Back to GetFilings.com



================================================================================

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

------------------------

FORM 10-K

(Mark One)

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the year ended December 31, 2002

OR

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

For the transition period from _____________ to _____________

Commission file number 1-10615

------------------------

EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware 13-3306985
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
765 Old Saw Mill River Road
Tarrytown, New York 10591
(Address of principal executive offices) (Zip Code)

(914) 785-4701
(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock--$.01 par value
Preferred Stock Purchase Rights

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 Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes |X| No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 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|

As of June 30, 2002, the aggregate market value of registrant's common
stock held by non-affiliates was approximately $74,885,000, based on a closing
sale price of $4.18 per share and 17,915,039 shares of registrant's common stock
outstanding.

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

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this 10-K incorporates information by reference from the
registrant's definitive proxy statement which will be filed no later than 120
days after December 31, 2002.

================================================================================



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements under the captions "Business" (Item 1) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (Item 7), the notes to the Company's audited financial statements
(Item 8) and elsewhere in this Annual Report on Form 10-K, as well as statements
made from time to time by Emisphere's representatives may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward looking statements include (without
limitation) statements regarding: planned or expected studies and trials of oral
formulations that utilize the Company's eligen(TM) technology; the timing of the
development and commercialization of the Company's product candidates or
potential products that may be developed using the Company's eligen(TM)
technology; the potential market size, advantages or therapeutic uses of the
Company's potential products; variation in actual savings and operating
improvements resulting from current restructurings; and the sufficiency of the
Company's available capital resources to meet the Company's funding needs. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the Company's actual results or achievements to be
materially different from any future results or achievements expressed or
implied by such forward-looking statements. Such factors include the factors
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors" and the other factors discussed in
connection with any forward-looking statements.


2


Table of Contents

TABLE OF CONTENTS

Page No.
--------
PART I

Item 1. Business 4
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 35

PART III

Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 36

Item 13. Certain Relationships and Related Transactions 36
Item 14. Controls and Procedures 36

PART IV

Item 15. Exhibits, Financial Statements Schedules and Reports on
Form 8-K 37
Signatures 38
Certifications 39
Index to Consolidated Financial Statements F-1
Exhibits Index E-1


3


Part I

ITEM 1. BUSINESS

Overview

Emisphere Technologies, Inc. ("Emisphere", or the "Company") is enabling
one of the most challenging technical hurdles in the pharmaceutical
industry--the oral delivery of medicines, which, for a variety of reasons,
cannot be offered to patients directly in an oral form. Emisphere has pioneered
the oral delivery of otherwise injectable drugs, including proteins, peptides,
polysaccharides and other compounds not currently deliverable by oral means.
These drugs present challenges for oral delivery because they are often large
molecules (macromolecules) which are inactivated in the gastrointestinal tract,
have limited ability to cross cell membranes and generally cannot be delivered
orally.

About The eligen(TM) Technology

Emisphere has a broad-based oral drug delivery technology platform, known
as the eligen(TM) technology, to accomplish oral drug delivery, which is based
on the use of proprietary, synthetic chemical compounds, known as EMISPHERE(R)
delivery agents, or "delivery agents". These molecules facilitate the transport
of therapeutic macromolecules across biological membranes such as the small
intestine. Emisphere's eligen(TM) technology makes it possible to orally deliver
a therapeutic molecule without altering its chemical form or biological
integrity.

By applying its unique eligen(TM) oral drug delivery technology, Emisphere
is facilitating the oral delivery of proteins, peptides, macromolecules and
charged organics. Several Emisphere formulations have advanced into clinical
trials being conducted by Emisphere and its partners.

The Oral Drug Delivery Market

Sales of therapeutic protein medicines totaled $17 billion in 1999 and are
estimated to be over $32.5 billion by 2005. Most of these drugs are currently
delivered by injection. Injections are undesirable for numerous reasons
including patient discomfort, inconvenience and risk of infection. Poor patient
acceptance of, and compliance with, injectable therapies can lead to increased
incidence of medical complications and higher healthcare costs. While many
medications are taken orally, all proteins and other large or highly charged
molecules are not administered this way because they degrade in the stomach or
intestine before they can be absorbed into the bloodstream. The Company believes
that its eligen(TM) oral drug delivery technology provides an important
competitive advantage in the delivery of macromolecules compared with the
current alternatives.

Oral delivery is the preferred delivery modality as compared to other
routes of drug administration including injection. Patient acceptance of and
adherence to a dosing regimen is higher among orally deliverable medications
when compared to injectables. To date, alternatives to injection including,
respiratory, nasal and transdermal delivery have been considered commercially
unattractive due to low natural bioavailability--the amount of drug absorbed
from the delivery site into the bloodstream.

Currently, the Company has several product candidates being developed by
partners and for potential partnerships in preclinical and clinical development
across a broad range of therapeutic areas including, cardiovascular, diabetes,
osteoporosis, growth disorders, asthma/allergies, obesity and anti-infectives.
At the end of February 2003, the Company had three clinical programs funded by
corporate partners and six different EMISPHERE delivery agents that have been
tested in humans.

The Company

Originally founded as Clinical Technologies Associates, Inc. in 1986. The
Company provided clinical trial services and was developing technology focused
on amino-acid microspheres for the oral delivery of both proteins and
non-protein drugs. Under the Clinical Technologies Associates, Inc. name, the
Company went public in 1989, listed on Nasdaq, under the ticker, "CTAI". In the
early 1990's, its strategic focus was narrowed and its efforts were redirected
exclusively to developing its oral drug delivery technology. In 1992, the name
was changed to Emisphere Technologies, Inc.

In 1994, the Company discovered SNAC (Sodium N-[8-(2 hydroxybenzoyl)amino]
caprylate), the EMISPHERE delivery agent which was used with formulations of
heparin, a well-known and highly prescribed anticoagulant/antithrombotic agent
that is currently administered only as an injection.

In 1996, the Company formed a joint venture with Elan Pharmaceuticals, plc
for the development of an oral heparin. In July 1999, however, we reacquired all
product, marketing and technology rights for these heparin product candidates
from Elan Corporation, plc. At the time, we based this decision on the belief
that at this stage of development, complete ownership and control of these
product candidates by one company allowed for more rapid clinical development
and commercialization.


4


In February 1997, Emisphere formed a strategic alliance with Eli Lilly and
Company ("Lilly") for the development of an oral recombinant parathyroid hormone
(PTH 1-34, or teraparatide) for the treatment of osteoporosis and a second
product candidate, recombinant human growth hormone (rhGH, or somatropin), for
treatment of growth disorders. In March 1998, Lilly executed license agreements
for both proteins and the Company received a $4.0 million milestone payment. In
June 2000, Emisphere executed a follow-on agreement with Lilly for both
proteins. Emisphere and Lilly continue to collaborate to bring oral forms of
parathyroid hormone and recombinant growth hormone through clinical testing. The
Company entered an oral unformulated solid dosage of parathyroid hormone into
the clinic with Lilly in late 2001 and in June 2000 the Company received a $2
million milestone payment for the selection of the EMISPHERE delivery agent to
be used with PTH. Upon entrance of the oral parathyroid hormone unformulated
dosage into the clinic, Lilly assumed responsibility for all further development
costs for oral parathyroid hormone. The Company entered an oral unformulated
dosage of recombinant human growth hormone into the clinic with Lilly in August
of 2002. Emisphere was responsible for the clinical testing through first human
dosing of an oral unformulated dosage of human growth hormone to demonstrate
proof-of-concept and was reimbursed by Lilly for all development costs. As the
Company's collaboration with Lilly for an oral recombinant human growth hormone
program continues, Lilly will continue to assume responsibility for all related
future development costs.

In December 1997, the Company entered into a collaboration agreement with
Novartis Pharma AG (Novartis) to develop an oral salmon calcitonin (used in the
treatment of osteoporosis). In February 2000, Novartis executed a license
agreement for the development of an oral form of salmon calcitonin. In March
2000, Novartis paid Emisphere $2.5 million to obtain the license to its
technology for calcitonin and to obtain an option to use the eligen(TM)
technology for a second compound. Although Novartis' rights to certain financial
terms concerning a second compound have expired, Emisphere and Novartis remain
in discussion to develop additional compounds using Emisphere's technology, and
a number of viable second compound candidates are under consideration. In
February 2003, Emisphere announced favorable results of a Phase IIa study with
Novartis evaluating the performance in post-menopausal women of an oral tablet
form of salmon calcitonin. The purpose of the study was to assess the efficacy
and safety of various doses of an oral tablet of calcitonin in post-menopausal
women and to confirm the activity of calcitonin when given orally, as reflected
by changes in markers of bone formation or resorption. The study demonstrated
activity on bone markers over a three month dosing period when the peptide was
delivered in combination with the EMISPHERE delivery agent. Only two serious
adverse events were reported, neither of which were related to the EMISPHERE
delivery agent or to calcitonin. The side effects seen with the highest doses of
calcitonin were consistent with those normally seen with high plasma levels of
calcitonin when administered by injection. These side effects were mainly
gastrointestinal in nature.

In March 2000, Regeneron Pharmaceuticals, Inc. established a collaboration
agreement with the Company for the development of an oral version of a
derivative of ciliary neutrophic factor (CNTF), which is under development as an
injectable by Regeneron as AXOKINE(TM), for use in the treatment of obesity.
Emisphere and Regeneron have conducted pre-clinical testing of an oral version.
The direction of development for the oral program will be contingent upon the
results from the Phase III trial. On January 7, 2003 Regeneron announced that
the last study participant had completed the 12-month placebo-controlled portion
of its Phase III pivotal trial designed to assess the efficacy and safety of
AXOKINE(TM) for weight loss in overweight and obese subjects, and also that the
U.S. Food and Drug Administration (FDA) has granted Fast Track designation to an
important component of the development program of AXOKINE(TM) for obesity.

In June 2000, DuPont Pharmaceuticals Company (the pharmaceutical division
of E.I. du Pont de Nemours and Company, the Dupont Companies, announced a
non-binding letter of intent with Emisphere for the development and marketing of
oral heparin. Based on the uncertainty of the fate of the pharmaceutical
business due to DuPont's intent to sell this division, the Company announced in
May 2001 that it elected to withdraw from the letter of intent with DuPont
Pharmaceuticals Company. The Company continues to have discussions with
potential partners for the marketing and/or development of its oral heparin
product candidates.

In November 2000, Cubist Pharmaceuticals, Inc. established a collaboration
agreement with the Company for the development of an oral form of daptomycin
which is under development as an injectable by Cubist as CIDECIN(R) for use in
the treatment of serious or life-threatening soft skin tissue infections.
Although the Company is not currently providing services to Cubist
Pharmaceuticals, Inc., on November 7, 2002, the Company amended and restated its
Research and Development agreement with Cubist in order to create a time and
materials framework in which to potentially apply the eligen(TM) oral drug
delivery technology to certain compounds being developed by Cubist, should
Cubist request us to do so. The parties are no longer collaborating on the
development of oral formulations of daptomycin analogues.

Throughout 2001 and 2002, the Company's clinical development pace
progressed as the Company continued its strategic shift from fundamental
research and technology licensing, to identifying additional therapeutic
compounds that address large markets. During this time, the Company's
self-developed product candidates progressed into and through human (clinical)
testing. Specifically, the Company began clinical trials with additional oral
formulations related to the Company's existing oral heparin program (heparin
tablets and capsules), and with oral formulations for new therapeutic programs
(e.g., insulin and cromolyn sodium). Emisphere's goal in 2003 continues to be to
develop these oral product candidates through at least proof-of-


5


concept ( in Phase I -II trials) and then evaluate the option of establishing
relationships with partners to complete the later stage development and
commercialization of these candidates.

Business Strategy

The Company's objective is to be the leader in enabling the development of
orally administered formulations of therapeutic macromolecules and other
compounds currently available only by injection, primarily through entering into
partnerships with leading pharmaceutical companies that would be responsible for
later stage development, marketing and commercialization.

The Company's business strategy includes:

o entering into strategic alliances with pharmaceutical partners who have
marketed products or compounds in development that would benefit from
the Company's eligen(TM) oral drug delivery technology

o pursuing new product opportunities by:

-- identifying additional therapeutic compounds (preferably already
approved for use as non-oral therapies) that address large markets;

-- performing proof-of-concept testing in humans (Phase I-II) using an
Emisphere delivery agent with compounds that the Company already has
demonstrated to be orally available in vivo using its
eligen(TM)technology.

-- establishing relationships with partners to complete the later stage
development and commercialization of these product candidates.

Though the Company intends to collaborate with leading pharmaceutical and
biotechnology companies, the Company will also strategically select how far to
develop its own product candidates depending on the risk level and cost
benefits.

The Drug Delivery Industry

The drug delivery industry develops technologies for the improved
administration of therapeutic compounds. These technologies have focused
primarily on safety, efficacy, ease of patient use and patient compliance. In
addition, alternative drug delivery technologies can be utilized to expand
markets for existing products, as well as to develop new products.
Pharmaceutical and biotechnology companies are looking to drug delivery as a way
to gain competitive advantage by improving the safety, efficacy, convenience and
patient compliance of their product candidates.

Drug delivery technologies can provide pharmaceutical companies with an
avenue for developing new products, as well as for extending existing drug
franchises. Drug delivery companies can also apply their technologies to
off-patent products to develop on their own.

The Company believes focusing on drug delivery of existing drugs to be
less risky than attempting to discover new drugs, because the product
development risk is lower. According to a recent Tufts Center for the Study of
Drug Development, the approximate cost to develop a drug is over $800 million
and requires approximately 14 years to progress from drug discovery, to drug
development and then to bring it to market.

By contrast, therapeutics that could be optimized through alternative
delivery, but already have large established markets for which there is an
established medical need, are targets for the drug delivery industry. An
advantage is that doctors are familiar with these drugs and are accustomed to
prescribing them. The product candidates that the Company typically targets have
been through the regulatory process demonstrating safety and efficacy and are
typically already on the market. The Company's estimated cost of developing an
EMISPHERE delivery agent with a drug candidate through proof of concept first
human studies is less than $2.0 million, and typically takes less than two
years.

In addition, focusing on drug delivery compared to drug discovery allows
the Company to form a number of collaborations to deliver a wide variety of
medicines without limiting rights to use its proprietary technology with
additional drug product opportunities.

Delivery of Macromolecule Medicines

The size of most macromolecules makes penetration of the skin inefficient
or ineffective. Passive transdermal delivery using "patch" technology for
macromolecules has not been successful to date since the skin is naturally
impermeable to


6


macromolecules. The Company is currently not aware of any macromolecule drugs,
which have been approved for marketing in the United States utilizing patch
technology. Some peptides and proteins can be transported across the skin
barrier into the bloodstream using high-pressure "needle-less" injection
devices. The devices, which inject proteins like human growth hormone through
the skin into the body, have been available for many years. However, the Company
believes these devices have not been well accepted due to patient discomfort,
relatively high cost, and the inconvenience of placing the drugs into the
device.

The nasal route of drug administration has been limited by low and
variable bioavailability for proteins and peptides. As a result, penetration
enhancers are often used with nasal delivery to achieve higher bioavailability.
These enhancers may cause local irritation to the nasal tissue and result in
safety concerns with long-term use. The Company believes a limited number of
peptides have been approved for marketing in the United States utilizing nasal
delivery. The Company believes these same obstacles will affect sublingual drug
delivery, which relies on the penetration of similar tissue under the tongue.

Pulmonary delivery of systemic drugs is emerging as a delivery route for
large molecules. The lungs are highly absorptive, providing a potential route
for difficult to deliver drugs. While local delivery to the lungs of respiratory
drugs is common, systemic delivery of macromolecule drugs requires new
formulations and delivery technologies to achieve efficient, reproducible
dosing. Long-term safety for certain compounds such as insulin, has yet to be
established. In addition, while pulmonary devices may be amenable to a limited
number of compounds, the Company believes that the total efficiency of pulmonary
systems is generally not high enough to become commercially feasible for
systemic delivery of most macromolecule drugs.

Buccal delivery (through the cheek membrane) is also emerging as a
delivery route for large molecules. This is sometimes considered "oral delivery"
when referenced because of the site of application, but it is not truly an oral
therapeutic option, due to the fact that buccally delivered drugs are not
swallowed and absorbed in the gastrointestinal tract, but are absorbed through
the local tissue into the systemic circulation. Like the pulmonary route,
long-term safety especially for proteins like insulin, has yet to be
established.

All four delivery routes are not optimal for treating many disease states
(i.e., diabetes) if the key to effective therapy is to first reach a specific
target organ, like the liver.

To date, the most practical and efficient route of macromolecule
administration, particularly recombinant proteins, has, therefore, been
injections. Drug injections that require administration in hospitals or doctors'
offices can be expensive and inconvenient to patients. Many patients find
self-injectable therapies unpleasant. As a result, injectable therapies for many
chronic and subchronic diseases meet with varying degrees of patient acceptance
and compliance with prescribed dosing regimens. Poor acceptance and compliance
can lead to increased incidence of medical complications and potentially higher
health-care costs. In addition, some elderly, infirm or pediatric patients
cannot administer their own injections and require assistance, thereby
increasing both inconvenience to these patients and the cost of therapy.

The eligen(TM) Oral Drug Delivery Technology

The Company's oral drug delivery technology is based upon proprietary,
synthetic chemical compounds that facilitate the transport of therapeutic
macromolecules and other compounds, across biological membranes, such as in the
small intestine. The Company's proprietary oral drug delivery agents, also known
as "carriers", or EMISPHERE delivery agents, represent a broad-based technology
platform. EMISPHERE delivery agents, which the Company believes uses the body's
natural transport process, allow macromolecules to cross membranes and yet
remain therapeutically active. Under physiological conditions, protein molecules
naturally exist in many different shapes, or "conformations." Some of these
conformations can be transported across the cell membranes. Once the drug
crosses the membrane, the delivery agent dissociates from the drug and the drug
reestablishes its natural distribution of conformations, ensuring that the
delivered drug molecules are in their therapeutically active state.

The Company's system maintains the biological effects of the drug for oral
delivery by overcoming four potential obstacles.

Obstacle One: The high acid content and enzymes of the digestive
tract degrades most macromolecules well before
they can be absorbed into the bloodstream.

Emisphere's Technology: The Company's system stabilizes the macromolecule
in a conformation with lower rates of degradation.
Solid dosage forms that do not dissolve in the
stomach can be developed and further reduce
degradation. Finally, the rapid rate of transit
through the biological membrane limits the
opportunity for losses due to the digestive
enzymes.

Obstacle Two: Many macromolecules and polar compounds are poorly
absorbed through certain membranes.

Emisphere's Technology: EMISPHERE delivery agents interact with the drug
molecule to create an entity with significantly
higher absorption properties.

Obstacle Three: With production costs of many macromolecules high,
the efficiency of delivery cannot be low.


7


Emisphere's Technology: Techniques have been developed in the past 10
years that have significantly lowered the
production costs of many macromolecules. The
Company's system's delivery efficiencies are
creating product candidates with acceptable profit
margins to the pharmaceutical industry.

Obstacle Four: Variability of dosing, in which, for example, one
patient receives 60% of a dose and another patient
10%, has been a challenge to the successful
development of oral delivery.

Emisphere's Technology: In thousands of human dosings and thousands of
animal experiments, our system's inter-subject and
inter-patient variability has been relatively
similar to the injectable product.

The development of an efficient, safe and reproducible delivery system for
macromolecules represents a significant commercial opportunity for the Company.
Given the advantages of oral delivery over injectable forms, we believe that
oral administration would represent the preferred means of delivery for most
biopharmaceuticals. This would significantly expand the potential market for
many biotechnology drugs.

Key Characteristics of Emisphere's Platform eligen(TM)Technology

The Company believes that our oral delivery approach may have potential
competitive advantages, including:

Broad applicability: EMISPHERE delivery agents are applicable across a
diverse group of molecules (proteins, carbohydrates, and peptides and other
poorly absorbed compounds);

Stand-alone delivery approach: Oral drug delivery using EMISPHERE delivery
agents does not rely upon the addition of other agents that can have adverse
effects on the intestinal membranes or digestion process (as is the case, for
example, with penetration enhancers or enzyme inhibitors);

Versatility of formulation: Emisphere has created various types of oral
formulations, including solutions, suspensions, tablets and capsules. Emisphere
also believes its oral drug technology is applicable to controlled release
dosage forms.

Ease of manufacture: The technology and manufacturing equipment required
to produce EMISPHERE(R) delivery agent material in commercial quantities, is for
the most part, we believe readily available.

Advances to the Platform Technology

During 2001, we conducted human studies which demonstrated successful
absorption using the eligen(TM) drug delivery technology with additional oral
product candidates in new therapeutic categories. For example, we developed an
EMISPHERE delivery agent selected for insulin, which successfully completed
proof-of-concept Phase I studies in healthy human subjects. We began testing the
safety and tolerability of this oral insulin unformulated dosage in Type II
diabetic patients in October 2001. Also, an oral unformulated dosage of cromolyn
sodium, which completed a proof-of-concept Phase I study in November 2001,
demonstrated absorption when delivered orally using an EMISPHERE delivery agent.

In 2001, the Company determined that SNAC, the EMISPHERE delivery agent
that was used to develop the liquid oral heparin formulation in the Phase III
PROTECT trial was suitable for use with the solid formulation. As a result, the
Company is developing a solid formulation with the EMISPHERE delivery agent,
SNAC, which has demonstrated a safety and efficacy profile in Phase III testing
(see forthcoming section entitled, "Discontinued Oral Liquid Heparin Program and
the Phase III PROTECT Trial").

The Company continues to make investments in research and development to
maintain the Company's technological leadership position in oral drug delivery.

In 2002, the Company's oral insulin and oral cromolyn sodium progressed
into proof-of-concept patient testing. In 2002, with our partner, Lilly, we also
progressed an oral form of recombinant human growth hormone (rhGH, or
somatropin), the largest protein we have ever evaluated with our eligen(TM)
technology, into human testing. More recently, in February 2003, we announced
positive and statistically significant Phase IIa data with our partner Novartis
AG for oral salmon calcitonin, which was dosed for 90 days, the longest time
period that our technology has been dosed in human testing.

In December 2002, a full analysis of Emisphere's "PROTECT" Phase III trial
evaluating a liquid oral heparin was presented at the 44th annual meeting of the
American Society of Hematology (ASH). The PROTECT study demonstrated for the
first time in patients that heparin, a macromolecule, could be delivered into
the bloodstream in an oral form. While a liquid formulation of oral heparin in a
30-day treatment regimen was deemed to have poor tolerability due to its taste
contributing to poor patient compliance in this study, its safety and
therapeutic effect were noteworthy. The data presented suggest that the oral
liquid heparin candidate in a 30-day regimen was statistically comparable to its
benchmark comparator, LOVENOX(R) (enoxaparin) in a 10-day


8


treatment regimen, in reducing the incidences of deep vein thrombosis (DVT)
following hip replacement surgery. The PROTECT study demonstrated for the first
time in patients that heparin could be delivered into the bloodstream in an oral
form. The data also demonstrated a therapeutic effect was observed for heparin
and a favorable safety profile was established in a Phase III study population
using the eligen(TM) technology.

Also in December 2002 at the ASH conference, the Company presented
positive outcomes from a human study evaluating two solid oral heparin
formulations in tablet and capsule form in healthy male volunteers. For each
solid dosage, which made use of Emisphere's eligen(TM) oral drug delivery
technology, the data demonstrated that an effect on blood coagulation was
achieved consistent with heparin blood levels deemed acceptable for prevention
of deep vein thrombosis (DVT), without any tolerability issues.

For all other materials tested aside from heparin, the Company is
evaluating principally capsule and tablet dosage forms, except for indications
in the elderly or pediatric patient populations, which may benefit from the
availability of a solution dosage form.

Other

In 2002, the United States Adopted Name Council adopted the name
salcaprozate sodium (pronounced "sal kap' roe zate") for the EMISPHERE delivery
agent, SNAC.

EMISPHERE Delivery Agent Library

The Company has designed and synthesized a library of over 1,800 delivery
agents and continues evaluating them for their ability to facilitate the
delivery of therapeutic macromolecules and other compounds across biological
membranes without altering the activity of these molecules. The eligen(TM)
technology offers the pharmaceutical industry a relatively inexpensive route to
generate significant new product opportunities. Beyond enabling the oral
delivery of heparin, insulin, parathyroid hormone, recombinant human growth
hormone, cromolyn and salmon calcitonin in humans, this technology has
demonstrated oral delivery in a variety of over 40 other compounds in animals.

Development Programs Using the eligen(TM) Technology

The following table sets forth, for both Emisphere's partnered development
programs and Emisphere's programs available for partnering, the candidates
currently in development, the indication(s) for each particular candidate, its
present stage of clinical development, and, with respect to Emisphere's partner
development programs, the identity of Emisphere's corporate partner for each
drug, as disclosed in prior public documentation by one or both parties, by way
of contractual and/or licensing agreement.



Therapeutic Area Program Status Partner
- ---------------- ------- ------ -------

Cardiovascular Oral UF Heparin Solid Doses POC in subjects self-developed
Oral LMWH Dose* POC in subjects self-developed

Osteoporosis Oral Salmon Calcitonin Phase IIa Novartis Pharma AG
Oral Recombinant Parathyroid Hormone Phase I Eli Lilly and Company
(teraparatide; PTH 1-34)

Growth Disorders Oral Recombinant Human Growth Hormone POC in subjects Eli Lilly and Company
(somatropin)

Diabetes Oral Insulin POC in patients self-developed

Asthma/Allergies Oral Cromolyn Sodium POC in patients self-developed

Obesity Oral Ciliary Neutrophic Growth Factor Pre-clinical Regeneron Pharmaceuticals,
(mCNTF) Inc.

Other Undisclosed Pre-clinical/Feasibility


- ----------
eligen(TM)Technology Product Candidate Development Explanations:
Pre-clinical--Investigate safety of product candidate in a
controlled laboratory environment; establish activity in standard
animal model.
Proof-of-Concept (POC) in subjects- Investigate safety of delivery
agent and drug/delivery agent combination and proper oral dose
ranges of a product candidate to meet pre-determined blood levels in
a small number of normal human subjects.
Proof-of-Concept (POC) in patients- Investigate safety and confirm
efficacy of an oral product candidate in patients or subjects using
a multiple dose regimen
* Emisphere has a relationship and agreement with a producer of low
molecular weight heparin (LMWH). Development of


9


this particular LMWH is dependent on this agreement.

Cardiovascular

Oral Heparin Program

Unfractionated heparin (UFH) and low molecular weight heparin (LMWH) are
widely used anticoagulants. These anticoagulants are primarily indicated for
treating and preventing post-surgical deep vein thrombosis (blood clots
following major surgery) and the more severe sequlae of pulmonary embolism.
However, these drugs are also frequently prescribed for acute myocardial
infarction, coronary angioplasty, coronary artery bypass graft surgery, stroke
and unstable angina. Currently, heparins are administered as either a continuous
intravenous infusion or a subcutaneous injection.

Studies have shown that heparin does not cause major bleeding but may
exacerbate bleeding that has already occurred. In comparison with LMWH, heparin
has a shorter circulating half-life, which may reduce its role in worsening
bleeding which is already occurring. Furthermore, studies indicate that UFH may
have utility for indications other than anticoagulation.

Heparin is often considered the anticoagulant of choice for the prevention
and treatment of cardiovascular complications, such as deep vein thrombosis
(DVT) or blood clots and pulmonary embolism in high-risk, hospitalized patients.
Heparin is favored over warfarin (or COUMADIN(R)) because heparin is more
effective, produces a rapid onset of anticoagulation activity, and has a shorter
physiological half-life and, is indicated in fewer drug-drug interactions. A
major disadvantage of heparin (and LMWH) therapy is the requirement for
administration subcutaneously, because current formulations are ineffective when
dosed orally.

Currently, the use of parenteral (injected or infused) unfractionated
heparin is typically restricted to in-hospital use. Low molecular weight heparin
(LMWH), which is considered the standard of therapy for DVT prevention and
treatment, is limited to subcutaneous injection. LMWHs are typically
administered for 7- 14 days on an outpatient basis for treatment of DVT. To
follow an injectable treatment regimen on an outpatient basis, patients have to
self-inject, or may have to incur additional cost for a home healthcare aid to
administer the injections. For many patients, hospital treatment with one of the
two U.S. approved low molecular weight heparins for 7-14 days is typically
followed by a 30 to 90 day or longer course of out-patient treatment using
warfarin, the only oral anticoagulant available. Warfarin, although relatively
inexpensive to purchase, is not an ideal anticoagulant because it has more
negative interactions with other pharmaceuticals than most FDA-approved drugs
and requires constant patient monitoring. Though LMWH is administered as an
injectable, its introduction has also been studied for use in the home setting,
for up to 28 days. The introduction of oral heparin, which we believe will be
considered a more convenient and "patient-friendly" therapy by both patients and
physicians, could open the home market to heparin by replacing warfarin and
injectable low molecular weight heparin use. We also believe that our oral
heparin product candidates will ultimately be applicable for a wide range of
anti-coagulant/antithrombotic uses.

Heparin represents a significant formulation challenge for our oral
delivery technology in that the potency of heparin is significantly lower than
all other macromolecules we are developing. With initial, early stage solid dose
formulations, even after the addition of excipients, a tablet formulation
required an excess of carrier. However, in 2002, we used traditional and novel
formulation techniques devised by Emisphere to reduce the delivery agent-to-drug
ratio versus historical solid formulations explored by Emisphere.

Emisphere is evaluating solid oral heparin formulations, including a
capsule and tablet forms of heparin, and, solid dosage forms of LMWH. Worldwide
heparin sales, including the LMWHs are estimated to be over $2.5 billion, with a
15% annual growth rate. Currently, heparin is prescribed primarily for the
treatment of venous (vein related) indications for a period of one to two weeks.
If successfully developed and commercialized, Emisphere believes that its solid
oral heparin and LMWH candidates could substantially penetrate and expand
existing markets. The Company anticipates that, large new markets for the
heparins will be created, including the development of oral heparin for new
clinical indications in inflammation and cancer.

Discontinued Liquid Oral Heparin Program and the PROTECT Phase III Trial

Emisphere initially set out to develop a solution formulation of oral
heparin. At the end of 1999, the Company initiated the Phase III development of
the Company's oral heparin solution formulation. The Company launched a
multi-center Phase III trial, named "PROTECT" (PRophylaxis with Oral
SNAC/heparin against ThromboEmbolic Complications following Total hip
replacement surgery).

The PROTECT Trial enrolled 2, 288 patients to evaluate the safety and
efficacy of a solution oral heparin formulation using Emisphere's eligen(TM)
oral drug delivery technology for the prevention of DVT in total hip replacement
surgery patients (a surgical patient population that historically has had the
highest rate of these events). The goal of the PROTECT Trial was to demonstrate
the superior efficacy and comparable safety of Emisphere's oral heparin when
dosed postoperatively for a 30-day regimen, as compared to injectable
enoxaparin, when dosed postoperatively for a 10-day regimen. (A 10-day regimen
of


10


injectable LOVENOX(R) (enoxaparin) is a standard of practice in the prevention
of DVT, as determined by the American College of Chest Physicians' Sixth
Consensus Conference.)

The endpoint of PROTECT was DVT occurrence in the 30 days following
surgery, or pulmonary embolism or death. Investigators at more than 120 sites,
worldwide, evaluated a liquid form of heparin, consisting of the EMISPHERE
delivery agent, SNAC (Sodium N-[8-(2 hydroxybenzoyl)amino] caprylate) in
combination with unfractionated heparin, when dosed orally in a 30-day regimen,
compared to LOVENOX (enoxaparin), when dosed subcutaneously (by injection) in a
10-day regimen. The study design was double-blind and double-dummy. Total DVTs
were determined by bilateral venogram, the FDA standard for measurement,
measured at 30 days following surgery. All venographies produced were read by a
team of radiologists at Boston's Massachusetts General Hospital to determine the
presence of a blood clot (thrombus).

On May 14, 2002, Emisphere announced initial results from the PROTECT
study. The results did not demonstrate the superiority of oral heparin, when
dosed in a 30-day treatment regimen, compared to LOVENOX(R) (enoxaparin)
administered by injection in a 10-day dosing regimen in preventing DVTs. On May
22, 2002, Emisphere announced a plan for restructuring its operations, which
included the discontinuation of its liquid oral heparin program and any related
initiatives, and a reduction of any associated infrastructure.

The study design of PROTECT, considered by thought leaders in the industry
to be rigorous by design, sought at least an absolute 10% reduction in DVT
events, to claim clinical superiority to the Food and Drug Administration (FDA).
The data from the study suggested that the lower than expected efficacy may have
been due to limitations related to the dosage form and that an improved
formulation would result in higher patient compliance. While the Company missed
the anticipated primary endpoint, the Company remains encouraged by the
potential of its broadly applicable technology platform. The orally administered
liquid form of heparin was clearly active using the Company's eligen(TM)
technology and therefore, we believe this to be a major advance in oral
macromolecule delivery.

In December 2002, a full analysis was presented from our "PROTECT" Phase
III trial evaluating a liquid oral heparin at the 44th annual meeting of the
American Society of Hematology (ASH). The PROTECT study demonstrated for the
first time in patients that the macromolecule, heparin, could be delivered into
the bloodstream in an oral form. While a liquid formulation of oral heparin in a
30-day treatment regimen was deemed to have poor tolerability due to its taste
contributing to poor patient compliance in this study, the Company believes that
its safety and therapeutic effect were noteworthy. The data presented suggest
that the oral liquid heparin candidate in a 30-day regimen was statistically
comparable to its benchmark comparator, LOVENOX(R) (enoxaparin) in a 10-day
treatment regimen, in reducing the incidences of DVT following hip replacement
surgery. The PROTECT study demonstrated for the first time in patients that
heparin could be delivered safely and effectively into the bloodstream in an
oral form.

As the Company moves this program forward with a solid form and explores
potential partnering options, the Company expects to leverage the extensive
safety database that is available related to SNAC, the EMISPHERE delivery agent
that was used in the Phase III PROTECT study.

Solid Oral Heparin Program

In June 2000, the Company published two studies that demonstrated the
successful treatment of deep vein thrombosis in animal models using oral
SNAC/heparin and oral SNAD/low molecular weight heparin.

A heparin capsule formulation with SNAC entered Phase I clinical trials in
March 2000. A tablet dosage formulation with the EMISPHERE delivery agent, SNAD,
entered Phase I in March of 2001. In October 2001, the Company presented a study
demonstrating the mechanism of oral heparin delivery using the EMISPHERE
delivery agent, SNAC. The study demonstrated that SNAC facilitated the transport
of heparin across the intestinal epithelium -- or membrane -- transcellularly.
In additional studies, uptake of heparin was seen as early as five minutes after
incubation of cells with heparin and SNAC.

In December 2002, also at the ASH conference, the Company presented
positive outcomes from a human study evaluating two solid oral heparin
formulations, in tablet and capsule form, in healthy male volunteers. The tablet
formulation was produced using standard techniques, while production of the
capsule utilized an approach specific to Emisphere's eligen(TM) technology. For
each solid dosage, which made use of Emisphere's eligen(TM) oral drug delivery
technology, the data demonstrated that an effect on blood coagulation was
achieved consistent with heparin blood levels deemed acceptable for prevention
of DVT, without any tolerability issues. In addition, the total volume of
material was significantly reduced in both formulations (e.g. the
carrier-to-drug ratio was reduced by as much as fourfold), from the oral liquid
formulation and the previous solid formulation. The Company believes reducing
the volume of both delivery agent and drug will provide us with the most patient
preferred and commercially viable solid dosage form. The Company's efforts to
explore optimizing an oral


11


solid heparin formulation are ongoing, and the Company intends to combine
characteristics of both the tablet and capsule to produce a new formulation
designed to enhance performance even further.

Initial Indications

Currently, the most common indications for heparin therapy are the
prevention of venous thrombosis (blood clots) following surgical procedures
lasting longer than 30 minutes (especially orthopedic, pelvic, abdominal,
trauma, angioplasty or heart surgery). In the United States, it is estimated
that more than 3 million such surgical procedures are performed each year and
more than 250,000 cases of DVT are reported. Without DVT prophylaxis, the
incidence of a patient getting a blood clot is often greater than 50% in hip
replacement patients. Preventative therapy is typically recommended for at least
10 to 14 days post-surgery. Recent literature supports 4 weeks of treatment as
the optimal duration of treatment. DVT treatment generally includes about 1-2
weeks of injectable LMWH, followed by 90-180 days of warfarin. However, several
studies indicate that longer heparin treatment (preferably for 30 days) is
preferred because the risk of DVT remains high throughout this period.

Additional Indications

The Company believes that many additional cardiovascular diseases could be
treated more effectively by extending the duration of heparin therapy from the
current standard of practice. Such a dosing regimen would be possible with an
oral formulation of unfractionated heparin or LMWH. These indications include:
unstable angina, arterial fibrillation, acute myocardial infarction, coronary
angioplasty, stent placement, coronary artery bypass graft, pulmonary embolism
and stroke.

A large and growing body of pre-clinical and clinical data also indicates
that heparin has potent anti-inflammatory and anti-cancer properties. Recently
heparin has been shown to be beneficial as a treatment for inflammatory bowel
disease, rheumatoid arthritis, asthma, psoriasis, transplant rejection and
proteinurias. In December 2001, along with the Company's research collaborators
at MIT-Harvard, we published in the journal, Circulation, experimental results
evaluating oral heparin in a preclinical model for the prevention of restenosis.
This data further supports previously published studies which highlight the
beneficial properties of heparin in multiple indications.

Consistent with the Company's business strategy to no longer pursue later
stage product development for large-scale therapeutic indications, we plan to
design early stage Proof of Concept clinical studies for niche indications to
evaluate the performance of our solid oral heparin product candidate.

Oral Heparin (Solid) Manufacturing

Heparin is a commodity product that can be obtained from multiple
suppliers. the Company has developed a novel propriety process to produce the
delivery agent, SNAC, at large scale under the FDA's good manufacturing
practices (GMP). SNAC has been produced in approximately 200 kg batch sizes.
Batches of liquid product have been produced at a 1,800 liter scale. To date,
the component materials and liquid product have shown good long-term stability.

Osteoporosis

Osteoporosis is a disease characterized by low bone mass and structural
deterioration of bone tissue, leading to bone fragility and an increased
susceptibility to fractures. It is a common condition among the elderly--both
men and women. The disease is estimated to affect 1 in 4 women over age 65, 1 in
2 women over age 80, and 1 in 10 men over age 80. The most common consequence of
osteoporosis is greatly increased risk of broken bones, especially in the hip
region. Osteoporosis is estimated to affect over 10 million Americans and be
responsible for more than 1.5 million hip, vertebral, wrist and other fractures
annually in the U.S. The disease is relatively expensive to treat. The estimated
cost of osteoporosis on the U.S. health care system amounts to an estimated $17
billion per year. It is estimated that by the year 2020, the cost of hip
fractures, which account for the highest percentage of fractures, will increase
six-fold. In the U.S. market, osteoporosis therapeutics revenues grew from $2.4
billion in 1998 to $4.0 billion in 2001. This growth is expected to continue
through 2006. Several medicines are available to either delay the onset of, or
reverse, bone loss. New therapies currently under development should further
boost market expansion, will foster greater patient compliance, and ultimately
improve the market penetration rate. The Company is developing with our
collaborators, Novartis and Lilly, two promising medicines for the treatment and
prevention of osteoporosis.

Oral Salmon Calcitonin Program with Novartis

Treatment with salmon calcitonin (sCT) has been shown to maintain bone
mineral density in the spine and reduce the risk of new vertebral fractures in
post-menopausal women with osteoporosis. It is also used in the treatment of
Paget's disease,


12


hypercalcemia of cancer and bone pain. Salmon calcitonin is more potent than
human calcitonin and is currently available as an injection or nasal spray.
Salmon calcitonin has also been shown to be effective in slowing bone loss.
Calcitonin's major advantages are its lack of serious side effects, excellent
long-term safety profile and ease of administration. Some studies even suggest
that sCT produces an analgesic effect. As a result, the nasal spray has been
used in the treatment of acute vertebral fracture syndrome to increase bone
density and decrease pain. Annual worldwide sales of sCT are estimated to be in
excess of $600 million.

The Company has conducted collaborative research with Novartis AG
(Novartis) on an oral form of sCT since 1997. Under the terms of our
collaboration agreement, Novartis initially made quarterly payments to us to
fund pre-clinical research required to apply the Emisphere's technology to
develop an oral sCT product. In October 1999, Novartis completed a Phase I
clinical study in the United Kingdom, testing a capsule form of sCT utilizing
the Emisphere technology. The study results, released in January 2000, indicated
that Novartis achieved its targeted endpoint of therapeutic sCT blood levels,
following oral administration of capsules containing sCT and an EMISPHERE
delivery agent. The Company believes that these results demonstrate the
successful oral delivery of a protein macromolecule from a solid oral dosage
form without chemical modification of the molecule or damage to the biological
membrane.

In February 2000, Novartis agreed to execute its option to acquire an
exclusive license to develop and commercialize oral sCT. As a result, Novartis
made a $2.0 million milestone payment to us in 2000 and upon initiating Phase
III studies we will receive an additional milestone payment from Novartis.
Although Novartis' rights to certain financial terms concerning a second
compound have expired, Emisphere and Novartis remain in discussions to develop
additional compounds using Emisphere's technology, and a number of viable second
compounds candidates are under consideration.

In 2002, Novartis entered Phase II testing with oral salmon calcitonin
using one of the EMISPHERE delivery agents. In February 2003, Emisphere
announced favorable results of a Phase IIa study with Novartis evaluating the
performance in post-menopausal women of an oral tablet form of salmon
calcitonin. The purpose of the study was to assess the efficacy and safety of
various doses of calcitonin in post-menopausal women and to confirm the activity
of calcitonin when given orally, as reflected by changes in markers of bone
formation or resorption. The study demonstrated activity on bone markers over a
three month dosing period when the peptide was delivered in combination with the
EMISPHERE delivery agent. Furthermore, only two serious adverse events were
reported, neither of which were related to the EMISPHERE delivery agent or to
calcitonin. The side effects seen with the highest doses of calcitonin were
consistent with those normally seen with high plasma levels of calcitonin when
administered by injection. These side effects were mainly gastrointestinal in
nature.

Recombinant Parathyroid Hormone (PTH) Program with Lilly

Recombinant Parathyroid Hormone (PTH) is a bone anabolic/formation
compound currently being developed by Lilly as an injectable for the treatment
of osteoporosis. In contrast to sCT that reduces bone loss, PTH stimulates new
bone formation. In Phase III testing, Lilly's daily injectable recombinant form
of PTH (being developed by Lilly as FORTEO(R)) reduced spine fractures by more
than 65% and reduced non-traumatic, non-spine fractures by 54% in women with
osteoporosis. PTH would potentially be targeted toward patients aged 65 and
older with advanced osteoporosis. In November 2002, FORTEO (injectable PTH 1-34,
or teraparatide) received U.S. Food and Drug Administration (FDA) approval for
the treatment of osteoporosis in postmenopausal women who are at high risk for a
fracture. FORTEO was also approved to increase bone mass in men with primary or
hypogonadal osteoporosis who are at high risk for a fracture. These include men
(or women) with a history of osteoporosis-related fracture, or who have multiple
risk factors for fracture, or who have failed or are intolerant to previous
osteoporosis therapy, based upon physician assessment. FORTEO is the first in a
new class of drugs called bone formation agents that work primarily to stimulate
new bone by increasing the number and action of bone-forming cells called
osteoblasts.

In August 2001, the Company announced the joint publication of a paper
with Lilly researchers on the oral delivery of PTH 1-34 in the American
Association of Pharmaceutical Scientists' July issue of Pharmaceutical Research
(Vol. 18, No. 7, 2001). This paper was jointly authored by Lilly and Emisphere
scientists. The paper reported the first reproducible, oral delivery of
biologically active PTH in a preclinical model of osteoporosis.

The Emisphere/Lilly oral PTH 1-34 program is currently in Phase I
development. Lilly is managing the clinical development program at its expense.
Emisphere is supporting the development phase for this product candidate.
However all costs incurred that Lilly requires Emisphere to expend on their
behalf will be reimbursed by Lilly.

Growth Disorders

Many children and adults suffer from growth hormone deficiency. Growth
hormone is necessary to simulate growth in children by promoting the growth of
muscle and bone. In adults, growth hormone maintains muscle and bone quality.


13


Recombinant human growth hormone (somatropin, or rhGH) has been available
for many years. Growth hormone deficient children who respond well to treatment
are likely to be taller adults following rhGH therapy. Unfortunately, rhGH must
be administered by injection and so compliance is particularly difficult in
pediatric patients. rhGH therapy requires a long-term commitment by the patient
and his or her family to achieve the best response. The prescribed dosing ranges
between three and seven injections per week. Treatment continues for several
years until the child has completed puberty or has stopped responding.

The overall psychological effects of rhGH therapy are encouraging. The
potential for an increased growth rate, more mature appearance and the hope for
an adult height within the normal range are viewed as positive by both parents
and children. rhGH is approved for pediatric growth hormone deficiency, adult
growth hormone deficiency, pre-kidney transplantation, and short stature due to
chronic kidney disease and Turner's syndrome. The injectable rhGH worldwide
market is estimated to be over $1.7 billion.

Recombinant Human Growth Hormone (rhGH) Program with Lilly

Oral recombinant human growth hormone (rhGH, or somatropin) is the Company's
second collaborative effort being developed with Lilly. In 2001, we selected a
delivery agent for the oral delivery of rhGH. In August of 2002, the Company
announced that we had begun human testing to evaluate an oral rhGH in
collaboration with Lilly.

The Emisphere/Lilly oral rhGH (somatropin) program is currently in Proof
of Concept Phase I development. Emisphere is managing the clinical testing and
is being reimbursed by Lilly. By using contract research organizations,
Emisphere supported the preclinical and early clinical development phase for
this product candidate in cooperation with Lilly. Any future clinical
development efforts will be managed and funded by Lilly and is yet to be
determined. Emisphere believes that an oral product would be the preferred
method of delivery for both children and adults.

Diabetes

Approximately 177 million people worldwide are afflicted by diabetes, with
approximately 17 million in the United States. Nearly one-third of individuals
in the United States with diabetes are unaware that they have this chronic
disease. In the United States, diabetes is estimated to be the fifth largest
cause of death, and is estimated to account for approximately $132 billion in
direct and indirect healthcare related costs. There are two principal types of
diabetes:

o Type 1. An autoimmune disease in which the body does not produce any
insulin. It first appears most often in children and young adults. o
People with Type 1 diabetes must take multiple daily insulin
injections to stay alive. Type 1 diabetes accounts for approximately
5-10% of total diabetes cases.

o Type 2. A metabolic disorder resulting from the body's inability to
make enough, or properly use, insulin. It is the most common form of
the o disease. Type 2 diabetes accounts for approximately 90-95% of
diabetes cases. The incidence of Type 2 diabetes is rising rapidly
as a result of an aging population, greater prevalence of obesity,
and a more sedentary lifestyle.

Most recent estimates indicate that the worldwide total insulin market is
estimated at over $1.0 billion and is projected to grow to over $4.0 billion in
2006. The overall diabetes market, including injection systems, needles and
other supplies, is approximately $10 billion, and is estimated to reach over $16
billion by 2005. Approximately 40% of all Type 2 diabetics also use insulin to
control the disease. This accounts for approximately 50% of the total insulin
use. Although many Type 2 diabetics could benefit from insulin therapy, they may
not use the drug because it is administered by injection. We believe that an
oral form of insulin would greatly facilitate the use of insulin in this patient
population.

Oral insulin therapy would greatly facilitate compliance for diabetic
patients who are not diligent with their prescribed injection regimens. However,
in addition to improving patient compliance, The Company believes oral insulin
should offer a more effective therapy. Oral delivery directs the insulin to the
liver. It is important for insulin to travel directly to the liver (the target
organ) because this route mimics the normal physiological insulin secretion of
the pancreas. The Company believes the available and market-pending non-oral
insulin therapies (i.e. injection), should be inferior to an insulin delivered
orally, because they are administered into the general (systemic) circulatory
system first, then must be delivered to the liver. This systemic introduction of
insulin requires higher circulating insulin levels, so that the appropriate
amount of the insulin can be presented to the liver. This excess insulin in the
general circulation may cause unwanted complications. Thus, the Company believes
that orally delivered insulin is the ideal option for therapy in diabetics.

Oral Insulin Program

An oral unformulated dosage of insulin using an EMISPHERE delivery agent
successfully entered Proof of Concept human testing in June of 2001. In August
2001, the Company contracted the services of an investment bank to assist us


14


in the preliminary negotiation process with potential partners for the Company's
oral insulin product candidate. Phase I oral insulin data was announced at an
Emisphere-sponsored Investor Day in September 2001.

Initially the Company tested two insulin/delivery agent combinations. The
Company is continuing the development of the most promising of these two oral
insulin candidates. The safety and tolerability of this unformulated dosage is
currently being evaluated in diabetics.

In October 2001, the Company completed a Proof of Concept Phase I study
using the most promising EMISPHERE delivery agent selected for insulin. These
data were used to support the testing of this unformulated dosage in Type 2
diabetic patients. Preliminary testing in Type 2 diabetic patients (a
"euglycemic clamp study") was completed in November 2001. Also, in 2002, the
Company announced completion of a study designed to demonstrate the
pharmacokinetics of insulin, absorption, and subsequent effects on blood glucose
of this product candidate following a standardized meal. The placebo controlled,
crossover study evaluated two oral doses of insulin. Each capsule contained 5 mg
of insulin and 200 mg of EMISPHERE delivery agent, so each patient was evaluated
with both a 5 mg and 10 mg dose. The study compared the two oral unformulated
dosages to a fast-acting injectable insulin in fourteen patients with type II
diabetes who had received a standardized solid meal (722 kcal). The study also
included a placebo group. The data demonstrated for the 10 mg dose that oral
insulin unformulated dosages, when administered 30 minutes prior to the
standardized meal, reduced post-prandial glucose excursion (the rise in blood
sugar following a meal), produced a marked increase in systemic insulin levels
and a concomitant reduction in C-peptide (a marker of endogenous insulin
production) as compared to the placebo. In addition, plasma insulin
concentrations peaked faster using Emisphere's oral unformulated dosage as
compared to fast acting injectable insulin (30 minutes for oral versus
approximately 45 minutes for injectable formulations). Similar results were
observed in certain patients given the 5 mg dose, who received the same
standardized meal. The study demonstrated evidence that one or two capsules
could impact post-prandial blood glucose in certain type II diabetic patients
and that favorable pharmacokinetics continue to be demonstrated. The Company
continues to work on a final image dosage oral insulin tablet formulation.

While the Company announced in March 2003 that its contract negotiations
with a potential partnered entity was terminated by the entity, the Company
continues to seek to partner this product candidate. The Company will continue
to develop the oral insulin program in parallel while seeking to secure a
partner for this program, and will evaluate and consider the best possible
partnership terms for the development and potential marketing of this product
candidate.

Asthma/Allergies

An allergy is an immune response by the body to certain stimuli in the
environment. One of the most common forms of allergy is hay fever, which is
estimated to affect as many as 35.9 million people in the United States. Asthma
is a chronic inflammatory disorder of the body's airways caused by allergens and
viral respiratory infections leading to bronchial hyper responsiveness and
obstruction of airways. More than 17 million Americans are currently estimated
to have asthma.

Oral Cromolyn Sodium Program

Cromolyn sodium mitigates allergic reactions by the inhibition of
histamine, a chemical mediator released from the mast cells. Cromolyn sodium is
marketed as a nebulized solution, or aerosol formulation, eye solution and nasal
spray for the treatment of asthma and allergies. Annual sales of cromolyn sodium
are estimated to be approximately $300 million in the United States.

Cromolyn sodium is currently not available orally due to its low
bioavailability. Cromolyn sodium is considered by physicians to be safer than
the most common medications used to control allergies and inflammation,
principally antihistamines and corticosteroids. As an asthma treatment, cromolyn
sodium can decrease airway hyperresponsiveness in patients and has virtually no
systemic toxicity.

The Company plans on developing an oral form of cromolyn sodium for the
treatment of asthma and allergy, and related allergic conditions. Development
efforts to date have demonstrated oral delivery in animal models and healthy
human subjects. In November 2001, we announced Proof of Concept Phase I data for
this product candidate using an EMISPHERE delivery agent, which demonstrated
absorption was achieved in under 30 minutes in healthy human subjects. The
Company has conducted additional Phase I dose ranging studies since then, and
have found the data to be consistent. The Company plans on conducting additional
Proof of Concept Phase I-II testing in 2003, using eligen(TM) technology for
cromolyn sodium, in asthma, and allergy patients.

The Company plans on focusing on an appropriate Proof of Concept Phase II
study design to expeditiously determine the safety and definitive efficacy for
systemically delivered cromolyn sodium. We will look to partner this program,
which the Company believes can generate a significant interest from the
pharmaceutical industry given the need to accommodate the underserved allergic
and asthmatic patient population.


15


Obesity

Obesity is a major health problem in all developed countries. The
prevalence of obesity in the United States has increased substantially during
the past decade. According to the 1999 National Health and Nutrition Examination
Survey, 64.5% of American adults is now considered overweight. A 1998 National
Institutes of Health report confirmed that obesity significantly increases a
number of health risks, including Type II diabetes. Obesity-related conditions
such as stroke and myocardial infarction are estimated to contribute to
approximately 350,000 deaths annually, ranking second only to smoking as a cause
of preventable death. As of 1999, the economic cost of being overweight and
obese in the United States was estimated at $102.2 billion annually. Current
treatment of obesity consists of diet, exercise and other life-style changes,
and a limited number of drugs. The Company believes that the fact that the
population overall is rapidly becoming more obese indicates that treatment of
obesity is difficult and characterized by very high recidivism.

Oral mCNTF Program with Regeneron Pharmaceuticals, Inc.

Regeneron Pharmaceuticals, Inc. is developing subcutaneous AXOKINE(TM) for
the treatment of obesity. In January 2002, Regeneron announced that it completed
Phase III enrollment for AXOKINE. On January 7, 2003 Regeneron announced that
the last study participant had completed the 12-month placebo-controlled portion
of its Phase III pivotal trial designed to assess the efficacy and safety of
AXOKINE(R) for weight loss in overweight and obese subjects, and also that the
U.S. Food and Drug Administration (FDA) has granted Fast Track designation to an
important component of the development program of AXOKINE(R) for obesity, which
will become effective once the New Drug Application ("NDA") is submitted.

During 2000, Emisphere established a research and development
collaboration and option agreement with Regeneron for the oral delivery of its
protein product candidate, a modified form of ciliary neutrophic factor (CNTF)
being developed as an injectable as AXOKINE. The collaboration was formed after
the Company's oral delivery technology successfully produced significant blood
levels of CNTF in Regeneron's preclinical animal models. This agreement adds an
important biotechnology company to its existing group of partners. Emisphere and
Regeneron have conducted pre-clinical testing of an oral version. However, the
direction of development for the oral program will be contingent upon the
results from the Phase III trial.

Collaborative Agreements

Emisphere is a party to collaborative agreements with corporate partners
to provide research and development services relating to the partners' products.
These agreements are in the form of research collaboration and licensing
agreements. In connection with these agreements, Emisphere has granted licenses
or the rights to obtain licenses to our oral drug delivery technology. In
return, the Company will receive certain payments upon the achievement of
milestones and will receive royalties on sales of products developed. Under
these agreements, we will also be reimbursed for research and development costs.
Emisphere also has the right to manufacture and supply EMISPHERE delivery agents
developed under these agreements to its corporate partners.

All of the Company's collaborative agreements are retractable by its
corporate partners without significant financial penalty to them.

Eli Lilly and Company. In June 2000, the Company and Lilly executed a
follow-on development agreement to their 1997 multi-year research and option
agreement to develop oral formulations of recombinant parathyroid hormone (PTH)
and human growth hormone (rhGH) utilizing the Company's proprietary drug
delivery technology. Under the new agreement, the two companies will collaborate
to bring oral forms of PTH and rhGH into clinical testing. The new agreement
also provides for supplemental research and development funding along with
milestone payments.

In connection with the Lilly agreements, the Company recognized contract
research revenues of $2.9 million, $3.8 million, $3.4 million, $1.2 million
(including a $0.6 million milestone payment), and $2.2 million (including a $2.0
million milestone payment), for the years ended December 31, 2002, 2001, and
2000, the five months period ended December 31, 2000, and the year ended July
31, 2000, respectively.

Novartis Pharma AG. In connection with the 1997 research collaboration
between the Company and Novartis, Novartis, in February 2000, agreed to execute
its option to acquire an exclusive license to develop and commercialize oral
salmon calcitonin and to obtain an option from the Company to investigate the
oral delivery of a second Novartis compound. Although Novartis' rights to
certain financial terms concerning a second compound have expired, Emisphere and
Novartis remain in discussions to develop additional compounds using Emisphere's
technology, and a number of viable second compound candidates are under
consideration.


16


In connection with the Novartis agreement, the Company has recognized $3.5
million, $1.0 million, and $3.5 million (including a $2.0 million milestone
payment and $0.5 million payment for an option to license a second compound),
for the year ended December 31, 2000, the five months ended December 31, 2000,
and the year ended July 31, 2000, respectively.

Regeneron Pharmaceuticals, Inc. In 2000, Emisphere entered into a research
collaboration with Regeneron to investigate the applicability of the Company's
technology for the oral delivery of a ciliary neutrophic factor (CNTF), being
developed for injection as AXOKINE, by Regeneron, for the treatment of obesity.

In connection with the Regeneron agreement, the Company recognized
contract research revenue of $0.03 million and $0.2 million for the years ended
December 31, 2002 and 2001, respectively. Regeneron will continue to pay for all
studies related to the pre-clinical product candidate development.

Cubist Pharmaceuticals, Inc. In November 2000, Emisphere entered into a
research and development collaboration agreement with Cubist for the oral
delivery of daptomycin (being developed for injection as CIDECIN) and other
lipopeptides. In connection with the Cubist agreement, the Company recognized
contract research revenue of $0.3 million, $0.4 million, $0.1 million, and $0.1
million, for the years ended December 31, 2002, 2001 and 2000, and the five
months ended December 31, 2000, respectively.

Although the Company is not currently providing services to Cubist
Pharmaceuticals, Inc., on November 7, 2002, the Company amended and restated our
Research and Development agreement with Cubist in order to create a time and
materials framework in which to potentially apply our oral drug delivery
technology to certain compounds being developed by Cubist, should Cubist request
us to do so, however, the parties are no longer collaborating on the development
of oral formulations of daptomycin analogues.

Feasibility Studies. The Company has also entered into proof-of-concept
studies with additional pharmaceutical and biotechnology companies for various
injectable compounds. Some of these feasibility studies are ongoing. Emisphere
will continue to pursue additional feasibility studies to determine the
potential for further collaborative development programs.

Patents, and Other Forms of Intellectual Property

Emisphere's patent strategy is designed to maximize its potential patent
portfolio, proprietary rights and any future licensing opportunities we might
pursue. The Company seeks patent protection on various aspects of its
proprietary chemical and pharmaceutical delivery technologies. This involves
seeking patent protection for not only the delivery agent compounds themselves,
but also for the combination of our compounds with a pharmaceutical or chemical
agent and for generic structures that encompass EMISPHERE delivery agents. The
Company plans to patent the processes utilized in manufacturing EMISPHERE
delivery agents, the methods of use of EMISPHERE delivery agents, as well as
improvements on the core technology which are important to the success of our
business. The Company concentrates its efforts in the key geographic markets of
the United States, Canada, Mexico, Europe, Japan and Australia, and file in
additional countries on a case-by-case basis. With regard to its SNAC/heparin
formulation, the Company has patents issued which claim the SNAC compound
itself, its compositions with heparin, and generic structures encompassing SNAC.
In 2001 we were granted two patents related to oral PTH, our program with Lilly.
The patents cover compositions of an EMISPHERE delivery agent with PTH, dosage
unit forms, methods of administration and preparation, as well as the delivery
agent itself.

Emisphere has patents, or patent applications pending, for delivery agents
that we currently use in conjunction with heparin, calcitonin, human growth
hormone, cromolyn sodium, and insulin. As of December 31, 2002, Emisphere has 72
issued patents in the United States which will expire beginning in 2007, and
have other patents issued or applications pending in various countries around
the world. Of Emisphere's 72 U.S. issued patents, 14 were issued by the U.S.
Patent and Trademark Office during fiscal 2002.(1) As of December 31, 2002,
Emisphere had 48 patent applications relating to its drug delivery technology
pending in the United States. Internationally, approximately 200 patents have
been granted or applications are pending in about 30 countries, including
Canada, Mexico, Japan and Australia, and in the European Patent Office.

In 2001, the Company registered the trademark, EMISPHERE, with the U.S.
Patent and Trademark Office for use with its drug delivery agents or "delivery
agents", and the Emisphere logo for both goods and services rendered by
Emisphere. Additionally, in 2002, the Company selected a brand name for our
technology, "eligen(TM)", for which Emisphere is applying for registration from
the U.S. Patent and Trademark Office.

(1) This number includes two patents issued to Emisphere (6,346,242 and
6,348,207) that contained spelling errors in the assignee name,
"Emisphere".

Manufacturing

The primary raw materials used in making the delivery agents for
Emisphere's heparin product candidates, and the delivery agents under
consideration for the Company's other product candidates, are readily available
from multiple sources and in large quantities. Emisphere currently has
arrangements with third parties to produce these delivery agents in accordance
with the


17


FDA's good manufacturing practices, (GMP), regulations in batch sizes of
approximately 200 kilograms. Generally, commercial manufacturers can produce
batch sizes of up to 2,000 kilograms.

The Company has identified numerous other commercial manufacturers meeting
the FDA's GMP regulations that have the capability of producing EMISPHERE
delivery agents. Emisphere will continue to manufacture delivery agents on a
small scale for research purposes and contract with third-party producers of
clinical testing materials. A third-party manufacturer whose facilities comply
with the FDA's GMP regulations is currently producing the Company's delivery
agent. The oral heparin formulation for its Phase I/II clinical trials was
produced by Emisphere under GMP conditions.

Competition

Emisphere's success depends, in part, upon maintaining a competitive
position in the development of product candidates and technologies in an
evolving field in which developments are expected to continue at a rapid pace.
Emisphere competes with other drug delivery, biotechnology and pharmaceutical
companies, research organizations, individual scientists and non-profit
organizations engaged in the development of alternative drug delivery
technologies or new drug research and testing, as well as with entities
developing new drugs that may be orally active. Emisphere's product candidates
also compete against alternative therapies for each of the medical conditions
our product candidate's address, independent of the means of delivery. Many of
Emisphere's competitors have substantially greater research and development
capabilities, experience and marketing, financial and managerial resources than
Emisphere does , and could represent significant competition.

Emisphere's competitors may succeed in developing competing technologies
and obtaining governmental approval for products before the Company alone, or
with its partners do. Emisphere cannot assure you that developments by other
drug delivery innovators will not render our product candidates, or the
therapeutic compounds used in combination with its product candidates,
noncompetitive or obsolete.

Oral Heparin Competition

Emisphere is aware that AstraZeneca PLC is in Phase III clinical trials of
a pro-drug form of melagatran, a direct thrombin inhibitor, which, if
successfully developed, would compete with Emisphere's oral heparin product
candidates. Emisphere is also aware of the recently approved injectable
pentassacharide product, ARIXTRA(TM), owned by Sanofi-Synthelabo, which is
indicated for the prevention of DVT in patients undergoing surgery for hip
fracture, hip replacement or knee replacement. ARIXTRA is an injectable product
and is not approved for a 30-day dosing regimen.

Emisphere is aware of other technologies, around the world, that use
micro-encapsulation and other forms of technology to orally deliver heparin,
however are not aware of any that demonstrate the preservation of both the
biological effects of the drug and the integrity of the intestinal membrane as
is the case with Emisphere's technology.

Oral Insulin Competition

Emisphere is aware of other companies and academic institutions that are
developing oral insulin analogues. These analogues differ from Emisphere's, in
that insulin is chemically modified, creating a new chemical entity (NCE). In
May 2002, Nobex entered into a partnership agreement with Glaxo SmithKline for
the development and potential marketing of this product candidate.

Emisphere is not aware of any technology, other than Emisphere's, that
demonstrate the preservation of both the biological effects of the drug and the
integrity of the intestinal membrane as is the case with Emisphere's technology.

Oral Osteoporosis Candidate Competition

Emisphere is aware that a nasal dosage form of salmon calcitonin already
exists. Salmon calcitonin also competes with other osteoporosis therapies,
including estrogen replacement therapy, bisphosphonates, selective estrogen
receptor modulators and several new biologics that are under development.

Emisphere is aware of other technologies, around the world to orally
deliver salmon calcitonin and parathyroid hormone, however we are not aware of
any that demonstrate the preservation of both the biological effects of the drug
and the integrity of the intestinal membrane as is the case with Emisphere's
technology. For instance, we are aware that Unigene Laboratories, Inc. with
GlaxoSmithKline is developing an oral form of PTH. Unigene is also developing an
oral salmon calcitonin. Both candidates are in early stage clinical testing.


18


Emisphere believes that orally delivered products will be preferred by
doctors and patients over the injectable forms. Furthermore, the Company
believes that it will be the leader in oral drug delivery, because in most
cases, it is striving for delivering already approved therapeutics with our
EMISPHERE delivery agents, preserving the biological effects of the drug and the
integrity of the intestinal membrane.

Nevertheless, Emisphere's oral formulations are expected to continue to
compete against well established injectable versions of the same drugs. For
example, solid oral heparin will continue to compete with other forms of generic
heparin and low molecular weight heparin, along with the new recently approved
pentasaccharide. Low molecular weight heparin is offered in the U.S. principally
by Aventis SA, under the trade name LOVENOX(R), and Pharmacia Corporation, under
the trade name FRAGMIN(R). Internationally, there are more than ten approved
forms of low molecular weight heparin. Outside of the hospital, warfarin is
currently prescribed as an anti-coagulant/antithrombotic. Warfarin is a generic
drug marketed under the trade name, COUMADIN(R), by Bristol-Myers Squibb Pharma
Company.

Government Regulation

Emisphere's operations and product candidates under development are
subject to extensive regulation by the FDA and other governmental authorities in
the United States and other governmental authorities in other countries.

The duration of the governmental approval process for marketing new
pharmaceutical substances, from the commencement of preclinical testing to the
receipt of a governmental final letter of approval for marketing a new
substance, varies with the nature of the product and with the country in which
such approval is sought. For entirely new drugs, the approval process could take
eight to ten years or more; however, for reformulations of existing drugs, the
process is typically shorter. In either case, the procedures required to obtain
governmental approval to market new drug products are costly and time-consuming,
requiring rigorous testing of the new drug product. There can be no assurance
that even after such time and expenditures, regulatory approval will be obtained
for any products that we develop.

The steps required before a new human pharmaceutical product can be
marketed or shipped commercially in the United States include, in part,
preclinical testing, the filing of an IND, the conduct of clinical trials and
the filing with the FDA of either an NDA for drugs or a Product License
Application (PLA) for biologics.

In order to conduct the clinical investigations necessary to obtain
eventual regulatory approval in the US, an applicant must file an IND with the
FDA to permit the shipment and use of the drug for investigational purposes. The
IND sets forth, in part, the results of preclinical (laboratory and animal)
toxicology and efficacy testing and the applicant's plans for clinical (human)
testing. If the FDA does not deny the exemption to ship or use the investigative
drug or place a "hold" on clinical testing within 30 days of the submission of
the IND, it becomes effective and clinical testing may begin after Institutional
Review Board approval of research involving human subjects.

Under the FDA's regulations, the clinical testing program required for
marketing approval of a new drug typically involves three clinical phases. In
Phase I, safety studies are generally conducted on normal, healthy human
volunteers to determine the maximum dosages and side effects associated with
increasing doses of the substance being tested. In Phase II, studies are
conducted on small groups of patients afflicted with a specific disease to gain
preliminary evidence of efficacy and to determine the common short-term side
effects and risks associated with the substance being tested. Phase III involves
large-scale trials conducted on disease-afflicted patients to provide
statistical evidence of efficacy and safety and to provide an adequate basis for
product labeling. Frequent reports are required in each phase and, if
unwarranted hazards to patients are found, the FDA may request modification or
discontinuance of clinical testing until further studies have been conducted.
Phase IV testing is conducted either to meet FDA requirements for additional
information as a condition of approval, or to post-approval market acceptance of
the pharmaceutical product.

Once clinical testing has been completed pursuant to an IND, the applicant
files an NDA or PLA with the FDA seeking approval for marketing the drug
product. The FDA reviews the NDA or PLA to determine if the drug is safe and
effective, and adequately labeled, and if the applicant can demonstrate proper
and consistent manufacture of the drug. The time required for FDA action on an
NDA or PLA varies considerably, depending on the characteristics of the drug,
whether the FDA needs more information than is originally provided in the NDA or
PLA and whether the FDA finds problems with the evidence submitted.

The facilities of each company involved in the manufacturing, processing,
testing, control and labeling must be registered with and approved by the FDA.
Continued registration requires compliance with GMP regulations. The FDA
conducts periodic establishment inspections to confirm continued compliance with
its regulations.

Emisphere is also subject to various federal, state and local laws,
regulations and recommendations relating to such matters as laboratory and
manufacturing practices and the use, handling and disposal of hazardous or
potentially hazardous substances used in connection with its research and
development work. Although we believe we are in compliance with these laws and
regulations in all material respects, there can be no assurance that we will not
be required to incur significant costs to comply with environmental and other
laws or regulations in the future.


19


Employees

As of March 1, 2003, Emisphere had 124 employees, 101 engaged in
scientific research and technical functions and 23 performing administrative and
clerical functions. Of the 124 employees, 37 hold Ph.D. or M.D. degrees. The
Company believes that our relationship with our employees is good.

Available Information

The Company files annual, quarterly, and current reports, proxy
statements, and other documents with the Securities and Exchange Commission, or
SEC, under the Securities Exchange Act of 1934, or the Exchange Act. The public
may read and copy any materials that the Company files with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that
contains reports, proxy and information statements, and other information
regarding issuers, including Emisphere, that file electronically with the SEC.
The public can obtain any documents that we file with the SEC at
http://www/sec/gov.

Emisphere also intends to make available free of charge on or through our
Internet website (http://www.emisphere.com) its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Exchange Act as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Our Internet website and the
information contained therein or connected thereto are not intended to be
incorporated into the Annual Report or this Form 10-K.

ITEM 2. PROPERTIES

Emisphere currently leases approximately 114,000 square feet of office
space at 765 Old Saw Mill River Road, Tarrytown, New York for use as executive
offices and laboratories. The current lease expires in September 2007 with two
five year extensions at then-current rates at its option. In addition, the
Company owns a facility with 100,000 square feet of research and development
capacity located on 29 acres of land in Connecticut. In the third quarter 2002,
the Company announced the decision to cease operations and sell the facility.
The Company officially ceased all operations at the facility as of December
2002.

ITEM 3. LEGAL PROCEEDINGS

We are not party to any litigation that is expected to have a material
effect on our operations or business.

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

None.


20


PART II

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

Emisphere's Common Stock is traded on the Nasdaq National Market under the
symbol EMIS.

The following table sets forth the range of high and low bid prices for
our Common Stock for the periods indicated, as reported by Nasdaq.

Year Ended December 31, High Low
----------------------- ---- ---
2001...................................................
First quarter.......................................... $30.500 $13.875
Second quarter......................................... 29.070 13.125
Third quarter.......................................... 29.840 16.810
Fourth quarter......................................... 33.050 19.990

2002...................................................
First quarter.......................................... $31.890 $15.370
Second quarter......................................... 18.000 3.850
Third quarter.......................................... 4.400 2.900
Fourth quarter......................................... 4.320 2.840

2003...................................................
First quarter (through March 14, 2003)................. $ 5.97 $ 2.47

As of March 14, 2003 there were approximately 278 stockholders of record,
including record owners holding shares on behalf of an indeterminate number of
beneficial owners, and 18,025,577 shares of Common Stock outstanding. The
closing price of our Common Stock on March 14, 2003 was $2.55.

The Company has never paid cash dividends and does not intend to pay cash
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance the growth of its business.

Other information required by this item is incorporated by reference in the
Proxy Statement to be distributed in connection with our annual meeting of
stockholders.


21


ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data for the years ended December 31,
2002, 2001, and 2000, the five months ended December 31,2000, and the years
ended July 31, 2000, 1999, and 1998 have been derived from the financial
statements of Emisphere and notes thereto, which have been audited by
Emisphere's independent accountants. The selected financial data for the year
ended December 31, 2000 are unaudited.



Five Months
Year Ended Ended Year Ended
December 31, December 31, July 31,
------------------------------------ ------------ --------------------------------
2002 2001 2000(1) 2000 2000 1999 1998
---- ---- ------ ---- ---- ---- ----
(in thousands, except per share data)

Statement of Operations Data:

Revenue ................................ $ 3,378 $ 4,728 $ 7,211 $ 2,414 $ 5,889 $ 10,180 $ 15,868
-------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Research and development ............... 49,719 53,301 24,820 10,386 27,448 21,217 14,236
General and administrative ............. 11,242 9,692 6,699 3,039 5,878 6,051 5,344
Restructuring .......................... 1,417(2)
Loss on impairment of intangible and
fixed assets .......................... 4,507(3)
Depreciation and Amortization .......... 6,185 4,014 2,605 1,167 2,434 1,633 954
Acquisition of in-process research and
development ........................... 9,686
Loss in Ebbisham Ltd. .................. -- -- -- -- -- 3,092 4,044
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses ............... 73,070 67,007 34,124 14,592 35,760 41,679 24,578

Operating loss ......................... (69,692) (62,279) (26,913) (12,178) (29,871) (31,499) (8,710)
Other (expense) and income ............. (1,650) 5,745 8,253 4,592 2,974 817 1,644
-------- -------- -------- -------- -------- -------- --------
Net loss ............................... $(71,342) $(56,534) $(18,660) $ (7,586) $(26,897) $(30,682) $ (7,066)
-------- -------- -------- -------- -------- -------- --------

Net loss per share--Basic and diluted .. $ (3.98) $ (3.18) $ (1.10) $ (0.43) $ (1.79) $ (2.63) $ (0.66)
======== ======== ======== ======== ======== ======== ========




December 31, July 31,
--------------------------------- ----------------------------------
2002 2001 2000 2000 1999 1998
---- ---- ---- ---- ---- ----
(in thousands)

Balance Sheet Data:
Cash, cash equivalents and investments $ 73,701 $ 139,278 $ 196,809 $ 207,793 $ 17,805 $ 34,828
Total assets ......................... 107,966 182,083 224,963 229,557 38,476 53,690
Long-term liabilities ................ 35,102 30,852 26,986 25,558 22,308 10,598
Accumulated deficit .................. (250,164) (178,822) (122,288) (114,702) (87,805) (57,123)
Stockholders' equity ................. 67,540 137,642 193,140 199,551 11,287 31,281


- ----------
(1) unaudited
(2) In the second quarter, the Company announced a plan to restructure its
operations, which included the discontinuation of its liquid oral heparin
program and any related initiatives, and a scale back of any associated
infrastructure. In the third quarter, the Company announced its plans to
further restructure operations by closing the Farmington research facility
and consolidating operations in Tarrytown. Total restructuring charges
were $1.33 million and $0.16 million in the second and third quarters,
respectively, of which $0.07 million of accrued restructuring charges was
reversed at December 31, 2002.
(3) In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", in
connection with the restructurings, the Company performed an evaluation of
certain intangible and fixed assets to determine if their carrying amount
exceeded their fair value. The Company recorded an impairment charge in
the second and fourth quarters of $4.4 million and $0.1 million
respectively.


22


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

General

Emisphere Technologies, Inc., is a biopharmaceutical company specializing
in the oral delivery of therapeutic macromolecules and other compounds that are
not currently deliverable by oral means. Since its inception in 1986, the
Company has devoted substantially all of its efforts and resources to research
and development conducted on its own behalf and through collaborations with
corporate partners and academic research institutions. Emisphere has had no
product sales to date. The timing of future product sales depends on many
factors, including the Company's relationship with partners, the progress of its
products in development through clinical trials, regulatory approval,
commercialization and market acceptance. These and other factors that may impact
future results are described under "Risk Factors" below.

Results of Operations

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Contract research revenues were $3.4 million in 2002, representing a
decrease of $1.3 million or 29% compared to the year ended December 31, 2001.
Revenues for 2002 related to research and development expense reimbursement
primarily under its collaborative agreements with Eli Lilly and Company, Cubist
Pharmaceuticals, Inc., and Regeneron Pharmaceuticals Inc. Cost of contract
research revenues approximate such revenues and are included in research and
development expenses. The decrease was primarily attributable to the winding
down by Emisphere of certain Phase I clinical studies in collaboration with Eli
Lilly and Company for $0.9 million in addition to a $0.4 million decrease due to
the near completion of the Company's screening phase research, primarily related
to its efforts on behalf of Cubist Pharmaceuticals, Inc., Regeneron
Pharmaceuticals Inc., and other agreements.

Total operating expenses were $73.1 million for 2002, an increase of $6.1
million, or 9%, compared to the year ended December 31, 2001. The total
operating expenses for 2002, excluding the restructuring costs and loss on asset
impairment of $5.9 million was $67.2 million, an increase of $0.2 million, or
0.2% over the year ended December 31, 2001 The details of this increase are
outlined below.

Research and development costs were $49.7 million for the year ended
December 31, 2002, a decrease of $3.6 million or 7%, as compared to the same
period in 2001. This decrease consisted of a $6.8 million decrease in clinical
trial expenses partially offset by $3.2 million increase in research costs. The
decrease in clinical trial expenses were primarily due to a $9.2 million
decrease in PROTECT and PROTECT related clinical trial expenses resulting from
the completion of the trial partially offset by increased Phase I proof of
concept clinical expenses primarily for solid oral heparin, oral insulin and
rhGH trial expense of $2.4 million. The $3.2 million increase in research cost
consisted of $1.2 million higher compensation expense due to increased headcount
that was partially related to the first full year of the operations at FarmTech,
one time production plant design expenses for the oral liquid heparin/delivery
agent of $1.0 million in 2002, increased lease and utility costs of $0.5 million
and $1.1 million in consulting expenses offset by a decrease in overall research
and development expenses resulting from the restructuring announced in May of
2002.

Overall the oral liquid heparin project expense for 2002, excluding
restructuring and impairment costs, was $15.3 million, consisting of $11.2
million in clinical trial expenses, $0.4 million in consulting, $1.3 million in
clinical supplies, $1.0 million production facility design work and $1.4 million
in all other expenses. With the discontinuance of the liquid oral heparin
program and any related initiatives these program costs will not recur in 2003.
General and administrative expenses were $11.2 million for the year ended
December 31, 2002, an increase of $1.5 million, or 16%, as compared to the same
period in 2001. This increase was primarily the result of $0.5 million in bonus
payouts, $0.8 million in increased compensation expense, $0.2 million in
relocation expenses, $0.1 million in recruiting expense primarily associated
with the addition of a chief operating officer and overall salary increases,
$0.1 million in overall occupancy and utility fees partially offset by a $0.2
million reduction in legal and professional fees.

Restructuring

On May 22, 2002, the Company announced a plan for restructuring its
operations, which included the discontinuation of its liquid oral heparin
program and any related initiatives, and a reduction of any associated
infrastructure. Additionally, in the third quarter of 2002, the Company
evaluated several alternatives to consolidate its two research facilities in
Tarrytown, New York and Farmington, Connecticut in order to eliminate excess
capacity, reduce spending, and raise cash. The decision was made


23


to dispose of the Farmington research facility. As a result of the restructuring
plan, the Company announced a reduction in force, which was implemented during
May and June 2002 at the Tarrytown facility and November and December 2002 for
the Farmington facility. The Company terminated 91 full-time and 26 temporary
employees, including 14 administrative personnel and 103 scientists and research
assistants. Five employees will remain until final disposition of the Farmington
research facility. The Company paid approximately $.18 million in stay bonuses
to the severed employees at Farmington. The restructuring plan resulted in the
reduction of the Company's full-time work force by approximately 50%.

The following table presents the original restructuring accruals for
Tarrytown and Farmington, the adjustments to these accruals, and the amounts
paid through December 31, 2002 (in millions):



Estimated Restructuring
Restructuring Actual Reserve as of
Expenses Disbursements Adjustments December 31, 2002

Severance and accrued vacation $1.0 $(0.96) $ 0.01 $0.05
Outplacement Services 0.07 (0.05) (0.02) --
Employee Benefits 0.09 (0.06) (0.03) --
Contract exit Costs 0.27 (0.20) -- 0.07
Other 0.06 (0.03) (0.03) --
Total $1.49 $(1.30) $(0.07) $0.12


In addition, the Company forgave loans to certain terminated employees and
recognized compensation expense of $0.02 million. The $0.12 million remaining
reserve is expected to be paid in the second quarter of 2003. The reserve is
included in accounts payable and accrued expenses in the consolidated balance
sheet as of December 31, 2002.

Loss on impairment of intangible and fixed assets

In connection with the results of the oral liquid heparin clinical trials,
management performed an evaluation of the recoverability of certain intangible
and fixed assets related to the oral liquid heparin program and related
initiatives. Management concluded that a total impairment of the portion of the
Purchased Technology intangible asset, representing patents related to the
liquid form of oral heparin was required because the Company does not anticipate
realization of the carrying value of this asset. The Company recorded a $3.9
million impairment charge.

At December 31, 2002, management performed an evaluation of the
recoverability of the remaining Purchased Technology related to the solid forms
of oral heparin. Since the studies related to this formulation are proceeding as
planned, management estimates that future undiscounted cash flows from programs
related to the solid form of oral heparin are still valid and therefore, an
impairment of the remaining Purchased Technology has not been triggered as of
December 31, 2002. The book value of the remaining Purchased Technology is
approximately $2.8 million. A negative outcome in the development of solid oral
heparin may trigger a write-down of related patents of $2.8 million in the
future.

In addition, an impairment of a reactor and associated accessories, which
was to be used only for manufacture of oral liquid heparin, and a gene chip
array system and related accessories had occurred. During the year, the Company
recorded a $0.6 million impairment charge, representing the reduction of the
carrying value of the reactor and gene chip array system and associated
accessories to their fair value, based on the sale of the machinery to third
parties.

In connection with the decision to dispose of the Farmington, Connecticut
research facility, management performed an evaluation of the recoverability of
land, building and equipment at the Farmington research facility. The evaluation
was based on the weighted-average probability of estimated undiscounted future
cash flows from five expressions of interest from third parties. Based on this
evaluation, an impairment loss of the carrying value of the land, building and
equipment has not been triggered as of December 31, 2002. The carrying value of
land, building, and equipment as of December 31, 2002 was approximately $4.5
million. Emisphere continues to be in discussions with potential buyers of its
Connecticut facility with proposals ranging from continuing operations as a
research facility to selling the facility and the 29 acres of land surrounding
the facility. In the event that the Company is not successful in selling the
Farmington facility, the Company will need to write down the carrying value of
the land, building and equipment further.

Depreciation and amortization costs were $6.2 million for the year ended
December 31, 2002, an increase of $2.2 million, or 54%, as compared to the same
period in 2001. This increase is mainly the result of depreciation expense
related to the


24


Farmington research facility, which was acquired in April 2001, along with
amortization expense for leasehold improvements related to additional laboratory
and office space placed into service at the Tarrytown facility in 2002.

As a result, the operating loss was $69.7 million including the
restructuring and impairment charges in the year ended December 31, 2002, an
increase of $7.4 million as compared to a $62.3 million operating loss for the
year ended December 31, 2001. Excluding the restructuring and asset impairment
charges the operating loss was $63.8 million in the year ended December 31, 2002
or an increase of $1.5 million compared to the same period last year.

Other income and expense changed to approximately $1.7 million of expense
for the year ended December 31, 2002 as compared to $5.7 million of income in
the same period of 2001. The change is primarily the result of a decrease in
investment income of $6.6 million, plus an increase in interest expense of $0.6
million related to the note due to Elan Corporation, Plc. The decrease in
investment income resulted from lower cash and investment balances and lower
interest rates. The Company also recorded a $0.2 million other than temporary
impairment charge to write-down to fair value its $0.3 million investment in the
preferred stock of a biotech company with products that could potentially use
Emisphere's oral delivery technology. The Company considered the following
factors to be primary indicators of impairment: i.) the biotech company's need
to raise sufficient capital to ensure funding of its research and development
projects, ii.) the inability to meet payment obligations as they become due and
iii.) the possibility that the company may not be able to continue as a going
concern unless additional financing is obtained. Fair value was estimated based
on the price of the biotech company's publicly-traded common stock.

Based on the above, Emisphere sustained a net loss of $71.3 million
including restructuring and impairment charges in the year ended December 31,
2002 as compared to a net loss of $56.5 million in the same period of 2001, an
increase of $14.8 million or 26%. Excluding the restructuring and impairment
charges our net loss was $65.2 million in the year ended December 31, 2002 or an
increase of $8.7 million or 15% compared to the same period last year.

The Company's costs in the first half of 2002 were relatively high due to
payments related to the Phase III PROTECT Trial and related studies. Since the
conclusion of these trials and subsequent restructuring, overall operating costs
have decreased dramatically.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Contract research revenues were $4.7 million in 2001, representing a
decrease of $2.5 million or 34% compared to the year ended December 31, 2000.
The decrease was primarily attributable to the absence of revenues from the
Novartis Pharma AG development program, including a non-recurring milestone
payment in 2000 and the near completion of the Company's related research
efforts. Revenues for 2001 related to research and development expense
reimbursement primarily under our collaborative agreements with Eli Lilly and
Company, Cubist Pharmaceuticals, Inc., and Regeneron Pharmaceuticals Inc. Costs
of contract research revenues approximate such revenues and are included in
research and development expenses.

Total operating expenses were $67.0 million for 2001, an increase of $32.9
million, or 96%, compared to the year ended December 31, 2000. The details of
the increase are as follows:

Research and development costs were $53.3 million for 2001, an increase of
$28.5 million, or 115%, compared to the year ended December 31, 2000. This
increase is mainly attributable to an increase of $14.8 million related to
conducting Phase I and Phase III clinical trials for our product candidates. The
remainder of the increase was primarily due to increased outside laboratory fees
and laboratory supply expenses of $5.9 million, salaries of $4.6 million, and
cost of occupancy of $3.0 million associated with the increased activities under
collaborative and proprietary development programs.

General and administrative expenses were $9.7 million in 2001, an increase
of $3.0 million, or 45%, compared to the year ended December 31, 2000. This
increase is primarily the result of increased legal and professional fees,
general occupancy costs, and salaries to support the increase in research
activity.

Depreciation and amortization was $4.0 million in 2001, an increase of
$1.4 million, or 54%, compared to the year ended December 31, 2000. The increase
was primarily due to depreciation of equipment and leasehold improvements made
in 2001 as we expanded our facilities at Tarrytown, New York and acquired land,
building and equipment in Connecticut.

Other income and expenses were $5.7 million of net income in 2001, a
decrease of $2.5 million, or 30%, compared to the year ended December 31, 2000.
This decrease is primarily the result of a $2.0 million decrease in investment
income resulting from lower cash, investment balances, and interest rates and an
increase of $0.5 million in non-cash interest accrued on a note payable.

Based on the above factors, we sustained a net loss of $56.5 million in
2001 an increase of $37.9 million compared to a net loss of $18.7 million in the
year ended December 31, 2000.


25


Liquidity and Capital Resources

As of December 31, 2002, the Company had cash, cash equivalents and
investments totaling $73.7 million, a decrease of $65.6 million, compared to
December 31, 2001.

Net cash used in operations was $64.1 million in 2002, as compared to
$39.6 million in the year ended December 31, 2001. The increase in cash used in
operations primarily occurred in the first half of 2002 and was related to the
Proof of Concept Phase I and II clinical trials as well as the completion of our
oral heparin solution Phase III clinical development program and the related
support spending. After completion of the Phase III clinical trial for oral
liquid heparin and the restructuring of the Company announced in May 2002, the
use of cash dropped significantly.

Capital expenditures were approximately $3.4 million in 2002 compared to
$18.7 million for the year ended December 31, 2001. The decrease in capital
expenditures is primarily due to the termination of all capital projects as well
as the new business model adopted after the restructuring, as outlined below.

Net cash provided by financing activities was approximately $1.3 million
in 2002, compared to $0.4 million during the year ended December 31, 2001 or an
increase of $0.9 million. The proceeds from the exercise of stock options
decreased from $4.0 million in 2001 to $1.3 million in 2002, due to lower prices
of the Company's common stock and fewer employee exercises. In 2001, the Company
used $3.6 million of cash to repurchase its common stock.

Emisphere's business model is to conduct Proof of Concept Phase I and II
clinical trials with the objective of attracting a partner to commercialize our
product without our funding. This business model will significantly reduce its
cash requirements in that the Company does not plan to self fund projects beyond
Phase I and II clinical trials. In 2003 the Company expects no oral heparin
solution clinical development expenses as the program was discontinued in May
2002. However, given its new business model of out-licensing and focusing on
partnerships rather than on self development of projects, the Company expects to
expand the Company's efforts to partner its products, including oral insulin,
solid heparin, cromolyn sodium and other projects. As a result, even though the
Company expects to continue to incur operating losses, these losses are
estimated to be significantly less that those incurred in 2002.

Likewise, Emisphere's cash requirements are expected to continue to
decrease due to the change in the Company's business model. These reduced costs
include, but are not limited to, decreases in personnel-related costs and
operating costs at the Tarrytown and the Connecticut facilities, leasing of
certain capital equipment, and potential sub leasing of office space in the
Tarrytown facility. Capital expenditures are expected to be in the range of $1
to $1.5 million in 2003. Purchases may be financed by a lease arrangement.

Emisphere expects its cash, cash equivalent and investment balances to
decrease by $28 to $29 million in 2003 ending the year at approximately $45
million. This level of cash usage assumes that we will not enter into
partnership agreements for either solid oral heparin or oral insulin. If the
Company were to develop solid oral heparin and insulin without a partner, it
would limit our development programs at a point prior to entering into a Phase
III clinical trial. In 2004, in the absence of a partnership, the Company may be
required to raise additional funds. Conversely, if the Company enters into a
collaboration agreement to develop oral heparin or oral insulin, depending upon
the terms of the partnership, Emisphere could receive expense reimbursement
and/or cash infusions. Such fundings may delay the Company's need for equity
financing to maintain operations beyond 2004.

In addition to 44,000 shares of the Company's common stock which had been
repurchased in prior years, in September 2001, the Company enacted a share
repurchase program, which our Board of Directors authorized for up to $30
million. During 2001, the Company repurchased an additional 200,000 shares of
our common stock for a total of $3.6 million. The current share repurchase
program was terminated in October 2001. Such stock, which is deemed to be
treasury stock, is recorded at cost. From time to time, in order to meet
corporate needs, we may repurchase further shares of our common stock. The
timing of stock repurchases is made at the discretion of management, with the
approval of our Board of Directors.

The following table summarizes our contractual obligations for long-term
debt, clinical research organization expense and research consulting agreements:



Amount Due in
---------------------------------------------------------------
Less than 1 More than 5
Type of Obligation Total Obligation year 1 to 3 years 3 to 5 years years
------------------ ---------------- ---- ------------ ------------ -----

Long-Term Debt (1)............................... $55.0 million $55.0 million
Clinical Research Organizations ................. 2.3 million $2.3 million
Research consultant agreements................... 0.1 million 0.1 million
------------- ------------- ------------- ------------
Total....................................... $57.4 million $2.4 million $55.0 million
============= ============= ============= ============= ============


- ----------
(1) $20 million Note Payable to Elan in connection with the purchase of
Ebbisham Ltd. due in July 2006; accrued interest to accumulate to $35.0
million if held to maturity; payable in cash or Emisphere stock at
Emisphere's option; balance due at December 31, 2002 was approximately
$33.2 million.


26


Critical Accounting Policies

The preparation of Consolidated Financial Statements in accordance with
accounting principles generally accepted in the United States involves the use
of estimates and assumptions that affect the recorded amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Certain of these estimates
and assumptions are considered to be Critical Accounting Policies, due to their
complexity, subjectivity, and uncertainty, along with their relevance to the
financial performance of the Company. Actual results may differ substantially
from these estimates. These policies and their key characteristics are outlined
below.

Investments. The Company invests excess cash in accordance with a policy
objective seeking to preserve both liquidity and safety of principal. The
Company considers all highly liquid, interest-bearing debt instruments with
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents include demand deposits held in banks and interest bearing
money market funds. Investments are carried at fair value and, are considered to
be available for sale. Accordingly, unrealized holding gains and losses are
reported in stockholders' equity. The Company generally invests its excess funds
in obligations of the U.S. government and its agencies, bank deposits,
mortgage-backed securities, and investment grade debt securities issued by
corporations and financial institutions at ratings of A-1 or A (Standard and
Poor's). Although the Company's investments carry high ratings when purchased, a
lowering of the rating of the corporate debt securities in our portfolio could
result in impairment to our investments.

Purchased Technology. Purchased Technology represents the value assigned
to patents underlying research and development projects of Ebbisham Ltd, related
to oral heparin, that were commenced but not yet completed as of the date of the
Company's acquisition of full ownership and which, if unsuccessful, have no
alternative future use. In accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", the fair value of Purchased Technology is reviewed for impairment on a
quarterly basis or whenever events and circumstances indicate that the carrying
value might not be recoverable. An impairment loss is recognized if the carrying
amount exceeds its fair value, which is based upon estimated undiscounted future
cash flows. At December 31, 2002, Purchased Technology is approximately $2.8
million, net of amortization. The Company amortizes purchased technology on a
straight-line basis over a period of 15 years, the average life of the related
patents. Estimated amortization expense for the Purchased Technology intangible
asset is $239,256 for each of the next five fiscal years. If there is an
impairment in the Purchased Technology intangible asset, this amount could be
significantly different.

Impairment of Long-Lived Assets. In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company reviews its long-lived assets for impairment on
a quarterly basis or whenever events and circumstances indicate that the
carrying value of an asset might not be recoverable. An impairment loss is
recognized if the carrying amount of the long-lived asset exceeds its fair
value, which is based upon estimated undiscounted future cash flows.

In the third quarter of 2002, the Company evaluated several alternatives
to consolidate its two research locations in Tarrytown, New York and Farmington,
Connecticut in order to eliminate excess capacity, reduce spending and raise
cash. The decision was made to dispose of the Farmington research facility. In
the fourth quarter, the Company evaluated the recoverability of the land,
building and equipment at the Farmington research facility. The evaluation was
based on the weighted- average probability of certain estimated undiscounted
future cash flows from five expressions of interest from third parties. Based on
estimates of expected proceeds, no impairment was recognized. The Company
estimated the proceeds of the sale of the lab equipment to be 30% of net book
value. If the Company based its estimates on the same weighted average
probability of expected cash flows, but received no value for the equipment, the
impairment charge would be in the range of $0.3 million. If the Company receives
the lowest offer and a 30% return on the equipment, our impairment would be in
the range of $1.9 million. If the Company received the next highest offer and a
30% return on the equipment, our impairment charge would be in the range of $0.3
million. The remaining offers, if taken individually would provide the Company
with a gain on sale. In the event that the Company is not successful in selling
the Farmington facility, the Company will need to write down the carrying value
of the land, building and equipment further.

Clinical Trial Accrual Methodology. Clinical trial expenses represent
obligations resulting from the Company's contracts with various research
organizations in connection with conducting clinical trials for the Company's
product candidates. The Company accounts for those expenses on an accrual basis
according to the progress of the trial as measured by patient enrolment and the
timing of the various aspects of the trial. Accruals are recorded as follows:
(1) contract costs are broken down based on the nature and the timing of costs;
(2) the costs for period expenses, such as investigator meetings and initial
start-up costs,


27


are expensed as incurred based on management's estimates; such estimates are
impacted by the change in the number of sites and recruitment of patients and
when they start; (3) direct service costs are recognized on a straight-line
basis over the life of the contract (on-going monitoring costs); and (4)
principal investigator expenses that are directly associated with recruitment
are recognized based on actual patient recruitment. All changes to the contract
amounts due to change orders are analyzed and recognized in accordance with the
above methodology. Change orders are triggered by changes in the scope, time to
completion and the number of sites. The Company adjusts its estimates of
expenses to reflect actual expenses.

Revenue Recognition. Contract research revenues consist of revenue from
collaborative agreements and feasibility studies and are comprised of reimbursed
research and development costs, as well as upfront and research and development
milestone payments. Deferred revenue represents payments received, which are
related to future performance. Non-refundable upfront and research and
development milestone payments and payments for services are recognized as
revenue as the related services are performed over the term of the
collaboration. Revenue recognized is the lower of (i) the percentage complete,
measured by incurred costs, applied to expected contractual payments or (ii) the
total non-refundable cash received to date. With regards to our revenues from
non-refundable fees, changes in our assumptions of estimated costs to complete
could have a material impact on the revenue we recognize. Contract research
revenues are expected to fluctuate from year to year and are dependent upon the
timing of work plans mutually agreed to with collaborators and to the allocation
of efforts between ourselves and our collaborators.

Research Project Spending

Emisphere has devoted substantially all of our efforts and resources to
research and development conducted on its own behalf (self-funded) and through
collaborations with corporate partners (partnered). Due to the uncertainties and
"Risk Factors" as described below, including the progress of its products in
development through clinical trials, regulatory approval, commercialization and
market acceptance, it is not possible to reliably predict future spending or
time to completion by project or project category.

The following table summarizes research and development spending by
project category (in thousands):



Five Months Year Cumulative
Year Ended Ended Ended Spending
December 31, December 31, July 31 To date (1)
------------------------------------ ------------ --------- -----------
2002 2001 2000 2000 2000 2000
---- ---- ---- ---- ---- ----

Feasibility Projects
Self-funded .............. $ 8,830 $ 6,066 $ 631 $ 630 $ 12 $ 16,012
Partnered ................ 429 831 396 136 596 2,027
Development Projects
Oral heparin (self-funded) 19,851 29,277 11,601 3,917 16,343 87,466
Partnered ................ 2,286 2,535 1,995 1,245 1,350 10,539
All Other (self-funded) .. 88 92 141
Other ......................... 18,521 14,592 10,109 4,458 9,055 73,635
--------- --------- --------- --------- --------- ---------
Total all Projects .. $ 49,916(2) $ 53,301 $ 24,820 $ 10,386 $ 27,448 $ 189,820
========= ========= ========= ========= ========= =========


- ----------
(1) Cumulative spending from August 1, 1995 through December 31, 2002

(2) During the year ending December 31, 2002, $0.197 million of research and
development expense, related to certain projects, was reclassified to
restructuring for severance charges in the Consolidated Statement of
Operations.

Transactions with Related Parties

During 2002, the Company paid $0.3 million to a former member of the Board
of Directors, subsequent to the cancellation of his vested stock options, and
recognized compensation expense for that amount.

Future Impact of Recently Issued Accounting Standards. In June 2002, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("FAS 146"). FAS 146 nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." FAS 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred, rather
than on the date of an entity's commitment to an exit plan and establishes that
fair value as the objective for initial measurement of the liability.


28


The provisions of this Statement shall be effective for exit or disposal
activities initiated after December 31, 2002. The provisions of Issue 94-3 shall
continue to apply for an exit activity initiated under an exit plan that met the
criteria of Issue 94-3 prior to this Statement's initial application. The
Company adopted FAS 146 on January 1, 2003

On December 31, 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FAS 123" (FAS 148).
FAS 148 provides several transition provisions that may be used upon adoption of
the accounting provisions of FAS 123. FAS 148 also mandates certain new
disclosures, whether or not FAS 123 is adopted, that are incremental to those
required by FAS 123. Those disclosures must be made in both interim and annual
financial statements. The transition and annual disclosure provisions of FAS 148
are effective for fiscal years ending after December 15, 2002. The new interim
disclosure provisions are effective for the first interim period beginning after
December 15, 2002.

On November 21, 2002, the EITF finalized Issue No. 00-21 "Accounting for Revenue
Arrangements with Multiple Deliverables", ("EITF 00-21") which addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting. EITF 00-21 also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The guidance in EITF 00-21 is effective for
revenue arrangements entered into for interim and annual periods beginning after
June 15, 2003.

On November 25, 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002.

These standards may apply to the Company should transactions falling
within the scope of these standards arise in the future.

Risk Factors

The following risk factors should be read carefully in connection with
evaluating our business and the forward-looking statements that we make in this
Report and elsewhere (including oral statements) from time to time. Any of the
following risks could materially adversely affect our business, our operating
results, our financial condition and the actual outcome of matters as to which
forward-looking statements are made in this Report.

Risks Related to Emisphere Technologies

Emisphere is highly dependent on the clinical success of our oral heparin
and oral insulin products.

One of Emisphere's leading product candidates it's developing and hope to
partner is a solid oral heparin. Heparin is currently not available in oral
form. This is the second form of oral heparin that the Company is attempting to
develop after its first attempt at developing an oral heparin in liquid form did
not meet its targeted endpoint of superiority to LOVENOX. The Company commenced
Phase III clinical trials ("PROTECT") for this solution form of product in 1999
and began dosing patients in January 2000. This trial was completed in early
2002 and did not meet its endpoint of superiority. As a result, all further
development of oral heparin solution was terminated. The Company's next leading
product, a solid oral heparin which is in Phase I testing, is also inherently
risky, and the outcome of its development is subject to uncertainty, as was the
liquid form. While Emisphere's objective is to show the
superiority/equivalence/non-inferiority of solid oral heparin to an existing
therapy, the Company cannot assure that future data will in fact demonstrate
superiority/equivalence/non-inferiority in the Phase I or later stage clinical
studies nor can the Company be assured that it can engage in a partnership to
enter into Phase II and III studies for the development of this product
candidate. Should this candidate be successful, there are still risks in
commercialization.

Another leading product candidate Emisphere is developing and hopes to
partner is an oral form of insulin. Insulin is currently only available as an
injection for type I and type II patients. We are aware that other companies are
currently developing alternative forms of delivery for insulin in spray (buccal)
or aerosol (pulmonary) forms and that this is a highly competitive area with a
large market risk. The Company has evaluated the performance of this product
candidate in early patient


29


testing in both Type I and Type II patients. While the Company believes that an
oral insulin has the potential to be an improved therapy for diabetics, and it
has demonstrated favorable data in early patient studies, it cannot assure that
this, or future data will in fact demonstrate that this product will be better
than existing therapy in forthcoming studies nor can it be assured that it can
engage in a partnership to enter into a development program for this product
candidate. Should this candidate be successful, there are still risks in
commercialization.

In addition, the manufacture, marketing and distribution of
pharmaceuticals is a formidable undertaking. The Company does not have the
marketing expertise to bring oral forms of heparin or insulin to market on its
own and our competitors may have more resources and/or experience in bringing
their product candidates to market.

Oral Heparin Potential Partnership Status

In July 1999, we reacquired all product, marketing and technology rights
for Emisphere's heparin products from Elan Corporation, plc, which had been our
joint venture partner since 1996. Until the Company enters into a new
partnership agreement, The Company remains responsible for the clinical trials,
development, manufacturing, marketing and distribution of our oral forms of
heparin. In accordance with the Elan agreement, Emisphere will be required to
pay Elan royalties on Emisphere sales which are capped on an annual basis. See
Note 7 to our consolidated financial statements.

The Company continues to seek a partner for this product candidate to
conduct later stage development and potential commercialization efforts.

Oral Insulin Potential Partnership Status

In 2002, an oral insulin partnership had been disclosed as a near-term
milestone as a result of late stage negotiations with a partnered entity. On
March 4, 2003, Emisphere received a letter stating that The Entity would no
longer pursue the partnership. Emisphere disclosed that the Entity's decision to
no longer pursue a partnership for the oral insulin program, and Emisphere's
decision to continue to develop this program would not affect the fiscal 2003
budget. Until Emisphere enters into a partnership agreement, it remains
responsible for the clinical trials, development, manufacturing, marketing and
distribution of its oral forms of insulin.

The Company continues to seek a partner for this product candidate to
conduct later stage development and potential commercialization efforts.

The Company's product candidates are in various stages of development, and
Emisphere cannot be certain that any will be suitable for commercial purposes.

To be profitable, the Company must successfully research, develop, obtain
regulatory approval for, manufacture, introduce, market and distribute our
products under development, or find a partner to assist us financially and
logistically with these steps. The time necessary to achieve these goals for any
individual product is long and uncertain. Before the Company or a potential
partner can sell any of our products under development, the Company must
demonstrate through preclinical (animal) studies and clinical (human) trials
that each product is safe and effective for human use for each targeted
indication. The Company cannot be certain that Emisphere or its current or
future partners will be able to begin, or continue, our planned clinical trials
for our product candidates, or if it is able, that its product candidates will
prove to be safe and will produce their intended effects.

A number of companies in the drug delivery, biotechnology and
pharmaceutical industries have suffered significant setbacks in clinical trials,
even after showing promising results in earlier studies or trials. Emisphere
cannot assure you that favorable results in any preclinical study or early
clinical trial will mean that favorable results will ultimately be obtained in
future clinical trials. Nor can Emisphere assure you that results of our limited
animal and human studies are indicative of results that would be achieved in
future animal studies or human clinical studies, all or some of which will be
required in order to have its proposed products obtain regulatory approval.
Similarly, Emisphere cannot assure you that any of its product candidates will
be approved by the FDA.

Emisphere's future business success depends heavily upon regulatory
approvals, which can be difficult to obtain for a variety of reasons, including
cost.

Emisphere's preclinical studies and clinical trials, as well as the
manufacturing and marketing of its technologies, are subject to extensive,
costly and rigorous regulation by various governmental authorities in the United
States and other countries. The process of obtaining required regulatory
approvals from the FDA and other regulatory authorities often takes many years,
is expensive and can vary significantly based on the type, complexity and
novelty of the product candidates. Emisphere cannot assure you that any
technologies or delivery agents developed by the Company, either independently
or in collaboration with


30


others, will meet the applicable regulatory criteria in order to receive the
required approvals for manufacturing and marketing. Delays in obtaining United
States or foreign approvals for its self-funded projects could result in
substantial additional costs to the Company, and, therefore, could adversely
affect our ability to compete with other companies. Additionally, delays in
obtaining regulatory approvals encountered by others with whom we collaborate,
or other licensees of ours, could also adversely affect our business and
prospects.

If regulatory approval of a product is granted, the approval may place
limitations on the intended uses of the product The Company wishes to
commercialize, and may restrict the way in which the Company is permitted to
market the product, either of which may affect cost greatly.

The Company is dependent upon collaborative partners to develop and
commercialize compounds using our delivery agents.

A key part of the Company's strategy is to form collaborations with
pharmaceutical companies that will assist us in developing, testing, obtaining
government approval for and commercializing oral forms of therapeutic compounds
using our drug delivery technologies. The Company does not currently possess the
ability or resources necessary to reach these goals alone, and it does not
currently intend independently to market products incorporating our technologies
in the foreseeable future. Other than our strategic alliances with Novartis,
Lilly, and Regeneron we have no commitments or development agreements currently
in effect.

Accordingly, the Company cannot assure you that:

o it will be able to enter into collaborative arrangements to develop
products utilizing its drug delivery technologies;

o Any existing or future collaborative arrangements will be
successful; or

o milestones in these agreements will be met.

If the Company is unable to obtain development assistance and funds from
other pharmaceutical companies to fund a portion of its product development
costs and to commercialize products, the Company may have to delay, scale back
or curtail one or more of its projects.

The Company has incurred substantial losses since inception and may
require additional capital.

Since the Company's inception in 1986, it has generated significant losses
from operations and it anticipates that it will continue to generate significant
losses from operations for the foreseeable future. On December 31, 2002, our
accumulated deficit was approximately $250 million. Operations to date have been
funded with the proceeds from collaborative research agreements, public and
private equity and debt financings and income earned on investments.

The Company expects to continue clinical development expenses for
self-funded projects including solid oral heparin and oral insulin clinical
development expenses in 2003 as it conducts Phase I/II clinical trials. The
Company expects no significant oral heparin solution clinical development
expenses as the program was discontinued in May 2002. However, given its new
business model of out licensing and focusing on partnerships not self
development of projects, the Company expects to expand its efforts to partner
its products, including oral insulin, solid heparin, cromolyn sodium and other
projects. As a result, even though the Company expects to continue to incur
operating losses for the foreseeable future, however these losses are estimated
to be significantly less that those incurred in 2002. Emisphere's business model
is to conduct Proof of Concept Phase I and II clinical trials with the objective
to attract a partner to commercialize our product without our funding. This
business model will significantly reduce its cash requirements in that it does
not plan on self funding projects.

The Company anticipates that its existing capital resources will enable us
to continue operations through the end of 2004 without raising additional
capital. However, this expectation is based on the current operating plan, that
could change as a result of many factors, and the Company may need additional
funding sooner than anticipated. To the extent operating and capital resources
are insufficient to meet future requirements, it will have to raise additional
funds to continue the development and commercialization of its products or
reduce spending by cutting spending on non critical projects. The ability to
raise funds in the future may not be available on favorable terms, or at all. To
the extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities could result in
dilution to its existing stockholders.

Actual savings and improvements in operations from current restructurings
may be lower than expected.

The ultimate sale of the Connecticut facility may not occur for the
foreseeable future and the costs of closing the facility may still require cash
outlays for utilities, insurance, maintenance, lawn care and real estate taxes.
Even if the facility sells, it may sell for less than the Company estimated,
resulting in an impairment charge.


31


If the Company cannot adequately protect its patent and proprietary
rights, the Company business will suffer.

Although the Company has patents for some of its product candidates and
have applied for additional patents, there can be no assurance that patents
applied for will be granted, that patents granted to or acquired by us now or in
the future will be valid and enforceable and provide us with meaningful
protection from competition or that we will possess the financial resources
necessary to enforce any of its patents. There can also be no assurance that any
products that Emisphere (or a licensee) develop will not infringe upon any
patent or other intellectual property right of a third party.

Emisphere also relies upon trade secrets, know-how and continuing
technological advances to develop and maintain our competitive position. The
Company maintains a policy of requiring employees, scientific advisors,
consultants and collaborators to execute confidentiality and invention
assignment agreements upon commencement of a relationship with Emisphere. The
Company cannot assure you, however, that these agreements will provide
meaningful protection for its trade secrets in the event of unauthorized use or
disclosure of such information.

Emisphere's success also depends, in part, on its ability to obtain patent
protection for its products, processes and technologies, to preserve its trade
secrets, and to operate without infringing the proprietary rights of third
parties, in various jurisdictions. Emisphere cannot assure you that any patent
applications relating to its potential products or processes will result in
patents being issued, or that resulting patents, if any, are valid, enforceable
or will provide protection against competitors who challenge its patents, obtain
patents that may have an adverse effect on its ability to conduct business, or
are able to circumvent its patent position. Emisphere cannot assure you that we
will have the necessary financial resources to enforce any of our patents.

Part of Emisphere's strategy involves collaborative arrangements with
other pharmaceutical companies for the development of new formulations of drugs
developed by others and, ultimately, the receipt of royalties on sales of the
new formulations of those drugs. These drugs are generally the property of the
pharmaceutical companies and may be the subject of patents or patent
applications and other forms of protection owned by the pharmaceutical
companies. To the extent those patents or other forms of protection expire,
become invalid or otherwise ineffective, or to the extent those drugs are
covered by patents or other forms of protection owned by third parties, sales of
those drugs by the collaborating pharmaceutical company may be restricted,
limited, enjoined, or may cease. Accordingly, the potential for royalty revenues
to us may be adversely affected.

The Company may be at risk of having to obtain a license from partners
making proprietary improvements to the Company's technology.

There is a risk that a partner may make improvements or innovations to the
Company's technology and that Emisphere may need to obtain a license from that
partnership. Royalties payable under such a license, if obtainable, would reduce
Emisphere's share of total revenue.

The Company is dependent on third parties to manufacture and in some
cases, test Emisphere's products.

While as of 2002, the Company now has a GMP compliant facility to
manufacture a limited number of clinical supplies related to our EMISPHERE
delivery agents, the Company currently has no manufacturing facilities for
large-scale clinical or commercial production of any compounds under
consideration as products. The Company also has no research facilities for later
stage product candidate testing prior to first human testing. Management is
currently evaluating its options to manufacture or rely on third parties.

The Company may face product liability claims related to participation in
clinical trials or the use or misuse of its products.

The Company has product liability insurance with a policy limit of $10
million per occurrence and in the aggregate. The testing, manufacturing and
marketing of products for humans utilizing its drug delivery technologies may
expose us to potential product liability and other claims resulting from their
use.

Liability may also result from claims made directly by consumers or by
pharmaceutical companies or others selling Emsiphere products. The Company seeks
to structure future development programs with pharmaceutical companies that
would complete the development, manufacturing and marketing of the finished
product, but the indemnity undertakings for product liability claims that we
secure from the pharmaceutical companies may later prove to be insufficient.

Risks Related to Our Industry

The Company faces rapid technological change and intense competition.

The Company's success depends, in part, upon maintaining a competitive
position in the development of products and technologies in an evolving field in
which developments are expected to continue at a rapid pace. The Company
competes with


32


other drug delivery, biotechnology and pharmaceutical companies, research
organizations, individual scientists and non-profit organizations engaged in the
development of alternative drug delivery technologies or new drug research and
testing, as well as with entities developing new drugs that may be orally
active. Many of these competitors have greater research and development
capabilities, experience, and marketing, financial and managerial resources than
we do, and, therefore, represent significant competition for the Company.

The Company's products, when developed and marketed, may compete with
existing injectable versions of the same drug, some of which are well
established in the marketplace and manufactured by formidable competitors, as
well as other existing drugs. For example, The Company's oral heparin product
candidate, if successful, would compete with injectable heparin, injectable low
molecular weight heparin and warfarin, an oral anti-coagulant. These products
are marketed throughout the world by very large companies such as Aventis SA,
Pharmacia & Upjohn, Inc. and Bristol Myers Squibb. Similarly, our salmon
calcitonin product candidate, if developed and marketed, would compete with a
wide array of existing osteoporosis therapies, including a nasal dosage form of
salmon calcitonin, estrogen replacement therapy, bisphosphonates and selective
receptor modulators.

The Company's competitors may succeed in developing competing technologies
or obtaining government approval for products before we do. Developments by
others may render our product candidates, or the therapeutic compounds used in
combination with its product candidates, noncompetitive or obsolete. For
example, the Company is aware that AstraZeneca PLC has completed Phase III
clinical trials of a pro-drug form of melagantran, a direct thrombin inhibitor,
which, if successfully developed, would compete with our oral heparin products.
Similarly, the Company is aware that Nobex Corporation has an oral insulin
formulation being developed by GlaxoSmithKline and that at least one competitor
has notified the FDA that it is developing a competing formulation of salmon
calcitonin. The Company cannot assure you that, if our products are marketed,
they will be preferred to existing drugs or that they will be preferred to or
available before other products in development. For a more detailed discussion
of known competitors and competing products candidates and technologies, see our
summary under the heading: "Item 1. Business-Competition."

Risks Relating to The Company's Common Stock

Anti-takeover provisions of the Company's corporate charter documents,
Delaware law and its agreements with collaborators may affect the price of the
Company's common stock.

Emisphere's Board of Directors has the authority to issue up to 1,000,000
shares of preferred stock and to determine the rights, preferences and
privileges of those shares without any further vote or action by its
stockholders. Of these 1,000,000 shares, 200,000 are currently designated Series
A Junior Participating Cumulative Preferred Stock in connection with its
stockholders' rights plan, and the remaining 800,000 shares remain available for
future issuance. Your rights as a holder of common stock may be adversely
affected by the rights of the holders of any preferred stock that may be issued
in the future. Additional provisions of our certificate of incorporation and
by-laws could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting common stock. These include
provisions that classify our board of directors, limit the ability of
stockholders to take action by written consent, call special meetings, remove a
director for cause, amend the by-laws or approve a merger with another company.
The Company also has a stockholder's right's plan, commonly referred to as a
"poison pill," that makes it difficult, if not impossible, for a person to
acquire control of the Company without the consent of our Board of Directors.

Emisphere is subject to the provisions of Section 203 of the Delaware
General Corporation Law which prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, either alone or together with affiliates and associates, owns (or
within the past three years, did own) 15% or more of the corporation's voting
stock.

Emisphere's stock price has been and may continue to be volatile.

The trading price for the Company's common stock has been and is likely to
continue to be highly volatile. The market prices for securities of drug
delivery, biotechnology and pharmaceutical companies have historically been
highly volatile. Factors that could adversely affect the Company's stock price
include:

o fluctuations in the Company's operating results;

o announcements of partnerships or technological collaborations,
innovations or new products by Emisphere or its competitors;


33


o governmental regulation;

o developments in patent or other proprietary rights;

o public concern as to the safety of drugs developed by Emisphere or
others;

o the results of preclinical testing and clinical studies or trials by
Emisphere, our partners or our competitors;

o litigation;

o general market conditions;

o number of shares available for trading (float).

o Inclusion in or dropping from stock indexes.

Future sales of common stock, or the prospect of future sales, may depress
the Company's stock price.

Sales of a substantial number of shares of common stock, or the perception
that sales could occur, could adversely affect the market price of our common
stock. As of December 31, 2002, Emisphere has outstanding options to purchase up
to 3,393,841 shares of common stock which are currently exercisable and
additional options to purchase up to 1,456,711 shares of common stock are
exercisable over the next several years. In addition, an aggregate of 25,000
shares of common stock have been reserved for issuance under our Directors'
Deferred Compensation Plan, of which 8,717 shares are currently issuable. The
holders of these options or rights have an opportunity to profit from a rise in
the market price of our common stock with a resulting dilution in the interests
of the other. The existence of these options or rights may adversely affect the
terms on which we may obtain additional financing.


34


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Emisphere's primary investment objective is to preserve principal while
maximizing yield without significantly increasing our risk. Our investments
consist of U.S. Treasuries, commercial paper and corporate notes. The Company's
investments totaled $70.9 million at December 31, 2002. Approximately $61.3
million, of which $49.2 million were short-term and $12.1 million were long-term
investments, had fixed interest rates, and $9.6 million, of which $8.5 million
were short-term, and $1.1 million were long- term investments, with variable
interest rates.

Due to the conservative nature of its short-term fixed interest rate
investments (maturities in less than one year), The Company does not believe
that we have a material exposure to interest rate risk. The Company's fixed
interest rate long-term investments are sensitive to changes in interest rates.
Interest rate changes would result in a change in the fair value of these
investments due to differences between the market interest rate and the rate at
the date of purchase of the investment. A 100 basis point increase in the
year-end market interest rates would result in a decrease of approximately $0.2
million in the market values of these investments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and financial statement schedules begin on page
F-1 of this report.

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

None.


35


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is incorporated by reference to the
Proxy Statement to be distributed in connection with our next annual meeting of
stockholders.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference to the
Proxy Statement to be distributed in connection with our next annual meeting of
stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is incorporated by reference to the
Proxy Statement to be distributed in connection with our next annual meeting of
stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference to the
Proxy Statement to be distributed in connection with our next annual meeting of
stockholders.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing of this report,
the Company's principal executive officer and principal financial
officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective
to ensure that information, required to be disclosed by the Company
in reports that it files or submits under the Exchange Act, is
recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.

(b) Changes in internal controls. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
most recent evaluation. There were no significant deficiencies or
material weaknesses, and therefore there were no corrective actions
taken.


36


PART IV

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

(a) (1) Financial Statements

A list of the financial statements filed as a part of this report
appears on page F-1.

(2) Financial Statement Schedules

Schedules have been omitted, because the information required is not
applicable or is shown in the Financial Statements or the
corresponding Notes to the Consolidated Financial Statements.

(3) Exhibits

A list of the exhibits filed as a part of this report appears on
pages E-1 and E-2, which follow immediately after the financial
statements.

(b) Reports on Form 8-K

None.

(c) See Exhibits listed under the heading "Exhibit Index" set forth on
page E-1.

(d) Not applicable. See Item 14 (a) (2).


37


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date: March 31, 2003

EMISPHERE TECHNOLOGIES, INC.

By: /s/ MICHAEL M. GOLDBERG
-------------------------------------------------
Michael M. Goldberg, M.D.
Chairman of the Board and Chief Executive Officer

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

Name and Signature Title Date
------------------ ----- ----

/s/ MICHAEL M. GOLDBERG Director, Chairman of the Board March 28, 2003
- --------------------------- and Chief Executive Officer
Michael M. Goldberg, M.D.

/s/ JERE E. GOYAN Director March 28, 2003
- ---------------------------
Jere E. Goyan, Ph.D

/s/ HOWARD M. PACK Director March 28, 2003
- ---------------------------
Howard M. Pack

/s/ MARK I. GREENE Director March 28, 2003
- ---------------------------
Mark I. Greene, M.D., Ph.D.

/s/ JOSEPH R. ROBINSON Director March 28, 2003
- ---------------------------
Joseph R. Robinson, Ph.D.

/s/ ROBERT J. LEVENSON Director March 28, 2003
- ---------------------------
Robert J. Levenson

/s/ FREDRICK D. COBB Assistant Vice President - March 28, 2003
- --------------------------- Finance and Accounting
Fredrick D. Cobb


38


CERTIFICATION

I, Michael M. Goldberg, M.D., certify that:

1. I have reviewed this annual report on Form 10-K of Emisphere
Technologies, Inc;

2. Based on my knowledge, this annual report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have;

a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiary, is made known to us by
others within that entity, particularly in which this annual
report is being prepared.

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this annual report (the "Evaluation Date"); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

/S/Michael M. Goldberg, M.D.
----------------------------
Michael M. Goldberg, M.D.
Chairman and CEO


39


CERTIFICATION

I, Fredrick D. Cobb, certify that:

1. I have reviewed this annual report on Form 10-Q of Emisphere
Technologies, Inc;

2. Based on my knowledge, this annual report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have;

a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiary, is made known to us by
others within that entity, particularly in which this annual
report is being prepared.

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this annual report (the "Evaluation Date"); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

/S/Fredrick D. Cobb
-------------------
Fredrick D. Cobb
Assistant Vice President Finance and
Accounting
(Principal Financial Officer)


40


EMISPHERE TECHNOLOGIES, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Index

Emisphere Technologies, Inc. Page(s)
-------
Report of Independent Accountants ............................... F-2

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2002 and 2001 .... F-3

Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000 (unaudited),
the five months ended December 31, 2000, and the
year ended July 31, 2000 ..................................... F-4

Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 (unaudited),
the five months ended December 31, 2000, and the
year ended July 31, 2000 ..................................... F-5

Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002 and 2001, the five
months ended December 31, 2000 and the year
ended July 31, 2000 .......................................... F-6

Notes to the Consolidated Financial Statements .................. F-7


F-1


REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of Emisphere Technologies, Inc.:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Emisphere Technologies, Inc. and subsidiary, at December 31, 2002 and 2001, and
the results of their operations and their cash flows for the years ended
December 31, 2002 and December 31, 2001, the five months ended December 31,
2000, and the year ended July 31, 2000 in conformity with generally accepted
accounting principles 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
generally accepted auditing standards 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.

PRICEWATERHOUSECOOPERS LLP

New York, New York
January 31, 2003


F-2


EMISPHERE TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)



December 31,
------------
2002 2001
---- ----

ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 22,784 $ 42,853
Investments ................................................................. 37,676 31,016
Prepaid expenses and other current assets ................................... 2,285 3,565
--------- ---------
Total current assets ..................................................... 62,745 77,434
Equipment and leasehold improvements, net of accumulated
depreciation and amortization ........................................... 23,282 31,089
Land, building and equipment held for sale, net of accumulated
depreciation ............................................................ 4,520
Purchased technology, net of accumulated amortization .................... 2,752 7,035
Investments .............................................................. 13,241 65,409
Other assets ............................................................. 1,426 1,116
--------- ---------
Total assets ............................................................. $ 107,966 $ 182,083
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 5,324 $ 13,581
Deferred revenue
8
--------- ---------
Total current liabilities ................................................ 5,324 13,589
Note payable, including accrued interest ................................. 33,181 28,712
Deferred lease liability ................................................. 1,921 2,140
--------- ---------
Total liabilities ........................................................ 40,426 44,441
--------- ---------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,000,000 shares; none issued and
outstanding
Common stock, $.01 par value; authorized 40,000,000 shares; issued 18,253,000
shares (18,009,000 outstanding) in 2002 and 18,041,000 shares (17,797,000
outstanding) in 2001 ....................................................... 182 180
Additional paid-in capital .................................................. 321,292 319,916
Note receivable from officer and director ................................... (804) (804)
Accumulated deficit ......................................................... (250,164) (178,822)
Accumulated other comprehensive income ...................................... 821 959
--------- ---------
71,327 141,429
Less, common stock held in treasury, at cost; 244,000 shares in 2002 and 2001 .. (3,787) (3,787)
--------- ---------
Total stockholders' equity .................................................. 67,540 137,642
Total liabilities and stockholders' equity .................................. $ 107,966 $ 182,083
========= =========


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


F-3


EMISPHERE TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)




Five
Months
Year Ended Ended Year Ended
December 31, December 31, July 31,
-------------------------------------------- ------------ ------------
2002 2001 2000 2000 2000
---- ---- ---- ---- ----
(unaudited)

Revenue ............................... $ 3,378 $ 4,728 $ 7,211 $ 2,414 $ 5,889
------------ ------------ ------------ ------------ ------------

Costs and expenses:
Research and development ........... 49,719 53,301 24,820 10,386 27,448
General and administrative ......... 11,242 9,692 6,699 3,039 5,878
Restructuring ...................... 1,417
Loss on impairment of intangible and
fixed assets ..................... 4,507

Depreciation and amortization ...... 6,185 4,014 2,605 1,167 2,434
------------ ------------ ------------ ------------ ------------
Total expenses .................. 73,070 67,007 34,124 14,592 35,760
------------ ------------ ------------ ------------ ------------
Operating loss .................. (69,692) (62,279) (26,913) (12,178) (29,871)
------------ ------------ ------------ ------------ ------------
Other (expense) and income:
Investment and other income ........ 3,044 9,612 11,606 6,058 6,140
Loss on impairment of investment ... (222)
Interest expense ................... (4,472) (3,867) (3,353) (1,466) (3,166)
------------ ------------ ------------ ------------ ------------
Total other (expense) and income (1,650) 5,745 8,253 4,592 2,974
------------ ------------ ------------ ------------ ------------
Net loss .............................. $ (71,342) $ (56,534) $ (18,660) $ (7,586) $ (26,897)
============ ============ ============ ============ ============

Net loss per share, basic and diluted . $ (3.98) $ (3.18) $ (1.10) $ (0.43) $ (1.79)
============ ============ ============ ============ ============

Weighted average shares outstanding,
basic and diluted ................... 17,919,000 17,755,000 16,954,000 17,646,000 15,039,000
============ ============ ============ ============ ============



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


F-4


EMISPHERE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)



Five Months
Year Ended Ended Year Ended
December 31, December 31, July 31,
----------------------------------- ------------------------
2002 2001 2000(1) 2000 2000
---- ---- ------- ---- ----

Cash flows from operating activities:
Net loss ....................................................... $ (71,342) $ (56,534) $ (18,660) $ (7,586) $ (26,897)
--------- --------- --------- -------- ---------
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash interest expense .................................. 4,468 3,867 3,327 1,466 3,123
Depreciation and amortization .............................. 5,811 3,451 2,043 933 1,871
Amortization of purchased technology ....................... 374 563 563 235 563
Impairment of intangible and fixed assets .................. 4,507
Amortization/deferral of deferred lease liability .......... (219) 30 (37) 127
Non-cash compensation ...................................... 43 294 101 92 45
Amortization of deferred financing cost .................... 21
Amortization of discount (premium) on investments .......... (9) 334 412 456 (175)
Impairment of investment ................................... 222
Net realized gain on sale of investments ................... (387) (274)
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other current
assets ................................................... 1,280 680 (4,644) (2,038) (2,570)
(Increase) in other assets ................................. (531)
(Decrease) increase in deferred revenue .................... (8) (1,355) 1,363 1,363)
(Decrease) increase in accounts payable and accrued
expenses ................................................. (8,271) 9,415 (55) (974) 2,215
--------- --------- --------- -------- ---------
Total adjustments ...................................... 7,280 16,975 3,140 1,496 5,220
--------- --------- --------- -------- ---------
Net cash used in operating activities .................. (64,062) (39,559) (15,520) (6,090) (21,677)
--------- --------- --------- -------- ---------
Cash flows from investing activities:
Proceeds from sales of investments ............................. 97,076 223,590 96,375 42,007 72,057
Purchases of investments ....................................... (51,311) (144,588) (271,314) (39,171) (243,358)
Proceeds from sale of fixed assets ............................. 332
Capital expenditures ........................................... (3,439) (18,656) (6,336) (5,521) (977)
--------- --------- --------- -------- ---------
Net cash provided by (used in) investing activities ........ 42,658 60,346 (181,275) (2,685) (172,278)
--------- --------- --------- -------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options ........................ 1,335 4,034 3,457 351 3,548
Repurchase of common stock ..................................... (3,594)
Net proceeds from issuance of common stock ..................... 188,143 211,644
Redemption of senior convertible notes ......................... (2,648)
--------- --------- --------- -------- ---------
Net cash provided by financing activities .......................... 1,335 440 191,600 351 212,544
--------- --------- --------- -------- ---------
Net (decrease) increase in cash and cash equivalents ............... (20,069) 21,227 (5,195) (8,424) 18,589
Cash and cash equivalents, beginning of year ....................... 42,853 21,626 26,821 30,050 11,461
--------- --------- --------- -------- ---------
Cash and cash equivalents, end of year ............................. $ 22,784 $ 42,853 $ 21,626 $ 21,626 $ 30,050
========= ========= ========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest ......................................... $ 56
=========
Non-cash investing and financing activities:
Capital expenditures in accounts payable ....................... $ 15 $ 690
======== =========

Note received for stock option exercise by officer ............. $ 804
=========


(1) Unaudited

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


F-5


EMISPHERE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2002 and 2001, the five months ended December
31, 2000 and the year ended July 31, 2000
(in thousands, except share data)




Accumulated Common Stock
Additional Other Held in Treasury
Common Stock Paid-in Note Accumulated Comprehensive ----------------
Shares Amount Capital Receivable Deficit (Loss) Income Shares Amount Total
------ ------ ------- ---------- ------- ------------- ------ ------ -----

Balance, July 31, 1999 ..... 12,181,000 122 99,162 (87,805) 1 44,000 (193) 11,287
Net loss ................... (26,897) (26,897)
Unrealized loss on
investments ............... (76) (76)
--------
Comprehensive loss ......... (26,973)
--------
Sale of common stock under
employee stock purchase
plans and exercise of
options ................... 448,000 4 4,348 4,352

Issuance of common stock
in connection with public
offerings, net of expenses . 5,050,000 51 211,593 211,644
Note receivable from officer
and director .............. (804) (804)

Issuance of stock options
for services rendered ..... 45 45
---------- -------- --------- --------- --------- -------- ------- -------- --------
Balance, July 31, 2000 ..... 17,679,000 177 315,148 (804) (114,702) (75) 44,000 (193) 199,551
Net Loss ................... (7,586) (7,586)
Unrealized gain on
investments ............... 732 732
--------
Comprehensive loss ......... (6,854)
--------
Sale of common stock under
employee stock purchase
plans and exercise of
options ................... 24,000 351 351

Issuance of stock options
for services rendered ..... 92 92
---------- -------- --------- --------- --------- -------- ------- -------- --------
Balance, December 31, 2000 . 17,703,000 177 315,591 (804) (122,288) 657 44,000 (193) 193,140
Net Loss ................... (56,534) (56,534)
Unrealized gain on
investments ............... 302 302
--------
Comprehensive loss ......... (56,232)
--------
Sale of common stock under
employee stock purchase
plans and exercise of
options ................... 338,000 3 4,031 4,034

Repurchase of common stock . 200,000 (3,594) (3,594)

Issuance of stock options
for services rendered ..... 294 294
---------- -------- --------- --------- --------- -------- ------- -------- --------
Balance, December 31, 2001 . 18,041,000 180 319,916 (804) (178,822) 959 244,000 (3,787) 137,642

Net Loss ................... (71,342) (71,342)
Unrealized loss on
investments ............... (138) (138)
--------
Comprehensive loss ......... (71,480)
--------
Sale of common stock under
employee stock purchase
plans and exercise of
options ................... 212,000 2 1,333 1,335

Issuance of stock options
for services rendered ..... 43 43
---------- -------- --------- --------- --------- -------- ------- -------- --------
Balance, December 31, 2002 . 18,253,000 $ 182 $ 321,292 $ (804) $(250,164) $ 821 244,000 $ (3,787) $ 67,540
========== ======== ========= ========= ========= ======== ======= ======== ========


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


F-6


EMISPHERE TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited with respect to the year ended December 31, 2000)
(in thousands, except share and per share data)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations. Emisphere Technologies, Inc. (the "Company") is a
biopharmaceutical company specializing in the oral delivery of therapeutic
macromolecules and other compounds that are not currently deliverable by oral
means. Since its inception in 1986, the Company has devoted substantially all of
its efforts and resources to research and development conducted on its own
behalf as well as through collaborations with corporate partners and academic
research institutions. The Company has no product sales to date. The Company
operates under a single segment.

In 2002 the Company experienced a substantial increase in clinical
development expenses for self-funded projects and in oral heparin solution
clinical development expenses as the Company conducted Phase III clinical
trials. On May 14, 2002 Emisphere announced the initial results from its Phase
III study with a liquid oral heparin solution (formulation) for the prevention
of Deep Vein Thrombosis ("DVT", or blood clots) in total hip replacement surgery
patients. The results did not demonstrate the superiority of liquid oral heparin
solution, when dosed in a 30-day treatment regimen, compared to Aventis'
Lovenox(R) (enoxaparin) administered by injection in a 10-day dosing regimen in
preventing DVTs. On May 22, 2002, the Company announced a plan for restructuring
its operations, which included the discontinuation of its liquid oral heparin
program and any related initiatives, and a scale back of any associated
infrastructure. In 2003 we expect no significant oral heparin solution clinical
development expenses. In September 2002, the decision was made to dispose of the
Farmington, Connecticut research facility in order to eliminate excess capacity,
reduce spending and raise cash. Operations in Connecticut were shut down by year
end and the facility land, building and equipment are held for sale.

Emisphere's business model is to conduct Proof of Concept Phase I and II
clinical trials with the objective of attracting a partner to commercialize our
product without our funding. This business model will significantly reduce its
cash requirements in that the Company does not plan to self fund projects beyond
Phase I and II clinical trials. In 2003 the Company expects no oral heparin
solution clinical development expenses as the program was discontinued in May
2002. However, given its new business model of out-licensing and focusing on
partnerships rather than on self development of projects, the Company expects to
expand the Company's efforts to partner its products, including oral insulin,
solid heparin, cromolyn sodium and other projects. As a result, even though the
Company expects to continue to incur operating losses, these losses are
estimated to be significantly less that those incurred in 2002.

Risks and Uncertainties. The Company has no products approved for sale by the
U.S. Food and Drug Administration. There can be no assurance that the Company's
research and development will be successfully completed, that any products
developed will obtain necessary government regulatory approval or that any
approved products will be commercially viable. In addition, The Company operates
in an environment of rapid change in technology and is dependent upon the
continued services of its current employees, consultants and subcontractors.

Use of Estimates The preparation of Consolidated Financial Statements in
accordance with accounting principles generally accepted in the United States
involves the use of estimates and assumptions that affect the recorded amounts
of assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ substantially from these estimates. Significant estimates
include the fair value and recoverability of the carrying value of Purchased
Technology, the fair value and recoverability of the Farmington research
facility, recognition of on-going clinical trial costs, estimated costs to
complete research collaboration projects and deferred taxes.

Change in Fiscal Year. On January 30, 2001, Emisphere's Board of Directors
approved a change in the Company's fiscal year end from July 31 to December 31.
A five-month transition period from August 1, 2000 to December 31, 2000 preceded
the start of the first calendar year reporting period 2001.

Principles of Consolidation. The consolidated financial statements include
the accounts of one subsidiary. All inter-company transactions have been
eliminated in consolidation.

Concentration of Credit Risk. Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist of cash and cash
equivalents and investments. The Company invests excess funds in accordance with
a policy objective seeking to preserve both liquidity and safety of principal.
The Company generally invests its excess funds in obligations of the


F-7


U.S. government and its agencies, bank deposits, money market funds,
mortgage-backed securities, and investment grade debt securities issued by
corporations and financial institutions. The Company holds no collateral for
these financial instruments.

Cash, Cash Equivalents, and Investments. The Company considers all highly
liquid, interest-bearing instruments with maturity of three months or less when
purchased to be cash equivalents. Cash and cash equivalents include demand
deposits held in banks and interest bearing money market funds.

The Company considers its short- and long-term investments to be available
for sale. Investments are carried at fair value, with unrealized holding gains
and losses reported in stockholders' equity. The fair value of the investments
has been estimated based on quoted market prices.

Realized gains and losses are included as a component of investment
income. In computing realized gains and losses, the Company determines the cost
of its investments on a specific identification basis. Such cost includes the
direct costs to acquire the investments, adjusted for the amortization of any
discount or premium. For the years ended December 31, 2002, 2001 and 2000, the
five months ended December 31, 2000 and the year ended July 31, 2000, gross
realized gains and losses were not significant.

The following is a summary of the fair value of available for sale
investments as of December 31, 2002 and 2001:

2002 2001
---- ----
Maturities less than one year:
U.S government securities.......................... $20,236 $11,944
Corporate debt securities........................... 17,440 19,072
Maturities between one and three years:
U.S. government securities.......................... 9,524 6,421
Corporate debt securities........................... 1,099 56,602
Maturities between five and ten years:
Corporate debt securities........................... 2,618 2,386
------- -------
$50,917 $96,425
======= =======

As of December 31, 2002 and 2001 the difference between the fair value and
amortized cost of available for sale investments was $821 and $959,
respectively..

Interest income, which is included in investment income, is recognized as
earned.

Equipment and Leasehold Improvements. Equipment and leasehold improvements
are stated at cost. Depreciation and amortization are provided for on the
straight-line basis over the estimated useful life of the asset. Leasehold
improvements are amortized over the life of the lease or of the improvements
whichever is shorter. Expenditures for maintenance and repairs that do not
materially extend the useful lives of the respective assets are charged to
expense as incurred. The cost and accumulated depreciation or amortization of
assets retired or sold, are removed from the respective accounts and any gain or
loss is recognized in operations.

Purchased Technology. Purchased Technology represents the value assigned
to patents underlying research and development projects of Ebbisham Ltd, related
to oral heparin, that were commenced but not yet completed as of the date of the
Company's acquisition of full ownership and which, if unsuccessful, have no
alternative future use. In accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", the fair value of Purchased Technology is reviewed for impairment on a
quarterly basis or whenever events and circumstances indicate that the carrying
value might not be recoverable. An impairment loss is recognized if the carrying
amount exceeds its fair value, which is based upon estimated undiscounted future
cash flows. At December 31, 2002, Purchased Technology is approximately $2.8
million, net of amortization. Purchased Technology is amortized on a
straight-line basis over a period of 15 years, the average life of the related
patents. Estimated amortization expense for the Purchased Technology intangible
asset is $239,256 for each of the next five fiscal years. If there is an
impairment in the Purchased Technology intangible asset, this amount could be
significantly different.

Impairment of Long-Lived Assets. In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company reviews its long-lived assets for impairment on
a quarterly basis or whenever events and circumstances indicate that the
carrying value of an asset might not be recoverable. An impairment loss is
recognized if the carrying amount of the long-lived asset is not recoverable and
its carrying amount exceeds its fair value, which is based upon estimated
undiscounted future cash flows.


F-8


Deferred Lease Liability. Various leases entered into by the Company
provide for rental holidays and escalations of the minimum rent during the lease
term, as well as additional rent based upon increases in real estate taxes and
common maintenance charges. The Company records rent expense from leases with
rental holidays and escalations using the straight-line method, thereby
prorating the total rental commitment over the term of the lease. Under this
method, the deferred lease liability represents the differences between the
minimum cash rental payments and the rent expense computed on a straight-line
basis.

Repurchase of Common Stock. From time to time, in order to meet corporate
needs, the Company repurchases shares of its common stock. Such stock, which is
deemed to be treasury stock, is recorded at cost. The timing of stock
repurchases is made at the discretion of management, with the approval of the
Company's Board of Directors.

Revenue Recognition. On August 1, 2000, the Company adopted the Securities
and Exchange Commission's ("SEC") Staff Accounting Bulletin 101, "Revenue
Recognition" ("SAB 101"). In accordance with SAB 101, contract research revenues
consist of revenue from collaborative agreements and feasibility studies and are
comprised of reimbursed research and development costs, as well as upfront and
research and development milestone payments. Deferred revenue represents
payments received, which are related to future performance. Non-refundable
upfront and research and development milestone payments and payment for services
("Non-refundable Fees") are recognized as revenue as the related services are
performed over the term of the collaboration. Revenue recognized is the lower of
(i) the percentage complete, measured by incurred costs, applied to expected
contractual payments or (ii) the total non-refundable cash received to date.
Adoption of SAB 101 did not have a material impact on the Company's financial
statements.

Prior to August 1, 2000, the Company recognized revenue as described
above, except that certain Non-refundable Fees, including reimbursements from
Ebbisham Ltd., were recognized as revenue when there were no additional
contractual services to be provided or costs to be incurred by the Company in
connection with the Non-refundable Fee.

Research and Development and Clinical Trial Expenses. Research and
development expenses include costs directly attributable to the conduct of
research and development programs, including the cost of salaries, payroll
taxes, employee benefits, materials, supplies, maintenance of research
equipment, costs related to research collaboration and licensing agreements,the
cost of services provided by outside contractors, including services related to
the Company's clinical trials, clinical trial expenses, the full cost of
manufacturing drug for use in research, preclinical development, and clinical
trials. All costs associated with research and development are expensed as
incurred.

Clinical research expenses represent obligations resulting from the Company's
contracts with various research organizations in connection with conducting
clinical trials for the Company's product candidates. The Company accounts for
those expenses on an accrual basis according to the progress of the trial as
measured by patient enrollment and the timing of the various aspects of the
trial. Accruals are recorded as follows: (1) Contract costs are broken down
based on the nature and the timing of costs; (2) the costs for period expenses,
such as investigator meetings and initial start-up costs, are expensed as
incurred based on management's estimates. Such estimates are impacted by the
change in the number of sites and recruitment of patients and when they start;
(3) direct service costs are recognized on a straight-line basis over the life
of the contract (on-going monitoring costs); and (4) principal investigator
expenses that are directly associated with recruitment are recognized based on
actual patient recruitment. All changes to the contract amounts due to change
orders are analyzed and recognized in accordance with the above methodology.
Change orders are triggered by changes in the scope, time to completion and the
number of sites. The Company adjusts estimates of expenses to reflect actual
experience.

Income Taxes. Deferred tax liabilities and assets are recognized for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. These liabilities and assets are determined
based on differences between the financial reporting and tax basis of assets and
liabilities measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is
recognized to reduce deferred tax assets to the amount that is more likely than
not to be realized. In assessing the likelihood of realization, management
considered estimates of future taxable income.

Stock-Based Employee Compensation. The accompanying financial position and
results of operations of the Company have been prepared in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under
APB No. 25, compensation expense is generally not recognized in connection with
the awarding of stock option grants to employees, provided that, as of the grant
date, all terms associated with the award are fixed and the quoted market price
of the Company's stock as of the grant date is equal to or less than the option
exercise price.


F-9


The Company has several stock-based compensation plans, which are
described in Note 10. In accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
as amended by Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation Transition and Disclosure, an amendment of SFAS
123" ("SFAS No. 148"), proforma operating results have been determined as if the
Company had prepared its financial statements in accordance with the fair value
based method of accounting for stock based compensation. The following table
illustrates the effect on net loss and net loss per share as if the Company had
applied the fair value based method. Since option grants awarded during 2002,
2001, and 2000 vest over several years and additional awards are expected to be
issued in the future, the pro forma results shown below are not likely to be
representative of the effects on future years of the application of the fair
value-based method.



Five Months
Year Ended Ended Year Ended
December 31, December 31, July 31,
------------ ------------ --------
2002 2001 2000 2000 2000
---- ---- ---- ---- ----
(unaudited)

Net loss, as reported .................................................... (71,342) (56,534) (18,660) (7,586) (26,897)
Add: Stock-based employee compensation expense included in
reported net loss ..................................................... 43 294 101 92 45
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards .......................... (7,378) (9,032) (6,098) (3,843) (5,235)
-------- -------- -------- -------- --------

Pro forma net loss ....................................................... $(78,677) $(65,272) $(24,657) $(11,337) $(32,087)

Net loss per share amounts, basic and diluted:
As reported .......................................................... $ (3.98) $ (3.18) $ (1.10) $ (0.43) $ (1.79)
Pro forma ............................................................ $ (4.39) $ (3.68) $ (1.45) $ (0.64) $ (2.13)


For the purpose of the above pro forma calculation, the fair value of each
option granted was estimated on the date of grant using the Black-Scholes option
pricing model. The following assumptions were used in computing the fair value
of options granted: expected volatility of 85% in 2002, 2001 and 2000, expected
lives of five years (except for the Employee Stock Purchase Plans, where the
expected lives are six months), zero dividend yield, and weighted-average
risk-free interest rate of 3.9% in 2002, 3.0% in 2001, and 6.0% in 2000.

The fair value of options and warrants granted to non-employees for goods
or services is expensed as the goods are utilized or the services performed.

Other disclosures required by SFAS 123 have been included in Note 10.

Net Loss Per Share. Net loss per share, basic and diluted, is computed
using the weighted average number of shares of the Company's common stock
outstanding during the period. For all periods presented, the Company reported
net losses and, therefore, no common stock equivalents were included in the
computation of diluted net loss per share, since such inclusion would have been
anti-dilutive. Stock options that have been excluded from diluted loss per share
amounted to 4,850,552, 4,794,148, 4,469,101 (unaudited), 4,470,251, and
4,466,661 for the years ended December 31, 2002, 2001 and 2000, the five months
ended December 31, 2000, and the year ended July 31, 2000, respectively.

Fair Value of Financial Instruments. The carrying amounts for cash, cash
equivalents, accounts payable, and accrued expenses approximate fair value
because of their short-term nature. The carrying amount for the Company's debt
instrument approximates fair value. The Company has determined that it is not
practicable to estimate the fair value of its Note Payable because of its unique
nature and the costs that would be incurred to obtain an independent valuation.
Specifically, the Note Payable was issued by the Company in the transaction and
with the terms described in Note 7. Repayment may be in the form of cash or the
Company's common stock. Additionally, the Company is engaged in research and
development activities and has not yet developed products for sale. Accordingly,
at this stage of the Company's development, a credit risk assessment is highly
judgmental. The Company also does not have other outstanding debt on which to
base an estimated current borrowing rate or other discount rate for purposes of
estimating the fair value of the Note Payable and the Company has not yet
obtained or developed a valuation model. These factors all contribute to the
impracticability of estimating the fair value of the Note Payable. At December
31, 2002, the carrying value of the Note Payable and accrued interest was
approximately $33.2 million.

Comprehensive Loss. Comprehensive loss represents the change in net assets
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive loss of the Company includes
net loss adjusted for the change in net unrealized gain or loss on marketable
securities. The disclosures required by Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" for the years ended December
31, 2000,2001 and 2002 have been incuded in the Statements of Stockholders'
Equity and Comprehensive Loss.

Reclassification of Prior Year Balances. Certain balances in the prior
year have been reclassed to conform with current year presentation.
Reclassification had no effect on the Consolidated Statement of Operations.


F-10


Future Impact of Recently Issued Accounting Standards. In June 2002, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("FAS 146".) FAS 146 nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." FAS 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred, rather
than on the date of an entity's commitment to an exit plan and establishes that
fair value as the objective for initial measurement of the liability. The
provisions of this Statement shall be effective for exit or disposal activities
initiated after December 31, 2002. The provisions of Issue 94-3 shall continue
to apply for an exit activity initiated under an exit plan that met the criteria
of Issue 94-3 prior to this Statement's initial application. The Company adopted
FAS 146 on January 1, 2003

On December 31, 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FAS 123" ("FAS
148"). FAS 148 provides several transition provisions that may be used upon
adoption of the accounting provisions of FAS 123. FAS 148 also mandates certain
new disclosures, whether or not FAS 123 is adopted, that are incremental to
those required by FAS 123. Those disclosures must be made in both interim and
annual financial statements. The transition and annual disclosure provisions of
FAS 148 are effective for fiscal years ending after December 15, 2002. The new
interim disclosure provisions are effective for the first interim period
beginning after December 15, 2002.

On November 21, 2002, the EITF finalized Issue No. 00-21 "Accounting for Revenue
Arrangements with Multiple Deliverables", ("EITF 00-21") which addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting. EITF 00-21 also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The guidance in EITF 00-21 is effective for
revenue arrangements entered into for interim or annual periods beginning after
June 15, 2003.

On November 25, 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002.

These standards may apply to the Company should transactions falling
within the scope of these standards arise in the future.

2. Restructuring

On May 22, 2002, the Company announced a plan for restructuring its
operations, which included the discontinuation of its liquid oral heparin
program and any related initiatives, and a reduction of any associated
infrastructure. Additionally, in the third quarter of 2002, the Company
evaluated several alternatives to consolidate its two research facilities in
Tarrytown, New York and Farmington, Connecticut in order to eliminate excess
capacity, reduce spending, and raise cash. The decision was made to dispose of
the Farmington research facility. As a result of the restructuring plan, the
Company announced a reduction in force, which was implemented during May and
June 2002 at the Tarrytown facility and November and December 2002 at the
Farmington facility. The Company terminated 91 full-time and 26 temporary
employees, including 14 administrative personnel and 103 scientists and research
assistants. Five employees will remain until final disposition of the
Connecticut research facility. The Company paid approximately $.18 million in
stay bonuses to the severed employees during the phase out of operations at
Farmington. The restructuring plan resulted in the reduction of the Company's
full-time work force by approximately 50%.

The following table presents the original restructuring accruals for
Tarrytown and Farmington, the adjustments to these accruals, and the amounts
paid through December 31, 2002 (in millions):



Estimated Restructuring
Restructuring Actual Reserve as of
Expenses Disbursements Adjustments December 31, 2002

Severance and accrued vacation $1.0 $(0.96) $ 0.01 $0.05
Outplacement Services 0.07 (0.05) (0.02) --
Employee Benefits 0.09 (0.06) (0.03) --
Contract exit Costs 0.27 (0.20) -- 0.07
Other 0.06 (0.03) (0.03) --
Total $1.49 $(1.30) $(0.07) $0.12



F-11


In addition, the Company forgave loans to certain terminated employees and
recognized compensation expense of $0.02 million. The $0.12 million remaining
reserve is expected to be paid in the second quarter of 2003. The reserve is
included in accounts payable and accrued expenses in the consolidated balance
sheet as of December 31, 2002.

3. Impairment of Intangible and Long-Lived Assets

In connection with the discontinuation of the oral liquid heparin
development program, management performed an evaluation of the recoverability of
certain intangible and fixed assets related to the program and related
initiatives. Management concluded that a total impairment of the Purchased
Technology intangible asset, representing patents related to the liquid form of
oral heparin, was required because the Company does not anticipate realization
of the carrying value of this asset. Accordingly the Company recorded a $3.9
million impairment charge.

At December 31, 2002, management performed an evaluation of the
recoverability of the remaining Purchased Technology related to the solid forms
of oral heparin. Since the studies related to this formulation are proceeding as
planned, management estimates that future undiscounted cash flows from programs
related to the solid forms of oral heparin are sufficient to realize the
carrying value of the asset and, therefore, an impairment of the remaining
Purchased Technology has not been triggered as of December 31, 2002.

In connection with the evaluation of the recoverability of fixed assets,
management determined that an impairment of a reactor and associated
accessories, which were to be used only for the manufacture of oral liquid
heparin, had occurred. The Company recorded a $0.5 million charge representing
the reduction of the carrying value of the reactor and associated accessories to
their fair value, based on the amount of the sale of the machinery to a third
party, which was consummated in the third quarter of 2002. The Company also
performed an evaluation of the recoverability of certain equipment at the
Tarrytown facility. The Company determined that there was no future use for a
gene chip array system and its related accessories. The Company recorded a $0.1
million charge representing the reduction of the carrying value of the gene chip
array system and associated accessories to their fair value, based on the amount
of the sale of the machinery to a third party. The sale was consummated in the
first quarter of 2003.

In connection with the decision to dispose of the Farmington facility, the
Company performed an evaluation of the equipment at Farmington and segregated
certain equipment which will be used or is currently in use at the Tarrytown
facility. The Company evaluated the remaining equipment and the land and
building for potential impairment. The evaluation was based on the
weighted-average probability of estimated undiscounted future cash flows from
five potential offers from third parties. The offers ranged from preserving the
facility as a medical research facility to selling the land and building as a
unit and selling the equipment on the open market. Based on current estimates of
expected proceeds, an impairment loss of the carrying value of the land,
building and equipment has not been triggered as of December 31, 2002. The land,
building, and equipment that are available for sale are included at their
carrying value in "Land, building and equipment held for sale" in the
consolidated balance sheet as of December 31, 2002. The carrying value of the
land, building, and equipment held for sale is approximately $1.17 million,
$1.74 million and $1.60 million, respectively. The carrying value of the
equipment retained for use by Emisphere is $0.71 million and is included in
"Equipment and leasehold improvements, net of accumulated depreciation and
amortization" in the consolidated balance sheet as of December 31, 2002. In the
event that the Company is not successful in selling the Farmington facility, the
Company will need to write down the carrying value of the land, building and
equipment further.

4. Other Than Temporary Impairment of Investments

The Company recorded a charge of $0.2 million related to the write-down to
fair value of its $0.3 million investment in the preferred stock of a biotech
company which has products that could potentially use Emisphere's oral delivery
technology. The Company considered the following factors to be primary
indicators of impairment: i.) the biotech company's need to raise sufficient
capital to ensure funding of its research and development projects, ii.) its
inability to meet its obligations as they become due and iii.) the possibility
that the company may not be able to continue as a going concern unless
additional financing is obtained. Fair value was estimated based on the price of
the biotech company's publicly-traded common stock.


F-12


5. Fixed Assets

Fixed assets as of December 31, 2002 and 2001 consist of the following (in
000's):



Useful Lives in Years 2002 2001
--------------------- ---- ----

Land....................................................................... -- $ -- $1,170
Building................................................................... 13 -- 1,754
Equipment.................................................................. 3-7 14,003 13,667
Leasehold improvements..................................................... Life of lease 26,502 26,553
------- -------
40,505 43,144
Less, accumulated depreciation and amortization............................ 17,223 12,055
------- -------
$23,282 $31,089
======= =======


Land, building and equipment held for sale as of December 31, 2002 consist
of the following:



Useful Lives in Years 2002
--------------------- ----

Land....................................................................... -- $1,170
Building................................................................... 13 1,940
Equipment.................................................................. 3-7 2,057
------
5,167
Less, accumulated depreciation and amortization............................ 647
------
$4,520
======


Depreciation expense for the years ended December 31, 2002, 2001 and 2000,
the five months ended December 31, 2000, and the year ended July 31, 2000 was
$5.8 million, $3.5 million, $2.0 million (unaudited), $0.9 million, and $1.9
million, respectively.

6. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following as of
December 31, 2002 and 2001(in 000's):



2002 2001
---- ----

Accounts payable....................................... $ 2,044 $2,711
Clinical trial expenses and contract research.......... 2,332 9,750
Compensation........................................... 441 630
Professional fees...................................... 434 345

Other.................................................. 73 145
------ -------
$5,324 $13,581
====== =======


7. Note Payable

Ebbisham Limited ("Ebbisham"), was an Irish corporation owned jointly by
Elan Corporation, plc ("Elan") and the Company. Ebbisham was formed to develop
and market heparin products using technologies contributed by Elan and the
Company.

In July 1999, the Company acquired Elan's ownership interest in Ebbisham,
in exchange for a seven year, $20.0 million zero coupon note carrying a 15%
interest rate, compounding semi-annually, plus royalties on oral heparin product
sales, subject to an annual maximum and certain milestone payments. Under
certain conditions, Elan has agreed to subscribe to the Company's common stock.

In connection with the acquisition by the Company of Elan's ownership
interest in Ebbisham, the purchase price of approximately $18.1 million was
allocated $9.7 million and $8.4 million to acquired in-process research and
development, which was expensed at the date of acquisition, and Purchased
Technology, respectively.

On February 28, 2002 Ebbisham was voluntary liquidated.

8. Income Taxes

As of December 31, 2002, the Company has available unused net operating
loss carry-forwards of approximately $216.9 million, which will expire in
various years from 2003 to 2022. The Company's research and experimental tax
credit carry-forwards expire in various years from 2003 to 2022. Future
ownership changes may limit the future utilization of these net operating loss
and research and development tax credit carry-forwards as defined by the
Internal Revenue Code. The tax effect of


F-13


temporary differences, net operating loss carry-forwards, and research and
experimental tax credit carry-forwards as of December 31, 2002 and 2001 is as
follows:



2002 2001
---- ----

Deferred tax assets and valuation allowance:
Accrued liabilities........................................ $ 1,144 $ 1,116
Equipment and leasehold improvements....................... 2,438 1,554
Net operating loss carry-forwards.......................... 86,850 61,714
Research and experimental tax credit carry-forwards........ 13,330 9,457
Valuation allowance........................................ (103,762) (73,841)
--------- --------
$ -- $ --
========= ========


9. Stockholders' Equity

The Company's certificate of incorporation provides for the issuance of
1,000,000 shares of preferred stock with the rights, preferences,
qualifications, and terms to be determined by the Company's Board of Directors.
As of December 31, 2002 and 2001, there were no shares of preferred stock
outstanding.

The Company has a stockholder rights plan in which Preferred Stock
Purchase Rights (the "Rights") have been granted at the rate of one
one-hundredth of a share of Series A Junior Participating Cumulative Preferred
Stock ("A Preferred Stock") at an exercise price of $80 for each share of the
Company's common stock.

The Rights are not exercisable, or transferable apart from the common
stock, until the earlier of (i) ten days following a public announcement that a
person or group of affiliated or associated persons have acquired beneficial
ownership of 20% or more of the outstanding common stock of the Company or (ii)
ten business days (or such later date, as defined) following the commencement
of, or announcement of an intention to make a tender offer or exchange offer,
the consummation of which would result in the beneficial ownership by a person,
or group, of 20% or more of the outstanding common stock of the Company.

Furthermore, if the Company enters into consolidation, merger, or other
business combinations, as defined, each Right would entitle the holder upon
exercise to receive, in lieu of shares of A Preferred Stock, a number of shares
of common stock of the acquiring company having a value of two times the
exercise price of the Right, as defined. The Rights contain antidilutive
provisions, are redeemable at the Company's option, subject to certain defined
restrictions for $.01 per Right, and expire on February 23, 2006.

As a result of the Rights dividend, the Board designated 200,000 shares of
preferred stock as A Preferred Stock. A Preferred Stockholders will be entitled
to a preferential cumulative quarterly dividend of the greater of $1.00 per
share or 100 times the per share dividend declared on the Company's common
stock. Shares of A Preferred Stock have a liquidation preference, as defined,
and each share will have 100 votes and will vote together with the common
shares.

In addition to 44,000 shares of the Company's common stock which had been
purchased in prior years the Company repurchased an additional 200,000 shares of
its common stock for a total of $3.6 million during 2001. Such repurchased stock
is held by the Company as treasury stock.

During the year ended July 31, 2000 the Company issued approximately 5.1
million shares of common stock in two public follow-on offerings for net
proceeds of approximately $212.0 million.

The note receivable from officer and director resulted from the July 31,
2000 exercise of stock options by an officer and director of the Company. The
exercise price and income taxes resulting from the exercise were loaned to the
officer by the Company. The loan is in the form of a full recourse promissory
note bearing a variable interest rate based upon LIBOR plus 1.00% (2.4% and 2.8%
at December 31, 2002 and 2001, respectively), and collateralized by the stock
issued upon exercise of the stock options. Interest is payable monthly and
principal is due the earlier of July 31, 2005 or upon the sale of stock held as
collateral.


F-14


10. Stock Plans

Stock Option Plans. Under the Company's 1991 and 2000 Stock Option Plans,
the 2002 Broad based Plan and the 1995 Non-Qualified Stock Option Plan
(individually, the "91 Plan", "00 Plan", "02 Plan" and "95 Plan," respectively,
or collectively, the "Plans") a maximum of 2,500,000, 1,419,500, 160,000 and
2,550,000 shares of the Company's common stock, respectively, are available for
awards to employees, consultants, and other individuals who render services to
the Company; the 02 Plan is available to employees only. The 91, 00 and 02 Plans
provide for the grant of either incentive stock options ("ISOs"), as defined by
the Internal Revenue Code, or options, which do not qualify as ISOs. The 95 Plan
provides for grants to officers and other key employees of Non-Qualified stock
options. An independent committee of the Board of Directors, which determines
option terms including exercise price and vesting period, awards the options
under the Plans. Generally, the options expire within a five- to ten-year
period, as determined by the Committee and as defined by the Plans. As of
December 31, 2002, shares available for future grants under the Plans amounted
to 797,975.

The following table summarizes stock option information for the Plans as
of December 31, 2002:



Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Exercise Number Life in Exercise Number Exercise
Price Outstanding Years Price Exercisable Price
----- ----------- ----- ----- ----------- -----

$ 1.50 11,460 2.33 $1.50 11,460 $1.50
$ 2.63-$3.28 283,038 9.51 $3.27 317 $2.63
$ 4.00-$4.25 12,333 2.85 $4.02 10,183 $4.02
$ 6.13-$8.63 1,431,930 3.12 $8.42 1,390,125 $8.47
$ 9.63-$13.88 1,305,396 8.33 $12.72 830,533 $12.26
$14.88-$21.80 389,261 6.56 $17.29 233,483 $16.86
$23.00-$28.48 14,230 6.91 $25.60 10,846 $25.67
$38.50-$48.06 733,350 7.39 $46.94 293,340 $46.94
--------- ---------
$ 1.50-$48.06 4,180,998 6.26 $16.71 2,780,287 $14.39
========= =========


Transactions involving stock options awarded under the Plans during the
year ended July 31, 2000, the five months ended December 31, 2000 and the years
ended December 31, 2001 and 2002 are summarized as follows:


F-15




Weighted Weighted
Average Average
Number Exercise Number Exercise
Outstanding Price Exercisable Price
----------- ----- ----------- -----

Balance outstanding July 31, 1999 ........... 4,020,429 $10.60 2,873,440 $10.45

2000
Granted ..................................... 896,751 $41.71
Canceled .................................... (134,801) $13.93
Exercised ................................... (262,697) $10.41
----------
Balance outstanding July 31, 2000 ........... 4,519,682 $16.68 3,014,743 $10.42

Five Months ended December 31, 2000
Granted ..................................... 24,250 $20.31
Canceled .................................... (11,310) $17.68
Exercised ................................... (10,350) $8.31
----------
Balance outstanding December 31, 2000 ....... 4,522,272 $16.72 3,126,606 $10.50

2001
Granted ..................................... 728,318 $15.59
Canceled .................................... (88,366) $12.98
Exercised ................................... (231,290) $10.46
----------
Balance outstanding December 31, 2001 ....... 4,930,934 $16.91 3,280,919 $10.85

2002
Granted ..................................... 1,246,970 $11.37
Canceled .................................... (1,967,186) $14.00
Exercised ................................... (29,720) $5.81
----------
Balance outstanding December 31, 2002 ....... 4,180,998 $16.71 2,780,287 $14.39
==========


Outside Directors' Plan. The Company has adopted a stock option plan for
outside directors, who are neither officers nor employees of the Company nor
holders of more than 5% of the Company's common stock, (the "Outside Directors'
Plan"). Under this plan, as amended, a maximum of 525,000 shares of the
Company's common stock is available for the granting of options to directors (i)
to purchase 35,000 shares of the Company's common stock on the date of initial
election or appointment to the Board of Directors and (ii) to purchase 21,000
shares on the fifth anniversary thereof and every three years thereafter. The
options have an exercise price equal to the fair market value of the Company's
common stock on the date of grant, vest at the rate of 7,000 shares per year,
and expire ten years after the date of grant. As of December 31, 2002 shares
available for future grants under the plan amounted to 117,000 shares.

The following table summarizes stock option information for the Outside
Directors' Plan as of December 31, 2002:



Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life in Years Price Exercisable Price
- -------------- ----------- ------------- ----- ----------- -----

$ 6.13-$8.63 105,000 3.73 $7.79 98,000 $7.91
$13.00-$14.04 170,000 8.18 $13.31 156,000 $13.25
$22.55-$23.50 56,000 5.95 $23.14 35,000 $23.50
$ 41.06 42,000 7.32 $41.06 28,000 $41.06
------- -------
$ 6.13-$41.06 373,000 6.50 $16.36 317,000 $15.19
======= =======


Transactions involving stock options awarded under the Outside Directors'
Plan during the years ended July 31, 2000, the five months ended December 31,
2000 and the years ended December 31, 2001 and 2002 are summarized as follows:



Weighted Weighted
Average Average
Number Exercise Number Exercise
Outstanding Price Exercisable Price
----------- ----- ----------- -----

Balance outstanding July 31, 1999 ........... 413,000 $12.68 336,000 $12.62

2000
Granted ..................................... 63,000 $41.06

Balance outstanding July 31, 2000 ........... 476,000 $16.44 371,000 $12.77

Balance outstanding December 31, 2000 ....... 476,000 $16.44 378,000 $12.64

2001
Granted ..................................... 21,000 $13.88
Exercised ................................... (35,000) $13.00
--------

Balance outstanding December 31, 2001 ....... 462,000 $16.58 378,000 $14.27
========
2002
Granted ..................................... 128,000 $14.58
Cancelled ................................... (217,000) 15.79
--------
Balance outstanding December 31, 2002 ....... 373,000 $16.36 317,000 $15.19
========



F-16


Directors' Deferred Compensation Stock Plan. Pursuant to the Directors'
Deferred Compensation Stock Plan (the "Directors' Deferred Plan"), outside
directors have a right to receive for each meeting of the Board of Directors, or
a committee thereof, attended a number of shares of the Company's common stock
equal to the amount determined by the Board of Directors as compensation for the
meeting divided by the fair market value of the Company's common stock on the
date of the meeting. An aggregate of 25,000 shares of the Company's common stock
has been reserved for issuance under the Directors' Deferred Plan. During the
years ended December 31, 2002, 2001 and 2000, the five months ended December 31,
2000, and the year ended July 31, 2000, the outside directors earned the rights
to receive an aggregate of 3,358 shares, 948 shares, 651 shares (unaudited), 295
shares, and 743 shares, respectively. Under the terms of the Directors' Deferred
Plan, shares are to be issued to a director within six months after he or she
ceases to serve on the Board of Directors. The Company records as an expense the
fair market value of the common stock issuable. This plan was amended as
proposed in the 2002 Proxy Statements subject to approval. As of September 30,
2002 the compensation of Directors under this plan was stopped.

Non-Plan Options. The Company's Board of Directors has issued options
("Non-Plan Options") to an executive officer ("Executive"), a former executive
officer, the Emisphere Charitable Foundation, and a consultant, who are not
covered by the Plans or the Outside Directors' Plan. The Board of Directors
determines the number and terms of each grant (option exercise price, vesting,
and expiration date). Non-Plan Options generally vest over a five-year period.

The following table summarizes stock option information for the Non-Plan
Options as of December 31, 2002:



Options Outstanding Options Exercisable
Weighted
Average Weighted
Remaining Average Weighted
Range of Number Contractual Exercise Number Average
Exercise Price Outstanding Life Price Exercisable Exercise Price
- -------------- ----------- ---- ----- ----------- --------------

$ 8.00-$9.75 286,554 2.53 $8.87 286,554 $8.87
$ 26.05 10,000 8.53 $26.05 10,000 $26.05
-------- --------

$8.00-$26.05 296,554 2.73 $9.45 296,554 $9.45
======== ========


Transactions involving awards of Non-Plan Options during the years ended
July 31, 2000, the five months ended December 31, 2000 and the years ended
December 31, 2001 and 2002 are summarized as follows:



Weighted Weighted
Average Average
Number Exercise Number Exercise
Outstanding Price Exercisable Price
----------- ----- ----------- -----

Balance outstanding July 31, 1999 ............................... 387,822 $ 8.65 387,822 $8.65

2000
Exercised ....................................................... (100,543) $ 8.00
---------
Balance outstanding July 31, 2000 and December 31, 2000 ......... 287,279 $ 8.87 287,279 $8.87

2001 and 2002
Granted ......................................................... 10,000 $26.05
Exercised ....................................................... (725) $ 9.75
---------
Balance outstanding December 31, 2001 and 2002 .................. 296,554 $ 9.45 296,554 $9.45
=========


Employee Stock Purchase Plans. The Company has adopted two employee stock
purchase plans (the "Purchase Plans")--the 1994 Employee Stock Purchase Plan
(the "Qualified Plan") and the 1994 Non-Qualified Employee Stock Purchase Plan
(the "Non-Qualified Plan"). The Purchase Plans provide for the grant to
qualified employees of options to purchase the Company's common stock. These
options are granted for dollar amounts of up to 15% of an employee's quarterly
compensation. The exercise price per share is equal to the lesser of the fair
market value of the Company's common stock on the date of grant or 85% of the
fair market value on the date of exercise. Options are granted automatically on
February 1, May 1, August 1, and November 1 and expire six months after the date
of grant. The Qualified Plan is not available for employees owning more than 5%
of the Company's common stock and imposes certain other quarterly limitations on
the option grants. Options under the Non-Qualified Plan are granted to the
extent that the option grants are restricted under the Qualified Plan. The
Purchase Plans provide for the


F-17


issuance of up to 600,000 shares of the Company's common stock under the
Qualified Plan and 100,000 shares under the Non-Qualified Plan.

Purchases of common stock under the Purchase Plans during the year ended
December 31, 2002 and 2001, the five months ended December 31, 2000, and the
year ended July 31, 2000 are summarized as follows:



Qualified Plan Non-Qualified Plan
-------------- ------------------
Shares Shares
Purchased Price Range Purchased Price Range
--------- ----------- --------- -----------

2002........................................... 166,197 $2.62-$25.48 16,102 $2.47-$20.88
2001........................................... 68,109 $11.79-$25.48 2,640 $13.52-$23.43
Five months ended December 31, 2000............ 9,544 $16.98-$25.91 3,950 $16.98-$25.91
2000........................................... 77,340 $6.59-$39.13 7,456 $6.59-$13.50


In addition, the Board of Directors adopted an amendment, to increase the
number of shares authorized for issuance under the Qualified Employee Stock
Purchase Plan by 600,000 shares, which subsequently requires Shareholders'
approval. As of December 31, 2002, including the shares subject to shareholder
approval, there are 580,378 shares reserved for future purchases under the
Qualified Plan and 28,443 shares reserved under the Non-Qualified Plan.

The weighted-average fair values and exercise prices for the options
granted during the years ended December 31, 2002, 2001 and 2000, the five months
ended December 31, 2000, and the year ended July 31, 2000 are presented in the
table below.



Five Months
Ended Year Ended
Year Ended December 31, December 31, July 31,
----------------------- ------------ --------
Name 2002 2001 2000(1) 2000 2000
---- ---- ---- ------- ---- ----

Stock options granted in which the exercise price
is equal to the market price of the stock on the grant date:
Weighted average grant date fair market value ............... $6.60 $10.71 $32.28 $14.36 $26.24
Number or options granted ................................. 593,051 759,318 840,550 24,250 959,751
Weighted Average Exercise Price ............................. $19.56 $15.68 $45.61 $20.31 $41.67

Stock options granted in which the exercise price
is more than the market price of the stock on the grant date:
Weighted average grant date fair market value ............... $9.16
Number or options granted ................................. 781,919
Weighted Average Exercise Price ............................. $13.27 N/A N/A N/A N/A


(1) Unaudited

11. Commitments

Leases. The Company leases office and laboratory space under
non-cancelable operating leases expiring in various years through 2007. As of
December 31, 2002, future minimum rental payments are as follows (in 000's):

Minimum
Rental
Years Ending December 31, Payments
- ------------------------- --------
2003............................................................... 2,358
2004............................................................... 2,358
2005............................................................... 2,358
2006............................................................... 2,365
2007............................................................... 1,577
-------
$11,016
=======

In 1998, the Company entered into a sublease (the "Sublease") for a
portion of its former premises, which expired in January 2002. Sublease rental
income for the years ended December 31, 2002, 2001 and 2000, the five months
ended December 31, 2000, the year ended July 31, 2000 was $0.02 million, $0.2
million, $0.2 million (unaudited), $0.1 million, and $0.2 million, respectively.

Rent expense for the years ended December 31, 2002, 2001 and 2000, the
five months ended December 31, 2000, and the year ended July 31, 2000 was
approximately $2.0 million, $2.0 million, $1.3 million (unaudited), $0.6
million, and $1.2 million, respectively. Additional charges for real estate
taxes and common maintenance charges for the years ended December 31, 2002, 2001
and 2000, the five months ended December 31, 2000, and the year ended July 31,
2000 were approximately $1.3 million, $1.1 million, $0.5 million (unaudited),
$0.3 million, and $0.7 million, respectively.

Other. The Company, for the years ended December 31, 2002, 2001 and 2000,
the five months ended December 31, 2000, and the year ended July 31, 2000, made
payments totaling approximately $1.8 million, $1.4 million, $1.4 million
(unaudited), $0.01 million, and $0.5 million, respectively, to several
universities and a research organization (the "Entities"), which is included in
research and development expenses. Certain members of the Company's Board of
Directors are affiliated with certain of these Entities. As of December 31,
2002, future aggregate payments to the Entities amount to approximately $0.1
million.

12. Retirement Plan

The Company has a defined contribution retirement plan (the "Retirement
Plan"), the terms of which, as amended, allow eligible employees who have met
certain age and service requirements to participate by electing to contribute a
percentage of their compensation to be set aside to pay their future retirement
benefits, as defined by the Retirement Plan. The Company has agreed to make
discretionary contributions to the Retirement Plan. For the years ended December
31, 2002, 2001 and 2000, the five months ended December 31, 2000, and the year
ended July 31, 2000, the Company made contributions to the Retirement Plan
totaling approximately $0.4 million, $0.4 million, $0.3 million (unaudited),
$0.2 million, and $0.2 million, respectively.


F-18


13. The Emisphere Charitable Foundation, Inc.

The Emisphere Charitable Foundation, Inc. (the "Foundation") intends to
seek tax-exempt status under section 501(c)(3) of the Internal Revenue Code. The
Foundation's charitable purpose is to grant financial assistance to pay expenses
incurred by persons or their families who are suffering from serious,
debilitating, or prolonged illnesses. The Company contributed Company stock
options to the Foundation. Two officers of the Company are directors of the
Foundation. The Foundation currently has 14,275 options to acquire an equal
number of shares of the Company's common stock at an exercise price of $9.75 per
share, all of which expire November 2003.

14. Collaborative Research Agreements

The Company is a party to collaborative agreements with corporate partners
(the "Partners") to provide research and development services relating to the
Partners' products. These agreements are in the form of research collaboration
and licensing agreements. In connection with these agreements, the Company has
granted licenses or the rights to obtain licenses to the Company's oral drug
delivery technology. In return, the Company will receive certain payments upon
the achievement of milestones and will receive royalties on sales of products
developed. Under these agreements, the Company will also be reimbursed for
development costs. The Company also has the right to manufacture and supply to
its Partners its delivery agents developed under these agreements.

The Company also performs research and development for others pursuant to
feasibility agreements, which are of short duration and are designed to evaluate
the applicability of the Company's drug delivery agents to specific drugs. Under
the feasibility agreements, the Company is generally reimbursed for the cost of
work performed.

All of the Company's collaborative agreements are cancelable by the
Partners without significant financial penalty to the Partners.

Eli Lilly and Company In June 2000, the Company and Lilly executed a
follow-on development agreement to their 1997 multi-year research and option
agreement to develop oral formulations of recombinant parathyroid hormone (PTH)
and human growth hormone (rhGH) utilizing the Company's proprietary drug
delivery technology. Under the new agreement, the two companies will collaborate
to bring oral forms of PTH and rhGH into clinical testing. The new agreement
also provides for supplemental research and development funding.

In connection with the Lilly agreements, the Company has recognized
contract research revenues of $2.9 million, $3.8 million, $3.4 million
(unaudited), $1.2 million (including a $0.6 million milestone payment), and $2.2
million (including a $2.0 million milestone payment), for the years ended
December 31, 2002, 2001 and 2000, the five months period ended December 31,
2000, and the year ended July 31, 2000, respectively.

Novartis Pharma AG In connection with the 1997 research collaboration
between the Company and Novartis, in February 2000, Novartis agreed to execute
its option to acquire an exclusive license to develop and commercialize oral
salmon calcitonin and to extend its collaboration with the Company to
investigate the oral delivery of a second Novartis compound. Although Novartis'
rights to certain financial terms concerning a second compound have expired,
Emisphere and Novartis remain in active discussion to develop additional
compounds using Emisphere's technology, and a number of viable second compounds
candidates are under consideration.

In connection with the Novartis agreement, the Company has recognized no
income in 2002 and 2001, and $3.5 million (unaudited), $1.0 million, and $3.5
million (including a $2.0 million milestone payment and a $0.5 million milestone
payment to obtain an option to use the eligen(TM) technology for a second
compound), for the year ended December 31, 2000, the five months ended December
31, 2000, and the year ended July 31, 2000, respectively.

Regeneron Pharmaceuticals Inc. In 2000, the Company entered into a
research collaboration with Regeneron to investigate the applicability of the
Company's technology to the development of an oral form of Regeneron's protein
compound candidate in development, AXOKINE, for the treatment of obesity.

In connection with the Regeneron agreement, the Company recognized
contract research revenue of $0.03 million and $0.2 million for the years ended
December 31, 2002 and 2001, respectively. Regeneron will continue to pay for all
studies related to the pre-clinical product candidate development.


F-19


Cubist Pharmaceuticals Inc. In November 2000, Emisphere entered into a
research and development collaboration with Cubist for the oral delivery of
daptomycin (being developed for injection as CIDECIN(TM)) and other
lipopeptides. In connection with the Cubist agreement, the Company recognized
contract research revenue of $0.3 million, $0.4 million, $0.1 million
(unaudited), and $0.1 million, for the years ended December 31, 2002, 2001 and
2000, and the five months ended December 31, 2000, respectively. The parties are
no longer collaborating on the development of oral formulations of daptomycin
analogues.

15. Summarized Quarterly Financial Data (Unaudited)

Following are summarized quarterly financial data for the years ended
December 31, 2002 and 2001:



2002
----
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------

Total revenues .............................. $ 729 $ 1,089 $ 735 $ 825
Operating loss .............................. (21,521) (24,559) (12,313) (11,299)
Net loss .................................... (21,400) (24,930) (13,016) (11,996)
Net loss per share, basic and diluted ....... $ (1.20) $ (1.39) $ (0.72) $ (0.67)




2001
----
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------

Total revenues .............................. $ 1,559 $ 1,358 $ 727 $ 1,084
Operating loss .............................. (10,514) (13,309) (18,025) (20,431)
Net loss .................................... (8,265) (11,556) (17,040) (19,673)
Net loss per share, basic and diluted ....... $ (0.47) $ (0.65) $ (0.96) $ (1.11)



F-20


EXHIBIT INDEX

Incorporated
Exhibit by Reference(1)
- ------- ---------------
3.1 --Restated Certificate of Incorporation of the Company
dated June 13, 1997, as amended by the Certificate of
Amendment dated February 5, 1999. A

3.2 --By-Laws of Emisphere, as amended December 7, 1998. A

4.1 --Restated Rights Agreement dated as of February 23, 1996
between Emisphere and Mellon Investor Services, LLC. B

4.2 --Note Purchase Agreement, dated July 2, 1999, between
Emisphere and Elan International Service, Ltd. C

4.3 --Zero Coupon note, dated July 2, 1999, issued by
Emisphere to Elan International Services, Ltd. For an
initial principal amount of $20 million. C

10.1 --1991 Stock Option Plan, as amended. J(2)

10.2 --Stock Option Plan for Outside Directors, as amended. D(2)

10.3 --Employee Stock Purchase Plan, as amended. E(2)

10.4 --Non-Qualified Employee Stock Purchase Plan. E(2)

10.5 --1995 Non-Qualified Stock Option Plan, as amended. J(2)

10.6 --Directors' Deferred Compensation Stock Plan. F(2)

10.7 --Employment Agreement, dated July 31, 2000, between
Michael M. Goldberg and Emisphere. K(2)

10.8 --Employment Agreement, dated December 5, 2001, between
Alan W. Dunton and Emisphere. L(2)

10.9 --Stock Option Agreements, dated January 1, 1991, February
15, 1991, December 1, 1991, August 1, 1992 and October 6,
1995 between Michael M. Goldberg and Emisphere. E(2)(3)

10.10 --Stock Option Agreement, dated July 31, 2000, between
Michael M.Goldberg and Emisphere. K(2)

10.11(a) --Non-Qualified Stock Option Agreement dated February 7,
2002, between Alan W. Dunton and Emisphere. L(2)

10.11(b) --Incentive Stock Option Agreement dated February 7, 2002,
between Alan W. Dunton and Emisphere. L(2)

10.12 --Termination Agreement, dated July 2, 1999, among
Emisphere, Elan Corporation, plc and Ebbisham Limited, now
a wholly owned Subsidiary of Emisphere. C

10.13 --Patent License Agreement, dated July 2, 1999, between
Emisphere and Elan Corporation, plc. C

10.14 --Subscription Agreement, dated July 2, 1999 between
Emisphere and Elan International Management, Ltd. C

10.15 --Registration Rights Agreement, dated July 2, 1999
between Emisphere and Elan International Management, Ltd. C

10.16 --Research Collaboration and Option Agreement dated as of
December 3, 1997 between Emisphere and Novartis Pharma AG. G(4)

10.17 --Research Collaboration and Option Agreement dated as of
June 8, 2000 between Emisphere and Eli Lilly and Company. K(4)

10.18 --Research Collaboration and Option Agreement dated March
8, 2000 between Emisphere and Regeneron Pharmaceuticals, Inc. I(4)

10.19(a) --License Agreement dated as of April 7, 1998 between
Emisphere and Eli Lilly and Company. K(4)

10.19(b) --License Agreement, dated as of April 7, 1998, between
Emisphere and Eli Lilly and Company. K(4)


E-1


Incorporated
Exhibit by Reference(1)
- ------- ---------------

10.20(a) --Lease Agreement, dated as of March 31, 2000, between
Emisphere and Keren Limited Partnership. H

10.20(b) --Amendment to Lease Agreement, dated as of March 31,
2000, between Emisphere and Eastview Holdings, LLC. K

10.20(c) --Amendment to Lease Agreement, dated as of March 31,
2000, between Emisphere and Eastview Holdings, LLC. K

10.21 --Promissory Note, dated June 15, 2001, by Lewis H. Bender
in favor of Emisphere. K(2)

10.22 --Promissory Note, dated July 31, 2000, by Michael M.
Goldberg in favor of Emisphere K(2)

10.23 --Emisphere Technologies, Inc. 2000 Stock Option Plan K(2)

10.24 --Amendment to Emisphere Technologies, Inc. Qualified
Employee Stock Purchase Plan M(2)

23.1 --Consent of PricewaterhouseCoopers LLP *

99.1 --Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 *

99.2 --Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 *

- --------
* Filed herewith.

(1) If not filed herewith, filed as an exhibit to the document referred to by
letter as follows:
A. Quarterly Report on Form 10-Q for the quarterly period ended January
31, 1999.
B. Registration Statement on Form 8-A12G/A dated and filed June 7,
2001.
C. Current Report on Form 8-K dated July 2, 1999.
D. Annual Report on Form 10-K for the fiscal year ended July 31, 1997.
E. Annual Report on Form 10-K for the fiscal year ended July 31, 1995.
F. Annual Report on Form 10-K for the fiscal year ended July 31, 1998.
G. Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1997.
H. Quarterly Report on Form 10-Q for the quarterly Period ended January
31, 1997.
I. Quarterly Report on Form 10-Q for the quarterly period ended April
30, 2000.
J. Annual Report on Form 10-K for the fiscal year ended July 31, 1999.
K. Annual Report on Form 10-K for the fiscal year ended July 31, 2000.
L. Annual Report on Form 10-K for the year ended December 31, 2001.
M. Registration Statement on Form S-8 dated and filed on November 27,
2002.
(2) Management contract or compensatory plan or arrangement.
(3) Omitted in part pursuant to Instruction 2 of Item 601 of Regulation S-K.
(4) Portions of this exhibit have been omitted based on a request for
confidential treatment filed separately with the Securities and Exchange
Commission.


E-2