##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended June 30, 2005



OR



| ̈ | 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



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BOSTON LIFE SCIENCES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 87-0277826                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



|                                                    |  |           
|--------------------------------------------------- |  | ----------
|20 Newbury Street, 5th Floor, Boston, Massachusetts |  | 02116     
|(Address of principal executive offices)            |  | (Zip code)



(617) 425-0200

(Registrants telephone number, including area code)



Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



As of August 5, 2005 there were 10,422,457 shares of Common Stock outstanding.



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##### Table of Contents

BOSTON LIFE SCIENCES, INC.



INDEX TO
FORM 10-Q



|           |  |                       |  |                                                                                                                                                                                  |  |     
|---------- |  | --------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                       |  |                                                                                                                                                                                  |  | Page
|Part I     |  | Financial Information |  |                                                                                                                                                                                 
|           |  |                       | 
|           |  | Item 1                |  | Financial Statements (Unaudited)                                                                                                                                                 |  |     
|           |  |                       | 
|           |  |                       |  | Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004                                                                                                  |  | 1   
|           |  |                       | 
|           |  |                       |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004, and for the period from inception (October 16, 1992) to June 30, 2005 |  | 2   
|           |  |                       | 
|           |  |                       |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004, and for the period from inception (October 16, 1992) to June 30, 2005           |  | 3   
|           |  |                       | 
|           |  |                       |  | Notes to Condensed Consolidated Financial Statements                                                                                                                             |  | 4   
|           |  |                       | 
|           |  | Item 2                |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                            |  | 11  
|           |  |                       | 
|           |  | Item 3                |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                                       |  | 31  
|           |  |                       | 
|           |  | Item 4                |  | Controls and Procedures                                                                                                                                                          |  | 31  
|           |  |                      
|Part II    |  | Other Information     |  |                                                                                                                                                                                 
|           |  |                       | 
|           |  | Item 6                |  | Exhibits                                                                                                                                                                         |  | 32  
|           | 
|SIGNATURES |  | 33                   



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##### Table of Contents

Part I  Financial Information



Item 1  Financial Statements



Boston Life Sciences, Inc.

(A Development Stage Enterprise)



Condensed Consolidated Balance Sheets

(Unaudited)



|                                                                                                                                                                                                                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                                                                                                                                                                                                                                                           |  | June 30, 2005 |              |   | December 31, 2004 |  
|Assets                                                                                                                                                                                                                                                                                                                                                                     |  |               |              |   |                   |   |              |  
|Current assets:                                                                                                                                                                                                                                                                                                                                                            |  |               |              |   |                   |   |              |  
|Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                  |  | $             | 1,211,392    |   |                   | $ | 152,971      |  
|Marketable securities                                                                                                                                                                                                                                                                                                                                                      |  |               | 1,449,955    |   |                   |   | 1,490,119    |  
|Other current assets                                                                                                                                                                                                                                                                                                                                                       |  |               | 281,127      |   |                   |   | 145,153      |  
|                                                                                                                                                                                                                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Total current assets                                                                                                                                                                                                                                                                                                                                                       |  |               | 2,942,474    |   |                   |   | 1,788,243    |  
|Fixed assets, net                                                                                                                                                                                                                                                                                                                                                          |  |               | 312,206      |   |                   |   | 400,178      |  
|Other assets                                                                                                                                                                                                                                                                                                                                                               |  |               | 376,726      |   |                   |   | 356,292      |  
|                                                                                                                                                                                                                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Total assets                                                                                                                                                                                                                                                                                                                                                               |  | $             | 3,631,406    |   |                   | $ | 2,544,713    |  
|                                                                                                                                                                                                                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Liabilities and Stockholders Equity                                                                                                                                                                                                                                                                                                                                       |  |               |              |   |                   |   |              |  
|Current liabilities:                                                                                                                                                                                                                                                                                                                                                       |  |               |              |   |                   |   |              |  
|Accounts payable and accrued expenses                                                                                                                                                                                                                                                                                                                                      |  | $             | 1,784,237    |   |                   | $ | 1,975,773    |  
|Commitments and contingencies (Note 7)                                                                                                                                                                                                                                                                                                                                     |  |               |              |   |                   |   |              |  
|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; none and 561.3 shares Convertible Series E issued and outstanding at June 30, 2005 and December 31, 2004 (liquidation preference of $5,868,464), respectively |  |               |             |   |                   |   | 3,501,539    |  
|Common stock, $.01 par value; 80,000,000 shares authorized; 10,422,457 and 6,892,856 shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively                                                                                                                                                                                                    |  |               | 104,225      |   |                   |   | 68,929       |  
|Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                 |  |               | 112,129,764  |   |                   |   | 102,649,933  |  
|Accumulated other comprehensive income (loss)                                                                                                                                                                                                                                                                                                                              |  |               | 2,029        |   |                   |   | (4,617       | )
|Deficit accumulated during development stage                                                                                                                                                                                                                                                                                                                               |  |               | (110,388,849 | ) |                   |   | (105,646,844 | )
|                                                                                                                                                                                                                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Total stockholders equity                                                                                                                                                                                                                                                                                                                                                 |  |               | 1,847,169    |   |                   |   | 568,940      |  
|                                                                                                                                                                                                                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                                                                                                                 |  | $             | 3,631,406    |   |                   | $ | 2,544,713    |  
|                                                                                                                                                                                                                                                                                                                                                                           |  |               |              |   |                   |   |              |  



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



1



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##### Table of Contents

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 June 30, 2005 | 
|                                                                                                  |  | 2005                        |            |   | 2004                      |   |            | 2005                                               |  |   | 2004       |   | 
|Revenues                                                                                          |  | $                           |           |   |                           | $ |           |                                                    |  | $ |           |   |  | $ |           |   |  | $ | 900,000      |  
|Operating expenses:                                                                               |  |                             |            |   |                           |   |            |                                                    |  |   |            |   |  |   |            |   |  |   |              |  
|Research and development                                                                          |  |                             | 1,442,286  |   |                           |   | 2,096,846  |                                                    |  |   | 2,732,748  |   |  |   | 3,685,273  |   |  |   | 68,520,123   |  
|General and administrative                                                                        |  |                             | 987,729    |   |                           |   | 1,757,454  |                                                    |  |   | 2,000,665  |   |  |   | 2,739,874  |   |  |   | 31,819,935   |  
|Purchased in-process research and development                                                     |  |                             |           |   |                           |   |           |                                                    |  |   |           |   |  |   |           |   |  |   | 12,146,544   |  
|                                                                                                  |  |                             |            |   |                           |   |            |                                                    |  |   |            |   |  |   |            |   |  |   |              |  
|Total operating expenses                                                                          |  |                             | 2,430,015  |   |                           |   | 3,854,300  |                                                    |  |   | 4,733,413  |   |  |   | 6,425,147  |   |  |   | 112,486,602  |  
|                                                                                                  |  |                             |            |   |                           |   |            |                                                    |  |   |            |   |  |   |            |   |  |   |              |  
|Loss from operations                                                                              |  |                             | (2,430,015 | ) |                           |   | (3,854,300 | )                                                  |  |   | (4,733,413 | ) |  |   | (6,425,147 | ) |  |   | (111,586,602 | )
|Other expenses                                                                                    |  |                             |           |   |                           |   |           |                                                    |  |   | (2,232     | ) |  |   |           |   |  |   | (1,582,853   | )
|Interest expense                                                                                  |  |                             | (2,065     | ) |                           |   | (208,868   | )                                                  |  |   | (45,965    | ) |  |   | (417,736   | ) |  |   | (4,302,418   | )
|Investment income                                                                                 |  |                             | 34,283     |   |                           |   | 35,218     |                                                    |  |   | 39,605     |   |  |   | 92,459     |   |  |   | 7,083,024    |  
|                                                                                                  |  |                             |            |   |                           |   |            |                                                    |  |   |            |   |  |   |            |   |  |   |              |  
|Net loss                                                                                          |  |                             | (2,397,797 | ) |                           |   | (4,027,950 | )                                                  |  |   | (4,742,005 | ) |  |   | (6,750,424 | ) |  |   | (110,388,849 | )
|Preferred stock beneficial conversion feature                                                     |  |                             |           |   |                           |   |           |                                                    |  |   |           |   |  |   |           |   |  |   | (8,062,712   | )
|Accrual of preferred stock dividends and modification of warrants held by preferred stock holders |  |                             |           |   |                           |   | (115,308   | )                                                  |  |   | (715,515   | ) |  |   | (259,591   | ) |  |   | (1,229,589   | )
|                                                                                                  |  |                             |            |   |                           |   |            |                                                    |  |   |            |   |  |   |            |   |  |   |              |  
|Net loss attributable to common stockholders                                                      |  | $                           | (2,397,797 | ) |                           | $ | (4,143,258 | )                                                  |  | $ | (5,457,520 | ) |  | $ | (7,010,015 | ) |  | $ | (119,681,150 | )
|                                                                                                  |  |                             |            |   |                           |   |            |                                                    |  |   |            |   |  |   |            |   |  |   |              |  
|Basic and diluted net loss attributable to common stockholders per share                          |  | $                           | (0.23      | ) |                           | $ | (0.61      | )                                                  |  | $ | (0.58      | ) |  | $ | (1.03      | ) |  |   |              |  
|                                                                                                  |  |                             |            |   |                           |   |            |                                                    |  |   |            |   |  |   |            |   |  |   |              |  
|Weighted average shares outstanding                                                               |  |                             | 10,411,967 |   |                           |   | 6,820,876  |                                                    |  |   | 9,337,030  |   |  |   | 6,805,412  |   |  |   |              |  
|                                                                                                  |  |                             |            |   |                           |   |            |                                                    |  |   |            |   |  |   |            |   |  |   |              |  



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



2



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##### Table of Contents

Boston Life Sciences, Inc.

(A Development Stage Enterprise)



Condensed Consolidated Statements of Cash Flows

(Unaudited)



|                                                                             |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|---------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | -------------------------------------------------- | - | ---------- | - |  | - | ------------ | -
|                                                                             |  | Six Months Ended June 30, |            |   | From Inception (October 16, 1992) to June 30, 2005 |  
|                                                                             |  | 2005                      |            |   | 2004                                               |   |           
|Cash flows from operating activities:                                        |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|Net loss                                                                     |  | $                         | (4,742,005 | ) |                                                    | $ | (6,750,424 | ) |  | $ | (110,388,849 | )
|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     |   |                                                    |   | 200,210    |   |  |   | 1,648,675    |  
|Non-cash charges related to options, warrants and common stock               |  |                           | 19,792     |   |                                                    |   | 118,228    |   |  |   | 4,218,559    |  
|Amortization and depreciation                                                |  |                           | 101,051    |   |                                                    |   | 113,811    |   |  |   | 2,289,968    |  
|Changes in current assets and liabilities:                                   |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|(Increase) decrease in other current assets                                  |  |                           | (135,974   | ) |                                                    |   | 56,581     |   |  |   | 577,836      |  
|Increase in accounts payable and accrued expenses                            |  |                           | 63,928     |   |                                                    |   | 264,369    |   |  |   | 1,011,572    |  
|                                                                             |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|Net cash used for operating activities                                       |  |                           | (4,649,308 | ) |                                                    |   | (5,997,225 | ) |  |   | (84,645,195  | )
|Cash flows from investing activities:                                        |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|Cash acquired through Merger                                                 |  |                           |           |   |                                                    |   |           |   |  |   | 1,758,037    |  
|Purchases of fixed assets                                                    |  |                           | (13,079    | ) |                                                    |   | (4,391     | ) |  |   | (1,356,699   | )
|Increase in other assets                                                     |  |                           | (20,434    | ) |                                                    |   | (97,944    | ) |  |   | (730,361     | )
|Decrease in restricted cash and marketable securities                        |  |                           |           |   |                                                    |   | 250,698    |   |  |   |             |  
|Purchases of marketable securities                                           |  |                           | (3,475,155 | ) |                                                    |   | (4,825,455 | ) |  |   | (115,602,245 | )
|Sales and maturities of marketable securities                                |  |                           | 3,521,965  |   |                                                    |   | 5,698,695  |   |  |   | 114,154,319  |  
|                                                                             |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|Net cash provided by (used for) investing activities                         |  |                           | 13,297     |   |                                                    |   | 1,021,603  |   |  |   | (1,776,949   | )
|Cash flows from financing activities:                                        |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|Proceeds from issuance of common stock                                       |  |                           | 6,050,171  |   |                                                    |   | 1,249      |   |  |   | 50,795,920   |  
|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                                                            |  |                           | (314,987   | ) |                                                    |   |           |   |  |   | (516,747     | )
|Payments of financing costs                                                  |  |                           | (40,752    | ) |                                                    |   | (27,664    | ) |  |   | (5,505,276   | )
|                                                                             |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|Net cash provided by (used for) financing activities                         |  |                           | 5,694,432  |   |                                                    |   | (26,415    | ) |  |   | 87,633,536   |  
|                                                                             |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|Net increase (decrease) in cash and cash equivalents                         |  |                           | 1,058,421  |   |                                                    |   | (5,002,037 | ) |  |   | 1,211,392    |  
|Cash and cash equivalents, beginning of period                               |  |                           | 152,971    |   |                                                    |   | 6,088,458  |   |  |   |             |  
|                                                                             |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|Cash and cash equivalents, end of period                                     |  | $                         | 1,211,392  |   |                                                    | $ | 1,086,421  |   |  | $ | 1,211,392    |  
|                                                                             |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|Supplemental cash flow disclosures:                                          |  |                           |            |   |                                                    |   |            |   |  |   |              |  
|Non-cash transactions (see Note 5)                                           |  |                           |            |   |                                                    |   |            |   |  |   |              |  



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



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##### Table of Contents

Boston Life Sciences, Inc.

(A Development Stage Enterprise)



Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2005



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, 2004.



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, 2005, the Company has experienced total net losses since
inception of approximately $110,400,000. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows from operations as management executes its current business plan. The cash, cash equivalents,
and marketable securities available at June 30, 2005 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, 2005 and its ability to control certain costs, including those related to clinical trial programs, pre-clinical activities, and certain general and administrative expenses will enable the Company to meet its
anticipated cash expenditures into September 2005. The Company will therefore need to immediately raise additional capital through a collaboration, merger or other transaction with other pharmaceutical or biotechnology companies, or through a debt
financing or equity offering to continue as a going concern. The Company is currently engaged in fundraising efforts. There can be no assurance, however, that the Company will be successful or that additional funds will be available on acceptable
terms, if at all.



There have been a number of recent
developments which have simplified the Companys capital structure. In November 2004, the Company utilized funds set aside in a restricted account to repay in full the Companys 10% Convertible Senior Secured Promissory Notes (the
Notes). In February 2005, the Company entered into agreements with the holders (the Holders) of 557.30 shares of Series E Cumulative Convertible Preferred Stock (the 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 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 Holders were also given the right to invest new funds amounting to up to 33% in 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
of 1933, as amended (the Securities Act). Following completion of the Companys $5,000,000 private placement in March 2005, the amount of this preemptive right was reduced to 33% of the next $11,900,000 raised by the Company in
future private placements. On February 4, 2005, the 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. The Company issued 900,646 shares of common stock in connection with the conversion of the 561.3 outstanding shares of Series E Stock.



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 3.1 million and 2.8 million shares of common stock were outstanding at June 30, 2005 and 2004, 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, 2005, which could generate proceeds to the Company of up to approximately $24,000,000, could potentially dilute earnings per share in the future.



4



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##### Table of Contents

Boston Life Sciences, Inc.

(A Development Stage Enterprise)



Notes to Condensed Consolidated Financial Statements (Unaudited)



3. Comprehensive Loss



The Company had total comprehensive loss of $2,396,060 and $4,075,506 for the three months ended June 30, 2005 and 2004, respectively. For the six months ended June 30, 2005 and 2004, total comprehensive loss was $4,735,359 and $6,775,688,
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



The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25)
and related interpretations, in accounting for its employee stock-based compensation plans and related equity issuances, rather than the alternative fair value accounting method provided for under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, (SFAS No. 123). Under APB 25, when the exercise price of options granted under these plans equals the market price of the underlying stock on the date of grant, provided other criteria
are met, no compensation expense is recognized. All stock-based awards to non-employees are accounted for in accordance with SFAS No. 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 following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:



|                                                                                                                 |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                 |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                                                                 |  | 2005                        |            |   | 2004                      |   |            | 2005 |  |   | 2004       |  
|Net loss, as reported                                                                                            |  | $                           | (2,397,797 | ) |                           | $ | (4,027,950 | )    |  | $ | (4,742,005 | ) |  | $ | (6,750,424 | )
|Add: Stock-based employee compensation expense (benefit) recognized                                              |  |                             | (86,404    | ) |                           |   | 106,064    |      |  |   |           |   |  |   | 106,064    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards |  |                             | (52,930    | ) |                           |   | (528,028   | )    |  |   | (914,230   | ) |  |   | (699,443   | )
|                                                                                                                 |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Pro forma net loss                                                                                               |  |                             | (2,537,131 | ) |                           |   | (4,449,914 | )    |  |   | (5,656,235 | ) |  |   | (7,343,803 | )
|Accrual of preferred stock dividends and modification of warrants held by preferred stock holders                |  |                             |           |   |                           |   | (115,308   | )    |  |   | (715,515   | ) |  |   | (259,591   | )
|                                                                                                                 |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Pro forma net loss attributable to common stockholders                                                           |  | $                           | (2,537,131 | ) |                           | $ | (4,565,222 | )    |  | $ | (6,371,750 | ) |  | $ | (7,603,394 | )
|                                                                                                                 |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted loss per share                                                                                 |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|As reported                                                                                                      |  | $                           | (0.23      | ) |                           | $ | (0.61      | )    |  | $ | (0.58      | ) |  | $ | (1.03      | )
|                                                                                                                 |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Pro forma                                                                                                        |  | $                           | (0.24      | ) |                           | $ | (0.67      | )    |  | $ | (0.68      | ) |  | $ | (1.12      | )
|                                                                                                                 |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



The fair value of each
option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of zero percent; expected volatility of 100%; risk-free interest rates, based on the date of grant, ranging
from 2% to 6%; and expected lives ranging from three to five years.



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##### Table of Contents

Boston Life Sciences, Inc.

(A Development Stage Enterprise)



Notes to Condensed Consolidated Financial Statements (Unaudited)



5. 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 of 557.30 shares of 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 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 first quarter of 2005 in connection with
this re-pricing. The Holders were also given the right to invest new funds amounting to up to 33% in 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, the amount of this preemptive right was reduced to 33% of the next $11,900,000 raised by the Company in future private placements. 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. 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 Robert L. Gipson (Gipson) and
Nikolaos D. Monoyios 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 $316,000, 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 2 years), to
stockholders equity during the first quarter of 2005 in connection with the changes to the Gipson and Monoyios Warrants. The Company recorded a charge of approximately $44,000, 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 interest expense during the first quarter of 2005 in connection with the
changes to the ISVP Warrant.



Private Placement



On March 9, 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. (Boucher) and other affiliates of Ingalls &
Snyder, LLC (I&S). In connection with the private placement, the Company agreed to file a registration statement relating to the resale of the common stock sold in the private placement upon request of the investors. All shares
purchased by the investors in the private placement are subject to a minimum holding period of one year.



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



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Boston Life Sciences, Inc.

(A Development Stage Enterprise)



Notes to Condensed Consolidated Financial Statements (Unaudited)



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 Statement No. 123(R) Share-Based Payments (SFAS 123(R)), the Company will record 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 until the earlier of (i) the exercise of these options or (ii) the
expiration or cancellation of these options. The Company recorded a charge of approximately $86,000 during the first quarter of 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.



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 under the common stock purchase agreement, dated as of March 9, 2005, by and among the Company and the purchasers listed therein.



6. Settlement and Standstill Agreement; Severance and Settlement Agreement and Release



On June 15, 2004, the Company entered into a settlement
and standstill agreement (the Settlement Agreement) with Gipson, Boucher, I&S and ISVP (the Investor Group). Under the Settlement Agreement, the Company reconstituted its Board of Directors to consist of Marc E. Lanser,
Robert Langer, John T. Preston, Gipson and Michael J. Mullen. S. David Hillson retired as Chairman of the Board and as a director and consultant of the Company.



The Investor Group agreed not to seek the removal of any of the directors prior to March 31, 2005 and entered into a mutual release of claims with the
Company, Mr. Hillson and Dr. Lanser. As contemplated by the Settlement Agreement, the Company obtained a release of the security interest on its property collateralizing its Notes held by ISVP by providing an irrevocable standby letter of credit in
the amount of $4,785,550 to collateralize the Notes. The Company also paid $300,000 to I&S as reimbursement for certain expenses as part of the settlement. The $300,000 payment is included in General and Administrative Expenses during the second
quarter of 2004.



In May 2004, the Company also entered into a
separation agreement with Mr. Hillson regarding his retirement. The separation agreement requires that Mr. Hillson continue to satisfy his obligations under the non-competition, confidentiality, invention assignment and non-solicitation provisions
of his previous agreement with the Company and that he release the Company from claims related to his former employment with the Company and his position on the Board of Directors. Mr. Hillsons separation agreement provided for a lump sum
payment of $187,500, which represented the balance of consulting fees due to Mr. Hillson under his previous agreement with the Company, and a lump sum payment of $90,000 in recognition of Mr. Hillsons contributions to the Company and loss of
certain other benefits under his previous agreement with the Company. The Company recorded a charge of $277,500 in the second quarter of 2004 related to these payments. Pursuant to the terms of the separation agreement, the Company granted options
to Mr. Hillson to purchase 40,000 shares of common stock at an exercise price of $5.00 per share and cancelled options previously granted to Mr. Hillson to purchase 80,000 shares of common stock at exercise prices ranging from $18.13 per share to
$39.06 per share. The separation agreement further provided that all of Mr. Hillsons remaining stock options are fully vested. FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation requires
the Company to employ variable accounting when there is both an option issuance and an option cancellation within a six month period. In addition to the 40,000 options issued in June, Mr. Hillson was awarded options in March 2004 to purchase 39,000
shares of common stock at an exercise price of $6.35 in connection with his services as a director of the Company. Of the options awarded in March 2004, 14,000 were attributed to Mr. Hillsons previous consulting agreement, and accordingly, the
Company recorded a charge of approximately $56,000 representing the fair value of these options as determined using the Black-Scholes pricing model. In addition, the Company will record a charge equal to the intrinsic value (difference between the
Companys stock price and exercise price) of the remaining 65,000 options which are deemed to have been repriced through the earlier of (i) the exercise of these options or (ii) the expiration of these options in the second quarter of 2008. The
amount of the charge will be adjusted quarterly based upon the intrinsic value of the options then outstanding at the end of each quarter.



In connection with his retirement, Mr. Hillson also made a written request under the terms of his indemnity agreement with the Company that the Company
create an indemnity trust for his benefit and fund the trust in the amount of $100,000. In response to the



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Boston Life Sciences, Inc.

(A Development Stage Enterprise)



Notes to Condensed Consolidated Financial Statements (Unaudited)



request, on June 15, 2004, the Company entered into a directors and officers indemnity trust agreement with Mr. Hillson and Boston Private Bank & Trust Company, as trustee, and funded the trust with $100,000. Mr.
Hillson may, from time to time, request withdrawals of funds from the trust in the event that he becomes entitled to receive indemnification payments or advances from the Company. Any amounts not disbursed from the indemnity trust will become
unrestricted at such time as the Company and Mr. Hillson agree that the indemnity trust is no longer required. FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45) requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. As required under the provisions of FIN 45,
the Company has evaluated its obligations under the indemnity agreement and has determined that the fair value of this obligation is immaterial at June 30, 2005.



On June 10, 2004, the Company also 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 entitles Dr. Lanser to receive continued base salary and benefits
for a period of nine months 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 provided 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 pre-clinical 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. The Company
recorded a charge of approximately $14,000 during the second quarter of 2005 related to this modification of Dr. Lansers options.



7. 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



Since inception, the Company has paid Harvard University and its affiliates under the terms of its current license agreements (the License
Agreements) approximately $800,000 in initial licensing fees and milestone payments. The License Agreements obligate the Company to pay up to an aggregate of approximately $4,220,000 in milestone payments in the future. These future milestone
payments are generally payable only upon the completion of later stage clinical trials and the filing of a New Drug Application (NDA) or similar application seeking product approval. Most of these contingent milestone payments are
associated with technologies that are presently in early stage development. Two of the Companys early-stage licenses with Harvard University were terminated during the three months ended June 30, 2005, resulting in lower potential future
milestone payments.



Contingencies



The Company is subject to legal proceedings in the ordinary course of
business. One 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. Management has responded that there is no legal or equitable basis for
payment of the claim, and believes that the resolution of this matter 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.



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Boston Life Sciences, Inc.

(A Development Stage Enterprise)



Notes to Condensed Consolidated Financial Statements (Unaudited)



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.



Lease Commitments



In June 2005, the Company entered into a noncancelable operating lease
agreement for new office space in Hopkinton, Massachusetts to house its executive and certain research and administrative personnel. The new lease is for approximately 5,300 square feet of space resulting in annual rent expense of approximately
$120,000. The lease agreement expires in June 2008 and provides for a three-year renewal option.



The Company believes that it will be able to, and intends to, sublease a substantial portion of the space available in its Boston, Massachusetts facility.
The Company expects that there may be a shortfall between the remaining lease payments and any proposed sublease payments. The Company will record any charge related to this potential shortfall when, and if, it vacates this facility.



In August 2005, the Company entered into a noncancelable operating lease
agreement in Woburn, Massachusetts to house certain research and administrative personnel. The new lease is for approximately 2,500 square feet of space resulting in annual rent expense of approximately $42,000. The lease agreement expires in August
2006.



8. Subsequent Events



In July 2005, Kenneth L. Rice, Jr. joined as Executive Vice President,
Finance and Administration and Chief Financial Officer of the Company and Joseph Hernon resigned as Chief Financial Officer. Mr. Hernon is presently expected to continue employment with the Company until September 30, 2005. Under the terms of a
proposed severance agreement, Mr. Hernon will be entitled to continued base salary and benefits for a period of nine-months commencing on his actual date of termination. The proposed severance also provides for the immediate acceleration of options
to purchase 133,527 shares of the Companys common stock held by Mr. Hernon and a two year period of exercisability for all unexercised options following the date of termination.



9. New Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123(R). SFAS 123(R) revises SFAS No. 123 supersedes APB 25 and
amends SFAS No. 95, Statement of Cash Flows, (FASB No. 95). SFAS 123(R) requires companies to expense the fair value of employee stock options and other forms of stock-based compensation over the employees service
period. Compensation cost is measured at the fair value of the award at the grant date and adjusted to reflect actual forfeitures and the outcome of certain conditions. The fair value of an award is not re-measured after its initial estimation on
the grant date. In March 2005, the SEC issued Staff Accounting Bulletin SAB 107 (SAB 107). SAB 107 expresses views of the SEC regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the SECs
views regarding the valuation of share-based payment arrangements for public companies. In December 2004, the FASB determined that the effective date of SFAS 123(R) should be the first interim or annual reporting period that begins after June 15,
2005. In April 2005, the SEC amended the effective compliance date to be the first annual reporting period beginning on or after June 15, 2005. Therefore, the Company is required to be compliant beginning January 1, 2006. The Company is evaluating
if the adoption of SFAS 123(R) and SAB 107 will have a material impact on its results of operations and earnings per share. The Company is also evaluating the requirements of SFAS 123(R) and SAB 107 and has not yet determined the method of adoption
or whether this adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123 as set forth in Note 4.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement No.
3, (SFAS No. 154). This statement changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle. It also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. APB No. 20 required
that most voluntary



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Boston Life Sciences, Inc.

(A Development Stage Enterprise)



Notes to Condensed Consolidated Financial Statements (Unaudited)



changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement requires retrospective application
to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The provisions of SFAS 154 are effective for fiscal years
beginning after December 15, 2005. The Company does not expect this statement to have a material impact on its financial condition or results of operations.



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##### Table of Contents

Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations



This Quarterly Report on Form 10-Q contains forward-looking statements. Specifically, any statements contained herein that are not based on historical
fact may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act). Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. Such statements include,
without limitation, statements regarding expectations or beliefs as to future results or events, such as the expected timing and results of clinical trials, discussions with regulatory agencies, schedules of Investigational New Drug applications, or
INDs, NDAs, and all other regulatory submissions, the timing of product introductions, the possible approval of products (including the ultimate approvability of the ALTROPANE®molecular imaging agent), and the market size and possible advantages of our products. All such forward-looking statements involve
substantial risks and uncertainties, and actual results may vary materially from these statements. Factors that may affect future results include: the availability and adequacy of financial resources, delays in the regulatory or development
processes, results from clinical and pre-clinical trials, regulatory decisions (including the discretion of the Food and Drug Administration, or FDA, following completion of our Phase III program to require us to conduct additional clinical trials
in order to achieve approvability of ALTROPANE), market acceptance of our products, the ability to obtain intellectual property protection, the outcome of discussions with potential partners and other possible risks and uncertainties that have been
noted in reports filed by us with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2004, as amended. If any of these risks actually occur, our business, financial condition, results of operations or liquidity would
likely suffer. 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.



General



Description of Company



We are a biotechnology company engaged in the research and development of biopharmaceutical products for the diagnosis and treatment of central nervous
system, or CNS, diseases. At June 30, 2005, we are 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, 2005, we have experienced total net losses
since inception of approximately $110,400,000. For the foreseeable future, we expect to experience continuing operating losses and negative cash flows from operations as management executes its current business plan. The cash, cash equivalents, and
marketable securities available at June 30, 2005 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,
2005 and our ability to control certain costs, including those related to clinical trial programs, pre-clinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures into September 2005.
We will therefore need to immediately raise additional capital through a collaboration, merger or other transaction with other pharmaceutical or biotechnology companies, or through a debt financing or equity offering to continue as a going concern.
We are currently engaged in fundraising efforts. There can be no assurance, however, that we will be successful or that additional funds will be available on acceptable terms, if at all.



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 trial of ALTROPANE molecular imaging agent as a diagnostic for Attention Deficit Hyperactivity Disorder, or ADHD, and our pre-clinical programs including Inosine and O-1369 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 immediately able to raise additional capital, we will not have sufficient funds to complete our Phase III clinical program of ALTROPANE as a diagnostic for PS or the Phase II trial of
ALTROPANE as a diagnostic for ADHD.



Product Development



The ALTROPANE molecular imaging agent is being developed
for two indications: the differential diagnosis of 1) PS (including Parkinsons Disease, or 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 non-PS movement disorders. In April 2004, we reached an agreement with the FDA under the Special Protocol Assessment, or SPA, process regarding our protocol design for a new Phase III clinical trial of ALTROPANE for the
differentiation of PS tremors from tremors due to other, non-PS causes. Our Phase III clinical trial is designed to distinguish PS from non-PS in patients with tremors. In August 2005, under a new SPA, we reached agreement with FDA on an amended
protocol, Parkinsons or Essential Tremor1, or POET-1, and a new protocol Parkinsons or Essential Tremor2, or POET-2. This new SPA agreement permits us to conduct two smaller Phase III trials and to reduce the statistical
endpoint of the two trials from p<0.02 to p<0.05. FDA has agreed to allow all subjects currently enrolled under the terms of the old SPA to be retained for purposes of the new SPA. We believe that this revised clinical plan will provide the
Company with earlier results and may increase the likelihood for first-time approval of ALTROPANE by FDA.



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Under the new SPA, we currently expect for each of POET-1 and POET-2, to enlist approximately 30 centers
in the United States, most of which are university-based, and to enroll a minimum of 332 patients (166 patients with Parkinsonian tremors and 166 patients with non-Parkinsonian tremors). Enrollment for POET-1 is ongoing. The primary endpoint for
POET-1 and POET-2 will be the confirmation that the diagnostic accuracy of the ALTROPANE molecular imaging agent is statistically superior to the diagnostic accuracy of the internist or general practitioner. A diagnosis of a Movement Disorder
Specialist, or MDS, will be utilized as the gold standard. We believe that, if the endpoints are met and no significant concerns or protocol deviations occur, these Phase III trials could provide the basis for an NDA submission and the
ultimate approval of ALTROPANE. However, we can provide no assurance that the trials will be successful, that FDA will not request additional clinical trial data or other regulatory information before it will accept an NDA submission for ALTROPANE.



We are currently conducting our second Phase II trial of the
ALTROPANE molecular imaging agent for the diagnosis of ADHD in adults using improved enrollment criteria, a simplified scanning procedure and algorithm adjustments for scan analysis. Patient enrollment in this trial has been constrained by our
limited financial resources. We do not expect to be able to accelerate enrollment in this trial until such time as we raise sufficient additional capital.



Inosine is a proprietary axonal growth factor which specifically promotes axon outgrowth in CNS cells. In July 2004, we filed an IND application with the
FDA for the use of Inosine to enhance motor function recovery after stroke. In September 2004, we announced that we had 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. Our response to the FDA clinical hold letter requires significant data gathering and analysis. This effort is ongoing. There is no assurance that our response, when
completed, will be adequate, that we will be taken off clinical hold or that other preclinical studies will not be required by the FDA prior to initiating the Phase I trial.



Our earlier stage product candidates, O-1369 for the treatment of PD and the FLUORATEC molecular imaging agent for the diagnosis of PD and ADHD, are in preclinical
development. However, further development of these product candidates, depends, in part, on our ability to raise additional capital. Troponin, our anti-angiogenic agent, and MDP14, a recombinant axon regeneration factor, are being considered for
potential ocular indications. We are currently exploring our strategic alternatives related to Troponin and MDP14.



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 pre-clinical development. Our product candidates must undergo a rigorous regulatory approval process which includes extensive pre-clinical 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 with before we can test our product candidates in humans or make them commercially available. Pre-clinical 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. However, we do not currently expect to generate revenues from product sales for at least the next three years.



The biotechnology and pharmaceutical industries are highly competitive and
are dominated by larger, more experienced and better capitalized companies. Any delays we encounter in completing our clinical trial programs may adversely impact our competitive position in the markets in which we compete. Such delays may also
adversely affect our financial position and liquidity.



Following is information on the direct research and development 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 $13,300,000 on a cumulative basis.



|                   |  |                  |         |              |   |            |  |   |           
|------------------ |  | ---------------- | ------- | ------------ | - | ---------- |  | - | ----------
|Program            |  | 2nd Quarter 2005 |         | Year to date |   | Cumulative
|Diagnostic imaging |  | $                | 457,000 |              | $ | 876,000    |  | $ | 17,672,000
|Anti-angiogenesis  |  | $                | 87,000  |              | $ | 147,000    |  | $ | 13,554,000
|CNS regeneration   |  | $                | 149,000 |              | $ | 288,000    |  | $ | 8,964,000 
|Other              |  | $                |        |              | $ | 50,000     |  | $ | 807,000   



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



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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. As of June 30, 2005, our estimate to complete POET-1 was approximately
$4,100,000. However, there can be no assurance that it will not cost more to complete POET-1. We are currently analyzing what additional expenditures may be required to conduct POET-2 and cannot reasonably estimate the cost of POET-2 at this time.



Critical Accounting Policies and Estimates



Our discussion and analysis of our financial condition and results of
operations are based upon our condensed 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, and the fair value and classification of equity instruments. 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 Condensed
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 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 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



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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.



Results of Operations



Three Months Ended June 30, 2005 and 2004



Our net loss was $2,397,797 during the three months ended June 30, 2005, as compared with $4,027,950 during the three months ended June 30, 2004. Our net
loss attributable to common stockholders was $2,397,797 during the three months ended June 30, 2005 as compared with $4,143,258 during the three months ended June 30, 2004. Net loss attributable to common stockholders totaled $0.23 per share for the
2005 period as compared to $0.61 per share for the 2004 period. The decrease in net loss in the 2005 period was primarily due to lower research and development, general and administrative, and interest expense. The lower net loss attributable to
common stockholders on a per share basis in the 2005 period was primarily due to a decrease in our net loss and an increase in weighted average shares outstanding of approximately 3,591,000 shares, which was primarily the result of the conversion of
all outstanding shares of Series E Stock in February 2005 and the private placement of common stock completed in March 2005.



Research and development expenses were $1,442,286 during the three months ended June 30, 2005, as compared with $2,096,846 during the three months ended
June 30, 2004. The decrease in the 2005 period was primarily attributable to a reduction in pre-clinical costs for Inosine of approximately $1,124,000 associated with certain animal toxicology studies completed in 2004. This decrease was partially
offset by higher clinical trial costs for POET-1 of approximately $268,000 associated with increased enrollment and employee severance costs of approximately $251,000 in the 2005 period. 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 POET-1 although these increases may be offset, in part, by
lower costs associated with our pre-clinical program for Inosine. Our working capital constraints may limit our planned expenditures.



General and administrative expenses were $987,729 during the three months ended June 30, 2005, as compared with $1,757,454 during the three months ended
June 30, 2004. The decrease in the 2005 period was primarily related to reduced legal and consulting expenses associated with the Settlement Agreement. As part of the Settlement Agreement, we paid $300,000 to I&S as reimbursement for certain
expenses and approximately $278,000 to our former Chairman of the Board of Directors in connection with consulting and separation agreements. In addition, we incurred higher legal fees of approximately $409,000 in the 2004 period primarily related
to the Settlement Agreement. This reduction was partially offset by higher compensation and recruiting expenses of approximately $92,000 in the 2005 period. We currently anticipate that our general and administrative expenses will increase over the
next twelve months due to required personnel additions and costs associated with the Sarbanes-Oxley Act of 2002.



Interest expense was $2,065 during the three months ended June 30, 2005, as compared with $208,868 during the three months ended June 30, 2004. The
decrease in the 2005 period was attributable to the prepayment in November 2004 of the outstanding principal plus accrued interest on the Notes.



Investment income was $34,283 during the three months ended June 30, 2005, as compared with $35,218 during the three months ended June 30, 2004. The
decrease was primarily due to lower average cash, cash equivalent, and marketable securities balances during the 2005 period offset by lower realized losses of approximately $10,000 in the 2005 period.



There was no accrual of preferred stock dividends during the three months
ended June 30, 2005, as compared with $115,308 during the three months ended June 30, 2004. In December 2003, we issued 800 shares of 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, whereby the holders agreed to convert their Series E Stock into common stock. The conversion
resulted in an absence of preferred stock dividends in the 2005 period.



Six Months Ended June 30, 2005 and 2004



Our
net loss was $4,742,005 during the six months ended June 30, 2005, as compared with $6,750,424 during the six months ended June 30, 2004. Net loss attributable to common stockholders, including a charge related to a modification of warrants held by
Holders of $655,992 in the 2005 period, was $5,457,520 during the six months ended June 30, 2005 as compared with $7,010,015 during the six months ended June 30, 2004. Net loss attributable to common stockholders totaled $0.58 per share for the 2005
period as compared to $1.03 per share for the 2004 period. The decrease in net loss in the 2005 period was primarily due to lower research and development, general and administrative, and interest expense. The lower net loss attributable to common
stockholders on a per share basis in the 2005 period was primarily due to the decrease in net loss and an increase in weighted average shares outstanding of approximately 2,532,000 shares, which was primarily the result of the conversion of all
outstanding shares of Series E Stock in February 2005 and the private placement of common stock completed in March 2005. The increase in weighted average shares outstanding was partially offset by a charge related to the modification of warrants
held by preferred stock holders recognized in the 2005 period which did not occur in the 2004 period.



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Research and development expenses were $2,732,748 during the six months ended June 30, 2005, as compared
with $3,685,273 during the six months ended June 30, 2004. The decrease in the 2005 period was primarily attributable to lower pre-clinical costs for Inosine of approximately $1,829,000 associated with certain animal toxicology studies. This
decrease was partially offset by higher program costs for the ALTROPANE molecular imaging agent for PD of approximately $474,000 primarily associated with increased enrollment in POET-1, higher payroll costs in the 2005 period of approximately
$161,000 due to increased headcount and employee severance costs of approximately $251,000 in the 2005 period.



General and administrative expenses were $2,000,665 during the six months ended June 30, 2005, as compared with $2,739,874 during the six months ended
June 30, 2004. The decrease in the 2005 period was primarily related to lower legal and consulting expenses largely associated with the Settlement Agreement. As part of the Settlement Agreement, we paid $300,000 to I&S as reimbursement for
certain expenses and approximately $278,000 to our former Chairman of the Board of Directors in connection with consulting and separation agreements. In addition, we incurred higher legal fees of approximately $684,000 in the 2004 period primarily
related to the Settlement Agreement. This decrease was partially offset by higher legal fees of approximately $75,000 in connection with patent and intellectual property efforts, an increase of approximately $124,000 primarily associated with a
special meeting of stockholders held in February 2005, and higher compensation and recruiting costs of $196,000 related to increased headcount.



Interest expense was $45,965 during the six months ended June 30, 2005, as compared with $417,736 during the six months ended June 30, 2004. The decrease
in the 2005 period was attributable to the prepayment in November 2004 of the outstanding principal plus accrued interest on the Notes. This decrease was partially offset by non-cash interest expense of approximately $44,000 incurred in February
2005 when the company agreed to lower the exercise price of the ISVP Warrant in return for its immediate exercise in cash.



Investment income was $39,605 during the six months ended June 30, 2005, as compared with $92,459 during the six months ended June 30, 2004. The decrease
was primarily due to lower average cash, cash equivalent, and marketable securities balances.



Accrual of preferred stock dividends and modification of warrants held by preferred stock holders was $715,515 during the six months ended June 30, 2005, as compared with $259,591 during the six months ended June 30,
2004. In December 2003, we issued 800 shares of 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, whereby the holders agreed to convert their Series E Stock into common stock. The conversion resulted in an absence of preferred stock dividends in the 2005 period. We agreed to pay a
dividend of $564.44 for each share of Series E Stock held by the Holders that was converted 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 2005 period related to the accrual of preferred stock
dividends as compared with $259,591 during the 2004 period.



Liquidity and
Capital Resources



Net cash used for operating activities,
primarily related to our net loss, totaled $4,649,308 during the six months ended June 30, 2005 as compared with $5,997,225 during the six months ended June 30, 2004. Net cash provided by investing activities totaled $13,297 during the six months
ended June 30, 2005 as compared with $1,021,603 during the six months ended June 30, 2004. The difference in investing activities principally reflects the purchase of marketable securities with the proceeds from the private placements described
below, net of the sales of marketable securities which were subsequently used to fund operations. Net cash provided by financing activities totaled $5,694,432 during the six months ended June 30, 2005 as compared with cash used for financing
activities of $26,415 during the six months ended June 30, 2004. The difference in financing activities principally reflects the effect of the private placements described below.



As of June 30, 2005, we had incurred total net losses since inception of approximately $110,400,000. 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, 2005, is as follows:



|              |  |                     |             |                   |                                                             
|------------- |  | ------------------- | ----------- | ----------------- | ------------------------------------------------------------
|Date          |  | Net Proceeds Raised |             | Securities Issued
|March 2005    |  | $                   | 5.0 million |                   | Common stock                                                
|December 2003 |  | $                   | 7.0 million |                   | Convertible preferred stock and warrants                    
|March 2003    |  | $                   | 9.9 million |                   | Common stock                                                
|July 2002     |  | $                   | 3.9 million |                   | Convertible 10% senior secured promissory notes and warrants



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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, 2005,
we had available cash, cash equivalents, and marketable securities of approximately $2,661,000 and working capital of approximately $1,158,000. The cash, cash equivalents, and marketable securities available at June 30, 2005 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, 2005 and our ability to control certain costs, including those
related to clinical trial programs, pre-clinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures into September 2005. We will therefore need to immediately raise additional capital
through a collaboration, merger or other transaction with other pharmaceutical or biotechnology companies, or through a debt financing or equity offering in order to continue as a going concern. We are currently engaged in fundraising efforts. There
can be no assurance, however, that we will be successful or that additional funds will be available on acceptable terms, if at all.



Contractual Obligations and Commitments



In June 2005, we entered into a noncancelable operating lease agreement for new office space in Hopkinton, Massachusetts to house our executive and
certain research and administrative personnel. The new lease is for approximately 5,300 square feet of space resulting in annual rent expense of approximately $120,000. We believe that we will be able to, and intend to, sublease a substantial
portion of the space available in our Boston, Massachusetts facility. We expect that there may be a shortfall between the remaining lease payments and any proposed sublease payments. We will record any charge related to this potential shortfall
when, and if, we vacate this facility. In August 2005, we entered into a noncancelable operating lease agreement in Woburn, Massachusetts to house certain research and administrative personnel. The new lease is for approximately 2,500 square feet of
space resulting in annual rent expense of approximately $42,000. The lease agreement expires in August 2006.



New Accounting Pronouncements



In December 2004, the FASB issued SFAS 123(R). SFAS 123(R) revises SFAS No. 123, supersedes APB 25, and amends FASB No. 95. SFAS 123(R) requires companies to expense the fair value of employee stock options and other forms of stock-based
compensation over the employees service period. Compensation cost is measured at the fair value of the award at the grant date and adjusted to reflect actual forfeitures and the outcome of certain conditions. The fair value of an award is not
re-measured after its initial estimation on the grant date. In March 2005, the SEC issued SAB 107. SAB 107 expresses views of the SEC regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the SECs views
regarding the valuation of share-based payment arrangements for public companies. In December 2004, the FASB determined that the effective date of SFAS 123(R) should be the first interim or annual reporting period that begins after June 15, 2005. In
April 2005, the SEC amended the effective compliance date to be the first annual reporting period beginning on or after June 15, 2005. Therefore, the Company is required to be compliant beginning January 1, 2006. The Company is evaluating if the
adoption of SFAS 123(R) and SAB 107 will have a material impact on its results of operations and earnings per share. The Company is also evaluating the requirements of SFAS 123(R) and SAB 107 and has not yet determined the method of adoption or
whether this adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123 as set forth in Note 4.



In May 2005, the FASB issued SFAS No. 154. This statement changes the requirements for the accounting for and reporting of a change in accounting
principle and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions should be followed. APB No. 20 required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This statement requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects
or the cumulative effect of the change. The provisions of SFAS 154 are effective for fiscal years beginning after December 15, 2005. We do not expect this statement to have a material impact on our financial condition or our results of operations.



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Risk Factors



We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The following discussion highlights
some of these risks and others are discussed elsewhere herein.



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. The majority of biotechnology companies are development stage companies. As of June 30, 2005, we had incurred cumulative net losses
of approximately $110,400,000 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 pre-clinical 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 financings. Additional funds may not be available to us on acceptable terms or at all. If adequate funds are not readily available, we may need to significantly reduce or even cease one or more of our research or
development programs. 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 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.



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For the foreseeable future, we expect to experience continuing operating losses and negative cash flows
from operations as management executes our current business plan. The cash, cash equivalents, and marketable securities available at June 30, 2005 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, 2005 and our ability to control certain costs, including those related to clinical trial programs, pre-clinical activities, and certain general and
administrative expenses will enable us to meet our anticipated cash expenditures into September 2005. We will therefore need to immediately raise additional capital through a collaboration, merger or other transaction with other pharmaceutical or
biotechnology companies, or through a debt financing or equity offering in order to continue as a going concern. We are currently engaged in fundraising efforts. There can be no assurance, however, that we will be successful or that additional funds
will be available on acceptable terms, if at all.



Our ability
to continue development of our programs, including POET-1 and POET-2, the Phase II trial of ALTROPANE molecular imaging agent as a diagnostic for ADHD, and our pre-clinical programs including Inosine and O-1369 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 immediately able to raise additional capital, we will not have sufficient funds to complete POET-1, POET-2 or the Phase II trial of ALTROPANE molecular imaging agent as a diagnostic for ADHD.



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 pre-clinical 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.



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Risk Related to Regulation



IF OUR PRE-CLINICAL 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 pre-clinical 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. Pre-clinical 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 pre-clinical 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 pre-clinical data for the filing of an IND. The FDA may request additional pre-clinical 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.



We are currently enrolling patients in POET-1 and have a written agreement with the FDA relating to the design and analysis of the study protocol for this Phase III trial. The primary endpoint of POET-1 and POET-2
will be confirmation of the hypothesis that the diagnostic accuracy of ALTROPANE is significantly superior to the diagnostic accuracy of the internist or general practitioner, when compared against the gold standard of diagnosis by an
MDS. We will need to complete the 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 pre-clinical 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 pharmaceutical products 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, or GLP, and Good Manufacturing



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Practices, or GMP. Our compliance with these standards are 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 them 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;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Voluntary or mandatory 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.
| | - |  | -------------------------------------------------------------



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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, the 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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, such as those with Harvard and its Affiliates, 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



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capability and have elected to outsource substantially all of our research and development, pre-clinical 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 pre-clinical 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. 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., Scientific Advisory Board Member, Boston Life Sciences, Inc.; 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Robert S. Langer, Jr. Sc.D., Institute Professor of Chemical and Biomedical Engineering, Massachusetts Institute of Technology.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Marc E. Lanser, M.D., Scientific Advisory Board Member, Boston Life Sciences, Inc.; President and CEO FluoroPharma.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Robert Licho, M.D., Chief, Division of Nuclear Medicine, UMass Memorial Medical Center; Associate Professor, University of Massachusetts Medical School.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Peter Meltzer, Ph.D., President, Organix, Inc., Woburn, MA.
| | - |  | -----------------------------------------------------------



Dr. Benowitz, Dr. Bianchine, Dr. Lanser and Dr. Licho provide scientific consultative services resulting in total payments of approximately $200,000 per
year. Dr. Benowitz provides scientific consultative services primarily related to the research and development of Inosine and MDP14. Dr. Licho provides scientific consultative services primarily related to the research and development of ALTROPANE
molecular imaging agent. Dr. Bianchine and Dr. Lanser provide scientific consultative services as members of our Scientific Advisory Board.



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



Our collaborations with
Harvard and its Affiliates and other institutions include:



| |  |  | Childrens Hospital in Boston, Massachusetts where certain of our collaborating scientists perform their research efforts;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Organix in Woburn, Massachusetts which manufactures our compounds for the treatment of PD and provides non-radioactive ALTROPANE for FDA mandated studies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | MDS Nordion in Vancouver, British Colombia which manufactures the ALTROPANE molecular imaging agent;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Chemic Laboratories in Canton, Massachusetts which provides ALTROPANE raw material and performs certain analytic services for our pre-clinical programs;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Bio-Concept in Derry, New Hampshire which performs certain analytic and packaging services for us; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Charles River Laboratories in Worcester, Massachusetts which conducts pre-clinical toxicology and efficacy studies for us.
| | - |  | --------------------------------------------------------------------------------------------------------------------------



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.



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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 pre-clinical 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 HARVARD AND ITS AFFILIATES, 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, HARVARD AND ITS AFFILIATES.



Historically, we have been heavily dependent on our relationship with
Harvard and its Affiliates because substantially all of our technologies were licensed from, and most of our research and development activities were performed by, Harvard and its Affiliates. Now that a portion of our early-stage research at Harvard
and its Affiliates has yielded an identified product in each area of research, we have begun and expect to continue to conduct much of our later stage development work and all of our formal pre-clinical and clinical programs outside of Harvard and
its Affiliates. Nevertheless, the originating scientists still play important advisory roles. Each of our collaborative research agreements is managed by a sponsoring scientist and/or researcher who has his or her own independent affiliation with
Harvard and its Affiliates.



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



| |  |  | ALTROPANE molecular imaging agent compositions and methods of use; and
| | - |  | ----------------------------------------------------------------------



| |  |  | Inosine compositions and methods of use.
| | - |  | ----------------------------------------



Generally, each license agreement is effective until the patent relating to the technology expires. The patents on the ALTROPANE molecular imaging agent
expire beginning in 2013. The patents on Inosine expire in 2017.



We are required to make certain licensing and related payments to Harvard and its Affiliates which generally include:



| |  |  | An initial licensing fee payment upon the execution of the agreement;
| | - |  | ---------------------------------------------------------------------



| |  |  | Reimbursement payments for all patent related costs incurred by Harvard and its Affiliates;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------



Since inception, we have paid Harvard and its Affiliates under the terms of our current License Agreements approximately
$800,000 in initial licensing fees and milestone payments. The License Agreements obligate us to pay up to an aggregate of $4,220,000 in milestone payments in the future. These future milestone payments are generally payable only upon the completion
of later stage clinical trials and the filing of an NDA or similar application seeking product approval. Most of these contingent milestone payments are associated with technologies that are presently in early stage development. Two of our
early-stage licenses with Harvard University were terminated during the three months ended June 30, 2005, resulting in lower potential future milestone payments.



We have entered into a small number of sponsored research agreements with Harvard and its Affiliates. 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 year.



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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. While this increased awareness will not impact our
rights to previously licensed technologies, it may make it more costly and difficult for us to obtain the licensing rights to new scientific discoveries at Harvard and its Affiliates.



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 pre-clinical 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | That 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | That 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.



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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 pre-clinical 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 WE ARE UNABLE TO OBTAIN ADEQUATE INSURANCE COVERAGE AND REIMBURSEMENT
LEVELS FOR ANY OF OUR PRODUCTS WHICH ARE APPROVED AND ENTER THE MARKET, THEN THEY MAY NOT BE ACCEPTED BY PHYSICIANS AND PATIENTS.



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. 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, and third-party payors are increasingly challenging the prices charged for
medical products and services;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Adequate insurance coverage 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, other 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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 such as us.



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 supporting scientific, clinical and cost-
effectiveness data for the use of our products to each payor. 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 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.



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.



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.



THE RECENT 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, which President Bush signed into law in December 2003,
established a new Medicare prescription drug benefit. The prescription drug program and future amendments or regulatory interpretations of the legislation could have the effect of reducing the prices that we are able to charge for any products we
develop and sell through Medicare. This prescription drug legislation and related amendments or regulations 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, beginning in January 2006, the legislation directs the Secretary of Health and Human Services to contract with procurement organizations to purchase physician-administered drugs from the
manufacturers and provides physicians with the option to obtain drugs through these organizations as an alternative to purchasing from the manufacturers, which some physicians may



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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 pre-clinical 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 Troponin, 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, 2005, 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 GMP
certified manufacturing process for the production of ALTROPANE. Finally, we agreed to minimum monthly purchases of ALTROPANE through December 31, 2005. The agreement provides for MDS Nordion to manufacture the ALTROPANE molecular imaging agent for
our future 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 GMP
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.



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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 GMP 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 GMP 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 do not have employment agreements with any of these key executives, although we expect to enter 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, pre-clinical 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;
| | - |  | ------------------------------------------------------------------------



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| |  |  | Regulatory developments in the United States and foreign countries;
| | - |  | -------------------------------------------------------------------



| |  |  | Changes in the structure of health care payment systems;
| | - |  | --------------------------------------------------------



| |  |  | 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.
| | - |  | -----------



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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, 2004, 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, 2005. 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 June 30, 2005, our chief executive
officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.



No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II  OTHER INFORMATION



ITEM 6: EXHIBITS



(a) Exhibits.



|     |  |                                                                                                                                                                                              
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Severance and Settlement Agreement and Release dated June 9, 2005, by and between the Company and Marc E. Lanser M.D. (1)                                                                    
|     | 
|10.2 |  | Consulting Agreement, dated as of June 9, 2005, by and between the Company and Marc E. Lanser (1)                                                                                            
|     | 
|10.3 |  | Lease, dated as of June 9, 2005, by and between the Company and Straly Corporation (relating to Hopkinton, Massachusetts lease) (1)                                                          
|     | 
|10.4 |  | Amendment, dated May 11, 2004, to License Agreement between The President and Fellows of Harvard College and the Company dated March 15, 2000 (1)                                            
|     | 
|10.5 |  | Amendment, dated May 18, 2004, to License Agreement between Childrens Medical Center Corporation and the Company dated December 15, 1998 (1)                                                
|     | 
|10.6 |  | Amendment, dated May 7, 2004, to License Agreement between The President and Fellows of Harvard College and the Company dated December 10, 2003 (1)                                          
|     | 
|31.1 |  | Certification of the Chairman and 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.
(1)
|     | 
|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.
(1)             
|     | 
|32.1 |  | Certification of the Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)                      
|     | 
|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. (1)                                   

---

|(1) | Filed herewith.
|--- | ---------------



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SIGNATURES



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



|                      |  |                                                                                                                                                  
|--------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|                      |  | BOSTON LIFE SCIENCES, INC                                                                                                                        
|                      |  | (Registrant)                                                                                                                                     
|                      | 
|DATE: August 15, 2005 |  | /s/ PETER G. SAVAS                                                                                                                               
|                      |  | Peter G. Savas Chairman and Chief Executive Officer (Principal Executive Officer)                                                                
|                      | 
|                      |  | /s/ KENNETH L. RICE, JR.                                                                                                                         
|                      |  | Kenneth L. Rice, Jr. Executive Vice President Finance and Administration And Chief Financial Officer (Principal Financial and Accounting Officer)



33