Cancer is the second leading cause of death in the United States, with an estimated 560,000 deaths and 1.4 million new cases diagnosed in 2004, according to the American Cancer Society. Cancers can be divided broadly into two groups: solid tumor cancers that affect organs in the body, such as the lungs and colon; and hematological, or blood-borne, cancers, such as leukemia. The American Cancer Society estimates that solid tumor cancers accounted for approximately 500,000 cancer-related deaths in 2003 and will account for approximately 1.0 million, or 71%, of new cases diagnosed in 2004.

The goals of cancer therapy are to cure the patient and, in the absence of cure, to improve the quality of life and extend the life expectancy of the patient. The most common form of pharmaceutical treatment for cancer is cytotoxic therapeutics, which are designed to target and kill rapidly proliferating cells. This process is referred to as cell-cycle arrest, which leads to cell death. Cytotoxic drugs include irinotecan, doxorubicin, taxanes and other inhibitors of cellular proliferation. In addition, therapies designed to hit a specific molecular target, such as Gleevec and Tarceva, may be used in combination with or as alternatives to cytotoxic therapies.

There are 518 known human kinases, many of which are known to be involved in cancer and other diseases. Most small molecule kinase inhibitors bind to a main site common among many kinases, thereby affecting multiple kinases rather than only those involved in the targeted disease. As a result, it has been difficult to discover small molecule kinase inhibitors that bind only to the kinase involved in the targeted disease process and not to other kinases. The ability to target a single kinase is referred to as specificity. Binding without specificity may lead to unwanted toxicity problems. A small but growing number of compounds, including Gleevec, inhibit the targeted kinase with greater specificity by binding not only the main site but also a nearby region called the variable binding region. Each kinase has a different variable binding region.

The Company expects to continue preclinical studies and to select a development candidate for its second oncology product candidate, an Aurora kinase inhibitor, in 2005 and to file an IND and commence Phase I clinical trials in 2006. The Company believes that small molecule Aurora kinase inhibitors have the potential to limit the growth of multiple tumor types without causing significant peripheral neuropathy.

The Company has worldwide development and commercialization rights to SNS-595 and its Aurora kinase inhibitors program. The Company may in the future enter into collaborations to maximize the commercial potential of these programs.

The Company has developed a proprietary fragment-based drug discovery approach, called "Tethering," that it combines with other drug discovery tools, such as structure-based design and medicinal chemistry, to discover and develop novel therapeutics for major diseases. The Company is applying Tethering in several programs to discover and develop novel kinase inhibitors for the treatment of cancer. Kinases are proteins found in cells that are critical in the communication and relay of signals to promote cell growth or function. In normal cell proliferation, when a cellular signaling pathway is activated it sends a signal telling the cell to grow and divide.

Cathepsin S is an enzyme involved in the activation of T-cells. Inappropriate activation of T-cells may lead to some inflammatory diseases, such as asthma, rheumatoid arthritis, multiple sclerosis, psoriasis and Crohn's disease. In collaboration with Johnson & Johnson PRD, the Company is applying Tethering to discover small molecule inhibitors of Cathepsin S. The Company intends to develop these inhibitors into drugs for the treatment of major inflammatory diseases. The Company believes that small molecule Cathepsin S inhibitors would have the advantages of a novel mechanism of action, ease of oral administration and ease of manufacturing.

Research and development expense increased from $21.3 million for the year ended December 31, 2003 to $23.6 million for the year ended December 31, 2004.

General and administrative expense increased from $6.1 million for the year ended December 31, 2003 to $7.4 million for the year ended December 31, 2004.

Interest income decreased from $713 thousand for the year ended December 31, 2003 to $518 thousand for the year ended December 31, 2004.