Common use of COMPREHENSIVE LOSS Clause in Contracts

COMPREHENSIVE LOSS. Balance at December 31, ------ ---------- -------- ------- -------- ------ -------- See accompanying notes F-5 YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net loss.................................................... $ (38,448) $ (18,356) $ (9,983) Adjustments to reconcile net loss to net cash used in Depreciation and amortization............................. 6,889 3,415 2,337 Amortization of deferred compensation..................... 365 183 101 Issuance of common stock and stock options in connection with licensing agreements............................... -- 284 600 Acquired in-process research and development.............. 9,890 -- -- Changes in assets and liabilities: Decrease (increase) in accounts receivable, other current assets, and other assets................................ (8,004) (876) 518 Increase (decrease) in accounts payable and accrued liabilities............................................. 12,724 (1,546) 7,443 Increase (decrease) in deferred revenue................... 452 (2,327) 3,963 --------- --------- --------- Net cash (used in) provided by operating activities......... (15,334) (19,223) 4,979 --------- --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES Acquisition of PulmoSpheres-Registered Trademark- Purchases of short-term investments......................... (122,481) (219,414) (483,247) Sales of short-term investments............................. 28,658 65,189 80,662 Maturities of short-term investments........................ 47,174 182,309 334,289 Purchases of property and equipment, net.................... (20,502) (34,584) (17,261) --------- --------- --------- Net cash used in investing activities....................... (82,439) (6,500) (85,557) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of convertible subordinated debentures, net........ 104,806 -- -- Payments of loan and capital lease and obligations.......... (64) (181) (168) Proceeds from tenant improvement loan....................... -- -- 5,000 Issuance of common stock, net of issuance costs............. 1,545 36,716 71,282 --------- --------- --------- Net cash provided by financing activities................... 106,287 36,535 76,114 --------- --------- --------- Net increase (decrease) in cash and cash equivalents........ 8,514 10,812 (4,464) Cash and cash equivalents at beginning of year.............. 24,916 14,104 18,568 --------- --------- --------- Cash and cash equivalents at end of year.................... $ 33,430 $ 24,916 $ 14,104 ========= ========= ========= See accompanying notes F-6 INHALE THERAPEUTIC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION Inhale Therapeutic Systems, Inc. ("Inhale", the "Company") was incorporated in the State of California in July 1990 and reincorporated in the State of Delaware in July 1998. Since inception, Inhale has been engaged in the development of a system to deliver drugs to the bloodstream through the lungs by inhaling a powdered version of the drug. The system is applicable to a wide range of peptides, proteins and other molecules. Inhale expects increasing losses over the next several years as research and development and manufacturing scale-up efforts continue, and as Inhale expands its facilities for commercial manufacturing. Management plans to continue to finance Inhale primarily through issuances of equity or debt securities, research and development contract revenue, and in the longer term, revenue from product sales and royalties. 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 and disclosure of contingent assets and liabilities 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. CASH, CASH EQUIVALENTS AND INVESTMENTS Inhale considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include demand deposits held in banks and interest bearing money market funds. All other liquid investments are classified as short-term investments. Short-term investments consist of federal and municipal government securities, repurchase agreements or corporate commercial paper with A1 or P1 short-term ratings and A or better long-term ratings with remaining maturities at date of purchase of greater than 90 days and less than one year. Inhale limits its concentration of risk by diversifying its investments among a variety of industries and issuers. Inhale has experienced no material losses on its investments. At December 31, 1999, all short-term investments are designated as available-for-sale and are carried at fair value, with material unrealized gains and losses, if any, reported in stockholders' equity. The amortized cost of securities is adjusted for amortization of material premiums and accretion of discounts to maturity. Such amortization, if any, is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities, if any, are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. INHALE THERAPEUTIC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following is a summary of available-for-sale debt securities as of December 31, 1999: AVAILABLE-FOR-SALE DEBT SECURITIES ----------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- (IN THOUSANDS) Obligations of U.S. government agencies............. $ 81,692 $108 $ -- $ 81,800 U.S. corporate commercial paper..................... 41,081 33 -- 41,114 Repurchase agreements, secured by U.S. Government ---- --------- -------- ---- --------- -------- $134,490 $141 $ -- $134,631 ======== ==== ========= ======== The following is a summary of available-for-sale debt securities as of December 31, 1998: AVAILABLE-FOR-SALE DEBT SECURITIES ----------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- (IN THOUSANDS) Obligations of U.S. government agencies $20,758 $ -- $ -- $ 20,758 U.S. corporate commercial paper 42,773 -- (19) 42,754 Repurchase agreements, secured by U.S. Government securities......................................... 17,704 -- -- 17,704 Other................................................ 105 -- -- 105 --------- ---- -------- --------- ---- -------- The gross realized losses and gains on the sale of debt securities available-for-sale during the years ended December 31, 1999 and 1998 were not material. At December 31, 1999 and 1998, the average portfolio duration was approximately five months and three months, respectively, and the contractual maturity of any single investment did not exceed eleven months at December 31, 1999 and 1998. The estimated fair value amounts have been determined by Inhale using available market information and appropriate valuation methodologies. However, market data must be interpreted to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Inhale could realize in a current market exchange. INHALE THERAPEUTIC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Inhale owns common stock in one technology company. These shares of Alliance Pharmaceutical Corp. ("Alliance") are accounted for as long-term available-for-sale securities. Due to restrictions on the sale of this stock, the Company carries that portion of its investment in Alliance that can be sold within one year at market value, with material unrealized gains and losses, if any, reported in stockholders' equity. That portion which cannot be sold within one year is carried at cost. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31: -------- -------- (IN THOUSANDS)

COMPREHENSIVE LOSS. Balance Balances at December 31June 30, ------ ---------- -------- ------- -------- ------ -------- See accompanying notes F-5 YEARS 2000........... $67 $146,817 $(50,953)======== === ======== YEAR ENDED DECEMBER 31JUNE 30, --------------------------------- 2000 1999 1998 1997 --------- --------- CASH FLOWS FROM (USED ININ U.S. DOLLARS, IN THOUSANDS) OPERATING ACTIVITIES Net loss.................................................... $ loss attributable to ordinary shareholders $(38,448) $ (18,356) $ (9,98351,067) Adjustments to reconcile net loss to net cash used in $(9,394) $ (253) Minority interests in losses of consolidated subsidiary............................................ (119) (47) (11) Loss on equity investment............................... 501 -- -- Provisions for doubtful accounts........................ 555 130 12 Depreciation and amortization............................. 6,889 3,415 2,337 ........................... 1,476 312 124 Stock-based compensation................................ 19,065 3,392 -- Amortization of deferred compensation..................... 365 183 101 Issuance of common stock and stock options in connection with licensing agreements............................... -- 284 600 Acquired in-process research and development.............. 9,890 -- -- intangible assets....................... 6,807 1,745 43 Accretion on Mandatorily Redeemable Convertible Preference Shares..................................... 84 98 71 Changes in assets and liabilities, net of effect of Sinanet acquisition: Decrease Accounts receivable................................... (increase3,235) in accounts receivable, (631) (417) Inventories........................................... 15 (136) 43 Prepaid expenses and other current assets, and other assets................................ Assets............. (8,004996) (87691) 518 Increase 128 Receivable from related parties....................... (decrease268) in accounts payable and accrued -- -- Other assets.......................................... 128 (9) (261) Accounts payable...................................... 375 145 47 Accrued liabilities............................................. 12,724 (1,546) 7,443 Increase (decrease) in deferred revenue................... 452 (2,327) 3,963 --------- --------- --------- ................................... 6,576 812 189 Net cash used in operating Activities.............. (used in) provided by operating activities......... (15,33420,103) (19,2233,674) 4,979 --------- --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES (285) Cash flows from investing activities: Cash acquired upon merger with Sinanet.................... -- 289 -- Acquisition of PulmoSpheres-Registered Trademark- Purchases of short-term investments......................... property and equipment..................... (122,4817,019) (219,4141,285) (483,247557) Sales of short-term investments............................. 28,658 65,189 80,662 Maturities Investment in joint ventures.............................. (1,395) -- -- Purchase of short-term investments........................ 47,174 182,309 334,289 Purchases of property and equipment, net.................... (20,50226,447) (34,5844,037) (17,261) --------- --------- --------- -- Net cash used in investing activities....................... Activities.............. (82,43934,861) (6,5005,033) (85,557557) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance Cash flows from financing activities: Proceeds from issuance of convertible subordinated debenturesPreference Shares, net........ 104,806 -- -- Payments of loan and capital lease and obligations.......... (64) (181) (168) 63,920 24,185 5,933 Proceeds from tenant improvement loan....................... -- -- 5,000 Issuance of common stockinitial public offering, net of $3,907 issuance costs............. 1,545 36,716 71,282 --------- --------- --------- .......................................... 68,819 -- -- Proceeds from notes receivables from shareholders......... 562 -- -- Net cash provided by financing activities................... 106,287 36,535 76,114 --------- --------- --------- .......... 133,542 24,188 5,692 Net increase (decrease) in cash and cash equivalents........ 8,514 10,812 (4,464) ................... 78,578 15,481 4,850 Cash and cash equivalents at beginning of year.............. 24,916 14,104 18,568 --------- --------- --------- 20,571 5,090 240 Cash and cash equivalents at end of year.................... $ 33,430 99,149 $20,571 $5,090 Supplemental disclosure of cash flow information: Cash flows from operating activities: operating activities: Cash paid for interest $ 24,916 -- $ 14,104 =1 $ 22 Supplemental schedule of noncash investing and financing activities: Shares, warrants and options issued for Sinanet Acquisition $ -- $17,269 $ -- ======== ========= ========= See accompanying Ordinary Shares issued for notes F-6 INHALE THERAPEUTIC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION Inhale Therapeutic Systems, Inc. ("Inhale", the "Company") was incorporated in the State of California in July 1990 and reincorporated in the State of Delaware in July 1998. Since inception, Inhale has been engaged in the development of a system to deliver drugs to the bloodstream through the lungs by inhaling a powdered version of the drug. The system is applicable to a wide range of peptides, proteins and other molecules. Inhale expects increasing losses over the next several years as research and development and manufacturing scale-up efforts continue, and as Inhale expands its facilities for commercial manufacturing. Management plans to continue to finance Inhale primarily through issuances of equity or debt securities, research and development contract revenue, and in the longer term, revenue from product sales and royalties. 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 and disclosure of contingent assets and liabilities 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. CASH, CASH EQUIVALENTS AND INVESTMENTS Inhale considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include demand deposits held in banks and interest bearing money market funds. All other liquid investments are classified as short-term investments. Short-term investments consist of federal and municipal government securities, repurchase agreements or corporate commercial paper with A1 or P1 short-term ratings and A or better long-term ratings with remaining maturities at date of purchase of greater than 90 days and less than one year. Inhale limits its concentration of risk by diversifying its investments among a variety of industries and issuers. Inhale has experienced no material losses on its investments. At December 31, 1999, all short-term investments are designated as available-for-sale and are carried at fair value, with material unrealized gains and losses, if any, reported in stockholders' equity. The amortized cost of securities is adjusted for amortization of material premiums and accretion of discounts to maturity. Such amortization, if any, is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities, if any, are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. INHALE THERAPEUTIC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following is a summary of available-for-sale debt securities as of December 31, 1999: AVAILABLE-FOR-SALE DEBT SECURITIES ----------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- (IN THOUSANDS) Obligations of U.S. government agencies............. receivable............... $ 81,692 $108 2,629 $ -- $ 81,800 U.S. corporate commercial paper..................... 41,081 33 -- 41,114 Repurchase agreements, secured by U.S. Government ---- --------- -------- ---- --------- -------- $134,490 $141 $ -- $134,631 ======== ==== ========= ======= ====== The following is a summary Conversion of available-for-sale debt securities as of December 31, 1998: AVAILABLE-FOR-SALE DEBT SECURITIES ----------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- (IN THOUSANDS) Obligations of U.S. government agencies $20,758 notes payable to Preference Shares.......... $ -- $ 3,509 $ -- $ 20,758 U.S. corporate commercial paper 42,773 -- (19) 42,754 Repurchase agreements, secured by U.S. Government securities......................................... 17,704 -- -- 17,704 Other................................................ 105 -- -- 105 --------- ---- -------- --------- ---- -------- The gross realized losses and gains on the sale of debt securities available-for-sale during the years ended December 31, 1999 and 1998 were not material. At December 31, 1999 and 1998, the average portfolio duration was approximately five months and three months, respectively, and the contractual maturity of any single investment did not exceed eleven months at December 31, 1999 and 1998. The estimated fair value amounts have been determined by Inhale using available market information and appropriate valuation methodologies. However, market data must be interpreted to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Inhale could realize in a current market exchange. INHALE THERAPEUTIC SYSTEMS, INC. ======== ======= ====== 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Inhale owns common stock in one technology company. These shares of Alliance Pharmaceutical Corp. ("Alliance") are accounted for as long-term available-for-sale securities. Due to restrictions on the sale of this stock, the Company carries that portion of its investment in Alliance that can be sold within one year at market value, with material unrealized gains and losses, if any, reported in stockholders' equity. That portion which cannot be sold within one year is carried at cost. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31: -------- -------- (IN THOUSANDSU.S. DOLLARS)

COMPREHENSIVE LOSS. Balance at December Issuance of stock for acquisitions............ Issuance of stock through employee stock purchase plan and stock options................. 1,547 2 11,486 -- -- -- 11,488 stockholder............. -- ------- -- ---- -- ---------- -- --------- 389 ------- -- ------- 389 ---------- 2002...................... 165,156 $166 $1,170,227 $(933,734) $(2,887) $(2,405) $ 231,367 ======= ==== ========== ========= ======= ======= ========== Payment received from BALANCE AT DECEMBER 31, ------ ---------- -------- ------- -------- ------ -------- See The accompanying notes F-5 YEARS are an integral part of these financial statements. AMKOR TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 ----------------------------------- 2002 2001 2000 --------- --------- CASH FLOWS FROM (USED ININ THOUSANDS) OPERATING ACTIVITIES Net ----------- Income (loss.................................................... $ ) from continuing operations $(38,448835,089) $(456,487) $ (18,356) $ (9,983) 137,801 Adjustments to reconcile net loss income (loss) from continuing operations to net cash used in by operating activities -- Depreciation and amortization............................. 6,889 3,415 2,337 ........................... 323,265 440,591 323,811 Amortization of deferred compensation..................... 365 183 101 Issuance debt issuance costs............ 8,251 22,321 7,013 Provision for accounts receivable....................... 500 4,000 (17) Provision for excess and obsolete inventory............. 5,841 17,869 10,000 Deferred income taxes................................... 72,719 (85,022) (8,255) Equity in loss of common stock and stock options in connection with licensing agreements............................... -- 284 600 Acquired in-process research and development.............. 9,890 investees............................. 33,865 100,706 20,991 Loss on impairment of equity investment................. 172,533 -- -- Loss on disposition of equity investment................ 1,767 -- -- Loss on disposal of fixed assets, net................... 2,496 14,515 1,355 Asset impairment charges and facility closure costs..... 284,602 3,600 -- Minority interest....................................... Changes in assets and liabilities: Decrease liabilities excluding effects of acquisitions -- Accounts receivable..................................... 1,932 (increase39,328) in 1,896 84,641 -- (62,556) Repurchase of accounts receivable, other receivable and settlement of security agreement.................................... -- -- (71,500) Inventories............................................. 218 31,372 (23,871) Other non-current assets, and other assets................................ 19,433 (8,004214) (87617,612) 518 Increase Accounts payable........................................ 28,313 (decrease23,808) in accounts payable and accrued 15,682 Accrued expenses........................................ 24,394 (24,126) 40,238 Other long-term liabilities............................................. 12,724 (1,546) 7,443 Increase (decrease) in deferred revenue................... 452 (2,327) 3,963 --------- --------- --------- ............................. Net cash (used in) provided by operating activities......... ............. 8,425 --------- 113,175 --------- 8,011 --------- 140,964 --------- 7,108 ----------- 347,681 ----------- sh flows from continuing investing activities: Purchases of property, plant and equipment................ (15,33495,104) (19,223) 4,979 --------- --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES Acquisition of PulmoSpheres-Registered Trademark- Purchases of short-term investments......................... (122,481158,595) (219,414478,950) Acquisitions of K1, K2 and K3 and K4, net of cash acquired................................................ -- -- (483,247927,290) Sales Proceeds from the sale of short-term investments............................. 28,658 65,189 80,662 Maturities of short-term investments........................ 47,174 182,309 334,289 Purchases of property property, plant and equipment, net.................... ... 2,870 1,863 2,823 Proceeds from disposition of equity investment............ 58,139 -- -- Proceeds from the sale (20,502purchase) (34,584) (17,261) --------- --------- --------- of investments.......... Net cash used in investing activities....................... ................. (82,439) (6,500) (85,5572,011) --------- (54,565) --------- (321) --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance (168,110) --------- 136,879 ----------- (1,743,140) ----------- sh flows from continuing financing activities: Net change in bank overdrafts and short-term borrowings... 6,860 15,067 5,975 Net proceeds from issuance of convertible subordinated debentures, net........ 104,806 long-term debt.............. -- -- Payments 750,486 1,027,479 Cash flows from continuing operating activities: Ca Ca Net proceeds from the issuance of loan and capital lease and obligations.......... (64) (181) (168) 20.5 million common Proceeds from tenant improvement loan....................... -- -- 5,000 Issuance issuance of common stock, net of issuance costs............. 1,545 36,716 71,282 --------- --------- --------- stock through employee stock purchase plan and stock options......................... 11,488 11,698 9,622 Net cash provided by (used in) financing activities................... 106,287 36,535 76,114 ... (11,382) 114,686 1,365,911 Effect of exchange rate fluctuations on cash and cash equivalents related to continuing operations.............. 1,333 (397) -- --------- --------- ----------- Cash flows from discontinued operations: Net cash provided by operating activities................. 63,302 19,502 26,144 Net cash used in financing activities..................... (671) -- -- --------- --------- ----------- Net cash provided by discontinued operations.......... 62,631 19,397 25,020 --------- --------- ----------- Net increase (decrease) in cash and cash equivalents........ 8,514 10,812 111,192 106,540 (4,4644,528) Cash and cash equivalents at equivalents, beginning of yearperiod.............. 24,916 14,104 18,568 200,057 93,517 98,045 --------- --------- --------- ----------- Cash and cash equivalents at equivalents, end of yearperiod.................... $ 33,430 311,249 $ 24,916 200,057 $ 14,104 93,517 ========= ========= ========= See accompanying notes F-6 INHALE THERAPEUTIC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION Inhale Therapeutic Systems, Inc. ("Inhale", the "Company") was incorporated in the State of California in July 1990 and reincorporated in the State of Delaware in July 1998. Since inception, Inhale has been engaged in the development of a system to deliver drugs to the bloodstream through the lungs by inhaling a powdered version of the drug. The system is applicable to a wide range of peptides, proteins and other molecules. Inhale expects increasing losses over the next several years as research and development and manufacturing scale-up efforts continue, and as Inhale expands its facilities for commercial manufacturing. Management plans to continue to finance Inhale primarily through issuances of equity or debt securities, research and development contract revenue, and in the longer term, revenue from product sales and royalties. 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 and disclosure of contingent assets and liabilities 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. CASH, CASH EQUIVALENTS AND INVESTMENTS Inhale considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include demand deposits held in banks and interest bearing money market funds. All other liquid investments are classified as short-term investments. Short-term investments consist of federal and municipal government securities, repurchase agreements or corporate commercial paper with A1 or P1 short-term ratings and A or better long-term ratings with remaining maturities at date of purchase of greater than 90 days and less than one year. Inhale limits its concentration of risk by diversifying its investments among a variety of industries and issuers. Inhale has experienced no material losses on its investments. At December 31, 1999, all short-term investments are designated as available-for-sale and are carried at fair value, with material unrealized gains and losses, if any, reported in stockholders' equity. The amortized cost of securities is adjusted for amortization of material premiums and accretion of discounts to maturity. Such amortization, if any, is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities, if any, are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. INHALE THERAPEUTIC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following is a summary of available-for-sale debt securities as of December 31, 1999: AVAILABLE-FOR-SALE DEBT SECURITIES ----------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- (IN THOUSANDS) Obligations of U.S. government agencies............. $ 81,692 $108 $ -- $ 81,800 U.S. corporate commercial paper..................... 41,081 33 -- 41,114 Repurchase agreements, secured by U.S. Government ---- --------- -------- ---- --------- -------- $134,490 $141 $ -- $134,631 ======== ==== ========= ======== The following is a summary Supplemental disclosures of available-for-sale debt securities as of December 31, 1998cash flow information: AVAILABLE-FOR-SALE DEBT SECURITIES ----------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- Xxxx paid (IN THOUSANDSreceived) Obligations of U.S. government agencies $20,758 $ -- $ -- $ 20,758 U.S. corporate commercial paper 42,773 -- (19) 42,754 Repurchase agreements, secured by U.S. Government securities......................................... 17,704 -- -- 17,704 Other................................................ 105 -- -- 105 --------- ---- -------- --------- ---- -------- The gross realized losses and gains on the sale of debt securities available-for-sale during the years ended December 31, 1999 and 1998 were not material. At December 31, 1999 and 1998, the average portfolio duration was approximately five months and three months, respectively, and the contractual maturity of any single investment did not exceed eleven months at December 31, 1999 and 1998. The estimated fair value amounts have been determined by Inhale using available market information and appropriate valuation methodologies. However, market data must be interpreted to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Inhale could realize in a current market exchange. INHALE THERAPEUTIC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS period for: Interest................................................ $ 142,299 $ 144,345 $ 111,429 Income taxes............................................ $ (CONTINUED845) Inhale owns common stock in one technology company. These shares of Alliance Pharmaceutical Corp. $ ("Alliance"642) are accounted for as long-term available-for-sale securities. Due to restrictions on the sale of this stock, the Company carries that portion of its investment in Alliance that can be sold within one year at market value, with material unrealized gains and losses, if any, reported in stockholders' equity. That portion which cannot be sold within one year is carried at cost. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31: -------- -------- (IN THOUSANDS)$ 18,092

COMPREHENSIVE LOSS. Balance at December 31, ------ ---------- -------- ------- -------- ------ -------- See accompanying notes F-5 YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net loss.................................................... $ (38,448) $ (18,356) $ (9,983) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 6,889 3,415 2,337 Amortization of deferred compensation..................... 365 183 101 Issuance of common stock for services..................... 798 -- -- Issuance of common stock and stock options in connection with licensing agreements............................... -- 284 600 Acquired in-process research and development.............. 9,890 -- -- Changes in assets and liabilities: Decrease (increase) in accounts receivable, other current assets, and other assets................................ (8,004) (876) 518 Increase (decrease) in accounts payable and accrued liabilities............................................. 12,724 (1,546) 7,443 Increase (decrease) in deferred revenue................... 452 (2,327) 3,963 --------- --------- --------- Net cash (used in) provided by operating activities......... (15,334) (19,223) 4,979 --------- --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES Acquisition of PulmoSpheres-Registered Trademark- Purchases of short-term investments......................... (122,481) (219,414) (483,247) Sales of short-term investments............................. 28,658 65,189 80,662 Maturities of short-term investments........................ 47,174 182,309 334,289 Purchases of property and equipment, net.................... (20,502) (34,584) (17,261) --------- --------- --------- --------- --------- Net cash used in investing activities....................... (82,439) (6,500) (85,557) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES --------- --------- --------- Issuance of convertible subordinated debentures, net........ 104,806 -- -- Payments of loan and capital lease and obligations.......... (64) (181) (168) Proceeds from tenant improvement loan....................... -- -- 5,000 Issuance of common stock, net of issuance costs............. 1,545 36,716 71,282 --------- --------- --------- Net cash provided by financing activities................... 106,287 36,535 76,114 --------- --------- --------- Net increase (decrease) in cash and cash equivalents........ 8,514 10,812 (4,464) Cash and cash equivalents at beginning of year.............. 24,916 14,104 18,568 --------- --------- --------- Cash and cash equivalents at end of year.................... $ 33,430 $ 24,916 $ 14,104 ========= ========= ========= See accompanying notes F-6 INHALE THERAPEUTIC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION Inhale Therapeutic Systems, Inc. ("Inhale", the "Company") was incorporated in the State of California in July 1990 and reincorporated in the State of Delaware in July 1998. Since inception, Inhale has been engaged in the development of a system to deliver drugs to the bloodstream through the lungs by inhaling a powdered version of the drug. The system is applicable to a wide range of peptides, proteins and other molecules. Inhale expects increasing losses over the next several years as research and development and manufacturing scale-up efforts continue, and as Inhale expands its facilities for commercial manufacturing. Management plans to continue to finance Inhale primarily through issuances of equity or debt securities, research and development contract revenue, and in the longer term, revenue from product sales and royalties. 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 and disclosure of contingent assets and liabilities 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. CASH, CASH EQUIVALENTS AND INVESTMENTS Inhale considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include demand deposits held in banks and interest bearing money market funds. All other liquid investments are classified as short-term investments. Short-term investments consist of federal and municipal government securities, repurchase agreements or corporate commercial paper with A1 or P1 short-term ratings and A or better long-term ratings with remaining maturities at date of purchase of greater than 90 days and less than one year. Inhale limits its concentration of risk by diversifying its investments among a variety of industries and issuers. Inhale has experienced no material losses on its investments. At December 31, 1999, all short-term investments are designated as available-for-sale and are carried at fair value, with material unrealized gains and losses, if any, reported in stockholders' equity. The amortized cost of securities is adjusted for amortization of material premiums and accretion of discounts to maturity. Such amortization, if any, is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities, if any, are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. INHALE THERAPEUTIC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following is a summary of available-for-sale debt securities as of December 31, 1999: AVAILABLE-FOR-SALE DEBT SECURITIES ----------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- (IN THOUSANDS) Obligations of U.S. government agencies............. $ 81,692 $108 $ -- $ 81,800 U.S. corporate commercial paper..................... 41,081 33 -- 41,114 Repurchase agreements, secured by U.S. Government ---- --------- -------- ---- --------- -------- $134,490 $141 $ -- $134,631 ======== ==== ========= ======== The following is a summary of available-for-sale debt securities as of December 31, 1998: AVAILABLE-FOR-SALE DEBT SECURITIES ----------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- (IN THOUSANDS) Obligations of U.S. government agencies agencies.............. $20,758 $ -- $ -- $ 20,758 U.S. corporate commercial paper paper...................... 42,773 -- (19) 42,754 Repurchase agreements, secured by U.S. Government securities......................................... 17,704 -- -- 17,704 Other................................................ 105 -- -- 105 --------- ---- -------- --------- ---- -------- The gross realized losses and gains on the sale of debt securities available-for-sale during the years ended December 31, 1999 and 1998 were not material. At December 31, 1999 and 1998, the average portfolio duration was approximately five months and three months, respectively, and the contractual maturity of any single investment did not exceed eleven months at December 31, 1999 and 1998. The estimated fair value amounts have been determined by Inhale using available market information and appropriate valuation methodologies. However, market data must be interpreted to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Inhale could realize in a current market exchange. INHALE THERAPEUTIC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Inhale owns common stock in one technology company. These shares of Alliance Pharmaceutical Corp. ("Alliance") are accounted for as long-term available-for-sale securities. Due to restrictions on the sale of this stock, the Company carries that portion of its investment in Alliance that can be sold within one year at market value, with material unrealized gains and losses, if any, reported in stockholders' equity. That portion which cannot be sold within one year is carried at cost. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31: -------- -------- (IN THOUSANDS)