As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/16/05  Adams Respiratory Therapeuti… Inc S-1/A¶                12:2.4M                                   Donnelley … Solutions/FA

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Amendment No. 2 to Form S-1                         HTML   1.16M 
12: CORRESP   ¶ Comment-Response or Other Letter to the SEC            9     14K 
 2: EX-2.1      Agreement of Merger                                   35    120K 
 3: EX-3.1      Certificate of Incorporation                          29    106K 
 4: EX-3.2      Articles of Incorporation/Organization or By-Laws     17     81K 
 7: EX-10.21    2005 Incentive Plan                                   30    102K 
 8: EX-10.22    Form of Restricted Stock Award                         4±    17K 
 9: EX-10.23    Form of Incentive Stock Option Award                   4±    19K 
10: EX-10.24    Form of Non-Statutory Stock Option Award               4±    20K 
 5: EX-10.8     Director Compensation Plan                            11     44K 
 6: EX-10.9     Form of Award Under Director Compensation Plan        10±    41K 
11: EX-23.2     Consent of Ernst & Young LLP                           1      6K 

425 Main Street

Walter E. Riehemann, Esq.

Copies of Communications to:

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.    o

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

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

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

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    o

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

          This offering is our initial public offering of shares of our common stock. We are offering                      shares of common stock and the selling stockholders are offering                      shares of common stock. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders.

          We expect the initial public offering price to be between $          and $          per share. Currently, no public market exists for our shares. After pricing of the offering, we expect that the shares will be quoted on the Nasdaq National Market under the symbol “ARxT”.

          The underwriters may also purchase up to an additional                      shares of common stock from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.

          Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

          The underwriters expect to deliver the shares to purchasers on or about                    , 2005.

          For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

          Buying shares of our common stock involves risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the financial statements and the related notes appearing at the end of this prospectus, before deciding to purchase shares of our common stock.

          Mucinex SE and Mucinex DM are currently our only commercial products. Sales of Mucinex SE accounted for approximately 86% of our revenue in fiscal 2004 and approximately 75% of our revenue for the nine months ended March 31, 2005. Sales of Mucinex DM accounted for approximately 21% of our revenue in the nine months ended March 31, 2005. Within the next year we intend to launch Mucinex D, a product combining long-acting guaifenesin with pseudoephedrine. We anticipate that in the near term our ability to generate revenues and establish our Mucinex brand will depend largely on the continued success of Mucinex SE and Mucinex DM and the successful commercialization of additional products that utilize the Mucinex brand name. Any failure or delay in our efforts to successfully commercialize our products could have a negative impact on our revenues and ability to execute our business strategy.

          We do not have our own manufacturing capability and currently rely on a single third party to manufacture Mucinex SE, Mucinex DM and future products that we develop. We have an exclusive arrangement with Cardinal Health for the manufacture of our products. For a ten-year term beginning April 2004, we agreed to use Cardinal Health as the exclusive manufacturer of our current products and all of our future drug products, unless Cardinal Health is unable to manufacture such products or unable to obtain the means to do so within a reasonable timeframe. As a result of this arrangement, we are unable to diversify our manufacturing sources and are vulnerable to any interruptions in our supply from Cardinal Health.

          In addition, Cardinal Health currently manufactures Mucinex SE and Mucinex DM at a single dedicated facility that has been unable to supply sufficient quantities to meet the demand for these products. At June 10, 2005, we had open orders for our products of approximately $2.3 million. We are working with Cardinal Health to obtain the necessary additional manufacturing capacity by having Cardinal Health install additional manufacturing equipment at the existing, dedicated facility and qualifying with the FDA a second Cardinal Health facility to manufacture our products. If we are unable to increase the manufacturing capacity, or unable to obtain the additional capacity on reasonable economic terms, we may not be able to produce our products in sufficient quantities to meet the demand, which could negatively impact our revenues and operating results. The addition of such capacity on unfavorable terms could also affect our revenue and profitability. In addition, any damage to, or disruption at, Cardinal Health’s facility could halt production of our products and materially harm our business.

          We intend to continue to rely on third parties to manufacture our products. Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including:

          In the event of a supply disruption or a deterioration in our product quality from a third party manufacturer, we would need to rely on alternative manufacturing sources or identify and qualify new manufacturers. We may not be able to identify or qualify such manufacturers in a timely manner, obtain a sufficient allocation of their capacity to meet our requirements or find another manufacturer to provide a suitable source of supply for our products. In addition, alternative vendors must comply with product validation and stability testing, which may involve additional manufacturing expense, or delay in production or regulatory approvals. The consequence of any resulting delays in meeting demand could negatively impact our inventory levels, sales, profitability, and reputation.

          We have the ability under our supply agreement with Cardinal Health to repurchase the Fort Worth, Texas manufacturing assets and operations. We are considering exercising our option to repurchase the manufacturing assets and operations back from Cardinal Health and we may use a portion of the proceeds from this offering for such repurchase. This repurchase may disrupt supply of our products, would involve a substantial amount of time and money to complete and could distract our senior management from the day-to-day operations of our business. We can offer no assurances that we will exercise our option for such repurchase, the timing of such exercise or that such repurchase will be made in accordance with the terms of the option.

          Currently, Cardinal Health obtains all of the guaifenesin for our products, the active ingredient in our Mucinex product line, from a single supplier, Boehringer Ingelheim Chemicals, Inc. According to Cardinal Health’s agreement with Boehringer Ingelheim, which lasts through June 2006, Cardinal Health must purchase from Boehringer Ingelheim all of the guaifenesin used in Mucinex SE and at least 90% of the guaifenesin used in our products produced under all subsequent new drug applications, or NDAs. Under its agreement with Boehringer Ingelheim, Cardinal Health may obtain guaifenesin from a third party supplier if, for any reason, Boehringer Ingelheim discontinues supplying guaifenesin or is unable for three continuous months to supply guaifenesin to Cardinal Health. Once Boehringer Ingelheim regains the ability to supply guaifenesin to Cardinal Health, Cardinal Health must again purchase guaifenesin from Boehringer Ingelheim. Upon written notice, Boehringer Ingelheim is entitled unilaterally to adjust the prices that Cardinal Health pays Boehringer Ingelheim by up to 3%. Cardinal Health and Boehringer Ingelheim must mutually agree on any price increase above 3%. Boehringer Ingelheim is currently qualifying a second dryer for guaifenesin. If Boehringer Ingelheim is unable to increase manufacturing capacity, they will not be able to meet our future demand for guaifenesin.

          The supplier from whom Cardinal Health has historically obtained dextromethorphan, the additional active ingredient in Mucinex DM, reduced their production of this substance in 2004. Cardinal Health was able to obtain an additional supply of dextromethorphan, which we expect will meet our needs through December 31, 2006. Cardinal Health has not qualified an alternative supplier for

          The FDA requires that all manufacturers of pharmaceutical ingredients for sale in, or from, the United States achieve and maintain compliance with the cGMP regulations and guidelines. There are a limited number of manufacturers operating under cGMP regulations that are capable of manufacturing either guaifenesin or dextromethorphan. We do not currently have alternative sources for production of either ingredient, and Cardinal Health has a limited ability to enter into relationships with alternative guaifenesin suppliers without terminating its agreement with Boehringer Ingelheim. Cardinal Health may be unable to utilize alternative manufacturing sources for these ingredients or to obtain such manufacturing on commercially reasonable terms or on a timely basis. Any transfer of Cardinal Health’s sources of supply to other manufacturers will require the satisfaction of various regulatory requirements, which could cause Cardinal Health to experience significant delays in receiving adequate supplies of guaifenesin, dextromethorphan or both. Any delays in the manufacturing process may adversely impact our ability to meet commercial demand on a timely basis, which would negatively impact our revenues, reputation and business strategy.

          As described more fully under the section entitled “Government Regulation,” following its approval of Mucinex SE, the FDA took enforcement action to remove all existing long-acting, single-ingredient guaifenesin single-entity products from the market. We believe that sales of Mucinex SE increased as a result of the FDA’s action and its resulting status as the only drug of its kind to be approved by the FDA for marketing and sale in the United States. The FDA approved Mucinex DM in April 2004 and Mucinex D in June 2004. As of the date of this prospectus, the FDA has not taken any action to remove from the market existing, long-acting guaifenesin and dextromethorphan combination products, which are similar to Mucinex DM, and existing, long-acting guaifenesin and pseudoephedrine combination products, which are similar to Mucinex D. We have no assurance that the FDA will ever undertake this action and we may never achieve the increase in sales we would anticipate if the FDA removed these competing, unapproved products from the market.

          In addition, as described more fully under the section entitled “Government Regulation,” based on our patent position and regulatory requirements, we estimate that the process of developing and obtaining the necessary FDA approvals for competitive long-acting guaifenesin products would take two to three years from the start of this process. However, it is possible that competitors have already begun the process of developing and obtaining FDA approval for products competitive with Mucinex SE or our other products. As a result, we cannot be sure that the effective market exclusivity that we currently enjoy for Mucinex SE, and would enjoy if the FDA removes from the market products similar to Mucinex DM or Mucinex D, will continue for any period of time into the future. If competitive long-acting guaifenesin OTC products are approved, our growth may be slowed or our results of operations may be adversely affected.

          Guaifenesin is a fundamental component in all of our currently marketed products and many of our product candidates. Guaifenesin and the other active ingredients in our products and product candidates have been used for many years. Our competitors may develop new chemicals or compounds that render guaifenesin, our patented delivery system or our products obsolete. We can offer no assurance that our development efforts will be able to lead or keep pace with discoveries or technological advances

          For the nine months ended March 31, 2005, our top five and ten customers accounted for an aggregate of approximately 62% and 82% of our gross sales, respectively. CVS, McKesson Corporation, Walgreens, and Wal-Mart each accounted for greater than 10% of our gross sales for the nine months ended March 31, 2005. We expect that, for the year ended June 30, 2005 and future periods, our top five and ten customers will, in the aggregate, continue to account for a large portion of our sales. In addition, retailers have demanded, and may continue to demand, increased service and other accommodations, as well as price concessions. As a result, we may face downward pressure on our prices and increased expenses to meet these demands, which would reduce our margins. Given the growing trend toward consolidation of retailers, we expect demands by customers and the concentration of our sales in a small number of customers to increase. The loss of one or more of our top customers, any significant decrease in sales to these customers, pricing concessions or other demands made by these customers, or any significant decrease in our retail display space in any of these customers’ stores could reduce our sales and margins and could have a material adverse effect on our business, financial condition and results of operations.

          Our competitors may develop products that are superior to ours or may more effectively market products that are competitive with ours. We believe that Mucinex SE and Mucinex DM compete primarily with products with strong brand awareness marketed by large pharmaceutical companies such as:

          We also face substantial competition from companies that market private label brands to our largest customers, which are typically sold at lower prices than our products.

          With respect to all of our existing and future drug products, regardless of whether such products are sold by prescription or OTC, we will compete with companies working to develop products and technologies that are more effective, safer or less costly than our products and technologies. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than us, have larger or more skilled sales forces to promote their products and develop more comprehensive protection for their technologies. Many of these competitors have substantially greater financial, technical and human resources than we do. Moreover, additional mergers and acquisitions in the pharmaceutical industry may result in our competitors having an even greater concentration of resources. We may not be able to maintain market acceptance of our products or successfully introduce new products if our competitors develop different or more advanced products, bring such products to market before we do or market their products more effectively in the OTC and prescription markets.

          With respect to our Mucinex SE, Mucinex DM and our other future OTC products, we also compete for brand recognition and product availability at retail stores. In addition, we compete with our competitors on price. Advertising, promotion, merchandising, packaging, and the timing of new product introductions and line extensions also have a significant impact on consumer buying decisions and, as a result, on our sales. The large pharmaceutical companies we compete against in the OTC market have considerably greater financial resources than we do and likely spend more on trade promotions and advertising. These competitors also likely benefit from greater purchasing power, stronger vendor relationships and broader distribution channels.

          Sales of our products also affect in-store position, wall display space and inventory levels in retail outlets. We have not been able to supply sufficient quantities of Mucinex SE and Mucinex DM to meet retail demand in recent months. If we are not able to improve inventory levels of Mucinex SE or Mucinex DM, maintain or improve in-store positioning of our products in retail stores, conduct effective advertising campaigns and other consumer and professional promotional programs, and maintain distribution and supply arrangements on competitive terms, we risk losing market share to our competitors in the OTC market.

          We have generated net income for only six consecutive quarters and the fiscal year ended June 30, 2004 is the first year we have shown net income. Our ability to maintain profitability depends on our ability to generate revenue from existing products and our ability to successfully develop, obtain regulatory approval for, manufacture, and commercialize our product candidates. Because of the numerous risks and uncertainties associated with our business, we can offer no assurance that we will continue to be profitable.

          We are highly dependent upon consumer perceptions of us, the Mucinex brand and the safety and quality of our products. We could be adversely affected if we or the Mucinex brand is subject to negative publicity. We could also be adversely affected if any of our products or any similar products distributed by other companies prove to be, or are asserted to be, harmful to consumers. Also, because of our dependence upon consumer perceptions, any adverse publicity associated with illness or other adverse effects resulting from consumers’ use or misuse of our products or any similar products distributed by other companies could have a material adverse impact on our results of operations.

          Our business exposes us to the risk of product liability claims that is inherent in the manufacturing, testing and marketing of drugs and related products. These lawsuits may divert our management from pursuing our business strategy and may be costly to defend. In addition, if we are held liable in any of these lawsuits, we may incur substantial liabilities and may be forced to limit or forgo further commercialization of those products. Although we maintain general liability and product liability insurance in an amount that we believe is reasonably adequate to insulate us from potential claims, this insurance may not fully cover potential liabilities. In addition, our inability to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercial production and sale of our products, which could adversely affect our business.

          The availability and levels of reimbursement by Medicaid affect the market for both our current and future products. Medicaid continually attempts to contain or reduce the costs of healthcare by

          Medicaid does not generally cover the costs of OTC products. Twenty-five state programs, however, have covered, and continue to cover, the cost of long-acting guaifenesin products, including our products. There is no assurance that any Medicaid program will cover any of our new products or will continue to cover our current products.

          We expect retail demand for our products to be higher between October 1 and March 31 due to the prevalence of cough, cold and flu. As a result, our shipments, and therefore revenues, are expected to be higher between July 1 and March 31 to support the retail demand through that season. We generally expect our revenues during the quarter ended June 30 to be lower than the other quarters. In addition, fluctuations in the severity of the annual cough, cold and flu season may cause our operating results to vary from year to year. Due to these seasonal fluctuations in demand, our operating results in any particular quarter may not be indicative of the results for any other quarter or for the entire year.

          We intend to expand our portfolio of products by:

          Our failure to expand our portfolio of products in both the prescription and OTC respiratory therapeutic markets, or any unexpected delays in launching new products, will impair our ability to execute our growth strategy, which will negatively affect our financial position and results of operations.

          As part of our business strategy, we intend to pursue product candidates that must undergo preclinical studies and clinical trials as a condition to regulatory approval. Preclinical studies and clinical trials are expensive and, because we do not have the ability to conduct our own clinical trials, we will hire third parties to run the trials, which will lessen our control over the process. Clinical trials may take several years to complete and may not be successful. The commencement and completion of clinical trials may be delayed by many factors, including:

          Although we have not been required to conduct extensive clinical trials to obtain FDA approval of our existing products, we expect that many of our future product candidates may require extensive clinical trials. We may not successfully complete clinical trials for our product candidates. Accordingly, we may not receive the regulatory approvals needed to market our product candidates. Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for our product candidates would delay or prevent the commercialization of such product candidates, which could negatively impact our financial position.

          We are subject to extensive regulation by the FDA and, to a lesser extent, by other applicable federal agencies, such as the Consumer Product Safety Commission, the Drug Enforcement Administration, the Federal Trade Commission, or FTC, the Environmental Protection Agency, and state government agencies. The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other federal statutes and rules regulate the testing, manufacture, packaging, labeling, storage, record keeping, promotion, distribution, and sale of our products. If we or our manufacturers fail to comply with those regulations, we could become subject to significant penalties or claims, which could materially and adversely affect our operating results or our ability to conduct our business. In addition, the adoption of new regulations or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may adversely affect our revenue and the marketing of our products.

          In accordance with the Federal Food, Drug and Cosmetic Act and FDA regulations, the manufacturing processes of our third party manufacturers must also comply with cGMPs. The FDA inspects the facilities of our third party manufacturers periodically to determine if our third party manufacturers are complying with cGMPs. The FDA may implement additional regulations with which we would have to comply, which would increase our expenses.

          Additionally, if we or our third party manufacturers fail to comply with federal or state regulations, we could be required to:

Any of these actions could materially and adversely affect our financial results.

          Further, our failure to comply with the FDA, FTC or state regulations relating to our product claims and advertising may result in enforcement actions and imposition of penalties or otherwise materially and adversely affect our marketing strategy and product sales.

          All new medicines must be approved by the FDA before they can be marketed and sold in the United States. Successfully completing extensive clinical trials and demonstrating manufacturing capability is typically required to obtain FDA approval, as described more fully under “Government Regulation.” Clinical development is expensive, uncertain and lengthy, often taking a number of years for a NDA to be filed with and ultimately approved by the FDA. Of the large number of drugs in development, only a small percentage result in the submission of a NDA to the FDA and even fewer are approved for commercialization.

          We may need to successfully address a number of challenges in order to complete the development of our future products. For example, to obtain marketing approval for a new product candidate, we and our third party manufacturers will be required to consistently produce the active pharmaceutical ingredient in commercial quantities and of specified quality on a repeated basis. This requirement is referred to as process validation. If we are unable to satisfy this process validation requirement for a future product candidate, through our third party manufacturers or otherwise, we will not receive approval to market such product.

          In addition, the FDA and other regulatory agencies may apply new standards for safety, manufacturing, packaging, and distribution of future product candidates. Complying with such standards may be time consuming or expensive and could result in delays in our obtaining marketing approval for future product candidates, or possibly preclude us from obtaining such approval. Such a delay could also increase our commercialization costs, possibly materially.

          Furthermore, our future products may not be effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining regulatory approval or prevent or limit commercial use. The FDA and other regulatory authorities may not approve any product that we develop. Even if we do obtain regulatory approval, such regulatory approvals may be subject to limitations on the indicated uses for which we may market a product, which may limit the size of the market for such product.

          As indicated above, an approved drug and its manufacturer are subject to continual review, including review and approval of the manufacturing facilities. Changes in the manufacturing process or procedure, including a change in the location where the product is manufactured or a change of a third party manufacturer, may require prior FDA review or approval or revalidation of the manufacturing process and procedures in accordance with cGMP. This review or revalidation may be costly and time consuming and could delay or prevent the launch or delivery of a product. To effect a change of site, we and the manufacturer must transfer the relevant manufacturing technology to the new site. This process is detailed and time consuming. If we change the manufacturing site, the FDA will likely require us to perform analytical tests to demonstrate that changing the manufacturing location will not affect the characteristics of the product. If we cannot establish to the satisfaction of the FDA that the products manufactured at the new site are equivalent to those manufactured at the prior site, we may not obtain, or may be delayed in obtaining, approval to manufacture our products at the new site. In addition, if we elect to manufacture products at the facility of another third party, we would need to ensure that the new facility and the manufacturing process are in compliance with cGMP. Any such new facility would be subject to a preapproval inspection by the FDA.

          Furthermore, in order to obtain approval by the FDA of new products, we need to complete testing on both the active pharmaceutical ingredient and on the finished product in the packaging we propose for commercial sales. This testing includes testing of stability, identification of impurities and testing of other product specifications by validated test methods. If the required testing is delayed or

          If we or others identify side effects after any of our products are on the market:

          Any of these events could harm or prevent sales of the affected products or could substantially increase the costs and expenses of commercializing or marketing these products.

          We are subject to ongoing reporting regulations that require us to report to the FDA if our products cause or contribute to a death or serious injury. These reports can lead to stricter safety warnings on product labeling, voluntary company recalls or withdrawal of the product from the market. In addition, if we become aware of adverse event reports, manufacturing defects or insufficient labeling, we may voluntarily elect to recall one of our products. Any recall, which must be reported to and supervised by the FDA, would divert managerial and financial resources and could harm our reputation with all of our customers and with the health care professionals who recommend our products, which may have a material adverse effect on our business.

          Our Mucinex D product contains pseudoephedrine HCl, a FDA-approved ingredient for the relief of nasal congestion. We intend to launch this product in the first quarter of 2006. We understand that pseudoephedrine has been used in the illicit manufacture of methamphetamine, a dangerous and addictive drug. To date, we believe that nine states have enacted regulations concerning the sale of pseudoephedrine, including limiting the amount of these products that can be purchased at one time, or requiring that these products be located behind the counter, with the stated goal of deterring the illicit/illegal manufacture of methamphetamine. In addition, several retailers, in the absence of such regulations, have begun keeping products containing pseudoephedrine behind the counter. If such regulations are adopted throughout the United States or if additional retailers institute similar policies, then our sales of Mucinex D and the maximum strength version of the same product may be negatively impacted.

          We are highly dependent on the principal members of our management. The continued service of our Chief Executive Officer and President, Michael J. Valentino, is critical to our success. Mr. Valentino is the only member of our management team with whom we have entered into an employment agreement, but he may terminate it on short or no notice.

          The loss of any of our other executive officers, including our Executive Vice President, Chief Financial Officer and Treasurer, David Becker, our Senior Vice President of Research and Development, Helmut Albrecht, our Executive Vice President, Chief Legal and Compliance Officer and Secretary, Walter E. Riehemann, our Executive Vice President, Chief Marketing and Development Officer, Robert Casale, our Vice President of Regulatory Affairs, Susan Witham, or our Executive Vice President, Commercial Operations, John Thievon, could cause disruption in our business. We do not carry key man life insurance on any of our key personnel.

          In addition, our growth will require us to hire a significant number of qualified technical personnel. Intense competition exists among other companies and research and academic institutions for qualified personnel. If we cannot continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow our business.

          We intend to pursue opportunities to acquire technologies, brands and products that would allow us to leverage our professional sales force or our marketing and development expertise or enhance our product portfolio or brand recognition in the OTC and prescription markets. We have limited experience in identifying and completing such acquisitions. Further, acquisitions typically entail many risks, including risks related to the integration of the technologies and products. In attempting to integrate such technologies and products, we may experience unexpected integration costs and delays, which may divert management and employee attention and disrupt our ability to develop and introduce new products. If we are not able to successfully integrate our acquisitions, we may not be able to realize the intended benefits of the acquisition.

          As a result of acquiring products or entering into other significant transactions, we have experienced, and will likely continue to experience, significant charges to earnings for acquisitions and related expenses, including transaction costs, closure costs or acquired in-process product development charges. These costs may include substantial fees for investment bankers, attorneys, accountants, and financial printing costs. Charges that we may incur in connection with acquisitions could adversely affect our results of operations for particular quarterly or annual periods. In addition, we may lack the required funds or resources to carry out such acquisitions.

          On April 20, 2005, an anonymous third party filed a request for reexamination of our U.S. patent with the USPTO. Under the federal patent statutes and regulations, the USPTO will conduct a reexamination if the third party raises a substantial question of patentability based on prior art or other printed publications. If the USPTO determines that the third party has raised a substantial question of patentability, it will commence a reexamination proceeding and has the authority to leave the patent in its

          Under its rules and regulations, the USPTO determines whether to commence a reexamination within 90 days of the request for reexamination. Often, however, the period is longer. Based on the USPTO’s past practice of granting requests for reexamination in most situations, we expect that the USPTO will commence a reexamination of our patent.

          While we intend to vigorously defend our patent position and believe we will prevail in the reexamination process, we may not be successful in maintaining our patent or the scope of its claims during reexamination and can offer no assurance as to the outcome of a reexamination proceeding. If the USPTO does not confirm our patent or substantially narrows the claims of our patent following a reexamination, then our competitive position will be weakened and we may face stronger and more direct competition, which would negatively impact our business and operating results.

          Our patent portfolio includes one U.S. patent, two foreign patents and several patent applications. Our most significant patent is currently the U.S. patent, which contains claims covering a long-acting guaifenesin product, including an immediate release portion and an extended-release portion that yields a certain pharmacokinetic profile. The active ingredients in our products and most of our product candidates, including guaifenesin, dextromethorphan and pseudoephedrine, are chemical compounds that have been in existence for many years and are not covered by patents that claim these chemical compounds. Our patents cover a formulation of a product that delivers guaifenesin with a bi-phasic release pattern. They do not and will not contain compound claims for the chemicals in these products. We cannot be sure that our patents will effectively exclude competitors from introducing similar or equivalent products.

          Our success will depend, in large part, on our ability to obtain additional patents in the United States, maintain our existing patent position and obtain and maintain adequate protection for the other intellectual property incorporated into our products. Our patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. We cannot be sure that we will receive patents for any of our pending patent applications or any patent applications we may file in the future. In addition, our patents may not afford us protection against competitors with similar technology. Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, we cannot be certain that we were the first to make the inventions claimed in issued patents or pending patent applications or that we were the first to file for protection of the inventions set forth in these patent applications. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and financial results.

          A significant part of our business strategy is to position Mucinex as a preferred brand for relief of respiratory congestion for the OTC cough, cold, allergy, and sinus market. We believe that familiarity with our brand is an important competitive advantage and that the growth and sustainability of our market share for the Mucinex product line will depend to a significant extent upon the goodwill associated with our related trademarks and trade names. We intend to use the trademarks and trade names on our products to convey that the products we sell are “brand name” products, and we believe consumers ascribe value to our brands. We own the material trademark and trade name rights used in connection with the packaging, marketing and sale of our Mucinex products. This ownership prevents our competitors or new

          Additionally, other parties may infringe on our property rights in our trademarks and trade names, which may dilute the value of our brands in the marketplace. Our competitors may also introduce brands that cause confusion with our brands in the marketplace, which could adversely affect the value that our customers associate with our brands and thereby negatively impact our sales. Any such infringement of our intellectual property rights would also likely result in a commitment of our time and resources to protect these rights through litigation or otherwise. In addition, third parties may assert claims against our trademark and trade name rights, and we may not be able to successfully resolve these claims. In such event, we may lose our ability to use the brand names that were the subject of these claims, which could have a material adverse impact on our sales and operating results. We could also incur substantial costs to defend even those claims that are not ultimately successful, which could materially adversely affect our business, results of operations or financial condition.

          In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We seek to protect this information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. If we do not adequately protect our trade secrets and proprietary information, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and financial results.

          Our technologies, products or potential products in development may infringe rights under patents or patent applications of third parties. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing, or sales of the product or product candidate that is the subject of the suit.

          As a result of patent infringement claims, or to avoid potential claims, we may choose to seek, or be required to seek, a license from the third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This inability to enter into licenses could harm our business significantly.

          The pharmaceutical industry has experienced substantial litigation and other proceedings regarding patent and other intellectual property rights. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the USPTO and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding,

          We will require substantial funds to commercialize our products, launch new products, promote our brand, and conduct development, including preclinical testing and clinical trials, of our potential products. We currently believe that we will generate sufficient revenue through our product sales, together with our net proceeds from this offering, to fund our anticipated levels of operations through at least the next     years. However, our future capital requirements will depend on many factors, including:

          Additional financing may not be available to us when we need it or on favorable terms. If we are unable to obtain adequate financing on a timely basis, we may be required to significantly curtail one or more of our marketing, development, licensing, or acquisition programs. We could be required to seek funds through arrangements with others that may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise pursue on our own. If we raise additional funds by issuing equity securities, our then-existing stockholders will experience dilution and the terms of any new equity securities may have preferences over our common stock.

          We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the “Use of Proceeds” section of this prospectus. Our stockholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. The failure by our management to apply these funds effectively could have a material adverse effect on our business. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

          When this offering is completed, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before the completion of this offering, will, in the aggregate, beneficially own shares representing approximately                     % of our capital stock. As a result,

          Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

          The affirmative vote of the holders of at least 66²/3% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 66²/3% of our shares of capital stock entitled to vote.

          In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who, together with its affiliates, owns or within the last three years has owned 15% of our voting stock, 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. Accordingly, Section 203 may discourage, delay or prevent a change in control of our company.

          Purchasers of common stock in this offering will pay a price per share that substantially exceeds the per share value of our tangible assets after subtracting our liabilities and the per share price paid by our existing stockholders and by persons who exercise currently outstanding options to acquire our common stock. Accordingly, after giving effect to the $45 million cash dividend declared by our board of directors on June 2, 2005 and assuming an initial public offering price of $          per share, you will experience immediate and substantial dilution of $          per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering at the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately           % of the aggregate price paid by all purchasers of our stock but will own only approximately           % of our common stock outstanding after this offering.

          Prior to this offering, there has been no public market for our common stock. Although we have applied for quotation of our common stock on the Nasdaq National Market, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price for our common stock will be determined through negotiations with the underwriters. This initial public

          Our stock price is likely to be volatile. The stock market in general and the market for pharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

          If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. All of the shares being sold in this offering will be freely tradable without restriction or further registration under the federal securities laws, unless purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act. Substantially all of the remaining shares to be outstanding upon completion of this offering will be eligible for sale pursuant to Rule 144 upon the expiration of lock-up agreements.

          Upon completion of this offering, holders of an aggregate of approximately            shares of common stock will have rights to require us to register these shares of common stock with the Securities and Exchange Commission. If we register their shares of common stock following the expiration of the lock-up agreements, they can sell those shares in the public market.

          Promptly following this offering, we intend to register approximately            shares of common stock that are authorized for issuance under our stock plans. As of March 31, 2005, 5,201,758 shares were subject to outstanding options, all of which were immediately exercisable. Once we register the shares authorized for issuance under our stock plans, they can be freely sold in the public market upon issuance, subject to our repurchase rights, the lock-up agreements referred to above and the restrictions imposed on our affiliates under Rule 144.

          Other than the $45 million cash dividend declared by our board of directors on June 2, 2005, we have never declared or paid cash dividends. We currently expect to retain earnings for our business and do not anticipate paying dividends on our common stock at any time in the foreseeable future. Because we do not anticipate paying dividends in the future, the only opportunity to realize the value of our common stock will likely be through a sale of those shares. The board of directors will decide whether to pay dividends on common stock from time to time in the exercise of its business judgment.

          This prospectus contains forward-looking statements. All statements, trend analyses and other information contained in this prospectus relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as “may,” “target,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “project,” and other similar expressions, constitute forward-looking statements. We made these statements based on our plans and current analyses of our business and the pharmaceutical industry as a whole. We caution that these statements may, and often do, vary from actual results and the differences between these statements and actual results can be material. Accordingly, we cannot assure you that actual results will not differ from those expressed or implied by the forward-looking statements. Factors that could contribute to these differences include, among other things:

          You should not place undue reliance on any forward-looking statement. The forward-looking statements in this prospectus speak only as of the date of this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations, or prospects may have changed since that date. Neither the delivery of this prospectus nor the sale of the common shares means that information contained in this prospectus is correct after the date of this prospectus. Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements, the risk factors or other information described in this prospectus, whether as a result of new information, future events, changed circumstances, or any other reason after the date of this prospectus.

          The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act do not protect any statements we make in connection with this offering.

          We estimate the net proceeds from our sale of the            shares of common stock in this offering to be approximately $           million at an assumed initial public offering price of $          per share, less the underwriting discount and commissions and estimated offering expenses. We will not receive any proceeds from the sale of our common stock by the selling stockholders in this offering. If the underwriters exercise their over-allotment option in full, we estimate our net proceeds will be approximately $            million.

          The principal purposes of this offering are to increase our capitalization and financial flexibility, to provide a public market for our common stock and to facilitate access to public capital markets.

          We intend to use the net proceeds of this offering over the next       years approximately as follows:

          We may use a portion of the net proceeds for the acquisition of businesses, products, technologies and the possible repurchase of the Cardinal Health manufacturing assets and operations in Fort Worth, Texas, though we have no agreements or understandings with respect to any acquisition at this time.

          The amounts that we actually expend for these specified purposes may vary significantly depending on a number of factors, including changes in our growth strategy, the success of our product development, the amount of our future revenues and expenses and our future cash flow. As a result, we will retain broad discretion in the allocation of the net proceeds of this offering and may spend such proceeds for any purpose, including purposes not presently contemplated.

          Pending the uses described above, we may invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities.

          We declared and paid a stock dividend on our capital stock in October 2000. On June 2, 2005, our board of directors declared a cash dividend totaling $45 million on shares of our common stock and shares of our preferred stock on an “as converted” basis (in accordance with our Certificate of Designations, Rights and Preferences of the Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock of the Certificate of Incorporation). On June 2, 2005, the requisite number of stockholders approved such dividend. The record date for the dividend is June 17, 2005. We expect that the dividend will be paid on or about June 21, 2005. We currently intend to retain all future earnings to finance our development efforts, the development of our proprietary technologies, the in-licensing or acquisition of specialty pharmaceutical products and trademarks, and the expansion of our business. We do not intend to declare or pay cash dividends on our capital stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law, and other factors our board of directors deems relevant.

          The following table sets forth our unaudited capitalization as of March 31, 2005:

          You should read this information together with our financial statements and the notes to those statements appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Selected Financial Data” sections of this prospectus.

          The above share data excludes the following:

          The following table presents our selected financial information, which you should read in conjunction with, and is qualified in its entirety by reference to, our historical financial statements, the notes to those statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected financial information set forth below as of June 30, 2004 and 2003 and for the years ended June 30, 2004, 2003 and 2002 has been derived from our audited financial statements included herein. The selected financial information as of June 30, 2002, 2001 and 2000 and for the years ended June 30, 2001 and 2000 have been derived from our audited financial statements, which are not included in this prospectus. The selected financial information as of and for the nine months ended March 31, 2005 and 2004 has been derived from unaudited financial statements, which include all adjustments consisting of normal recurring accruals that we consider necessary for a fair presentation of the financial position and the results of operations for these periods. Historical results are not indicative of future performance.

          You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this prospectus. Data presented as of March 31, 2005 and 2004 and for the interim periods then ended is based on our unaudited financial statements presented elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the section entitled “Risk Factors” section of this prospectus for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

          We are a specialty pharmaceutical company focused on late-stage development, commercialization and marketing of OTC and prescription pharmaceuticals for the treatment of respiratory disorders. We currently market two products, Mucinex SE and Mucinex DM.

          Mucinex SE. Mucinex SE is a long-acting, single-ingredient guaifenesin OTC product and the only long-acting guaifenesin product approved by the FDA. The FDA approved Mucinex SE in July 2002.

          Mucinex DM. Mucinex DM is an OTC product containing long-acting guaifenesin and the cough suppressant dextromethorphan, and is the only FDA-approved, long-acting guaifenesin and dextromethorphan combination product. The FDA approved Mucinex DM in April 2004.

          Future Products. We have four additional products that have been approved by the FDA that we intend to market in the future: Mucinex D, an OTC product containing long-acting guaifenesin and the decongestant, pseudoephedrine; a maximum strength long-acting, single-ingredient guaifenesin OTC product (under the Humibid brand name); a maximum strength OTC combination product containing long-acting guaifenesin and dextromethorphan; and a maximum strength OTC combination product containing long-acting guaifenesin and pseudoephedrine. Like Mucinex SE and Mucinex DM, these additional products are the only FDA-approved products of their kind.

          Revenue Growth. Our net revenues have grown from $13.8 million for the year ended June 30, 2002 to $14.0 million and $61.3 million for the years ended June 30, 2003 and 2004, respectively. Our net revenues for the nine months ended March 31, 2004 and 2005 were $49.0 million and $121.1 million, respectively. Our revenue growth has been primarily driven by Mucinex SE sales following its launch in July 2002 and Mucinex DM sales following its launch in August 2004. We believe that the key factors underlying the growth of Mucinex SE and Mucinex DM revenues include:

          Results of Operations. We commenced operations in 1997, and as of June 30, 2003, we had an accumulated deficit of $65.7 million. During the fiscal year ended June 30, 2004, we reported net income of $35.8 million, which included an income tax benefit of approximately $16.1 million related primarily to the reversal of the valuation allowance that had been recorded against the deferred tax asset resulting from accumulated net operating losses. During the nine months ended March 31, 2005, we reported net income of $24.0 million, which reduced the accumulated deficit at March 31, 2005 to $5.9 million.

          Seasonality. We expect retail demand for our products to be higher between October 1 and March 31 due to the prevalence of cough, cold and flu. As a result, our shipments, and therefore revenues, are expected to be higher between July 1 and March 31 to support the retail demand through that season. We generally expect our revenues during the quarter ended June 30 to be lower than the other quarters.

          Future Growth. We believe that our future growth will be driven by professional and consumer marketing efforts to create increased awareness of the Mucinex brand and the benefits of long-acting guaifenesin and new product launches such as Mucinex D and our maximum strength products. Additionally, the FDA may take action to remove from the market the current long-acting guaifenesin products similar to Mucinex DM and Mucinex D, which could have a beneficial impact on our business. We plan to continue to spend significant amounts on the commercialization of our current products, the continuing development of our pipeline products and the in-licensing or acquisition of new product candidates. Our future profitability is dependent upon the successful commercialization of Mucinex SE and Mucinex DM and the introduction of new products such as Mucinex D and Humibid.

          Recent Developments. On June 2, 2005, our board of directors declared a cash dividend totaling $45 million on shares of our common stock and shares of our preferred stock on an “as converted” basis (in accordance with our Certificate of Designations, Rights and Preferences of the Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock of the Certificate of Incorporation). On June 2, 2005, the requisite number of stockholders approved such dividend. The record date for the dividend is June 17, 2005. We expect that the dividend will be paid on or about June 21, 2005.

          Our financial statements are presented on the basis of accounting principles that are generally accepted in the United States. We have taken into consideration all professional accounting standards that are effective as of the date of these financial statements. Included within these policies are our “critical accounting policies.” Critical accounting policies are those policies that are most important to the preparation of our financial statements and require management’s most subjective and complex judgments due to the need to make estimates about matters that are inherently uncertain. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operations and financial condition. Our critical accounting policies are described in detail below.

          While our significant accounting policies are more fully described in Note 1 to our financial statements contained in this prospectus, we believe that the following accounting policies relating to

          Revenue Recognition. We recognize revenue when title and risk of loss have transferred to the customer, when estimated provisions for product returns, rebates, chargebacks, and other sales allowances are reasonably determinable and when collection is reasonably assured. Accruals for these provisions are presented in the financial statements as reductions to sales.

          Sales Returns and Allowances. When we sell our products, we reduce the amount of revenue recognized from such sale by an estimate of future product returns and other sales allowances. Other sales allowances include cash discounts, rebates, including Medicaid rebates, chargebacks, sales incentives, and royalties relating to products sold in the current period. Factors that are considered in our estimates of future product returns include an estimate of the amount of product in the trade channel, competitive products, the remaining time to expiration of the product, and the historical rate of returns. Consistent with industry practice, we maintain a return policy that allows our customers to return product within a specified period prior to and subsequent to the expiration date. Factors that are considered in our estimates regarding other sales allowances include historical payment experience in relationship to revenues, estimated customer inventory levels and current contract prices and terms with both direct and indirect customers and product royalty rates. If actual future payments for product returns and other sales allowances exceed the estimates we made at the time of sale, our financial position, results of operations and cash flow would be negatively impacted. There have been no material changes to our estimates in the periods presented.

          The following table shows, at each balance sheet date, the balances of liabilities and accounts receivable valuation accounts resulting from sales returns and allowances:

          The following table summarizes the activity of accrued returns and other sales allowances:

          Cardinal Health Profit Share. In April 2004, we sold substantially all of our manufacturing assets, raw materials and in-process inventory located in Fort Worth, Texas to Cardinal Health. Pursuant to our supply agreement with Cardinal Health, Cardinal Health manufactures and supplies all of our existing drug products. Under this supply agreement, Cardinal Health is required to segregate direct manufacturing costs from indirect manufacturing costs. As finished goods are completed and shipped to a warehouse we designate, Cardinal Health bills us for the actual direct manufacturing costs incurred plus a mark-up. This mark-up is merely provided for interim billing and cash flow purposes and the actual amount payable to Cardinal Health is calculated at the end of each calendar quarter under a profit sharing formula. Profit for this purpose is calculated as net sales less the actual direct manufacturing cost of products sold during the calendar quarter and less freight and other logistics costs. The resulting profit is subject to profit sharing rates that decline as the total value of this profit increases. At the end of each calendar quarter, a reconciliation is completed and a billing adjustment is made to the extent that the actual profit share differs from the total mark-up paid to Cardinal Health during the calendar quarter.

          The accounting policy with regard to this arrangement is to record the actual direct manufacturing cost and the effective profit share amount as inventory, as that is our final cost to purchase the inventory. The difference between the billed mark-up and the effective profit share amount are reflected on the balance sheet as a receivable from or payable to Cardinal Health. At March 31, 2005, we have a receivable from Cardinal Health of $3.9 million as a result of the mark-up billed by Cardinal Health exceeding the contract year effective profit share amount.

          The receivable of $3.9 million at March 31, 2005 is calculated as follows:

          Inventory at June 30, 2004 included $982,000 of profit share. The use of the final profit share rate for the contract year ended March 31, 2005 would have reduced cost of goods sold at June 30, 2004 by approximately $475,000. The actual profit share rate for the contract year ended March 31, 2005 was reduced due to the sales increase that resulted from the consumer advertising campaign that began in November of 2004.

          Each month, as product is sold, the actual direct manufacturing cost plus an estimate of the profit share amount earned by Cardinal Health is charged to cost of sales. The estimated profit share amount considers for each contract year (i) our projected net product sales and gross profit, (ii) the projected profit share and (iii) the contractual minimum profit share amount.

          Assuming our net sales per unit and the actual direct manufacturing cost per unit are constant during the contract year, an increase in unit sales will result in a lower effective profit share amount per unit for the contract year. Conversely, if unit sales are lower than our initial estimates, the effective profit share per unit increases. At each contract year-end (March 31), a final reconciliation is performed and estimates are adjusted to the actual results.

          Income Taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards, or SFAS, No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Our net deferred tax assets relate primarily to net operating loss carryforwards, or NOL, research credits and sales reserves. In assessing the reliability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. This assessment requires significant judgment and estimates. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. We consider our history of losses, scheduled reversal of deferred tax assets and liabilities and projected future taxable income over the periods in which the deferred tax items are deductible. In addition, Internal Revenue Code Sections 382 and 383 contain provisions that may limit the NOL available to be used in any given year upon the occurrence of certain events, including significant changes in ownership interest. During fiscal year 2004, we utilized approximately 50% of our NOLs. Given this utilization, as well as projections for taxable income during fiscal 2005, the entire valuation allowance was reversed at June 30, 2004.

          Stock-Based Compensation. We account for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, or SFAS 123, for stock-based employee compensation. We use the graded-vesting methodology to record the stock-based compensation expense over the vesting period, which generally ranges from three to five years. This methodology results in a greater amount of expense recognized towards the beginning of the vesting period

          Accretion of Preferred Stock. We adjust the carrying value of our Series A redeemable convertible preferred stock, or Series A Preferred Stock, our Series B redeemable convertible preferred stock, or Series B Preferred Stock, and our Series C redeemable convertible preferred stock, or Series C Preferred Stock, to redemption value. For Series A and Series B Preferred Stock, redemption value equals fair value. For Series C Preferred Stock, redemption value equals the greater of 200% of the original per share purchase price or fair value. All classes of preferred stock are redeemable at the option of the holder on specified dates. Accretion of Series C Preferred Stock up to liquidation value is recorded as a reduction of net income applicable to common stockholders. To the extent that the fair value is greater than the accreted liquidation value at the balance sheet date, the preferred stock is adjusted to reflect the fair market value with the offset charged to accumulated deficit in stockholders’ equity. Upon the closing of this offering, our redeemable convertible preferred stock will automatically convert into shares of common stock and, as a result, there will be no further accretion and the preferred stock amount will be credited to common stock and additional paid-in capital.

          We incurred approximately $870 and $1,196 of issuance costs in connection with the issuance of Series A and B Preferred Stock, respectively. Such costs have been recorded as a reduction of the carrying amount of the preferred stock and are being accreted through a charge to accumulated deficit up to the original redemption date, using the effective interest method and are included in net income applicable to common stockholders. There were no issuance costs associated with the Series C Preferred Stock.

          Significant Factors, Assumptions and Methodologies Used in Determining Fair Value. Determining fair value of our stock requires making complex and subjective judgments. During the 12 months ended March 31, 2005, we granted 1,695,500 options with an exercise price ranging from $0.78 to $4.00 with the deemed fair value of the underlying common stock equal to the exercise price. Although we did not obtain valuations by an unrelated valuation specialist, management performed and our board of directors approved contemporaneous estimates of the fair value of our common stock. Management’s valuations considered a number of factors including:

          These valuations are based on a number of estimates and assumptions and the adjustment of any of the factors could result in an estimate of fair value that would be materially different than the one we determined.

          Product Development. Our product development expenses have historically consisted of formulation and analytical development work with existing and well established drugs and pharmaceutical ingredients, the development of scale-up and manufacturing data and stability programs, human pharmacokinetic studies to establish bioavailability and bioequivalence data for our products versus reference drugs, as well as the preparation and filing of NDAs.

          Generally, our formulation, chemistry and analytical manufacturing controls and stability work has been performed utilizing our own employees and since April 2004, in cooperation with Cardinal Health. Product development expenses include salary and benefits, raw materials and supplies, facilities, depreciation, and other allocated expenses associated with the performance of the above work and functions. Pharmacokinetic studies, clinical trials and certain support functions in preparing protocols, reports and other regulatory documents are performed by scientific consultants and third party contract research organizations.

          Selling, Marketing and Administrative. Selling, marketing and administrative expenses include professional sales and marketing, consumer marketing, trade sales and distribution activities, and administrative expenses.

          Our professional selling and marketing expenses are comprised primarily of (i) our professional sales representatives and the related management function, which includes salary, commission, benefits (including stock-based compensation), and business related expenses, (ii) physician samples, (iii) sales force training, (iv) sales force information technology, and (v) market research and advertising agency costs.

          Our consumer marketing expenses are comprised of costs related to (i) media, including television, radio and print advertising, (ii) market research, (iii) website operations, (iv) commercial production, and (v) internal management personnel. Substantially all of the costs associated with our consumer marketing expenses are paid to an outside advertising agency.

          Our trade sales and distribution expenses are primarily comprised of costs associated with our national and regional trade sales personnel and their related territory operations and outsourced warehouse and shipping operations paid to Cardinal Health.

          Administrative expenses include salaries and benefits (including stock-based compensation), professional fees and facility costs. We estimate that our administrative expenses will increase to support our growing development, sales and marketing efforts. We also expect to incur additional costs associated with operating as a public company.

          Net Sales. Net sales increased by $72.1 million to $121.1 million for the nine months ended March 31, 2005, as compared to $49.0 million for the nine months ended March 31, 2004. The increase in net sales during the nine months ended March 31, 2005 is primarily due to (i) Mucinex SE being the exclusive long-acting, single-ingredient guaifenesin product available in the United States for the full nine months ended March 31, 2005, as compared to only four months during the nine-month period ended March 31, 2004, (ii) the launch of our consumer advertising campaign in November 2004 and (iii) the launch of Mucinex DM, which was partially offset by a reduction in other product sales. Other products consist of the AlleRx^tm and Aquatab product lines, which were discontinued in February 2005 and August 2004, respectively. Net sales during the nine months ended March 31, 2005 approximated 89% of gross sales as compared to approximately 84% for the nine months ended March 31, 2004. The favorable increase in net sales as a percentage of gross sales is a result of lower product return rates for Mucinex SE and Mucinex DM and a lower percentage of sales being subject to chargebacks.

          We discontinued the manufacture and sale of our Aquatab product lines to focus on building the Mucinex brand.

          In February 2005, we acquired the Humibid trademark and transferred our AlleRx^tm product line in exchange for the Humibid name. We believe the Humibid name is more in line with our growth strategy than the AlleRx^tm product line.

          The following table sets forth our net sales for the nine months ended March 31, 2005 and March 31, 2004.

          Selling, Marketing and Administrative. Selling, marketing and administrative expenses increased $35.8 million to $52.7 million for the nine months ended March 31, 2005, as compared to $16.9 million for the nine months ended March 31, 2004. The increase during the nine months ended March 31, 2005 is primarily due to (i) approximately $23.3 million of spending on the consumer advertising campaign, (ii) approximately $2.0 million of additional expense related to distribution and shipping on the increased volume, (iii) approximately $11.2 million associated with various sales and marketing programs such as the hiring of 50 additional sales representatives in December 2004, professional marketing and market research expenses, expansion of the trade sales department, sales training and meetings, and implementation of a sales force automation system for our 100-person sales force, and (iv) $1.6 million of incremental general and administrative expenses primarily related to new headcount, information technology and performance bonuses. Stock-based compensation is reflected within selling, marketing and administrative expenses and decreased by $231,000, or 45%, to $283,000 for the nine months ended March 31, 2005, as compared to $514,000 reported during the nine months ended March 31, 2004. The decrease is primarily due to a lower number of stock options granted during the nine months ended March 31, 2005, as compared to the same period ended March 31, 2004 and a reduction in the minimum value per stock option used in calculating the stock compensation expense.

          In June of 2005, our board of directors approved and we paid bonuses to certain employees totaling approximately $6.9 million, which included an additional discretionary performance bonus of $4.1 million. At March 31, 2005, $1.6 million was accrued and the remaining $5.3 million will be expensed during the quarter ended June 30, 2005.

          Product Development. Product development expenses increased by $2.1 million, or 90%, to $4.5 million during the nine months ended March 31, 2005, as compared to $2.4 million for the nine months ended March 31, 2004. The increase for the nine months ended March 31, 2005 is primarily attributable to continued development of our Mucinex line extensions and other development projects.

          Interest Expense. Interest expense decreased by $2.3 million, or 97%, to $77,000 during the nine months ended March 31, 2005, as compared to $2.4 million for the nine months ended March 31, 2004. The decrease in interest expense is a result of our 8% Convertible Secured Promissory Notes due 2005, or the 8% Convertible Notes, being converted into our Series C Preferred Stock on June 30, 2004. The 8% Convertible Notes earned interest at the rate of 8% annually and also required us to record non-cash

          Interest Income. Interest income increased $418,000 to $519,000 during the nine months ended March 31, 2005, as compared to $101,000 for the nine months ended March 31, 2004. The increase during the nine months ended March 31, 2005 is primarily due to our average cash balance of approximately $44.8 million during the nine months ended March 31, 2005, as compared to approximately $20.8 million during the nine months ended March 31, 2004.

          Income Taxes. Income tax expense for the nine months ended March 31, 2005 was $15.6 million. We had no income tax expense for the nine months ended March 31, 2004. Our effective tax rate for the nine months ended March 31, 2005 was 39% compared to 0% for the nine months ended March 31, 2004. At March 31, 2004, we did not believe that we had a sufficient earnings history to reduce the valuation allowance that had been recorded against our deferred tax assets that had accumulated primarily as a result of net operating losses for income tax purposes. At June 30, 2004, we had approximately $25.7 million of net NOL that is subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code.

          Accretion of Preferred Stock. Accretion of our redeemable convertible preferred stock for the nine months ended March 31, 2005 was $17.5 million, as compared to $481,000 for the nine months ended March 31, 2004. The $17.0 million increase in the nine months ended March 31, 2005 reflects the accretion to liquidation value of the Series C Preferred Stock. Upon the closing of this offering, our redeemable convertible preferred stock will automatically convert into shares of common stock and, as a result, there will be no further accretion.

          Net Sales. Net sales increased by $47.3 million to $61.3 million during the fiscal year ended June 30, 2004, as compared to $14.0 million during the fiscal year ended June 30, 2003. During fiscal year 2004, Mucinex SE net sales increased approximately $48.4 million to $52.9 million primarily as a result of our exclusive market position in the long-acting, single-ingredient guaifenesin market and the promotional efforts of our professional sales force. Our other products, which have been discontinued, decreased primarily as a result of our former Aquatab product line being negatively impacted by generic competition. Net sales during the fiscal year ended June 30, 2004 approximated 82% of gross sales as compared to 73% during fiscal year 2003. The favorable increase in net sales percentage during fiscal year 2004 is a result of the increase in Mucinex SE sales that have a significantly lower rate of returns as compared to products sold during fiscal year 2003.

          Cost of Goods Sold. Cost of goods sold increased by $6.7 million to $11.9 million during the fiscal year ended June 30, 2004, as compared to $5.3 million during the fiscal year ended June 30, 2003. The increase in cost of goods sold from fiscal year 2003 to fiscal year 2004 primarily resulted from an increase in our unit sales of Mucinex SE. As a percentage of net sales, cost of goods sold decreased to 20% during the fiscal year ended June 30, 2004 from 37% during the fiscal year ended June 30, 2003, primarily as a result of greater manufacturing efficiencies related to increased production and the lack of a one-time inventory charge of approximately $1.0 million recorded during fiscal year 2003. During fiscal year 2002, we manufactured Mucinex SE inventory in anticipation of the FDA’s removal of the competitive unapproved products. However, as the FDA granted the competitive manufacturers an effective seventeen-month grace period, allowing them to remain on the market until November 30, 2003, approximately $1.0 million, or approximately 20 million tablets, of Mucinex SE inventory expired and was written off in fiscal 2003. Cost of goods sold includes $1.4 million of profit share earned by Cardinal Health from inception of the agreement on April 1, 2004 through June 30, 2004.

          Selling, Marketing and Administrative. Selling, marketing and administrative expenses were essentially flat at $23.3 million during the fiscal year ended June 30, 2004 and 2003. This result is primarily due to: (i) employing ten fewer sales representatives during fiscal 2004 as compared to fiscal 2003; (ii) a reduction in Mucinex SE sample expense during fiscal 2004 due to focusing our production

          Product Development. Product development expenses decreased $1.4 million, or 30%, to $3.2 million during the fiscal year ended June 30, 2004, as compared to $4.5 million for the fiscal year ended June 30, 2003. This decrease is primarily the result of a reduction in expenses associated with the later stages of development for Mucinex D and Mucinex DM during fiscal 2004, as compared to the completion of the clinical costs and NDA preparation costs for such products during fiscal 2003.

          Interest Expense. Interest expense decreased by $198,000, or 5%, to $3.4 million during the fiscal year ended June 30, 2004, as compared to $3.6 million for the fiscal year ended June 30, 2003. Fiscal year 2004 interest expense included approximately $1.7 million of stated interest related to the 8% Convertible Notes that were converted to Series C Preferred Stock on June 30, 2004 and approximately $1.4 million of non-cash debt discount amortization related to the beneficial conversion feature and the warrants to purchase common stock that were issued in connection with the 8% Convertible Notes. Fiscal year 2003 interest expense was comprised of approximately $340,000 of stated interest related to the 8% Convertible Notes and our 10% Convertible Promissory Notes due 2003, or the Bridge Notes, and approximately $3.2 million of non-cash debt discount amortization related to the warrants issued to purchase common stock in connection with the Bridge Notes and the 8% Convertible Notes.

          Interest Income. Interest income increased by $176,000 to $205,000 for the fiscal year ended June 30, 2004, as compared to $29,000 for the fiscal year ended June 30, 2003. This is primarily a result of our average cash balance increasing by approximately $18.1 million to approximately $26.4 million during fiscal year 2004, as compared to $8.3 million during fiscal year 2003. Our average cash balance increased primarily as a result of the funding under the 8% Convertible Notes between May and August 2003 as well as our improved profitability during fiscal year 2004, as compared to a net loss in fiscal year 2003.

          Income Taxes. Income tax benefit for the fiscal year ended June 30, 2004 was approximately $16.1 million and resulted in an effective income tax rate of (82%). At June 30, 2004, after having achieved three consecutive quarters of before-tax profit and based on financial projections for fiscal year 2005, the valuation allowance that offset our deferred tax asset was eliminated. At June 30, 2004, our NOL of approximately $25.7 million was subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code. At June 30, 2003, we had a NOL of approximately $51.7 million.

          Accretion of Preferred Stock. Accretion of our redeemable convertible preferred stock for the year ended June 30, 2004 was $590,000, as compared to $627,000 for the year ended June 30, 2003. The $37,000 decrease in the year ended June 30, 2004 reflects the timing of the accretion of issuance costs on the redeemable convertible preferred stock. Upon the closing of this offering, our redeemable convertible preferred stock will automatically convert into shares of common stock and as a result, there will be no further accretion.

          Net Sales. Net sales increased by $283,000, or 2%, to $14.0 million during the fiscal year ended June 30, 2003, as compared to $13.8 million for the fiscal year ended June 30, 2002. This increase primarily resulted from the launch of Mucinex SE, which was substantially offset by the reduction in sales of our other products due to generic competition on the Aquatab line of products. During July 2002, we launched Mucinex SE and reported $4.5 million of net sales for fiscal year 2003. We believe Mucinex SE

          Cost of Goods Sold. Cost of goods sold increased by $1.2 million, or 31%, to $5.3 million during the fiscal year ended June 30, 2003, as compared to $4.0 million during the fiscal year ended June 30, 2002, despite an increase in sales of only $283,000. The increase primarily resulted from the one-time charge of approximately $1.0 million related to expired Mucinex SE inventory that was expensed as cost of goods sold during fiscal year 2003.

          Selling, Marketing and Administrative. Selling, marketing and administrative expenses increased by $5.3 million, or 30%, to $23.3 million during the fiscal year ended June 30, 2003, as compared to $18.0 million during the fiscal year ended June 30, 2002. This increase primarily resulted from employing approximately 60 professional sales representatives during fiscal year 2003, as compared to approximately 40 professional sales representatives during fiscal year 2002 and incurring an approximate incremental $1.2 million of physician sample expense related to the launch of Mucinex SE. In addition, during fiscal year 2003, our administrative expenses increased as a result of an accrued charge of $2.0 million in connection with the CellTech litigation. Stock-based compensation is reflected within selling, marketing and administrative expenses. We recorded stock-based compensation of $880,000 and $1.3 million during the fiscal years ended June 30, 2003, and 2002, respectively. This decrease was primarily due to the reduction in the minimum value per stock option used in calculating the stock compensation expense for fiscal 2003.

          Product Development. Product development expenses decreased by approximately $2.9 million, or 39%, to $4.5 million during the fiscal year ended June 30, 2003, as compared to $7.4 million during the fiscal year ended June 30, 2002. This decrease is primarily attributable to our fiscal year 2003 expenses being primarily related to completion of the clinical work and NDA preparation fees for Mucinex D, as compared to the more comprehensive and expensive formulation, development and clinical work that was performed for these products during fiscal year 2002.

          Interest Expense. Interest expense for the fiscal year ended June 30, 2003 totaled $3.6 million and was comprised of $340,000 of stated interest related to the 8% Convertible Notes and the Bridge Notes and approximately $3.2 million of non-cash debt discount amortization related to the beneficial conversion feature and the warrants issued to purchase common stock in connection with the Bridge Notes and the 8% Convertible Notes. We had no interest expense during fiscal year 2002.

          Interest Income. Interest income decreased $151,000 to $29,000 for the fiscal year ended June 30, 2003, as compared to $180,000 for the fiscal year ended June 30, 2002. The decrease is primarily due to a reduction in our average cash balances available for investing during fiscal year 2003, as compared to fiscal year 2002. During fiscal year 2002, our cash balances were higher primarily as a result of our $25.8 million Series B Preferred Stock financing that closed in July 2001.

          Accretion of Preferred Stock. Accretion of our redeemable convertible preferred stock for the year ended June 30, 2003 was $627,000, as compared to $619,000 for the year ended June 30, 2002. The $8,000 decrease in the year ended June 30, 2003 reflects the timing of the accretion of issuance costs on the redeemable convertible preferred stock at June 30, 2003. Upon the closing of this offering, our redeemable convertible preferred stock will automatically convert into shares of common stock and as a result, there will be no further accretion.

          From inception through June 30, 2003, we financed our operations primarily through the net proceeds from private placements of common stock, redeemable convertible preferred stock, notes convertible into redeemable convertible preferred stock, a revolving bank line of credit, and revenues generated by our products. Total funding we received under sales of equity securities and convertible notes, from inception to March 31, 2005, totaled approximately $77.4 million. Beginning with the quarter ended December 31, 2003, we have reported positive before tax profit in each quarter.

          As of March 31, 2005, we had approximately $46.3 million of cash and cash equivalents and working capital of $68.2 million, which includes a current deferred tax asset of $7.1 million related primarily to the future benefit of our net operating losses for tax purposes.

          On June 2, 2005, our board of directors declared a cash dividend totaling $45 million on shares of our common stock and shares of our preferred stock on an “as converted” basis (in accordance with our Certificate of Designations, Rights and Preferences of the Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock of the Certificate of Incorporation). On June 2, 2005, the requisite number of stockholders approved such dividend. The record date for the dividend is June 17, 2005. We expect that the dividend will be paid on or about June 21, 2005. On a pro forma basis, our cash balance at March 31, 2005 would have been approximately $1.3 million.

          In addition to the equity funding described above, we also had access to a revolving line of credit with Silicon Valley Bank that ranged from $3.0 million to $5.0 million between 2001 and November 2004. As of December 31, 2004, our revolving line of credit with Silicon Valley Bank had expired. We have not had any outstanding balances under the revolving line of credit since May 2003. We are currently evaluating our need for a line of credit.

          Purchases of our finished product inventory from Cardinal Health are paid at an amount equal to Cardinal Health’s actual manufacturing cost plus a mark-up. The mark-up payments to Cardinal Health are trued up each March 31^st to the actual profit share amount. Any excess of the mark-up payments over the actual profit share amount are refunded to us. Conversely, if the actual profit share amount exceeds the payments paid to Cardinal Health during the contract year, the shortfall would be paid to Cardinal Health. For the first contract year-ended March 31, 2005, our mark-up payments exceed the actual profit share amount by $3.9 million, which is included on the balance sheet under prepaid expenses and other assets. The purpose of the mark-up payments is to provide Cardinal Health with an interim cash flow prior to the actual profit share calculation. The mark-up percentages are defined in the Cardinal Health supply agreement as follows:

          Consequently, our liquidity will be impacted on an interim basis by the difference between the stated mark-up percentages per the Cardinal Health supply agreement and the effective mark-up percentage resulting from the contract year-end profit share calculation.

          We expect to increase our selling, marketing and administrative, and our product development expenses. We anticipate our selling and marketing expenses to increase as we seek to (i) continue to switch long-acting guaifenesin and combination prescription products into OTC sales of Mucinex products, (ii) expand the market for long-acting guaifenesin and combination products and (iii) increase our share of the OTC cough, cold, allergy, and sinus markets. Therefore, we believe that we may need to increase our number of professional sales representatives beyond the current 100 and increase our consumer advertising spending. We anticipate that our administrative expenses will increase to support our current

          We believe the proceeds from this offering, together with our cash and cash equivalents, will be sufficient to meet our anticipated operating needs for at least the next      years. We continually evaluate new opportunities for late-stage or currently-marketed complementary product candidates and, if and when appropriate, intend to pursue such opportunities through the acquisitions of companies, products or technologies and our own development activities. Our ability to execute on such opportunities in some circumstances may be dependent, in part, upon our ability to raise additional capital on commercially reasonable terms. There can be no assurance that funds from these sources will be available when needed or on terms favorable to us or our stockholders. If additional funds are raised by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock.

          Nine months ended March 31, 2005 compared to nine months ended March 31, 2004. Net cash provided by operating activities was $5.9 million and $18.6 million for the nine months ended March 31, 2005 and 2004, respectively. The decrease in net cash provided by operations during the nine months ended March 31, 2005 was primarily due to the increase in accounts receivable and a prepayment of our consumer advertising expenses prior to March 31, 2005, which was partially offset by an increase in net income, accounts payable and income taxes payable as well as a reduction to the deferred tax assets.

          Net cash used in investing activities was $3.6 million and $227,000 for the nine months ended March 31, 2005 and 2004, respectively. The increase in net cash used in investing activities was primarily for leasehold improvements and information technology equipment installed at our new corporate headquarters located in Chester, New Jersey and the deposit relating to the AlleRx^tm transaction.

          Net cash provided by financing activities was $538,000 and $4.4 million during the nine months ended March 31, 2005 and 2004, respectively. During the nine months ended March 31, 2004, we received $4.6 million of cash from issuances of the 8% Convertible Notes. During the nine months ended March 31, 2005, the proceeds from financing activities were limited to the exercise of options and warrants to purchase common stock.

          Fiscal Year ended June 30, 2004 compared to fiscal year ended June 30, 2003. Net cash provided by operations was $25.8 million for the fiscal year ended June 30, 2004, as compared to net cash used in operations of $13.6 million during the fiscal year ended June 30, 2003. The increase in cash provided by operations of $39.4 million was primarily a result of our net income for fiscal 2004 of $35.8 million versus a net loss of $22.6 million during fiscal year 2003. The increase in net income was tempered by the non-cash impact of the reversal of the income tax valuation allowance of $16.8 million and the payment of a $2.0 million litigation settlement.

          Net cash provided by investing activities was $3.8 million during the fiscal year ended June 30, 2004, as compared to net cash used by investing activities of $402,000 during the fiscal year ended June 30, 2003. The increase in cash provided by investing activities of $4.2 million was primarily due to the proceeds of $5.6 million during fiscal year 2004 related to the sale of our manufacturing assets to Cardinal Health and was offset by a $1.3 million payment made during fiscal year 2004 related to a license agreement entered into with Pharmaceutical Design L.L.C., or PD.

          Net cash provided by financing activities was $4.4 million and $16.1 million for the fiscal years ended June 30, 2004 and 2003, respectively. The decrease in net cash provided by financing activities of $11.7 million was primarily due to the sale of $16.3 million of the 8% Convertible Notes during fiscal year 2003, as compared to only $4.6 million during fiscal year 2004.

          Fiscal Year ended June 30, 2003 compared to fiscal year ended June 30, 2002. Net cash used in operating activities was $13.6 million and $12.2 million for the fiscal years ended June 30, 2003 and 2002, respectively. The increase of cash used in operations of $1.4 million was primarily due to a $7.1 million increase in the net loss for fiscal year 2003, as compared to fiscal year 2002, which was partially offset by an increase of $3.2 million of non-cash expenses primarily related to beneficial conversion interest and an increase in operating liabilities in excess of operating assets of approximately $1.3 million and the $2.0 million accrual for the CellTech litigation settlement in fiscal 2003.

          Net cash used in investing activities was $402,000 and $1.9 million for the fiscal years ended June 30, 2003 and 2002, respectively. The decrease in net cash used by investing activities of $1.5 million was primarily due to a $1.0 million reduction in purchases of manufacturing equipment and $500,000 payment made to extend the JMED Pharmaceuticals, Inc., or JMED, license during fiscal year 2003.

          Net cash provided by financing activities was $16.1 million and $19.8 million for the fiscal years ended June 30, 2003 and 2002, respectively. During fiscal year 2003, we sold approximately $16.3 million of the 8% Convertible Notes and Bridge Notes. During fiscal year 2002, we sold approximately $21.4 million of Series B Preferred Stock and immediately paid off our revolving bank line of credit of approximately $2.0 million.

          Our major outstanding contractual obligations relate to operating leases, raw material purchase commitments, minimum profit share payments to Cardinal Health under the Cardinal Health supply agreement, royalty payments on our Mucinex and Humibid products, and payments under consulting agreements with former employees. These contract obligations as of June 30, 2004 are as follows:

          In April 2004, we entered into a ten-year supply agreement with Cardinal Health under which Cardinal Health has the exclusive right to manufacture and supply all of our existing and future drug products, unless Cardinal Health is unable to manufacture such products or unable to obtain the means to do so within a reasonable time frame. Under the supply agreement, we are committed to pay Cardinal Health a minimum profit share of $4.0 million, $3.0 million and $3.0 million during the contract years ending March 31, 2005, 2006 and 2007, respectively. As of March 31, 2005, we exceeded the contract minimum for the contract year ending March 31, 2005. We are considering exercising our option to

          In March 2004, we entered into a development and license agreement with PD, an affiliate of JMED, in which we licensed intellectual property related to potential product candidates that combine our FDA-approved formulations with other readily available respiratory therapeutics in a kit format. Pursuant to this agreement, we paid PD $1.3 million. Under our agreement with PD, upon a change of control, which includes this offering, PD has the right to exchange the appraised fair market value of all of its economic interest, which includes an on-going royalty interest, in the licensed products into shares of our common stock. The agreement imposes certain requirements on the parties, but these requirements have been suspended by an amendment to the agreement. Under the amendment, we have until August 31, 2005 to determine if we wish to proceed with the agreement. If we decide not to proceed, we have agreed to pay PD $500,000 and the agreement will terminate. In the event we close this offering prior to the time we have made an election whether to proceed, we have agreed to issue to PD shares of our common stock worth $500,000, valued at the public offering price, as an advance against obligations under our agreement. After this offering, we will have the option until August 31, 2005 of proceeding with this agreement. If we do go forward with the agreement, the parties have agreed to negotiate in good faith to modify certain terms of the agreement.

          In December 2004, we entered into an agreement with JMED for the right to assign the AlleRx^tm license agreement to Cornerstone Biopharma, Inc., or Cornerstone, and we paid JMED $2.0 million for that right to assign the AlleRx^tm license agreement in January 2005. In connection with the PD license agreement, JMED was granted the right to convert its on-going royalty interest in the AlleRx^tm product into our common stock in the event of a public offering or change of control. The assignment of the JMED agreement to Cornerstone provided that JMED had the right to exchange its royalty interest for our common stock, as outlined under the PD license agreement. The valuation of the on-going royalty was scheduled to be performed prior to March 31, 2005. The parties have waived the March 31, 2005 deadline and are currently working toward obtaining a valuation. To the extent that the final appraisal exceeds the $2.0 million previously paid, JMED will have the right to convert such excess into our common stock at the public offering price. Upon conversion of JMED’s royalty interest into our common stock, we will become the recipient of future royalties earned under the license agreement. If JMED does not elect to convert the excess royalty interest into our common stock, JMED will continue to collect royalties under the license agreement, and we will be paid 40% of such royalties up to a maximum of $1.0 million. We have agreed to guarantee the royalty payments due to JMED from Cornerstone through the date of a change of control or public offering.

          In February 2005, we entered into an agreement with Cornerstone in which we received the Humibid trademarks from Cornerstone and Cornerstone received the AlleRx^tm assets from us. Additionally, the parties released each other from all claims and damages in a lawsuit that we filed against Cornerstone in 2004. As part of this arrangement, we are contractually obligated to assume the financial responsibility for the first $1.0 million of returned AlleRx^tm product that was sold by us prior to February 15, 2005 and returned to Cornerstone during the 18 month period beginning February 15, 2005. Conversely, Cornerstone is financially responsible for the first $1.0 million of Humibid product returns for the same 18-month period. After the $1.0 million threshold is met, we will have the responsibility for all Humibid product returns whether sold by us or Cornerstone and Cornerstone will bear the same liability for AlleRx^tm products. In connection with this agreement, we are obligated to pay to Cornerstone a royalty ranging from 1% to 2% of net Humibid sales for a period of three years after February 15, 2005, with an annual minimum royalty payment of $50,000. We have recorded a $3.0 million returns liability in connection with this transaction.

          In connection with the settlement that we reached with CellTech during April 2004, we agreed to pay to CellTech royalties on sales of our Mucinex products, subject to an annual maximum of $500,000 and an annual minimum of $200,000 until December 31, 2013.

          During fiscal year 2004, Cardinal Health’s supplier of dextromethorphan, an active ingredient in Mucinex DM, notified Cardinal Health that they will be exiting the dextromethorphan manufacturing business. At such time, Cardinal Health requested of the supplier, and the supplier agreed, to commit to supplying Cardinal Health with an approximate four-year supply of dextromethorphan. However, based upon our recent Mucinex DM sales activity, we believe that as of March 31, 2005, the remaining supply will meet our needs through December 31, 2006. Cardinal Health has made a commitment to the dextromethorphan supplier and is obligated to take delivery of the material over the course of three years beginning in September 2004. We have provided Cardinal Health with a letter agreement, dated September 30, 2004, stating that we will reimburse Cardinal Health for Cardinal Health’s cost in obtaining any unused quantities of dextromethorphan at the first to occur of (i) expiration of the material or (ii) six years from the date of the letter agreement. Furthermore, we are actively pursuing alternative sources of material suppliers for dextromethorphan. As of March 31, 2005, the remaining commitment is approximately $2.6 million.

          Cardinal Health obtains all of the guaifenesin for our products from a single supplier, Boehringer Ingelheim. According to Cardinal Health’s agreement with Boehringer Ingelheim, which expires in June 2006, Cardinal Health must purchase all of the guaifenesin used in Mucinex SE and at least 90% of the guaifenesin used in our products produced under all subsequent NDAs.

          We do not have any off-balance sheet arrangements.

          Our excess cash is invested in short-term U.S. government securities, high quality money market instruments and corporate debt. These instruments have various short-term maturities. We hold no derivative financial instruments and we do not currently engage in hedging activities. Accordingly, due to the maturity and credit quality of our investments, we are not subjected to any substantial risk arising from changes in interest rates, currency exchange rates and commodity and equity prices. We do not have any outstanding debt.

          SFAS No. 150. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS No. 150 essentially requires issuers to classify as liabilities certain types of financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. Our preferred stock is contingently redeemable at the option of the holder and therefore is classified outside of stockholders’ equity.

          FASB Interpretation No. 46. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which addresses the consolidation of business enterprises (variable interest entities) to which the usual condition (ownership of a majority voting interest) of consolidation does not apply. The interpretation focuses on financial interests that indicate control. It concludes that in the absence of clear control through voting interests, a company’s exposure (variable interest) to the economic risks and potential rewards from the variable interest entity’s assets and activities are the best evidence of control. Variable interests are rights and obligations that convey economic gains or losses from changes in the values of the variable interest entity’s assets and liabilities. Variable interests may arise from financial instruments, service contracts, nonvoting ownership interests, and other arrangements. If an enterprise holds a majority of the variable interests of an entity, it would be considered the primary beneficiary. The primary beneficiary would be required to include the assets, liabilities and the results of operations of the variable interest entity in its financial statements. In December 2003, the FASB issued a revision to FIN 46 to address certain implementation issues. We do not have any variable interest entities. Accordingly, the adoption of FIN 46 and FIN 46 (revised) had no impact on our results of operations, financial position or cash flows.

          The data included in this prospectus regarding market share, historical sales, market size, and ranking, including our position and the position of our competitors within these markets, are based on data generated by the independent market research firms Information Resources, Inc., or IRI, and IMS Health Incorporated, or IMS Health.

          IRI data reports non-prescription retail sales in the food, drug and mass merchandise markets. IRI data for the mass merchandise market, however, does not include Wal-Mart, which ceased providing sales data to IRI in 2001. Although Wal-Mart represents a significant portion of the mass merchandise market for us, as well as our competitors, we believe that Wal-Mart’s exclusion from IRI data does not significantly change our market share or ranking relative to our competitors. As used in this prospectus, the OTC cough, cold, allergy, and sinus market includes both the cold, allergy, sinus and the cough syrup segments as reported by IRI. We believe our current and future products compete against products comprising both of these segments as reported by IRI.

          IMS Health reports data from various sources including drug manufacturers, wholesales, retailers, pharmacies, mail order, long-term care facilities, and hospitals. We rely on IMS Health-NPA^tm for prescription and sales data related to our products and IMS Health-National Sales Perspectives^tm for sales information related to the non-retail sector of our business. This prescription and non-retail data is not reported in the data we receive from IRI.

          We are a specialty pharmaceutical company focused on the late-stage development, commercialization and marketing of over-the-counter, or OTC, and prescription pharmaceuticals for the treatment of respiratory disorders. We currently market two OTC products under our Mucinex brand and expect to launch four additional products that are already approved by the U.S. Food and Drug Administration, or the FDA, over the next two years.

          Mucinex SE, launched in July 2002, is a long-acting, single-ingredient guaifenesin product. Guaifenesin is an expectorant that thins bronchial secretions and makes coughs more productive. Guaifenesin has an established clinical acceptance. Mucinex DM, launched in August 2004, combines long-acting guaifenesin with the cough suppressant dextromethorphan. According to IRI, for the 52-week period ended May 15, 2005, Mucinex was the seventh best-selling brand of the 169 brands in the cough, cold, allergy, and sinus market, based on retail dollar sales.

          For the fiscal year ended June 30, 2004, our revenues were $61.3 million and our net income was $35.8 million (including a tax benefit of $16.1 million related primarily to the future benefit of our net operating loss). This represents a 337% growth in revenues over the fiscal year ended June 30, 2003. For the nine months ended March 31, 2005, our revenues were $121.1 million and our net income was $24.0 million, representing a 147% increase in revenues over the nine months ended March 31, 2004.

          The FDA has approved additional long-acting guaifenesin products that we have developed. Mucinex D, approved in June 2004, combines long-acting guaifenesin with the decongestant pseudoephedrine. Also, the FDA has approved three maximum strength products: a single-ingredient guaifenesin product; a guaifenesin/dextromethorphan combination product; and a guaifenesin/pseudoephedrine combination product. Each of these maximum strength products has twice the amount of active ingredients as its Mucinex counterpart. We expect to launch Mucinex D and Humibid, our maximum strength, single-ingredient guaifenesin product, in the first quarter of 2006, and the remaining maximum strength formulations in the second half of 2006. We are currently working on the development of two additional OTC products and one new prescription product, each of which combines long-acting guaifenesin with other active ingredients.

          All of our Mucinex products and their maximum strength versions are based on our patented delivery system for guaifenesin. Our delivery system has an immediate release component to provide rapid relief from excess mucus and an extended-release component to provide a 12-hour effect. We intend to utilize this delivery system technology in other OTC and prescription products to treat additional respiratory disorders.

          Mucinex SE, Mucinex DM and Mucinex D and their maximum strength versions are the only long-acting guaifenesin products approved by the FDA. The FDA’s policy is to remove unapproved products from the market once a similar product has been approved. Following approval of Mucinex SE, the FDA took enforcement action to remove all other long-acting, single-ingredient guaifenesin products from the market in December 2003. Based on IMS Health-NPA^tm data, we estimate that, for the 12 months ended June 30, 2003, approximately 10.5 million prescriptions were dispensed for competing long-acting, single-ingredient guaifenesin products. Mucinex SE is now the only product available to meet this demand, and we believe that we have switched the majority of these prescriptions to OTC sales of Mucinex SE. Based on IMS Health-NPA^tm data, we estimate that, for the 12 months ended June 30, 2003, approximately 14.5 million prescriptions were dispensed for products containing long-acting guaifenesin in combination with dextromethorphan or pseudoephedrine. If the FDA removes competitive unapproved products under its policy, Mucinex DM and Mucinex D, when introduced, would be the only products available to meet this demand. If the FDA removes these unapproved products from the market, we believe a majority of the prescriptions currently dispensed for those products would be switched to OTC sales of Mucinex DM and Mucinex D.

          We believe the approval of Mucinex SE, Mucinex DM and Mucinex D as OTC products represents an opportunity to introduce long-acting guaifenesin and combination products into a larger OTC market where guaifenesin was previously only available in short-acting form. We believe, based on IRI data, that the current OTC cough, cold, allergy, and sinus market is approximately 17 times the size of the prescription market for products similar to our approved products, based on units sold for the 12 months ended June 30, 2003.