expected contribution to the Company. Salary levels also take into account the salary and

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compensation paid by similar companies with which we compete for executive talent. Base salaries are reviewed annually taking into account the executive officer’s effectiveness in achieving the corporate goals set out for the previous year, his or her expected contribution for the coming year and the competitive data. Base salaries are also evaluated relative to other components of our compensation program to ensure the executives total compensation and mix of components is consistent with our compensation philosophy and objectives.

Each year, the Company establishes a budget for merit based salary increases for its employees. The Committee retains discretion as to whether or not salary increases will be granted and makes a determination based upon achievement of the corporate goals, individual performance and market data. In fiscal 2008, the Committee determined that the 2008 bases salaries for Messrs. Rauscher, Colangelo and Maitre would remain unchanged, however in association with his promotion to Senior Vice President, Sales and Marketing, Mr. Glickman’s base salary was increased.

Annual Incentives

Our named executive officers are eligible to receive annual cash incentive payments in an amount equal to a percentage of their annual base salary based on attainment of corporate performance goals as determined by the Compensation Committee. The Committee sets a percentage of base salary as a target for each named executive officer’s annual incentive cash bonus and then determines the annual incentive cash bonus to be paid based on achievement of stated goals.

Each year, the Chief Executive Officer recommends corporate goals for the prospective year. The Compensation Committee reviews, modifies if necessary, and approves the proposed goals and then sets and prioritizes officer performance goals for the year and assigns relative weight of importance for each performance goal. In prior years, in assessing executive officer performance, the Committee considered individual performance goals for each executive officer in addition to the corporate goals. In fiscal 2008, the Committee decided to measure executive officer performance against the corporate goals only and not utilize individual performance goals. The Committee’s decision reflects its belief that the corporate goals provide unified objectives for the management team and a more objective basis for assessing executive performance and determining annual incentive payments. With the exception of quarterly cash incentive payments the Company agreed to provide Mr. Glickman prior to his promotion on July 28, 2008 to Senior Vice President, Sales and Marketing, the Compensation Committee determined that in fiscal 2008 the Company’s executive officers would not receive an annual cash incentive payment to conserve the Company’s financial resources.

Long-Term Equity Incentives

We grant equity awards to our named executive officers, in the form of restricted stock grants and stock options to provide executive officers with longer term incentives and as a key tool to encourage retention. Because of the direct relationship between the value of an equity award and the market price of our common stock, we believe that granting stock options and other equity awards is an effective method of motivating executive officers to manage our company in a manner that is consistent with the interests of our stockholders. Equity awards are typically granted to employees when they are hired, upon promotions and each year in connection with annual performance review. For annual performance grants, the executive team makes a recommendation to the Compensation Committee as part of the Company’s annual salary planning cycle which occurs in March, and the Committee determines the grant for each executive officer. Equity awards typically include a mix of options to purchase our common stock and restricted shares of our common stock that vest over a prescribed period. Exercise prices for option grants are wholly determined by the Compensation Committee and are fixed at the fair market value on the date of Compensation Committee approval or at a specified date of grant.

We grant stock awards to our executive officers based upon prior performance, the importance of retaining their services and the potential for their performance to help us attain our long-term goals. In determining annual

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equity awards the Compensation Committee also takes into account the extent to which previous equity awards continue to provide appropriate incentives to employees. Company and individual performance and competitive market practices are key considerations in determining size and mix of grants for employees, including executive officers. Equity grants awarded to officers and other eligible employees are typically confined to a certain percentage of common shares outstanding. With the exception of the equity grants awarded to Mr. Glickman in conjunction with this promotion to Senior Vice President, Sales and Marketing, in fiscal 2008 the Compensation Committee determined that the Company’s executive officers would not receive an equity grant award.

Other Benefits

Our executives are entitled to few benefits that are not otherwise available to all of our employees. Other benefits for executive officers include executive life insurance, relocation expenses and car allowances. Our Chief Executive Officer also receives a predetermined annual allowance of $14,652 as prescribed in Mr. Rauscher’s employment agreement with the Company which is paid primarily for car allowances, Mr. Maitre, our Executive Vice President and Chief Financial Officer, received $63,853 as a reimbursement for relocation expenses in fiscal 2008, Mr. Colangelo, our former Executive Vice President, received $13,383, which was paid primarily as a reimbursement for travel expenses in fiscal 2008, and Mr. Glickman, our Senior Vice President, Sales and Marketing, received $14,380 which was paid primarily for car allowances.

All of our named executive officers participated in our 401(k) plan and received matching employer contributions at the same rate as other employee-participants through December 27, 2008, after which the Company elected to suspend any further 401(k) matching contributions for its executive offices, as well as its employee-participants. Our health and insurance plans are the same for all employees and our healthcare premiums follow a shared cost schedule, under which employees contribute approximately 24% of the healthcare premiums.

Termination-based compensation

Under the terms of their employment agreements, our executive officers are, under specified circumstances, entitled to receive severance payments and, in some cases, accelerated vesting of equity awards upon termination of employment. The severance payments, and in particular the change of control severance, are intended to aid in employee retention and maintain productivity in the event of a change of control of the Company. In addition, these payments are designed to align executive and stockholder interests by enabling executives to consider corporate transactions that are in the best interests of the stockholders and other constituents of the Company without undue concern over whether the transactions may jeopardize the executives’ own employment. The specific triggering provisions and severance due each of the executive officers is described below under “Employment Agreements” and “Potential Payments upon Change of Control.” We believe that our severance arrangements are in line with severance packages offered to executive officers of companies of similar size to us represented in the compensation data we reviewed.

162(m) Policy

Under Section 162(m) of the Internal Revenue Code, publicly held corporations may be prohibited from deducting as an expense for federal income tax purposes total compensation in excess of $1 million paid to certain executive officers in a single year. However, Section 162(m) provides an exception for qualifying “performance-based” compensation, including compensation attributable to certain stock options. We periodically review the potential consequences of Section 162(m) and may structure the performance-based portion of our executive compensation to comply with certain exemptions in Section 162(m). However, we reserve the right to use our judgment to authorize compensation payments that do not comply with the exemptions in Section 162(m) when we believe that such payments are appropriate and in the best interests of the stockholders, after taking into consideration changing business conditions or the officer’s performance.

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Post-Employment Compensation

Pension Benefits

We do not provide pension arrangements or post-retirement health coverage for our executives or employees. Our executive officers are eligible to participate in our 401(k) defined contribution plan. The Company contributed to each participant a matching contribution equal to 50% of the first 6% of the participant’s compensation that has been contributed to the plan, as prescribed in the plan document and within federal tax limits, however effective December 27, 2008 the Company elected to suspend any further 401(k) matching contributions. All of our executive officers participated in our 401(k) plan during fiscal 2008 and received matching contributions through December 27, 2008, after which no further matching contributions were made by the Company.

Nonqualified Deferred Compensation

We do not provide any nonqualified defined contribution or other deferred compensation plans.

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Summary Compensation Table for 2008

The following table sets forth a summary of annual and long-term compensation awarded, earned or paid for the fiscal years ended December 31, 2008, December 31, 2007 and December 31, 2006 to our Chief Executive Officer, two Executive Vice Presidents and Senior Vice President.


Name and Principal Position	Year	Salary ($)		Non-Equity Incentive Plan Compensation ($)	Stock Awards ($)(1)	Option Awards ($)(2)	All Other Compensation ($)		Total ($)
Steven Rauscher	2008	432,600		—	82,026	156,552	25,215	(3)	696,393
Chief Executive Officer and President	2007	432,600		196,253	156,883	390,698	25,709	(4)	1,202,143
Chief Executive Officer and President	2006	432,115		325,282	92,196	919,779	174,240	(5)	1,943,612

Dominick Colangelo	2008	351,298		—	68,433	222,123	20,590	(6)	662,444
Former Executive Vice President, Corporate Development and Operations	2007 2006	340,000 338,654		128,537 206,136	125,818 73,757	267,581 193,495	7,200 7,050	(7) (8)	869,136 819,092

Philippe Maitre	2008	298,731		—	59,560	78,824	70,603	(9)	507,718
Executive Vice President and Chief Financial Officer	2007	270,000		81,659	41,546	52,883	64,711	(10)	510,799
Executive Vice President and Chief Financial Officer	2006	155,769	(11)	96,904	14,264	18,001	22,022	(12)	306,960

Mark Glickman	2008	275,834	(14)	39,907	24,686	28,638	19,594	(13)	388,659
Senior Vice President, Sales and Marketing

(1)

Reflects the amounts recognized for financial statement reporting purposes for fiscal 2008 and 2007 in accordance with SFAS No. 123R. Refer to Note 2, “Stock-Based Compensation,” in the Notes to Consolidated Financial Statements found in our Annual Report on Form 10-K filed with the SEC on February 6, 2008 for the assumptions used to determine the valuation of our stock awards.

(2)

The values shown reflect the dollar amounts relating to option awards recognized for financial statement purposes for the fiscal year ended December 31, 2008 and 2007 in accordance with SFAS No. 123R. Refer to Note 2, “Stock-Based Compensation,” in the Notes to Consolidated Financial Statements found in our Annual Report on Form 10-K filed with the SEC on February 6, 2008 for the assumptions used to determine the valuation of our option awards.

(3)	The amount represents $3,813 in contributions to Mr. Rauscher’s life insurance premiums, $6,750 to the Company’s 401(k) Retirement Savings Plan and $14,652 in compensation allowances related to car allowances.

(4)	The amount represents $3,758 in contributions to Mr. Rauscher’s life insurance premiums, $6,750 to the Company’s 401(k) Retirement Savings Plan and $15,201 in compensation allowances related to car allowances.

(5)

The 2006 amount represents $3,758 in contributions to Mr. Rauscher’s life insurance premiums, $6,600 to the Company’s 401(k) Retirement Savings Plan, $14,652 in compensation allowances which are paid in accordance with Mr. Rauscher’s employment agreement primarily for car allowances and $149,230 related to income realized for payment in full of all principal outstanding under a note whereby, the Company loaned Mr. Rauscher $163,000 to allow him to pay income tax liabilities associated with the grant of 3,000 restricted shares. In accordance with the terms of the loan, Mr. Rauscher transferred 3,000 shares to the Company as payment in full under such loan and paid the Company an amount equal to $41,334 for interest due to the Company pursuant to such loan.

(6)	The amount represents $457 in contributions to Mr. Colangelo’s life insurance premiums, $6,750 to the Company’s 401(k) Retirement Savings Plan and $13,383 in compensation as a reimbursement for travel expenses in fiscal 2008.

(7)	The amount represents $450 in contributions to Mr. Colangelo’s life insurance premiums, and $6,750 to the Company’s 401(k) Retirement Savings Plan.

(8)	The 2006 amount represents $450 in contributions to Mr. Colangelo’s life insurance premiums, and $6,600 to the Company’s 401(k) Retirement Savings Plan.

(9)	The amount represents $4,673 in contributions to the Company’s 401(k) Retirement Savings Plan and $63,853 in relocation costs.

(10)	This amount represents $4,673 in contributions to the Company’s 401(k) Retirement Savings Plan and $60,038 in relocation costs.

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(11)	Mr. Maitre commenced employment with the Company in May 2006, and this amount represents the pro-rata amount paid to Mr. Maitre of his $270,000 base salary in fiscal 2006.

(12)	This amount represents $22,022 in relocation costs.

(13)	The amount represents $5,214 to the Company’s 401(k) Retirement Savings Plan, $2,380 as a reimbursement for travel expenses in fiscal 2008.

(14)	Mr. Glickman was promoted to Senior Vice President, Sales and Marketing by the Company on July 28, 2009.

Grants of Plan-Based Awards for 2008

The following table sets forth certain information with respect to the options granted during or for the fiscal year ended December 31, 2008 to each of our named executive officers.


	Estimated Future Payouts Under Non-Equity Incentive Plan Awards			All Other Stock Awards: Number of Shares of Stock or Units (1) (#)	All Other Option Awards: Number of Securities Underlying Options (#)		Exercise or Base Price of Option Awards (5) ($)	Grant Date Fair Value of Stock and Option Awards (6) ($)
Name and Principal Position	Target ($)	Maximum ($)	Grant Date				Exercise or Base Price of Option Awards (5) ($)
Steven Rauscher	259,560	389,340	2/25/08	18,147	45,303	(2)	2.16	95,437
Chief Executive Officer and President

Dominick Colangelo	170,000	255,000	2/25/08	14,672	36,629	(2)	2.16	77,163
Former Executive Vice President, Corporate Development and Operations

Philippe Maitre	150,000	225,000	2/25/08	14,672	35,000	(3)	2.16	75,141
Executive Vice President and Chief Financial Officer

Mark Glickman	147,500	221,250	2/25/08	1,157	2,893	(3)	2.16	6,090
Senior Vice President, Sales and Marketing			7/28/08	10,000	15,000	(4)	1.48	22,715

(1)	Awards consist of restricted stock awards that vest 50% per year for two years on November of each year.

(2)	Awards consist of stock option awards 25% of which vest immediately and the remaining 75% of which vest quarterly in equal installments over two years from the date of grant.

(3)	Awards consist of stock option awards that vest quarterly in equal annual installments over two years from the date of grant.

(4)	Awards consist of stock option awards that vest 50% per year for two years from the date of grant.

(5)	The exercise price of the stock option awards is equal to the average of the high and low sales price of the common stock on the day of grant as reported by The NASDAQ Global Market.

(6)

This column represents the grant date fair value of each equity award computed in accordance with SFAS No. 123R. Refer to Note 2, “Stock-Based Compensation,” in the Notes to Consolidated Financial Statements found in our Annual Report on Form 10-K filed with the SEC on February 6, 2008 for the assumptions used to determine the valuation of our equity awards.

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Outstanding Equity Awards Value at Fiscal Year-End Table

The following table includes certain information with respect to the value of all unexercised options previously awarded to the named executive officers at the fiscal year end December 31, 2008.


	Option Awards							Stock Awards
Name and Principal Position	Number of Securities Underlying Unexercised Options Exercisable	Number of Securities Underlying Unexercised Options Unexercisable		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options	Option Exercise Price		Option Expiration Date (1)	Number of Shares or Units of Stock That Have Not Vested		Market Value of Shares or Units of Stock That Have Not Vested		Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested	Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
Steven Rauscher	34,037	—		—	$	115.50	10/25/2010	—			—	—	—
Chief Executive Officer and President	30,000	—		—	$	115.50	10/25/2010	—			—	—	—
Chief Executive Officer and President	3,463	—		—	$	115.50	10/25/2010	—			—	—	—
	1,953	—		—	$	13.36	3/6/2012	—			—	—	—
	3,751	—		—	$	45.16	3/6/2012	—			—	—	—
	3,750	—		—	$	45.16	3/6/2012	—			—	—	—
	2,500	—		—	$	8.80	10/9/2012	—			—	—	—
	1,667	—		—	$	8.80	10/9/2012	—			—	—	—
	834	—		—	$	8.80	10/9/2012	—			—	—	—
	8,251	—		—	$	3.072	3/11/2013	—			—	—	—
	2,344	—		—	$	10.24	3/11/2013	—			—	—	—
	2,344	—		—	$	10.24	3/11/2013	—			—	—	—
	1,069	—		—	$	15.42	2/3/2014	—			—	—	—
	2,378	—		—	$	41.76	4/12/2014	—			—	—	—
	51,812	—		—	$	41.76	4/12/2014	—			—	—	—
	8,311	—		—	$	41.76	4/12/2014	—			—	—	—
	1	—		—	$	21.80	3/6/2015	—			—	—	—
	9,285	—		—	$	21.80	3/6/2015	—			—	—	—
	4,167	—		—	$	21.80	3/6/2015	—			—	—	—
	45,834	—		—	$	21.80	3/6/2015	—			—	—	—
	1,068	—		—	$	18.20	12/20/2015	—			—	—	—
	596	—		—	$	15.40	2/26/2016	—			—	—	—
	30,655	—		—	$	15.40	2/26/2016	—			—	—	—
	5	7,550	(2)	—	$	4.94	3/6/2017	—			—	—	—
	52,849	—		—	$	4.94	3/6/2017	—			—	—	—
	1	21,236	(3)	—	$	2.16	2/24/2018	—			—	—	—
	24,066	—		—	$	2.16	2/24/2018	—			—	—	—
	—	—		—	$	—	—	9,073	(4)	$	1,633

Dominick Colangelo	10,431	—		—	$	28.76	1/2/2015	—			—	—	—
Former Executive Vice President	13,007	—		—	$	28.76	1/2/2015	—			—	—	—
Former Executive Vice President	25,000	—		—	$	15.40	2/26/2016	—			—	—	—
	42,733	—		—	$	4.94	3/6/2017	—			—	—	—
	19,460	—		—	$	2.16	2/24/2018	—			—	—	—

Philippe Maitre	10,938	10,937	(5)	—	$	13.64	5/21/2016	—			—	—	—
Executive Vice President and Chief Financial Officer	—	—		—		—	—	4,374	(6)	$	787	—	—
	—	—		—		—	—	7,336	(4)	$	1,320	—	—
	15,648	2,410	(2)	—	$	4.94	3/6/2017	—			—	—	—
	1,220	—		—	$	4.94	3/6/2017	—			—	—	—
	—	18,118	(2)	—	$	2.16	2/24/2018	—			—	—	—
	13 125	3757	(2)	—	$	2 16	2/24/2018	—			—	—	—

Mark Glickman	12,500	37,500	(5)	—	$	3.27	8/21/2017	—			—	—	—
Senior Vice President, Sales and Marketing	—	—		—		—	—	18,750	(6)	$	3,375	—	—
	1,085	1,808	(2)	—	$	2.16	2/24/2018	—			—	—	—
	—	—		—		—	—	578	(4)	$	104	—	—
	—	15,000	(7)	—	$	1.47	7/27/2018	—			—	—	—
	—	—		—		—	—	10,000	(4)	$	1,800	—	—

(1)	The expiration date of each stock option occurs ten years after the date of grant of each such option.

(2)	Stock options which vest in eight equal quarterly installments beginning 90 days from the date of grant.

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(3)	Stock options 25% of which vest immediately and the remaining 75% of which vest quarterly in equal installments over two years from the date of grant.

(4)	Restricted stock which vests in two equal annual installments over two years.

(5)	Stock options which vest in four equal annual installments from the date of grant.

(6)	Restricted shares which vest in four equal annual installments from the date of grant.

(7)	Stock options which vest in two equal annual installments over two years.

Options Exercised and Stock Vested in the year ended December 31, 2008


	Stock Awards
Name	Number of Shares Acquired on Vesting (#)	Value Realized on Vesting ($)
Steven Rauscher	21,172	5,716
Dominick Colangelo	17,117	4,622
Philippe Maitre	13,385	7,443
Mark Glickman	6,829	7,250

Employment Agreements

Steven Rauscher, President and Chief Executive Officer

Steven Rauscher, President and Chief Executive Officer, has an employment agreement with us, which commenced on October 26, 2000. Mr. Rauscher’s current base salary is $432,600 per year. The agreement entitles Mr. Rauscher to receive an annual incentive bonus target of 60% of his base salary based on our achievement of certain performance measures as determined by the Board of Directors. Upon hiring in October 2000, Mr. Rauscher was awarded stock options to purchase 67,500 shares of common stock at an exercise price of $115.50 per share, the fair market value of the common stock on the date of grant. These options are fully vested. In connection with his commencement of employment with us in 2001, Mr. Rauscher was also awarded 3,000 shares of restricted common stock.

In the event that Mr. Rauscher’s employment is terminated by us for reasons other than for cause, or he terminates it with good reason (as defined), the agreement provides for the continuation of all compensation and benefits for a period of up to 12 months, or until such time as he finds comparable employment, whichever occurs first. Also, if, within two years following a change of control (as defined) of the Company, Mr. Rauscher’s employment is terminated other than for cause, or he experiences a material reduction in responsibilities or compensation, or is required to relocate out of the greater Boston area, he will receive a lump sum severance payment in an amount equal to two times the sum of his base salary and annual target incentive bonus, as well as the pro-rated portion of his target bonus for the year in which his employment is terminated, and any remaining unvested options and restricted shares will immediately and fully vest and all his options will remain exercisable for the shorter of two years from his date of termination or the expiration date of the option. Mr. Rauscher is also entitled to continue to participate in the Company’s group health and dental plans for a period of 24 months following termination and the Company is obligated to continue to contribute to the premium cost of that coverage for such period. Mr. Rauscher’s employment agreement also provides that he will be entitled to receive a payment to cover any excise tax payable with respect to such severance payments as a result of Section 280G of the U.S. tax code.

Dominick Colangelo, Former Executive Vice President, Corporate Development and Operations

Dominick (Nick) Colangelo, Esq., Former Executive Vice President, Corporate Development and Operations, had an employment agreement with us, which commenced on January 1, 2005 and was voluntarily terminated by Mr. Colangelo on December 11, 2008. Mr. Colangelo’s base salary was $340,000 per year. The

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agreement, as amended, entitles Mr. Colangelo to receive an annual incentive bonus target of 50% of his salary based on his performance and that of the Company against goals to be determined by the Board of Directors annually. Upon hiring in January 2005, Mr. Colangelo received a cash signing bonus of $100,000 and was awarded stock options to purchase 31,250 shares of common stock at $28.76 per share, the fair market value of the common stock on the date of grant, which options vest in four equal annual installments on the anniversary of his commencement of employment.

Mr. Colangelo resigned from the Company on December 12, 2008. In connection with Mr. Colangelo’s resignation, the Company and Mr. Colangelo entered into a Consulting Agreement, the term of which began on December 13, 2008 and expired on January 31, 2009, whereby Mr. Colangelo continued to support the Company’s corporate development initiatives, which include the acquisition of additional pharmaceutical products through in-licensing, promotion or purchase agreements. The Consulting Agreement provides that during the term, Mr. Colangelo shall receive a total consulting fee of $55,794. In the event specifically identified product(s) are acquired or in-licensed by the Company on or prior to March 16, 2009, Mr. Colangelo will receive milestone payments ranging from between $56,700 and $99,200. In the event a product is acquired or in-licensed after March 16, 2009, a certain percentage reduction is taken from the milestone payment each business day up until 33 business days, after which no payment will be due to Mr. Colangelo. The Agreement provides that in no event shall the aggregate milestone payments to Mr. Colangelo exceed $99,200. The Agreement also provides that the Company shall reimburse Mr. Colangelo for any out-of-pocket expenses relating to services performed under the Agreement, up to a maximum of $5,000. In the Agreement, Mr. Colangelo and the Company provided a general and mutual release of claims against the other.

Philippe Maitre, Executive Vice President and Chief Financial Officer

Philippe Maitre, Executive Vice President and Chief Financial Officer, has an employment agreement with us, which commenced on May 22, 2006. Mr. Maitre’s current base salary is $300,000 per year. The agreement entitles Mr. Maitre to receive an annual incentive bonus target of 50% of his base salary based on his performance and that of the Company against goals to be determined by the Board of Directors annually after consultation with Mr. Maitre. Upon hiring, Mr. Maitre received a cash signing bonus of $25,000 and was awarded (i) stock options to purchase 21,875 shares of common stock at an exercise price of $13.64 per share, the fair market value of the common stock on the date of grant, which options vest in four equal annual installments on the anniversary of his commencement of employment, and (ii) 8,750 shares of restricted common stock which shares vest in four equal annual installments on the anniversary of his commencement of employment. We also agreed to reimburse Mr. Maitre for reasonable relocation expenses up to $125,000, in addition to amounts incurred for any federal, state or local taxes as a result of such relocation reimbursement.

In the event that Mr. Maitre’s employment is terminated by us for reasons other than for cause, or he terminates it with good reason (as defined), the agreement provides for the continuation of all compensation and benefits for a period of up to nine months, or until such time as he finds comparable employment, whichever occurs first. Also, if, within two years following a change of control (as defined) of the Company, Mr. Maitre’s employment is terminated other than for cause, or he experiences a material reduction in responsibilities at the surviving company, he will receive a lump sum severance payment equal to one and a half times the sum of his base salary and annual target incentive bonus, as well as the pro-rated portion of his target bonus for the year in which his employment is terminated and any remaining unvested restricted shares and options will immediately and fully vest and all his options will remain exercisable for the shorter of two years from his date of termination or the expiration date of the option. Mr. Maitre is also entitled to continue to participate in our group health and dental plans for a period of 18 months following termination and the Company is obligated to continue to contribute to the premium cost of that coverage for such period. Mr. Maitre’s employment agreement also provides that he will be entitled to receive a payment to cover any excise tax payable on such severance payments as a result of Section 280G of the U.S. tax code.

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Mark Glickman, Senior Vice President, Sales and Marketing

Mark Glickman, Senior Vice President, Sales and Marketing, has an employment agreement with us, which commenced on August 28, 2007. In association with Mr. Glickman’s promotion to Senior Vice President, Sales and Marketing on July 28, 2009, his base salary was increased and is $295,000 per year. The agreement entitles Mr. Glickman to receive an annual incentive bonus target of 50% of his base salary based on his performance and that of the Company against goals to be determined by the Board of Directors annually after consultation with Mr. Glickman. Upon hiring, Mr. Glickman received a cash signing bonus of $40,000 and was awarded (i) stock options to purchase 50,000 shares of common stock at an exercise price of $3.27 per share, the fair market value of the common stock on the date of grant, which options vests in four equal annual installments on the anniversary of his commencement of employment, and (ii) 25,000 shares of restricted common stock which stock vest in four equal annual installments on the anniversary of his commencement of employment. Additionally, upon his promotion to Senior Vice President, Sales and Marketing in July 2008, Mr. Glickman was awarded (i) stock options to purchase 15,000 shares of common stock at an exercise price of $1.47 per share, the fair market value of the common stock on the date of grant, which options vest in two equal annual installments on the anniversary of his commencement of employment, and (ii) 10,000 shares of restricted common stock which shares vest in two equal annual installments on the anniversary of his commencement of employment.

In the event that Mr. Glickman’s employment is terminated by us for reasons other than for cause, or he terminates it with good reason (as defined), the agreement provides for the continuation of all compensation and benefits for a period of up to nine months, or until such time as he finds comparable employment, whichever occurs first. Also, if, within two years following a change of control (as defined) of the Company, Mr. Glickman’s employment is terminated other than for cause, or he experiences a material reduction in responsibilities at the surviving company, he will receive a lump sum severance payment equal to one and a half times the sum of his base salary and annual target incentive bonus, as well as the pro-rated portion of his target bonus for the year in which his employment is terminated and any remaining unvested restricted shares and options will immediately and fully vest and all his options will remain exercisable for the shorter of two years from his date of termination or the expiration date of the option. Mr. Glickman is also entitled to continue to participate in our group health and dental plans for a period of 18 months following termination and the Company is obligated to continue to contribute to the premium cost of that coverage for such period. Mr. Glickman’s employment agreement also provides that he will be entitled to receive a payment to cover any excise tax payable on such severance payments as a result of Section 280G of the U.S. tax code.

Potential Payments Upon Termination of Employment or Change of Control Under Employment Agreements

The following table summarizes the potential payments to each named executive officer assuming that one of the following events occurs. The table assumes that the event occurred on December 31, 2008, the last business day of our fiscal year. We have assumed a price per share of our common stock of $0.18, which was the closing price of our common stock on December 31, 2008.


Name	Termination Other Than “For Cause” or Resignation With Good Reason			Termination Other Than “For Cause” Following a Change in Control
Steven Rauscher President and Chief Executive Officer	$	705,402	(1)	$	1,710,120	(2)

Philippe Maitre Executive Vice President and Chief Financial Officer		347,432	(3)		965,929	(4)

Mark Glickman Senior Vice President, Sales and Marketing		341,807	(5)		974,415	(6)

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(1)	Includes payment of the following: $432,600 for the continuation of salary, $259,560 for his target bonus and $13,242 for continuation of benefits for a period of 12 months following such termination, or until Mr. Rauscher finds comparable employment. We have assumed payment for the full 12 months.

(2)

Includes payment of the following: $1,384,320 in a lump sum payment for salary and bonus, equivalent to two times his base salary for fiscal year 2008 plus two times his annualized target incentive bonus; $259,560 for the pro-rated portion of his target bonus for the year in which he was terminated; $26,485 for benefits, the value of which is based upon the premiums in effect on December 31, 2008; $39,755 for accelerated vesting of equity awards, based on the fair value of unvested stock options as of December 31, 2008 in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-based Payments”; and $[ ] for any excise tax payable with respect to such severance payments in accordance with Section 280G of the U.S. tax code. The gross-up figures assume a December 31, 2008 change in control and termination date. For purposes of these figures, the following are included as parachute payments: cash severance payable upon the termination in connection with the change of control, additional pro-rated bonus amounts payable upon the termination, and the value of the acceleration of outstanding equity awards, all determined in accordance with applicable tax regulations. Any earned but unpaid salary or bonus amounts due following the termination are not treated as parachute payments. We have assumed that all outstanding options are cashed out in the assumed transaction for an amount equal to the excess, if any, of $0.18 (the closing price of our common stock on December 31, 2008, the last business day of the year) over the exercise per share under the option, multiplied by the number of shares subject to the option. Finally, these figures assume that none of the parachute payments will be discounted as attributable to reasonable compensation and no value is attributed to the executive executing a non-competition agreement in connection with the assumed termination of employment.

(3)	Includes payment of $225,000 for the continuation of salary, $112,500 for his target bonus and $9,932 for continuation of benefits for a period of nine months following such termination, or until Mr. Maitre finds comparable employment. We have assumed payment for the full nine months.

(4)

Includes payment of the following: $675,000 in a lump sum payment for salary and bonus, equivalent to one and a half times the sum of his base salary for fiscal year 2008 plus his annualized target incentive bonus; $150,000 for the pro-rated portion of his target bonus for the year in which he was terminated; $19,864 for benefits, the value of which is based upon the premiums in effect on December 31, 2008; and $121,066 for accelerated vesting of equity awards, based on the fair value of unvested stock options as of December 31, 2008 in accordance with the provisions of SFAS No. 123R, “Share-based Payments”.

(5)	Includes payment of $221,250 for the continuation of salary, $110,625 for his target bonus and $9,932 for continuation of benefits for a period of nine months following such termination, or until Mr. Glickman finds comparable employment. We have assumed payment for the full nine months.

(6)

Includes payment of the following: $663,750 in a lump sum payment for salary and bonus, equivalent to one and a half times the sum of his base salary for fiscal year 2008 plus his annualized target incentive bonus; $147,500 for the pro-rated portion of his target bonus for the year in which he was terminated; $19,864 for benefits, the value of which is based upon the premiums in effect on December 31, 2008; and $143,301 for accelerated vesting of equity awards, based on the fair value of unvested stock options as of December 31, 2007 in accordance with the provisions of SFAS No. 123R, “Share-based Payments”.

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In accordance with our Audit Committee charter, our Audit Committee is responsible for reviewing and approving the terms and conditions of all related party transactions. Although we have not entered into any financial transactions with any immediate family member of a director or executive officer of our Company, if we were to do so, any such material financial transaction would need to be approved by our Audit Committee. A report is made to our Audit Committee annually disclosing all related parties that are employed by us and related parties that are employed by other companies with whom we had a material relationship during that year, if any. In determining whether to approve or ratify an interested transaction, the Audit Committees takes into account such factors as they deem appropriate, which may include whether the interested transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction.

We did not have any reportable related party transaction in fiscal 2007.

We have determined that, in 2006 and 2008, we had the following reportable related transactions described below.

To finance the acquisition of ANTARA capsules in August 2006, we entered into several financing arrangements with Paul Royalty Fund Holdings II, LP, an affiliate of Paul Capital Partners (“PRF”), in consideration for an aggregate amount of $70.0 million. In connection with such financing arrangements, we agreed to elect one person designated by PRF to our Board following the closing in August of 2006 and to continue to nominate one person designated by PRF for election to our Board by our shareholders. Initially, Greg Brown and Walter Flamenbaum were PRF’s previous representatives and John Leone currently acts as the PRF designee to our Board. In connection with such financing transaction, we entered into the Revenue Interests Assignment Agreement pursuant to which we sold to PRF the right to receive specified royalties on Oscient’s net sales in the United States (and the net sales of its affiliates and licensees) of FACTIVE tablets and Guardian II sold to Paul Capital the right to receive specified royalties on Guardian II’s net sales in the United States (and the net sales of its affiliates and licensees) of ANTARA capsules, in each case until December 31, 2016 in exchange for an aggregate of $40 million from Paul Capital. The royalty payable to Paul Capital on net sales of ANTARA and FACTIVE are tiered as follows: 9% for the first $75 million in annual net revenues, 6% for annual net revenues in excess of $75M, but less than $150 million, and 2% for annual net revenues which exceed $150 million. Once the cumulative royalty payments to Paul Capital exceed $100 million, the royalties become nominal. Further, our wholly owned subsidiary, Guardian II, entered into a Note Purchase Agreement with PRF pursuant to which Guardian II issued and sold a $20,000,000 aggregate principal amount of 12% senior secured note due on the fourth anniversary of the closing date, subject to Guardian II’s option to extend the maturity to the sixth anniversary of the closing date, provided (i) there are no defaults under the note at the time, and (ii) we issue to PRF, at the time of the exercise of such option, a warrant for a number of shares of common stock equal to 10% of the principal balance plus accrued interest divided by $6.94, with an exercise price of $6.94 per share. In connection with such financial agreements, Guardian II and PRF entered into a Security Agreement under which Guardian II granted to PRF a security interest in and to substantially all assets owned by Guardian II (including rights to the ANTARA products) in order to secure its performance under each of the agreements with PRF. As part of the financing, we and PRF also entered into a Common Stock and Warrant Purchase Agreement, pursuant to which, in exchange for $10 million, Oscient sold to PRF 1,388,889 shares of the common stock (as adjusted pursuant to the one-for-eight reverse stock split) at a price of $7.20 per share (as adjusted pursuant to the one-for-eight-reverse stock split) and issued PRF a warrant to purchase 288,019 shares of common stock (as adjusted pursuant to the one-for-eight reverse stock split) at an exercise price of $6.94 per share (as adjusted pursuant to the one-for-eight reverse stock split). The Warrant is exercisable for seven years from the date of closing.

On November 5, 2008 we entered into a First Amendment (the “Amendment”) to the revenue interests assignment agreement.

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The Amendment provided that PRF consent to the grant by Guardian II of a second-ranking security interest in and to the assets of Guardian II to secure Guardian II’s guarantee of the notes that were issued in the November 2008 Exchange Offer. Guardian II granted a first priority security interest to PRF in 2006 in substantially all of its assets in order to secure the obligations of the Company and Guardian II under the revenue interests assignment agreement and the note purchase agreement dated July 21, 2006.

Under the terms of the Amendment, in the event that the sum of the net sales of ANTARA and FACTIVE in the U.S. and the gross margin received by the Company from sales of FACTIVE within its territory outside of the U.S. (for which the definition of Net Revenues has been expanded to include in the Amendment) is less than 85% of certain specified annual sales thresholds, then PRF will be entitled to a (i) 3% increase in the applicable royalty percentage payable on the first $75 million of sales of such products in the applicable year and (ii) 2% increase in the applicable royalty percentage payable on net sales of such products in excess of $75 million and less than $150 million in the applicable year. The specified sales thresholds are $115 million in 2009, $135 million in 2010, $150 million in 2011 and $175 million thereafter through the term. Furthermore, the Amendment provides that in the event that the Company fails to achieve the specified sales threshold in any applicable year, the increased applicable royalty percentage shall also be payable on the net sales of any future drug products acquired or in-licensed by the Company or its subsidiaries. The increase in the applicable percentage payable on net sales shall be limited to a maximum payment to PRF of $2.25 million per year and $15 million during the term of the Agreement, and in no event shall such payment exceed the amount which PRF would have received in the applicable year had the specified sales threshold for that year been achieved.

The Amendment also provides that in the event that the Company or its subsidiaries acquires or in-licenses additional drug products, the Company shall make a one-time milestone payment to PRF of $1.25 million on the second anniversary of the Company’s first commercial sale of such product.

Under the terms of the Amendment, in the event that PRF and the Company determine that the fair market value of the collateral in which PRF has been granted a security interest by Guardian II is less than the Put/Call Price, the Company will elect, in its sole discretion, to either grant PRF a security interest in 25% of each additional drug product acquired or in-licensed by the Company or its subsidiaries, or pay PRF $1.5 million on the second year anniversary of the Company’s first commercial sale of each such product.

The Amendment also provides that any acceleration or failure to pay the notes to be issued in the exchange offer shall be considered a Put Event.

The Company issued to PRF (i) a $2.0 million aggregate principal amount note which was substantially identical to the notes issued in the exchange offer and (ii) 500,000 shares of the Company’s common stock. The Company also has granted certain registration rights to PRF with respect to the note and the shares. Additionally, the Company agreed to amend the exercise price of the common stock purchase warrant dated August 18, 2006 issued to PRF to purchase 288,018 shares of the Company’s common stock to be equal to the closing price of the Company’s Common Stock on the NASDAQ Global Market on the date immediately preceding the closing of the exchange offer.

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Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding the beneficial ownership of Company common stock as of February 1, 2009 by:

•

each person known by the Company to own beneficially 5% or more of Company common stock;

•

each director and nominee for director of the Company;

•

each executive officer of the Company; and

•

all of the directors and executive officers of the Company as a group.

The percentages shown are based on shares of Company common stock outstanding as of February 6, 2009, and where indicated also include beneficially owned shares of common stock underlying the Company’s outstanding convertible notes. Unless otherwise indicated, the address for each stockholder is c/o Oscient Pharmaceuticals Corporation, 1000 Winter Street, Suite 2200, Waltham, Massachusetts 02451. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares such power with his or her spouse) with respect to all shares of capital stock listed as owned by such person or entity.

Beneficial ownership shown includes shares of common stock issuable upon conversion of the 2009 Notes and the 2011 notes. Some of the holders of the 2009 Notes and the 2011 notes are restricted in their ability to convert their 2009 Notes into 2011 notes or common stock, and their 2001 notes into common stock, to the extent that such conversion would result in the holder beneficially owning more than 9.99% of the Company’s issued and outstanding common stock.


	Amount and Nature of Beneficial Ownership		Percent of Class Including Convertible Notes		Amount and Nature of Beneficial Ownership Excluding Convertible Notes		Percent of Class Excluding Convertible Notes
5% Stockholders:
Akanthos Capital Management, LLC	8,299,091	(1)	9.9	%(2)	1,790,000	(3)	4.8	%
Citigroup Incorporated	2,167,805	(4)	5.5	%	—		—
DellaCamera Capital Management, LLC	7,637,400	(5)	17.7	%	1,647,400	(6)	4.4	%
GLG Partners, LP	4,132,266	(7)	10.2	%	859,539	(8)	2.3	%
Highbridge Capital Management, LLC	10,877,975	(9)	9.9	%(10)	2,317,877	(11)	6.6	%
OrbiMed Advisors, LLC	14,335,625	(12)	9.9	%(13)	2,989,625	(14)	8.0	%
Paul Royalty Fund Holdings II	3,995,097	(15)	10.2	%	2,176,908	(16)	5.8	%
Maverick Capital, Ltd.	6,982,280	(17)	9.9	%(18)	—		—
MPM Asset Management Investors	6,691,352	(19)	15.2	%	—		—
Radcliffe Capital Management, LP	2,911,636	(20)	7.4	%	628,000	(21)	1.7	%
Visium Asset Management, LP	4,400,000	(22)	9.9	%(23)	2,400,000	(24)	6.5	%
Zazove Associates, LLC	6,569,592	(25)	15.5	%	1,262,320	(26)	3.4	%

Directors and Named Executive Officers:
Gregory B. Brown	3,137	(27)	—		3,137	(27)	—
Mark A. Glickman	50,104	(28)	0.1	%	50,104	(28)	0.1	%
Robert J. Hennessey	17,728	(29)	—		17,728	(29)	—
John R. Leone	3,996,778	(30)	10.2	%	2,178,589	(31)	5.8	%
Philippe M. Maitre	91,541	(32)	0.2	%	91,541	(32)	0.2	%
William R. Mattson	3,137	(33)	—		3,137	(33)	—
Gary Patou	13,691		—		13,691		—
Steven M. Rauscher	405,998	(34)	1.1	%	405,998	(34)	1.1	%
William S. Reardon	11,929	(35)	—		11,929	(35)	—
Norbert G. Riedel	19,183	(36)	0.1	%	19,183	(36)	0.1	%
David K. Stone	23,757	(37)	0.1	%	23,757	(37)	0.1	%
All directors and officers as a group (11 persons)	4,636,983	(38)	11.7	%	2,818,794	(39)	7.4	%

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(1)

Includes 6,509,091 shares of Common Stock issuable upon the conversion of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011. The address of this shareholder is 21700 Oxnard Street, Suite 1520, Woodland Hills, CA 91367. This information is based on the Form 3 and the Schedule 13G filed December 15, 2008 and on the Schedule 13G/A filed on December 23, 2008 by Akanthos Capital Management, LLC.

(2)

Pursuant to an agreement between the Company and Akanthos Master Fund, Akanthos Master Fund may not convert any of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011 held by it to the extent that Akanthos Master Fund would beneficially own, after such conversion, more than 9.9% of the Company’s outstanding shares of Common Stock. This information is based on the Form 3 and the Schedule 13G filed December 15, 2008 and on the Schedule 13G/A filed on December 23, 2008 by Akanthos Capital Management, LLC.

(3)	The address of this shareholder is 21700 Oxnard Street, Suite 1520, Woodland Hills, CA 91367. This information is based on the Form 3 and the Schedule 13G filed December 15, 2008 and on the Schedule 13G/A filed on December 23, 2008 by Akanthos Capital Management, LLC.

(4)

Includes 2,167,805 shares of Common Stock issuable upon the conversion of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011. The address of this shareholder is 399 Park Avenue, New York, NY 10043. This information is based on the joint Schedule 13G filed on January 29, 2009 by Citigroup Global Markets Inc., Citigroup Financial Products Inc., Citigroup Global Markets Holdings Inc. and Citigroup Inc.

(5)

Includes 5,990,000 shares of Common Stock issuable upon the conversion of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011. DellaCamera Capital Management, LLC acts as the investment manager of the DellaCamera Capital Master Fund, Ltd. DellaCamera Capital Fund, Ltd. is the controlling shareholder of the DellaCamera Capital Master Fund, Ltd. Ralph DellaCamera, Jr., Andrew Kurtz and Vincent Spinnato are the controlling persons of DellaCamera Capital Management, LLC. The address of this shareholder is 461 Fifth Avenue, 10^th Floor, New York, NY 10017. This information is based on the Schedule 13G filed on November 13, 2008 and the Form 4 filed on December 3, 2008 by DellaCamera Capital Management, LLC.

(6)	The address of this shareholder is 461 Fifth Avenue, 10^th Floor, New York, NY 10017. This information is based on the Form 4 filed on December 3, 2008 by DellaCamera Capital Management, LLC.

(7)

Includes 3,272,727 shares of Common Stock issuable upon the conversion of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011. GLG Partners LP acts as the investment manager of GLG Market Neutral Fund and may be deemed, as of the date hereof, to be the beneficial owner of the Company’s securities or derivative securities held by GLG Market Neutral Fund. GLG Partners Limited is the general partner of GLG Partners LP. GLG Partners, Inc. indirectly wholly owns GLG Partners Limited. The address of this shareholder is 390 Park Avenue, 20^th Floor, New York, NY 10022. This information is based on the Form 3 and the Schedule 13G filed on January 15, 2009 by GLG Partners LP.

(8)

GLG Partners LP acts as the investment manager of GLG Market Neutral Fund and may be deemed, as of the date hereof, to be the beneficial owner of the Company’s securities or derivative securities held by GLG Market Neutral Fund. GLG Partners Limited is the general partner of GLG Partners LP. GLG Partners, Inc. indirectly wholly owns GLG Partners Limited. The address of this shareholder is 390 Park Avenue, 20^th Floor, New York, NY 10022. This information is based on the Form 3 and the Schedule 13G filed on January 15, 2009 by GLG Partners LP.

(9)

Includes 8,398,181 shares of Common Stock issuable upon the conversion of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011 and includes warrants exercisable for 161,917 shares of Common Stock held by Highbridge International LLC, however pursuant to the terms of these warrants, such warrants cannot be exercised until such time as its holders would not beneficially own, after such exercise, more than 4.99% of the outstanding shares of Common Stock. The address of this shareholder is 9 West 57th Street, 27th Floor, New York, New York 10019. This information is based on the Schedule 13G/A filed on December 2, 2008 by Highbridge Capital Management, LLC.

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(10)

Pursuant to an agreement between the Company and Highbridge International LLC, Highbridge International LLC may not convert any of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011 held by it to the extent that Highbridge International LLC would beneficially own, after such conversion, more than 9.99% of the Company’s outstanding shares of Common Stock. The address of this shareholder is 9 West 57th Street, 27th Floor, New York, New York 10019. This information is based on the Schedule 13G filed on December 2, 2008 and the Schedule 13G/A filed on December 2, 2008 by Highbridge Capital Management, LLC.

(11)

Includes warrants exercisable for 161,917 shares of Common Stock held by Highbridge International LLC, however pursuant to the terms of these warrants, such warrants cannot be exercised until such time as its holders would not beneficially own, after such exercise, more than 4.99% of the outstanding shares of Common Stock. The address of this shareholder is 9 West 57th Street, 27th Floor, New York, New York 10019. This information is based on the Schedule 13G/A filed on December 2, 2008 by Highbridge Capital Management, LLC.

(12)

Includes 11,346,000 shares of Common Stock issuable upon the conversion of 12.50% Convertible Guaranteed Senior Notes due 2011 and includes warrants exercisable for 153,125 shares of Common Stock held by OrbiMed Advisors, LLC and OrbiMed Capital, LLC. The reporting persons hold the securities on behalf of other persons who have the right to receive, or the power to direct the receipt of dividends from, or proceeds from the sale of, such securities. No one such other person’s interest in the securities whose ownership is reported here relates to more than five percent of the class. OrbiMed Advisors LLC and OrbiMed Capital LLC hold shares and share equivalents issuable from the Company’s Convertible Guaranteed Senior Notes due 2011 and warrants on behalf of Caduceus Capital Master Fund Limited (1,074,000 Common Shares, 4,296,000 Convertible Notes, and 60,625 warrants), Caduceus Capital II, L.P. (976,500 Common Stock, 3,906,000 Convertible Notes, and 43,750 warrants), UBS Eucalyptus Fund, LLC (713,000 Common Stock, 2,852,000 Convertible Notes, and 43,750 warrants), PW Eucalyptus Fund, Ltd. (73,000 Common Stock, 292,000 Convertible Notes, and 5,000 warrants). The Convertible Guaranteed Senior Notes due 2011 and warrants may only be converted to the extent that the conversion would not cause any of the reporting persons to be the beneficial owners of greater than 9.99% of the outstanding shares of the Company’s Common Stock. The address of the reporting person is 767 Third Avenue, 30^th Floor, New York, New York 10017. This information is based on the Schedule 13G/A filed on December 11, 2008 by OrbiMed Advisors, LLC and OrbiMed Capital, LLC.

(13)

OrbiMed Advisors, LLC and OrbiMed Capital, LLC may not convert any of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011 held by them or their warrants exercisable for 153,125 shares of Common Stock to the extent that the reporting persons would beneficially own, after such conversion, more than 9.99% of the Company’s outstanding shares of Common Stock. The address of the reporting person is 767 Third Avenue, 30^th Floor, New York, New York 10017. This information is based on the Schedule 13G/A filed on December 11, 2008 by OrbiMed Advisors, LLC and OrbiMed Capital, LLC.

(14)

Includes warrants exercisable for 153,125 shares of Common Stock held by OrbiMed Advisors, LLC and OrbiMed Capital, LLC. Such warrants may only be converted to the extent that the conversion would not cause any of the reporting persons to be the beneficial owners of greater than 9.99% of the outstanding shares of the Company’s Common Stock. OrbiMed Advisors LLC and OrbiMed Capital LLC hold shares of Common Stock and warrants on behalf of Caduceus Capital Master Fund Limited (1,074,000 Common Shares and 60,625 warrants), Caduceus Capital II, L.P. (976,500 Common Stock and 43,750 warrants), UBS Eucalyptus Fund, LLC (713,000 Common Stock and 43,750 warrants), PW Eucalyptus Fund, Ltd. (73,000 Common Stock and 5,000 warrants). The address of the reporting person is 767 Third Avenue, 30^th Floor, New York, New York 10017. This information is based on the Schedule 13G/A filed on December 11, 2008 by OrbiMed Advisors, LLC and OrbiMed Capital, LLC.

(15)	Includes 1,388,889 restricted shares directly held by Paul Royalty Fund Holdings II (“PRFH”) and indirectly held by Paul Royalty Fund II, LP (“PRF”), Paul Royalty Associates II, LP (“PRA”), Paul

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Royalty Management, LLC (“PRM”) and Paul Capital Advisors, LLC (“PCA”). PRFH directly owns 1,388,889 shares of Common Stock. Includes 1,818,189 shares of Common Stock issuable upon the conversion of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011 and 500,000 shares of common stock issued to PRFH in connection with that certain First Amendment dated November 5, 2008 to the Revenue Interest Assignment Agreement by and between the Company, its wholly-owned subsidiary Guardian II Acquisition Corporation and PRFH (the “RIAA Amendment”). PRF and PRA may be deemed to indirectly own 1,388,889 shares of common stock held by PRFH because PRF and PRA are the general partners of PRFH. PRM may be deemed to indirectly own the shares because PRM is the general partner of PRF and PRA. As manager of PRA, PCA exercises voting and dispositive power over investments held by PRA. Includes warrants exercisable for 288,019 shares of Common Stock held by PRFH. PRF and PRA may be deemed to own the warrants held by PRFH because PRF and PRA are the general partners of PRFH. PRM may be deemed to own the warrants because PRM is the general partner of PRF and PRA. This information is based on the joint Schedule 13G filed on August 28, 2006 by PRFH.

(16)

Includes 1,388,889 restricted shares directly held by PRFH and indirectly held by PRF, PRA, PRM and PCA. PRFH directly owns 1,388,889 shares of Common Stock. Includes 500,000 shares of common stock issued to PRFH in connection with the RIAA Amendment. PRF and PRA may be deemed to indirectly own 1,388,889 shares of common stock held by PRFH because PRF and PRA are the general partners of PRFH. PRM may be deemed to indirectly own the shares because PRM is the general partner of PRF and PRA. As manager of PRA, PCA exercises voting and dispositive power over investments held by PRA. Includes warrants exercisable for 288,019 shares of Common Stock held by PRFH. PRF and PRA may be deemed to own the warrants held by PRFH because PRF and PRA are the general partners of PRFH. PRM may be deemed to own the warrants because PRM is the general partner of PRF and PRA. This information is based on the joint Schedule 13G filed on August 28, 2006 by PRFH.

(17)

Includes 6,982,280 shares of Common Stock issuable upon the conversion of the Company’s 5% Convertible Promissory Notes due in 2009. The notes are held for the benefit of Maverick Fund USA, Ltd., Maverick Fund II, Ltd. and Maverick Fund, L.D.C. (the “Maverick Entities”). Maverick Capital, Ltd is a registered investment adviser under the Investment Advisers Act of 1940, as amended and acts as the investment manager for each of the Maverick Entities and has sole voting and dispositive power over the securities held by the Maverick Entities. The address of the reporting person is 300 Crescent Court, 18^th Floor, Dallas, TX 72501. This information is based on the Company’s January 28, 2009 amendment of its 5% Convertible Promissory Notes due in 2009.

(18)	The Maverick Entities hold the 2009 Notes subject to a beneficial ownership cap, such that the Maverick Entities cannot convert the 2009 Notes into 2011 notes or common stock to the extent that such conversion results in the Maverick Entities being beneficial owners of more than 9.99%.

(19)

Includes 6,691,352 shares of Common Stock issuable upon the conversion of the Company’s 5% Convertible Promissory Notes due in 2009. The notes are held by BB BioVentures L.P., (“BB Bioventures”), by MPM BioVentures Parallel Fund, L.P. (“MPM Parallel”) and by MPM Asset Management Investors 1998 LLC (“MPM Investors”). BB BioVentures is under common control with MPM Parallel and MPM Investors. BAB BioVentures L.P. (“BAB BV”), BAB BioVentures NV and MPM BioVentures I LLC (“BioVentures LLC”) are the direct and indirect general partners of BB BioVentures. MPM BioVentures I L.P. (“BioVentures LP”) and BioVentures LLC are the direct and indirect general partners of MPM Parallel. The address of the reporting person is 200 Clarendon Street, 54^th Floor, Boston, MA 02116. This information is based on the Company’s January 28, 2009 amendment of its 5% Convertible Promissory Notes due in 2009.

(20)

Includes 2,283,636 shares of Common Stock issuable upon the conversion of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011. The address of the reporting person is 50 Monument Road, Suite 300, Bala Cynwyd, PA 19004. This information is based on the Schedule 13G filed on December 2, 2008 by Radcliffe SPC, Ltd. and Radcliffe Capital Management, LP.

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(21)	The address of the reporting person is 50 Monument Road, Suite 300, Bala Cynwyd, PA 19004. This information is based on the Schedule 13G filed on December 2, 2008 by Radcliffe SPC, Ltd. and Radcliffe Capital Management, LP.

(22)

Includes 2,000,000 shares of Common Stock issuable upon the conversion of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011. Visium Asset Management, LP has indirect beneficial ownership as the investment manager of pooled investment vehicles. The address of this shareholder is 950 Third Avenue – 29^th Floor, New York, NY 10022. This information is based on the Schedule 13F filed on November 7, 2008 and the Schedule 13G filed on December 8, 2008 by Visium Asset Management, LP.

(23)

Pursuant to an agreement between the Company and Visium Asset Management, LP, Visium Asset Management, LP may not convert any of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011 held by it the extent that after such conversion the reporting persons would beneficially own greater than 9.99% of the outstanding shares of the Company’s Common Stock. Visium Asset Management, LP has indirect beneficial ownership as the investment manager of pooled investment vehicles. The address of this shareholder is 950 Third Avenue – 29^th Floor, New York, NY 10022. This information is based on the Schedule 13F filed on November 7, 2008 and the Schedule 13G filed on December 8, 2008 by Visium Asset Management, LP.

(24)

Visium Asset Management, LP has indirect beneficial ownership as the investment manager of pooled investment vehicles. The address of this shareholder is 950 Third Avenue – 29^th Floor, New York, NY 10022. This information is based on the Schedule 13F filed on November 7, 2008 and the Schedule 13G filed on December 8, 2008 by Visium Asset Management, LP.

(25)

Includes 5,307,272 shares of Common Stock issuable upon the conversion of Company’s 12.50% Convertible Guaranteed Senior Notes due 2011. The address of this shareholder is 1001 Tahoe Blvd., Incline Village, NV 89451. This information is based on the Schedule 13F filed on February 5, 2009 by Zazove Associates, LLC.

(26)	The address of this shareholder is 1001 Tahoe Blvd., Incline Village, NV 89451. This information is based on the Schedule 13F filed on February 5, 2009 by Zazove Associates, LLC.

(27)	Includes (i) 1,937 shares of common stock, which shares are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009 and (ii) 450 restricted shares.

(28)	Includes (i) 13,947 shares of common stock, which shares are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009 and (ii) 29,328 restricted shares.

(29)	Includes (i) 10,770 shares of common stock, which shares are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009 and (ii) 450 restricted shares.

(30)

Includes 1,388,889 restricted shares directly held by PRFH and indirectly held by PRF, PRA, PRM and PCA. PRFH directly owns 1,388,889 shares of Common Stock. Includes 1,818,189 shares of Common Stock issuable upon the conversion of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011 and 500,000 shares of common stock issued to PRFH in connection with the RIAA Amendment. PRF and PRA may be deemed to indirectly own 1,388,889 shares of common stock held by PRFH because PRF and PRA are the general partners of PRFH. PRM may be deemed to indirectly own the shares because PRM is the general partner of PRF and PRA. As manager of PRA, PCA exercises voting and dispositive power over investments held by PRA. Includes warrants exercisable for 288,019 shares of Common Stock held by PRFH. PRF and PRA may be deemed to own the warrants held by PRFH because PRF and PRA are the general partners of PRFH. PRM may be deemed to own the warrants because PRM is the general partner of PRF and PRA. As manager of PRA, PCA exercises voting and dispositive power over investments held by PRA. Mr. Leone, a partner of Paul Capital Healthcare, is the designee of PRF to the Company’s Board of Directors. Includes (i) 781 shares of common stock, which shares are issuable upon

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the exercise of vested options or options that are to become vested within 60 days following February 1, 2009, and (ii) 600 restricted shares.

(31)

Includes 1,388,889 restricted shares directly held by PRFH and indirectly held by PRF, PRA, PRM and PCA. PRFH directly owns 1,388,889 shares of Common Stock. Includes 500,000 shares of common stock issued to PRFH in connection with the RIAA Amendment. PRF and PRA may be deemed to indirectly own 1,388,889 shares of common stock held by PRFH because PRF and PRA are the general partners of PRFH. PRM may be deemed to indirectly own the shares because PRM is the general partner of PRF and PRA. As manager of PRA, PCA exercises voting and dispositive power over investments held by PRA. Includes warrants exercisable for 288,019 shares of Common Stock held by PRFH. PRF and PRA may be deemed to own the warrants held by PRFH because PRF and PRA are the general partners of PRFH. PRM may be deemed to own the warrants because PRM is the general partner of PRF and PRA. As manager of PRA, PCA exercises voting and dispositive power over investments held by PRA. Mr. Leone, a partner of Paul Capital Healthcare, is the designee of PRF to the Company’s Board of Directors. Includes (i) 781 shares of common stock, which shares are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009, and (ii) 600 restricted shares.

(32)	Includes (i) 47,716 shares of common stock, which shares are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009 and (ii) 11,710 restricted shares.

(33)	Includes (i) 1,937 shares of common stock, which shares are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009 and (ii) 450 restricted shares.

(34)	Includes (i) 338,788 shares of common stock, which shares are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009 and (ii) 9,073 restricted shares.

(35)	Includes (i) 9,376 shares of common stock, which shares are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009 and (ii) 450 restricted shares.

(36)	Includes (i) 17,843 shares of common stock, which shares are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009 and (ii) 450 restricted shares.

(37)	Includes (i) 18,907 shares of common stock, which shares are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009 and (ii) 450 restricted shares.

(38)

Includes (i) 462,302 shares of common stock that are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009, (ii) 53,411 restricted shares held by officers and directors, (iii) warrants exercisable for 288,019 shares of common stock held by PRFH, (iv) 1,388,889 restricted shares held by PRFH, (v) 1,818,189 shares of Common Stock issuable upon the conversion of the Company’s 12.50% Convertible Guaranteed Senior Notes due 2011 issued to PRFH in connection with the RIAA Amendment, and (vi) 500,000 shares of common stock issued to PRFH in connection with the RIAA Amendment.

(39)

Includes (i) 462,302 shares of common stock that are issuable upon the exercise of vested options or options that are to become vested within 60 days following February 1, 2009, (ii) 53,411 restricted shares held by officers and directors, (iii) warrants exercisable for 288,019 shares of common stock held by PRFH, (iv) 1,388,889 restricted shares held by PRFH, and (v) 500,000 shares of common stock issued to PRFH in connection with the RIAA Amendment.

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SELLING SECURITY HOLDERS

We issued the 2009 Notes in a private placement in connection with our merger with Genesoft in February 2004 pursuant to the terms of the Note Purchase and Exchange Agreement dated as of November 17, 2003. On January 28, 2008, we entered into an amendment to the Note Purchase and Exchange Agreement with the holders of approximately $16.8 million of the $17 million principal amount of our outstanding 5% Convertible Promissory Notes due 2009 to extend the maturity date until December 1, 2009, lower the price at which the 2009 Notes are convertible into shares of the Company’s common stock to $1.10 and provide that the 2009 notes may be convertible into the Company’s 2011 notes at the option of the holder. The holders of the 2009 notes are the selling security holders identified in the table below.

Selling securityholders, including, to the extent permitted, their transferees, pledges or donees or their successors, may use this prospectus to offer and sell the 2011 notes and related guarantees and the shares of our common stock issuable upon conversion of the 2011 notes. We have prepared the table below based on information received from the selling securityholders on or prior to February 9, 2009.

Except as otherwise indicated below, to our knowledge, no selling securityholder nor any of its affiliates has held any position or office with, been employed by or otherwise has had any material relationship with us or our affiliates during the three years prior to the date of this prospectus.

Our registration of the 2011 notes, related note guarantees and the shares of our common stock that may be issuable upon conversion of the 2011 notes does not mean that the selling securityholders identified below will sell all or any of these securities. In addition, the selling securityholders may have sold, transferred or disposed of all or a portion of their 2011 notes since the date on which they provided the information regarding their holdings in transactions exempt from the registration requirements of the Securities Act. Information concerning the selling securityholders may change from time to time and any changed information will be provided in supplements to or amendments of this prospectus, if and when necessary.


Selling Securityholder	Principal Amount of 2011 Notes Owned Before the Offering That May Be Sold (a)		Principal Amount of 2011 Notes Owned After Offering (b)	% of 2011 Notes Owned After Offering (b)	Shares of Common Stock Owned Before the Offering That May Be Sold (a)(c)	Shares of Common Stock Owned After the Offering (d)	% of Common Stock Owned After Offering (d)
BB BioVentures LP (1)(2)	$	8,535,696	0	*	9,155,425	0	*
MPM Bioventures Parallel Fund L.P. (1)(3)	$	1,040,938	0	*	1,116,515	0	*
MPM Asset Management Investors 1998 LLC (1)(4)	$	111,413	0	*	119,502	0	*
Maverick Fund II, Ltd. (5)(6)	$	1,135,608	0	*	1,218,058	0	*
Maverick Fund USA, Ltd. (5)(7)	$	2,791,842	0	*	2,994,542	0	*
Maverick Fund LDC (5)(8)	$	6,181,816	0	*	6,630,644	0	*
William J. Rutter Revocable Trust U/A/D 4/11/02 (9)	$	1,347,902	0	*	1,445,766	0	*
William H. Rutter (10)	$	421,219	0	*	451,802	0	*
Cynthia S. Rutter (11)	$	421,219	0	*	451,802	0	*
David B. Singer (5)(12)	$	168,488	0	*	180,721	0	*

Notes:

*	Less than 1%

(a)	Assumes conversion of the full amount of 2009 notes held by the selling securityholder into 2011 notes in the principal amount of the 2009 notes plus accrued interest.

(b)	Assumes all of the 2011 notes to be registered on this registration statement are sold in the offering by the selling securityholders.

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(c)

Assumes conversion of the full amount of 2011 notes to be registered on this registration statement at the rate of 909.0909 shares per $1,000 principal amount of 2011 notes (equal to a conversion price of $1.10 per share). The conversion rate and the number of shares of common stock issuable upon conversion of the notes may adjust under circumstances described under “Description of notes—Conversion rights.” Accordingly, the number of shares of our common stock issuable upon conversion of the notes may increase or decrease from time to time.

(d)	Assumes that the selling securityholder has sold all the shares of our common stock shown as being issuable upon the assumed conversion of notes listed next to its name and represents additional shares of our common stock beneficially owned before the offering.

(1)	Luke Evnin, manager of BB BioVentures LP, MPM Bioventures Parallel Fund, L.P. and MPM Asset Management Investors 1998 LLC, was a director of the Company until March 2006.

(2)	Represents 7,536,789 shares issuable upon the conversion of the 2011 notes plus an additional 1,618,636 shares which may be sold if the Company elects under the voluntary conversion terms of the 2011 notes to make payments of additional interest in common shares instead of cash.

(3)	Represents 919,121 shares issuable upon the conversion of the 2011 notes plus and additional 197,395 shares which may be sold if the Company elects under the voluntary conversion terms of the 2011 notes to make payments of additional interest in common shares instead of cash.

(4)	Represents 98,374 shares issuable upon the conversion of the 2011 notes plus and additional 21,127 shares which may be sold if the Company elects under the voluntary conversion terms of the 2011 notes to make payments of additional interest in common shares instead of cash.

(5)

Maverick Fund II, Ltd., Maverick Fund USA, Ltd. and Maverick Fund, L.D.C. (each a “Maverick Entity” and, together, the “Maverick Entities”) hold the 2009 Notes subject to a beneficial ownership cap, such that the Maverick Entities cannot convert the 2009 Notes into 2011 notes or common stock to the extent that such conversion results in the Maverick Entities being beneficial owners of more than 9.99%. Accordingly, the securities shown being registered and offered by the Maverick Entities reflect the full amount of 2011 notes and shares issuable on conversion of the 2011 notes up to 9.99% threshold.

David Singer, a director of Oscient until March 2006 and a limited partner and executive of Maverick Capital, Ltd., separately holds 2009 Notes and is one of the selling securityholders.

(6)	Represents 1,002,711 shares issuable upon the conversion of the 2011 notes plus and additional 215,347 shares which may be sold if the Company elects under the voluntary conversion terms of the 2011 notes to make payments of additional interest in common shares instead of cash.

(7)	Represents 2,465,121 shares issuable upon the conversion of the 2011 notes plus and additional 529,421 shares which may be sold if the Company elects under the voluntary conversion terms of the 2011 notes to make payments of additional interest in common shares instead of cash.

(8)	Represents 5,458,377 shares issuable upon the conversion of the 2011 notes plus and additional 1,172,266 shares which may be sold if the Company elects under the voluntary conversion terms of the 2011 notes to make payments of additional interest in common shares instead of cash.

(9)	Represents 1,190,161 shares issuable upon the conversion of the 2011 notes plus and additional 255,605 shares which may be sold if the Company elects under the voluntary conversion terms of the 2011 notes to make payments of additional interest in common shares instead of cash.

(10)	Represents 371,925 shares issuable upon the conversion of the 2011 notes plus and additional 79,876 shares which may be sold if the Company elects under the voluntary conversion terms of the 2011 notes to make payments of additional interest in common shares instead of cash.

(11)	Represents 371,925 shares issuable upon the conversion of the 2011 notes plus and additional 79,876 shares which may be sold if the Company elects under the voluntary conversion terms of the 2011 notes to make payments of additional interest in common shares instead of cash.

(12)	Represents 148,770 shares issuable upon the conversion of the 2011 notes plus and additional 31,951 shares which may be sold if the Company elects under the voluntary conversion terms of the 2011 notes to make payments of additional interest in common shares instead of cash.

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DESCRIPTION OF THE 2011 NOTES

The 12.50% Convertible Guaranteed Senior Notes Due 2011 being offered for re-sale under this prospectus will be issued under the indenture dated as of November 25, 2008 by and among Oscient, Guardian II and U.S. Bank National Association, as trustee, which we refer to as the trustee. The terms of the 12.50% Convertible Guaranteed Senior Notes Due 2011 include those expressly set forth in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939, as amended, which we refer to as the Trust Indenture Act.

This description of provisions of the 12.50% Convertible Guaranteed Senior Notes Due 2011 is not complete and is subject to, and qualified in its entirety by reference to, the 12.50% Convertible Guaranteed Senior Notes Due 2011 and the indenture. We urge you to read the 12.50% Convertible Guaranteed Senior Notes Due 2011 and indenture because it will define your rights as a holder of the 12.50% Convertible Guaranteed Senior Notes Due 2011. You may request a copy of the indenture from the trustee.

For purposes of this description, references to “Oscient Pharmaceuticals,” “we,” “our” and “us” refer only to Oscient Pharmaceuticals Corporation and not to any of its subsidiaries. References to “Guardian II” refer to our wholly owned subsidiary Guardian II Acquisition Corporation and references to the “2011 notes” refers to the 12.50% Convertible Guaranteed Senior Notes Due 2011 being offered for re-sale under this prospectus.

General

The selling security holders are offering for sale up to up to $22,156,142 in principal amount of 2011 notes and the related note guarantees as described herein.

The 2011 notes :

•

are Oscient’s unsecured obligations;

•

are being issued under the same indenture as the aggregate principal amount of $85,184,000 12.50% Convertible Guaranteed Senior Notes due 2011 which were issued in our November 2008 exchange offer;

•

are guaranteed by our subsidiary Guardian II and this guarantee is secured by a second priority lien on substantially all of the assets of Guardian II. The second priority lien is subject to the first priority lien on substantially all of the assets of Guardian II which is held by PRF and secures Guardian II’s indebtedness to PRF under the $20.0 million aggregate principal amount 12% senior secured note due August 2010 and the interest accrued to date thereon (the “Paul Capital Note”) and our and Guardian II’s payment obligations to PRF under the revenue interests assignment agreement described herein. See “Risk Factors”—“Risks related to the Notes”—“The value of the guarantee and the collateral securing the 2011 notes may not be sufficient to satisfy obligations under the 2011 notes.”;

•

are convertible, at the option of the holder, at anytime on or prior to maturity, into shares of our common stock at an initial conversion rate of 909.0909 shares per $1,000 principal amount of 2011 notes (equal to a conversion price of approximately $1.10 per share). (see “—Conversion Rights” and “—Automatic conversion”);

•

mature on January 15, 2011, unless earlier converted or repurchased. See “Risk Factors”—“Risks related to the Notes”—“The value of the guarantee and the collateral securing the 2011 notes may not be sufficient to satisfy obligations under the 2011 notes.”;

•

will accrue interest at a rate of 12.50% per annum payable on each April 15 and October 15 of each year, commencing on April 15, 2009, except as set forth under “—Interest.” Interest will be paid, at our election, in cash or in kind by increasing the principal amount of the 2011 notes or by issuing additional 2011 notes (“PIK interest”);

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•

will be issued in denominations of $1,000 and integral multiples of $1,000;

•

are represented by one or more registered notes in global form, but in certain limited circumstances may be represented by notes in definitive form (see “—Form, denomination and registration” and “—Book-entry, delivery and form”);

•

are redeemable by us for cash, at our option, in whole or in part, beginning on October 15, 2010 (see “—Optional redemption”);

•

are subject to repurchase by us upon a fundamental change (as defined below);

•

provide for an increase in the conversion rate for 2011 notes surrendered for conversion in connection with certain fundamental changes, as described under “—Conversion rate adjustment on a fundamental change.”; and

We may also issue additional new notes under the indenture that rank equally with 2011 notes being offered hereunder and the 12.50% Convertible Guaranteed Senior Notes due 2011 issued under the indenture in our November 2008 exchange offer up to a combined maximum aggregate principal amount of $140,000,000. Any such additional new notes that we issue may be registered or unregistered.

The registered holder of a 2011 note will be treated as the owner of it for all purposes, including, without limitation, for purposes of determining to whom we will send any notice required to be sent to holders of the 2011 notes pursuant to the 2011 notes indenture.

The indenture governing the 2011 notes provides that we may not incur additional indebtedness in excess of $50 million (“Permitted Indebtedness”) from the earlier of (i) the date that is one year from the date on which our common stock has traded at a price which exceeds the conversion price then in effect for at least 20 trading days during any consecutive 30 trading day period and (ii) the first anniversary of the maturity date of the 2011 notes; provided that, any indebtedness incurred to finance new product acquisition or in connection with any refinancing of Permitted Indebtedness, or certain existing indebtedness shall not be counted toward the aforementioned limit. The 2011 notes indenture otherwise does not limit the amount or kind of debt that may be incurred by us or any of our subsidiaries.

Other than restriction on the incurrence of additional indebtedness described above and as described under “—Repurchase of the 2011 notes at the option of holders upon a fundamental change” and “—Consolidation, merger and sale of assets” below, the 2011 notes indenture does not contain any covenants or other provisions which may afford holders of the 2011 notes protection in the event of a highly leveraged transaction involving us. We may not reissue a 2011 note that has matured or been converted, repurchased by us at the option of a holder, redeemed or otherwise canceled.

Payments on the 2011 notes; paying agent and registrar

We will pay principal and cash interest, if any, on the 2011 notes at the office or agency designated by us in the Borough of Manhattan, The City of New York. We have initially designated U.S. Bank National Association as our paying agent and registrar and its agency in New York, New York as a place where 2011 notes may be presented for payment or for registration of transfer. We may, however, change the paying agent or registrar without prior notice to the holders of the 2011 notes, and we may act as paying agent or registrar.

We will pay principal and cash interest, if any, on 2011 notes in global form registered in the name of or held by The Depository Trust Company (“DTC”) or its nominee in immediately available funds to DTC or its nominee, as the case may be, as the registered holder of such global note.

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Interest

The 2011 notes accrue interest at a rate of 12.50% per year from the date of issuance. We may elect to pay interest on the 2011 notes in cash or in kind by increasing the principal amount of the 2011 notes or by issuing additional 2011 notes (“PIK interest”) in an amount equal to the amount of PIK interest for the applicable payment period to the holders of the 2011 notes on the relevant record date (in integral multiples of $1,000). Interest on the 2011 notes is payable in cash or in PIK interest semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2009, to record holders at the close of business on the preceding April 1 and October 1, respectively, except the final interest payment date will be January 15, 2011, provided that:

•

interest payable upon redemption will be paid to the person to whom principal is payable, unless the redemption date is an interest payment date, in which case interest shall be paid to the record holder on the relevant record date; and

•

as set forth in the next sentence.

If you convert your 2011 notes into common stock during the period after any record date but prior to the next interest payment date we will not be required to pay interest on the interest payment date if the 2011 notes have been called for redemption on a redemption date that occurs during this period, but accrued and unpaid interest on such 2011 notes will be paid on the redemption date.

Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. We will not be required to make any payment on the 2011 notes due on any day which is not a business day until the next succeeding business day. The payment made on the next succeeding business day will be treated as though it were paid on the original due date and no interest will accrue on the payment for the additional period of time.

We must elect the form of interest payment for the 2011 notes with respect to each interest period by delivering a notice to the trustee prior to the beginning of each interest period. The trustee shall promptly deliver a corresponding notice to the holders. In the absence of such an election for any interest period, interest on the 2011 notes shall be payable according to the election for the previous interest period. Interest for the first interest period commencing on the original issue date shall be payable in PIK interest. Notwithstanding anything to the contrary, the payment of accrued interest in connection with any redemption of 2011 notes as described under “—Optional redemption” or “—Repurchase of the 2011 notes at the option of holders upon a fundamental change” shall be made solely in cash.

If we elect to pay PIK interest on the 2011 notes such PIK interest will be payable (x) with respect to 2011 notes represented by one or more global notes registered in the name of, or held by, The Depository Trust Company (“DTC”) or its nominee on the relevant record date, by increasing the principal amount of the outstanding global 2011 notes by an amount equal to the amount of PIK interest for the applicable interest period (or, if necessary, pursuant to the requirements of DTC, to authenticate new global 2011 notes executed by us with such increased principal amounts) and (y) with respect to 2011 notes represented by certificated notes, by issuing PIK notes in certificated form in an aggregate principal amount equal to the amount of PIK interest for the applicable period, in the case of each of (x) and (y) in integral multiples of $1,000 (with fractional interest paid in cash) and the trustee will, at our request, authenticate and deliver such PIK notes in certificated form for original issuance to the holders on the relevant record date, as shown by the records of the register of holders. Following an increase in the principal amount of the outstanding global 2011 notes as a result of a PIK interest payment, the global 2011 notes will bear interest on such increased principal amount from and after the date of such PIK interest payment. Any PIK notes issued in certificated form will be dated as of the applicable interest payment date and will bear interest of 12.50% from and after such date. All 12.50% notes due 2011 issued pursuant to a PIK interest payment will be governed by, and subject to the terms, provisions and conditions of, the indenture and shall have the same rights and benefits as the 2011 notes issued on the original issue date, except as noted in the prior sentence. Any certificated PIK notes will be issued with the description “PIK” on the face of such PIK

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note. In connection with the payment of PIK interest in respect of the 2011 notes, we are entitled to, without the consent of the holders, increase the outstanding principal amount of the 2011 notes or issue additional 2011 notes (the “PIK notes”) under the indenture on the same terms and conditions as the 2011 notes offered hereby.

Unless the context requires otherwise, references to “notes” for all purposes of the indenture and this “Description of the 2011 Notes” section include any PIK notes that are actually issued, and references to “principal amount” of the notes includes any increase in the outstanding principal amount of the notes as a result of a PIK interest payment.

Transfer and exchange

You may transfer or exchange 2011 notes at the office of the registrar in accordance with the 2011 notes indenture. The registrar and the trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents. No service charge will be imposed by us, the trustee or the registrar for any registration of transfer or exchange of 2011 notes, but we may require a holder to pay a sum sufficient to cover any transfer tax or other similar governmental charge required by law or permitted by the 2011 notes indenture. We are not required to exchange or register the transfer of:

•

any 2011 note or portion thereof selected for redemption;

•

any 2011 note or portion thereof surrendered for conversion; or

•

any 2011 note or portion thereof surrendered for repurchase but not withdrawn in connection with a repurchase date.

Secured Guarantee

The 2011 notes are guaranteed by our subsidiary Guardian II and this guarantee is secured by a second priority lien on substantially all of the assets of Guardian II. The second priority lien is subject to the first priority lien on substantially all of the assets of Guardian II which is held by Paul Royalty Fund Holdings II, LP, an affiliate of Paul Capital Partners, or PRF. Guardian II’s assets include certain license rights to sell ANTARA capsules in the U.S. and the associated intellectual property rights, ANTARA inventory and the accounts receivable from sales of ANTARA.

Ranking

The 2011 notes are:

•

unsecured obligations of Oscient;

•

guaranteed by our subsidiary Guardian II and this guarantee will be secured by a second priority lien on substantially all of the assets of Guardian II;

•

ranked equally in right of payment with existing 12.50% Convertible Guaranteed Senior Notes due 2011 which is currently approximately $87.2 million in principal amount;

•

ranked equally in right of payment with all existing and future senior unsecured indebtedness of Oscient but, to the extent of the value of the second priority lien on substantially all of the assets of our subsidiary Guardian II, effectively senior to all of the Oscient’s existing and future unsecured senior indebtedness including, our 5% Convertible Promissory Notes due 2009;

•

effectively junior in right of payment to Guardian II’s indebtedness to Paul Royalty Fund Holdings LP (“PRF”) under the note we issued to PRF and our and Guardian II’s payment obligations to PRF under the revenue interests assignment agreement as described below; and

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•

ranked senior in right of payment to any of our future indebtedness that by its terms is junior or subordinated in right of payment to the 2011 notes.

Our subsidiary Guardian II incurred debt and other obligations in connection with the acquisition of the U.S. rights to ANTARA, including $20 million of debt payable to PRF in August 2010 under the note we issued to PRF (the “Paul Capital Note”) and obligations under the revenue interests assignment agreement pursuant to which we sold to PRF the right to receive specified royalties on Oscient’s net sales in the U.S. (and the net sales of its affiliates and licensees) of the ANTARA products and FACTIVE tablets until December 31, 2016. The royalty payable to PRF on net sales of ANTARA and FACTIVE are tiered as follows: 9% for the first $75 million in annual net revenues, 6% for annual net revenues in excess of $75M, but less than $150 million, and 2% for annual net revenues which exceed $150 million. Once the cumulative royalty payments to PRF exceed $100 million, the royalties become nominal. We have the option under the Paul Capital Note to pay 50% of the interest due for each applicable interest payment period in-kind by increasing the aggregate principal amount of the Paul Capital Note. As of September 30, 2008, we have accrued $2,675,250 of additional principal under the Paul Capital Note as a result of payment in-kind interest.

Guardian II granted PRF a security interest in substantially all of its assets to secure its obligations to PRF. Guardian II’s assets include certain license rights to sell ANTARA capsules in the U.S. and the associated intellectual property rights, and the ANTARA inventory and accounts receivables. Under the terms of the agreements with PRF, we are also obligated to maintain a portion of our consolidated cash in an account in the name of Guardian II.

Guardian II’s assets include certain license rights to sell ANTARA capsules in the U.S. and the associated intellectual property rights, and the ANTARA inventory and accounts receivables. Under the terms of the agreements with PRF, we are also obligated to maintain a portion of our consolidated cash in an account in the name of Guardian II. Guardian II’s other indebtedness, in addition to the Paul Capital Note and obligations under the revenue interests assignment agreement discussed above, consists of trade payables related to ANTARA inventories.

On November 5, 2008 we entered into a first amendment (the “Amendment”) to the revenue interests assignment agreement.

The Amendment provides that PRF consented to the grant by Guardian II of a second-ranking security interest in and to the assets of Guardian II to secure Guardian II’s guarantee of the notes that will be issued in the Exchange Offer. Guardian II granted a first priority security interest to PRF in 2006 in substantially all of its assets in order to secure the obligations of us and Guardian II under the revenue interests assignment agreement and the note purchase agreement dated July 21, 2006.

Under the terms of the Amendment, in the event that the sum of the net sales of ANTARA and FACTIVE in the U.S. and the gross margin received by us from sales of FACTIVE within its territory outside of the U.S. (for which the definition of Net Revenues has been expanded to include in the Amendment) is less than 85% of certain specified annual sales thresholds, then PRF will be entitled to a (i) 3% increase in the applicable royalty percentage payable on the first $75 million of sales of such products in the applicable year and (ii) 2% increase in the applicable royalty percentage payable on net sales of such products in excess of $75 million and less than $150 million in the applicable year. The specified sales thresholds are $115 million in 2009, $135 million in 2010, $150 million in 2011 and $175 million thereafter through the term. Furthermore, the Amendment provides that in the event that we fail to achieve the specified sales threshold in any applicable year, the increased applicable royalty percentage shall also be payable on the net sales of any future drug products acquired or in-licensed by the Company or its subsidiaries. The increase in the applicable percentage payable on net sales shall be limited to a maximum payment to PRF of $2.25 million per year and $15 million during the term of the Agreement, and in no event shall such payment exceed the amount which PRF would have received in the applicable year had the specified sales threshold for that year been achieved.

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The Amendment also provides that in the event that we or our subsidiaries acquire or in-licenses additional drug products, the Company shall make a one-time milestone payment to PRF of $1.25 million on the second anniversary of our first commercial sale of such product.

Under the terms of the Amendment, in the event that PRF and we determine that the fair market value of the collateral in which PRF has been granted a security interest by Guardian II is less than the Put/Call Price, we would elect, in its sole discretion, to either grant PRF a security interest in 25% of each additional drug product acquired or in-licensed by us or our subsidiaries, or pay PRF $1.5 million on the second year anniversary of the Company’s first commercial sale of each such product.

The Amendment also provides that any acceleration or failure to pay the notes to be issued in the exchange offer shall be considered a Put Event.

We issued to PRF (i) a $2.0 million aggregate principal amount note which will be substantially identical to the notes issued in the exchange offer and (ii) 500,000 shares of our common stock. We also granted certain registration rights to PRF with respect to the note and the shares. Additionally, the Company amended the exercise price of the common stock purchase warrant dated August 18, 2006 issued to PRF to purchase 288,018 shares of our common stock to be equal to $0.45, the closing price of our Common Stock on the NASDAQ Global Market on the date immediately preceding the closing of the exchange offer.

The cash and other assets of Guardian II, including the ANTARA assets, may not be available to holders of the 2011 notes in the event of any liquidation, dissolution, bankruptcy or other similar proceedings. The 2011 notes will be effectively subordinated to Guardian II’s obligations to PRF. In the event of our bankruptcy, liquidation, reorganization or other winding up, Guardian II’s assets will be available to pay obligations on the 2011 notes only after all obligations to PRF have been repaid in full from such assets. See “Risk Factors”—“Your right to recover amounts under the second priority lien will be junior to amounts recovered in respect of the first priority liens and rank equally with the outstanding $85M of existing 12.50% Convertible Guaranteed Senior Notes Due 2011.” Additionally, your rights to recover amounts as a second priority lien holder will rank equally and be without preference to the holders of our existing 12.50% Convertible Guaranteed Senior Notes Due 2011 which were issued in November 2008. We advise you that there may not be sufficient assets remaining to pay amounts due on any or all the 2011 notes then outstanding. See “Risk Factors”—“Risks related to the Notes”—“The value of the guarantee and the collateral securing the 2011 notes may not be sufficient to satisfy obligations under the 2011 notes” and “Risk Factors”—“Lupin Limited’s and Orchid Healthcare’s Paragraph IV Certifications under the Hatch-Waxman Act related to ANTARA and FACTIVE respectively could have a material adverse effect on our financial condition and results of operations, as it could result in the introduction of a generic product prior to the expiration of the patents covering ANTARA and FACTIVE, as well as in significant legal expenses and diversion of management time.”

We are obligated to pay reasonable compensation to the trustee and to indemnify the trustee against certain losses, liabilities or expenses incurred by the trustee in connection with its duties relating to the 2011 notes. The trustee’s claims for these payments will generally be senior to those of holders of 2011 notes in respect of all funds collected or held by the trustee.

As of September 30, 2008, we had approximately $310.9 million of indebtedness outstanding (including accrued interest and excluding unamortized bond discount of $36.9 million).

Security Agreements and Intercreditor Agreement

Guardian II and PRF entered into a security agreement in August 2006 under which Guardian II granted to PRF a senior security interest in and to substantially all assets owned by Guardian II (the “First Priority Lien”) in order to secure our and Guardian II’s payment obligations (the “First Lien Obligations”) to PRF under the Revenue Interests Assignment Agreement and Guardian II’s obligations of payment under the Paul Capital Note.

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Guardian II and the trustee, in its capacity as collateral agent for the holders of the 12.50% Convertible Guaranteed Senior Notes Due 2011 issued in our November exchange offer, entered into a Security Agreement under which Guardian II granted to the trustee a second priority security interest in and to substantially all assets owned by Guardian II (the “Second Priority Lien”) in order to secure Guardian II’s guarantee of our obligations with respect to the 12.50% Convertible Guaranteed Senior Notes Due 2011 issued in the exchange offer and the additional 2011 notes that may be issued under the indenture, which includes the 2011 notes being offered hereunder (the “Second Lien Obligations”).

The relative rights of PRF (the “First Lien Holder”) and the trustee, as collateral agent for the holders of 2011 notes (the “Second Lien Agent”), Oscient, Guardian II, the First Lien Holder and the Second Lien Agent are governed by an intercreditor agreement (the “Intercreditor Agreement”). The indenture governing the 2011 notes provides that each holder of notes issued thereunder, by accepting a 2011 note, shall be deemed to have agreed to and accepted the terms and conditions of the Intercreditor Agreement.

The following description is a summary of certain provisions, among others, contained in the Intercreditor Agreement that will relate to the rights and obligations of the First Lien Holder and the Second Lien Agent. It does not restate the Intercreditor Agreement in its entirety nor does it describe provisions relating to the rights and obligations of other holders of our indebtedness. As such, we urge you to read that document because it, and not the discussion that follows, defines certain rights of the holders of the 2011 notes.

Ranking and Priority

Pursuant to the terms of the Intercreditor Agreement, the Second Priority Lien in favor of the trustee will be junior in ranking to the First Priority Lien in favor of PRF.

The ranking and priority of our and Guardian II’s debt obligations to the holders of 2011 notes under the 2011 notes indenture (as opposed to security claims) will not be regulated or affected by the Intercreditor Agreement.

Limitations on Second Lien Obligations

The Second Lien Obligations (other than Second Lien Obligations owned or controlled by the First Lien Holder or its affiliates) will not exceed $140,000,000 principal amount, plus any interest and fees, payable by us or Guardian II in connection with the Second Lien Obligations (the “Second Lien Cap”). We currently have outstanding approximately $87.2 million of 12.50% Convertible Guaranteed Senior Notes Due 2011. In the event that we or Guardian II incur obligations in excess of the Second Lien Cap, such obligations would not have the benefit of the Second Priority Lien. See “Risk Factors”—“Risks Related to the Notes”—“We are permitted to incur additional indebtedness which will be secured by the second priority lien and is on parity with the 2011 notes.”

Enforcement Action

Prior to the date the First Priority Lien is extinguished, neither the trustee nor the holders of the 2011 notes may, without the prior written consent of the First Lien Holder, take any action to enforce the Second Priority Lien. Even if an event of default under the 2011 notes indenture has occurred and the 2011 notes have been accelerated, the trustee is not permitted to enforce the Second Priority Lien until the First Lien Obligations are discharged, but the trustee and any holder of the 2011 notes may:

(a)

file a claim or statement of interest with respect to the Second Lien Obligations in any insolvency proceeding commenced by or against us or Guardian II;

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(b)

take any action not adverse to the priority status of the First Lien Obligations or the rights of the First Lien Holder to exercise remedies thereof in order to create, perfect, preserve or protect (but not enforce) its rights in the collateral securing the Second Priority Lien;

(c)

file any necessary responsive or defensive pleadings in opposition to any motion, claim, adversary proceeding or other pleading made by any person objecting to or seeking the disallowance of the claims of the holders of the 2011 notes, including any claims secured by the collateral;

(d)

vote on any plan of reorganization, file any proof of claim, initiate or file claims for fraud or breach of representations and warranties, provided that in no event shall the Second Lien Agent or the holders of the 2011 notes vote on any plan of reorganization that does not recognize and give effect to the rights and the relative priorities and provisions of the Intercreditor Agreement; or

(e)

join (but not exercise any control with respect to) any judicial foreclosure proceeding or other judicial lien enforcement proceeding with respect to the collateral initiated by the First Lien Holder solely to the extent necessary to protect the collateral of the Second Lien Agent and the holders of the 2011 notes and to the extent that such action could not reasonably be expected, in any material respect, to restrain, hinder, limit, delay for any material period or otherwise interfere with enforcement action of the First Lien Holder.

See “Risk Factors—“Risks Related to the Notes”—“The intercreditor agreement will substantially limit the rights of the holders of the 2011 notes with respect to the collateral securing the 2011 notes and holders of 2011 notes will not control decisions regarding collateral.”

After the payment of claims of the First Lien Holder, the trustee in accordance with the provisions of the 2011 notes indenture will distribute any remaining cash proceeds (after payment of the costs of enforcement and collateral administration and any other amounts owed to the trustee) of the collateral received by it for the ratable benefit of the holders of the 2011 notes. The proceeds from the sale of the collateral remaining after the satisfaction of all First Priority Lien claims may not be sufficient to satisfy the obligations owed to the holders of the 2011 notes. See “Risk Factors—Risks Related to the Notes—The value of the guarantee and the collateral securing the 2011 notes may not be sufficient to satisfy obligations under the 2011 notes.”

Turnover

So long as the discharge of First Lien Obligations has not occurred, whether or not any insolvency proceeding has been commenced by or against Oscient or Guardian II, any collateral or proceeds thereof received by the Second Lien Agent or any holders of the 2011 notes relating to the collateral, including any enforcement action relating to the collateral, will be segregated and held in trust and immediately paid over to the First Lien Holder in the same form as received, with any necessary endorsements or as a court of competent jurisdiction may otherwise direct. The First Lien Holder is authorized to make any such endorsements as agent for the Second Lien Agent or any such holders of the 2011 notes. This authorization is coupled with an interest and is irrevocable until the discharge of First Lien Obligations.

Subordination

Notwithstanding the date, time, method, manner or order of recognition, creation, grant, attachment or perfection (including, without limitation, the order of filing or recordation of any mortgage, financing statement or other document or notice in any jurisdiction or under any applicable law) of any liens securing the Second Lien Obligations granted on the collateral or of any liens securing the First Lien Obligations granted on the collateral and notwithstanding any provision of the Uniform Commercial Code or any other applicable law or the provisions of the First Lien Documents (as defined below under the heading “Control”) or the Second Lien Documents, or any defect or deficiencies in, or failure to perfect, the liens securing the First Lien Obligations or

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any other circumstance whatsoever (including whether or not any liens securing any First Lien Obligations are subordinated to any lien securing any other obligation of Guardian II or Oscient, or any other person) each of the Second Lien Agent, on behalf of itself and the holders of the 2011 notes, and the First Lien Holder hereby agrees that:

(i)

all liens on the Collateral granted under or pursuant to the First Lien Documents in favor of the First Lien Holder or any agent or trustee therefor securing the First Lien Principal Obligations (defined as the sum of (a) the unpaid amount of the First Lien Obligations and (b) any amount payable under the Revenue Interests Assignment Agreement) up to but not exceeding the First Lien Cap (defined as (i) $22,675,250.83, less the amount of all subsequent repayments, prepayments, repurchases or other retirements for value of principal of the Paul Capital Note; plus (ii) any and all amounts payable from time to time under the revenue interests assignment agreement as currently in effect, including without limitation, the amount of the Put/Call Price (as from time to time in effect); plus (iii) $5,000,000) will be and remain senior in all respects and prior to all Liens on the collateral that are held by the Second Lien Agent, the holders of the 2011 notes or any agent or trustee therefor, whether obtained by grant, possession, operation of law, subrogation or otherwise, securing any Second Lien Obligations; and

(ii)

all liens on the collateral that are held from time to time by the Second Lien Agent, the holders of the 2011 notes or any agent or trustee therefor, whether obtained by grant, possession, operation of law, subrogation or otherwise, securing any Second Lien Obligations will be and remain junior and subordinate in all respects to all liens on the collateral granted under or pursuant to the First Lien Documents in favor of the First Lien Holder or any agent or trustee therefor securing First Lien Obligations up to but not exceeding the Maximum First Lien Debt Amount.

The lien priorities in respect of the collateral cannot be altered or otherwise affected by any permitted modification of the Second Lien Documents or permitted modification of the First Lien Documents or any permitted refinancing of the Second Lien Obligations or permitted refinancing of the First Lien Obligations, or by any action that any creditor may take or fail to take in respect of any grantor or the collateral. Except as expressly provided in the Intercreditor Agreement, the First Lien Holder has agreed not to contractually subordinate its lien on any collateral to the lien of any other creditor (“Third Party Creditor”) of any grantor without the prior written consent of Second Lien Agent, unless the aggregate of the First Lien Obligations and the principal obligations owed to the Third Party Creditor equals an amount which does not exceed the First Lien Cap.

Control

The Intercreditor Agreement provides that, prior to the discharge of the First Lien Obligations, the First Lien Holder shall have the exclusive right to make determinations regarding the release of the collateral without the consent of the holders of the 2011 notes. Moreover, the Intercreditor Agreement provides that if the First Priority Lien is released by the First Lien Holder including in circumstances where (i) the First Lien Holder exercises any remedies in respect of the collateral or (ii) the collateral is sold or otherwise disposed of by the First Lien Holder, then the Second Priority Lien shall also be automatically, unconditionally and simultaneously released.

The First Lien Holder may modify, extend or amend the terms of the security agreement governing the First Priority Lien, the Revenue Interests Assignment Agreement and the Paul Capital Note without notice to or the consent of the Second Lien Agent or the holders of the 2011 notes (collectively, the “First Lien Documents”), provided that, the Second Lien Agent’s consent shall be required if any modification would:

(1)

increase the sum of Paul Capital Note if such increase would cause the then outstanding aggregate principal amount of the amounts owed to PRF under the revenue interests assignment agreement and the Paul Capital Note to exceed the First Lien Cap; or

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(2)

modify or add any covenant or event of default under an agreement relating to the First Priority Lien which directly restricts us from making payments with respect to the 2011 notes which would otherwise be permitted under the agreements relating to the First Priority Lien as in effect on the date hereof.

The holders of the Second Priority Lien may change, waive, modify or vary the security agreement governing the Second Priority Lien, the 2011 notes indenture, or the 2011 notes, each in accordance with their terms, and the 2011 notes may be refinanced, in each case, with the consent of the First Lien Holder, which consent will not be unreasonably withheld, all without affecting the lien subordination or other provisions of the Intercreditor Agreement; provided, however, that (x) the holders of such refinancing debt (or the agent for such holders) bind themselves in a writing addressed to the First Lien Holder to the terms of the Intercreditor Agreement and (y) any such amendment, supplement, modification or refinancing cannot, without the consent of the First Lien Holder:

(1)

modify the method of computing interest or increase the interest rate or yield provisions applicable to the Second Lien Obligations by more than 4% per annum in the aggregate (excluding increases (A) resulting from increases in an underlying reference rate not caused by any amendment, supplement, modification or refinancing of the Second Lien Obligations or (B) resulting from the accrual of interest at the default rate specified in the 2011 notes indenture; or

(2)

modify or add any covenant or event of default under the security agreement governing the Second Priority Lien, the 2011 notes indenture, or the 2011 notes which in any way, directly or indirectly, restricts the us or Guardian from making payments to PRF under the security agreement governing the First Priority Lien, the Revenue Interests Assignment Agreement or the Paul Capital Note;

(3)

change to earlier dates any dates upon which payments of principal or interest are due thereon;

(4)

change the prepayment or redemption provisions thereof; or

(5)

change or amend any other term of such documents if such change or amendment would result in a default under such documents as in effect on the date of the Intercreditor Agreement.

Purchase Option

If the First Lien Holder has initiated any action to enforce its rights with respect to the First Priority Lien, the Second Lien Agent may, within 30 days of the First Lien Holder initiating any such action and on giving not less than five business days’ notice to the First Lien Holder, at the expense of the holder of the 2011 notes purchase or procure the purchase by the holders of the 2011 notes (or a person or persons nominated by them) of all (but not part only) of the First Lien Obligations and the rights and obligations of the First Lien Holder under the First Lien Documents, provided however, that nothing herein will require the First Lien Holder to postpone or defer any enforcement action pending exercise of the purchase option under this section.

A purchase will take effect on the following terms:

(1)

payment in full in cash of an amount equal to the First Lien Obligations (including any make whole, prepayment premium or fees payable in connection with the First Lien Obligations) outstanding as at the date that amount is to be paid and including, without limitation, the Put/Call Price;

(2)

after the transfer, the First Lien Holder will not be under any actual or contingent liability to any obligor or any other person under the Intercreditor Agreement or any First Lien Document for which it is not holding cash collateral in an amount and established on terms reasonably satisfactory to it in respect of the First Lien Obligations; and

(3)

the relevant transfer shall be without recourse to, or warranty from, the First Lien Holder, except that the First Lien Holder shall be deemed to have warranted on the date of that transfer that: (A) it is the

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owner of the beneficial interest, free from all security interests and third party interests (other than any arising under the First Lien Documents or by operation of law) in all rights and interests under the First Lien Documents purporting to be transferred by it by that transfer; (B) it has the corporate power to effect that transfer; (C) it has taken all necessary action to authorize the making by it of that transfer; and (D) it will not contest or challenge the validity or effectiveness of that transfer.

Insolvency

If we or Guardian II is subject to any insolvency or liquidation proceeding, the trustee and the 2011 notes holders agree that:

(1)

Until the First Lien Obligations have been discharged, if Oscient or Guardian II enters any insolvency proceeding and the First Lien Holder consents to the use of “Cash Collateral” (as such term is defined in Section 363(a) of Title II of the United States the Bankruptcy Code (the “Bankruptcy Code”), on which the First Lien Holder or any other creditor has a lien, or permits Oscient or Guardian II to obtain financing under Section 364 of the Bankruptcy Code or any similar bankruptcy law (each, a “DIP Financing”), then, so long as the maximum principal amount of indebtedness under such DIP Financing, together with the aggregate principal amount owed to PRF under the First Lien Obligations outstanding at such time (after giving effect to the application of the proceeds of any DIP Financing to refinance all or any portion of the First Lien Obligations) does not exceed the First Lien Cap, then the Second Lien Agent, on behalf of itself and the holders of the 2011 notes,

(A)

has agreed that it will raise no objection to, or otherwise contest or interfere with, such use of Cash Collateral or DIP Financing on the grounds of adequate protection or otherwise nor support any other person objecting to, or otherwise contest or interfere with, such sale, use, or lease of Cash Collateral or DIP Financing and will not request any form of adequate protection or any other relief in connection therewith (except to the extent expressly permitted under the Intercreditor Agreement) and, to the extent the liens securing the First Lien Obligations are subordinated to or pari passu with such DIP Financing, the Second Lien Agent will subordinate its liens in the collateral to (x) the liens securing such DIP Financing (and all obligations relating thereto), (y) any adequate protection liens provided to the First Lien Holder and (z) any “carve-out” for professional and United States Trustee fees agreed to by the First Lien Holder; and

(B)

agrees that notice received two (2) calendar days prior to the entry of an order approving such usage of Cash Collateral or approving such DIP Financing shall be adequate notice provided that the foregoing shall not prohibit the Second Lien Agent from objecting solely to any provisions in any DIP Financing relating to, describing or requiring any provision or content of a plan of reorganization other than any provisions requiring that the DIP Financing be paid in full in cash.

Nothing set forth in the Intercreditor Agreement will restrict the Second Lien Agent from proposing DIP Financing, or the First Lien Holder from objecting thereto on any grounds. The sole effect of this provision is to specify when the Second Lien Agent and the holders of the 2011 notes will consent to DIP Financing. This provision will not affect the relative priority of the First Lien Obligations whether or not the First Lien Holder consents to or permits such DIP Financing.

(2)

The Second Lien Agent, on behalf of the holders of the 2011 notes, agrees that it will raise no objection to or otherwise contest or oppose a sale or other disposition of any collateral (and any post-petition assets subject to adequate protection liens in favor of the First Lien Holder) free and clear of its liens or other claims under Section 363 of the Bankruptcy Code if the First Lien Holder has consented to such sale or disposition of such assets, so long as the interests of the holders of the 2011 notes in the collateral (and any post-petition assets subject to adequate protection liens, if any, in favor of the Second Lien Agent) attach to the proceeds thereof, subject to the terms of the Intercreditor Agreement, and the motion to sell or dispose of such assets does not impair the rights of the holders of the 2011

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notes under Section 363(k) of the Bankruptcy Code; provided, that the First Lien Cap shall be reduced by an amount equal to the net cash proceeds of such sale or other disposition which are used to permanently pay or prepay the principal amount of any DIP Financing provided by the First Lien Holder or its affiliates or the obligations to PRF under the First Lien Obligations.

(3)

Until the First Lien Obligations have been discharged, the Second Lien Agent, on behalf of itself and the holders of the 2011 notes, agrees that none of them shall seek (or support any other person seeking) relief from the automatic stay or any other stay in any insolvency proceeding in respect of the collateral, without the prior written consent of the First Lien Holder.

(4)

The Second Lien Agent, on behalf of itself and the holders of the 2011 notes, agrees that none of them shall contest (or support any other person contesting):

(A)

any request by the First Lien Holder for adequate protection; or

(B)

any objection by the First Lien Holder to any motion, relief, action or proceeding based on the First Lien Holder claiming a lack of adequate protection.

Notwithstanding the foregoing, in any insolvency proceeding, if the First Lien Holder is granted adequate protection in the form of additional collateral in connection with any Cash Collateral use or DIP Financing, then the Second Lien Agent, on behalf of itself or any of the holders of the 2011 notes, may seek or request adequate protection in the form of a lien on such additional collateral, so long as such lien will be subordinated to the liens securing the First Lien Obligations and such Cash Collateral use or DIP Financing (and all obligations relating thereto) on the same basis Second Lien Obligations are subordinated to the First Lien Obligations under the Intercreditor Agreement; and so long as the Second Lien Agent and the holders of the 2011 notes each waive all rights, privileges, powers and remedies, if any, to seek and receive payment in cash of any claims arising by virtue of such liens, unless the discharge of First Lien Obligations has occurred.

(5)

The Second Lien Agent, for itself and on behalf of the holders of the 2011 notes, agrees that notice of a hearing to approve DIP Financing or use of Cash Collateral on an interim basis shall be adequate if delivered to the Second Lien Agent by facsimile transmission, email or other means as soon as reasonably practicable after the date such hearing is established by the court and that notice of a hearing to approve DIP Financing or use of Cash Collateral on a final basis shall be adequate if delivered to the Second Lien Agent at least five (5) days in advance of such hearing.

Optional redemption

No sinking fund will be provided for the 2011 notes, which means that the 2011 notes indenture will not require us to redeem or retire the 2011 notes periodically. Prior to October 15, 2010, the 2011 notes will not be redeemable. Beginning October 15, 2010, we may redeem at any time for cash all or part of the 2011 notes, upon not less than 30 nor more than 60 days notice before the redemption date by mail to the trustee, the paying agent and each holder of 2011 notes, for a price equal to 100% of the principal amount of the 2011 notes to be redeemed plus accrued and unpaid interest to but excluding the redemption date.

If we decide to redeem fewer than all of the outstanding 2011 notes, the trustee will select the 2011 notes to be redeemed (in principal amounts of $1,000 or integral multiples thereof) by lot, on a pro rata basis or by another method the trustee considers fair and appropriate.

If the trustee selects a portion of your 2011 notes for redemption and you convert a portion of the same 2011 notes, the converted portion will be deemed to be from the portion selected for redemption.

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In the event of any redemption in part, we will not be required to:

•

issue, register the transfer of or exchange any 2011 note during a period of 15 days before the redemption date; or

•

register the transfer of or exchange any 2011 notes so selected for redemption, in whole or in part, except the unredeemed portion of any 2011 notes being redeemed in part.

Conversion rights

Subject to satisfaction of the conditions described under the headings “—Conversion upon redemption,” and “—Conversion rate adjustments,” holders may convert each of their 2011 notes into shares of our common stock at any time on or prior to January 15, 2011 at an initial conversion rate of 909.0909 shares per $1,000 principal amount of 2011 notes (equal to a conversion price of $1.10 per share). The conversion rate and the equivalent conversion price in effect at any given time are referred to as the “applicable conversion rate” and the “applicable conversion price,” respectively, and will be subject to adjustment as described below. A holder may convert fewer than all of such holder’s 2011 notes so long as the 2011 notes converted are an integral multiple of $1,000 principal amount.

If you elect to voluntarily convert some or all of the 2011 notes on or prior to November 25, 2010, we will pay additional interest. This additional interest will be equal to the amount of interest that would have been payable on the 2011 notes from the last day interest was paid on the 2011 notes, through and including November 25, 2010. Additional interest, if any, will be paid in cash or, solely at our option, in our common shares or a combination of cash and our common shares. If we pay additional interest upon a voluntary conversion with our common shares, such shares will be valued at the conversion price that is in effect at that time.

Subject to the provisions described in the paragraph above and under the heading “—Automatic conversion,” unless you convert your 2011 notes on an interest payment date, you will not receive any cash payment representing accrued and unpaid interest upon conversion of a 2011 note. Instead, upon conversion, we will deliver to you a fixed number of shares of our common stock and a cash payment to account for any fractional shares. Any cash payment for fractional shares will be based on the closing sale price of our common stock on the trading day immediately prior to the conversion date. Delivery of shares of common stock upon conversion of the 2011 notes will be deemed to satisfy our obligation to pay the principal amount of the 2011 notes and accrued and unpaid interest. Accrued and unpaid interest will be deemed paid in full rather than canceled, extinguished or forfeited. We will not adjust the conversion rate to account for accrued and unpaid interest. The trustee will initially act as the conversion agent.

If any 2011 notes not called for redemption are converted after a record date for any interest payment date and prior to the next interest payment date, the 2011 notes must be accompanied by an amount equal to the interest payable on the next interest payment date on the converted principal amount, unless at the time of conversion there is a default in the payment of interest on the 2011 notes.

If a holder converts 2011 notes, we will pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of our common stock upon conversion, unless the tax is due because the holder requests the shares to be issued in a name other than the holder’s name, in which case the holder will pay that tax.

If a holder wishes to exercise its conversion right, the holder must deliver a conversion notice, together, if the 2011 notes are in certificated form, with the certificated security, to the conversion agent along with appropriate endorsements and transfer documents, if required, and pay any transfer or similar tax, if required. Holders may obtain copies of the required form of the conversion notice from the conversion agent.

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If a holder has already delivered a repurchase notice as described under “—Repurchase of the 2011 notes at the option of holders upon a fundamental change” with respect to a 2011 note, however, the holder may not surrender that 2011 note for conversion until the holder has withdrawn the repurchase notice in accordance with the 2011 notes indenture.

Conversion upon redemption

You may surrender for conversion any of your 2011 notes called by us for redemption at any time prior to the close of business one business day prior to the redemption date. If you have already submitted a 2011 note for repurchase on a fundamental change repurchase date, you may not surrender that 2011 note for conversion until you have withdrawn your repurchase election in accordance with the 2011 notes indenture.

Automatic conversion

We may elect to automatically convert some or all of the 2011 notes (an “automatic conversion”) at any time on or prior to maturity if the closing price of our common shares has exceeded 130% of the conversion price for at least 20 trading days during any consecutive 30-day trading period ending within five trading days prior to the notice of automatic conversion (an “automatic conversion price”). The notice of automatic conversion must be given not more than 30 and not less than 20 days prior to the date of automatic conversion.

If an automatic conversion occurs on or prior November 25, 2009, we will pay additional interest. This additional interest will be equal to the amount of interest that would have been payable on the 2011 notes from the last day interest was paid on the 2011 notes, through and including November 25, 2009. Additional interest, if any, will be paid in cash or, solely at our option, in our common shares or a combination of cash and our common shares. If we pay additional interest upon an automatic conversion with our common shares, such shares will be valued at 90% of the automatic conversion price that is in effect at that time. We will specify in the automatic conversion notice whether we will pay the additional interest in cash or common shares.

If we do not automatically convert all of the 2011 notes, the trustee will select the 2011 notes to be automatically converted in principal amount of $1,000 or in whole multiples thereof, by lot or on a pro rata basis or by another method that the trustee considers fair and appropriate. If any 2011 notes are to be automatically converted in part only, we will issue a 2011 note or 2011 notes with a principal amount equal to the unredeemed principal portion thereof. If a portion of your 2011 notes is selected for partial automatic conversion and you voluntarily convert a portion of your 2011 notes, the voluntarily converted portion will be deemed to be taken from the portion selected for automatic conversion.

You will not be required to pay any stamp, transfer, documentary or similar taxes or duties upon automatic conversion but will be required to pay any stamp or transfer tax or duty if the common shares issued upon conversion of the 2011 notes is in a name other than your name. Certificates representing common shares will not be issued or delivered unless all stamp or transfer taxes and duties, if any, payable by the holder have been paid.

Conversion rate adjustment on a fundamental change

If and only to the extent you elect to convert your 2011 notes in connection with a fundamental change (as defined below under “—Repurchase of the 2011 notes at the option of holders upon a fundamental change”) that occurs on or prior to January 15, 2011, pursuant to which 10% or more of the consideration for our common stock (other than cash payments for fractional shares) in such fundamental change transaction consists of cash or securities (or other property) that are not traded or scheduled to be traded immediately following such transaction on a United States national securities exchange, we will increase the conversion rate for the 2011 notes surrendered for conversion by the amount, if any, determined by reference to the table below, based on the date

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on which such fundamental change becomes effective (the “effective date”) and the price paid per share for our common stock in such fundamental change transaction (the “share price”). If holders of our common stock receive only cash in such fundamental change transaction, the share price shall be the cash amount paid per share. Otherwise, the share price will be the average of the closing prices of our common stock for each of the ten trading days immediately prior, but not including the effective date of such fundamental change transaction.

The share prices set forth in the first row of the table below (i.e., column headers) will be adjusted as of any date on which the conversion rate of the 2011 notes is adjusted, as described below under “—Conversion rate adjustments.” The adjusted share prices will equal the share prices applicable immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the conversion rate immediately prior to the adjustment giving rise to the share price adjustment and the denominator of which is the conversion rate as so adjusted. The conversion rate adjustment amounts set forth in the table below will be adjusted in the same manner as the conversion rate set forth under “—Conversion rate adjustments.”

The following table sets forth the amount, if any, by which the applicable conversion rate will increase for each share price and effective date set forth below. The applicable conversion rate will be increased by 110% of the amount set forth in the following table, for each share price and effective date set forth below.


	Stock Price
	$0.47	$0.50	$0.60	$0.70	$0.80	$0.90	$1.00	$1.10	$1.20	$1.30	$1.40	$1.50
Effective Date
November 25, 2008	996.74	863.64	530.30	292.21	113.64	0.00	0.00	0.00	0.00	0.00	0.00	0.00
April 15, 2009	1,041.25	908.14	574.81	336.72	158.14	19.26	0.00	0.00	0.00	0.00	0.00	0.00
October 15, 2009	1,098.07	964.96	631.63	393.53	214.96	76.07	0.00	0.00	0.00	0.00	0.00	0.00
April 15, 2010	1,154.89	1,021.78	688.45	450.35	271.78	132.89	21.78	0.00	0.00	0.00	0.00	0.00
October 15, 2010	1,211.70	1,078.60	745.27	507.17	328.60	189.71	78.60	0.00	0.00	0.00	0.00	0.00
November 25, 2010	1,224.01	1,090.91	757.58	519.48	340.91	202.02	90.91	0.00	0.00	0.00	0.00	0.00
January 15, 2011	1,224.01	1,090.91	757.58	519.48	340.91	202.02	90.91	0.00	0.00	0.00	0.00	0.00

The exact share prices and effective dates may not be set forth in the table above, in which case:

•

If the share price is between two share price amounts in the table or the effective date is between two effective dates in the table, the amount of the conversion rate adjustment will be determined by a straight-line interpolation between the adjustment amounts set for the two share prices and the two dates, as applicable, based on a 365-day year.

•

If the share price on the effective date is in excess of $1.50 per share (subject to adjustment), no adjustment to the applicable conversion rate will be made.

•

If the share price on the effective date is less than $0.47 per share (subject to adjustment), no adjustment to the applicable conversion rate will be made.

Notwithstanding the foregoing, in no event will the conversion rate exceed 2,255.51 per $1,000 principal amount of 2011 notes, subject to adjustments in the same manner as the conversion rate as set forth under “—Conversion rate adjustments.”

148

Conversion rate adjustments

The conversion rate will be adjusted as described below, except that we will not make any adjustments to the conversion rate if holders of the 2011 notes participate in any of the transactions described below.

(1) If we issue shares of our common stock as a dividend or distribution on our common stock, or if we effect a stock split or stock combination, the conversion rate will be adjusted based on the following formula:


		OS’
CR’ = CR₀ x		—
		OS₀

where,


CR₀	=	the conversion rate in effect immediately prior to such event

CR’	=	the conversion rate in effect immediately after such event

OS₀	=	the number of shares of our common stock outstanding immediately prior to such event

OS’	=	the number of shares of our common stock outstanding immediately after such event

(2) If we issue to all or substantially all holders of our common stock any rights or warrants entitling them for a period of not more than 60 days to subscribe for or purchase shares of our common stock, or securities convertible into shares of our common stock, at a price per share or a conversion price per share less than the sale price of our common stock on the business day immediately preceding the time of announcement of such issuance, the conversion rate will be adjusted based on the following formula (provided that the conversion rate will be readjusted to the extent that such rights or warrants are not exercised prior to their expiration):


		OS₀ + X
CR’ = CR₀ x
		OS₀ + Y

where,


CR₀	=	the conversion rate in effect immediately prior to such event

CR’	=	the conversion rate in effect immediately after such event

OS₀	=	the number of shares of our common stock outstanding immediately prior to such event

X	=	the total number of shares of our common stock issuable pursuant to such rights

Y	=	the number of shares of our common stock equal to the aggregate price payable to exercise such rights divided by the average sale price of our common stock for the ten consecutive trading days prior to the business day immediately preceding the record date for the issuance of such rights

149

(3) If we distribute shares of our capital stock, evidences of our indebtedness or other assets or property of ours to all or substantially all holders of our common stock, excluding:

•

dividends, distributions and rights or warrants referred to in clause (1) or (2) above; and

•

dividends or distributions in cash referred to in clause (4) below;

then the conversion rate will be adjusted based on the following formula:


		SP₀
CR’ = CR₀ x
		SP₀ - FMV

where,


CR₀	=	the conversion rate in effect immediately prior to such distribution

CR’	=	the conversion rate in effect immediately after such distribution

SP₀	=	the average sale price per share of our common stock for the ten consecutive trading days prior to the business day immediately preceding the record date for such distribution

FMV	=	the fair market value (as determined by our board of directors) of the shares of capital stock, evidences of indebtedness, assets or property distributed with respect to each outsta nding share of our common stock on the record date for such distribution

(4) If we make cash distributions to all or substantially all holders of our common stock, the conversion rate will be adjusted based on the following formula:


		SP₀
CR’ = CR₀ x
		SP₀ - C

where,


CR₀	=	the conversion rate in effect immediately prior to the record date for such distribution

CR’	=	the conversion rate in effect immediately after the record date for such distribution

SP₀	=	the average sale price of our common stock for the ten consecutive trading days prior to the business day immediately preceding the record date of such distribution

C	=	the amount in cash per share we distribute to holders of our common stock

150

(5) If we or any of our subsidiaries purchase shares of our common stock pursuant to a tender offer, the conversion rate will be increased based on the following formula:


		AC + (SP’ x OS’)
CR’ = CR₀ x
		OS₀ x SP’

where,


CR₀	=	the conversion rate in effect on the date such tender offer expires

CR’	=	the conversion rate in effect on the day next succeeding the date such tender offer expires

AC	=	the aggregate value of all cash and any other consideration (as determined by our board of directors) paid for shares purchased in such tender offer

OS₀	=	the number of shares of our common stock outstanding immediately prior to the date such tender offer expires

OS’	=	the number of shares of our common stock outstanding immediately after the date such tender offer expires

SP’	=	the average sale price of our common stock for the ten days commencing on the trading day next succeeding the date such tender offer expires

If however, the application of the foregoing formula would result in a decrease in the conversion rate, no adjustment to the conversion rate will be made.

To the extent that we adopt any future rights plan, upon conversion of the 2011 notes into our common stock you will receive, in addition to the common stock, the rights under the future stockholder rights plan whether or not the rights have separated from the common stock at the time of conversion and no adjustment to the conversion rate shall be made in accordance with clause (3) above.

Except as stated herein, we will not adjust the conversion rate for the issuance of our common stock or any securities convertible into or exchangeable for our common stock or the right to purchase our common stock or such convertible or exchangeable securities.

In the event of:

•

any reclassification of our common stock, or

•

a consolidation, merger or combination involving us, or

•

a sale or conveyance to another person of our property and assets as an entirety or substantially as an entirety,

in which holders of our outstanding common stock would be entitled to receive stock, other securities, other property, assets or cash for their common stock, holders of 2011 notes will generally be entitled thereafter to convert their 2011 notes into the same type of consideration received by common stock holders immediately prior to one of these types of events.

We are permitted to increase the conversion rate of the 2011 notes by any amount for a period of at least 20 days if our board of directors determines that such increase would be in our best interest. We are required to give at least 15 days prior notice of any increase in the conversion rate. We may also (but are not required to) increase the conversion rate to avoid or diminish income tax to holders of our common stock or rights to purchase common stock in connection with a dividend or distribution of stock (or rights to acquire stock) or similar event.

151

Holders of the 2011 notes may, in some circumstances, be deemed to have received a distribution or dividend subject to U.S. federal income tax as a result of an adjustment or the nonoccurrence of an adjustment to the conversion rate. See “Material United States Federal Income Tax Consequences—Tax Consequences to U.S. Holders—Constructive Distributions in Respect of 2011 notes.”

We will not be required to make an adjustment in the conversion rate unless the adjustment would require a change of at least 1% in the conversion rate. However, we will carry forward any adjustments that are less than 1% of the conversion rate.

Repurchase of the 2011 notes at the option of holders upon a fundamental change

If a fundamental change (as defined below in this section) occurs at any time, you will have the right, at your option, to require us to repurchase all or any portion of your 2011 notes that is equal to $1,000 or an integral multiple of $1,000 on a repurchase date that is no earlier than 25 days and no later than 35 days after the date of our notice of the fundamental change.

The price we are required to pay is equal to 100% of the principal amount of the 2011 notes to be repurchased plus accrued and unpaid interest to but excluding the fundamental change repurchase date. If the repurchase date is an interest payment date, we will pay interest on the interest payment date to the record holder on the relevant record date

Guardian II Acquisition CORP S-1