SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

_________________

FORM 10-Q
_________________

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

For the Quarterly Period Ended September 30, 2003

Commission File Number 000-31141

DISCOVERY PARTNERS
INTERNATIONAL, INC.
(Exact Name of registrant as specified in its charter)


Delaware	33-0655706
(State or other jurisdiction of	(I.R.S. employer identification number)
incorporation or organization)


9640 Towne Centre Drive
San Diego, California 92121	(858) 455-8600
(Address of principal executive	(Registrant's telephone number,
offices and zip code)	Including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes [X] No [ ]

As of November 7, 2003 a total of 24,683,604 shares of the Registrant’s Common Stock, $0.001 par value, were issued and outstanding.

DISCOVERY PARTNERS INTERNATIONAL, INC.
FORM 10-Q


PART I	FINANCIAL INFORMATION
Item 1	Financial Statements:
	Condensed Consolidated Balance Sheets At September 30, 2003 (unaudited) and December 31, 2002
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (unaudited)
	Notes to Consolidated Financial Statements
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3	Quantitative and Qualitative Disclosures About Market Risk
Item 4	Controls and Procedures

PART II. OTHER INFORMATION

Item 1	Legal Proceedings
Item 2	Changes in Securities and Use of Proceeds
Item 3	Defaults Upon Senior Securities
Item 4	Submission of Matters to a Vote of Security Holders
Item 5	Other Information
Item 6	Exhibits and Reports on Form 8-K

DISCOVERY PARTNERS INTERNATIONAL, INC.

PART I
FINANCIAL INFORMATION

Item 1.Financial Statements

Discovery Partners International, Inc.
Condensed Consolidated Balance Sheets

	September 30, 2003			December 31, 2002
	(unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	3,238,066		$	8,309,269
Short-term investments		61,326,678			66,751,109
Accounts receivable		9,920,885			9,816,462
Inventories		3,996,499			4,607,941
Other current assets		1,665,542			1,333,173

Total current assets		85,572,101			85,393,523
Restricted cash		570,272			930,598
Property and equipment, net		8,353,656			9,819,577
Patent, license rights and other intangible assets, net		8,773,773			7,219,564
Other assets, net		787,231			1,080,163

Total assets	$	104,057,033		$	104,443,425

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	4,343,343		$	3,650,032
Restructuring accrual		964,811			--
Contract loss accrual		--			837,522
Current portion of obligations under capital leases and line of credit		13,508			722,892
Deferred revenue		2,566,430			2,290,566

Total current liabilities		7,888,092			7,501,012
Obligations under capital leases, less current portion		--			305,970
Deferred rent		102,476			104,940
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, no
shares issued and outstanding at September 30, 2003 and December 31, 2002		--			--
Common stock, $.001 par value, 99,000,000 shares authorized,
24,622,394 and 24,371,131 issued and outstanding at
September 30, 2003 and December 31, 2002, respectively		24,622			24,371
Common stock issuable		1,026,000			--
Treasury stock, at cost, 216,886 and 35,000 shares at September 30, 2003 and
December 31, 2002, respectively		(775,451	)		(119,250	)
Additional paid-in capital		201,342,594			200,691,363
Deferred compensation		(1,231,964	)		(260,226	)
Accumulated other comprehensive income		809,437			885,485
Accumulated deficit		(105,128,773	)		(104,690,240	)

Total stockholders' equity		96,066,465			96,531,503

Total liabilities and stockholders' equity	$	104,057,033		$	104,443,425

See accompanying notes

Discovery Partners International, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002


Revenues	$	11,409,291		$	10,544,241		$	35,360,632		$	28,959,962
Cost of revenues:
Cost of revenues before additional charges		6,882,144			6,975,814			23,245,753			19,158,799
Additional charges:
Provision for discontinued products and obsolete inventory		--			--			--			5,781,262
Anticipated contract loss		--			--			--			1,485,000

Gross margin		4,527,147			3,568,427			12,114,879			2,534,901
Operating expenses:
Research and development		544,633			1,301,095			1,911,794			5,147,479
Selling, general and administrative		3,360,808			3,523,720			9,862,626			9,832,908
Restructuring expense		315,424			--			1,872,986			--
Amortization of stock-based compensation		177,808			138,276			337,762			510,321


Total operating expenses		4,398,673			4,963,091			13,985,168			15,490,708

Income (loss) from operations		128,474			(1,394,664	)		(1,870,289	)		(12,955,807	)
Interest income, net		437,349			514,479			1,430,432			1,496,171
Foreign currency transaction losses, net		(43,576	)		(26,016	)		(50,201	)		(89,036	)
Other income (expense), net		22,789			--			51,525			--

Minority interest in consolidated subsidiary		--			97,278			--			313,002


Net income (loss)	$	545,036		$	(808,923	)	$	(438,533	)	$	(11,235,670	)


Net income (loss) per share, basic	$	0.02		$	(0.03	)	$	(0.02	)	$	(0.46	)


Weighted average shares outstanding, basic		24,333,739			24,328,208			24,318,088			24,306,838


Net income (loss) per share, diluted	$	0.02		$	(0.03	)	$	(0.02	)	$	(0.46	)


Weighted average shares outstanding, diluted		25,266,949			24,328,208			24,318,088			24,306,838

The composition of stock-based compensation is as follows:

Cost of revenues	$	567		$	2,049		$	2,651		$	7,363
Research and development		21,777			60,812			93,367			212,521
Selling, general and administrative		155,464			75,415			241,744			290,437

	$	177,808		$	138,276		$	337,762		$	510,321

See accompanying notes

Discovery Partners International, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Nine Months ended
	September 30, 2003			September 30, 2002


OPERATING ACTIVITIES
Net income (loss)	$	(438,533	)	$	(11,235,670	)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Depreciation and amortization		3,678,786			3,846,561
Amortization of deferred compensation		337,762			510,321
Restructuring expense		1,872,986			--
Provision for discontinued products and obsolete inventory		--			5,781,262
Anticipated contract loss		--			1,485,000
Minority interest in consolidated subsidiary		--			(313,002	)
Change in operating assets and liabilities:
Accounts receivable		(519,456	)		(268,869	)
Inventories		611,440			(2,244,938	)
Other current assets		(320,644	)		(175,300	)
Accounts payable and accrued expenses		970,494			291,377
Contract loss accrual		(837,522	)		(58,130	)
Restructuring accrual		(908,175	)		--
Deferred revenue		207,753			(1,106,617	)
Deferred rent		(2,464	)		10,000
Restricted cash		378,019			(382	)

Net cash provided by (used in) operating activities		5,030,446			(3,478,387	)
INVESTING ACTIVITIES
Purchases of property and equipment		(1,410,177	)		(1,989,833	)
Other assets		325,587			62,838
Purchase of patents, license rights and other intangible assets		(2,105,597	)		(2,080,590	)
Proceeds from maturity of short-term investments		46,944,372			6,546,744
Purchases of short-term investments		(52,368,803	)		(39,579,773	)

Net cash used in investing activities		(8,614,618	)		(37,040,614	)
FINANCING ACTIVITIES
Principal payments on capital leases and line of credit, net		(1,076,313	)		(634,051	)
Issuance of common stock		368,034			152,431
Purchase of treasury stock		(289,000	)		--

Net cash used in financing activities		(997,279	)		(481,620	)
Effect of exchange rate changes		(489,752	)		645,022

Net decrease in cash and cash equivalents		(5,071,203	)		(40,355,599	)
Cash and cash equivalents at beginning of period		8,309,269			50,915,481

Cash and cash equivalents at end of period	$	3,238,066		$	10,559,882

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	$	149,027		$	132,988

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Deferred compensation related to the issuance of restricted stock	$	1,309,500		$	--

Common stock received in payment of employee notes receivable	$	367,201		$	--

See accompanying notes

DISCOVERY PARTNERS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2003

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required for complete financial statements. The condensed consolidated balance sheet as of September 30, 2003, condensed consolidated statements of operations for the three and nine months ended September 30, 2003 and 2002, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2003 and 2002 are unaudited, but include all adjustments (consisting of normal recurring adjustments), which the Company considers necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2003 shown herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For more complete financial information, these financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2002 included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

The consolidated financial statements include all the accounts of the Company and its wholly owned subsidiaries, Irori Europe, Ltd. (substantially inactive), Discovery Partners International AG (DPI AG), ChemRx Advanced Technologies, Inc., Systems Integration Drug Discovery Company, Inc., Xenometrix, Inc. and Structural Proteomics, Inc. All intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, such as, inventory, intangible assets and restructuring accruals, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. Net Income (Loss) Per Share

Basic and diluted net income (loss) per share is presented in conformity with SFAS No. 128,Earnings per Share. In accordance with SFAS No. 128, basic net income (loss) per share has been computed using the weighted average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net income (loss) per share has been computed using the weighted-average number of common and common stock equivalent shares outstanding during the period, less shares subject to repurchase. Common equivalent shares, composed of outstanding stock options and warrants, are included in diluted net income (loss) per share to the extent these shares are dilutive. The computations for basic and diluted earnings per share are as follows:

	Income (Numerator)			Earnings Per Share



Three Months Ended September 30, 2003

Basic earnings per share:
Net income	$	545,036	24,333,739	$	0.02
Diluted earnings per share:
Dilutive stock options		--	780,330
Contingently issuable restricted stock		--	152,880

Net income plus assumed conversions	$	545,036	25,266,949	$	0.02

The total number of shares issuable upon exercise of stock options and warrants excluded from the calculation of diluted earnings per share since they are anti-dilutive were 1,801,235.

3. Comprehensive Loss

SFAS No. 130,Reporting Comprehensive Income,requires the Company to report, in addition to net loss, comprehensive income (loss) and its components. A summary follows:

Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

	Three months ended						Nine months ended
	September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002


Comprehensive loss:
Foreign currency translation adjustment	$	376,424		$	30,710		$	469,338		$	471,074
Unrealized loss on investments		(231,237	)		(69,723	)		(545,386	)		(31,059	)
Net income (loss)		545,036			(808,923	)		(438,533	)		(11,235,670	)

Comprehensive income (loss)	$	690,223		$	(847,936	)	$	(514,581	)	$	(10,795,655	)

4. Inventory

Inventories are recorded at the lower of weighted average cost or market. Inventories consist of the following:

	September 30, 2003			December 31, 2002
	(Unaudited)


Raw materials	$	1,685,670		$	1,119,688
Work-in-process		2,637,233			3,735,508
Finished goods		18,714,714			18,552,432

		23,037,617			23,407,628
Less reserves for excess and obsolete inventory		(19,041,118	)		(18,799,687	)

	$	3,996,499		$	4,607,941

5. Deferred Stock Compensation

In conjunction with the Company’s initial public offering completed in July 2000, the Company recorded deferred stock compensation totaling approximately $2.7 million and $1.0 million during the years ended December 31, 2000 and 1999, respectively, representing the difference at the date of grant between the exercise or purchase price and estimated fair value of the Company’s common stock as estimated by the Company’s management. Additionally, in August 2003, awards of 52,500 shares and rights to acquire 190,000 shares of restricted stock were awarded pursuant to the Company’s 2000 Stock Incentive Plan to certain of the Company’s key employees resulting in an increase in deferred compensation of $1.3 million. The restricted stock and rights to acquire restricted stock vest in annual installments over a four-year period. In accordance with APB No. 25, deferred compensation is included as a reduction of stockholders’ equity and is being amortized to expense on an accelerated basis in accordance with Financial Accounting Standards Board Interpretation No. 28 over the vesting period of the options, restricted stock and rights to acquire restricted stock. During the three months ended September 30, 2003 and 2002, the Company recorded amortization of stock-based compensation expense of approximately $178,000 and $138,000, respectively. During the nine months ended September 30, 2003 and 2002, the Company recorded amortization of stock-based compensation expense of approximately $338,000 and $510,000, respectively.

6. Common Stock Issuable

In August 2003, rights to acquire 190,000 shares of restricted stock were awarded to certain of the Company’s key employees. As a result, $1,026,000 was recorded as common stock issuable representing the fair value at the time of grant of the shares issuable in the future.

7. Rights Agreement

On February 13, 2003, the Company’s Board of Directors adopted a Rights Agreement (the “Agreement”). The Agreement provides for a dividend distribution of one preferred share purchase right for each outstanding share of the Company’s common stock held of record at the close of business on February 24, 2003. The rights are not currently exercisable. Under certain conditions involving an acquisition or proposed acquisition by any person or group holding 15 percent or more of the Company outstanding common stock, the rights permit the holders to purchase from the Company one unit consisting of one-thousandth of a share of our Series A junior participating preferred stock at a price of $19.00 per unit, subject to adjustment. Under certain conditions, the rights may be redeemed by the Company’s Board of Directors in whole, but not in part, at a price of $0.01 per right.

8. Contract Termination

During the second quarter of 2002, due to changing market conditions, the Company made a decision to cease selling nonexclusive proprietary chemical compounds on a stand-alone basis to third parties. At the time, the Company had contract obligations to deliver compounds each quarter through the second quarter of 2003. The pricing of the compounds included in this contract assumed that the Company would sell these compounds, under certain conditions, to multiple other customers. As a result of the decision to cease selling these compounds on a stand-alone basis, these additional sales would not be realized and thus a loss was anticipated for this contract. Accordingly, an anticipated loss accrual was recorded as of September 30, 2002 totaling $1.5 million. During 2002, the Company incurred a loss totaling $647,000 related to the sale of compounds under this contract reducing the contract loss accrual to $837,000 as of December 31, 2002. On March 31, 2003, this contract was terminated at the customer’s request. During the first quarter of 2003, the Company incurred an additional loss on the contract totaling $400,000 reducing the contract loss accrual to $437,000. In accordance with the termination agreement, we were paid $600,000 as an early termination fee which is included in revenue. Additionally, the remaining $437,000 contract loss accrual was no longer required and was thus eliminated with a corresponding decrease to cost of sales for the first quarter 2003.

9. Glaxo SmithKline Agreement

In December 2002, the Company entered into an agreement with Glaxo SmithKline (GSK). In accordance with the agreement, the Company agreed to develop and supply to GSK two complete X-Kan™ Chemistry Synthesis Systems. X-Kans are chemical microreactors that combine the 2D tagging features of the previously introduced Irori NanoKan™ technology with an increased size and scale that are similar to the currently available Irori MicroKan™ and MiniKan™ products. Revenue under this agreement is recognized on a percentage-of-completion basis, up to contractual limits.

10. Bruker AXS Inc. Agreement

In July 2003, the Company entered into an agreement with Bruker AXS Inc. Under the terms of the agreement, the Company has appointed Bruker AXS the worldwide distributor for Discovery Partners’ Crystal Farm™ line of protein crystallography products.

11. Significant Customer

In the three and nine months ended September 30, 2003, 66% and 61%, respectively, of revenue came from the Company’s chemistry contracts with Pfizer.

12. Restructuring

In April 2003, the Company announced that it would consolidate its domestic chemistry facilities into two centers of excellence: in South San Francisco for primary screening library design and synthesis programs and in San Diego for lead optimization and medicinal chemistry projects. At the same time, the Company announced its plans to establish new offshore chemistry capabilities to take advantage of lower cost structures. These actions resulted in the closure of its Tucson facility. As a result of this decision, the Company recognized restructuring related charges of $1.6 million as operating expenses in the second quarter of 2003 and $0.3 million in the third quarter of 2003. The Company does not expect to incur any additional restructuring charges related to the Tucson closure. In accordance with SFAS No. 146,Accounting for CostsAssociated with Exit or Disposal Activities, severance and retention bonuses for involuntary employee terminations and the costs to exit certain contractual and lease obligations were accrued as of the restructuring date. Moving, relocation and other costs related to consolidation of facilities are expensed as incurred. The charges are comprised of the following:

	Three Months Ended September 30, 2003		Nine Months Ended September 30, 2003



Severance and Retention Bonuses for Involuntary Employee Terminations	$	5,236	$	375,599
Costs to Exit Certain Contractual and Lease Obligations		--		919,171
Moving, Relocation and Other Costs Related to Consolidation of Facilities		310,188		578,216

Total Restructuring Expense	$	315,424	$	1,872,986

Under the restructuring plan 28 employees were involuntarily terminated, including scientific and administrative staff.

The following table summarizes the activity and balances of the restructuring reserve:

	Severance and Retention Bonuses for Involuntary Employee Terminations			Costs to Exit Certain Contractual and Lease Obligations			Moving, Relocation and Other Costs Related to Consolidation of Facilities			Total



Balance at December 31, 2002	$	--		$	--		$	--		$	--
Reserve Established		370,363			919,171			268,028			1,557,562
Utilization of reserve:
Cash		(116,286	)		--			(186,982	)		(303,268	)

Balance at June 30, 2003	$	254,077		$	919,171		$	81,046		$	1,254,294

Reserve Established		5,236			--			310,188			315,424
Utilization of reserve:
Cash		(259,313	)		(96,047	)		(249,547	)		(604,907	)

Balance at September 30, 2003	$	--		$	823,124		$	141,687		$	964,811

The Company expects to complete the utilization of the reserve related to this restructuring by July 2005.

13. Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46,Consolidation of Variable Interest Entities(FIN 46). This Interpretation provides guidance on the identification of variable interest entities (VIE) for which control is achieved through means other than through voting rights and how to determine when and which business enterprises should consolidate VIEs. The entity identified as the VIEs primary beneficiary is required to consolidate the VIE. Effective October 9, 2003, the FASB issued a Staff Position deferring the effective date for applying the provisions of FIN46 for VIEs created before February 1, 2003. The new application date is the first interim or annual period ending after December 15, 2003. The Company has not identified any entity that would require consolidation. The maximum exposure to losses related to any entity that is determined to be a VIE is limited to the carrying amount of the investment in the entity.

In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. This statement amends SFAS No. 123,Accounting for Stock Based Compensation, to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The disclosure provisions became effective for the year ended December 31, 2002. The Company has currently chosen not to adopt the voluntary change to the fair value based method of accounting for stock-based employee compensation. If the Company should choose to adopt such a method, its implementation pursuant to SFAS No. 148 could have a material effect on the Company’s financial position and results of operations.

In April 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial reporting for derivative instruments and for hedging activities accounted for under SFAS No. 133 and is effective for contracts entered into or modified, and for hedges designated, after June 30, 2003. Adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments issued in the form of shares that are mandatorily redeemable as well as certain other financial instruments be classified as liabilities in the financial statements. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

14. Stock-Based Compensation

As permitted by SFAS No. 123,Accounting for Stock-Based Compensation, the Company accounts for common stock options granted to employees and directors using the intrinsic value method and, thus, recognizes no compensation expense for such stock-based awards where the exercise prices are equal to or greater than the fair value of the Company’s common stock on the date of the grant. Pro forma information regarding net income or loss is required by SFAS No. 123. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: a risk-free interest rate of 4.5%; a dividend yield of 0%; a volatility factor of 97% and an option life of 6.6 years. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 using the straight-line method to stock-based employee compensation:

	Three Months Ended						Nine Months Ended
	September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002


Net income (loss), as reported	$	545,036		$	(808,923	)	$	(438,533	)	$	(11,235,670	)
Deduct: Total stock-based
compensation expense
determined under fair value based method		(717,997	)		(754,179	)		(2,257,694	)		(2,071,384	)

Pro forma net loss	$	(172,961	)	$	(1,563,102	)	$	(2,696,227	)	$	(13,307,054	)

Earnings (loss) per share:
Basic and diluted - as reported	$	0.02		$	(0.03	)	$	(0.02	)	$	(0.46	)

Basic and diluted - pro forma	$	(0.01	)	$	(0.06	)	$	(0.11	)	$	(0.55	)

DISCOVERY PARTNERS INTERNATIONAL, INC.

PART I

FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

THIS FORM 10-Q CONTAINS CERTAIN STATEMENTS THAT ARE NOT STRICTLY HISTORICAL AND ARE “FORWARD-LOOKING” STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND INVOLVE A HIGH DEGREE OF RISK AND UNCERTAINTY. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS DUE TO RISKS AND UNCERTAINTIES THAT EXIST IN OUR OPERATIONS, DEVELOPMENT EFFORTS AND BUSINESS ENVIRONMENT, INCLUDING THOSE DESCRIBED BELOW UNDER THE HEADING “RISKS AND UNCERTAINTIES” AND THOSE DESCRIBED IN OUR FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002 AND OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

Web Site Access to SEC Filings

We maintain an Internet website atwww.discoverypartners.com. We make available free of charge via our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Overview

We sell a broad range of products and services to pharmaceutical and biotechnology companies to make the drug discovery process for our customers faster, less expensive and more effective at generating drug candidates. We focus on the portion of the drug discovery process that begins after identification of a drug target through when a drug candidate is ready for clinical trials. Our major products and services are as follows:

We develop, produce and sell collections of chemical compounds in collaborations with pharmaceutical and biotechnology companies to be used to test for their potential use as new drugs or for use as the chemical starting point for new drugs.
We develop, manufacture and sell proprietary instruments and the associated line of consumable supplies that are used by the pharmaceutical and biotechnology industries in their own in-house drug discovery chemistry operations.
We provide assay development and screening services to our customers in which chemical compounds are tested for their biological activity as potential drugs.
We provide medicinal chemistry for lead optimization and biological profiling.
We provide access to computational software tools that guide the entire process of chemical compound design, development and testing.
We license our proprietary gene profiling system that characterizes a cell’s response upon exposure to compounds and other agents by the pattern of gene expression in the cell.

Business conditions in our industry have been difficult since 2002 and we expect it to continue through at least 2003. We do not expect that we could achieve substantial revenue growth through 2003 without adversely affecting profitability. We do not intend to seek revenue growth that would adversely affect profitability, and we will try to manage our expenses accordingly.

In the three and nine months ended September 30, 2003, 66% and 61%, respectively, of our revenues came from our chemistry contracts with Pfizer, and we anticipate that this relationship will continue to provide for a significant percentage of our revenue throughout 2003 and 2004. However, Pfizer has the right to terminate the relationship without cause by giving six months’ notice. It is imperative that we continue to satisfy this key customer due to the significance of the revenue.

Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates, and the estimates themselves might be different if we used different assumptions.

We believe the following critical accounting policies involve significant judgments and estimates that are used in the preparation of our financial statements.

Revenue recognition.Revenue from product sales, which include the sale of instruments, related consumables, and chemical compounds, is recorded as products are shipped if the costs of such shipments can be reasonably estimated and if all customer’s acceptance criteria have been met. Certain of our contracts for product sales include customer acceptance provisions that give our customers the right of replacement if the delivered product does not meet specified criteria; however, we have historically demonstrated that the products meet the specified criteria and the number of customers exercising their right of replacement has been insignificant (less than 1% of revenues) and therefore we recognize revenue without providing for such contingency. Development contract revenues and high-throughput screening service revenues are recognized on a percentage-of-completion basis. Advances received under these development contracts and high-throughput screening service agreements are initially recorded as deferred revenue, which is then recognized as costs are incurred over the term of the contract. Certain of these contracts may allow the customer the right to reject the work performed; however, we have no material history of such rejections and therefore we recognize revenue without providing for such contingency. Revenue from drug discovery and chemistry service agreements is recognized on a monthly basis and is based upon the number of full time equivalent (FTE) employees that actually worked on each agreement and the agreed-upon rate per FTE per month. Revenue due to us under the Xenometrix patent licensing agreements is recognized upon receipt of monies, provided we have no future obligation with respect to such payments. From time to time we receive requests from customers to bill and hold goods for them. In these cases, the customer accepts the risk of loss and the transfer of ownership of such goods prior to shipment. If the specific revenue recognition criteria under accounting principles generally accepted in the United States at the time of the bill and hold are met, the revenue is recognized.

In February 2003, we entered into an agreement with Glaxo SmithKline (GSK). In accordance with the agreement, we agreed to develop and supply to GSK two complete X-Kan™ Chemistry Synthesis Systems. X-Kans are chemical microreactors that combine the 2D tagging features of the previously introduced Irori NanoKan™ technology with an increased size and scale that are similar to the currently available Irori MicroKan™ and MiniKan™ products. Revenue under this agreement is recognized on a percentage-of-completion basis, up to contractual limits.

Inventory.Inventories are recorded at the lower of cost or market. We write-down our inventory for estimated obsolescence or non-marketability if there is an excess of cost of inventory over the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than we have projected, additional inventory write-downs may be required. During the second quarter of 2002, we identified changes in the market for chemical compound libraries including a shift in demand from diverse purified compounds to purified targeted compounds and an increased demand to bring proprietary assets into drug discovery collaborations. As a result, we made a decision to cease developing, producing and selling our non-exclusive chemical compounds on a stand-alone basis to third parties and, instead, will make these compounds available only as part of collaborations with our future partners; however, there are no assurances that this strategy will be successful. We will expense the development and production of any compound that is created for use as part of collaborations with our future partners. As of September 30, 2003, 93% of our inventory reserve is associated with our chemical compound finished goods inventory. A significant portion of our net inventory balance represents work-in-process related to two multi-year chemistry collaborations. Estimated losses on any deliverables are recorded when they become apparent. As of September 30, 2003, we have reserved approximately $741,000 against the work-in-process representing the anticipated losses on the sale of chemical compound libraries.

Long-lived assets.We periodically assess the recoverability of our long-lived assets by determining whether the carrying value of such assets exceeds its fair value. If impairment is indicated, we reduce the carrying value of the asset to fair value. As of September 30, 2003, we have prepaid $6.0 million to Abbott Laboratories for royalties related to the µARCS screening technology. This prepayment is carried on our balance sheet as other intangible assets. To date, commercialization activities using this technology have not generated revenues; therefore, no amortization has been recorded. This technology, however, is currently being evaluated by a major pharmaceutical company and based on this ongoing evaluation and potential revenues from this company, we believe that the carrying value of the asset is not impaired. However, if we are not successful in generating revenues in the future from this asset, we may be required to record impairment charges up to $6.0 million.

Restructuring. We account for restructuring activities in accordance with SFAS. No. 146,Accounting for Costs Associated with Exit or Disposal Activities.SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between SFAS No. 146 and Issue 94-3 relates to the requirements under SFAS No. 146 for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are to be applied prospectively to exit or disposal activities that are initiated after December 31, 2002.

In April 2003, we made a decision to close our Tucson facility. As a result we recognized restructuring related charges of $1.9 million as operating expenses for the nine months ended September 30, 2003 in accordance with SFAS No. 146. These charges are comprised of $0.4 million related to severance and retention bonuses for involuntary employee terminations, $0.9 million related to costs to exit certain contractual and lease obligations and $0.6 million related to moving, relocation and other costs related to consolidation of facilities. The lease related to the Tucson facility terminates in July 2005. We do not expect to incur any additional restructuring charges related to the Tucson closure.

Results of Operations For The Three Months Ended September 30, 2003 and 2002

Revenues.Total revenues increased 8% from the three months ended September 30, 2002 to the three months ended September 30, 2003. The revenue growth was primarily due to increases in exclusive compound supply revenue and high-throughput screening revenue offset by decreases in nonexclusive compound supply sales. In the third quarter of 2003, 66% of our revenue came from our chemistry contracts with Pfizer, and we anticipate that this relationship will continue to provide for a high percentage of our revenue throughout 2003 and 2004. However, Pfizer has the right to terminate the relationship without cause by giving six months’ notice. It is imperative that we continue to satisfy this key customer.

Gross margin. Gross margin as a percentage of revenues for the three months ended September 30, 2003 was 40%, up from 34% for the three months ended September 30, 2002. The improvement in gross margin for the third quarter 2003 is primarily due to higher screening volumes, higher exclusive chemistry compound production volumes, savings in material costs and other operating efficiencies.

Research and development expenses.Research and development expenses consist primarily of salaries and benefits, supplies and expensed development materials, and facilities costs and equipment depreciation. Research and development expenses decreased 58% ($0.8 million) from the three months ended September 30, 2002 to the three months ended September 30, 2003. Research and development expenses decreased primarily due to the redeployment of development scientists and engineers to the direct revenue generating activities of customer funded research and development programs and collaborations.

Selling, general and administrative expenses.Selling, general and administrative expenses consist primarily of salaries and benefits for sales and marketing and administrative personnel, advertising and promotional expenses, professional services, and facilities costs. Selling, general and administrative expenses decreased 5% ($163,000) from the three months ended September 30, 2002 to the three months ended September 30, 2003 due primarily to cost containment actions and the absence of executive recruiting and relocation costs, which more than offset higher personnel costs.

Restructuring expenses. Restructuring expenses related to the closure of our Tucson facility were $0.3 million for the third quarter of 2003 consisting of moving, relocation and other costs. We do not expect to incur any additional restructuring charges related to the Tucson closure.

Stock-based compensation.During 1999 and 2000, we granted stock options with exercise prices that were less than the estimated fair value of the underlying shares of common stock on the date of grant. Additionally, we awarded 52,500 shares of restricted stock and rights to acquire 190,000 shares of restricted stock in August 2003. As a result, we have recorded deferred stock-based compensation to be amortized over the period that these options, restricted stock grants and rights to acquire restricted stock vest. The deferred stock-based compensation expense for the three months ended September 30, 2003 was approximately $178,000, compared to approximately $138,000 for the three months ended September 30, 2002.

Interest income.Interest income decreased 15% ($77,000) from the three months ended September 30, 2002 to the three months ended September 30, 2003 due primarily to declines in the U.S. interest rates and a marginal decrease in the average cash balance.

Results of Operations For The Nine Months Ended September 30, 2003 and 2002

Revenues.Total revenues increased 22% from the nine months ended September 30, 2002 to the nine months ended September 30, 2003. The revenue growth was primarily due to increases in exclusive compound supply revenue and high-throughput screening revenue offset by decreases in nonexclusive compound supply sales. For the nine months ended September 30, 2003, 61% of our revenue came from our chemistry contracts with Pfizer, and we anticipate that this relationship will continue to provide for a high percentage of our revenue throughout 2003 and 2004. However, Pfizer has the right to terminate the relationship without cause by giving six months’ notice.

Cost of revenues.Cost of revenues for the nine months ended September 30, 2002 includes a charge of $5.8 million related to provisions for discontinued products. During the nine months ended September 30, 2002, we identified changes in the market for chemical compound libraries including a shift in demand from diverse purified compounds to purified targeted compounds and an increased demand to bring proprietary assets into drug discovery collaborations. As a result, we made a decision to cease selling our nonexclusive chemical compounds on a stand-alone basis to third parties and, instead, will make these compounds available only as part of collaborations with our future partners; however, there are no assurances that this strategy will be successful. Accordingly, we increased our inventory reserve by approximately $5.8 million to fully reserve for the chemical compound libraries as of September 30, 2002 and recorded this charge as cost of revenue.

At the time, we had contract obligations to deliver compounds each quarter through the second quarter of 2003. The pricing of the compounds included in this contract assumed that we would sell these compounds, under certain conditions, to multiple other customers. As a result of our decision to cease selling these compounds on a stand-alone basis, these additional sales would not be realized and thus a loss was anticipated for this contract. Accordingly, an anticipated loss accrual was recorded as of September 30, 2002 totaling $1.5 million. During 2002, we incurred a loss totaling $647,000 related to the sale of compounds under this contract reducing the contract loss accrual to $837,000 as of December 31, 2002. On March 31, 2003, this contract was terminated at the customer’s request. During the first quarter of 2003, we incurred an additional loss on the contract totaling $400,000 reducing the contract loss accrual to $437,000. In accordance with the termination agreement, we were paid $600,000 as an early termination fee which is included in revenue. Additionally, the remaining $437,000 contract loss accrual was no longer required and was thus eliminated with a corresponding decrease to cost of sales for the first quarter 2003.

Gross margin. Gross margin as a percentage of revenues was 34%, up from 9% for the nine months ended September 30, 2002, which included provisions related to the discontinuation of the Company’s non-exclusive compound supply business equaling 25% of revenue. The improvement in gross margin for the first nine months of 2003 was primarily due to the absence of provisions related to the discontinued product line. Higher screening volumes, higher exclusive chemistry compound production volumes, and lower material costs associated with inventory cost management initiatives undertaken in 2003 offset decreases in instrumentation gross margins.

Research and development expenses.Research and development expenses consist primarily of salaries and benefits, supplies and expensed development materials, and facilities costs and equipment depreciation. Research and development expenses decreased 63% ($3.2 million) from the nine months ended September 30, 2002 to the nine months ended September 30, 2003. Research and development expenses decreased primarily due to the redeployment of development scientists and engineers to the direct revenue generating activities of customer funded research and development programs and collaborations.

Selling, general and administrative expenses.Selling, general and administrative expenses consist primarily of salaries and benefits for sales and marketing and administrative personnel, advertising and promotional expenses, professional services, and facilities costs. Selling, general and administrative expenses increased slightly ($30,000) from the nine months ended September 30, 2002 to the nine months ended September 30, 2003, due primarily to additional personnel costs which were offset by savings due to cost containment actions.

Restructuring expenses. Restructuring expenses related to the closure of our Tucson facility were $1.9 million for the nine months ended September 30, 2003 and consist of $0.9 million of costs to exit certain contractual and lease obligations, $0.4 million of severance and retention bonuses for involuntary employee terminations and $0.6 million of moving, relocation and other costs. We do not expect to incur any additional restructuring charges related to the Tucson closure.

Stock-based compensation.During 1999 and 2000, we granted stock options with exercise prices that were less than the estimated fair value of the underlying shares of common stock on the date of grant. Additionally, we awarded 52,500 shares of restricted stock and rights to acquire 190,000 shares of restricted stock in August 2003. As a result, we have recorded deferred stock-based compensation to be amortized over the period that these options, restricted stock grants and rights to acquire restricted stock vest. The deferred stock-based compensation expense for the nine months ended September 30, 2003 was approximately $338,000, compared to approximately $510,000 for the nine months ended September 30, 2002.

Interest income.Interest income decreased 4% ($66,000) from the nine months ended September 30, 2002 to the nine months ended September 30, 2003 due primarily to declines in the U.S. interest rates and our average cash balance, offset by an increase in realized gains on the sale of certain investments and a decrease in interest expense due to a reduction in debt.

Liquidity and Capital Resources

Since inception of the Company, we have funded our operations principally with $39.0 million of private equity financings and $94.7 million of net proceeds from our initial public offering in July/August 2000.

At September 30, 2003, cash and cash equivalents and short-term investments totaled approximately $70.0 million, compared to $69.6 million at December 31, 2002.

We currently anticipate investing between $2.0 million and $3.0 million through December 31, 2003 for leasehold improvements and capital equipment necessary to support future revenue growth. Our actual future capital requirements will depend on a number of factors, including our success in increasing sales of both existing and new products and services, expenses associated with any unforeseen litigation, regulatory changes, competition and technological developments, and potential future merger and acquisition activity.

On October 4, 2001, our Board of Directors authorized a Stock Repurchase Program, authorizing us to repurchase up to 2,000,000 shares of common stock at no more than $3.50 per share. In 2001, we acquired 35,000 shares for a total of $119,000 and in February 2003, we purchased 115,000 shares for a total of $289,000. We may continue to purchase additional shares in the future.

In April 2003, we announced our decision to consolidate our domestic chemistry facilities into two centers of excellence: in South San Francisco for primary screening library design and synthesis programs and in San Diego for lead optimization and medicinal chemistry projects. At the same time, we announced our plans to establish new offshore chemistry capabilities to take advantage of lower cost structures. These actions resulted in the closure of our Tucson facility. As a result of this decision, we have recognized restructuring related charges of $1.9 million as operating expenses for the nine months ended September 30, 2003. As of September 30, 2003, $965,000 of these charges are unpaid. Of this amount, we expect to pay out approximately $250,000 in the fourth quarter of 2003 with the remaining amount to be paid out ratably through July 2005. We do not expect to incur any additional restructuring charges related to the Tucson closure.

Recent developments

In August 2003, we granted awards of 52,500 shares of restricted stock and rights to acquire 190,000 shares of restricted stock pursuant to our 2000 Stock Incentive Plan to certain of our key employees. These grants were made in lieu of stock option awards, which would have a similar impact on earnings under SFAS No. 123. The awards of restricted stock and rights to acquire restricted stock vest in annual installments over a four-year period. Beginning in the third quarter of 2003, we will recognize the related compensation expense on an accelerated basis equal to $256,000, $501,000, $341,000, $180,000 and $31,000 in each of the years 2003, 2004, 2005, 2006 and 2007, respectively.

RISKS AND UNCERTAINTIES

In addition to the other information contained herein, you shouldcarefully consider the following risk factors in evaluating our company.

We derive a significant percentage of our revenues from a single customer. If this customer relationship terminated, we might have difficulty finding customers that would purchase our products and services in sufficient amounts to replace the capacity resulting from the loss of this significant customer.

We anticipate that a significant portion of our revenues for 2003 and beyond will be derived from the chemistry collaboration we entered into with Pfizer in December 2001. Under the agreement, Pfizer has a contractual right to terminate the contract, with or without cause, upon six months notice beginning on January 1, 2003. During the first nine months of 2003, revenue from Pfizer represented 61% of total revenue. If our relationship with Pfizer or our contracts with other customers to whom we provide significant products or services are terminated, we will have capacity available until we are able to find new customers for our products and services to replace that capacity. We may be delayed in entering or not able to enter into contracts with new customers to replace any available capacity. We will continue to bear the costs of that capacity until we are able to enter into contracts with customers for those products or services. Revenues with respect to those products and services may be delayed or we may not recognize revenues at all to the extent we are delayed in entering or not able to enter into contracts with new customers to replace available capacity.

The drug discovery industry is competitive and subject to technological change,and we may not have the resources necessary to compete successfully.

We compete with companies in the United States and abroad that engage in the development and production of drug discovery products and services. These competitors include companies engaged in the following areas of drug discovery:

Assay development and screening, including Cerep, Evotec OAI AG, Pharmacopeia and Tripos;
Combinatorial chemistry instruments, including Argonaut and Mimotopes;
Compound libraries and lead optimization, including Albany Molecular Research, Pharmacopeia, Array Biopharma, Evotec OAI AG, Biofocus and ArQule;
Informatics, including Accelrys and Tripos; and
Gene profiling, including Affymetrix and Gene Logic.

Academic institutions, governmental agencies and other research organizations also conduct research in areas in which we provide services, either on their own or through collaborative efforts. Also, essentially all of our pharmaceutical company customers have internal departments that provide some or all of the products and services we sell, so these customers may have limited needs for our products and services. Many of our competitors, including Pharmacopeia, have access to greater financial, technical, research, marketing, sales, distribution, service and other resources than we do. We may not yet be large enough to achieve satisfactory market recognition or operating efficiencies, particularly in comparison to some competitors. In addition, small size (particularly when combined with unprofitable operations) often results in the loss of stock research analyst coverage; absence of coverage makes it difficult for a company to find and hold a stock market following. Currently, only two analysts follow us.

Moreover, the pharmaceutical and biotechnology industries are characterized by continuous technological innovation. We anticipate that we will face increased competition in the future as new companies enter the market and our competitors make advanced technologies available. Technological advances or entirely different approaches that we or one or more of our competitors develop may render our products, services and expertise obsolete or uneconomical. For example, advances in informatics and virtual screening may render some of our technologies, such as our large compound libraries, obsolete. Additionally, the existing approaches of our competitors or new approaches or technologies that our competitors develop may be more effective than those we develop. We currently are investing in µARCS technology to improve screening processes. However, we may be unable to successfully sell this technology to customers and we may never recover the cost of our investment including the prepaid royalty to Abbott, which is carried on our balance sheet as other intangible assets in an amount equal to approximately $6.0 million. We may not be able to compete successfully with existing or future competitors.

In addition, due to improvements in global communications, combined with the supply of lower cost PhD level scientific talent in offshore locations such as China, India and Eastern Europe, we face the growing threat of competition for our chemistry and computational chemistry services.

We expect business conditions in our industry to be difficult in the near term.

Business conditions in the drug discovery services business have been difficult since 2002 and although we have seen some signs of improvement and renewed investment we expect business could continue to be difficult through at least 2003. We do not expect that we could achieve substantial revenue growth through 2003 without adversely affecting profitability. We do not intend to seek revenue growth that would adversely affect profitability.

Our success will depend on the prospects of the pharmaceutical andbiotechnology industries and the extent to which these industries engage thirdparties to perform one or more aspects of their drug discovery process.

Our revenues depend to a large extent on research and development expenditures by the pharmaceutical and biotechnology industries and companies in these industries outsourcing research and development projects. These expenditures are based on a wide variety of factors, including the resources available for purchasing research equipment, the spending priorities among various types of research and policies regarding expenditures during recessionary periods. Geopolitical uncertainty or general economic downturns in our customers’ industries or any decrease in research and development expenditures could harm our operations, as could increased popularity of management theories that counsel against outsourcing of critical business functions. Any decrease in drug discovery spending by pharmaceutical and biotechnology companies could cause our revenues to decline and adversely impact our profitability.

The concentration of the pharmaceutical industry and the current trend towardincreasing consolidation could hurt our business prospects.

The pharmaceutical customer segment of the market for our products and services is highly concentrated, with approximately 50 large pharmaceutical companies conducting drug discovery research. The continuation of the current trend toward consolidation of the pharmaceutical industry may reduce the number of our potential customers even further. Accordingly, we expect that a relatively small number of customers will account for a substantial portion of our revenues.

Additional risks associated with a highly concentrated customer base include:

fewer customers for our products and services;
larger companies may develop and utilize in-house technology and expertise rather than using our products and services;
larger customers may negotiate price discounts or other terms for our products and services that are unfavorable to us; and
the market for our products and services may become saturated.

For example, because of the heavy concentration of the pharmaceutical industry and the relatively high cost of our systems, such as, NanoKan, µARCS and Crystal Farm, we expect to place only a limited number of systems before we saturate the market for these products.

We may not achieve or sustain profitability in the future.

We have incurred operating and net losses since our inception. As of September 30, 2003, we had an accumulated deficit of $105.1 million. For the years ended December 31, 2000, 2001 and 2002 and for the nine months ended September 30, 2003, we had net losses of $11.7 million, $11.1 million, $62.1 million and $0.4 million, respectively. We may also in the future incur operating and net losses and negative cash flow from operations. We may not be able to achieve or maintain profitability. Moreover, if we do achieve profitability, the level of any profitability cannot be predicted and may vary significantly from quarter to quarter. For example, although we had net income in the first and third quarters of 2003 we incurred a net loss in the second quarter of 2003 and we may not be able to achieve profitability for the year.

Our decision to discontinue the non-exclusive chemical compound supply productline places more emphasis on integrated drug discovery collaborations, an areaof higher risk and complexity.

As a result of our decision to limit access to our proprietary chemistry compounds and capabilities solely to companies that enter into integrated drug discovery, chemistry or screening and optimization collaborations with us, we now rely on this relatively complex form of customer engagement to deliver value for the Company. As a result of the inherent complexity of such collaborations, we have an increased risk of being unable to reach agreement with the prospective customer for such collaborations or of structuring sub-optimal arrangements that fail to adequately compensate us for the risks inherent in such collaborations. We may also have difficulty gaining new business due to our lack of demonstrated therapeutic product success.

Our success will depend on technological improvements to the process of drugdiscovery and on improvements to our customers’ expected return on investment(ROI) in the phases of the drug discovery and development process that weparticipate in.

The drug discovery and development process can be broadly separated into the following stages: Target identification; target validation; lead discovery; lead optimization; pre-clinical development; IND filing; clinical trials, phases I-III; new drug application (NDA); and post market surveillance. We currently participate in the areas of lead discovery and lead optimization. Current market studies indicate that, on average, less than one in fifty leads discovered ultimately results in an NDA. Moreover, based on current averages, for the isolated phases of lead discovery and lead optimization, the cost of acquiring a validated target plus the costs of lead discovery and lead optimization are greater than the expected proceeds of out-licensing a potential drug candidate during the pre-clinical phase of drug development. It is estimated that currently, a positive expected ROI on drug discovery and development does not occur until the drug candidate has successfully passed through phase II of clinical trials. Such conditions make it difficult for us to solicit profitable business from collaboration partners who are unable to fund the development of drug candidates through phase II of clinical trials.

We may not be successful in maintaining offshore capabilities

We recently entered into a long-term research and development collaboration agreement under which we plan to utilize scientists and equipment at a recently completed facility located in India to take advantage of a lower cost structure. However, we may not be successful in maintaining a successful relationship in this offshore location. Additionally, such offshore business could suffer due to the geographical time and distance challenges as well as cultural difficulties of managing such an operation, which could cause delays, customer dissatisfaction or other issues.

We may fail to expand customer relationships through integration of productsand services.

We may not be successful in selling our offerings in combination across the range of drug discovery disciplines we serve because integrated combinations of our products and services may not achieve time and cost efficiencies for our customers, especially our large pharmaceutical company customers. On the other hand, biotechnology companies may desire our integrated offerings but are often not sufficiently financed to pay for these services. In addition, we may not succeed in further integrating our offerings. We may not be able to use existing relationships with customers in individual areas of our business to sell products and services in multiple areas of drug discovery. If we do not achieve integration of our products and services, we may not be able to take advantage of potential revenue opportunities and differentiate ourselves from competitors.

All our products and services have lengthy sales cycles and involve significantscientific risk of fulfillment, which could cause our operating results tofluctuate significantly from quarter to quarter.

Sales of all our products and services typically involve significant technical evaluation and commitment of expense or capital by our customers. Accordingly, the sales cycles, or the time from finding a prospective customer through closing the sale, associated with these products or collaborations, range from six to eighteen months. Sales of these products and the formation of these collaborations are subject to a number of significant risks, including customers’ budgetary constraints and internal acceptance reviews that are beyond our control. Due to these lengthy and unpredictable sales cycles, our operating results could fluctuate significantly from quarter to quarter. We expect to continue to experience significant fluctuations in quarterly operating results due to a variety of factors, such as general and industry specific economic conditions, that may affect the research and development expenditures of pharmaceutical and biotechnology companies.

A large portion of our revenues rely upon the scientific success, either on the customer’s part in the form of delivering specified proteins for assay development or chemistry library design ideas of scientific projects for chemical compound development and production, or on our part in the form of assay or compound development or compound production. To the extent that either we experience delays in receiving specific deliverables required for us to complete our objectives or we encounter delays in our ability meet our scientific obligations, we may be unable to receive and recognize revenues in accordance with our expectations.

A large portion of our expenses, including expenses for facilities, equipment and personnel, is relatively fixed. Accordingly, if revenues decline or do not grow as anticipated, we might not be able to correspondingly reduce our operating expenses. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period.

Due to the possibility of fluctuations in our revenues (on an absolute basis and relative to our expenses), we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance.

If our products and services do not become widely used in the pharmaceuticaland biotechnology industries, it is unlikely that we will succeed.

We have a limited history of offering our products and services, including informatics tools, biology services, µARCS, toxicology services, Crystal Farm and combinatorial chemistry instrumentation systems. It is uncertain whether our current customers will continue to use these products and services or whether new customers will use these products and services. In order to be successful, our products and services must meet the requirements of the pharmaceutical and biotechnology industries, and we must convince potential customers to use our products and services instead of competing technologies and offerings. Moreover, we cannot thrive unless we can achieve economies of scale on our various offerings. Market acceptance will depend on many factors, including our ability to:

convince potential customers that our technologies are attractive alternatives to other technologies for drug discovery;
manufacture products and conduct services in sufficient quantities with acceptable quality and at an acceptable cost;
convince potential customers to purchase drug discovery products and services from us rather than developing them internally; and
place and service sufficient quantities of our products.

Because of these and other factors, some of which are beyond our control, our products and services may not gain sufficient market acceptance.

The intellectual property rights we rely on to protect the technologyunderlying our products and techniques may not be adequate, which could enablethird parties to use our technology or very similar technology and could reduceour ability to compete in the market.

Our success will depend on our ability to obtain, protect and enforce patents on our technology and to protect our trade secrets. We also depend, in part, on patent rights that third parties license to us. Any patents we own or license may not afford meaningful protection for our technology and products. Others may challenge our patents or the patents of our licensors and, as a result, these patents could be narrowed, invalidated or rendered unenforceable. In addition, current and future patent applications on which we depend may not result in the issuance of patents in the United States or foreign countries. Competitors may develop products similar to ours that are not covered by our patents. Further, since there is a substantial backlog of patent applications at the U.S. Patent and Trademark Office, the approval or rejection of our or our competitors’ patent applications may take several years.

Our European eukaryotic gene profiling patent was opposed by various companies. Oral proceedings were held before the Opposition Division of the European Patent Office in January 2003. At the conclusion of the hearing, the Opposition Division maintained our patent in amended form. As amended, the patent claims kits and methods for identifying and characterizing the potential toxicity of a compound using expression profiles of four categories of stress. However, the decision of the Opposition Division may be appealed to the Technical Board of Appeal of the European Patent Office. Such appeal, if any, will not be resolved for several years. There is no assurance that we will ultimately prevail in the appeal or be successful in enforcing or further licensing our European patent. If we are unsuccessful, the value of our gene profiling patent and any royalties it may generate could be reduced.

In addition to patent protection, we also rely on copyright protection, trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of our trade secrets and proprietary information, we require our employees, consultants and advisors to execute confidentiality and proprietary information agreements. However, these agreements may not provide us with adequate protection against improper use or disclosure of confidential information, and there may not be adequate remedies in the event of unauthorized use or disclosure. Furthermore, like many technology companies, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities conducted by us. In some situations, our confidentiality and proprietary information agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships.

Although we require our employees and consultants to maintain the confidentiality of all confidential information of previous employers, their prior affiliations may subject us or these individuals to allegations of trade secret misappropriation or other similar claims. Finally, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets. Our failure to protect our proprietary information and techniques may inhibit or limit our ability to exclude certain competitors from the market.

The drug discovery industry has a history of intellectual property litigationand we may be involved in intellectual property lawsuits, which may beexpensive.

In order to protect or enforce our patent rights, we may have to initiate legal proceedings against third parties. In addition, others may sue us for infringing their intellectual property rights, or we may find it necessary to initiate a lawsuit seeking a declaration from a court that we are not infringing the proprietary rights of others. The patent positions of pharmaceutical, biotechnology and drug discovery companies are generally uncertain. A number of pharmaceutical companies, biotechnology companies, independent researchers, universities and research institutions may have filed patent applications or may have been granted patents that cover technologies similar to the technologies owned by, or licensed to, us or our collaborators. A number of patents may have been issued or may be issued in the future that could cover certain aspects of our technology and that could prevent us from using technology that we use or expect to use. In addition, we are unable to determine all of the patents or patent applications that may materially affect our ability to make, use or sell any potential products. Legal proceedings relating to intellectual property would be expensive, take significant time and divert management’s attention from other business concerns, no matter whether we win or lose. The cost of such litigation could affect our profitability.

Further, an unfavorable judgment in an infringement lawsuit brought against us, in addition to any damages we might have to pay, could require us to stop the infringing activity or obtain a license. Any required license may not be available to us on acceptable terms, or at all. In addition, some licenses may be nonexclusive, and therefore, our competitors may have access to the same technology that is licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our products or services.

Our stock price likely will be volatile.

The trading price of our common stock likely will be volatile and could be subject to fluctuations in price in response to various factors, many of which are beyond our control, including:

actual or anticipated variations in quarterly operating results;
announcements of technological innovations by us or our competitors;
new products or services introduced or announced by us or our competitors;
changes in financial estimates by (or the beginning or cessation of coverage by) securities analysts;
conditions or trends in the pharmaceutical and biotechnology industries or in the drug discovery "tools" industry;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments, or terminations of strategic partners or joint ventures;
the implementation or wind-down of stock buyback programs;
additions or departures of key personnel;
economic and political factors; and
sales of our common stock.

In addition, price and volume fluctuations in the stock market in general, and the Nasdaq National Market and the market for technology companies in particular, have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of life sciences companies have been particularly volatile. Conditions or trends in the pharmaceutical and biotechnology industries generally may cause further volatility in the trading price of our common stock, because the market may incorrectly perceive us as a pharmaceutical or biotechnology company. These broad market and industry factors may harm the market price of our common stock, regardless of our operating performance. In the past, plaintiffs have often instituted securities class action litigation following periods of volatility in the market price of a company’s securities. A securities class action suit against us could result in potential liabilities, substantial costs and the diversion of management’s attention and resources, regardless of whether we win or lose.

Our customers may restrict our use of scientific information, which couldprevent us from using this information for additional revenue.

We plan to generate and use information that is not proprietary to our customers and which we derive from performing drug discovery services for our customers. However, our customers may not allow us to use information such as the general interaction between types of chemistries and types of drug targets that we generate when performing drug discovery services for them. Our current contracts typically restrict our use of certain scientific information we generate for our customers, such as the biological activity of chemical compounds with respect to drug targets, and future contracts also may restrict our use of additional scientific information. To the extent that our use of information is restricted, we may not be able to collect and aggregate scientific data and take advantage of potential revenue opportunities.

Our success will depend on our ability to attract and retain key executives,experienced scientists and sales personnel.

Our future success will depend to a significant extent on our ability to attract, retain and motivate highly skilled scientists and sales personnel. In addition, our business would be significantly harmed if we lost the services of Riccardo Pigliucci, our chief executive officer. Our ability to maintain, expand or renew existing engagements with our customers, enter into new engagements and provide additional services to our existing customers depends, in large part, on our ability to hire and retain scientists with the skills necessary to keep pace with continuing changes in drug discovery technologies and sales personnel who are highly motivated. Additionally, it is difficult for us to find qualified sales personnel in light of the fact that our sales personnel generally hold Ph.D’s. Our employees are “at will,” which means that they may resign at any time, and we may dismiss them at any time (subject, in some cases, to severance payment obligations). We believe that there is a shortage of, and significant competition for, scientists with the skills and experience in the sciences necessary to perform the services we offer. We compete with pharmaceutical companies, biotechnology companies, combinatorial chemistry companies, contract research companies and academic institutions for new personnel. We may not be successful in attracting new scientists or sales personnel or in retaining or motivating our existing personnel.

We have acquired several businesses and face risks associated with integratingthese businesses and potential future acquisitions.

We plan to continue to review potential acquisition candidates in the ordinary course of our business, and our strategy includes building our business through acquisitions. Acquisitions involve numerous risks, including, among others, difficulties and expenses incurred in the consummation of acquisitions and assimilation of the operations, personnel and services or products of the acquired companies, difficulties of operating new businesses, the diversion of management’s attention from other business concerns and the potential loss of key employees of the acquired company. In addition, acquired businesses may have management structures incompatible with our own and may experience difficulties in maintaining their existing levels of business after joining us. If we do not successfully integrate and grow the businesses we have acquired or any businesses we may acquire in the future, our business will suffer. Additionally, acquisition candidates may not be available in the future or may not be available on terms and conditions acceptable to us. Acquisitions of foreign companies also may involve additional risks of assimilating different business practices, overcoming language and cultural barriers and foreign currency translation. We currently have no agreements or commitments with respect to any acquisition, and we may never successfully complete any additional acquisitions.

Our success will depend on our ability to manage growth and expansion.

Growth in our operations has placed and, if we grow in the future, will continue to place a significant strain on our operational, human and financial resources. In the past three years we have acquired five new businesses, and we intend to continue to grow our business internally and by acquisition. As and if we expand our operations we will not necessarily have in place infrastructure and personnel sufficient to accommodate the increased size of our business. Our ability to effectively manage any growth through acquisitions or any internal growth will depend, in large part, on our ability to hire, train and assimilate additional management, professional, scientific and technical personnel and our ability to expand, improve and effectively use our operating, management, marketing and financial systems to accommodate our expanded operations. These tasks are made more difficult as we acquire businesses in geographically disparate locations.

Our operations could be interrupted by damage to our facilities.

Our results of operations are dependent upon the continued use of our highly specialized laboratories and equipment. Our operations are primarily concentrated in facilities in San Diego, California, South San Francisco, California and Allschwil, Switzerland. Natural disasters, such as earthquakes, fires or terrorist acts could damage our laboratories or equipment and these events may materially interrupt our business. We maintain business interruption insurance to cover lost revenues caused by such occurrences. However, this insurance would not compensate us for the loss of opportunity and potential adverse impact on relations with existing customers created by an inability to meet our customers’ needs in a timely manner, and may not compensate us for the physical damage to our facilities.

We may incur exchange losses when foreign currency used in internationaltransactions is converted into U.S. dollars.

Currency fluctuations between the U.S. dollar and the currencies in which we do business, including the British pound, the Japanese yen, the Swiss franc and the Euro, will cause foreign currency translation gains and losses. We cannot predict the effects of exchange rate fluctuations on our future operating results because of the number of currencies involved, changes in the percentage of our revenue that will be invoiced in foreign currencies, the variability of currency exposure and the potential volatility of currency exchange rates. We do not currently engage in foreign exchange hedging transactions to manage our foreign currency exposure; however, we may begin to hedge certain transactions between the Swiss franc and other currencies that are invoiced from our Swiss affiliate in order to minimize foreign exchange transaction gains and losses.

We may be subject to liability regarding hazardous materials.

Our products and services as well as our research and development processes involve the controlled use of hazardous materials. For example, we often use acids, bases, oxidants, and flammable materials. Acids include trifluoroacetic acid and hydrochloric acid, bases include sodium hydroxide and triethylamine, oxidants include peracids and potassium permanganate, and flammable solvents include methanol, hexane and tetrahydrofuran. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. We cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for any damages that result, and any such liability could exceed our resources and disrupt our business. In addition, we may have to incur significant costs to comply with environmental laws and regulations related to the handling or disposal of such materials or waste products in the future, which would require us to spend substantial amounts of money.

Because it is unlikely that we will pay dividends, our stockholders will onlybe able to benefit from holding our stock if the stock price appreciates.

We have never paid cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future.

Anti-takeover provisions in our stockholder rights plan and in our charter and bylaws could make a third-party acquisition of us difficult.

In 2003 we adopted a stockholder rights plan (a so-called “poison pill”). Also, our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. In addition, as a result of our acquisition of Axys Advanced Technologies, we have a standstill agreement with Axys Pharmaceuticals, which prevents Axys Pharmaceuticals (and prevents its subsequent acquirer, Applera Corporation) from making a hostile effort to acquire us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Short-term investments.Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since a significant portion of our investments are and will be in short-term marketable securities, U.S. government securities and corporate bonds. Due to the nature and maturity of our short-term investments, we have concluded that there is no material market risk exposure to our principal. The average maturity of our investment portfolio is six months. A 1% change in interest rates would have an effect of approximately $340,000 on the value of our portfolio.

Foreign currency rate fluctuations. The functional currency for our Discovery Partners International AG (DPI AG) group is the Swiss franc. DPI AG accounts are translated from their local currency to the U.S. dollar using the current exchange rate in effect at the balance sheet date for the balance sheet accounts, and using the average exchange rate during the period for revenues and expense accounts. The effects of translation for our DPI AG group are recorded as a separate component of stockholders’ equity (accumulated other comprehensive income (loss)). DPI AG conducts its business with customers in local currencies. Exchange gains and losses arising from these transactions are recorded using the actual exchange differences on the date the transaction is settled. We have not in the past taken any action to reduce our exposure to changes in foreign currency exchange rates, such as options or futures contracts, with respect to transactions with DPI AG or transactions with our worldwide customers, but anticipate that we could begin to hedge against foreign exchange transaction gains and losses resulting from non-Swiss franc invoices issued to customers by DPI AG in the near future. A 10% change in the value of the Swiss franc relative to the U.S. dollar throughout the first nine months of 2003 would have resulted in a 1% change in expenses for the nine months ended September 30, 2003. The impact on revenues is lower due to the fact that DPI AG invoiced approximately 32% of its revenues for the nine months ended September 30, 2003 in U.S. dollars.

Inflation.We do not believe that inflation has had a material impact on our business or operating results during the periods presented.

Item 4. Controls and Procedures

Our Chief Executive Officer, Mr. Pigliucci, and Chief Financial Officer, Mr. Kussman, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2003. Based upon that evaluation, Mr. Pigliucci and Mr. Kussman concluded that our disclosure controls and procedures are effective in causing material information to be collected, communicated and analyzed by management of the Company on a timely basis and to ensure that the quality and timeliness of our public disclosures comply with its SEC disclosure obligations. Such evaluation did not identify any change in our internal control over financial reporting that occurred during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Changes in Securities and Use of Proceeds

The registration statement (File No. 333-36638) for our initial public offering was declared effective by the SEC on July 27, 2000. We received net proceeds from the Offering of approximately $94.7 million. Through September 30, 2003, we had used approximately $17.0 million of the net proceeds for acquisitions of companies, $6.0 million for prepaid µARCS royalties, $9.6 million for capital expenditures and $0.9 million for costs associated with restructuring.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit Number	Exhibit Description
3.1	Certificate of Incorporation of the Company (1)
3.2	Bylaws of the Company (1)
4.1	Specimen common stock certificate (1)
4.2	Rights Agreement, dated as of February 13, 2003, including the form of Certificate of Designation,
	the form of Rights Certificate and the Summary of Rights (2)
10.78	Worldwide Distribution and Strategic Alliance Agreement between us and Bruker AXS Inc., dated
	July 24, 2003
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
	2002
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
	2002
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
	2002
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
	2002

_____________

†

Certain confidential portions of this Exhibit were omitted by means of redacting a portion of the text (the “Mark”). This Exhibit has been filed separately with the Secretary of the Commission without the Mark pursuant to the Company’s Application Requesting Confidential Treatment under Rule 24b-2 under the Securities Exchange Act of 1934.

(1)

Incorporated by Reference to the Company’s Registration Statement No. 333-36638 on Form S-1 filed with the Securities and Exchange Commission on July 27, 2000

(2)

Incorporated by Reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 2003.

(b) Reports on Form 8-K:

We filed a Current Report on Form 8-K on October 21, 2003 to report the Company’s financial results for the three and nine months ended September 30, 2003, as reported in a press release dated October 21, 2003 and the script of the Chief Executive and Financial Officers’ comments from the Company’s third quarter 2003 earnings conference call.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	DISCOVERY PARTNERS INTERNATIONAL, INC

Date: November 12, 2003	By: /s/Riccardo Pigliucci
	Riccardo Pigliucci
	Chief Executive Officer
	(Duly Authorized Officer)

Date: November 12, 2003	By: /s/Craig Kussman
	Chief Financial Officer,
	Senior Vice President Finance
	and Administration and Secretary
	(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit Number	Exhibit Description
3.1	Certificate of Incorporation of the Company (1)
3.2	Bylaws of the Company (1)
4.1	Specimen common stock certificate (1)
4.2	Rights Agreement, dated as of February 13, 2003, including the form of Certificate of Designation,
	the form of Rights Certificate and the Summary of Rights (2)
10.78	Worldwide Distribution and Strategic Alliance Agreement between us and Bruker AXS Inc., dated
	July 24, 2003
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
	2002
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
	2002
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
	2002
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
	2002

_____________

†

(1)

Incorporated by Reference to the Company’s Registration Statement No. 333-36638 on Form S-1 filed with the Securities and Exchange Commission on July 27, 2000

(2)

Incorporated by Reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 2003.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

Infinity Pharmaceuticals (INFIQ) 10-Q2003 Q3 Quarterly report

Content analysis

For the Quarterly Period Ended September 30, 2003

Commission File Number 000-31141

TABLE OF CONTENTS

DISCOVERY PARTNERS INTERNATIONAL, INC.

1. Basis of Presentation

2. Net Income (Loss) Per Share

3. Comprehensive Loss

4. Inventory

5. Deferred Stock Compensation

6. Common Stock Issuable

7. Rights Agreement

8. Contract Termination

9. Glaxo SmithKline Agreement

10. Bruker AXS Inc. Agreement

11. Significant Customer

12. Restructuring

13. Recent Accounting Pronouncements

14. Stock-Based Compensation

DISCOVERY PARTNERS INTERNATIONAL, INC.

PART I

FINANCIAL INFORMATION (continued)

Web Site Access to SEC Filings

Overview

Critical Accounting Policies

Results of Operations For The Three Months Ended September 30, 2003 and 2002

Results of Operations For The Nine Months Ended September 30, 2003 and 2002

Liquidity and Capital Resources

Recent developments

RISKS AND UNCERTAINTIES

We may not achieve or sustain profitability in the future.

We may not be successful in maintaining offshore capabilities

Our stock price likely will be volatile.

We may be subject to liability regarding hazardous materials.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART IIOTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

EXHIBIT INDEX

PART II
OTHER INFORMATION