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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transition period

Commission file number 0-6533

BOSTON LIFE SCIENCES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (617) 425-0200

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

NONE

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

Common Stock, Par Value $.01 Per Share

Warrants to Purchase Common Stock

Rights to Purchase Preferred Stock

(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((§) 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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

Based on the last sales price of the registrant’s Common Stock as reported on the NASDAQ SmallCap Market on June 30, 2003 (the last business day of our most recently completed second fiscal quarter), the aggregate market value of the 32,173,958 outstanding shares of voting stock held by nonaffiliates of the registrant was $59,521,822.

As of March 24, 2004, there were 33,915,533 shares of the registrant’s Common Stock issued and outstanding.

Documents incorporated by reference:    Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission relative to the registrant’s 2004 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12 and 13 of Part III of this Annual Report on Form 10-K.

PART I

Item 1.    Business.

Overview

We are a development stage biotechnology company engaged in the research and development of biopharmaceutical products for the diagnosis and treatment of central nervous system, or CNS, diseases and for the treatment of some cancers. We were originally a privately held company founded in 1992 and merged with a publicly held company effective June 15, 1995. Our principal executive offices are located at 20 Newbury Street, 5th Floor, Boston, Massachusetts 02116, and our telephone number is (617) 425-0200.

We are strategically located in one of the world’s most prominent centers of biotechnology research – Boston, Massachusetts. Many of the world’s leading universities and hospitals are located in the Boston area and these institutions have established highly regarded medical schools and research facilities. Since our founding we have effectively utilized our close relationships with these institutions to secure the rights to a broad array of diagnostic and therapeutic discoveries. We currently have 11 technologies in our product portfolio, all of which were invented or discovered by researchers working at Harvard University and its affiliated hospitals, or Harvard and its Affiliates, and have been licensed to us.

Corporate Strategy

Our business model remains uncommon in the biotechnology industry, although in recent years there have been a growing number of other companies which have recognized the value of employing such an approach. One of the unique aspects of our model is that it focuses on commercializing novel medical technologies while minimizing the infrastructure that would otherwise be required in the successful growth and development of a medical technology or biotechnology company. The primary elements of our model include:

We believe that our unique business model is well suited for the biotechnology industry for a number of important reasons. Our employment of an outsourcing strategy whereby we utilize the research facilities of our collaborating scientists enables us to pursue the research and development of a specific program at a cost

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significantly below that of most fully staffed biotechnology concerns. As a result of these cost controls, we have been able to pursue the development of a greater number of scientific programs thereby mitigating the high risk of product failure that is inherent in the drug development process. We have further minimized our risks by pursuing development in a number of scientific areas compared to those biotechnology companies which are narrowly focused.

The following are trademarks of ours that are mentioned in this Annual Report on Form 10-K: ALTROPANE^® and FLUORATEC^™. Other trademarks used in this Annual Report on Form 10-K are the property of their respective owners.

ALTROPANE Imaging Agent

The ALTROPANE imaging agent is a small molecule invented by researchers at Harvard and its Affiliates, including the Massachusetts General Hospital, that we are developing as an aide in the diagnosis of Parkinsonian Syndromes, or PS, in patients with tremor and as an aide in the diagnosis of Attention Deficit Hyperactivity Disorder, or ADHD.

Proposed Mechanism of Action

The ALTROPANE imaging agent is an ¹²³I-based nuclear medicine imaging agent that binds with extremely high affinity and specificity to the Dopamine Transporter, or DAT. The DAT is a protein that is on the surface membrane of specialized neurons in the brain that produce dopamine, a key neurotransmitter.

ALTROPANE selectively binds to the DAT in the brain. The amount of the ALTROPANE imaging agent taken up by the brain is therefore directly proportional to the number of DATs that are present in any given area of the brain. Since DATs are on the membrane of dopamine-producing cells, destruction of these cells results in decreased numbers of DATs. Therefore, Parkinson’s Disease, or PD, which is caused by a decreased number of dopamine producing cells, is associated with a marked decreased in the number of DATs. As a result, when the ALTROPANE imaging agent is administered to patients with PD, its uptake is substantially diminished as compared to patients without PD. This marked decrease in the ALTROPANE imaging agent uptake in patients with PD is the basis for the use of the ALTROPANE imaging agent as a diagnostic test for Parkinsonian Syndromes (including PD).

The route of administration of the ALTROPANE molecule is by intravenous injection. By radioactively labeling ALTROPANE with ¹²³I, it can be used as a nuclear imaging agent that can be detected using a specialized nuclear medicine camera known as a Single Photon Emission Computed Tomography, or SPECT, camera. SPECT cameras are widely available in both community and academic medical centers. The scanning procedure using ALTROPANE takes about 40 minutes to complete. Results of these tests are usually available the same day as the scanning procedure.

Parkinsonian Syndromes (PS)

Parkinsonian Syndromes are characterized by presynaptic loss of dopamine-producing cells. The most prevalent form of PS is Parkinson’s Disease which is a chronic, irreversible, neurodegenerative disease that generally affects people over 50 years old. It is caused by a significant decrease in the number of dopamine producing cells in specific areas of the brain. Inadequate production of dopamine causes the PD symptoms of resting tremor, muscle retardation, and rigidity. PD afflicts about 250,000-500,000 Americans and about 4 million individuals in developed nations worldwide. The number of individuals having PD is expected to grow substantially as people continue to live longer and the overall population ages. Since administration of currently available therapies at an early stage of PD may delay the progression of the disease, early definitive diagnosis may be of substantial benefit. To our knowledge, there is presently no objective test commercially available in the United States to diagnose PD.

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Clinical Trial Program for ALTROPANE as a Diagnostic for PS

We are continuing with our clinical development program which, to date, demonstrates ALTROPANE’s potential as a diagnostic for PS. As a diagnostic imaging agent, ALTROPANE is subject to the same regulatory requirements as a new therapeutic drug. These requirements include:

Initial Phase III Trial

Our initial Phase III study was designed to confirm the ALTROPANE imaging agent’s ability to differentiate PS movement disorders (including PD) from other non-PS movement disorders and to assess the efficacy of the ALTROPANE imaging agent-SPECT scanning in a sample population representative of those individuals that consult with neurologists or internists for undiagnosed movement disorders. Both of the trial’s primary endpoints were met on a statistically significant basis. The study enrolled 100 subjects having the clinical diagnosis of Parkinsonian Syndrome, and 65 patients having non-Parkinsonian Syndrome movement disorders. The clinical diagnosis of patients in the trial was made by expert neurologists specializing in movement disorders. The ALTROPANE imaging agent-SPECT scans were performed on each subject and were reviewed by an independent three-member panel of nuclear medicine physicians specializing in neuroimaging who had no knowledge of the clinical diagnosis. The ALTROPANE imaging agent scans were read and categorized as being consistent with either PS or non-PS, and were then compared to the expert clinical diagnosis. There were no ALTROPANE imaging agent-related serious adverse events reported in the study.

Post Initial Phase III Trial Activities

Following the completion of our initial Phase III clinical trial, we addressed a number of important manufacturing and regulatory matters. We also began compiling the clinical and regulatory information that will be required in order to submit a New Drug Application, or NDA, for ALTROPANE with the Food and Drug Administration, or FDA.

FDA regulations require that we establish a manufacturing source for the commercial supply of ALTROPANE under the Good Manufacturing Practice, or GMP, regulations established by the FDA. In August 2000, we signed an agreement with MDS Nordion, Inc., or MDS Nordion, of Ottawa, Canada to supply ALTROPANE under GMP standards. MDS Nordion is a well-recognized manufacturer of ¹²³I and specializes in the production of radioactive isotopes and in radioactively labeling imaging agents. MDS Nordion completed the GMP commercial manufacturing scale-up process for the ALTROPANE imaging agent in September 2001. According to the terms of the Development and Supply Contract, MDS Nordion compiled and prepared the regulatory information for the Chemistry Manufacturing and Controls, or CMC, section of our planned NDA for PD. In February 2003, MDS Nordion submitted a Drug Master File describing the manufacture of ALTROPANE to the FDA. MDS Nordion will also supply the GMP ALTROPANE imaging agent for our ADHD and other

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clinical trials, as well as manufacture and distribute the ALTROPANE imaging agent following commercial launch, when and if an NDA filing is approved by the FDA.

We have initiated efforts to determine our sales, marketing and distribution strategy for the ALTROPANE imaging agent so that we are adequately prepared to launch the product when and if marketing approval is received from the FDA. Such efforts have included the commissioning of an independent market analysis which generally confirmed our internal assessment of the potential market for a PS diagnostic, including expected demand, estimated pricing, and other factors such as insurance reimbursement. In addition, we have held discussions with a number of potential partners and collaborators regarding the sales, marketing and distribution of the ALTROPANE imaging agent. To date, we have not finalized our sales, marketing and distribution strategy. However, we believe we can successfully launch the product within six months of receiving marketing approval from the FDA, although no assurances can be made that we will receive such approval.

Following completion of our initial Phase III trial, we had a series of meetings and discussions with the FDA regarding the clinical trial data accumulated to date, manufacturing requirements, and other related considerations associated with a late stage product. The purpose of these communications and conferences was to identify and resolve any questions or issues that the FDA wanted addressed. Our communications with the FDA also included an assessment of the market opportunity for ALTROPANE based on the indications tested to date, and the possibility of expanding the market size by expanding the indications tested.

New Phase III Trial in Tremor Patients

Based on our meetings and discussions with the FDA, we plan to conduct a new Phase III clinical trial designed to distinguish Parkinsonian from non-Parkinsonian Syndromes in patients with tremors. In July 2003, we filed a Special Protocol Assessment, or SPA, with the FDA relating to the design and analysis of the study protocol for this new Phase III trial. The new Phase III trial will enroll subjects who have been referred to a neurology clinic with a diagnosis of tremor. Upon enrollment in the study, the subjects will then be diagnosed by the general practitioner or internist as having either a Parkinsonian or non-Parkinsonian tremor. Each subject will then undergo an ALTROPANE SPECT scan prior to being diagnosed by a Movement Disorder Specialist, or MDS, as having either a Parkinsonian or non-Parkinsonian tremor. The SPECT scans will be read “blind” by a panel of nuclear medicine physicians and the results of the blinded reads will then be compared to the MDS diagnosis for sensitivity and specificity. The primary endpoint will be the confirmation of the hypothesis that the diagnostic accuracy of ALTROPANE is significantly superior to the diagnostic accuracy of the internist or general practitioner. Because we have elected to pursue a single, large Phase III trial for this indication, rather than two smaller, replicate trials, the FDA has required that we power the trial to achieve a p-value of 0.02 or less and we expect that the FDA will require that level of statistical significance for the primary endpoint in order to achieve approvability. We currently expect to enlist up to 25 academic medical centers for the study and expect to enroll a minimum of 500 patients (250 patients with Parkinsonian tremors and 250 patients with non-Parkinsonian tremors).

We have had several communications with FDA since the initial SPA was filed with the FDA. The FDA offered us recommendations pertaining to the design of the clinical protocol for the new Phase III trial, including alternatives for inclusion criteria for the clinical indication being sought by us, and guidance concerning primary and secondary endpoints proposed in the statistical plan. The FDA also provided advice on further clarification of the SPECT imaging criteria. In December 2003 and in February 2004 we submitted a revised protocol addressing FDA’s recommendations concerning study design, statistical plan and safety assessments. We are currently awaiting final agreement from the FDA on the most recent submission of the protocol. In order to expedite reaching a written agreement with the FDA, our most recent submission was not made under the SPA process, but rather was submitted under an alternative, expedited procedure. The FDA has assured us that a binding agreement reached under this alternative procedure will be equivalent to an agreement reached pursuant to the SPA process. We currently expect to receive correspondence from the FDA containing a binding agreement relating to this protocol and to initiate the new Phase III trial in the first half of 2004. Once initiated, we presently anticipate this new Phase III clinical trial will take approximately twelve months to complete. If the results of this trial are successful, we hope to submit an NDA for ALTROPANE for use in distinguishing Parkinsonian from non-Parkinsonian Syndromes in patients with tremors within six months of the trial’s completion.

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Attention Deficit Hyperactivity Disorder (ADHD)

Attention Deficit Hyperactivity Disorder, or ADHD, is the most commonly diagnosed behavioral disorder in children and is the fastest growing psychiatric disorder in adults. ADHD is characterized by inattention, impulsivity, and hyperactivity. Since 1990, the total number of American children diagnosed with ADHD has risen from 900,000 to over 5.5 million, and the use of stimulant medication such as RITALIN^® (methylphenidate) has increased 700% in the same period. It is estimated that four to 12 percent of school-aged children are affected by this disorder. ADHD often continues to manifest itself throughout a patient’s adolescence and into adulthood. It is estimated that 40 to 80 percent of children with ADHD still meet the diagnostic criteria in adolescence and young adulthood.

It is estimated that two to four percent of adults are affected by ADHD. Adults with ADHD tend to have fewer problems with hyperactivity, but more problems with inattention and distractibility. Many patients with ADHD often express other psychiatric disorders as well, such as depression, anxiety, obsessive compulsive disorder, and alcohol and substance abuse.

ADHD is a chronic disorder, therefore it is important for a physician to establish a continuing plan of monitoring, evaluating, and optimizing treatment plans. ADHD is typically treated with stimulant medications. It should be noted, however, that there is controversy over the long-term use of these stimulant medications, particularly in children. Although most patients with ADHD respond to medications, there are still between 15 percent to 30 percent who do not respond or suffer from intolerable side effects.

Diagnosing ADHD

ADHD is currently diagnosed according to a set of behavioral criteria defined in the Diagnostic and Statistical Manual, or DSM, used by psychiatrists. This manual provides clinicians with the currently accepted list of diagnostic criteria to use in diagnosing the vast majority of mental disorders. A comprehensive evaluation is necessary to establish a diagnosis, rule out other causes and determine the presence or absence of co-morbid conditions. Such evaluation should include a clinical assessment of the individual’s academic, social emotional, functional and developmental capabilities. Because everyone shows signs of these behaviors at one time or another, the guidelines for determining whether a person has ADHD are very specific. Patients with ADHD exhibit three broad behavioral symptoms that may be indicative of the disease. These include inattentiveness, hyperactivity, and impulsiveness. In children and teenagers, the symptoms must be more frequent or more severe than in other children the same age. In adults, the symptoms must impair a patient’s ability to function normally in daily life. In addition, the behaviors must create significant difficulty in at least two areas of a patient’s life, such as at home, in social settings, at school, or at work. Finally, symptoms must be present for at least six concurrent months.

While these criteria provide a structural framework for diagnosing ADHD, it has not been possible to validate these criteria against an objective biological standard since such a standard has never been established and does not currently exist. Consequently, the DSM criteria have generated widespread concern and, in the view of many critics, often are misapplied and misinterpreted. The lack of a clear-cut, demonstrated biological basis for ADHD has led to a great deal of confusion concerning the diagnosis of ADHD and has even provoked skepticism regarding its existence. It is interesting to note, for example, that 40 percent of adult patients who likely have ADHD would not meet the criteria set forth in the DSM-IV manual because it states that symptoms must have been evident before the age of seven. Because of such imprecise diagnostic methods, we believe it facilitates both the over- and under- diagnosis of ADHD. As such, the introduction of an objective test to assist in the definitive diagnosis of ADHD would help avoid the unnecessary treatment of patients who simply have behavioral problems unrelated to ADHD. At the same time, it would identify those patients who have not received treatment for the condition because of inadequate diagnostic methods.

Researchers have recently postulated, but have not been able to confirm, that ADHD may be linked to an abnormality in the DAT. A number of stimulant medications, including RITALIN^® (methylphenidate) and other

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newer therapeutics, currently constitute the most prescribed treatment for the broadly described disorder labeled ADHD. Since there has not been an objective test to differentiate between biochemical abnormality and purely psychological behavior disorders, the increasing use of potentially addictive drugs among children has prompted vigorous public debate amongst educators, parents and the medical community. This concern has escalated in recent years as evidenced by widespread coverage in the media.

Clinical Trial Program for ALTROPANE as a Diagnostic for ADHD

We initiated our development program utilizing the ALTROPANE imaging agent for the early diagnosis of ADHD in June 1999. Under a Physician’s Sponsored Investigational New Drug, or IND, application, adult patients with ADHD underwent brain scanning using the ALTROPANE imaging agent, and were found to have a significantly abnormal elevation in the number of DATs in the midbrain. All of the patients tested showed this abnormality. The excessive number of dopamine transporters found in the midbrain in these ADHD subjects suggests that this may be the underlying detectable biochemical abnormality in at least a certain segment of individuals presenting with symptoms of ADHD. The results of the study were subsequently published in the British medical journal The Lancet.

We completed our initial Phase II clinical trial in September 2000. The trial, comprising 40 adult patients, was designed to expand the database on normal individuals and to elaborate on the findings obtained in our Physician’s Sponsored trial. In March 2001, we announced that the ALTROPANE imaging agent had succeeded in identifying adults with long-standing expertly-diagnosed ADHD in the Phase II study. Adults (age 20-40) diagnosed by clinical experts as having ADHD had highly statistically-significant elevations in the number of their brain dopamine transporters (p<0.001) compared to normal (non-ADHD) individuals of the same age group. The 40 subject study was carried out at four academic medical institutions in the U.S., and the data analysis was performed at the Massachusetts General Hospital in Boston. The highly statistically significant separation of ADHD from normal individuals based on the ALTROPANE imaging agent brain scan in this study confirmed the results of the pilot study.

Our second Phase II trial in adults using a simplified scanning procedure and algorithm adjustments is presently ongoing. If we obtain successful results in this trial, we will then proceed to a Phase III clinical trial.

Market Potential for ALTROPANE

ALTROPANE is the only dopamine transporter imaging agent currently available that is capable of effectively detecting abnormal levels (higher or lower than normal) of the DAT in the brain. Most neurologists believe that a clinical history and a physical diagnosis are adequate for diagnosing most patients with PS. However, they also admit that approximately 25 percent of these patients present with symptoms and/or a clinical history that are inconclusive. As such, they would clearly benefit from a diagnostic test that would provide them with additional clinical information that is highly specific to these conditions to help them make a definite diagnosis when clinical symptoms and the history are inconclusive. We believe that early definitive diagnosis of patients with PS should lead to more effective treatment and a higher quality of life for these patients.

We believe that the total market prospects for the ALTROPANE imaging agent in both PS and ADHD are substantial. It is estimated that approximately 132,000 individuals per year present to their physician with new, undiagnosed movement disorders, and are therefore candidates for the ALTROPANE imaging agent scan to diagnose or rule out early PS. In the far larger ADHD market, a conservatively estimated 1.5 million adults between the ages of 20 to 40 are tentatively diagnosed with ADHD. The most significant single market is, of course, the 3 million children who are categorized as having ADHD. The annual incidence (new cases) of behavioral disorders consistent with ADHD in both adults and children is approximately 1.3 million. We believe that an effective diagnostic for ADHD will provide a much-needed objective basis for therapeutic intervention with drugs such as RITALIN^® (methylphenidate) and newer therapeutics. Including its use for both PD and ADHD indications, we believe that the ALTROPANE imaging agent has the potential, if approved, to become

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one of the largest selling radiopharmaceuticals ever developed. Our preliminary projections point toward a combined potential of 300,000 to 500,000 scans per year, five years post marketing approval and commercial introduction.

Principal Preclinical Development Programs

1.    Inosine, Axogenesis Factor 1 (AF-1), and Macrophage Factor

Scientific Background

It has been widely believed that human beings are incapable of regenerating damaged or destroyed nerves in their central nervous system. Thus, severe injuries to the spinal cord and brain generally result in permanent disability. In a limited way, other accessory nerve pathways can compensate for those that have been destroyed, resulting in limited recovery with rehabilitation, particularly after stroke. In contrast, peripheral nerves, such as those innervating the limbs, can regenerate, although extremely slowly, resulting in the potential for substantial functional recovery with time. The question as to why peripheral nerves, but not CNS nerves, can regenerate has been one of the central questions in neurobiology. Much research effort has been devoted to identifying the factors that could explain the differences in regenerative potential between the peripheral and CNS nerves.

Inosine, AF-1 and Macrophage Factor are nerve growth factors which specifically promote axon outgrowth in CNS cells. We acquired the rights to Inosine, AF-1 and Macrophage Factor from Children’s Hospital in 1998, 1995, and 2001, respectively. Since axons form the connections between cells of the CNS (brain and spinal cord), we believe that Inosine and AF-1 could provide a means to regenerate those connections following CNS damage suffered in stroke or spinal cord injury. Inosine is currently our lead candidate. AF-1 and Macrophage Factor are presently in early stage pre-clinical development.

Proposed Mechanism of Action

Inosine is a purine that is a naturally occurring product of the hydrolysis of adenosine, a purine nucleoside. Inosine is released in small quantities in the nervous system after injury. After a stroke, increased levels of inosine are found in the brain along with a host of other trophic factors from the brain tissue surrounding the stroke. These trophic factors are believed to contribute to limited reorganization of the CNS cells after stroke. This reorganization helps to explain how damaged areas of the brain can undergo axonal sprouting and the structural remodeling that is responsible for new axonal connections.

Inosine acts as an agonist of a novel enzyme, N-kinase, which is thought to be the master switch for axon regeneration. Based upon research over the past decade or more, it has become apparent that the key to axonal regeneration is overcoming the inhibitory factors that are activated or naturally present when axons are injured or severed. Some of these inhibitory factors include inhibitory proteins found in the myelin sheaths surrounding the axons themselves. The purpose of the myelin sheaths is to speed nerve conduction along the length of an axon.

An examination of the damage caused by stroke and the limitations of existing forms of treatment provides a good example of why we believe that Inosine may provide a therapeutic benefit to stroke patients. In simple terms, ischemic stroke is essentially caused by an acute blockage of a blood vessel to a specific area of the brain. Depending on the extent of the territory vascularized by this vessel, clinical consequences range from minor debility to death. As far as we are aware, all current therapies, both approved or in development, are focused on minimizing the damage to the affected territory of the brain, either by reversing the blockage (by clot dissolution) or protecting brain cells from the ischemic injury (cytoprotective agents). However, once the damage is complete, there is little or no functional recovery, since there is little or no nerve regeneration in the CNS that could compensate for the irreversible loss of the nerve cells and their connections. Up to now, the inability to provide regeneration therapy for stroke has been simply due to the absence of any effective compounds having the necessary in vivo regenerative activity. Based on experimental results in animals, Inosine appears to be effective in regenerating nerve connections in the CNS. Inosine can be administered directly into the

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cerebrospinal fluid which bathes the brain, thereby exposing the relevant brain tissue to therapeutic amounts of Inosine while potentially minimizing systemic toxicity. Inosine can potentially be administered via a widely-used delivery system for several months if necessary, in order to promote the optimal amount of regeneration. In animals, Inosine appears to be effective even when given after the damage has been done and the stroke is complete. This is in sharp contrast to other potential agents for stroke therapy now in development which must be given almost immediately after the stroke.

Pre-Clinical Development to Date

Experiments and animal tests conducted by our principal collaborating scientist, Dr. Larry Benowitz, and his colleagues at Children’s Hospital in Boston have reported some of the most significant accomplishments in the field of nerve regeneration published to date. We believe that these results demonstrate that we are in the forefront in the search for potentially important regenerative agents for stroke and spinal cord injury. A summary of these milestones is set forth below:

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Codman & Shurtleff, Inc.

In September 2003, we entered into an agreement with Codman & Shurtleff, Inc., or Codman, a Johnson & Johnson subsidiary, related to our development of Inosine for stroke. Under the agreement, Codman will supply us with implantable pumps and catheters for our preclinical and clinical studies for Inosine, and in exchange, Codman will receive a right of first refusal for Inosine for a specified period and under certain conditions. We believe that the sourcing of the pumps and catheters from a reliable, high quality supplier in Codman will enable us to complete our pre-clinical toxicology studies, file our IND, and proceed into clinical development in a more streamlined manner by utilizing the same drug delivery technology in each step.

Investigational New Drug Application and Clinical Trial Program

We are currently compiling the pre-clinical data required for the filing of an IND for Inosine for treatment of ischemic stroke. We are currently conducting three-month toxicity studies designed to assess the toxicity of Inosine administered via continuous infusion into the lateral ventricle of the brain in both rats and dogs in a manner identical to that proposed in the clinical trials. We have initiated the design of the Phase I and II clinical trials, including the preparation of the trial protocols, and have held discussions with a number of potential clinical sites. We expect to file an IND for treatment of ischemic stroke for Inosine in the third quarter of 2004 and, subsequent to FDA’s approval, initiate clinical studies in humans. However, there can be no assurances that the FDA will accept our IND submission or will not request additional pre-clinical data before allowing us to initiate human clinical trials.

Market Opportunity

Although the full range of uses for these growth factors is still under development, our current research is centered on nerve regeneration in patients with stroke and spinal cord injuries.

The annual incidence of stroke in the U.S. is approximately 500,000 with more than 3,000,000 stroke survivors currently alive. The incidence of traumatic brain injury is approximately 50,000 annually. The incidence of spinal cord injury is approximately 10,000 cases annually. Treatment for these conditions is presently limited to hemodynamic support, steroids to reduce inflammation, and, in the case of stroke, the correction of predisposing hematological abnormalities.

2.    Troponin

Description

Troponin-I, or Troponin, is a naturally occuring protein found within human cartilage and other tissues, such as skeletal muscle. As a tissue of the body, cartilage has few blood vessels and is a very infrequent site for tumor formation. Troponin was discovered to be present in cartilage by scientists at Children’s Hospital in Boston, and found to have extremely strong anti-angiogenic activity, both in vitro and in vivo. The scientific basis for our development of Troponin was published in the March 16, 1999, edition of the Proceedings of the National Academy of Sciences.

Scientific Background

Angiogenesis, the formation of new blood vessels, plays an important role in the growth and spread of cancer throughout the body. Experimental and clinical evidence strongly suggests that the inhibition of

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angiogenesis could potentially offer a general therapeutic approach to the prevention or treatment of all solid tumor metastases. This approach is independent of tumor type since it targets only proliferating blood vessel cells, and if the anti-angiogenic agent is specific to endothelial (blood vessel) cells, it is also theoretically nontoxic since angiogenesis does not take place under normal circumstances. In addition to the treatment of cancer, the anti-angiogenic approach appears to have significant potential for the treatment of eye diseases that are associated with abnormal retinal angiogenesis. Two of these diseases, Macular Degeneration and Diabetic Retinopathy, are the major causes of blindness in developed countries.

Mechanism of Action

Troponin has been shown to inhibit the proliferative response of endothelial cells to tumor-related growth factors such as vascular endothelial growth factor, or VEGF, and fibroblast growth factor, or FGF. Troponin’s anti-angiogenic effect is not dependent on the binding of Troponin to these growth factors, but rather is due to a “paralysis” of the cellular response. The exact mechanism by which this occurs is the subject of ongoing investigation.

Troponin I has been shown to markedly suppress the expression of key genes associated with blood vessel cell (endothelial cell) division and growth. Typically, endothelial cells upregulate (i.e. stimulate) certain “proliferative-response” genes in reaction to angiogenic factors such as FGF, which may be generated by tumors to promote blood vessel development (angiogenesis) necessary for tumor growth. However, we have observed that when blood vessel cells were treated with Troponin I prior to exposure to FGF, the expression of some of these genes was suppressed in some cases by up to 90% compared to expression stimulated by treatment with FGF alone. These results suggest that Troponin’s anti-angiogenic and anti-cancer effects may be due at least in part to a broad-based suppression of tumor-induced angiogenesis at the fundamental level of gene expression.

Pre-Clinical Development to Date

To date, much of our effort has focused on the development of a reliable manufacturing process for Troponin. This work has largely been performed at our research and manufacturing facility, which was established in Baltimore, Maryland in 2001. The development of an economic, scale-up methodology for the production of complex proteins while still retaining the necessary biological activity has been a very difficult problem for the biotechnology industry. This has been especially true in the case of most anti-angiogenic agents. We believe that we have developed a proprietary method for the purification of complex bacterial-produced recombinant proteins, such as Troponin, that conserves the biological activity of the native protein. We have scaled-up the manufacturing process for Troponin in order to produce material for our pre-clinical efficacy study. If this study is successful, we will then increase the scale-up process to the level required for clinical trial production.

We have completed initial one-month toxicology tests for Troponin. Preliminary results revealed no significant toxicity in either species (primates and rats) during and after the one-month infusion period. These tests evaluated the toxic potential of recombinant human Troponin when administered as a continuous infusion for a one-month period in both rats and primates. These studies incorporated doses up to ten times the anticipated dose to be used in human clinical trials. Significantly, primates exhibited no demonstrable immune response. Preliminary evaluation revealed no adverse effects on any organs, and blood tests revealed no clinically significant abnormalities in hematologic or chemistry parameters.

We have also completed efficacy testing in animal models which indicate that Troponin, when administered by constant infusion in extremely low doses to mice, had dramatically suppressed growth of melanoma metastases in the lung. These results, though preliminary, strongly support our belief that Troponin has significant potential as a clinically effective anti-angiogenic product for the prevention of tumor metastases in high-risk cancer patients.

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Investigational New Drug Application and Clinical Trial Program

We have initiated a cancer survival study in mice utilizing the same Troponin formulation that we anticipate using in human testing. The results of this important “proof of concept” study should be available in the second quarter of 2004. Following this study, if successful, we plan to carry out the pre-clinical studies that will be required to be included in an IND application. These data will include the results of pharmacologic efficacy and toxicology studies in animals. We have initiated the design of the Phase I and II clinical trials, including the preparation of the trial protocol, and have held discussions with a number of potential clinical sites. We currently expect that our initial trial would be in patients with non-small cell lung cancer. However, there can be no assurances that the FDA will accept our IND submission or will not request additional pre-clinical data before allowing us to initiate human clinical trials.

Market Potential

Cancer is the second leading cause of death in the U.S., exceeded only by heart disease. In the U.S., 1 of every 4 deaths is from cancer. According to the American Cancer Society, American men have a 1 in 2 lifetime risk of developing cancer. American women have a 1 in 3 lifetime chance. The number of Americans suffering from cancer is expected to increase dramatically over the next few decades due to the overall aging of the population. Nearly 80% of all cancers are diagnosed at ages 55 and older.

According to Merrill Lynch estimates, the market potential for cancer therapeutics exceeds $10 billion in the U.S. alone based solely on those patients who currently receive treatment for solid tumors. It has been estimated that there are approximately 800,000 new cases of solid tumors annually in the U.S. and more than 6 million cases in developed countries. In addition to cancer, the incidence of various forms of eye disease in which angiogenesis plays a role, most of which cause blindness, has been estimated at 500,000 annually in the U.S.

3.    Other Pre-clinical Programs

Parkinson’s Disease Therapeutic

In September 2001, we acquired the licensing rights to a group of new therapeutic compounds developed by the same scientists who developed the ALTROPANE imaging agent. We believe that this group of compounds represents a novel and promising approach to the treatment of PD. Each product candidate in this group is a small tropane-based molecule that binds with extremely high selectivity to the DAT, thereby blocking the re-uptake of dopamine from nerve connections. This blockade results in an increase in local dopamine concentrations at the nerve junctions and thus compensates for the decreased dopamine production characteristic of PD. We believe that the strategy of DAT blockade represents a new approach to the treatment of PD.

The scientific basis for our development of this group of compounds was supported by a research paper, published in a September 2001 issue of the journal Science, entitled “Dendrodendritic inhibition through reversal of dopamine transport.” The research described in the paper strongly implicates the DAT as a major mediator of the brain damage that causes the symptoms of PD. While we initially assumed that our DAT blockers would be effective in reducing the symptoms of early PD, we did not have enough evidence to be able to assert that they might also fundamentally change the course of the underlying disease. We believe that we now have a scientific basis for the pursuit of such a claim.

The initial, early stage pre-clinical results have provided evidence that these compounds can improve the symptoms of experimental PD, and possibly reverse the movement abnormalities associated with PD. Further pre-clinical development, including additional animal studies will be required before we can determine which, if any, product candidate(s) should advance into human clinical trials.

FLUORATEC Imaging Agent

We have initiated the preclinical development of a “second generation” technetium-based compound for the diagnosis of PD and ADHD. This compound differs from the ALTROPANE imaging agent in structure and in

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the advantageous substitution of technetium for iodine as the radioligand. Primate studies using the technetium compound have demonstrated that this compound is taken up by the normal striatum in sufficient quantity to provide an easily readable image. Primates with experimentally-induced PD had markedly decreased uptake of the compound. Radiation dosimetry, pharmacokinetic, and toxicology studies were all favorable. Based on these pre-clinical results, a Physician’s Sponsored IND was filed with the FDA and studies with the FLUORATEC imaging agent were subsequently performed in healthy volunteers. The image quality was comparable to that obtained with the ALTROPANE imaging agent. We believe that the ability to eventually follow the ALTROPANE imaging agent to market with a second-generation technetium product would give us a long-term competitive advantage.

FlouroPharma Cardiac Imaging Agent

FlouroPharma, Inc., an early-stage company, is developing Positron Emission Tomography, or PET, imaging agents for the diagnosis of cardiac ischemia. We are not currently in a financial position to commit capital and resources to acquire rights to and/or fund development of this technology. The Chairman of our Board of Directors, David Hillson, and our President, Marc Lanser, have equity interests in FlouroPharma and Dr. Lanser intends to serve as a director and chairman of the board of FlouroPharma. We understand that FlouroPharma has agreed in principle with its founding investors to grant us a right of first refusal if it pursues a development and/or sublicensing agreement with a biotechnology or pharmaceutical company, subject to our meeting certain financial, liquidity and other conditions.

Scientific Collaborators

A summary of the principal scientific, research and development professionals associated with us, and a composite of their professional background and affiliations is as follows:

Larry I. Benowitz, Ph.D., Director, Laboratories for Neuroscience Research in Neurosurgery, Children’s Hospital, Boston; Associate Professor of Neuroscience, Department of Surgery, Harvard Medical School;

Alan J. Fischman, M.D., Ph.D., Director, Department of Nuclear Medicine, Massachusetts General Hospital; Professor of Radiology, Harvard Medical School;

Robert S. Langer, Sc.D., Germeshausen Professor of Chemical and Biomedical Engineering, Massachusetts Institute of Technology;

Robert Licho, M.D., Director of Medical Imaging, Boston Life Sciences, Inc.; Clinical Director of Nuclear Medicine, University of Massachusetts/Memorial Medical Center; Associate Professor of Radiology, University of Massachusetts Medical School;

Peter Meltzer, Ph.D., President, Organix, Inc., Woburn, MA; and

Marsha A. Moses, Ph.D., Associate Professor, Harvard Medical School and Children’s Hospital.

Research and Development

We rely on licensing from third parties, principally Harvard and its Affiliates, as our source for new technologies and product candidates and we maintain only limited internal research and development personnel and facilities. Research and development expenses for the years ended December 31, 2003, 2002 and 2001 were $4.4 million, $6.9 million and $7.4 million, respectively.

Licensing Agreements, Patents and Intellectual Property

We have obtained exclusive licenses to patent portfolios that cover each of our products in development. Additional licenses are currently being negotiated for additional patent properties that will extend our protection.

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The licenses in place provide for milestone payments and royalties based on product sales or revenues, at rates that are consistent with those standard in the industry. We generally have a first option to license additional technologies invented or discovered during the course of related research programs funded by us. There can be no assurance that such research will lead to the discovery of new technologies or that we will be able to obtain a license for any newly discovered technologies on acceptable terms, if at all.

Our patent strategy is to pursue patent protection in the U.S. and in major developed countries for our technologies. At December 31, 2003, we owned or licensed 12 issued U.S. patents and had 22 pending patent applications in the U.S. to protect our proprietary methods and processes. We have also filed 63 corresponding foreign patent applications for certain of these U.S. patent applications. The issued U.S. patents relate to imaging the central nervous system, nerve regeneration and angiogenesis inhibition. Our goal is to obtain broad patent protection for our technologies and their related medical indications. The patents on the ALTROPANE imaging agent expire beginning in February 2013, with the last issued U.S. patent expiring in October 2013. The patents on Inosine expire in September 2017 and the Troponin composition and method patents expire in February 2016.

The patent positions of pharmaceutical and biotechnology companies, including ours, are uncertain and involve complex and evolving legal and factual questions. The patent application and issuance process generally takes at least several years and is usually very expensive without any guarantee that a patent will be issued. In many cases, our know-how and technology may not be patentable, and if it is, the coverage sought in a patent application can be denied or significantly reduced before or after the patent is issued. Since patent applications are secret until the applications are published and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make inventions covered by each of our pending patent applications or that we were the first to file patent applications for such inventions. There can be no assurance that patents will issue from our pending or future patent applications or, if issued, that such patents will be of commercial benefit to us, afford us adequate protection from competing products, or not be challenged or declared invalid. In addition, even if we secure patent protection, our products may still infringe on the patents or rights of other parties, and they may decide not to grant a license to us. We may have to change our products or processes, engage in legal challenges to the validity of third party patents that block our ability to market a product, pay licensing fees or stop certain activities because of the patent rights of third parties, any of which could cause additional unexpected costs and delays.

In the event that a third party has also filed a patent application relating to inventions claimed in our patent applications, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and cost for us, even if the eventual outcome is favorable to us. We cannot provide assurance that our patents and patent applications, if issued, would be held valid by a court of competent jurisdiction.

We also rely on trade secrets and proprietary know-how. We seek to protect this information primarily through confidentiality agreements with our collaborators and consultants, but there can be no guarantee that these agreements will not be breached or that we will have adequate remedies for such breach. In addition, if consultants, scientific advisors, or other third parties apply technological information which they have developed separate from us to our technologies, there may be disputes as to the ownership of such information which may not be resolved in our favor.

Competition

The biotechnology and pharmaceutical industries are highly competitive and are dominated by larger, more experienced and better capitalized companies. Thus, we compete with a number of pharmaceutical and biotechnology companies which have financial, technical and marketing resources and experience significantly greater than ours. Such greater experience and financial strength may enable them to bring their products to market sooner than us, thereby gaining a competitive advantage. In addition, research on the causes of, and possible treatments for diseases for which we are trying to develop products, including CNS disorders such as stroke, PD and ADHD and cancers diseases, are developing rapidly, and there is a potential for extensive

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technological innovation in relatively short periods of time. Given that many of our competitors have greater financial resources, there can be no assurance that we will be able to keep pace with any new technological developments. In addition, many of our competitors and potential competitors have significantly greater experience than we do in completing preclinical and clinical testing of new pharmaceutical products and obtaining FDA and other regulatory approvals of products, which could also enable them to bring products to market faster than us.

We expect that our products will compete with a variety of products currently offered and under development by a number of pharmaceutical and biotechnology companies that have greater financial and marketing resources than ours. We believe that our products, if successfully developed, will compete with these products principally on the basis of improved and extended efficacy and safety and the overall economic benefit to the health care system offered by such products. However, there can be no assurance that our products, if developed, will achieve better efficacy and safety profiles than current drugs now offered or products under development by our competitors. Competition among pharmaceutical products approved for sale also may be based on, among other things, patent position, availability and price. In addition, we expect that our competitors will have greater marketing resources and experience than we do, which may enable them to market their products more successfully than we market ours.

A significant amount of research and development in the biotechnology industry is conducted by academic institutions, governmental agencies and other public and private research organizations. We possess only limited internal research and development facilities and personnel and rely on collaborations with these entities (principally, Harvard and its Affiliates) to acquire new technologies and product candidates. These entities often seek patent protection and enter into licensing arrangements to collect royalties for use of technology or for the sale of products they have discovered or developed. We face competition in our licensing or acquisition activities from pharmaceutical companies and biotechnology companies that also seek to collaborate with or acquire technologies or product candidates from these entities. Accordingly, we may have difficulty licensing or acquiring technologies or product candidates on acceptable terms.

Regulatory Considerations

Our technologies must undergo a rigorous regulatory approval process, which includes extensive preclinical and clinical testing, to demonstrate safety and efficacy before any resulting product can be marketed. To date, neither the FDA nor any of its international equivalents has approved any of our technologies for marketing. In the biotechnology industry, it has been estimated that less than five percent of the technologies for which clinical efforts are initiated ultimately result in an approved product. The clinical trial and regulatory approval process can require many years and substantial cost, and there can be no guarantee that our efforts will result in an approved product.

Our activities are regulated by a number of government authorities in the United States and other countries, including the FDA pursuant to the Federal Food, Drug and Cosmetic Act. The FDA regulates pharmaceutical products, including their manufacture and labeling. Data obtained from testing is subject to varying interpretations which can delay, limit or prevent FDA approval. In addition, changes in existing regulatory requirements could prevent or affect the timing of our ability to achieve regulatory compliance. Federal and state laws, regulations and policies may be changed with possible retroactive effect, and how these rules actually operate can depend heavily on administrative policies and interpretations over which we have no control.

Obtaining FDA approvals is time-consuming and expensive. The steps required before our potential products may be marketed in the United States include (i) preclinical laboratory and animal tests, (ii) the submission to the FDA of an application for an IND, which must become effective before U.S. human clinical trials may commence, (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the product, (iv) the submission to the FDA of a marketing authorization application(s) and (v) FDA approval of the application(s) prior to any commercial sale or shipment of the drug. There is no guarantee that such

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approvals will be granted for any of our potential products, or that the FDA review process will not involve delays that significantly and negatively affect our potential products. We also may encounter similar delays in foreign countries. In addition, even if we receive regulatory approvals, they may have significant limitations on the uses for which any approved products may be marketed. In addition, any marketed product and its manufacturer are subject to periodic review, and any discovery of previously unrecognized problems with a product or manufacturer could result in suspension or limitation of approvals.

Manufacturing

We currently outsource manufacturing for all of our products, with the exception of Troponin, and expect to continue to outsource manufacturing in the future. We believe our current suppliers will be able to manufacture our products efficiently in sufficient quantities and on a timely basis, while maintaining product quality. We seek to maintain quality control over manufacturing through ongoing inspections, rigorous review, control over documented operating procedures and thorough analytical testing by outside laboratories. We believe that our current strategy of primarily outsourcing manufacturing is cost-effective since we avoid the high fixed costs of plant, equipment and large manufacturing staffs.

FDA regulations require that we establish a manufacturing source for the commercial supply of ALTROPANE under the Good Manufacturing Practice, or GMP, regulations established by the FDA. In August 2000, we signed an agreement with MDS Nordion, Inc., or MDS Nordion, of Ottawa, Canada to supply ALTROPANE under the GMP standards. MDS Nordion is a well-recognized manufacturer of ¹²³I and specializes in the production of radioactive isotopes and in radioactively labeling imaging agents. MDS Nordion completed the GMP commercial manufacturing scale-up process for the ALTROPANE imaging agent in September 2001. According to the terms of the Development and Supply Contract, MDS Nordion compiled and prepared the regulatory information for the Chemistry Manufacturing and Controls, or CMC, section of our planned NDA for PD. In February 2003, MDS Nordion submitted a Drug Master File describing the manufacture of ALTROPANE to the FDA. MDS Nordion will also supply the GMP ALTROPANE imaging agent for our ADHD and other clinical trials, as well as manufacture and distribute ALTROPANE following commercial launch, when and if the NDA filing is approved by the FDA.

In May 2001, we entered into a lease agreement for certain laboratory space in Baltimore, Maryland. We acquired this space in connection with our hiring of a Senior Vice President of Protein Development to support our efforts to establish a consistent manufacturing process for Troponin. In May 2002, we increased the amount of space we are leasing in Baltimore to a total of approximately 3,300 square feet. To date, much of our effort has focused on the development of a reliable manufacturing process for Troponin. The development of an economic, scale-up methodology for the production of complex proteins while still retaining the necessary biological activity has been a very difficult problem for the biotechnology industry. This has been especially true in the case of most anti-angiogenic agents. We believe that we have developed a proprietary method for the purification of complex bacterial-produced recombinant proteins, such as Troponin, that conserves the biological activity of the native protein.We have scaled-up the manufacturing process for Troponin in order to produce material for our pre-clinical efficacy study. If this study is successful, we will then increase the scale-up process to the level required for clinical trial production.

Marketing and Sales

We continue to evaluate opportunities for corporate alliances and partners to assist us in developing, commercializing and marketing our products. Our strategy is to enter into collaborative arrangements with pharmaceutical and other companies for the development, manufacturing, marketing and sales of our products, including internationally. These collaborators are generally expected to be responsible for funding or reimbursing all or a portion of the development costs, including the costs of clinical testing necessary to obtain regulatory approvals and for commercial manufacturing, in exchange for rights to market certain products in particular geographic territories.

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Forward-Looking Statements

This Item and other Items in this report contain “forward-looking” information as that term is defined in the Private Securities Litigation Reform Act of 1995, as amended, or by the Securities and Exchange Commission in its rules, regulations and releases. This information includes statements on the prospects for our drug development activities, regulatory approvals and results of operations based on our current expectations, such as statements regarding certain milestones with respect to the development of our technologies and product candidates. Forward-looking statements are statements that are not historical facts, and can be identified by, among other things, the use of forward-looking language, such as “believe,” “expect,” “may,” “will,” “should,” “seeks,” “plans,” “schedule to,” “anticipates” or “intends” or the negative of those terms, or other variations of those terms of comparable language, or by discussions of strategy or intentions. In particular, these forward-looking statements include statements relating to present or anticipated scientific progress, development or regulatory approval of potential products, the timing of filings with regulatory agencies or commencement of clinical trials, future revenues, capital expenditures, research and development expenditures, present and future collaborations, intellectual property, personnel and manufacturing requirements and capabilities. We caution investors that such forward-looking statements are not guarantees of future performance, and that known and unknown risks, uncertainties and other factors, including those risks factors identified below, in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report, may cause actual results to differ materially from those forward-looking statements. In addition, we caution you that forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them, even if our experience or future changes make it clear that any projected results expressed or implied herein will not be realized.

Risk Factors

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The following discussion highlights some of these risks and others are discussed elsewhere herein.

WE ARE A DEVELOPMENT STAGE COMPANY, WE HAVE ALWAYS HAD LOSSES FROM OUR OPERATIONS AND WE EXPECT FUTURE LOSSES. WE WILL NEVER BE PROFITABLE UNLESS WE DEVELOP, AND OBTAIN REGULATORY APPROVAL AND MARKET ACCEPTANCE OF, OUR PRODUCT CANDIDATES.

Biotechnology companies that have no approved products or other sources of revenue are generally referred to as development stage companies. The majority of biotechnology companies are development stage companies. As of December 31, 2003, we have incurred cumulative net losses of approximately $94 million since inception. We have never generated revenues from product sales. We do not currently expect to generate revenues from product sales for at least the next eighteen months, and probably longer. If we do generate revenues and operating profits in the future, our ability to continue to do so in the long term could be affected by the introduction of competitors’ products and other market factors. We expect to incur significant operating losses for at least the next twenty-four months, and probably longer. The level of our operating losses may increase in the future if more of our product candidates begin human clinical trials. We will never generate revenues or achieve profitability unless we develop and obtain regulatory approval and market acceptance of our product candidates.

WE WILL REQUIRE ADDITIONAL FUNDING IN THE FUTURE IN ORDER TO CONTINUE OUR BUSINESS AND OPERATIONS AS CURRENTLY CONDUCTED. IF WE ARE UNABLE TO SECURE SUCH FUNDING ON ACCEPTABLE TERMS, WE MAY NEED TO SIGNIFICANTLY REDUCE OR EVEN CEASE ONE OR MORE OF OUR RESEARCH OR DEVELOPMENT PROGRAMS, OR WE MAY BE REQUIRED TO OBTAIN FUNDS THROUGH ARRANGEMENTS WITH OTHERS THAT MAY REQUIRE US TO SURRENDER RIGHTS TO SOME OR ALL OF OUR TECHNOLOGIES.

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We spend a significant amount for research and development, including pre-clinical studies and clinical trials of our technologies. We believe that the cash, cash equivalents, and marketable securities available at December 31, 2003 will provide sufficient working capital to meet our anticipated expenditures for at least the next twelve months. Thereafter, we will need to raise substantial additional capital if we are unable to generate sufficient revenue from product sales or through collaborative arrangements with third parties. To date, we have always experienced negative cash flows from operations and have funded our operations primarily from equity financings. If adequate funds are not readily available, we may need to significantly reduce or even cease one or more of our research or development programs. Alternatively, to secure such funds, we may be required to enter financing arrangements with others that may require us to surrender rights to some or all of our technologies. If the results of our current or future clinical trials are not favorable, it may negatively affect our ability to raise additional funds. If we are successful in obtaining additional equity financing, the terms of such financing will have the effect of diluting the holdings and the rights of our shareholders. Estimates about how much funding will be required are based on a number of assumptions, all of which are subject to change based on the results and progress of our research and development activities.

WE HAVE CONVERTIBLE NOTES, PREFERRED STOCK AND CERTAIN WARRANTS OUTSTANDING WHICH MAY NEGATIVELY AFFECT OUR ABILITY TO ATTRACT ADDITIONAL FINANCING AND MAINTAIN LIQUIDITY.

We have $4,350,500 in principal of 10% convertible senior secured convertible promissory notes, the Notes, that become due in June 2005. We have set aside approximately $5.0 million in restricted cash and marketable securities to repay the Notes and the future interest on the Notes in accordance with the terms of our Series E Cumulative Convertible Preferred Stock, or Series E Stock, agreements. However, there can be no assurance that we will not need to raise additional capital before June 2005 in order to maintain enough restricted cash and marketable securities to satisfy the Notes and future interest payments on the Notes when they become due.

The repayment of the Notes is secured by a first priority security interest and continuing lien on substantially all of our property (which may however, under certain conditions, be released). The existence of this secured interest held by the holders of the Notes could negatively impact our ability to favorably negotiate future financings because potential investors may not want to subordinate their rights to those of the holders of the Notes.

In addition, under our agreements with the holders of our Notes, the holders of our Series E Stock and the holders of certain of our warrants, our ability to obtain future financing through the issuance of debt and equity securities could be limited by covenants in those agreements restricting, among other things, our ability to pay cash dividends, incur additional indebtedness, issue securities more senior in rank than our current securities, and engage in any transaction resulting in a change of control without the consent of such securityholders. For example, subject to specified exceptions, each holder of our Series E Stock has the right to invest in any financing completed by us involving equity or equity-linked securities through June 9, 2005. Each holder has the right to participate in any such financing in an amount equal to 50% of the amount invested in the Series E financing. Subject to specified exceptions, in the event of any financing by us after June 9, 2005 involving equity or equity-linked securities other than common stock, the holders of Series E Stock will have the right to exchange any of their outstanding shares of Series E Stock for securities in the new financing at 100% of its liquidation preference.

OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP OUR PRODUCT CANDIDATES INTO COMMERCIAL PRODUCTS.

To date, we have not marketed, distributed or sold any products and, with the exception of the ALTROPANE imaging agent, all of our technologies and early-stage product candidates are in pre-clinical development. The success of our business depends primarily upon our ability to successfully develop and commercialize our product candidates. Successful research and product development in the biotechnology

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industry is highly uncertain, and very few research and development projects produce a commercial product. In the biotechnology industry, it has been estimated that less than five percent of the technologies for which research and development efforts are initiated ultimately result in an approved product.

IF OUR PRECLINICAL TESTING AND CLINICAL TRIALS ARE NOT SUCCESSFUL, WE WILL NOT OBTAIN REGULATORY APPROVAL FOR COMMERCIAL SALE OF OUR PRODUCT CANDIDATES.

We will be required to demonstrate, through pre-clinical testing and clinical trials, that our drug candidates are safe and effective before we can obtain regulatory approval for the commercial sale of our drug candidates. Pre-clinical testing and clinical trials are lengthy and expensive and the historical rate of failure for drug candidates is high. Product candidates that appear promising in the early phases of development, such as in pre-clinical study or in early human clinical trials, may fail to demonstrate safety and efficacy in pivotal clinical trials.

Except for the ALTROPANE imaging agent, we have not yet submitted INDs for our other product candidates which will be required before we can begin clinical trials in the United States. We may not submit INDs for these product candidates if we are unable to accumulate the necessary pre-clinical data for the filing of an IND. The FDA may request additional pre-clinical data before allowing us to commence clinical trials. The FDA or other applicable regulatory authorities may suspend clinical trials of a drug candidate at any time if we or they believe the subjects or patients participating in such trials are being exposed to unacceptable health risks or for other reasons. Adverse side effects of a drug candidate on subjects or patients in a clinical trial could result in the FDA or foreign regulatory authorities refusing to approve a particular drug candidate for any or all indications of use.

We plan to conduct a new Phase III clinical trial of ALTROPANE for use in distinguishing Parkinsonian from non-Parkinsonian Syndromes in patients with tremors and are seeking a written agreement with the FDA relating to the design and analysis of the study protocol for this new Phase III trial. The primary endpoint of the new Phase III trial will be confirmation of the hypothesis that the diagnostic accuracy of ALTROPANE is significantly superior to the diagnostic accuracy of the internist or general practitioner, when compared against the “gold standard” of diagnosis by a movement disorder specialist. Because we have elected to pursue a single, large Phase III trial for this indication, rather than two replicate, smaller trials, the FDA has required that we power the trial to achieve a p-value of 0.02 or less and we expect that the FDA will require that level of statistical significance for the primary endpoint in order to achieve approvability. Even if we reach an agreement with the FDA regarding the design of this study, we will need to complete the study and obtain successful results prior to the filing of an NDA for ALTROPANE. Even if successfully completed, there is no assurance that this new Phase III clinical trial will be sufficient to achieve the approvability of ALTROPANE.

Clinical trials require sufficient patient enrollment which is a function of many factors, including the size of the potential patient population, the nature of the protocol, the availability of existing treatments for the indicated disease and the eligibility criteria for enrolling in the clinical trial. Delays or difficulties in completing patient enrollment can result in increased costs and longer development times.

We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend those trials, or delay the analysis of data from our completed or ongoing clinical trials. Any of the following could delay the initiation or the completion of our ongoing and planned clinical trials:

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OUR PRODUCT CANDIDATES ARE SUBJECT TO RIGOROUS REGULATORY REVIEW AND, EVEN IF APPROVED, REMAIN SUBJECT TO EXTENSIVE REGULATION.

Our technologies must undergo a rigorous regulatory approval process which includes extensive pre-clinical and clinical testing to demonstrate safety and efficacy before any resulting product can be marketed. Our research and development activities are regulated by a number of government authorities in the United States and other countries, including the FDA pursuant to the Federal Food, Drug, and Cosmetic Act. The clinical trial and regulatory approval process usually requires many years and substantial cost. To date, neither the FDA nor any of its international equivalents has approved any of our product candidates for marketing.

The FDA regulates pharmaceutical products in the United States, including their testing, manufacturing and marketing. Data obtained from testing is subject to varying interpretations which can delay, limit or prevent FDA approval. The FDA has stringent laboratory and manufacturing standards which must be complied with before we can test our product candidates in people or make them commercially available. Examples of these standards include Good Laboratory Practices, or GLP, and Good Manufacturing Practices, or GMP. Our compliance with these standards are subject to initial certification by independent inspectors and continuing audits thereafter. Obtaining FDA approval to sell our product candidates is time-consuming and expensive. The FDA usually takes at least 12 to 18 months to review a New Drug Application, or NDA, which must be submitted before the FDA will consider granting approval to sell a product. If the FDA requests additional information, it may take even longer for them to make a decision especially if the additional information that they request requires us to complete additional studies. We may encounter similar delays in foreign countries. After reviewing any NDA we submit, the FDA or its foreign equivalents may decide not to approve our products.

Other risks associated with the regulatory approval process include:

IF WE ARE UNABLE TO SECURE ADEQUATE PATENT PROTECTION FOR OUR TECHNOLOGIES, THEN WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AS A BIOTECHNOLOGY COMPANY.

At the present time, we do not have patent protection for all uses of our technologies. There is significant competition in our primary scientific areas of research and development including CNS disorders and cancer. Such competitors will seek patent protection for their technologies, and such patent applications or rights might conflict with the patent protection that we are seeking for our technologies. If we do not obtain patent protection for our technologies, or if others obtain patent rights that block our ability to develop and market our technologies, our business prospects may be significantly and negatively affected. Further, even if patents can be obtained, these patents may not provide us with any competitive advantage if our competitors have stronger patent positions or if their product candidates work better in clinical trials than our product candidates.

Our patent strategy is to obtain broad patent protection, in the U.S. and in major developed countries, for our technologies and their related medical indications. The patent application and issuance process generally takes at least several years and is usually very expensive without any guarantee that a patent will be issued. In many

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cases, our know-how and technology may not be patentable. Risks associated with protecting our patent and proprietary rights include the following:

WE ARE DEPENDENT ON EXPERT ADVISORS AND OUR COLLABORATIONS WITH RESEARCH AND DEVELOPMENT SERVICE PROVIDERS.

Most biotechnology and pharmaceutical companies have established internal research and development programs, including their own facilities and employees which are under their direct control. By contrast, we have limited internal research capability and have always outsourced substantially all of our research and development, pre-clinical and clinical activities. As a result, we are dependent upon our network of expert advisors and our collaborations with other research and development service providers for the development of our technologies and product candidates. These expert advisors are not our employees but provide us with important information and knowledge that may enhance our product development strategies and plans. Our collaborations with other research and development service providers are important for the testing and evaluation of our technologies, in both the pre-clinical and clinical stages.

Many of our expert advisors are employed by, or have their own collaborative relationship with Harvard and its Affiliates. A summary of the key scientific, research and development professionals with whom we work, and a composite of their professional background and affiliations is as follows:

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Dr. Benowitz, Dr. Fischman, Dr. Langer and Dr. Moses provide us scientific consultative services under agreements renewed annually by mutual agreement of the parties, which generally provide for total payments in the aggregate of less than $250,000 per year. Dr. Benowitz provides scientific consultative services primarily related to the research and development of Inosine and AF-1. Dr. Langer and Dr. Moses provide scientific consultative services primarily related to the research and development of Troponin. Dr. Fischman provides scientific consultative services primarily related to the research and development of the ALTROPANE imaging agent.

We do not have a formal agreement with Dr. Meltzer individually but do enter into research and development contracts from time to time with Organix, Inc., of which Dr. Meltzer is president.

Many of our institutional collaborations are also with Harvard and its Affiliates. Those institutions with which we have collaborative relationships include:

We generally have a number of collaborations with research and development service providers ongoing at any point in time. These agreements generally cover a specific project or study, are usually for a duration between one month to one year, and expire upon completion of the project. Under these agreements, we are usually required to make an initial payment upon execution of the agreement with the remaining payments based upon the completion of certain specified milestones such as completion of a study or delivery of a report.

We cannot control the amount and timing of resources our advisors and collaborators devote to our programs or technologies. Our advisors and collaborators may have employment commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. If any of our advisors or collaborators were to breach or terminate their agreement with us or otherwise fail to conduct their activities successfully and in a timely manner, the pre-clinical or clinical development or commercialization of our technologies and product candidates or our research programs could be delayed or terminated. Any such delay or termination could have a material adverse effect on our business, financial condition or results of operations.

Disputes may arise in the future with respect to the ownership of rights to any technology developed with our advisors or collaborators. These and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our technologies, or could require or result in litigation to resolve. Any such event could have a material adverse effect on our business, financial condition or results of operations.

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Our advisors and collaborators sign agreements that provide for confidentiality of our proprietary information. Nonetheless, they may not maintain the confidentiality of our technology and other confidential information in connection with every advisory or collaboration arrangement, and any unauthorized dissemination of our confidential information could have a material adverse effect on our business, financial condition or results of operations.

IF WE ARE UNABLE TO MAINTAIN OUR KEY WORKING RELATIONSHIPS WITH HARVARD AND ITS AFFILIATES, WE MAY NOT BE SUCCESSFUL SINCE SUBSTANTIALLY ALL OF OUR CURRENT TECHNOLOGIES WERE LICENSED FROM, AND MOST OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES WERE PERFORMED BY, HARVARD AND ITS AFFILIATES.

Historically, we have been heavily dependent on our relationship with Harvard and its Affiliates because substantially all of our technologies were licensed from, and most of our research and development activities were performed by, Harvard and its Affiliates. Now that a portion of our early-stage research at Harvard and its Affiliates has yielded an identified product in each area of research, we have begun and expect to continue to conduct much of our later stage development work and all of our formal pre-clinical and clinical programs outside of Harvard and its Affiliates. Nevertheless, the originating scientists still play important advisory roles. Each of our collaborative research agreements is managed by a sponsoring scientist and/or researcher who has his or her own independent affiliation with Harvard and its Affiliates.

Under the terms of our license agreements with Harvard and its Affiliates, we acquire the exclusive, worldwide license to make, use, and sell the technology covered by each respective license agreement. Among other things, the technologies licensed under these agreements include:

Generally, each license agreement is effective until the patent relating to the technology expires. The patents on the ALTROPANE imaging agent expire beginning in February 2013, with the last issued U.S. patent expiring in October 2013. The patents on Inosine expire in September 2017 and the Troponin composition and method patents expire in February 2016.

We are required to make certain licensing and related payments to Harvard and its Affiliates which generally include:

In aggregate, we have paid Harvard and its Affiliates approximately $500,000 in initial licensing fees and reimbursed 100% of patent costs. In addition, we have paid an aggregate of approximately $200,000 in milestone payments. Under the terms of our licensing agreements with Harvard and its Affiliates, we may become obligated to pay up to an aggregate of $5.8 million in milestone payments in the future. These future milestone payments are generally payable only upon the completion of later stage clinical trials and the filing of an NDA or similar application seeking product approval. Most of these contingent milestone payments are associated with technologies that are presently in early stage development.

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We have entered into a small number of sponsored research agreements with Harvard and its Affiliates. Under these agreements, we provide funding so that the sponsoring scientists can continue their research efforts. These payments are generally made in equal quarterly installments over the term of the agreements which are usually for one year.

Universities and other not-for-profit research institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology that they have developed. While this increased awareness will not impact our rights to previously licensed technologies, it may make it more costly and difficult for us to obtain the licensing rights to new scientific discoveries at Harvard and its Affiliates.

IF WE ARE UNABLE TO RETAIN OUR KEY PERSONNEL AND/OR RECRUIT ADDITIONAL KEY PERSONNEL IN THE FUTURE, THEN WE MAY NOT BE ABLE TO OPERATE EFFECTIVELY.

Our success depends significantly upon our ability to attract and retain highly qualified scientific and management personnel who are able to formulate, implement and maintain the operations of a biotechnology company such as ours. The loss of the service of any of the key members of our senior management team may significantly delay or prevent the achievement of product development and other business objectives. As an example, Dr. Marc E. Lanser, our President, was formerly on the staff of, and maintains close affiliations with Harvard and its Affiliates. Substantially all of our technologies were licensed from Harvard and its Affiliates. Our past ability to secure these licenses and to enter into sponsored research and development agreements with Harvard and its Affiliates was enhanced by Dr. Lanser’s affiliations and familiarity with Harvard and its Affiliates. Other key members of our senior management team include David Hillson, our Chairman, Joseph Hernon, our Chief Financial Officer, Jeanne Marie Varga, our Senior Vice President, Regulatory Affairs, Dr. Richard Thorn, our Senior Vice President of Manufacturing, and Dr. Irene Gonzalez, our Senior Vice President of Protein Development. None of these key executives, other than Mr. Hillson, have agreed not to compete with us following any termination of their employment. We do not presently carry key person life insurance on any of our scientific or management personnel. We do not have employment agreements with any of these key executives, other than Mr. Hillson.

We currently outsource most of our research and development, pre-clinical and clinical activities. If we decide to increase our internal research and development capabilities for any of our technologies, we may need to hire additional key management and scientific personnel to assist the limited number of employees that we currently employ. There is significant competition for such personnel from other companies, research and academic institutions, government entities and other organizations. If we fail to attract such personnel, it could have a significant negative effect on our ability to develop our technologies.

IF WE ARE UNABLE TO ESTABLISH, MAINTAIN AND RELY ON NEW COLLABORATIVE RELATIONSHIPS, THEN WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES.

To date, our operations have primarily focused on the pre-clinical development of most of our technologies, as well as conducting clinical trials for certain of our technologies. During the next eighteen months, we currently expect that the continued development of our technologies will result in the initiation of additional clinical trials, and the market introduction of any product for which regulatory approval is obtained. We expect that these developments will require us to establish, maintain and rely on new collaborative relationships in order to successfully develop and commercialize our technologies. There is no certainty that:

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WE ARE ENGAGED IN HIGHLY COMPETITIVE INDUSTRIES DOMINATED BY LARGER, MORE EXPERIENCED AND BETTER CAPITALIZED COMPANIES.

The biotechnology and pharmaceutical industries are highly competitive and are dominated by larger, more experienced and better capitalized companies. Such greater experience and financial strength may enable them to bring their products to market sooner than us, thereby gaining the competitive advantage of being the first to market. Research on the causes of, and possible treatments for diseases for which we are trying to develop therapeutic or diagnostic products, are developing rapidly and there is a potential for extensive technological innovation in relatively short periods of time. Factors affecting our ability to successfully manage the technological changes occurring in the biotechnology and pharmaceutical industries as well as our ability to successfully compete include:

Many of the largest biotechnology and pharmaceutical companies in the world are trying to develop products in the same product markets as us. There are presently more than sixty companies developing cancer products using an anti-angiogenic or similar approach, and there are hundreds of other companies utilizing different approaches in developing cancer products. To our knowledge, there is only one company, Nycomed Amersham, that has successfully developed a diagnostic for Parkinson’s Disease which is the medical purpose for which our most advanced product candidate, the ALTROPANE imaging agent, is being developed. To date, Nycomed has obtained marketing approval only in Europe, and to the best of our knowledge, is not presently seeking approval in the United States. However, Nycomed has significantly greater financial resources than us, and their decision to seek approval in the United States could significantly adversely affect our competitive position. The established market presence, and greater financial strength, of Nycomed in the European market will make it difficult for us to successfully market the ALTROPANE imaging agent in Europe.

IF WE ARE UNABLE TO OBTAIN ADEQUATE INSURANCE COVERAGE AND REIMBURSEMENT LEVELS FOR ANY OF OUR PRODUCTS WHICH ARE APPROVED AND ENTER THE MARKET, THEN THEY MAY NOT BE ACCEPTED BY PHYSICIANS AND PATIENTS.

Substantially all biotechnology products are distributed to patients by physicians and hospitals, and in most cases, such patients rely on insurance coverage and reimbursement to pay for some or all of the cost of the product. In recent years, the continuing efforts of government and third party payers to contain or reduce health care costs have limited, and in certain cases prevented, physicians and patients from receiving insurance coverage and reimbursement for medical products, especially newer technologies. Our ability to generate adequate revenues and operating profits could be adversely affected if such limitations or restrictions are placed on the sale of our products. Specific risks associated with medical insurance coverage and reimbursement include:

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WE HAVE LIMITED MANUFACTURING CAPACITY AND MARKETING EXPERIENCE AND EXPECT TO BE HEAVILY DEPENDENT UPON THIRD PARTIES TO MANUFACTURE AND MARKET APPROVED PRODUCTS.

We currently have limited manufacturing facilities for either clinical trial or commercial quantities of any of our technologies and currently have no plans to obtain additional facilities. To date, we have obtained the limited amount of quantities required for pre-clinical and clinical trials from contract manufacturing companies. We intend to continue using contract manufacturing arrangements with experienced firms for the supply of material for both clinical trials and any eventual commercial sale, with the exception of Troponin, which we presently plan to produce in our facility in Baltimore, Maryland.

We will depend upon third parties to produce and deliver products in accordance with all FDA and other governmental regulations. We may not be able to contract with manufacturers who can fulfill our requirements for quality, quantity and timeliness, or be able to find substitute manufacturers, if necessary. The failure by any third party to perform their obligations in a timely fashion and in accordance with the applicable regulations may delay clinical trials, the commercialization of products, and the ability to supply product for sale.

With respect to our most advanced product candidate, the ALTROPANE imaging agent, we have entered into an agreement with, and are highly dependent upon, MDS Nordion. Under the terms of the agreement, which currently expires on December 31, 2004, we paid MDS Nordion a one-time fee of $300,000 in connection with its commitment to designate certain of its facilities exclusively for the production of the ALTROPANE imaging agent. We also paid MDS Nordion approximately $900,000 to establish a GMP certified manufacturing process for the production of the ALTROPANE imaging agent. Finally, we have agreed to minimum monthly purchases of the ALTROPANE imaging agent of at least $20,000 through December 31, 2004. The agreement provides for MDS Nordion to manufacture the ALTROPANE imaging agent for our future clinical trials and, if the drug is approved, for commercial supply. The agreement also provides that MDS Nordion will compile and prepare the information regarding manufacturing that will be a required component of any NDA we file for the ALTROPANE imaging agent in the future. We do not presently have arrangements with any other suppliers in the event that Nordion is unable to manufacture ALTROPANE for us. We could encounter a significant delay before another supplier could manufacture ALTROPANE for us due to the time required to establish a GMP manufacturing process for the ALTROPANE imaging agent.

We do not have any experience in marketing pharmaceutical products. In order to earn a profit on any future product, we will be required to either enter into arrangements with third parties with respect to marketing the products or internally develop such marketing capability. We may encounter difficulty in negotiating sales and marketing arrangements with third parties on favorable terms for us. Most of the companies who can provide such services are financially stronger and more experienced in selling pharmaceutical products than we are. As a

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result, they may be in a position to negotiate an arrangement that is more favorable to them. We could experience significant delays in marketing any of our products if we are required to internally develop a sales and marketing organization. We have no experience in performing such activities and could incur significant costs in developing such a capability.

WE HAVE CONVERTIBLE PREFERRED STOCK, CONVERTIBLE NOTES, OPTIONS AND WARRANTS OUTSTANDING WHICH, WHEN EXERCISED OR CONVERTED, MAY CAUSE DILUTION TO OUR SHAREHOLDERS.

As of December 31, 2003, we had the following convertible preferred stock, convertible notes, options and warrants outstanding which, when exercised or converted, may cause dilution to our shareholders.

As of December 31, 2003, approximately 0.7, 1.4, and 2.2 million of the stock options are exercisable at prices below $1.50, ranging from $1.50 to $3.00, and greater than $3.00, respectively. As of December 31, 2003, approximately 0.8, 6.5, and 2.4 million of the warrants are exercisable at prices below $1.50, ranging from $1.50 to $3.00, and greater than $3.00, respectively. The convertible preferred stock and convertible notes include provisions whereby the conversion price of the preferred stock and notes is reduced if we issue common stock at a price less than the then applicable conversion price of the preferred stock and notes ($1.25 and $1.00, respectively, at December 31, 2003). Such provisions could motivate the holders of these instruments to sell our common stock short in the public market, which could negatively affect our stock price. The exercise or conversion of our common stock equivalents will dilute the percentage ownership interest of our current shareholders. In addition, the terms upon which we would be able to obtain additional money through the sale of our stock may be negatively affected by the existence of these common stock equivalents because new investors may be concerned about the impact upon the future market price of the stock if these common stock equivalents were consistently exercised and the underlying stock sold.

OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE AND CAN BE AFFECTED BY FACTORS UNRELATED TO OUR BUSINESS AND OPERATING PERFORMANCE.

The market prices for securities of biotechnology and emerging pharmaceutical companies in general have been highly volatile and may continue to be highly volatile in the future. These price and volume fluctuations have often been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our common stock.

IF WE ARE UNABLE TO MAINTAIN COMPLIANCE WITH NASDAQ LISTING REQUIREMENTS, OUR SHARES COULD BE DELISTED.

Our listing on the NASDAQ Markets is conditioned upon our compliance with the NASD’s continued listing requirements. The minimum standards for listing on the NASDAQ National Market is stockholders’ equity of $10 million or market capitalization of $50 million. The minimum standards for listing on the NASDAQ SmallCap Market is stockholders’ equity of $2.5 million or market capitalization of $35 million. In January 2003, we received a NASDAQ Staff Determination Letter indicating that we failed to comply with the

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new stockholders’ equity requirements for continued listing on the NASDAQ Markets and that our securities were, therefore, subject to delisting. We requested a hearing before a NASDAQ Listing Qualifications Panel to appeal the Staff Determination and present our plan to secure compliance with the $2.5 million stockholders’ equity requirement for transfer to the NASDAQ SmallCap Market. Subsequent to the hearing, we completed a private placement of common stock which generated gross proceeds of $10 million. In March 2003, we received a notification from NASDAQ approving its transfer to the NASDAQ SmallCap Market. However, there can be no assurances that we will be able to maintain compliance with NASDAQ’s present listing standards, or that NASDAQ will not implement additional listing standards with which we are unable to comply. Failure to maintain compliance with NASDAQ listing requirements could result in the delisting of our shares from trading on the NASDAQ system, which could have a material adverse effect on the trading price, volume and marketability of our common shares.

THE FOLLOWING FACTORS, IN ADDITION TO OTHER RISK FACTORS DESCRIBED IN THIS SECTION, MAY HAVE A SIGNIFICANT IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK:

WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS WHICH COULD DISCOURAGE OR PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR SHAREHOLDERS.

Provisions of our shareholder rights plan, our amended and restated certificate of incorporation and our bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. These provisions may also make it more difficult for our shareholders to remove members of our board of directors or management. If a change of control is delayed or prevented the market price of our common stock could suffer.

THE ANNOUNCEMENT OF PLANS BY CERTAIN OF OUR SHAREHOLDERS TO CONDUCT A PROXY CONTEST FOR THE ELECTION OF DIRECTORS AT OUR NEXT ANNUAL MEETING AND RELATED LITIGATION COULD DISTRACT OUR MANAGEMENT, DIVERT OUR RESOURCES, DISCOURAGE POTENTIAL BUSINESS PARTNERS AND SUPPLIERS AND NEGATIVELY IMPACT OUR STOCK PRICE.

Certain of the holders of our securities, namely, Robert L. Gipson, Thomas O. Boucher, Jr., Ingalls & Snyder L.L.C. and Ingalls & Snyder Value Partners L.P., have filed Schedule 13Ds with the Securities and

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Exchange Commission stating their intention to engage in a proxy solicitation contest for the election of directors at our 2004 annual meeting. These securityholders have also brought litigation against us and our directors relating to our shareholder rights plan and our December 2003 private placement. These securityholders also recently submitted a books and records request to us under Delaware law. The Schedule 13Ds, the related litigation and the books and records request could distract our management from our operations, divert our resources from operations, discourage potential business partners and suppliers from approaching us and negatively impact our stock price.

Employees

As of December 31, 2003, we employed 10 individuals full-time, three of whom hold Ph.D. and/or M.D. degrees and another four of whom hold other advanced degrees. In addition, we engaged the services of seven individuals as scientific collaborators on a contractual basis. None of our employees are covered by a collective bargaining agreement. We consider our employee relations to be good.

Available Information

Our internet website is http://www.bostonlifesciences.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after such reports are filed with, or furnished to, the Securities and Exchange Commission. We have made these reports available through our website during the period covered by this report.

ITEM 2.    Properties.

Our corporate office is located in Boston, Massachusetts. The lease on this 6,600 square foot facility expires in 2012. The lease contains provisions whereby we can sublet all or part of the space and fully retain any sublease income generated. We also lease 3,300 square feet of laboratory space located in Baltimore, Maryland that expires in May 2006. We believe that our existing facilities are adequate for their present and anticipated purposes, except that additional facilities will be needed if we elect to expand our laboratory and/or manufacturing activities.

ITEM 3.    Legal Proceedings.

On November 13, 2003, Robert L. Gipson, Thomas O. Boucher, Jr., Ingalls & Snyder Value Partners, L.P. and Ingalls & Snyder, L.L.C., the plaintiffs, filed a complaint against us and the members of our Board of Directors in the Delaware Court of Chancery alleging an improper entrenchment motive regarding the Board of Director’s interpretation of our 2001 Rights Agreement, as amended to date. On September 29, 2003 and October 15, 2003, the plaintiffs filed amendments to their Schedule 13D relating to our common stock in which they stated their intention to seek the removal of certain members of our Board of Directors and management, to nominate an alternate slate of directors for election at our next annual meeting and to seek redemption of our Rights Agreement. In October 2003, the Board of Directors considered the possibility that Mr. Boucher’s holdings of our common stock, together with the holdings of certain other shareholders being attributed to Mr. Boucher by virtue of his acting in concert with such shareholders, may have exceeded a beneficial ownership threshold that could trigger a distribution of preferred stock purchase rights under our Rights Agreement.

By letter from counsel dated October 14, 2003, the Board of Directors communicated to the plaintiffs that Mr. Boucher may have exceeded the threshold for triggering the distribution of the rights under our Rights Agreement and that the Board of Directors had taken action to temporarily delay the distribution of the rights. The complaint filed by the plaintiffs was seeking, among other things, declaratory relief that Mr. Boucher had not exceeded the beneficial ownership threshold for triggering the distribution of rights under our Rights Agreement

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and that the directors had breached their fiduciary duties in connection with applying our Rights Agreement, and injunctive relief to compel the directors to call and hold a special meeting of stockholders. In December 2003, the plaintiffs requested expedited relief in the form of a preliminary injunction regarding Mr. Boucher’s status under our Rights Agreement. On December 23, 2003, we amended our Rights Agreement in order to clarify Mr. Boucher’s status under our Rights Agreement and the plaintiffs withdrew their request for expedited relief. There have been no subsequent developments regarding this litigation.

On December 31, 2003, the plaintiffs filed another complaint in the Delaware Court of Chancery against us and the members of our Board of Directors alleging an improper entrenchment motive and breach of fiduciary duty by the directors in connection with our issuance of preferred stock and warrants in our December 2003 private placement. The complaint filed by the plaintiffs was seeking unspecified equitable and monetary relief. We asked the court to dismiss this lawsuit because it lacked any factual basis and ignored fundamental principles of law. Instead of responding to our motion to dismiss, on March 9, 2004, the plaintiffs moved to dismiss their own lawsuit without prejudice prior to the deadline to explain to the court why their claim was legitimate. The Delaware Court of Chancery immediately granted the motion and dismissed the case. On March 22, 2004, the plaintiffs made a books and records request under Delaware law seeking additional information regarding our December 2003 private placement and seeking information on a number of unrelated matters.

ITEM 4.    Submission of Matters to a Vote of SecurityHolders.

We did not submit any matter to the vote of our securityholders during the fourth quarter of 2003.

Executive Officers of the Registrant

The following is a list of our executive officers and their principal positions. Each individual officer serves at the pleasure of the Board of Directors.

Marc E. Lanser, M.D. Dr. Lanser has been President and Chief Operating Officer and a member of the Board since October 2003. Prior to October 2003, Dr. Lanser had been Executive Vice President and Chief Scientific Officer and a member of the Board since June 1995. Prior to June 1995, Dr. Lanser held the same position with the Company from November 1994. From October 1992 until November 1994, Dr. Lanser was President and Chief Executive Officer of the Company. Prior to assuming the position of President and Chief Executive Officer of the Company, Dr. Lanser was an Assistant Professor of Surgery at Harvard Medical School and member of the full-time academic faculty, where he directed an NIH funded research project in immunology and received an NIH Research Career Development Award. Dr. Lanser has published more than 30 scientific articles in his field in peer-reviewed journals. Dr. Lanser received his M.D. from Albany Medical College.

Joseph P. Hernon, CPA. Mr. Hernon has been Chief Financial Officer since August 1996, and Secretary since 1998. Prior to joining the Company, Mr. Hernon was a Business Assurance Manager at Coopers & Lybrand where he was employed from January 1987 to August 1996. Mr. Hernon holds a Masters of Science in Accountancy from Bentley College and a Bachelor of Science in Business Administration from the University of Lowell.

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PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters.

Since March 27, 2003, our Common Stock has traded on the NASDAQ SmallCap Market under the symbol BLSI. Prior to March 27, 2003, our Common Stock was traded on the NASDAQ National Market under the same symbol. The following table sets forth the high and low sale prices for our Common Stock by quarter for 2003 and 2002, as reported by NASDAQ. These prices reflect inter-dealer quotation, without retail mark-up, markdowns or other fees or commissions, and may not necessarily represent actual transactions.

On March 24, 2004, the closing sales price for our Common Stock was $1.19 per share. The number of stockholders of record of Common Stock on March 24, 2004 was approximately 5,500. We have not paid any dividends on our Common Stock and do not expect to pay dividends on our Common Stock in the foreseeable future.

On December 9, 2003, we completed a private placement with a group of institutional and private investors raising gross proceeds of $8 million. In the private placement, we issued and sold 800 shares of our new Series E Cumulative Convertible Preferred Stock, or Series E Stock, accompanied by warrants to purchase 2,880,000 shares of our Common Stock. The purchase price of each share of Series E Stock was $10,000. Each share of Series E Stock is convertible into 8,000 shares of Common Stock based on an initial conversion price of $1.25 per share and was accompanied by a warrant to purchase 3,600 shares of Common Stock at an exercise price of $1.55 per share. The warrants will become exercisable on June 9, 2004 and will expire on December 9, 2007.

Burnham Hill Partners, a division of Pali Capital, Inc., acted as placement agent with respect to the private placement and received a cash fee and placement agent warrants to purchase 640,000 shares of Common Stock at an exercise price of $1.49 per share. The placement agent warrants will become exercisable on June 9, 2004 and will expire on December 9, 2008. Burnham Hill Partners will also receive a cash fee equal to 4% of the cash we receive upon the exercise of the investor warrants.

The Series E Stock is initially convertible into Common Stock at $1.25 per share, and is subject to a weighted average anti-dilution adjustment if we issue equity securities in the future at a lower price. The holders of Series E Stock are entitled to receive a dividend of 4% per annum, payable beginning on October 31, 2004 and on each anniversary thereof. The dividend rate will increase to 8% on June 9, 2005. The dividend is payable in cash, but we may elect to pay it in shares of Common Stock under specified circumstances.

The warrants issued to investors purchasing Series E Stock will become exercisable on June 9, 2004 and will expire at the close of business on December 9, 2007. The $1.55 per share exercise price of the investor warrants will be adjusted based on a weighted average anti-dilution formula in the event we issue securities below that price, subject to a floor of $1.48 per share.

The Series E Stock and the warrants were sold in a private placement pursuant to Regulation D under the Securities Act of 1933, as amended. We relied on representations from the investors to establish this exemption.

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Item 6.    Selected Financial Data.

The selected consolidated financial information presented below has been derived from the audited consolidated financial statements of the Company. This data is qualified in its entirety by reference to, and should be read in conjunction with, the Company’s Consolidated Financial Statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere herein.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section contains forward-looking statements based on current management expectations. Meaningful factors which could cause future results to differ materially from such expectations include, without limitation, the following: (i) results from current and planned clinical trials, (ii) scientific data collected on our technologies currently in preclinical research and development, (iii) decisions made by the FDA or other regulatory bodies with respect to the initiation of human clinical trials, (iv) decisions made by the FDA or other regulatory bodies with respect to approval and commercial sale of any of our proposed products, (v) the commercial acceptance of any products approved for sale and our ability to manufacture, distribute and sell for a profit any products approved for sale, (vi) our ability to obtain the necessary patents and proprietary rights to effectively protect our technologies, (vii) the outcome of any collaborations or alliances entered into by us in the future with pharmaceutical or other biotechnology companies, (viii) dependence on key personnel, and (ix) maintaining NASDAQ listing requirements.

Overview

Description of Company

We are a biotechnology company engaged in the research and development of biopharmaceutical products for the diagnosis and treatment of central nervous system, or CNS, and diseases and for the treatment of some cancers. At December 31, 2003, we are considered a “development stage enterprise” as defined in Statement of Financial Accounting Standards No. 7.

As of December 31, 2003, we have experienced total net losses since inception of approximately $94 million. For the foreseeable future, we expect to experience continuing operating losses and negative cash flows as management executes our current business plan. We believe that the cash, cash equivalents, and marketable securities available at December 31, 2003 will provide sufficient working capital to meet our anticipated expenditures for at least the next twelve months. We will need to raise additional capital in the future through collaboration agreements with other pharmaceutical or biotechnology companies, debt financing and equity offerings. There can be no assurance, however, that we will be successful or that additional funds will be available on acceptable terms, if at all. We have $4,350,500 in principal of Notes that become due in June 2005. We have set aside approximately $5.0 million in restricted cash and marketable securities to repay the Notes and the future interest on the Notes in accordance with the terms of our Series E Stock agreements. However, there can be no assurance that we will not need to raise additional capital before June 2005 in order to maintain enough restricted cash and marketable securities to satisfy the Notes and future interest payments on the Notes when they become due.

Product Development

ALTROPANE is an imaging agent being developed for the diagnosis of Parkinsonian Syndromes, or PS (including Parkinson’s Disease, or PD), Parkinsonian Tremor, and Attention Deficit Hyperactivity Disorder, or ADHD. We have completed a Phase III trial of ALTROPANE for use in differentiating PS movement disorders from non-PS movement disorders. We intend to conduct a new Phase III trial of ALTOPANE for use in distinguishing Parkinsonian from non-Parkinsonian Syndromes in patients with tremors and are seeking a binding written agreement with the FDA relating to the design and analysis of the study protocol for this new Phase III trial. We have had several communications with FDA since the initial SPA was filed with the Agency. The FDA has provided recommendations pertaining to the design of the clinical protocol, including alternatives for inclusion criteria for the clinical indication being sought by us, and guidance concerning primary and secondary endpoints proposed in the statistical plan. The FDA also provided advice on further clarification of the SPECT imaging criteria. In December 2003 and in February 2004, we submitted revised protocols addressing FDA’s recommendations concerning study design, statistical plan and safety assessments. We are currently awaiting final agreement from the FDA on the most recent protocol submission for the new Phase III trial. In order to expedite reaching a written agreement with the FDA, our most recent submission was not made under the SPA process, but rather was submitted under an alternative, expedited procedure. The FDA has assured us that a binding agreement reached under this alternative procedure will be equivalent to an agreement reached pursuant to the SPA process. We currently expect to receive correspondence from the FDA containing a binding

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agreement relating to this protocol and to initiate the new Phase III trial in the first half of 2004. Once initiated, we presently anticipate this new Phase III trial for ALTROPANE will take approximately twelve months to complete. If the results of this Phase III trial are successful, we hope to submit an NDA for ALTROPANE for use in distinguishing Parkinsonian from non-Parkinsonian Syndromes in patients with tremors within six months of the trial’s completion.

We are currently conducting our second Phase II trial of ALTROPANE for the diagnosis of ADHD in adults using a simplified scanning procedure and algorithm adjustments.

Inosine is a nerve growth factor which specifically promotes axon outgrowth in CNS cells. We are currently conducting pre-clinical studies required for the filing of an Investigational New Drug application, or IND. We expect to file an IND for treatment of ischemic stroke for Inosine in the third quarter of 2004 and, subsequent to FDA’s approval, initiate clinical trials in humans.

Troponin I, or Troponin, is our anti-angiogenic agent under development as a potential treatment for cancer. Troponin is presently in pre-clinical development.

Earlier stage product candidates include FLUORATEC, a “second-generation” imaging agent for the diagnosis of PD and ADHD and compounds for the treatment of PD and other central nervous system disorders.

To date, we have not marketed, distributed or sold any products and, with the exception of the ALTROPANE imaging agent, all of our technologies and early-stage product candidates are in pre-clinical development. Our product candidates must undergo a rigorous regulatory approval process which includes extensive pre-clinical and clinical testing to demonstrate safety and efficacy before any resulting product can be marketed. The FDA has stringent laboratory and manufacturing standards which must be complied with before we can test our product candidates in people or make them commercially available. Pre-clinical testing and clinical trials are lengthy and expensive and the historical rate of failure for product candidates is high. Clinical trials require sufficient patient enrollment which is a function of many factors, and delays and difficulties in completing patient enrollment can result in increased costs and longer development times. The foregoing uncertainties and risks limit our ability to estimate the timing and amount of future costs that will be required to complete the clinical development of each program. In addition, we are unable to estimate when material net cash inflows are expected to commence as a result of the successful completion of one or more of our programs. However, we do not currently expect to generate revenues from product sales for at least the next eighteen months.

The biotechnology and pharmaceutical industries are highly competitive and are dominated by larger, more experienced and better capitalized companies. Any delays we encounter in completing our clinical trial programs may adversely impact our competitive position in the markets in which we compete. Such delays may also adversely affect our financial position and liquidity.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared by us in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our estimates include those related to marketable securities and research contracts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For a complete description of our significant accounting policies, see Note 1 to our consolidated financial statements in our Annual Report on Form 10-K.

Marketable Securities

Our marketable securities consist exclusively of investments in United States agency bonds and corporate debt obligations. These marketable securities are adjusted to fair value on the consolidated balance sheet through

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other comprehensive income. We disclose the value of restricted marketable securities, if any, in the notes to our consolidated financial statements. If a decline in the fair value of a security is considered to be other than temporary, the investment is written down to a new cost basis and the unrealized loss is removed from accumulated other comprehensive loss and recorded in the Consolidated Statement of Operations. We evaluate whether a decline in fair value is other than temporary based on factors such as the significance of the decline, the duration of time for which the decline has been in existence and our ability and intent to hold the security to maturity. To date, we have not recorded any other than temporary impairments related to our marketable securities. These marketable securities are classified as current assets because they are highly liquid and are available, as required, to meet working capital and other operating requirements.

Research Contracts

We regularly enter into contracts with third parties to perform research and development activities in connection with our scientific technologies. Costs incurred under these contracts are recognized ratably over the term of the contract which we believe corresponds to the manner in which the work is performed. Clinical trial, contract services and other outside costs require that we make estimates of the costs incurred in a given accounting period and record accruals at period end as the third party service periods and billing terms do not always coincide with our period end. We base our estimates on our knowledge of the research and development programs, services performed for the period, past history for related activities and the expected duration of the third party service contract where applicable.

Fair Value and Classification of Equity Instruments

Historically, in connection with our debt and equity financings we have issued warrants to purchase shares of our common stock. We record each of the securities issued on a relative fair value basis up to the amount of the proceeds received. We estimate the fair value of the warrants using the Black-Scholes option pricing model. The Black-Scholes model is dependent on a number of variables and estimates including: interest rates, dividend yield, volatility and the expected term of the warrants. Our estimates are based on market interest rates at the date of issuance, our past history for declaring dividends, our stock price volatility and the contractual term of the warrants. The value ascribed to the warrants in connection with debt offerings is considered a cost of capital and amortized to interest expense over the term of the debt.

We have, at certain times, issued preferred stock and notes, which was convertible into common stock at a discount from the common stock market price at the date of issuance. The discounted amount associated with such conversion rights represents an incremental yield, ie. a “beneficial conversion feature is recorded when the consideration allocated to the convertible security, divided by the number of common stock at the date of issuance of the convertible instrument.

A beneficial conversion feature associated with the preferred stock is recognized as a return to the preferred shareholders and represents a non-cash charge in the determination of net loss available to common stockholders. The beneficial conversion feature is recognized in full immediately if there is no redemption date for the preferred stock, or over the period of issuance through the redemption date, if applicable. A beneficial conversion feature associated with debentures, notes or other debt instruments is recognized as discount to the debt and is amortized as additional interest expense ratably over the remaining term of the debt instrument.

Results of Operations

Year Ended December 31, 2003 and 2002

Our net loss was $8,367,994 during the year ended December 31, 2003 as compared with $10,993,142 during the year ended December 31, 2002. Net loss attributable to common stockholders totaled $0.36 per share during 2003 as compared with $0.50 per share during 2002. The lower net loss in 2003 was primarily due to

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lower research and development expenses and the absence in 2003 of certain non-recurring equity related charges, partially offset by higher interest expense in 2003. The lower net loss attributable to common stockholders on a per share basis in the 2003 period was primarily due to an increase in weighted average shares outstanding of approximately 8.4 million shares, which was primarily the result of a private placement of common stock completed by us in the 2003 period.

Research and development expenses were $4,383,237 during the year ended December 31, 2003 as compared with $6,906,254 during the year ended December 31, 2002. The decrease in 2003 was primarily attributable to lower manufacturing development costs for Troponin of approximately $1,319,000, lower manufacturing development and NDA preparation costs for ALTROPANE for the diagnosis of PS of approximately $351,000, and lower pre-clinical costs for earlier stage product candidates of approximately $271,000. During the 2002 period, the Company’s manufacturing efforts on Troponin were focused on continuing work on the development of the manufacturing process whereas in the 2003 period such efforts were focused on refining the purification process and accumulating material for further pre-clinical studies. We currently anticipate research and development expenses to increase during the year ended December 31, 2004 primarily due to our new Phase III trial for ALTROPANE.

General and administrative expenses were $3,531,650 during the year ended December 31, 2003 as compared with $3,395,754 during the year ended December 31, 2002. The increase in 2003 was primarily due to higher payroll and related costs of approximately $91,000.

Other expenses were zero during the year ended December 31, 2003 as compared with $896,741 during the year ended December 31, 2002. The decrease in 2003 was due to non-cash charges related to agreements we entered into in 2002 and 2001 with significant securityholders to modify outstanding warrants. In November 2002, we agreed to extend the expiration date and lower the exercise price of certain warrants in return for the elimination of certain reset provisions of those warrants. We recorded a one-time charge of approximately $610,000 in 2002 related to this transaction. In June 2001, we agreed to issue additional warrants to a securityholder in return for a delay of the reset of the exercise price of certain warrants held by the securityholder. We recorded charges of approximately $287,000 in both 2002 and 2001 related to this transaction. The non-cash charges recognized in each transaction were based upon a fair value calculation of the warrants modified or issued in each transaction as determined under the Black-Scholes pricing model.

Interest expense totaled $755,850 during the year ended December 31, 2003 as compared to $237,610 during the year ended December 31, 2002. The increase was due to higher daily average balances in the 2003 period related to the 10% Convertible Senior Secured Promissory Notes, or the Notes, which were issued in July 2002, and therefore, outstanding for all of 2003 compared to less than half of 2002. During the 2003 period, we incurred approximately $429,000 in interest on the 10% coupon on the Notes, $292,000 in non-cash interest associated with the amortization of the discounted carrying value of the notes and $35,000 in amortization of debt issuance costs.

Interest income was $302,743 during the year ended December 31, 2003 as compared with interest income of $443,217 during the year ended December 31, 2002. The decrease was primarily due to lower average interest rates in the 2003 period, partially offset by higher average cash, cash equivalents, and marketable securities balances and higher realized gains of approximately $73,000 in the 2003 period.

Accrual of preferred stock dividends was $34,029 during the year ended December 31, 2003 as compared with none during the year ended December 31, 2002. In December 2003, we issued 800 shares of Series E Stock with a purchase price of $10,000 per share of Series E Stock. The holders of Series E Stock are entitled to receive a cumulative dividend of 4% per annum, payable beginning on October 31, 2004 and on each anniversary thereof. The dividend rate will increase to 8% on June 9, 2005. In connection with the issuance of Series E Stock, we recorded a beneficial conversion feature of $2,696,658 during the year ended December 31, 2003 as compared to none during the year ended December 31, 2002. A beneficial conversion feature is recorded when

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the consideration allocated to the convertible security, divided by the number of common shares into which the security converts, is below the fair value of the common stock at the date of issuance of the convertible instrument. The amount of the beneficial conversion feature has been immediately accreted and resulted in a deemed dividend as the preferred stock does not have a redemption term. The value of the beneficial conversion feature has been reflected as an adjustment to the net loss attributable to common stockholders on the Company’s Statement of Operations.

At December 31, 2003, we had net deferred tax assets of approximately $43 million for which a full valuation allowance has been established. As a result of our concentrated efforts on research and development, we have a history of incurring net operating losses and expect to incur additional net operating losses for the foreseeable future. Accordingly, we have concluded that it is more likely than not that the future benefits related to the deferred tax assets will not be realized and, therefore, provided a full valuation allowance for these assets. In the event we achieve profitability, these deferred tax assets may be available to offset future income tax liabilities and expense.

Year Ended December 31, 2002 and 2001

Our net loss was $10,993,142 during the year ended December 31, 2002 as compared with $10,252,587 during the year ended December 31, 2001. Net loss per share totaled $0.50 per share during 2002 as compared with $0.49 per share during 2001. The higher net loss in 2002 was primarily due to lower interest income in 2002. The decrease in interest income was partially offset by lower research and development expenses in 2002.

Research and development expenses were $6,906,254 during the year ended December 31, 2002 as compared with $7,416,989 during the year ended December 31, 2001. The decrease in 2002 was primarily attributable to lower manufacturing development costs for Troponin of approximately $1,323,000. The decrease in these expenses was partially offset by higher pre-clinical costs for Inosine of approximately $491,000 and higher research and development wages resulting from increased headcount of approximately $257,000.

General and administrative expenses were $3,395,754 during the year ended December 31, 2002 as compared with $3,168,629 during the year ended December 31, 2001. The increase in 2002 was primarily due to higher professional service costs of approximately $565,000, including an increase in non-cash expenses of $125,000 primarily related to the issuance of warrants to consultants. The increase in these expenses was partially offset by the absence of approximately $196,000 in personnel recruitment costs that were incurred in the 2001 period when we hired a number of senior executives.

Other expenses were $896,741 during the year ended December 31, 2002 as compared with $683,880 during the year ended December 31, 2001. The increase in 2002 was due to non-cash charges related to agreements we entered into in 2002 and 2001 with significant securityholders to modify outstanding warrants. In November 2002, we agreed to extend the expiration date and lower the exercise price of certain warrants in return for the elimination of certain reset provisions of those warrants. We recorded a one-time charge of approximately $610,000 in 2002 related to this transaction. During 2001, we lowered the exercise price of certain warrants held by a securityholder in return for daily trading restrictions on the number of shares of common stock that the securityholder could sell through May 2002, which resulted in a one-time charge of $396,880. In June 2001, we agreed to issue additional warrants to a securityholder in return for a delay of the reset of the exercise price of certain warrants held by the securityholder. We recorded charges of approximately $287,000 in both 2002 and 2001 related to this transaction. The non-cash charges recognized in each transaction were based upon a fair value calculation of the warrants modified or issued in each transaction as determined under the Black-Scholes pricing model.

Interest expense totaled $237,610 during the year ended December 31, 2002 as compared to zero during the during the year ended December 31, 2001. In July 2002, we issued $4 million of Notes, and incurred $175,715 in interest on the 10% coupon, $46,539 in non-cash interest associated with the accretion of the discounted carrying value of the Notes and approximately $15,000 in amortization of debt issuance costs.

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Interest income was $443,217 during the year ended December 31, 2002 as compared with interest income of $1,016,911 during the year ended December 31, 2001. The decrease was primarily due to lower average cash, cash equivalents, and marketable securities balances during the 2002 period as compared to the 2001 period.

Liquidity and Capital Resources

Cash used for operating activities, primarily related to our net loss, totaled $7,814,164 in 2003 as compared to $9,367,353 in 2002. The decrease in 2003 is primarily related to lower research and development expenses in the 2003 period. Cash used for investing activities totaled $3,890,462 in 2003 as compared to cash provided by investing activities of $3,131,441 in 2002. The difference in investing activities principally reflects the increase in restricted cash in 2003 and the purchase of marketable securities with the proceeds from the private placements, described below, completed by us in 2003, net of the sales of marketable securities which were subsequently used to fund operations. Cash provided by financing activities was $16,998,683 in 2003 as compared to $6,743,011 in 2002. The difference in financing activities principally reflects the effect of the private placements, described below, completed by us in 2003 and 2002.

As of December 31, 2003, we have incurred total net losses since inception of approximately $94 million. To date, we have dedicated most of our financial resources to the research and development of our product candidates, preclinical compounds, general and administrative expenses and costs related to obtaining and protecting patents. Since inception, we have primarily satisfied our working capital requirements from the sale of our securities through private placements. These private placements have included the sale of preferred stock and common stock, as well as notes payable and convertible debentures. A summary of financings completed during the three years ended December 31, 2003 is as follows:

In the future, our working capital and capital requirements will depend on numerous factors, including the progress of our research and development activities, the level of resources that we devote to the developmental, clinical, and regulatory aspects of our technologies, and the extent to which we enter into collaborative relationships with pharmaceutical and biotechnology companies.

At December 31, 2003, we had available cash, cash equivalents, and marketable securities of approximately $11.0 million and working capital of approximately $10.0 million. We believe that the cash, cash equivalents, and marketable securities available at December 31, 2003 will provide sufficient working capital to meet our anticipated expenditures for at least the next twelve months. In addition, we have approximately $5.0 million in a segregated account to satisfy our obligations with respect to the Notes which mature in June 2005. These segregated funds are not included in the available cash, cash equivalents, and marketable securities and working capital amounts referenced above. We will need to raise additional capital in the future through collaboration agreements with other pharmaceutical or biotechnology companies, debt financing and/or equity offerings. There can be no assurance, however, that we will be successful or that additional funds will be available on acceptable terms, if at all. In addition, we have certain covenants with the holders of our Notes and the purchasers of our Series E Stock that may limit our ability to engage in certain types of financings in the future. Pending approval of additional authorized shares of common stock by stockholders at our 2004 annual meeting, we have a limited number of shares of authorized common stock for issuance in future financings.

Following is information on the direct research and development costs incurred (all amounts in thousands) on our principal scientific technology programs currently under development. These amounts do not include

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research and development employee and related overhead costs which total approximately $10.1 million on a cumulative basis.

Estimating costs and time to complete development of a specific program or technology is difficult due to the uncertainties of the development process and the requirements of the FDA which could require additional clinical trials or other development and testing. Results of any testing could lead to a decision to change or terminate development of a technology, in which case estimated future costs could change substantially. In the event we were to enter into a licensing or other collaborative agreement with a corporate partner involving sharing or funding by such corporate partner of development costs, the estimated development costs incurred by us could be substantially less than estimated. Additionally, research and development costs are extremely difficult to estimate for early-stage technologies due to the fact that there is generally less comprehensive data available for such technologies to determine the development activities that would be required prior to the filing of an NDA. As a result, we cannot reasonably estimate the cost and the date of completion for any technology that is not at least in Phase III clinical development due to the uncertainty regarding the number of required trials, the size of such trials, and the duration of development. We have not received final agreement from the FDA on our revised protocol for the design of our new Phase III clinical trial for ALTROPANE. We presently anticipate this trial will take approximately twelve months to complete and cost approximately $3.5 million. However, there can be no assurance that the FDA will accept our revised protocol or that it will not request additional modifications.

Contractual Obligations and Commitments

Research and development commitments consists of contractual obligations with third parties, as well as the estimated costs of approximately $3.5 million to complete our new Phase III clinical trial for ALTROPANE. We lease certain office equipment, office space and laboratory space under noncancelable operating leases. Our current corporate office lease expires in 2012 and contains provisions whereby we can sublet all or part of the space and fully retain any sublease income generated. We also lease laboratory space that expires in May 2006. As of December 31, 2003, approximate future minimum commitments under the above leases and other contractual obligations are as follows:

In July 2002, we entered into agreements pursuant to which we issued $4.0 million in principal amount of Notes to a single institutional investor in a private placement. The Notes mature in June 2005 and bear interest at 10% per annum, payable semi-annually on June 1 and December 1. We may elect to pay interest on the Notes in

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either cash or, subject to certain limitations, additional Notes on the same terms. We elected to pay the interest due on December 1, 2002 and June 1, 2003 in additional Notes in the amounts of $143,333 and $207,167, respectively. In December 2003, we elected to pay the interest due on December 1, 2003 in the amount of $217,525 in cash. Among other adjustments, unless the investor consents otherwise, if we issue equity securities in the future for consideration per share of common stock less than the then applicable conversion price of the Notes, the conversion price of the Notes will be reduced to equal that lower price. The Notes are currently convertible into common stock at a conversion price of $1.00 per share. The Notes are secured by a first priority security interest and continuing lien on all current and after acquired property of ours. We generally may obtain a release of the security interest by providing alternative collateral in the form of either cash or a bank letter of credit. Until the time, if any, that we provide alternative collateral or less than $500,000 principal amount of Notes remains outstanding, the agreements also prohibit us, among other things, from entering into any merger, consolidation or sale of all or substantially all of our assets, incurring additional indebtedness, encumbering our assets with any liens and redeeming or paying cash dividends on any of our capital stock. We are permitted to grant licenses or sublicenses of our intellectual property to third parties in the ordinary course of business free from the security interest, but the holders of the Notes will receive a first priority security interest and continuing lien on all amounts owing to us in respect of any such license or sublicense. The agreements also contain customary events of default, including any change of control and breach by us of our representations and warranties and covenants contained in the agreements. If an event of default were to occur, our obligations under the Notes could be accelerated and become immediately due and payable in full.

As a condition of our December 2003 private placement of Series E Stock and warrants, we agreed to exercise our right to obtain a release of the security interest and continuing lien on our property that currently secure our outstanding Notes by providing alternative collateral in the form of cash or a standby letter-of-credit in the amount of all remaining principal and interest payments on the Notes through maturity. The remaining principal and interest payments on the Notes through maturity total approximately $5,000,000. We communicated to the holders of the Notes our intention to obtain a release of the lien on our property by providing alternative collateral in the form of an irrevocable standby letter of credit in the amount of our remaining obligations. To date, we have been unable to reach agreement with the noteholders on the terms of such a letter of credit. We are currently reviewing our options regarding the release of liens and in the interim have set aside sufficient funds in a segregated account to satisfy our remaining obligations under the Notes in order to comply with our covenant to the December 2003 private placement investors.

Our Series E Stock includes a dividend obligation of 4% through June 2005, increasing to 8% thereafter. Generally, we may elect to pay the dividend in cash or in shares of our common stock. We have reserved a sufficient number of shares to pay the dividends payable in October 2004 and October 2005 in shares of our common stock.

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” and in December 2003 issued a revised FIN 46 (“FIN 46R”) which addresses the period of adoption of FIN 46 for entities created before January 31, 2003. FIN 46 provides a new consolidation model which determines control and consolidation based on potential variability in gains and losses. The provisions of FIN 46 are effective for enterprises with variable interest entities created after January 31, 2003. We must adopt the provisions of FIN 46 in the first quarter of fiscal 2004 and do not expect the adoption to have a material impact on our financial statements.

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial instruments

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entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after December 15, 2004. The adoption of SFAS 150 is not expected to have a material effect on our financial statements.

Off-Balance Sheet Arrangements

We had no “off balance sheet arrangements” (as defined in the applicable Securities and Exchange Commission rule) during the year end December 31, 2003.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk.

We generally maintain a portfolio of cash equivalents, and short-term and long-term marketable securities in a variety of securities which can include commercial paper, certificates of deposit, money market funds and government and non-government debt securities. The fair value of these available-for-sale securities are subject to changes in market interest rates and may fall in value if market interest rates increase. Our investment portfolio includes only marketable securities with active secondary or resale markets to help insure liquidity. We have implemented policies regarding the amount and credit ratings of investments. Due to the conservative nature of these policies, we do not believe we have material exposure due to market risk. We may not have the ability to hold our fixed income investments until maturity, and therefore our future operating results or cash flows could be affected if we are required to sell investments during a period in which increases in market interest rates have adversely affected the value of our securities portfolio.

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Item 8.    Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

     of Boston Life Sciences, Inc.

In our opinion, the accompanying consolidated balance sheets and related consolidated statements of operations, of comprehensive loss and stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Boston Life Sciences, Inc. and its subsidiaries (the “Company”) (a development stage enterprise) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 and, cumulatively, for the period from October 16, 1992 (date of inception) to December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/    PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts

March 30, 2004

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BOSTON LIFE SCIENCES, INC.

(A Development Stage Enterprise)

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial statements.

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BOSTON LIFE SCIENCES, INC.

(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of the consolidated financial statements.

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BOSTON LIFE SCIENCES, INC.

(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS AND STOCKHOLDERS’ EQUITY

For the Period from inception (October 16, 1992) to December 31, 2003

The accompanying notes are an integral part of the consolidated financial statements.

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BOSTON LIFE SCIENCES, INC.

(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS AND STOCKHOLDERS’ EQUITY —(Continued)

For the Period from inception (October 16, 1992) to December 31, 2003