e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2006


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

For the transition period from to

Commission File Number 0-6533

BOSTON LIFE SCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		87-0277826
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)

85 Main Street, Hopkinton, Massachusetts		01748
(Address of Principal Executive Offices)		(Zip Code)

(508) 497-2360
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 7, 2006 there were 16,513,394 shares of Common Stock outstanding.

Part I — Financial Information

Item 1 — Financial Statements

Boston Life Sciences, Inc.
(A Development Stage Enterprise)

Condensed Consolidated Balance Sheets
(Unaudited)


	June 30,			December 31,
	2006			2005
Assets
Current assets:
Cash and cash equivalents	$	1,636,590		$	578,505
Marketable securities		578,615			8,750,832
Other current assets		578,213			486,599

Total current assets		2,793,418			9,815,936
Fixed assets, net		195,527			275,802
Other assets		383,844			423,750

Total assets	$	3,372,789		$	10,515,488

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	1,981,533		$	2,288,890
Accrued lease (Note 5)		28,926			60,966

Total current liabilities		2,010,459			2,349,856
Accrued lease, excluding current portion (Note 5)		253,695			274,326

Total liabilities		2,264,154			2,624,182

Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; 25,000 shares designated Convertible Series A, 500,000 shares designated Convertible Series D, and 800 shares designated Convertible Series E; no shares issued and outstanding		—			—
Common stock, $.01 par value; 80,000,000 shares authorized; 16,507,994 and 16,478,084 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively		165,080			164,781
Additional paid-in capital		125,981,956			124,887,204
Accumulated other comprehensive loss		(991	)		(12,393	)
Deficit accumulated during development stage		(125,037,410	)		(117,148,286	)

Total stockholders’ equity		1,108,635			7,891,306

Total liabilities and stockholders’ equity	$	3,372,789		$	10,515,488

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

Boston Life Sciences, Inc.
(A Development Stage Enterprise)

Condensed Consolidated Statements of Operations
(Unaudited)


	Three months ended June 30,						Six months ended June 30,						From Inception
													(October 16,
													1992) to
	2006			2005			2006			2005			June 30, 2006
Revenues	$	—		$	—		$	—		$	—		$	900,000
Operating expenses:
Research and development		2,094,175			1,442,286			4,314,343			2,732,748			76,229,204
General and administrative		1,873,581			987,729			3,700,966			2,000,665			39,040,734
Purchased in-process research and development		—			—			—			—			12,146,544

Total operating expenses		3,967,756			2,430,015			8,015,309			4,733,413			127,416,482

Loss from operations		(3,967,756	)		(2,430,015	)		(8,015,309	)		(4,733,413	)		(126,516,482	)
Other expenses		—			—			—			(2,232	)		(1,582,878	)
Interest expense		—			(2,065	)		—			(45,965	)		(4,302,417	)
Investment income		43,074			34,283			126,185			39,605			7,364,367

Net loss		(3,924,682	)		(2,397,797	)		(7,889,124	)		(4,742,005	)		(125,037,410	)
Preferred stock beneficial conversion feature		—			—			—			—			(8,062,712	)
Accrual of preferred stock dividends and modification of warrants held by preferred stockholders		—			—			—			(715,515	)		(1,229,589	)

Net loss attributable to common stockholders		(3,924,682	)		(2,397,797	)		(7,889,124	)		(5,457,520	)	$	(134,329,711	)

Basic and diluted net loss attributable to common stockholders per share	$	(0.24	)	$	(0.23	)	$	(0.48	)	$	(0.58	)

Weighted average common shares outstanding		16,507,631			10,411,967			16,504,732			9,337,030

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

Boston Life Sciences, Inc.
(A Development Stage Enterprise)

Condensed Consolidated Statements of Cash Flows
(Unaudited)


	Six months ended						From Inception
	June 30,						(October 16,
							1992) to
							June 30,
	2006			2005			2006
Cash flows from operating activities:
Net loss	$	(7,889,124	)	$	(4,742,005	)	$	(125,037,410	)
Adjustments to reconcile net loss to net cash used for operating activities:
Purchased in-process research and development		—			—			12,146,544
Write-off of acquired technology		—			—			3,500,000
Interest expense settled through issuance of notes payable		—			—			350,500
Non-cash interest expense		—			43,900			1,648,675
Non-cash charges related to options, warrants and common stock		1,091,928			19,792			5,372,504
Amortization and depreciation		99,120			101,051			2,500,569
Changes in operating assets and liabilities:
(Increase) decrease in other current assets		(91,614	)		(135,974	)		280,750
(Decrease) increase in accounts payable and accrued expenses		(307,357	)		63,928			1,208,868
(Decrease) increase in accrued lease		(52,671	)		—			282,621

Net cash used for operating activities		(7,149,718	)		(4,649,308	)		(97,746,379	)
Cash flows from investing activities:
Cash acquired through Merger		—			—			1,758,037
Purchases of fixed assets		(18,845	)		(13,079	)		(1,450,621	)
Decrease (increase) in other assets		39,906			(20,434	)		(737,479	)
Purchases of marketable securities		(1,570,293	)		(3,475,155	)		(128,143,677	)
Sales and maturities of marketable securities		9,753,912			3,521,965			127,564,071

Net cash provided by (used for) investing activities		8,204,680			13,297			(1,009,669	)
Cash flows from financing activities:
Proceeds from issuance of common stock		3,123			6,050,171			63,579,691
Proceeds from issuance of preferred stock		—			—			35,022,170
Preferred stock conversion inducement		—			—			(600,564	)
Proceeds from issuance of notes payable		—			—			6,585,000
Proceeds from issuance of convertible debentures		—			—			9,000,000
Principal payments of notes payable		—			—			(7,146,967	)
Dividend payments on Series E Cumulative Convertible Preferred Stock		—			(314,987	)		(516,747	)
Payments of financing costs		—			(40,752	)		(5,529,945	)

Net cash provided by financing activities		3,123			5,694,432			100,392,638

Net increase in cash and cash equivalents		1,058,085			1,058,421			1,636,590
Cash and cash equivalents, beginning of period		578,505			152,971			—

Cash and cash equivalents, end of period	$	1,636,590		$	1,211,392		$	1,636,590

Supplemental cash flow disclosures:
Non-cash transactions (see Note 6)

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

Boston Life Sciences, Inc.
(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2006

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 of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The interim unaudited condensed consolidated financial statements contained herein include, in management’s opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented. The results of operations for the interim period shown on this report are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The uncertainty inherent in the need to raise additional capital and the Company’s recurring losses from operations raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As of June 30, 2006, the Company has experienced total net losses since inception of approximately $125,000,000. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows from operations as the Company’s management executes its current business plan. The cash, cash equivalents, and marketable securities available at June 30, 2006 will not provide sufficient working capital to meet the Company’s anticipated expenditures for the next twelve months. The Company believes that the cash, cash equivalents, and marketable securities available at June 30, 2006, combined with the $3,000,000 available to the Company under an unsecured promissory note issued by the Company on August 8, 2006 to Robert L. Gipson (“Gipson”), a significant stockholder and former director of the Company (Note 10), and its ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable the Company to meet its anticipated cash expenditures through October 2006. In order to continue as a going concern, the Company will therefore need to raise additional capital through one or more of the following: collaboration, merger, acquisition or other transaction with other pharmaceutical or biotechnology companies, or through a debt financing or equity offering. The Company is currently engaged in collaboration, merger, acquisition and other related fundraising efforts. There can be no assurance, however, that the Company will be successful in such collaboration, merger, acquisition and other fundraising efforts or that additional funds will be available on acceptable terms, if at all. If the Company is unable to raise additional capital, it may need to reduce, cease or delay one or more of its research or development programs and adjust its current business plan and may not be able to continue as a going concern.

In connection with the common stock financing completed by the Company in March 2005, the Company agreed with the purchasers in such financing, including Gipson (the “March 2005 Investors”), that, subject to certain exceptions, it would not issue any shares of its common stock at a per share price less than $2.50 without the prior consent of purchasers holding a majority of the shares issued in such financing. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by the Company should the price per share in such financing be set at less than $2.50.

2. Net Loss Per Share

Basic and diluted net loss per share available to common stockholders has been calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded from the calculation of weighted average common shares outstanding since their inclusion would be anti-dilutive.

Stock options and warrants to purchase approximately 4.0 million and 3.1 million shares of common stock were outstanding at June 30, 2006 and 2005, respectively, but were not included in the computation of diluted net loss per common share because they

were anti-dilutive. The exercise of those stock options and warrants outstanding at June 30, 2006 could potentially dilute earnings per share in the future.

3. Comprehensive Loss

The Company had total comprehensive loss of $3,917,439 and $2,396,060 for the three months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, total comprehensive loss was $7,877,722 and $4,735,359, respectively. The difference between total comprehensive loss and net loss is due to unrealized gains and losses on marketable securities.

4. Accounting for Stock-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123R”) using the modified prospective method, which results in the provisions of SFAS 123R only being applied to the consolidated financial statements on a going-forward basis (that is, the prior period results have not been restated). Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period or expected performance period. The Company recognizes stock-based compensation expense using the straight-line attribution method unless the award includes a performance condition. The Company recognizes stock-based compensation expense on awards with performance conditions in accordance with FASB Interpretation 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans”, as required under SFAS 123R. Previously the Company had followed Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, which resulted in the accounting for employee share options at their intrinsic value in the consolidated financial statements. All stock-based awards to non-employees are accounted for in accordance with SFAS 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) and Emerging Issues Task Force 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling, Goods or Services.”

The Company has two stock option plans under which it can issue both nonqualified and incentive stock options to employees, officers, consultants and scientific advisors of the Company. At June 30, 2006, the 1998 Omnibus Plan (the “1998 Plan”) provided for the issuance of options to purchase up to 1,220,000 shares of the Company’s common stock through April 2008. At June 30, 2006, the 2005 Stock Incentive Plan (the “2005 Plan”) provided for the issuance of options, restricted stock, restricted stock units, stock appreciation rights or other stock-based awards to purchase 1,900,000 shares of the Company’s common stock. The 2005 Plan contains a provision which allows for an annual increase in the number of shares available for issuance under the 2005 Plan on the first day of each of the Company’s fiscal years during the period beginning in fiscal year 2006 and ending on the second day of fiscal year 2014. The annual increase in the number of shares shall be equal to the lowest of 400,000 shares; 4% of the Company’s outstanding shares on the first day of the fiscal year; and an amount determined by the Board of Directors.

The Company also has outstanding stock options in two other stock option plans, the Amended and Restated Omnibus Stock Option Plan and the Amended and Restated 1990 Non-Employee Directors’ Non-Qualified Stock Option Plan. Both of these plans have expired and no future issuance of awards is permissible.

The Company’s Board of Directors determines the term, vesting provisions, price, and number of shares for each award that is granted. The term of each option cannot exceed ten years. The Company has outstanding options with performance conditions which, if met, would accelerate vesting upon achievement of the applicable milestones.

Stock-based employee compensation expense consists of the following:


	Three Months Ended			Six Months Ended
	June 30, 2006
Research and development	$	163,309		$	345,260
General and administrative		303,910			660,380

	$	467,219		$	1,005,640


Impact on basic and diluted net loss attributable to common stockholders per share	$	(0.03	)	$	(0.06	)

The Company had previously adopted the provisions of SFAS 123 through disclosure only. The following table illustrates the effect on net loss and loss per share for the three and six month periods ended June 30, 2005 as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee awards:


	Three Months Ended			Six Months Ended
	June 30, 2005
Net loss, as reported	$	(2,397,797	)	$	(4,742,005	)
Add: Stock-based employee compensation benefit recognized		(86,404	)		—
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards		(52,930	)		(914,230	)

Pro forma net loss	$	(2,537,131	)	$	(5,656,235	)
Accrual of preferred stock dividends and modification of warrants held by preferred stockholders		—			(715,515	)

Pro forma net loss attributable to common stockholders	$	(2,537,131	)	$	(6,371,750	)

Basic and diluted loss attributable to common stockholders per common share:
As reported	$	(0.23	)	$	(0.58	)
Pro forma	$	(0.24	)	$	(0.68	)

The Company uses the Black-Scholes option-pricing model to calculate the fair value of each option grant on the date of grant. The fair value of stock options granted during the three and six months ended June 30, 2006 and 2005 was calculated using the following estimated weighted-average assumptions:


	Three Months Ended June 30,		Six Months Ended June 30,
	2006	2005	2006	2005
Expected term	—	3 years	6 years	3 years
Risk-free interest rate	—	3.6% — 3.7%	4.3%	3.4% — 3.9%
Stock volatility	—	100%	90%	100%
Dividend yield	—	0%	0%	0%

There were no stock options granted during the three months ended June 30, 2006.

Expected term — The Company determined the weighted-average expected term assumption based on the simplified method as described by Staff Accounting Bulletin No. 107, “Share-Based Payment” for “plain vanilla” options. The Company determined the weighted-average expected term assumption for performance-based option grants based on historical data on exercise behavior.

Risk-free interest rate — The risk-free interest rate used for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected term.

Expected volatility — The Company’s expected stock-price volatility assumption is based on historical volatilities of the underlying stock which is obtained from public data sources.

Expected dividend yield — The Company has never declared or paid any cash dividends on its common stock and does not expect to do so in the foreseeable future. Accordingly, the Company uses an expected dividend yield of zero to calculate the grant-date fair value of a stock option.

As of June 30, 2006, there remained approximately $2,342,000 of compensation costs related to non-vested stock options to be recognized as expense over a weighted-average period of approximately 1.44 years.

A summary of the Company’s outstanding stock options for the six months ended June 30, 2006 and 2005 is presented below.


	2006					2005
				Weighted-					Weighted-
				Average					Average
	Shares			Exercise Price		Shares			Exercise Price
Outstanding at beginning of year		2,590,152		$	4.23		1,484,521		$	5.89
Granted		949,000			2.50		1,124,494			2.51
Exercised		(750	)		2.22		—			—
Forfeited and expired		(168,698	)		10.09		(500,263	)		2.43

Outstanding at end of period		3,369,704		$	3.45		2,108,752		$	4.86

Options exercisable at end of period		1,566,789		$	4.37		1,089,676		$	6.75

The weighted-average fair value of options granted was $1.91 and $1.49 during the six months ended June 30, 2006 and 2005, respectively.

The following table summarizes information about stock options outstanding at June 30, 2006:


	Options Outstanding					Options Exercisable
			Weighted-					Weighted
			Average	Weighted-				Average	Weighted-
			Remaining	Average				Remaining	Average
	Number		Contractual	Exercise		Number		Contractual	Exercise
Range of Exercise Prices	Outstanding		Life	Price		Exercisable		Life	Price
$1.35 — $2.00		100,500	9.1 years	$	1.97		29,389	9.1 years	$	1.96
$2.01 — $3.00		2,050,155	8.5 years		2.38		714,358	7.1 years		2.32
$3.10 — $4.65		900,363	8.5 years		3.58		504,356	8.5 years		3.59
$4.99 — $6.96		132,500	3.1 years		5.50		132,500	3.1 years		5.50
$8.95 — $13.06		80,740	2.2 years		10.63		80,740	2.2 years		10.63
$15.62 — $22.36		105,446	2.2 years		16.44		105,446	2.2 years		16.44

		3,369,704	8.0 years	$	3.45		1,566,789	6.7 years	$	4.37

The aggregate intrinsic value of outstanding options as of June 30, 2006 was $1,935,352, of which $714,831 was related to exercisable options. The intrinsic value of options exercised during the six months ended June 30, 2006 was $570. The intrinsic value of options vested during the period was $186,819.

5. Relocation and Sublease

In September 2005, the Company relocated its headquarters to office space located in Hopkinton, Massachusetts. In addition, the Company amended its Lease Agreement (the “Lease Amendment”), dated as of January 28, 2002 by and between the Company and Brentwood Properties, Inc. (the “Landlord”) relating to the Company’s former principal executive offices (the “Premises”) located on the fourth and fifth floors of a building in Boston, Massachusetts (the “Lease Agreement”). Pursuant to the terms of the Lease Amendment, the Landlord consented to, among other things, the Small Army Sublease and Dell Sublease (each as defined below), each of which runs through the term of the Lease Agreement. In consideration for the Landlord’s consent, the Company agreed to increase its security deposit provided for under the Lease Agreement from $250,000 to $388,600, subject to periodic reduction pursuant to a predetermined formula.

In September 2005, the Company entered into a Sublease Agreement (the “Small Army Sublease”) with Small Army, Inc., as subtenant (“Small Army”), to sublease approximately 3,300 rentable square feet on the fourth floor of the Premises. The initial term of the Small Army Sublease is eighty months beginning on October 1, 2005. Pursuant to the terms of the Small Army Sublease, Small Army has agreed to pay: (i) $8,800 in base rent per month from March 1, 2006 through May 30, 2009; and (ii) $9,625 in base rent per month for the period from June 1, 2009 through May 30, 2012. Small Army has agreed to pay the Company a proportionate share of the Company’s additional obligations under the Lease Agreement resulting from any future increases in certain costs to operate the Premises, including insurance and real estate taxes.

In September 2005, the Company entered a Sublease Agreement (the “Dell Sublease”) with Dell Mitchell Architects, Inc., as subtenant (“Dell”), to sublease approximately 3,300 rentable square feet on the fifth floor of the Premises. The initial term of the Dell

Sublease is eighty-one months beginning on September 1, 2005. Pursuant to the terms of the Dell Sublease, Dell has agreed to pay: (i) $8,800 in base rent per month from March 16, 2006 through May 30, 2009; and (ii) $9,625 in base rent per month for the period from June 1, 2009 through May 30, 2012. Dell has agreed to pay the Company a proportionate share of the Company’s additional obligations under the Lease Agreement resulting from any future increases in certain costs to operate the Premises, including insurance and real estate taxes.

As a result of the Company’s relocation, an expense was recorded in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (“SFAS 146”). SFAS 146 requires that a liability be recorded for a cost associated with an exit or disposal activity at its fair value in the period in which the liability is incurred. The liability recorded for the Lease Amendment was calculated using discounted estimated cash flows described above for the Small Army Sublease and the Dell Sublease. As prescribed by SFAS 146, an estimated credit-adjusted risk-free rate of 15% was used to discount the estimated cash flows. The expense and accrual recorded in accordance with SFAS 146 requires the Company to make significant estimates and assumptions. These estimates and assumptions will be evaluated and adjusted as appropriate on at least a quarterly basis for changes in circumstances. It is reasonably possible that such estimates could change in the future resulting in additional adjustments, and the effect of any such adjustments could be material.

During the three and six months ended June 30, 2006, the Company paid approximately $15,000 and $75,000, respectively, net of sublease receipts. During the three and six months ended June 30, 2006, the Company recorded approximately $11,000 and $22,000, respectively of expenses related to the imputed cost of the lease expense accrual included in general and administrative expenses on the accompanying condensed consolidated statements of operations.

6. Stockholders’ Equity

Reverse Stock Split

On February 4, 2005, the Company’s stockholders authorized the Company’s Board of Directors to effect a reverse stock split of its common stock at a ratio of one-for-five. The Company has retroactively applied the reverse stock split to all the share and per share amounts for all periods presented in these financial statements. In addition, the reverse stock split resulted in a reclassification from common stock to additional paid-in capital to reflect the adjusted share amount as the par value of the Company’s common stock remained at $0.01.

Preferred Stock

In February 2005, the Company entered into agreements with the holders (the “Holders”) of 557.3 shares of Series E Cumulative Convertible Preferred Stock (“Series E Stock”), whereby the Holders agreed to convert their outstanding shares of Series E Stock and in return the Company agreed to pay a dividend of $564.44 per share of Series E Stock held by the Holders and lower the exercise price of the warrants to purchase common stock held by the Holders from $7.71 to $0.05. The Company recorded a charge of approximately $656,000, as determined under the Black-Scholes pricing model (with the following assumptions: dividend yield of zero percent; expected volatility of 100%; risk free interest rate of approximately 3% and warrant term of approximately 3 years), to net loss attributable to common stockholders during the six months ended June 30, 2005 in connection with this repricing. The Holders were also given the right to invest new funds totaling up to 33% of the next $16,900,000 raised by the Company in private placements effected by the Company pursuant to an exemption from registration under the Securities Act. Following completion of the Company’s $5,000,000 private placement in March 2005 and the $12,780,000 private placement in September 2005, this preemptive right expired. On February 4, 2005, the Company’s stockholders approved an amendment to the Certificate of Designations, Rights and Preferences of the Series E Stock, providing for the mandatory conversion of all outstanding shares of Series E Stock upon the affirmative vote of 75% of the outstanding shares of Series E Stock. In February 2005, the requisite vote of the Holders was obtained and the Company issued 900,646 shares of common stock in connection with the conversion of the 561.3 outstanding shares of Series E Stock.

Warrant Exercises

In February 2005, in consideration of the immediate exercise of warrants in cash, the Company agreed to lower the exercise price of a warrant to purchase 100,000 shares (the “ISVP Warrant”) of the Company’s common stock held by Ingalls & Snyder Value Partners, L.P. (“ISVP”) from $5.00 to $2.25 per share and to lower the exercise price of warrants to purchase 200,000 (the “Gipson Warrant”) and 164,025 (the “Monoyios Warrant”) shares of the Company’s common stock held by Gipson and Nikolaos D. Monoyios, respectively, from $10.00 to $2.25. The Company received approximately $1,044,000 in connection with the

exercise of the ISVP Warrant, the Gipson Warrant and the Monoyios Warrant. The Company recorded a charge of approximately $44,000 to interest expense during the three months ended March 31, 2005 in connection with the changes to the warrants.

Private Placement

In March 2005, the Company completed a private placement of 2,000,000 shares of its common stock which raised approximately $5,000,000 in gross proceeds. The investors in the private placement included Gipson, Thomas O. Boucher, Jr. and other affiliates of Ingalls & Snyder, LLC. In connection with the private placement completed by the Company in March 2005, the Company agreed with the March 2005 Investors that, subject to certain exceptions, it would not issue any shares of its common stock at a per share price less than $2.50 without the prior consent of purchasers holding a majority of the shares issued in such financing. In connection with the private placement, the Company also agreed to file a registration statement relating to the resale of the common stock sold in the private placement upon request of such investors.

Cancellation and Regrant of Stock Options

On March 11, 2005, the Company’s Board of Directors approved the cancellation of options to purchase an aggregate of 483,787 shares of the Company’s common stock and the regrant of options to purchase an aggregate of 454,760 shares of the Company’s common stock. The per share exercise prices of the cancelled options ranged from $3.75 to $39.06, with a weighted average exercise price of $11.89. The aggregate number of stock options outstanding after such cancellation and regrant of options was reduced by approximately 6%. These cancellations and regrants were effected under the Amended and Restated Omnibus Stock Option Plan and the 1998 Omnibus Stock Option Plan, each of which expressly permitted option exchanges. Each of the regranted options contains the following terms: (i) an exercise price equal to the fair market value on the grant date which was the last sale price on March 11, 2005, or $2.31 per share; (ii) a ten-year duration; and (iii) 33% vesting on the date of grant with the remaining 67% vesting thereafter in 36 equal monthly installments. Prior to the adoption of SFAS 123R (see Note 4), the Company recorded a charge each quarter equal to the intrinsic value (difference between the Company’s stock price and exercise price) of the 454,760 options which are deemed to have been repriced. The Company recorded a charge of approximately $86,000 during the three months ended March 31, 2005 related to the repricing. The Company reversed the previously recorded charge of approximately $86,000 during the three months ended June 30, 2005 due to the decrease in the intrinsic value of the repriced options at June 30, 2005. Effective January 1, 2006, the Company adopted SFAS 123R and accordingly will expense the fair value of the unvested employee stock options over the employee service period.

Rights Agreement

On March 14, 2005, the Company and Continental Stock Transfer & Trust Company amended the Rights Agreement dated as of September 11, 2001, to amend the definition of Exempt Person to include all purchasers of shares of the Company’s common stock in connection with the Company’s private placement completed in March 2005.

7. Severance and Settlement Agreement and Release

On June 10, 2004, the Company entered into an employment agreement with Dr. Lanser (the “Lanser Agreement”) providing for his continued employment with the Company. The Lanser Agreement was effective for a term of one year, provided for compensation plus other benefits, and included confidentiality and non-competition provisions. On June 9, 2005, the Company entered into a Severance and Settlement Agreement and Release with Dr. Lanser (the “Lanser Settlement”). The Lanser Settlement terminated the Lanser Agreement and entitled Dr. Lanser to receive continued base salary and benefits for a period of nine months from June 11, 2005 and requires that Dr. Lanser continue to satisfy his obligations under the confidentiality, invention assignment and restricted activities provisions of the Lanser Agreement. The Company recorded a charge of approximately $251,000 during the second quarter of 2005 related to this obligation. The Lanser Settlement also provides that Dr. Lanser’s unvested options to purchase 107,314 shares of common stock will continue to vest on their stated terms and conditions as long as Dr. Lanser continues to provide services as a member of the Company’s Scientific Advisory Board. On June 9, 2005, the Company entered into a two-year consulting agreement with Dr. Lanser, unless earlier terminated by the Company or Dr. Lanser (the “Consulting Agreement”). Under the terms of the Consulting Agreement, Dr. Lanser will, among other things, support the Company in certain of its preclinical and clinical development efforts and serve as a member of the Company’s Scientific Advisory Board. In the event that the Company terminates the Consulting Agreement without cause (as defined in the Consulting Agreement) prior to June 11, 2007, all unvested options will become fully vested. During the three months ended June 30, 2005, the Company recorded a charge of $14,000 related to this modification of Dr. Lanser’s options. The Company recorded charges of approximately $17,000 and $61,000 during the three and six months ended June 30, 2006, respectively related to this modification.

8. Commitments and Contingencies

The Company recognizes and discloses commitments when it enters into executed contractual obligations with other parties. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

License Agreements

In May 2006, the Company entered into two license agreements (“Axon Regeneration Licenses”) with Children’s Medical Center Corporation (also known as Children’s Hospital Boston) (“CMCC”) to acquire the exclusive worldwide rights to new axon regeneration technologies and to replace the Company’s former axon regeneration licenses with CMCC. The Axon Regeneration Licenses provide for payments to CMCC for accrued patent costs, an up-front license payment of $50,000 and future milestone payments of up to an aggregate of approximately $425,000 for each product candidate upon achievement of certain regulatory milestones. Additionally, the Company entered into two sponsored research agreements with CMCC which provide for a total of $550,000 in annual funding for three years.

Since inception, the Company has paid Harvard University and its affiliated hospitals (“Harvard and its Affiliates”) under the terms of its current license agreements (the “Harvard License Agreements”) approximately $650,000 in initial licensing fees and milestone payments. The Harvard License Agreements obligate the Company to pay up to an aggregate of approximately $2,570,000 in milestone payments in the future. The future milestone payments are generally payable only upon achievement of certain regulatory milestones.

The Company’s license agreements with Harvard and its Affiliates and CMCC generally provide for royalty payments equal to specified percentages of product sales, annual license maintenance fees and continuing patent prosecution costs.

Contingencies

The Company is subject to legal proceedings in the ordinary course of business. One such matter involves a claim for cash and warrants to purchase shares of common stock of the Company in connection with one of the Company’s private placements. One other such matter involves a claim for cash of $250,000 in connection with one of the Company’s license agreements. Management has responded to such claims and believes that there is no legal or equitable basis for payment of the claims and that the resolution of these matters and others will not have a material adverse effect on the condensed consolidated financial statements.

Guarantor Arrangements

As permitted under Delaware law, the Company has entered into agreements whereby the Company indemnifies its executive officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.

The Company enters into arrangements with certain service providers to perform research, development and clinical services for the Company. Under the terms of these arrangements, such service providers may use the Company’s technologies in performing their services. The Company enters into standard indemnification agreements with those service providers, whereby the Company indemnifies them for any liability associated with their use of the Company’s technologies. The maximum potential amount of future payments the Company would be required to make under these indemnification agreements is unlimited; however, the Company has product liability and general liability policies that enable the Company to recover a portion of any amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.

9. FluoroPharma, Inc. Amendment

In June 2005, Dr. Lanser left the Company to become President and CEO of FluoroPharma, Inc. (“FluoroPharma”) an early stage company developing Position Emission Tomography (“PET”) imaging agents for the diagnosis of cardiac ischemia. In July 2005, the Company reached an agreement with FluoroPharma to terminate a development agreement between the Company and FluoroPharma

relating to FluoroPharma’s PET imaging agents in exchange for 25,000 shares of FluoroPharma Series A Preferred Stock. The Company accounts for this investment under the cost method. In February 2006, the Company agreed to convert its 25,000 shares of Series A Preferred Stock into 25,000 shares of common stock of FluoroPharma. In addition, the Company received a warrant to purchase 5,000 shares of FluoroPharma’s common stock.

10. Loan From Significant Stockholder

On August 8, 2006, the Company issued to Gipson an unsecured promissory note (the “August Promissory Note”), pursuant to which the Company may, through one or more advances, borrow up to an aggregate principal amount of $3,000,000 from Gipson. From time to time prior to the Maturity Date (discussed below), Gipson shall make requested advances to the Company under the August Promissory Note so long as each advance totals at least $1,000,000.

The outstanding principal amount borrowed under the August Promissory Note shall be due and payable upon the earliest to occur of: (i) December 31, 2007; (ii) the date on which the Company consummates an equity financing in which the gross proceeds to the Company total at least $10,000,000; and (iii) the date on which Gipson declares an event of default (as defined in the August Promissory Note), the first of these three events to occur referred to as the “Maturity Date.”

Interest shall accrue on each advance under the August Promissory Note from the date of such advance and all unpaid interest shall be due and payable on the Maturity Date. Interest on each advance shall accrue at a per annum rate equal to: (a) 9% from the date of the advance to the Maturity Date; (b) 11% from and after the Maturity Date or during the continuance of an event of default; or (c) if less than the rates applicable under both clauses (a) and (b), the maximum rate permissible by law.

The Company has agreed to certain covenants under the August Promissory Note, including covenants agreeing not to: (A) incur or assume indebtedness; (B) make any dividends or distributions on its capital stock; (C) sell, lease or transfer any material assets or property; or (D) liquidate or dissolve.

According to a Schedule 13G/A filed with SEC on January 24, 2006, Gipson beneficially owned approximately 18.9% of the outstanding common stock of the Company on January 1, 2006. Gipson, who serves as a Senior Director of Ingalls & Snyder LLC and a General Partner of ISVP, served as a director of the Company from June 15, 2004 until October 28, 2004.

11. New Accounting Pronouncement

In July 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the expected impact, if any, of adopting FIN 48 on the consolidated financial statements.

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

Our management’s discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See Item 1A. “Risk Factors.”

Overview

Description of Company

We are a development stage biotechnology company engaged in the research and development of biopharmaceutical products for the diagnosis and treatment of central nervous system, or CNS, disorders. Our current product candidate pipeline includes diagnostic and therapeutic programs based on proprietary technologies of which we retain worldwide exclusive rights. We are developing diagnostic agents in molecular imaging and therapeutic drugs for axon regeneration and blockade of the Dopamine Transporter, or DAT. Our programs target unmet medical needs in the diagnosis and treatment of Parkinson’s Disease, or PD, the diagnosis of Attention Deficit Hyperactivity Disorder, or ADHD, and the treatment of stroke, spinal cord injury, traumatic brain injury and certain ocular conditions.

At June 30, 2006, we were considered a “development stage enterprise” as defined in Statement of Financial Accounting Standards No. 7, “Accounting and Reporting by Development Stage Enterprises.”

As of June 30, 2006, we have experienced total net losses since inception of approximately $125,000,000. For the foreseeable future, we expect to experience continuing operating losses and negative cash flows from operations as our management executes our current business plan. The cash, cash equivalents, and marketable securities available at June 30, 2006 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. We believe that the cash, cash equivalents, and marketable securities available at June 30, 2006, combined with the $3,000,000 available to us under an unsecured promissory note issued by us on August 8, 2006 to Robert L. Gipson, or Gipson, a significant stockholder and former director of the Company, and our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures through October 2006. In order to continue as a going concern, we will therefore need to raise additional capital through one or more of the following: collaboration, merger, acquisition or other transaction with other pharmaceutical or biotechnology companies, or through a debt financing or equity offering. We are currently engaged in collaboration, merger, acquisition and other related fundraising efforts. There can be no assurance, however, that we will be successful in our collaboration, merger, acquisition or other fundraising efforts or that additional funds will be available on acceptable terms, if at all. If we are unable to raise additional capital, we may need to reduce, cease or delay one or more of our research or development programs and adjust our current business plan and may not be able to continue as a going concern.

In connection with our common stock financing completed by us in March 2005, we agreed with the purchasers in such financing, including Gipson, or the March 2005 Investors, that, subject to certain exceptions, we would not issue any shares of our common stock at a per share price less than $2.50 without the prior consent of the purchasers holding a majority of the shares issued in such financing. On August 7, 2006, the closing price of our common stock was $3.82. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50.

Our ability to continue development of our programs, including our Phase III program of ALTROPANE^® molecular imaging agent as a diagnostic for Parkinsonian Syndromes, or PS, the Phase II program of ALTROPANE molecular imaging agent as a diagnostic for ADHD and our preclinical programs including those in axon regeneration, PD therapeutics and ocular therapeutics may be affected by the availability of financial resources to fund each program. Financial considerations may cause us to modify planned development activities for one or more of our programs, and we may decide to suspend development of one or more programs until we are able to secure additional working capital. If we are not able to raise additional capital, we may not have sufficient funds to complete our Phase III clinical trials of ALTROPANE as a diagnostic for PS or the Phase II program of ALTROPANE as a diagnostic for ADHD.

We continually evaluate possible acquisitions of, or investments in, businesses, technologies and products that are complementary to our business. We believe that a near-term opportunity may exist for us to potentially take advantage of market dynamics and financing conditions in our sector that we believe could enable us to acquire on favorable terms select biotechnology and drug development companies that have sound technical foundations, strong technical leadership and shareholders amenable to change and further investment in the combined entity.

The consideration paid in connection with an acquisition could affect our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate any such acquisition or acquisitions. To the extent we issue shares of stock or other rights to purchase stock, including options or other rights, existing stockholders may be diluted. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs and restructuring charges. Acquisitions may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges. To the extent that we use common stock for all or a portion of the consideration to be paid for future acquisitions, our existing stockholders may experience significant dilution.

In order to effect an acquisition, we may need additional financing. We cannot be certain that any such financing will be available on terms favorable or acceptable to us, or at all. If we raise additional funds through the issuance of equity, equity-related or debt securities, these securities may have rights, preferences or privileges senior to those of the rights of our common stockholders, who would then experience dilution. There can be no assurance that we will be able to identify or successfully complete any acquisitions.

Product Development

Molecular Imaging Program

The ALTROPANE molecular imaging agent is being developed for two indications: the differential diagnosis of 1) PS (including PD) and non-PS in patients with tremor; and 2) ADHD. We have completed an initial Phase III trial of ALTROPANE for use in differentiating PS movement disorders from other movement disorders. In April 2004, we reached an agreement with the Food and Drug Administration, or FDA, under the Special Protocol Assessment, or SPA, process regarding our protocol design for a new Phase III clinical trial of ALTROPANE designed to distinguish PS from non-PS in patients with tremors. This trial was designed to enroll a minimum of 500 patients and required that the statistical significance of the results reach a p-value of less than 0.02. Under the SPA, interim analysis of trial data was not permitted. Patient enrollment in this trial was initiated in July 2004 and continued into 2005. In August 2005, we reached agreement with the FDA on a new SPA providing for an amended Phase III program that specified two sequential clinical protocols: 1) Parkinson’s or Essential Tremor-1, or POET-1, and 2) a new protocol Parkinson’s or Essential Tremor-2, or POET-2. This new SPA permitted us to conduct two smaller Phase III trials and lower the statistical endpoint hurdle of the two trials from p<0.02 to p<0.05. The FDA agreed to allow all patients enrolled under the terms of the old SPA to be retained for purposes of the new SPA. Consistent with the terms of the old SPA, interim analysis of the data was not permitted under the new SPA. Publication of the detailed results of POET-1 prior to the completion of POET-2 was also prohibited. A diagnosis of a Movement Disorder Specialist, was utilized as the “gold standard.” The endpoints for POET-1 are the confirmation that the diagnostic accuracy of an ALTROPANE molecular imaging agent is statistically superior to the diagnostic accuracy of an internist or general practitioner. Based on certain statistical and modeling assumptions, we initially estimated that the POET-1 trial would require enrollment of approximately 332 patients to meet the endpoints and be statistically significant.

After a series of discussions with the FDA, in March 2006, we notified the FDA that we elected to terminate our SPA and end POET-1 enrollment so we could analyze the complete set of clinical data for efficacy. No safety issues were identified in the trial. Based on the previous performance of ALTROPANE and our permitted monitoring of non-blinded data from the approximately 200 patients enrolled in the POET-1 trial, statistical modeling indicated that POET-1 may have enrolled enough patients in the trial to evaluate the efficacy of ALTROPANE. We based our original plan for enrolling 332 patients in POET-1 in part on published reports in scientific journals that indicated a 20 to 30 percent misdiagnosis rate in the early stages of PD. Our review of the non-blinded data from patients enrolled in the POET-1 trial indicated that the error rate of general practitioners who participated in POET-1 was higher. As such, statistical modeling indicated that, providing the performance of ALTROPANE in POET-1 is consistent with its historical performance in earlier trials, statistical significance could be achieved without enrolling additional patients. In July 2006, we received the clinical data from POET-1 and we are presently analyzing and evaluating these data. After review of the results, we will, working with the FDA, determine the future clinical development plan for the ALTROPANE program including, but not limited to, POET-2. There can be no assurance that POET-1 has achieved statistical significance.

We are in the ongoing process of assembling the necessary safety and clinical databases required as part of a New Drug Application, or NDA, submission for ALTROPANE for PD. We will need to complete further clinical studies and obtain successful results prior to the filing of an NDA for ALTROPANE. Preparation and submission of an NDA is a time consuming and costly process, and requires significant resources to complete and submit to the FDA. In addition, the FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies.

We are currently analyzing the imaging results and the clinical data obtained from patients enrolled to-date in our Phase II clinical trial using ALTROPANE molecular imaging agent for the diagnosis of ADHD to verify findings in prior studies and ensure that the trial design and quantification algorithms are appropriate for this patient population. There can be no assurance that we will successfully complete our Phase II clinical trial. In July 2006, our licensor was issued a new U.S. patent, for which we have worldwide exclusive rights, that claims the use of DAT binding agents in the diagnosis of ADHD using several imaging modalities.

In addition to ALTROPANE, we are developing a technetium-based molecular imaging agent for the diagnosis of PD and ADHD. Our technetium-based molecular imaging program is in preclinical development. We have identified several promising lead compounds. Provided that we are able to devote sufficient resources to continue and complete development activities and that the program results in data that support the continued development required to file an Investigational New Drug application, or IND, we anticipate that we will submit an IND for our technetium-based molecular imaging program during the fourth quarter of 2007.

We believe that engaging a partner for our molecular imaging program, in particular, for the launch and commercialization of ALTROPANE, is likely to be the most effective means to maximize the value of the program. If we are able to devote sufficient resources to continue and complete certain development activities and that the program results in data that supports the continued development, we believe that we will be able to partner the molecular imaging program by the end of 2007.

Axon Regeneration Program

We are developing product candidates for functional recovery from CNS disorders resulting from traumas, such as stroke, spinal cord injury, traumatic brain injury and optic nerve injury utilizing technology referred to as axon regeneration. The aim of axon regeneration is to cause nerve fibers called axons to grow and form new connections that would restore signaling between nerve cells and enable restoration of function.

In May 2006, we entered into two license agreements, or the Axon Regeneration Licenses, with Children’s Medical Center Corporation (also known as Children’s Hospital Boston), or CMCC, to acquire the exclusive worldwide rights to new axon regeneration technologies and to replace our former axon regeneration licenses with CMCC. Additionally, we entered into two three-year sponsored research agreements with CMCC, or the Sponsored Research Agreements, to support approaches to activate pro-regenerative pathways that stimulate axon regeneration, led by Dr. Larry Benowitz, and for approaches to deactivate anti-regenerative pathways that inhibit axon regeneration, led by Dr. Zhigang He. We believe that these agreements extend our existing capabilities in axon regeneration by potentially providing multiple avenues for intervention in functional CNS recovery. Licensing the rights to the technologies of two complementary approaches to axon regeneration is part of our strategy to build a broad platform of technology and intellectual property for the development of axon regeneration therapeutics. We believe that the assembly of broad intellectual property and technology in axon regeneration will create competitive advantages. The simultaneous implementation of the sponsored research programs may open avenues for exploring combination therapies for intractable CNS disorders. The research also provides an opportunity to continue to enrich the application of the technologies and our intellectual property portfolio.

Our lead product candidate in axon regeneration is INOSINE. INOSINE is a proprietary axon regeneration factor that specifically promotes axon outgrowth in CNS neurons. In July 2004, we filed an IND application, or INOSINE IND, with the FDA for the use of INOSINE to enhance motor functional recovery after stroke. In September 2004, we announced that we received a written response to our INOSINE IND filing from the FDA. In its response, the FDA placed our Phase I study on clinical hold pending the submission of additional pharmacology and toxicology data. In August 2005, we completed and submitted the results of certain studies requested by the FDA. In October 2005, the FDA informed us that we remained on clinical hold pending receipt of additional information from existing tissue samples and related data from preclinical studies performed at contract laboratories. We have obtained the tissues from our preclinical studies and are determining whether the analysis of the tissues, when and if completed, will be adequate to enable us to complete our clinical hold response with sufficient information to permit the FDA to release us from clinical hold. There is no assurance that we will be taken off clinical hold or that other preclinical studies will not be required by the FDA prior to initiating a Phase I trial under the INOSINE IND.

In addition to the Phase I trial contemplated under the INOSINE IND, we are exploring the possibility of undertaking clinical studies under a Physician’s Sponsored IND or the FDA’s new exploratory IND for INOSINE. We are also assessing the merits of several additional options that we believe represent potential paths to initiating clinical trials, not all of which rely on the INOSINE IND. We have determined that any of these options for INOSINE will require additional preclinical work prior to initiation of a clinical trial. We are conducting the necessary preclinical studies to evaluate the feasibility of these additional paths to clinical trials in humans. Until these preclinical efforts are complete, we are unable to project the timing of initiation of clinical activities for INOSINE or our other axon regeneration factors. There can be no assurance that resources will be available to continue and complete the development activities being conducted or contemplated, that the program will result in data that supports the continued development, or that we will be able to initiate clinical trials required for the development of axon regeneration factors.

Parkinson’s Disease Therapeutic Program

We are developing a DAT blocker for the treatment of PD. Our DAT blocker program is in preclinical development. We have identified several promising lead compounds. We believe that our DAT blockers have high selectivity for the DAT and may represent

a novel and promising approach for both symptomatic management and disease modification in PD. By blocking the DAT and preventing dopamine from re-entering the neuron, there is an increased amount of dopamine at the nerve junctions to compensate for the dwindling dopamine production that is characteristic of PD. This may provide symptomatic relief. In addition, blocking dopamine and possible neurotoxins from entering the neuron through the DAT may protect the existing dopamine-producing neurons from further destruction, representing a potential for preventing disease progression. Provided that we are able to devote sufficient resources to continue and complete development activities and that the program results in data that support the continued development required to file an IND, we anticipate that we will submit an IND for our PD therapeutic program during the first half of 2008.

Ocular Therapeutic Program

Our ocular therapeutic program is designed to leverage our intellectual property estate to derive value from alternative uses of our compounds already in development. The overall objective of the program is to develop a sufficiently broad and deep set of in vitro and animal data to demonstrate to potential development and commercialization partners the potential utility of our compounds as therapeutics for important eye diseases.

Our primary focus in the ocular therapeutic program is the development of oncomodulin which is being tested to determine its potential utility to enhance axon regeneration after acute injury to the optic nerve and possibly glaucoma. In May 2006, Nature Neuroscience published results of a study performed by our collaborator, Dr. Larry Benowitz of CMCC, in which oncomodulin was shown to stimulate axon regeneration in the injured optic nerve in rodents.

Sales and Marketing and Government Regulation

To date, we have not marketed, distributed or sold any products and, with the exception of ALTROPANE, all of our technologies and early-stage product candidates are in preclinical development. Our product candidates must undergo a rigorous regulatory approval process which includes extensive preclinical and clinical testing to demonstrate safety and efficacy before any resulting product can be marketed. The FDA has stringent standards with which we must comply before we can test our product candidates in humans or make them commercially available. Preclinical testing and clinical trials are lengthy and expensive and the historical rate of failure for product candidates is high. Clinical trials require sufficient patient enrollment which is a function of many factors. Delays and difficulties in completing patient enrollment can result in increased costs and longer development times. The foregoing uncertainties and risks limit our ability to estimate the timing and amount of future costs that will be required to complete the clinical development of each program. In addition, we are unable to estimate when material net cash inflows are expected to commence as a result of the successful completion of one or more of our programs.

Research and Development

Following is information on the direct research and development costs including, but not limited to, process development, preclinical and clinical costs incurred on our principal scientific technology programs currently under development. These amounts do not include research and development employee and related overhead costs which total approximately $16,382,000 on a cumulative basis.


	2nd Quarter
Program	2006		Year to Date		Cumulative
Molecular Imaging	$	921,000	$	1,985,000	$	21,244,000
Axon Regeneration	$	284,000	$	497,000	$	9,736,000
Parkinson’s Disease Therapeutic	$	29,000	$	50,000	$	809,000
Ocular Therapeutic	$	94,000	$	132,000	$	307,000

Estimating costs and time to complete development of a specific program or technology is difficult due to the uncertainties of the development process and the requirements of the FDA which could require additional clinical trials or other development and testing. Results of any testing could lead to a decision to change or terminate development of a technology, in which case estimated future costs could change substantially. In the event we were to enter into a licensing or other collaborative agreement with a corporate partner involving sharing or funding by such corporate partner of development costs, the estimated development costs incurred by us could be substantially less than estimated. Additionally, research and development costs are extremely difficult to estimate for early-stage technologies due to the fact that there are generally less comprehensive data available for such technologies to determine the development activities that would be required prior to the filing of an NDA. As a result, we cannot reasonably estimate the cost and the date of completion for any technology that is not at least in Phase III clinical development due to the uncertainty regarding the number of required trials, the size of such trials and the duration of development. Even in Phase III clinical development, estimating

the cost and the filing date for an NDA can be challenging due to the uncertainty regarding the number and size of the required Phase III trials. We are currently analyzing what additional expenditures may be required to complete the Phase III clinical trial program for ALTROPANE for the diagnosis of PS and cannot reasonably estimate the cost of this Phase III clinical trial program at this time.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared by us in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our estimates include those related to marketable securities, research contracts, the fair value and classification of equity instruments, our lease accrual and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Marketable Securities

Our marketable securities consist exclusively of investments in United States agency bonds and corporate debt obligations. These marketable securities are adjusted to fair value on the condensed consolidated balance sheet through other comprehensive income. If a decline in the fair value of a security is considered to be other than temporary, the investment is written down to a new cost basis and the unrealized loss is removed from accumulated other comprehensive loss and recorded in the Consolidated Statement of Operations. We evaluate whether a decline in fair value is other than temporary based on factors such as the significance of the decline, the duration of time for which the decline has been in existence and our ability and intent to hold the security to maturity. To date, we have not recorded any other than temporary impairments related to our marketable securities. These marketable securities are classified as current assets because they are highly liquid and are available, as required, to meet working capital and other operating requirements.

Research Contracts

We regularly enter into contracts with third parties to perform research and development activities on our behalf in connection with our scientific technologies. Costs incurred under these contracts are recognized ratably over the term of the contract or based on actual enrollment levels which we believe corresponds to the manner in which the work is performed. Clinical trial, contract services and other outside costs require that we make estimates of the costs incurred in a given accounting period and record accruals at period end as the third party service periods and billing terms do not always coincide with our period end. We base our estimates on our knowledge of the research and development programs, services performed for the period, past history for related activities and the expected duration of the third party service contract, where applicable.

Fair Value and Classification of Equity Instruments

Historically, we have issued warrants to purchase shares of our common stock in connection with our debt and equity financings. We record each of the securities issued on a relative fair value basis up to the amount of the proceeds received. We estimate the fair value of the warrants using the Black-Scholes option pricing model. The Black-Scholes model is dependent on a number of variables and estimates including: interest rates, dividend yield, volatility and the expected term of the warrants. Our estimates are based on market interest rates at the date of issuance, our past history for declaring dividends, our estimated stock price volatility and the contractual term of the warrants. The value ascribed to the warrants in connection with debt offerings is considered a cost of capital and amortized to interest expense over the term of the debt.

We have, at certain times, issued preferred stock and notes, which were convertible into common stock at a discount from the common stock market price at the date of issuance. The discounted amount associated with such conversion rights represents an incremental yield, or “beneficial conversion feature” that is recorded when the consideration allocated to the convertible security, divided by the number of common shares into which the security converts, is below the fair value of the common stock at the date of issuance of the convertible instrument.

A beneficial conversion feature associated with the preferred stock is recognized as a return to the preferred shareholders and represents a non-cash charge in the determination of net loss available to common stockholders. The beneficial conversion feature is recognized in full immediately if there is no redemption date for the preferred stock, or over the period of issuance through the redemption date, if applicable. A beneficial conversion feature associated with debentures, notes or other debt instruments is

recognized as discount to the debt and is amortized as additional interest expense ratably over the remaining term of the debt instrument.

Lease Accrual

We are required to make significant judgments and assumptions when estimating the liability for our net ongoing obligations under our amended lease agreement relating to our former executive offices located in Boston, Massachusetts. In accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” we use a discounted cash-flow analysis to calculate the amount of the liability. We applied a discount rate of 15% representing our best estimate of our credit adjusted risk-free rate. The discounted cash-flow analysis is based on management’s assumptions and estimates of our ongoing lease obligations, and income from sublease rentals, including estimates of sublease timing and sublease rental terms. It is possible that our estimates and assumptions will change in the future, resulting in additional adjustments to the amount of the estimated liability, and the effect of any adjustments could be material. We will review our assumptions and judgments related to the lease amendment on at least a quarterly basis, until the outcome is finalized, and make whatever modifications we believe are necessary, based on our best judgment, to reflect any changed circumstances.

Stock-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” or SFAS 123R. SFAS 123R requires companies to measure compensation cost for all share-based awards at fair value on grant date and recognize it as expense over the requisite service period or expected performance period of the award. Prior to January 1, 2006, we accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, or APB 25, “Accounting for Stock Issued to Employees,” and related interpretations. We also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. We elected to adopt the modified prospective transition method as provided by SFAS 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing share-based compensation.

We estimate the fair value of stock-based awards using the Black-Scholes valuation model on the grant date. Key input assumptions used to estimate the fair value of stock-based awards include the following:

Expected term — We determined the weighted-average expected term assumption based on the simplified method as described by Staff Accounting Bulletin No. 107, “Share-Based Payment” for “plain vanilla” options. We determined the weighted-average expected term assumption for performance based option grants based on historical data on exercise behavior.

Risk-free interest rate — The risk-free interest rate used for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected term.

Expected volatility — Our expected stock-price volatility assumption is based on historical volatilities of the underlying stock which is obtained from public data sources.

Expected dividend yield — We have never declared or paid any cash dividends on our common stock and we do not expect to do so in the foreseeable future. Accordingly, we used an expected dividend yield of zero to calculate the grant-date fair value of a stock option.

Results of Operations

Three months ended June 30, 2006 and 2005

Our net loss attributable to common stockholders was $3,924,682 during the three months ended June 30, 2006 as compared with $2,397,797 during the three months ended June 30, 2005. Net loss attributable to common stockholders totaled $0.24 per share for the 2006 period as compared to $0.23 per share for the 2005 period. The increase in net loss attributable to common stockholders in the 2006 period was primarily due to higher operating expenses. The increase in net loss attributable to common stockholders on a per

share basis in the 2006 period was primarily due to higher operating expenses offset by an increase in weighted average shares outstanding of approximately 6,100,000 shares, which was primarily the result of the private placement of common stock completed in September 2005.

Research and development expenses were $2,094,175 during the three months ended June 30, 2006 as compared with $1,442,286 during the three months ended June 30, 2005. The increase in the 2006 period was primarily attributable to higher costs associated with our molecular imaging program of approximately $464,000 primarily associated with clinical trial costs for POET-1 and assembly and preparation of our safety and clinical databases for ALTROPANE. The increase in the 2006 period was also attributable to higher costs of approximately $135,000 associated with our axon regeneration program related to increased preclinical development activities. We currently anticipate that our research and development expenses will increase over the next twelve months although there may be significant fluctuations on a quarterly basis. This expected increase is primarily related to costs associated with higher preclinical costs for our axon regeneration, DAT blocker and molecular imaging agent programs. Our working capital constraints may limit our planned expenditures.

General and administrative expenses were $1,873,581 during the three months ended June 30, 2006 as compared with $987,729 during the three months ended June 30, 2005. The increase in the 2006 period was primarily related to higher compensation and related costs of approximately $440,000 primarily related to increased stock-based compensation expense and headcount. The increase in the 2006 period was also attributable to higher legal and consulting costs of approximately $301,000 primarily related to our collaboration, merger, acquisition and fundraising efforts. We currently anticipate that our general and administrative expenses will increase over the next twelve months although there may be significant fluctuations on a quarterly basis. This expected increase is primarily related to costs associated with our commercialization and communication efforts primarily related to our ALTROPANE molecular imaging agent program and costs associated with compliance with the Sarbanes-Oxley Act of 2002.

Interest expense was $0 during the three months ended June 30, 2006 as compared with $2,065 during the three months ended June 30, 2005.

Investment income was $43,074 during the three months ended June 30, 2006 as compared with $34,283 during the three months ended June 30, 2005. The increase in the 2006 period was primarily due to higher average cash, cash equivalent, and marketable securities balances and higher interest rates during the 2006 period.

Six months ended June 30, 2006 and 2005

Our net loss was $7,889,124 during the six months ended June 30, 2006 as compared with $4,742,005 during the six months ended June 30, 2005. Our net loss attributable to common stockholders was $7,889,124 during the six months ended June 30, 2006 as compared with $5,457,520 during the six months ended June 30, 2005. Net loss attributable to common stockholders totaled $0.48 per share for the 2006 period as compared to $0.58 per share for the 2005 period. The increase in net loss in the 2006 period was primarily due to higher operating expenses. The decrease in net loss attributable to common stockholders on a per share basis in the 2006 period was primarily due to an increase in weighted average shares outstanding of approximately 7,200,000 shares, which was primarily the result of the private placements of common stock completed in March and September 2005.

Research and development expenses were $4,314,343 during the six months ended June 30, 2006 as compared with $2,732,748 during the six months ended June 30, 2005. The increase in the 2006 period was primarily attributable to higher costs associated with our molecular imaging program of approximately $1,109,000 primarily associated with clinical trial costs for POET-1 and assembly and preparation of our safety and clinical databases for ALTROPANE; higher costs of approximately $210,000 associated with our axon regeneration program related to increased preclinical development activities; and higher compensation and related costs of $236,000 primarily related to increased stock-based compensation expense and headcount, partially offset by a reduction in severance costs.

General and administrative expenses were $3,700,966 during the six months ended June 30, 2006 as compared with $2,000,665 during the six months ended June 30, 2005. The increase in the 2006 period was primarily related to higher compensation and related costs of approximately $1,100,000 primarily related to increased stock-based compensation expense and headcount; higher legal and consulting costs of approximately $337,000 primarily related to our collaboration, merger, acquisition and fundraising efforts; and higher commercialization and communication costs of approximately $183,000. The increase was partially offset by approximately $130,000 associated with a special meeting of stockholders held in February 2005.

Other expenses was $0 during the six months ended June 30, 2006 as compared with $2,232 during the six months ended June 30, 2005.

Interest expense was $0 during the six months ended June 30, 2006 as compared with $45,965 during the six months ended June 30, 2005. The decrease in the 2006 period was attributable to non-cash interest expense incurred in February 2005 when we agreed to lower the exercise price of a warrant to purchase 100,000 shares of our common stock held by Ingalls & Snyder Value Partners, L.P. in return for its immediate exercise in cash.

Investment income was $126,185 during the six months ended June 30, 2006 as compared with $39,605 during the six months ended June 30, 2005. The increase in the 2006 period was primarily due to higher average cash, cash equivalent, and marketable securities balances and higher interest rates during the 2006 period.

Accrual of preferred stock dividends was $0 during the six months ended June 30, 2006 as compared with $715,515 during the six months ended June 30, 2005. In December 2003, we issued 800 shares of Series E Cumulative Convertible Preferred Stock, or Series E Stock, with a purchase price of $10,000 per share of Series E Stock which initially yielded a cumulative dividend of 4% per annum with a potential increase to 8% in June 2005. In February 2005, we entered into agreements with the holders of Series E Stock, or the Holders, whereby the Holders agreed to convert their Series E Stock into common stock. We agreed to pay a dividend of $564.44 for each share of Series E Stock converted into common stock by the Holders and to lower the exercise price of the warrants held by the Holders from $7.71 to $0.05. We recorded a charge of $655,992 to net loss attributable to common stockholders under the Black-Scholes pricing model in connection with the re-pricing of the warrants. We recorded a charge of $59,523 to net loss attributable to common stockholders during the six months ended June 30, 2005 related to the accrual of preferred stock dividends.

Liquidity and Capital Resources

Net cash used for operating activities totaled $7,149,718 during the six months ended June 30, 2006 as compared with $4,649,308 during the six months ended June 30, 2005. The increase in the 2006 period is primarily related to higher operating expenses in the 2006 period. Net cash provided by investing activities totaled $8,204,680 during the six months ended June 30, 2006 as compared with $13,297 during the six months ended June 30, 2005. The increase in the 2006 period primarily reflects the proceeds from the sales of marketable securities which were subsequently used to fund operations. Net cash provided by financing activities totaled $3,123 during the six months ended June 30, 2006 as compared with $5,694,432 during the six months ended June 30, 2005. The difference in financing activities principally reflects the effect of the March 2005 private placement described below.

As of June 30, 2006, we had incurred total net losses since inception of approximately $125,000,000. To date, we have dedicated most of our financial resources to the research and development of our product candidates, general and administrative expenses and costs related to obtaining and protecting patents. Since inception, we have primarily satisfied our working capital requirements from the sale of our securities through private placements. These private placements have included the sale of preferred stock and common stock, as well as notes payable and convertible debentures. A summary of financings completed during the three years ended June 30, 2006, is as follows:


Date	Net Proceeds Raised	Securities Issued
September 2005	$12.8 million	Common stock
March 2005	$5.0 million	Common stock
December 2003	$7.0 million	Convertible preferred stock and warrants

In the future, our working capital and capital requirements will depend on numerous factors, including the progress of our research and development activities, the level of resources that we devote to the developmental, clinical, and regulatory aspects of our technologies, and the extent to which we enter into collaborative relationships with pharmaceutical and biotechnology companies.

At June 30, 2006, we had available cash, cash equivalents, and marketable securities of approximately $2,215,000 and working capital of approximately $783,000. The cash, cash equivalents, and marketable securities available at June 30, 2006 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. We believe that the cash, cash equivalents, and marketable securities available at June 30, 2006, combined with the $3,000,000 available to us under an unsecured promissory note issued by us on August 8, 2006 to Gipson, a significant stockholder and former director of the Company, and our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures through October 2006. In order to continue as a going concern, we will therefore need to raise additional capital through one or more of the following: collaboration, merger, acquisition or other transaction with other pharmaceutical or biotechnology companies, or through a debt financing or equity offering. We are currently engaged in collaboration, merger, acquisition and other related fundraising efforts. There can be no assurance, however, that we will be successful in our collaboration, merger, acquisition or other related fundraising efforts or that additional funds will be available on acceptable terms, if at all. If we are unable to raise additional capital we may need to reduce, cease or delay one or more of our research or development programs and adjust our current business plan and may not be able to continue as a going concern.

In connection with our common stock financing completed by us in March 2005, we agreed with the March 2005 Investors that, subject to certain exceptions, we would not issue any

shares of our common stock at a per share price less than $2.50 without the prior consent of purchasers holding a majority of the shares issued in such financing. On August 7, 2006, the closing price of our common stock was $3.82. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50.

Contractual Obligations and Commitments

Our major outstanding contractual obligations relate to operating lease obligations and research and development commitments with third parties. Except as set forth below, the disclosures relating to our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2005 have not materially changed since we filed that report.

In May 2006, we entered into the Axon Regeneration Licenses with CMCC to acquire the exclusive worldwide rights to new axon regeneration technologies and to replace our former axon regeneration licenses with CMCC. The Axon Regeneration Licenses provide for payments to CMCC for accrued patent costs, an up-front license payment of $50,000 and future milestone payments of up to an aggregate of approximately $425,000 for each product candidate upon achievement of certain regulatory milestones. Additionally, we entered into the Sponsored Research Agreements with CMCC which provide for a total of $550,000 in annual funding for three years. The Axon Regeneration licenses provide for royalty payments equal to specified percentages of product sales, annual maintenance fees and continuing patent prosecution costs.

New Accounting Pronouncement

In July 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the expected impact, if any, of adopting FIN 48 on our consolidated financial statements.

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the market risks reported in our Annual Report on Form 10-K for the year ended December 31, 2005, as amended. We generally maintain a portfolio of cash equivalents, and short-term and long-term marketable securities in a variety of securities which can include commercial paper, certificates of deposit, money market funds and government and non-government debt securities. The fair value of these available-for-sale securities are subject to changes in market interest rates and may fall in value if market interest rates increase. Our investment portfolio includes only marketable securities with active secondary or resale markets to help insure liquidity. We have implemented policies regarding the amount and credit ratings of investments. Due to the conservative nature of these policies, we do not believe we have material exposure due to market risk. We may not have the ability to hold our fixed income investments until maturity, and therefore our future operating results or cash flows could be affected if we are required to sell investments during a period in which increases in market interest rates have adversely affected the value of our securities portfolio.

Item 4 — Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2006. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of

Part II — Other Information

Item 1A — Risk Factors

Statements contained or incorporated by reference in this quarterly report on Form 10-Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections, and the beliefs and assumptions of our management including, without limitation, our expectations regarding our product candidates, including the success and timing of our preclinical, clinical and development programs, the submission of regulatory filings and proposed partnering arrangements, collaboration, merger, acquisition and fund raising efforts, results of operations, selling, general and administrative expenses, research and development expenses and the sufficiency of our cash for future operations. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “will,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms, variations of such terms or the negative of those terms.

We cannot assure investors that our assumptions and expectations will prove to have been correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those factors discussed below. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer.

The following discussion includes three revised risk factors “We will need substantial additional funding in order to continue our business and operations. If we are unable to secure such funding on acceptable terms, we may need to significantly reduce, delay or cease one or more of our research or development programs, or surrender rights to some or all of our technologies.”, “If any collaborator terminates or fails to perform its or their obligations under agreements with us, the development and commercialization of our product candidates could be delayed or terminated.” and “If we are unable to maintain our key working relationships with our key collaborators, including Harvard and its Affiliates and Children’s Medical Center Corporation, we may not be successful since substantially all of our current technologies were licensed from, and most of our research and development activities were performed by, such collaborators. We expect that a substantial portion of our future development efforts will be based upon technologies developed by and research and development performed by these collaborators.” that reflect developments subsequent to the discussion of risk factors included in our most recent Annual Report on Form 10-K. In addition, we have deleted the risk factor entitled “Changes in stock option accounting rules may have a significant adverse affect on our operating results” and we have added a new risk factor entitled “Changes in estimates under financial accounting standards related to share-based payments could have a material adverse impact on our reported results of operations.”

Risks Related to our Financial Results and Need for Additional Financing

WE ARE A DEVELOPMENT STAGE COMPANY. WE HAVE INCURRED LOSSES FROM OUR OPERATIONS SINCE INCEPTION AND ANTICIPATE LOSSES FOR THE FORESEEABLE FUTURE. WE WILL NOT BE ABLE TO ACHIEVE PROFITABILITY UNLESS WE OBTAIN REGULATORY APPROVAL AND MARKET ACCEPTANCE OF OUR PRODUCT CANDIDATES.

Biotechnology companies that have no approved products or other sources of revenue are generally referred to as development stage companies. As of June 30, 2006, we had incurred cumulative net losses of approximately $125,000,000 since inception. We have never generated revenues from product sales and we do not currently expect to generate revenues from product sales for at least the next three years. If we do generate revenues and operating profits in the future, our ability to continue to do so in the long term could be affected by the introduction of competitors’ products and other market factors. We expect to incur significant operating losses for at least the next three years. The level of our operating losses may increase in the future if more of our product candidates begin human clinical trials. We will never generate revenues or achieve profitability unless we obtain regulatory approval and market acceptance of our product candidates. This will require us to be successful in a range of challenging activities, including clinical trial stages of development, obtaining regulatory approval for our product candidates, and manufacturing, marketing and selling them. We may never succeed in these activities, and may never generate revenues that are significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

WE WILL NEED SUBSTANTIAL ADDITIONAL FUNDING IN ORDER TO CONTINUE OUR BUSINESS AND OPERATIONS. IF WE ARE UNABLE TO SECURE SUCH FUNDING ON ACCEPTABLE TERMS, WE MAY NEED TO SIGNIFICANTLY REDUCE, DELAY OR CEASE ONE OR MORE OF OUR RESEARCH OR DEVELOPMENT PROGRAMS, OR SURRENDER RIGHTS TO SOME OR ALL OF OUR TECHNOLOGIES.

We require significant funds to conduct research and development activities, including preclinical studies and clinical trials of our technologies, and to commercialize our product candidates. Because the successful development of our product candidates is uncertain, we are unable to estimate the actual funds we will require to develop and commercialize them. Our funding requirements depend on many factors, including:

	•		The scope, rate of progress and cost of our clinical trials and other research and development activities;

	•		Future clinical trial results;

	•		The terms and timing of any collaborative, licensing and other arrangements that we may establish;

	•		The cost and timing of regulatory approvals and of establishing sales, marketing and distribution capabilities;

	•		The cost of establishing clinical and commercial supplies of our product candidates and any products that we may develop;

	•		The cost of obtaining and maintaining licenses to use patented technologies;

	•		The effect of competing technological and market developments; and

	•		The cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights and other patent-related costs, including litigation costs and the results of such litigation.

Until such time, if ever, as we can generate substantial revenue from product sales or through collaborative arrangements with third parties, we may need to raise additional capital. To date, we have experienced negative cash flows from operations and have funded our operations primarily from equity and debt financings.

For the foreseeable future, we expect to experience continuing operating losses and negative cash flows from operations as our management executes our current business plan. The cash, cash equivalents, and marketable securities available at June 30, 2006 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. We believe that the cash, cash equivalents, and marketable securities available at June 30, 2006, combined with the $3,000,000 available to us under an unsecured promissory note issued by us on August 8, 2006 to Gipson, a significant stockholder and former director of the Company, and our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures through October 2006. In order to continue as a going concern, we will therefore need to raise additional capital through one or more of the following: collaboration, merger, acquisition or other transaction with other pharmaceutical or biotechnology companies, or through a debt financing or equity offering. We are currently engaged in collaboration, merger, acquisition and other related fundraising efforts. There can be no assurance, however, that we will be successful in our collaboration, merger, acquisition or other fundraising efforts or that additional funds will be available on acceptable terms, if at all. If we are unable to raise additional capital we may need to reduce, cease or delay one or more of our research or development programs and adjust our current business plan and may not be able to continue as a going concern.

In connection with our common stock financing completed by us in March 2005, we agreed with the March 2005 Investors that, subject to certain exceptions, we would not issue any shares of our common stock at a per share price less than $2.50 without the prior consent of the purchasers holding a majority of the shares issued in such financing. On August 7, 2006, the closing price of our common stock was $3.82. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50. Alternatively, to secure such funds, we may be required to enter financing arrangements with others that may require us to surrender rights to some or all of our technologies or grant licenses on terms that are not favorable to us. If the results of our current or future clinical trials are not favorable, it may negatively affect our ability to raise additional funds. If we are successful in obtaining additional equity and or debt financing, the terms of such financing will have the effect of diluting the holdings and the rights of our shareholders. Estimates about how much funding will be required are based on a number of assumptions, all of which are subject to change based on the results and progress of our research and development activities.

Our ability to continue development of our programs, including our Phase III program of ALTROPANE molecular imaging agent as a diagnostic for PS, our Phase II program of ALTROPANE molecular imaging agent as a diagnostic for ADHD, and our preclinical programs including those in axon regeneration, PD therapeutics and ocular therapeutics may be affected by the availability of financial resources to fund each program. Financial considerations may cause us to modify planned development activities for one or more of our programs, and we may decide to suspend development of one or more programs until we are able to secure additional working capital. If we are not able to raise additional capital, we may not have sufficient funds to complete our Phase III clinical trials of ALTROPANE molecular imaging agent as a diagnostic for PS or the Phase II program of ALTROPANE molecular imaging agent as a diagnostic for ADHD.

CHANGES IN ESTIMATES UNDER FINANCIAL ACCOUNTING STANDARDS RELATED TO SHARE-BASED PAYMENTS COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR REPORTED RESULTS OF OPERATIONS.

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”, or SFAS 123R. SFAS 123R is a complex accounting standard that requires companies to expense the fair value of employee stock options and similar awards. The application of SFAS 123R requires significant judgment and the use of estimates, particularly surrounding stock price volatility, option forfeiture rates, expected option lives and the probability of achieving certain milestones for performance-based stock-based awards, to build a model for appropriately valuing share-based compensation. The estimation of stock awards that will ultimately vest and the probability of achieving certain milestones for performance-based stock-based awards requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. Any such adjustments or corrections of charges could negatively affect our results of operations, stock price and our stock price volatility and/or could adversely impact our ability to obtain results in accordance with accounting principles generally accepted in the Unites States that are consistent with previously provided financial guidance concerning our expected results of operations.

OUR ESTIMATES OF OUR LIABILITY UNDER OUR BOSTON, MASSACHUSETTS LEASE MAY CHANGE.

Our lease in Boston, Massachusetts expires in 2012. We have entered into two sublease agreements covering all 6,600 square feet under this lease through the date of expiration. In determining our obligations under the lease that we do not expect to occupy, we have made certain assumptions for the discounted estimated cash flows related to the rental payments that our subtenants have agreed to pay. We may be required to change our estimates in the future as a result of, among other things, the default of one or both of our subtenants with respect to their payment obligations. Any such adjustments to the estimate of liability could be material.

Risks Related to Commercialization

OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP OUR PRODUCT CANDIDATES INTO COMMERCIAL PRODUCTS.

To date, we have not marketed, distributed or sold any products and, with the exception of the ALTROPANE molecular imaging agent, all of our technologies and early-stage product candidates are in preclinical development. The success of our business depends primarily upon our ability to successfully develop and commercialize our product candidates. Successful research and product development in the biotechnology industry is highly uncertain, and very few research and development projects produce a commercial product. In the biotechnology industry, it has been estimated that less than five percent of the technologies for which research and development efforts are initiated ultimately result in an approved product. If we are unable to successfully commercialize the ALTROPANE molecular imaging agent or any of our other product candidates, our business would be materially harmed.

EVEN IF WE RECEIVE APPROVAL TO MARKET OUR DRUG CANDIDATES, THE MARKET MAY NOT BE RECEPTIVE TO OUR DRUG CANDIDATES UPON THEIR COMMERCIAL INTRODUCTION, WHICH COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING OUR PRODUCTS AND FROM BEING PROFITABLE.

Even if our drug candidates are successfully developed, our success and growth will also depend upon the acceptance of these drug candidates by physicians and third-party payors. Acceptance of our product development candidates will be a function of our products being clinically useful, being cost effective and demonstrating superior diagnostic or therapeutic effect with an acceptable side effect profile as compared to existing or future treatments. In addition, even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time.

Factors that we believe will materially affect market acceptance of our drug candidates under development include:

	•		The timing of our receipt of any marketing approvals, the terms of any approval and the countries in which approvals are obtained;

	•		The safety, efficacy and ease of administration of our products;

	•		The competitive pricing of our products;

	•		The success of our education and marketing programs;

	•		The sales and marketing efforts of competitors; and

	•		The availability and amount of government and third-party payor reimbursement.

If our products do not achieve market acceptance, we will not be able to generate sufficient revenues from product sales to maintain or grow our business.

ACQUISITIONS PRESENT MANY RISKS, AND WE MAY NOT REALIZE THE ANTICIPATED FINANCIAL AND STRATEGIC GOALS FOR ANY SUCH TRANSACTIONS.

We may in the future acquire complementary companies, products and technologies. Such acquisitions involve a number of risks, including:

	•		We may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or that economic conditions change, all of which may generate a future impairment charge;

	•		We may have difficulty integrating the operations and personnel of the acquired business, and may have difficulty retaining the key personnel of the acquired business;

	•		We may have difficulty incorporating the acquired technologies;

	•		We may encounter technical difficulties or failures with the performance of the acquired technologies or drug products or may experience unfavorable results in the clinical studies related to such technologies or products;

	•		We may face product liability risks associated with the sale of the acquired company’s products;

	•		Our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing diverse locations;

	•		We may have difficulty maintaining uniform standards, internal controls, procedures and policies across locations;

	•		The acquisition may result in litigation from terminated employees or third-parties; and

	•		We may experience significant problems or liabilities associated with product quality, technology and legal contingencies.

These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as out-of-pocket costs.

The consideration paid in connection with an acquisition also affects our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate any acquisition. To the extent we issue shares of stock or other rights to purchase stock, including options or other rights, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs (such as acquired in-process research and development costs) and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.

Risk Related to Regulation

IF OUR PRECLINICAL TESTING AND CLINICAL TRIALS ARE NOT SUCCESSFUL, WE WILL NOT OBTAIN REGULATORY APPROVAL FOR COMMERCIAL SALE OF OUR PRODUCT CANDIDATES.

We will be required to demonstrate, through preclinical testing and clinical trials, that our product candidates are safe and effective before we can obtain regulatory approval for the commercial sale of our product candidates. Preclinical testing and clinical trials are lengthy and expensive and the historical rate of failure for product candidates is high. Product candidates that appear promising in the early phases of development, such as in preclinical study or in early human clinical trials, may fail to demonstrate safety and efficacy in clinical trials.

Except for the ALTROPANE molecular imaging agent, we have not yet received IND approval from the FDA for our other product candidates which will be required before we can begin clinical trials in the United States. We may not submit INDs for our product candidates if we are unable to accumulate the necessary preclinical data for the filing of an IND. The FDA may request additional preclinical data before allowing us to commence clinical trials. As an example, the FDA has requested additional information before it will consider approving our IND filing for one of our product candidates, INOSINE. The FDA or other applicable regulatory authorities may suspend clinical trials of a drug candidate at any time if we or they believe the subjects or patients participating in such trials are being exposed to unacceptable health risks or for other reasons. Adverse side effects of a drug candidate on subjects or patients in a clinical trial could result in the FDA or foreign regulatory authorities refusing to approve a particular drug candidate for any or all indications of use.

After a series of discussions with the FDA, in March 2006, we notified the FDA that we elected to terminate our SPA and end POET-1 enrollment so we could analyze the complete set of clinical data for efficacy. No safety issues were found in this trial. Based on the previous performance of ALTROPANE and our permitted monitoring of non-blinded data from the approximately 200 patients enrolled in the POET-1 trial to date, statistical modeling indicated that POET-1 may have enrolled enough patients in the trial to evaluate the efficacy of ALTROPANE. We based our original plan for enrolling 332 patients in POET-1 in part on published reports in scientific journals that indicated a 20 to 30 percent misdiagnosis rate in the early stages of PD. Our review of the non-blinded data from patients enrolled in the POET-1 trial indicated that the error rate of general practitioners who participated in POET-1 was higher. As such, statistical modeling indicated that providing the performance of ALTROPANE in POET-1 is consistent with its historical performance in earlier trials, statistical significance could be achieved without enrolling additional patients. We will need to complete further clinical studies and obtain successful results prior to the filing of an NDA for ALTROPANE. Even if successfully completed, there is no assurance that these Phase III clinical trials will be sufficient to achieve the approvability of ALTROPANE molecular imaging agent.

Clinical trials require sufficient patient enrollment which is a function of many factors, including the size of the potential patient population, the nature of the protocol, the availability of existing treatments for the indicated disease and the eligibility criteria for enrolling in the clinical trial. Delays or difficulties in completing patient enrollment can result in increased costs and longer development times.

We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend those trials, or delay the analysis of data from our completed or ongoing clinical trials. Any of the following could delay the initiation or the completion of our ongoing and planned clinical trials:

	•		Ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;

	•		Delays in enrolling patients and volunteers into clinical trials;

	•		Lower than anticipated retention rate of patients and volunteers in clinical trials;

	•		Negative or inconclusive results of clinical trials or adverse medical events during a clinical trial could cause a clinical trial to be repeated or a program to be terminated, even if other studies or trials related to the program are successful;

	•		Insufficient supply or deficient quality of drug candidate materials or other materials necessary for the conduct of our clinical trials;

	•		Serious and unexpected drug-related side-effects experienced by participants in our clinical trials; or

•

The placement of a clinical trial on hold.

OUR PRODUCT CANDIDATES ARE SUBJECT TO RIGOROUS REGULATORY REVIEW AND, EVEN IF APPROVED, REMAIN SUBJECT TO EXTENSIVE REGULATION.

Our technologies and product candidates must undergo a rigorous regulatory approval process which includes extensive preclinical and clinical testing to demonstrate safety and efficacy before any resulting product can be marketed. Our research and development activities are regulated by a number of government authorities in the United States and other countries, including the FDA pursuant to the Federal Food, Drug, and Cosmetic Act. The clinical trial and regulatory approval process usually requires many years and substantial cost. To date, neither the FDA nor any of its international equivalents has approved any of our product candidates for marketing.

The FDA regulates drugs in the United States, including their testing, manufacturing and marketing. Data obtained from testing is subject to varying interpretations which can delay, limit or prevent FDA approval. The FDA has stringent laboratory and manufacturing standards which must be complied with before we can test our product candidates in people or make them commercially available. Examples of these standards include Good Laboratory Practices and current Good Manufacturing Practices, or cGMP. Our compliance with these standards is subject to initial certification by independent inspectors and continuing audits thereafter. Obtaining FDA approval to sell our product candidates is time-consuming and expensive. The FDA usually takes at least 12 to 18 months to review an NDA which must be submitted before the FDA will consider granting approval to sell a product. If the FDA requests additional information, it may take even longer for the FDA to make a decision especially if the additional information that they request requires us to complete additional studies. We may encounter similar delays in foreign countries. After reviewing any NDA we submit, the FDA or its foreign equivalents may decide not to approve our products. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing our product candidates.

Other risks associated with the regulatory approval process include:

	•		Regulatory approvals may impose significant limitations on the uses for which any approved products may be marketed;

	•		Any marketed product and its manufacturer are subject to periodic reviews and audits, and any discovery of previously unrecognized problems with a product or manufacturer could result in suspension or limitation of approvals;

	•		Changes in existing regulatory requirements, or the enactment of additional regulations or statutes, could prevent or affect the timing of our ability to achieve regulatory compliance. Federal and state laws, regulations and policies may be changed with possible retroactive effect, and how these rules actually operate can depend heavily on administrative policies and interpretation over which we have no control, and we may possess inadequate experience to assess their full impact upon our business; and

	•		The approval may impose significant restrictions on the indicated uses, conditions for use, labeling, advertising, promotion, marketing and/or production of such product, and may impose ongoing requirements for post-approval studies, including additional research and development and clinical trials.

OUR PRODUCTS COULD BE SUBJECT TO RESTRICTIONS OR WITHDRAWAL FROM THE MARKET AND WE MAY BE SUBJECT TO PENALTIES IF WE FAIL TO COMPLY WITH REGULATORY REQUIREMENTS, OR IF WE EXPERIENCE UNANTICIPATED PROBLEMS WITH OUR PRODUCTS, WHEN AND IF ANY OF THEM ARE APPROVED.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory bodies. These requirements include submissions of safety and other post-marketing information and reports, registration requirements, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. The manufacturer and the manufacturing facilities we use to make any of our product candidates will also be subject to periodic review and inspection by the FDA. The subsequent discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on the product or manufacturer or facility, including withdrawal of the product from the market. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously

unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in:

	•		Restrictions on such products, manufacturers or manufacturing processes;

	•		Warning letters;

	•		Withdrawal of the products from the market;

	•		Refusal to approve pending applications or supplements to approved applications that we submit;

	•		Recall;

	•		Fines;

	•		Suspension or withdrawal of regulatory approvals;

	•		Refusal to permit the import or export of our products;

	•		Product seizure; and

	•		Injunctions or the imposition of civil or criminal penalties.

FAILURE TO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WOULD PREVENT US FROM MARKETING OUR PRODUCTS ABROAD.

Although we have not initiated any marketing efforts in foreign jurisdictions, we intend in the future to market our products outside the United States. In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval abroad may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval and we may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or approval by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market outside the United States. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.

FOREIGN GOVERNMENTS TEND TO IMPOSE STRICT PRICE CONTROLS WHICH MAY ADVERSELY AFFECT OUR REVENUES, IF ANY.

The pricing of prescription pharmaceuticals is subject to governmental control in some foreign countries. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.

Risks Related to our Intellectual Property

IF WE ARE UNABLE TO SECURE ADEQUATE PATENT PROTECTION FOR OUR TECHNOLOGIES, THEN WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AS A BIOTECHNOLOGY COMPANY.

At the present time, we do not have patent protection for all uses of our technologies. There is significant competition in the field of CNS diseases, our primary scientific area of research and development. Our competitors may seek patent protection for their technologies, and such patent applications or rights might conflict with the patent protection that we are seeking for our technologies. If we do not obtain patent protection for our technologies, or if others obtain patent rights that block our ability to develop and market our technologies, our business prospects may be significantly and negatively affected. Further, even if patents can be obtained, these

patents may not provide us with any competitive advantage if our competitors have stronger patent positions or if their product candidates work better in clinical trials than our product candidates. Our patents may also be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products.

Our patent strategy is to obtain broad patent protection, in the United States and in major developed countries, for our technologies and their related medical indications. Risks associated with protecting our patent and proprietary rights include the following:

	•		Our ability to protect our technologies could be delayed or negatively affected if the United States Patent and Trademark Office, or USPTO, requires additional experimental evidence that our technologies work;

	•		Our competitors may develop similar technologies or products, or duplicate any technology developed by us;

	•		Our competitors may develop products which are similar to ours but which do not infringe our patents or products;

	•		Our competitors may successfully challenge one or more of our patents in an interference or litigation proceeding;

	•		Our patents may infringe the patents or rights of other parties who may decide not to grant a license to us. We may have to change our products or processes, pay licensing fees or stop certain activities because of the patent rights of third parties which could cause additional unexpected costs and delays;

	•		Patent law in the fields of healthcare and biotechnology is still evolving and future changes in such laws might conflict with our existing and future patent rights, or the rights of others;

	•		Our collaborators, employees and consultants may breach the confidentiality agreements that we enter into to protect our trade secrets and propriety know-how. We may not have adequate remedies for such breach; and

	•		There may be disputes as to the ownership of technological information developed by consultants, scientific advisors or other third parties which may not be resolved in our favor.

WE IN-LICENSE A SIGNIFICANT PORTION OF OUR INTELLECTUAL PROPERTY AND IF WE FAIL TO COMPLY WITH OUR OBLIGATIONS UNDER ANY OF THE RELATED AGREEMENTS, WE COULD LOSE LICENSE RIGHTS THAT ARE NECESSARY TO DEVELOP OUR PRODUCT CANDIDATES.

We are a party to and rely on a number of in-license agreements with third parties that give us rights to intellectual property that is necessary for our business. In addition, we expect to enter into additional licenses in the future. Our current in-license arrangements impose various development, royalty and other obligations on us. If we breach these obligations and fail to cure such breach in a timely manner, these exclusive licenses could be converted to non-exclusive licenses or the agreements could be terminated, which would result in our being unable to develop, manufacture and sell products that are covered by the licensed technology.

IF WE BECOME INVOLVED IN PATENT LITIGATION OR OTHER PROCEEDINGS RELATED TO A DETERMINATION OF RIGHTS, WE COULD INCUR SUBSTANTIAL COSTS AND EXPENSES, SUBSTANTIAL LIABILITY FOR DAMAGES OR BE REQUIRED TO STOP OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS.

A third party may sue us for infringing its patent rights. Likewise, we may need to resort to litigation to enforce a patent issued or licensed to us or to determine the scope and validity of third-party proprietary rights. In addition, a third party may claim that we have improperly obtained or used its confidential or proprietary information. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared against us by the USPTO, regarding intellectual property rights with respect to our products and technology. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.

If any parties successfully claim that our creation or use of proprietary technologies infringes upon their intellectual property rights, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a license. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license and are unable to design around a patent, we may be unable to effectively market some of our technology and products, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. We might be required to redesign the formulation of a product candidate so that it does not infringe, which may not be possible or could require substantial funds and time. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect of our business operations if we are unable to enter into license agreements that are acceptable to us. Moreover, we expect that a number of our collaborations will provide that royalties payable to us for licenses to our intellectual property may be offset by amounts paid by our collaborators to third parties who have competing or superior intellectual property positions in the relevant fields, which could result in significant reductions in our revenues from products developed through collaborations.

CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION.

In order to protect our proprietary technology and processes, we rely in part on confidentiality agreements with our collaborators, employees, consultants, outside scientific collaborators and sponsored researchers, and other advisors. These agreements may be breached, may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such party. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Risks Related to our Dependence on Third Parties

IF ANY COLLABORATOR TERMINATES OR FAILS TO PERFORM ITS OR THEIR OBLIGATIONS UNDER AGREEMENTS WITH US, THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD BE DELAYED OR TERMINATED.

We are dependent on expert advisors and our collaborations with research and development service providers. Our business could be adversely affected if any collaborator terminates its collaboration agreement with us or fails to perform its obligations under that agreement. Most biotechnology and pharmaceutical companies have established internal research and development programs, including their own facilities and employees which are under their direct control. By contrast, we have limited internal research capability and have elected to outsource substantially all of our research and development, preclinical and clinical activities. As a result, we are dependent upon our network of expert advisors and our collaborations with other research and development service providers for the development of our technologies and product candidates. These expert advisors are not our employees but provide us with important information and knowledge that may enhance our product development strategies and plans. Our collaborations with research and development service providers are important for the testing and evaluation of our technologies, in both the preclinical and clinical stages.

Many of our expert advisors are employed by, or have their own collaborative relationship with Harvard University and its affiliated hospitals, or Harvard and its Affiliates, or CMCC. A summary of the key scientific, research and development professionals with whom we work, and a composite of their professional background and affiliations is as follows:

	•		Larry I. Benowitz, Ph.D., Director, Laboratories for Neuroscience Research in Neurosurgery, Children’s Hospital, Boston; Associate Professor of Neuroscience, Department of Surgery, Harvard Medical School.

	•		Joseph R. Bianchine, M.D., Ph.D., F.A.C.P., F.A.C.C.P., former Senior Scientific Advisor, Schwarz Pharma AG.

	•		Alan J. Fischman, M.D., Ph.D., Director, Department of Nuclear Medicine, Massachusetts General Hospital; Professor of Radiology, Harvard Medical School.

	•		Zhigang He, Ph.D., BM, Research Associate, Department of Neurology, Children’s Hospital Boston; Associate Professor of Neurology, Department of Neurology, Harvard Medical School.

	•		Robert S. Langer, Jr. Sc.D., Director, Boston Life Sciences, Inc., Institute Professor of Chemical and Biomedical Engineering, Massachusetts Institute of Technology.

	•		Peter Meltzer, Ph.D., President, Organix, Inc., Woburn, MA.

Dr. Benowitz and Dr. Bianchine provide scientific consultative services resulting in total payments of approximately $52,000 per year. Dr. Benowitz provides scientific consultative services primarily related to our axon regeneration and ocular programs. Dr. Bianchine provides scientific consultative services primarily related to our axon regeneration and DAT blocker programs.

We do not have a formal agreement with Dr. Meltzer but do enter into research and development contracts from time to time with Organix, Inc., of which Dr. Meltzer is president. Our significant collaborations include:

	•		Beacon Bioscience in Doylestown, Pennsylvania which performs services for us including ALTROPANE SPECT evaluations and image management;

	•		Chemic Laboratories in Canton, Massachusetts which provides ALTROPANE chemical intermediate material, INOSINE drug substance, and performs certain analytic services for our preclinical programs;

	•		Children’s Hospital Boston in Boston, Massachusetts where certain of our collaborating scientists perform their research efforts;

	•		Harvard Medical School in Boston, Massachusetts where certain of our collaborating scientists perform their research efforts;

	•		INC Research in Raleigh, North Carolina which performs services for us including clinical and medical monitoring, statistical analysis and data management services;

	•		Massachusetts General Hospital, Boston, Massachusetts where certain of our collaborating scientists perform their research efforts;

	•		MDS Nordion in Vancouver, British Colombia which manufactures the SPECT ALTROPANE molecular imaging agent;

	•		Medifacts International in Rockville, Maryland which is our ECG core laboratory and provides cardiac safety services; and

	•		Organix in Woburn, Massachusetts which provides non-radioactive ALTROPANE for FDA mandated studies and synthesizes our compounds for the treatment of PD and for axon regeneration.

We generally have a number of collaborations with research and development service providers ongoing at any point in time. These agreements generally cover a specific project or study, are usually for a duration between one month to one year, and expire upon completion of the project. Under these agreements, we are usually required to make an initial payment upon execution of the agreement with the remaining payments based upon the completion of certain specified milestones such as completion of a study or delivery of a report.

We cannot control the amount and timing of resources our advisors and collaborators devote to our programs or technologies. Our advisors and collaborators may have employment commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. If any of our advisors or collaborators were to breach or terminate their agreement with us or otherwise fail to conduct their activities successfully and in a timely manner, the preclinical or clinical development or commercialization of our technologies and product candidates or our research programs could be delayed or terminated. Any such delay or termination could have a material adverse effect on our business, financial condition or results of operations.

Disputes may arise in the future with respect to the ownership of rights to any technology developed with our advisors or collaborators. These and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our technologies, or could require or result in litigation to resolve. Any such event could have a material adverse effect on our business, financial condition or results of operations.

Our advisors and collaborators sign agreements that provide for confidentiality of our proprietary information. Nonetheless, they may not maintain the confidentiality of our technology and other confidential information in connection with every advisory or collaboration arrangement, and any unauthorized dissemination of our confidential information could have a material adverse effect on our business, financial condition or results of operations.

IF WE ARE UNABLE TO MAINTAIN OUR KEY WORKING RELATIONSHIPS WITH OUR KEY COLLABORATORS, INCLUDING HARVARD AND ITS AFFILIATES AND CHILDREN’S MEDICAL CENTER CORPORATION, WE MAY NOT BE SUCCESSFUL SINCE SUBSTANTIALLY ALL OF OUR CURRENT TECHNOLOGIES WERE LICENSED FROM, AND MOST OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES WERE PERFORMED BY, SUCH COLLABORATORS. WE EXPECT THAT A SUBSTANTIAL PORTION OF OUR FUTURE DEVELOPMENT EFFORTS WILL BE BASED UPON TECHNOLOGIES DEVELOPED BY AND RESEARCH AND DEVELOPMENT PERFORMED BY THESE COLLABORATORS.

Historically, we have been, and expect to continue to be, heavily dependent on our relationships with our key collaborators, including Harvard and its Affiliates and CMCC. To date, substantially all of our technologies were licensed from, and most of our research and development activities were performed by, our key collaborators, including Harvard and its Affiliates and CMCC. We expect that a substantial portion of our future development efforts will be based upon technologies developed by and research and development performed by these collaborators.

Under the terms of our license agreements with Harvard and its Affiliates and CMCC, we acquired the exclusive, worldwide license to make, use, and sell the technology covered by each respective agreement. Among other things, the technologies licensed under these agreements include:

	•		ALTROPANE molecular imaging agent compositions and methods of use;

	•		Technetium-based molecular imaging agent compositions and methods of use;

	•		Axon regeneration methods of use; and

	•		DAT blocker compositions and methods of use.

Generally, each of these license agreements is effective until the last patent licensed relating to the technology expires or at a fixed and determined date. The patents on the ALTROPANE molecular imaging agent expire beginning in 2013. The patents on the technetium-based molecular imaging agents expire beginning in 2020. The patents within our axon regeneration program expire beginning in 2016. The applications for patents relating to our DAT blocker program are currently pending.

We are required to make certain payments under our license agreements with our collaborators which generally include:

	•		An initial licensing fee payment upon the execution of the agreement and annual license maintenance fee;

	•		Reimbursement payments for all patent related costs incurred by the licensor, including fees associated with the filing of continuation-in-part patent applications;

	•		Milestone payments as licensed technology progresses through each stage of development (filing of IND, completion of one or more clinical stages and submission and approval of an NDA); and

	•		Royalty payments on the sales of any products based on the licensed technology.

In May 2006, we entered into the Axon Regeneration Licenses with CMCC to acquire the exclusive worldwide rights to new axon regeneration technologies and to replace our former axon regeneration licenses with CMCC. The Axon Regeneration Licenses provide for payments to CMCC for accrued patent costs, an up-front license payment of $50,000 and future milestone payments of up to an aggregate of approximately $425,000 for each product candidate upon achievement of certain regulatory milestones. Additionally, we entered into two sponsored research agreements with CMCC which provide for a total of $550,000 in annual funding for three years.

Since inception, we have paid Harvard and its Affiliates under the terms of the Harvard License Agreements, approximately $650,000 in initial licensing fees and milestone payments. The Harvard License Agreements obligate us to pay up to an aggregate of approximately $2,570,000 in milestone payments in the future.

These future milestone payments are generally payable only upon achievement of certain regulatory milestones.

We have entered into sponsored research agreements with certain key collaborators, including Harvard and its Affiliates and CMCC. Under these agreements, we provide funding so that the sponsoring scientists can continue their research efforts. These payments are generally made in equal quarterly installments over the term of the agreements which are usually for one to three years.

Universities and other not-for-profit research institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology that they have developed. The loss of our relationship with one or more of our key collaborators could adversely affect our ongoing development programs and could make it more costly and difficult for us to obtain the licensing rights to new scientific discoveries.

IF WE ARE UNABLE TO ESTABLISH, MAINTAIN AND RELY ON NEW COLLABORATIVE RELATIONSHIPS, THEN WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES.

To date, our operations have primarily focused on the preclinical development of most of our technologies, as well as conducting clinical trials for certain of our technologies. We currently expect that the continued development of our technologies will result in the initiation of additional clinical trials. We expect that these developments will require us to establish, maintain and rely on new collaborative relationships in order to successfully develop and commercialize our technologies. We face significant competition in seeking appropriate collaborators. Collaboration arrangements are complex to negotiate and time consuming to document. We may not be successful in our efforts to establish additional collaborations or other alternative arrangements, and the terms of any such collaboration or alternative arrangement may not be favorable to us. There is no certainty that:

	•		We will be able to enter into such collaborations on economically feasible and otherwise acceptable terms and conditions;

	•		Such collaborations will not require us to undertake substantial additional obligations or require us to devote additional resources beyond those we have identified at present;

	•		Any of our collaborators will not breach or terminate their agreements with us or otherwise fail to conduct their activities on time, thereby delaying the development or commercialization of the technology for which the parties are collaborating; and

	•		The parties will not dispute the ownership rights to any technologies developed under such collaborations.

IF ONE OF OUR COLLABORATORS WERE TO CHANGE ITS STRATEGY OR THE FOCUS OF ITS DEVELOPMENT AND COMMERCIALIZATION EFFORTS WITH RESPECT TO OUR RELATIONSHIP, THE SUCCESS OF OUR PRODUCT CANDIDATES AND OUR OPERATIONS COULD BE ADVERSELY AFFECTED.

There are a number of factors external to us that may change our collaborators’ strategy or focus with respect to our relationship with them, including:

	•		The amount and timing of resources that our collaborators may devote to the product candidates;

	•		Our collaborators may experience financial difficulties;

	•		We may be required to relinquish important rights such as marketing and distribution rights;

	•		Should a collaborator fail to develop or commercialize one of our product candidates, we may not receive any future milestone payments and will not receive any royalties for the product candidate;

	•		Business combinations or significant changes in a collaborator’s business strategy may also adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement;

	•		A collaborator may not devote sufficient time and resources to any collaboration with us, which could prevent us from realizing the potential commercial benefits of that collaboration;

	•		A collaborator may terminate their collaborations with us, which could make it difficult for us to attract new collaborators or adversely affect how we are perceived in the business and financial communities; and

	•		A collaborator could move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors.

If any of these occur, the development and commercialization of one or more drug candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.

Risks Related to Competition

WE ARE ENGAGED IN HIGHLY COMPETITIVE INDUSTRIES DOMINATED BY LARGER, MORE EXPERIENCED AND BETTER CAPITALIZED COMPANIES.

The biotechnology and pharmaceutical industries are highly competitive, rapidly changing, and are dominated by larger, more experienced and better capitalized companies. Such greater experience and financial strength may enable them to bring their products to market sooner than us, thereby gaining the competitive advantage of being the first to market. Research on the causes of, and possible treatments for, diseases for which we are trying to develop therapeutic or diagnostic products are developing rapidly and there is a potential for extensive technological innovation in relatively short periods of time. Factors affecting our ability to successfully manage the technological changes occurring in the biotechnology and pharmaceutical industries, as well as our ability to successfully compete, include:

	•		Many of our potential competitors in the field of CNS research have significantly greater experience than we do in completing preclinical and clinical testing of new pharmaceutical products, the manufacturing and commercialization process, and obtaining FDA and other regulatory approvals of products;

	•		Many of our potential competitors have products that have been approved or are in late stages of development;

	•		Many of our potential competitors may develop products or other novel technologies that are more effective, safer or less costly than any that we are developing;

	•		Many of our potential competitors have collaborative arrangements in our target markets with leading companies and research institutions;

	•		The timing and scope of regulatory approvals for these products;

	•		The availability and amount of third-party reimbursement;

	•		The strength of our patent position;

	•		Many of our potential competitors are in a stronger financial position than us, and are thus better able to finance the significant cost of developing, manufacturing and selling new products; and

	•		Companies with established positions and prior experience in the pharmaceutical industry may be better able to develop and market products for the treatment of those diseases for which we are trying to develop products.

To our knowledge, there is only one company, GE Healthcare (formerly Nycomed/Amersham), that has marketed a diagnostic imaging agent for PD. To date, GE Healthcare has obtained marketing approval only in Europe, and to the best of our knowledge, is not presently seeking approval in the United States. However, GE Healthcare has significantly greater infrastructure and financial resources than us, and their decision to seek approval in the United States could significantly adversely affect our competitive position. Their established market presence, and greater financial strength in the European market will make it difficult for us to successfully market ALTROPANE in Europe.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY, OUR PRODUCT CANDIDATES MAY BE RENDERED NONCOMPETITIVE OR OBSOLETE.

Our competitors may develop or commercialize more effective, safer or more affordable products, or obtain more effective patent protection, than we are able to. Accordingly, our competitors may commercialize products more rapidly or effectively than we are able to, which would adversely affect our competitive position, the likelihood that our product candidates will achieve initial market acceptance, and our ability to generate meaningful revenues from our product candidates. Even if our product candidates achieve initial market acceptance, competitive products may render our products obsolete, noncompetitive or uneconomical. If our product candidates are rendered obsolete, we may not be able to recover the expenses of developing and commercializing those product candidates.

IF THIRD-PARTY PAYORS DO NOT ADEQUATELY REIMBURSE OUR CUSTOMERS FOR ANY OF OUR PRODUCTS THAT ARE APPROVED FOR MARKETING, THEY MIGHT NOT BE ACCEPTED BY PHYSICIANS AND PATIENTS OR PURCHASED OR USED, AND OUR REVENUES AND PROFITS WILL NOT DEVELOP OR INCREASE.

Substantially all biotechnology products are distributed to patients by physicians and hospitals, and in most cases, such patients rely on insurance coverage and reimbursement to pay for some or all of the cost of the product. In recent years, the continuing efforts of government and third party payors to contain or reduce health care costs have limited, and in certain cases prevented, physicians and patients from receiving insurance coverage and reimbursement for medical products, especially newer technologies. We believe that the efforts of governments and third-party payors to contain or reduce the cost of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies. Obtaining reimbursement approval for a product from each governmental or other third-party payor is a time-consuming and costly process that could require us to provide to each prospective payor scientific, clinical and cost-effectiveness data for the use of our products. If we succeed in bringing any of our product candidates to market and third-party payors determine that the product is eligible for coverage; the third-party payors may nonetheless establish and maintain price levels insufficient for us to realize a sufficient return on our investment in product development. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases.

Our ability to generate adequate revenues and operating profits could be adversely affected if such limitations or restrictions are placed on the sale of our products. Specific risks associated with medical insurance coverage and reimbursement include:

	•		Significant uncertainty exists as to the reimbursement status of newly approved health care products;

	•		Third-party payors are increasingly challenging the prices charged for medical products and services;

	•		Adequate insurance coverage and reimbursement may not be available to allow us to charge prices for products which are adequate for us to realize an appropriate return on our development costs. If adequate coverage and reimbursement are not provided for use of our products, the market acceptance of these products will be negatively affected;

	•		Health maintenance organizations and other managed care companies may seek to negotiate substantial volume discounts for the sale of our products to their members thereby reducing our profit margins; and

	•		In recent years, bills proposing comprehensive health care reform have been introduced in Congress that would potentially limit pharmaceutical prices and establish mandatory or voluntary refunds. It is uncertain if any legislative proposals will be adopted and how federal, state or private payors for health care goods and services will respond to any health care reforms.

U.S. drug prices may be further constrained by possible Congressional action regarding drug reimportation into the United States. Some proposed legislation would allow the reimportation of approved drugs originally manufactured in the United States back into the United States from other countries where the drugs are sold at a lower price. Some governmental authorities in the U.S. are pursuing lawsuits to obtain expanded reimportation authority. Such legislation, regulations, or judicial decisions could reduce the prices we receive for any products that we may develop, negatively affecting our revenues and prospects for profitability. Even without legislation authorizing reimportation, increasing numbers of patients have been purchasing prescription drugs from Canadian and other non-United States sources, which has reduced the price received by pharmaceutical companies for their products.

The Centers for Medicare and Medicaid Services, or CMS, the agency within the Department of Health and Human Services that administers Medicare and that is responsible for setting Medicare reimbursement payment rates and coverage policies for any product candidates that we commercialize, has authority to decline to cover particular drugs if it determines that they are not “reasonable and

necessary” for Medicare beneficiaries or to cover them at lower rates to reflect budgetary constraints or to match previously approved reimbursement rates for products that CMS considers to be therapeutically comparable. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and both Medicare and other third-party payors may have sufficient market power to demand significant price reductions.

Moreover, marketing and promotion arrangements in the pharmaceutical industry are heavily regulated by CMS, and many marketing and promotional practices that are common in other industries are prohibited or restricted. These restrictions are often ambiguous and subject to conflicting interpretations, but carry severe administrative, civil, and criminal penalties for noncompliance. It may be costly for us to implement internal controls to facilitate compliance by our sales and marketing personnel.

As a result of the trend towards managed healthcare in the United States, as well as legislative proposals to constrain the growth of federal healthcare program expenditures, third-party payors are increasingly attempting to contain healthcare costs by demanding price discounts or rebates and limiting both coverage and the level of reimbursement of new drug products. Consequently, significant uncertainty exists as to the reimbursement status of newly approved healthcare products.

MEDICARE PRESCRIPTION DRUG COVERAGE LEGISLATION AND FUTURE LEGISLATIVE OR REGULATORY REFORM OF THE HEALTH CARE SYSTEM MAY AFFECT OUR ABILITY TO SELL OUR PRODUCT CANDIDATES PROFITABLY.

A number of legislative and regulatory proposals to change the healthcare system in the United States and other major healthcare markets have been proposed in recent years. In addition, ongoing initiatives in the United States have exerted and will continue to exert pressure on drug pricing. In some foreign countries, particularly countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. Significant changes in the healthcare system in the United States or elsewhere, including changes resulting from the implementation of the Medicare prescription drug coverage legislation and adverse trends in third-party reimbursement programs, could limit our ability to raise capital and successfully commercialize our product candidates.

In particular, the Medicare Prescription Drug Improvement and Modernization Act of 2003 established a new Medicare prescription drug benefit. The prescription drug program and future amendments or regulatory interpretations of the legislation could affect the prices we are able to charge for any products we develop and sell for use by Medicare beneficiaries and could also cause third-party payors other than the federal government, including the states under the Medicaid program, to discontinue coverage for any products we develop or to lower reimbursement amounts that they pay. The legislation changed the methodology used to calculate reimbursement for drugs that are administered in physicians’ offices in a manner intended to reduce the amount that is subject to reimbursement. In addition, the Medicare prescription drug benefit program that took effect in January 2006 directed the Secretary of Health and Human Services to contract with procurement organizations to purchase physician- administered drugs from manufacturers and provided physicians with the option to obtain drugs through these organizations as an alternative to purchasing from manufacturers, which some physicians may find advantageous. Because we have not received marketing approval or established a price for any product, it is difficult to predict how this new legislation will affect us, but the legislation generally is expected to constrain or reduce reimbursement for certain types of drugs.

Further federal, state and foreign healthcare proposals and reforms are likely. While we cannot predict the legislative or regulatory proposals that will be adopted or what effect those proposals may have on our business, including the future reimbursement status of any of our product candidates, the announcement or adoption of such proposals could have an adverse effect on potential revenues from product candidates that we may successfully develop.

WE HAVE LIMITED MANUFACTURING CAPACITY AND MARKETING INFRASTRUCTURE AND EXPECT TO BE HEAVILY DEPENDENT UPON THIRD PARTIES TO MANUFACTURE AND MARKET APPROVED PRODUCTS.

We currently have limited manufacturing facilities for either clinical trial or commercial quantities of any of our product candidates and currently have no plans to obtain additional facilities. To date, we have obtained the limited quantities of drug product required for preclinical and clinical trials from contract manufacturing companies. We intend to continue using contract manufacturing arrangements with experienced firms for the supply of material for both clinical trials and any eventual commercial sale, with the exception of oncomodulin, which we presently plan to produce in our facility in Baltimore, Maryland.

We will depend upon third parties to produce and deliver products in accordance with all FDA and other governmental regulations. We may not be able to contract with manufacturers who can fulfill our requirements for quality, quantity and timeliness, or be able to find substitute manufacturers, if necessary. The failure by any third party to perform their obligations in a timely fashion and in

accordance with the applicable regulations may delay clinical trials, the commercialization of products, and the ability to supply product for sale. In addition, any change in manufacturers could be costly because the commercial terms of any new arrangement could be less favorable and because the expenses relating to the transfer of necessary technology and processes could be significant.

With respect to our most advanced product candidate, ALTROPANE molecular imaging agent, we have entered into an agreement with, and are highly dependent upon, MDS Nordion. Under the terms of the agreement, which currently expires on December 31, 2006, we paid MDS Nordion a one-time fee of $300,000 in connection with its commitment to designate certain of its facilities exclusively for the production of the ALTROPANE molecular imaging agent. We also paid MDS Nordion approximately $900,000 to establish a cGMP certified manufacturing process for the production of ALTROPANE. Finally, we agreed to minimum monthly purchases of ALTROPANE through December 31, 2006. We hope to sign an extension with MDS Nordion before December 31, 2006 but there can be no assurance that we will be able to or that the terms will be acceptable. The agreement provides for MDS Nordion to manufacture the ALTROPANE molecular imaging agent for our clinical trials. The agreement also provides that MDS Nordion will compile and prepare the information regarding manufacturing that will be a required component of any NDA we file for ALTROPANE in the future. We do not presently have arrangements with any other suppliers in the event that Nordion is unable to manufacture ALTROPANE for us. We could encounter a significant delay before another supplier could manufacture ALTROPANE for us due to the time required to establish a cGMP manufacturing process for ALTROPANE.

We currently have a limited marketing infrastructure. In order to earn a profit on any future product, we will be required to invest in the necessary sales and marketing infrastructure or enter into collaborations with third parties with respect to executing sales and marketing activities. We may encounter difficulty in negotiating sales and marketing collaborations with third parties on favorable terms for us. Most of the companies who can provide such services are financially stronger and more experienced in selling pharmaceutical products than we are. As a result, they may be in a position to negotiate an arrangement that is more favorable to them. We could experience significant delays in marketing any of our products if we are required to internally develop a sales and marketing organization or establish collaborations with a partner. There are risks involved with establishing our own sales and marketing capabilities. We have no experience in performing such activities and could incur significant costs in developing such a capability.

USE OF THIRD PARTY MANUFACTURERS MAY INCREASE THE RISK THAT WE WILL NOT HAVE ADEQUATE SUPPLIES OF OUR PRODUCT CANDIDATES.

Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including:

	•		Reliance on the third party for regulatory compliance and quality assurance;

	•		The possible breach of the manufacturing agreement by the third party; and

	•		The possible termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us.

If we are not able to obtain adequate supplies of our product candidates and any approved products, it will be more difficult for us to develop our product candidates and compete effectively. Our product candidates and any products that we successfully develop may compete with product candidates and products of third parties for access to manufacturing facilities. Our contract manufacturers are subject to ongoing, periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their designees to ensure strict compliance with cGMP regulations and other governmental regulations and corresponding foreign standards. We cannot be certain that our present or future manufacturers will be able to comply with cGMP regulations and other FDA regulatory requirements or similar regulatory requirements outside the United States. We do not control compliance by our contract manufacturers with these regulations and standards. Failure of our third party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates and products.

Risks Related to Employees and Growth

IF WE ARE UNABLE TO RETAIN OUR KEY PERSONNEL AND/OR RECRUIT ADDITIONAL KEY PERSONNEL IN THE FUTURE, THEN WE MAY NOT BE ABLE TO OPERATE EFFECTIVELY.

Our success depends significantly upon our ability to attract, retain and motivate highly qualified scientific and management personnel who are able to formulate, implement and maintain the operations of a biotechnology company such as ours. We consider retaining Peter Savas, our Chairman and Chief Executive Officer, Mark Pykett, our President and Chief Operating Officer and Kenneth L. Rice, Jr., our Executive Vice President Finance and Administration and Chief Financial Officer to be key to our efforts to develop and commercialize our product candidates. The loss of the service of any of these key executives may significantly delay or prevent the achievement of product development and other business objectives. We have entered into employment and non-compete agreements with Messrs. Savas, Pykett and Rice. We do not presently carry key person life insurance on any of our scientific or management personnel.

We currently outsource most of our research and development, preclinical and clinical activities. If we decide to increase our internal research and development capabilities for any of our technologies, we may need to hire additional key management and scientific personnel to assist the limited number of employees that we currently employ. There is significant competition for such personnel from other companies, research and academic institutions, government entities and other organizations. If we fail to attract such personnel, it could have a significant negative effect on our ability to develop our technologies.

Risks Related to our Stock

OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE AND CAN BE AFFECTED BY FACTORS UNRELATED TO OUR BUSINESS AND OPERATING PERFORMANCE.

The market price of our common stock may fluctuate significantly in response to factors that are beyond our control. The stock market in general periodically experiences significant price and volume fluctuations. The market prices of securities of pharmaceutical and biotechnology companies have been volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could result in significant fluctuations in the price of our common stock, which could cause a decline in the value of your investment. The market price of our common stock may be influenced by many factors, including:

	•		Announcements of technological innovations or new commercial products by our competitors or us;

	•		Announcements in the scientific and research community;

	•		Developments concerning proprietary rights, including patents;

	•		Delay or failure in initiating, conducting, completing or analyzing clinical trials or problems relating to the design, conduct or results of these trials;

	•		Announcement of FDA approval or non-approval of our product candidates or delays in the FDA review process;

	•		Developments concerning our collaborations;

	•		Publicity regarding actual or potential medical results relating to products under development by our competitors or us;

	•		Failure of any of our product candidates to achieve commercial success;

	•		Our ability to manufacture products to commercial standards;

	•		Conditions and publicity regarding the life sciences industry generally;

	•		Regulatory developments in the United States and foreign countries;

	•		Changes in the structure of health care payment systems;

Item 5 — Other Information

On August 8, 2006, we issued to Gipson an unsecured promissory note, or the August Promissory Note, pursuant to which we may, through one or more advances, borrow up to an aggregate principal amount of $3,000,000 from Gipson. From time to time prior to the Maturity Date (discussed below), Gipson shall make requested advances to us under the August Promissory Note so long as each advance totals at least $1,000,000.

The outstanding principal amount borrowed under the August Promissory Note shall be due and payable upon the earliest to occur of: (i) December 31, 2007; (ii) the date on which we consummate an equity financing in which the gross proceeds to us total at least $10,000,000; and (iii) the date on which Gipson declares an event of default (as defined in the August Promissory Note), the first of these three events to occur referred to as the Maturity Date.

We have agreed to certain covenants under the August Promissory Note, including covenants agreeing not to: (A) incur or assume indebtedness; (B) make any dividends or distributions on our capital stock; (C) sell, lease or transfer any material assets or property; or (D) liquidate or dissolve.

According to a Schedule 13G/A filed with SEC on January 24, 2006, Gipson beneficially owned approximately 18.9% of our outstanding common stock on January 1, 2006. Gipson, who serves as a Senior Director of Ingalls & Snyder LLC and a General Partner of Ingalls & Snyder Value Partners, L.P., served as one of our directors from June 15, 2004 until October 28, 2004.

Item 6 — Exhibits

10.1+		License Agreement (including sponsored research agreement) between CMCC and the Company dated as of May 10, 2006 (Dr. Larry Benowitz)

10.2+		License Agreement (including sponsored research agreement) between CMCC and the Company dated as of May 10, 2006 (Dr. Zhigang He)

10.3		Promissory Note (unsecured) in favor of Robert Gipson dated August 8, 2006.

31.1		Certification of the Chief Executive Officer pursuant to Section 1350 of Title 18, United States Code, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Section 1350 of Title 18, United States Code, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


+		Confidential treatment has been requested as to certain portions which have been filed separately with the Securities and Exchange Commission.


	Page
Part I Financial Information

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005		3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005, and for the period from inception (October 16, 1992) to June 30, 2006		4

Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2006 and 2005, and for the period from inception (October 16, 1992) to June 30, 2006		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3. Quantitative and Qualitative Disclosures About Market Risk		22

Item 4. Controls and Procedures		22

Part II Other Information

Item 1A. Risk Factors		24

Item 5. Other Information		42

Item 6. Exhibits		42

SIGNATURES
EX-10.1 Exclusive License Agreement (Benowitz)
EX-10.2 Exclusive License Agreement (He)
Ex-10.3 Promissory Note (unsecured) in favor of Robert Gipson dated August 8, 2006
EX-31.1 Section 302 Certification of C.E.O.
EX-31.2 Section 302 Certification of C.F.O.
EX-32.1 Section 906 Certification of C.E.O.
EX-32.2 Section 906 Certification of C.F.O.


		BOSTON LIFE SCIENCES, INC
		(Registrant)

DATE: August 14, 2006		/s/ Peter G. Savas

		Peter G. Savas
		Chief Executive Officer
		(Principal Executive Officer)

DATE: August 14, 2006		/s/ Kenneth L. Rice, Jr.

		Kenneth L. Rice, Jr.
		Executive Vice President Finance and Administration And Chief Financial Officer (Principal Financial and Accounting Officer)

	•		Period-to-period fluctuations in our financial results or those of companies that are perceived to be similar to us;

	•		Departure of our key personnel;

	•		Future sales of our common stock;

	•		Investors’ perceptions of us, our products, the economy and general market conditions;

	•		Differences in actual financial results versus financial estimates by securities analysts and changes in those estimates; and

	•		Litigation.