UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549




FORM
      10-Q




(Mark
      One)




x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 for the quarterly period ended September 30,
                2007




or




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 for the transition period from _______ to
                _______.




Commission
                file number:  001-14907IMMTECH
                PHARMACEUTICALS, INC.(Exact
                name of registrant as specified in its
                charter)





Delaware
            
            39-1523370(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)




One
                North End Avenue, New York, New York  10282(Address
                of principal executive offices)
            (Zip
                Code)Registrant’s
                telephone number:  (212) 791-2911Former
                name, former address and former fiscal year, if changed since last
                report




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




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




Large
      accelerated filer  oAccelerated
      filer  x  Non-accelerated
      filer  o









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




As
      of
      November 8, 2007, 15,498,253 shares of the Registrant’s common stock, par value
      $0.01 per share (“Common Stock”), were outstanding.




















PART
                I.
            FINANCIAL
                INFORMATION
            1


Item
                1.
            Financial
                Statements
            1


Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            21


Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            25


Item
                4.
            Controls
                and Procedures
            25


PART
                II.
            OTHER
                INFORMATION
            26


Item
                1.
            Legal
                Proceedings
            26


Item
                1A.
            Risk
                  Factors
            26


Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            27


Item
                3.
            Defaults
                Upon Senior Securities
            28


Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            28


Item
                5.
            Other
                Information
            28


Item
                6.
            Exhibits
            28







-i-


**PART
        I.**


**Item
                1.**
            **Financial
                Statements.**




**IMMTECH
                PHARMACEUTICALS, INC. AND SUBSIDIARIES****(A
                Development Stage Enterprise)****CONDENSED
                CONSOLIDATED BALANCE SHEETS (UNAUDITED)****September
                30,**
            
            
            **March
                31,****ASSETS**
            
            **2007**
            
            
            **2007**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            9,839,925
            
            
            $
            12,461,795Restricted
                funds on deposit
            
            
            693,731
            
            
            
            3,118,766Other
                current assets
            
            
            399,072
            
            
            
            98,627Total
                current assets
            
            
            10,932,728
            
            
            
            15,679,188PROPERTY
                AND EQUIPMENT - Net
            
            
            104,226
            
            
            
            140,263PREPAID
                RENT
            
            
            3,271,777
            
            
            
            3,309,240OTHER
                ASSETS
            
            
            311,529
            
            
            
            15,477TOTAL
            
            $
            14,620,260
            
            
            $
            19,144,168**LIABILITIES
                AND STOCKHOLDERS' EQUITY**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            1,426,738
            
            
            $
            2,585,395Accrued
                expenses
            
            
            252,078
            
            
            
            375,925Deferred
                revenue
            
            
            2,791,043
            
            
            
            1,726,673Total
                current liabilities
            
            
            4,469,859
            
            
            
            4,687,993Total
                liabilities
            
            
            4,469,859
            
            
            
            4,687,993STOCKHOLDERS'
                EQUITY:Preferred
                stock, par value $0.01 per share, 3,913,000 shares authorized
                andunissued
                as of September 30, 2007 and March 31, 2007.Series
                A convertible preferred stock, par value $0.01 per share, stated
                value






-1-





$25
                per share, 320,000 shares authorized, 54,500 and 55,500 shares
                issuedand
                outstanding as of September 30, 2007 and March 31, 2007,
                respectively;aggregate
                liquidation preference of $1,399,817 as of September 30,
                2007.
            
            
            1,399,817
            
            
            
            1,425,283Series
                B convertible preferred stock, par value $0.01 per share, stated
                value$25
                per share, 240,000 shares authorized, 13,464 shares issued and
                outstandingas
                of September 30, 2007 and March 31, 2007; aggregate liquidation
                preferenceof
                $348,694 as of September 30, 2007.
            
            
            348,694
            
            
            
            348,621Series
                C convertible preferred stock, par value $0.01 per share, stated
                value$25
                per share, 160,000 shares authorized, 45,536 shares issued and
                outstandingas
                of September 30, 2007 and March 31, 2007; aggregate liquidation
                preferenceof
                $1,180,594 as of September 30, 2007.
            
            
            1,180,594
            
            
            
            1,180,345Series
                D convertible preferred stock, par value $0.01 per share, stated
                value$25
                per share, 200,000 shares authorized, 115,200 and 117,200 shares
                issuedand
                outstanding as of September 30, 2007 and March 31, 2007
                respectively;aggregate
                liquidation preference of $2,960,007 as of September 30,
                2007.
            
            
            2,960,007
            
            
            
            3,010,914Series
                E convertible preferred stock, par value $0.01 per share, stated
                value$25
                per share, 167,000 shares authorized, 106,600 and 110,200 shares
                issuedand
                outstanding as of September 30, 2007 and March 31, 2007,
                respectively;aggregate
                liquidation preference of $2,739,069 as of September 30,
                2007.
            
            
            2,739,069
            
            
            
            2,831,116Common
                stock, par value $0.01 per share, 100,000,000 sharesauthorized,
                15,464,972 and 15,333,221 shares issued and outstandingas
                of September 30, 2007 and March 31, 2007, respectively
            
            
            154,649
            
            
            
            153,332Additional
                paid-in capital
            
            
            108,158,007
            
            
            
            106,031,851Deficit
                accumulated during the developmental stage
            
            
            (106,790,436
            )
            
            
            (100,525,287
            )Total
                stockholders' equity
            
            
            10,150,401
            
            
            
            14,456,175TOTAL
            
            $
            14,620,260
            
            
            $
            19,144,168See
                notes to condensed consolidated financial statements
                (unaudited).





-2-


**IMMTECH
                  PHARMACEUTICALS, INC. AND SUBSIDIARIES****(A
                  Development Stage Enterprise)****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**
 **October
                  15,****1984****Three
                  Months Ended**
              
              
              **Six
                  Months Ended**
              
              
              **(Inception)
                  to****September
                  30,**
              
              
              **September
                  30,**
              
              
              **September
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**
              
              
              **2007**REVENUES
              
              $
              1,030,333
              
              
              $
              491,330
              
              
              $
              1,856,682
              
              
              $
              2,432,939
              
              
              $
              26,939,435EXPENSES:Research
                  and development
              
              
              2,282,839
              
              
              
              1,755,326
              
              
              
              4,200,651
              
              
              
              4,224,162
              
              
              
              64,314,584General
                  and administrative
              
              
              2,213,918
              
              
              
              2,363,796
              
              
              
              3,931,206
              
              
              
              4,583,651
              
              
              
              67,908,563Other
                  (litigation settlement)
              
              
              
              
              
              
              (1,874,454
              )
              
              
              
              
              
              
              (1,874,454
              )
              
              
              (1,874,454
              )Equity
                  in loss of joint venture
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              135,002Total
                  expenses
              
              
              4,496,757
              
              
              
              2,244,668
              
              
              
              8,131,857
              
              
              
              6,933,359
              
              
              
              130,483,695LOSS
                  FROM OPERATIONS
              
              
              (3,466,424
              )
              
              
              (1,753,338
              )
              
              
              (6,275,175
              )
              
              
              (4,500,420
              )
              
              
              (103,544,260
              )OTHER
                  INCOME (EXPENSE):Interest
                  income
              
              
              132,242
              
              
              
              132,334
              
              
              
              280,005
              
              
              
              282,695
              
              
              
              1,754,036Interest
                  expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,129,502
              )Loss
                  on sales of investment securities - net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,942
              )Cancelled
                  offering costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (584,707
              )Gain
                  on extinguishment of debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,427,765Other
                  income
              
              
              132,242
              
              
              
              132,334
              
              
              
              280,005
              
              
              
              282,695
              
              
              
              1,464,650
  -3-
 NET
                  LOSS
              
              
              (3,334,182
              )
              
              
              (1,621,004
              )
              
              
              (5,995,170
              )
              
              
              (4,217,725
              )
              
              
              (102,079,610
              )CONVERTIBLE
                  PREFERRED STOCK DIVIDENDS AND CONVERTIBLEPREFERRED
                  STOCK PREMIUM DEEMED DIVIDENDS
              
              
              (134,982
              )
              
              
              (137,082
              )
              
              
              (269,979
              )
              
              
              (279,890
              )
              
              
              (7,080,725
              )REDEEMABLE
                  PREFERRED STOCK CONVERSION, PREMIUMAMORTIZATION
                  AND DIVIDENDS
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,369,899NET
                  LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
              
              $
              (3,469,164
              )
              
              $
              (1,758,086
              )
              
              $
              (6,265,149
              )
              
              $
              (4,497,615
              )
              
              $
              (106,790,436
              )BASIC
                  AND DILUTED NET LOSS PER SHARE ATTRIBUTABLETO
                  COMMON STOCKHOLDERS:Net
                  loss
              
              $
              (0.22
              )
              
              $
              (0.12
              )
              
              $
              (0.39
              )
              
              $
              (0.30
              )Convertible
                  preferred stock dividends and convertiblepreferred
                  stock premium deemed dividends
              
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              (0.02
              )
              
              
              (0.02
              )BASIC
                  AND DILUTED LOSS PER SHARE ATTRIBUTABLETO
                  COMMON STOCKHOLDERS
              
              $
              (0.23
              )
              
              $
              (0.13
              )
              
              $
              (0.41
              )
              
              $
              (0.32
              )WEIGHTED
                  AVERAGE SHARES USED IN COMPUTINGBASIC
                  AND DILUTED NET LOSS PER SHARE
              
              
              15,409,787
              
              
              
              14,026,413
              
              
              
              15,390,029
              
              
              
              13,973,658See
                  notes to condensed consolidated financial statements
                  (unaudited).
 -4-


**IMMTECH
                PHARMACEUTICALS, INC. AND SUBSIDIARIES****(A
                Development Stage Enterprise)****CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)****October
                15,****1984****Three
                Months Ended**
            
            
            **Six
                Months Ended**
            
            
            **(Inception)
                to****September
                30,**
            
            
            **September
                30,**
            
            
            **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**
            
            
            **2007**OPERATING
                ACTIVITIES:Net
                loss
            
            $
            (3,334,182
            )
            
            $
            (1,621,004
            )
            
            $
            (5,995,170
            )
            
            $
            (4,217,725
            )
            
            $
            (102,079,610
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Compensation
                recorded related to issuance of commonstock,common
                stock options and warrants
            
            
            901,158
            
            
            
            557,307
            
            
            
            1,393,951
            
            
            
            1,233,387
            
            
            
            32,086,921Depreciation
                and amortization of property and equipment
            
            
            36,387
            
            
            
            37,951
            
            
            
            73,500
            
            
            
            77,213
            
            
            
            1,262,194(Gain)/Loss
                on disposal of fixed assets
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,982Equity
                in loss of joint venture
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            135,002Loss
                on sales of investment securities - net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,942Amortization
                of debt discounts and issuance costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            134,503Gain
                on extinguishment of debt
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,427,765
            )Changes
                in assets and liabilities:Other
                current assets
            
            
            104,701
            
            
            
            (1,781,143
            )
            
            
            (300,445
            )
            
            
            (1,982,961
            )
            
            
            (399,072
            )Other
                assets
            
            
            (118,421
            )
            
            
            70,000
            
            
            
            (296,052
            )
            
            
            70,399
            
            
            
            (311,529
            )Accounts
                payable
            
            
            61,192
            
            
            
            (751,187
            )
            
            
            (1,158,657
            )
            
            
            (332,921
            )
            
            
            1,754,273Accrued
                expenses
            
            
            (169,073
            )
            
            
            18,378
            
            
            
            (123,847
            )
            
            
            25,764
            
            
            
            915,091Deferred
                revenue
            
            
            (1,099,412
            )
            
            
            (491,329
            )
            
            
            1,064,370
            
            
            
            3,215,968
            
            
            
            2,791,043Net
                cash used in operating activities
            
            
            (3,617,650
            )
            
            
            (3,961,027
            )
            
            
            (5,342,350
            )
            
            
            (1,910,876
            )
            
            
            (65,130,025
            )




-5-




INVESTING
                ACTIVITIES:Purchase of property and equipment
            
            
            
            
            
            
            (5,659
            )
            
            
            
            
            
            
            (39,671
            )
            
            
            (1,617,249
            )Restricted funds on deposit
            
            
            988,556
            
            
            
            557,628
            
            
            
            2,425,035
            
            
            
            (3,679,357
            )
            
            
            (693,731
            )Advances to joint venture
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (135,002
            )Proceeds from maturities of investment securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,800,527Purchases of investment securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,803,469
            )Net
                cash provided by (used in) investing activities
            
            
            988,556
            
            
            
            551,969
            
            
            
            2,425,035
            
            
            
            (3,719,028
            )
            
            
            (2,448,924
            )FINANCING
                ACTIVITIES:Advances from stockholders and affiliates
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            985,172Proceeds from issuance of notes payable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,645,194Principal payments on notes payable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (218,119
            )Payments for debt issuance costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (53,669
            )Payments for extinguishment of debt
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (203,450
            )Net proceeds from issuance of redeemable preferred stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,330,000Net
                  proceeds from issuance of convertible preferred stock and warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            17,085,434Payments
                of convertible preferred stock dividends and for fractional shares
                of
                common stock resulting from the conversions of convertible preferred
                stock
            
            
            (17
            )
            
            
            (2
            )
            
            
            (466
            )
            
            
            (407
            )
            
            
            (6,058
            )Net proceeds from issuance of common stock
            
            
            295,911
            
            
            
            30,000
            
            
            
            295,911
            
            
            
            29,994
            
            
            
            53,608,811Additional capital contributed by stockholders
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            245,559Net
                cash provided by financing activities
            
            
            295,911
            
            
            
            29,998
            
            
            
            295,445
            
            
            
            29,587
            
            
            
            77,418,874NET  INCREASE
                (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            (2,333,200
            )
            
            
            (3,379,060
            )
            
            
            (2,621,870
            )
            
            
            (5,600,317
            )
            
            
            9,839,925CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            12,173,125
            
            
            
            11,916,610
            
            
            
            12,461,795
            
            
            
            14,137,867
            
            
            
            -CASH
                AND CASH EQUIVALENTS, END OF  PERIOD
            
            $
            9,839,925
            
            
            $
            8,537,550
            
            
            $
            9,839,925
            
            
            $
            8,537,550
            
            
            $
            9,839,925See
                notes to condensed consolidated financial statements
                (unaudited).




-6-


**IMMTECH
      PHARMACEUTICALS, INC. AND SUBSIDIARies**


**(A
      Development Stage Enterprise)**




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)**




**1.**
            **BASIS
                OF PRESENTATION**




The
      accompanying condensed consolidated financial statements have been prepared
      by
      Immtech Pharmaceuticals, Inc. and its subsidiaries (the “Company”) pursuant to
      the rules and regulations of the Securities and Exchange Commission (“SEC”) and,
      in the opinion of management, include all adjustments necessary for a fair
      statement of results for each period shown (unless otherwise noted herein,
      all
      adjustments are of a normal recurring nature).  Certain information
      and footnote disclosures normally included in financial statements prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America have been condensed or omitted pursuant to such SEC rules and
      regulations.  The Company, with a fiscal year ending March 31,
      believes that the disclosures made are adequate to prevent the financial
      information given from being misleading.  It is suggested that these
      financial statements be read in conjunction with the financial statements and
      notes thereto included in the Company’s latest Annual Report on Form
      10-K.




**2.**
            **COMPANY
                BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
                POLICIES**




*Description
      of Business*– Immtech Pharmaceuticals, Inc. (a development stage enterprise)
      and its subsidiaries, is a pharmaceutical company working to commercialize
      drugs
      to treat infectious diseases, and the Company is expanding its targeted markets
      by applying its proprietary pharmaceutical platform to treat other
      disorders.  The Company has advanced clinical programs that include
      new treatments for Pneumocystis pneumonia (“PCP”), malaria, and trypanosomiasis
      (“African sleeping sickness”), and a well-defined, expanding library of
      compounds targeting fungal infections, hepatitis C virus (“HCV”) and other
      serious diseases.  Immtech holds an exclusive worldwide license to
      certain patents and patent applications related to technology and products
      derived from a proprietary pharmaceutical platform.  The Company has
      worldwide rights to commercialize and sublicense such patented technology,
      including a large library of well-defined compounds from which a pipeline of
      therapeutic products could be developed.




The
      Company holds worldwide patents and patent applications, and licenses and rights
      to license technology, primarily from a scientific consortium that has granted
      to the Company exclusive rights to commercialize products from, and license
      rights to the technology.  The scientific consortium includes
      scientists from The University of North Carolina at Chapel Hill (“UNC-CH”),
      Georgia State University (“Georgia State”), Duke University (“Duke University”)
      and Auburn University (“Auburn University”) (collectively, the “Scientific
      Consortium”).  The Company is a development stage enterprise and,
      since its inception on October 15, 1984, has engaged in research and
      development programs, expanded its network of scientists and scientific advisors
      and licensing technology agreements, and worked to commercialize the aromatic
      cation pharmaceutical technology platform (the Company acquired its rights
      to
      the aromatic cation technology platform in 1997 and promptly thereafter
      commenced development of its current programs).  The Company uses the
      expertise and resources of strategic partners and third parties in a number
      of
      areas, including:  (i) laboratory research, (ii) animal and
      human trials and (iii) manufacture of pharmaceutical drugs.




The
      Company does not have any products currently available for sale, and no products
      are expected to be commercially available for sale until after March 31,
      2008, if at all.




-7-


Since
      inception, the Company has incurred accumulated net losses of approximately
      $102,080,000.  Management expects the Company will continue to incur
      significant losses during the next several years as the Company continues
      development activities, clinical trials and commercialization
      efforts.  In addition, the Company has various research and
      development agreements with third parties and is dependent upon such parties’
abilities to perform under these agreements.  There can be no
      assurance that the Company’s activities will lead to the development of
      commercially viable products.  The Company’s operations to date have
      consumed substantial amounts of cash.  The negative cash flow from
      operations is expected to continue in the foreseeable future.  The
      Company believes it will require substantial additional funds to commercialize
      its drug candidates.  The Company’s cash requirements may vary
      materially from those now planned when and if the following become known:
      results of research and development efforts, results of clinical testing,
      responses to grant requests, formation and development of relationships with
      strategic partners, changes in the focus and direction of development programs,
      competitive and technological advances, requirements in the regulatory process
      and other factors.  Changes in circumstances in any of the above areas
      may require the Company to allocate substantially more funds than are currently
      available or than management intends to raise.




Management
      believes the Company’s existing unrestricted cash and cash equivalents, and the
      grants received or awarded and awaiting disbursement of, will be sufficient
      to
      meet the Company’s planned expenditures through at least the next twelve months,
      although there can be no assurance the Company will not require additional
      funds.  Management may seek to satisfy future funding requirements
      through public or private offerings of securities, by collaborative or other
      arrangements with pharmaceutical or biotechnology companies or from other
      sources or by issuance of debt.




The
      Company’s ability to continue as a going concern is dependent upon its ability
      to generate sufficient funds to meet its obligations as they become due,
      complete the development and commercialization of drug candidates and,
      ultimately, to generate sufficient revenues for profitable
      operations.  Management’s plans for the forthcoming year, in addition
      to normal operations, include continuing financing efforts, obtaining additional
      research grants and entering into research and development agreements with
      other
      entities.




*Principles
      of Consolidation*– The consolidated financial statements include the
      accounts of Immtech Pharmaceuticals, Inc. and its wholly owned
      subsidiaries.  All intercompany balances and transactions have been
      eliminated.




*Revenue
      Recognition*– Grants to perform research have been the Company’s primary
      source of revenue and are generally granted to support research and development
      activities for specific projects or drug candidates.  Revenue related
      to grants to perform research and development is recognized as earned based
      on
      the performance requirements of the specific grant.  Upfront cash
      payments from research and development grants are reported as deferred revenue
      until such time as the research and development activities covered by the grant
      are performed.




Revenue
      from licensing arrangements is recorded when earned based on the performance
      requirements of the contract.  Nonrefundable upfront license fees, for
      product candidates where the Company is providing continuing services related
      to
      product development, are deferred and recognized as revenue over the development
      period or as the Company provides services required under the
      agreement.  The timing and amount of revenue the Company recognizes
      from licenses, either from upfront fees or milestones where the Company is
      providing continuing services related to product development, is dependent
      upon
      the Company’s estimates of filing dates.  As product candidates move
      through the development process, it is necessary to revise these estimates
      to




-8-


consider
      changes to the product development cycle, such as changes in the clinical
      development plan, regulatory requirements, or various other factors, many of
      which may be outside of the Company’s control.  The impact on revenue
      changes in the Company’s estimates and the timing thereof, is recognized
      prospectively over the remaining estimated product development
      period.




*Net
      Income (Loss) Per Share*– Net income (loss) per share is calculated in
      accordance with Statement of Financial Accounting Standard (“SFAS”) No. 128,
“Earnings Per Share.”  Basic net income (loss) and diluted net income
      (loss) per share are computed by dividing net income (loss) attributable to
      common stockholders by the weighted average number of common shares
      outstanding.  Diluted net income per share, when applicable, is
      computed by dividing net income attributable to common stockholders by the
      weighted average number of common shares outstanding increased by the number
      of
      potential dilutive common shares based on the treasury stock
      method.  Diluted net loss per share was the same as the basic net loss
      per share for the three and six month periods ended September 30, 2007 and
      September 30, 2006, as none of the Company’s outstanding common stock options,
      warrants and the conversion features of Series A, B, C, D and E Convertible
      Preferred Stock were dilutive.




*Stock-Based
      Compensation*– Effective April 1, 2006, the Company adopted SFAS No. 123(R),
“*Share-Based Payment*,” using the modified prospective
      method.  SFAS No. 123(R) requires entities to recognize the cost of
      employee services in exchange for awards of equity instruments based on the
      grant-date fair value of those awards (with limited exceptions).  The
      cost, based on the estimated number of awards that are expected to vest, will
      be
      recognized over the period during which the employee is required to provide
      the
      services in exchange for the award.  No compensation cost is
      recognized for awards for which employees do not render the requisite
      service.  Upon adoption, the grant-date fair value of employee share
      options and similar instruments was estimated using the Black-Scholes valuation
      model.  The Black-Scholes valuation requires the input of highly
      subjective assumptions, including the expected life of the stock-based award
      and
      stock price volatility.  The assumptions used are management’s best
      estimates, but the estimates involve inherent uncertainties and the application
      of management’s judgment.  As a result, if other assumptions had been
      used, the recorded and pro forma stock-based compensation expense could have
      been materially different from that depicted in the financial
      statements.




*Segment
      Reporting*– The Company is a development stage pharmaceutical company that
      operates as one segment.




*New
      Accounting Standard*– The Company adopted FASB Interpretation No. 48,
“*Accounting for Uncertainty in Income Taxes*,” (“FIN 48”) on April 1,
      2007.  The adoption of FIN 48 did not have an impact.  At
      the adoption date and as of September 30, 2007, the Company does not have a
      liability for uncertain tax benefits.  The Company does not presently
      expect any reasonably possible material change to the estimated amount of
      liability associated with its uncertain tax positions during the next twelve
      months.




The
      Company files income tax returns in the U.S. federal jurisdiction, and various
      state jurisdictions.  Periods subject to examination for the Company’s
      federal tax return are the 1990 through 2006 tax years.  In addition,
      open tax years related to state jurisdictions remain subject to examination
      but
      are not considered material.




*New
      Accounting Standard*– In September 2006, the FASB issued Statement No. 157
      (“SFAS 157”), “*Fair Value Measurements*.”  SFAS 157 defines
      fair value, establishes a framework for measuring fair value in accordance
      with
      generally accepted accounting principles, and expands disclosures




-9-


about
      fair value measurements.  SFAS 157 is effective for us in fiscal year
      2009.  The Company is currently assessing the impact of the adoption
      of this statement.




*New
      Accounting Standard*– In February 2007, the FASB issued Statement No. 159
      (“SFAS 159”), “*Fair Value Opti**on for Financial Assets and Financial
      Liabilities*.”  SFAS 159 establishes the irrevocable option to
      elect to carry certain financial assets and liabilities at fair value, with
      changes in fair value recorded in earnings.  SFAS 159 is effective for
      us in fiscal year 2009.  The Company is currently assessing the impact
      of the adoption of this statement.




**3.**
            **STOCKHOLDERS’
                EQUITY**




On
      January 7, 2004, the stockholders of the Company approved an increase in the
      number of authorized common stock from 30 million to 100 million
      shares.  On June 14, 2004, the Company filed with the Secretary of
      State of the State of Delaware an Amended and Restated Certificate of
      Incorporation implementing, among other things, the approved authorized 70
      million share common stock increase from 30 million to 100 million shares of
      common stock.




*Series
      A Convertible Preferred Stock* - On February 14, 2002, the Company filed a
      Certificate of Desigation with the Secretary of State of the State of Delaware
      designating 320,000 shares of the Company’s 5,000,000 authorized shares of
      preferred stock as Series A Convertible Preferred Stock, $0.01 par value, with
      a
      stated value of $25.00 per share.  Dividends accrue at a rate of 6.0%
      per annum on the $25.00 stated value per share and are payable semi-annually
      on
      April 15 and October 15 of each year while the shares are
      outstanding.  The Company has the option to pay the dividend either in
      cash or in equivalent shares of common stock, as defined.  Included in
      the carrying value of the Series A Convertible Preferred Stock in the
      accompanying condensed consolidated balance sheets are $37,317 and $39,783
      of
      accrued preferred stock dividends at September 30, 2007 and March 31, 2007,
      respectively.  Each share of Series A Convertible Preferred Stock may
      be converted by the holder at any time into shares of our common stock at a
      conversion rate determined by dividing the $25.00 stated value, plus any accrued
      and unpaid dividends (the “Liquidation Price”), by a $4.42 conversion price (the
“Conversion Price A”), subject to certain adjustments, as defined in the Series
      A Certificate of Designation.  On April 15, 2007, the Company issued
      6,308 shares of common stock and paid $87 in lieu of fractional common shares
      as
      dividends on the preferred shares. On April 15, 2006, the Company issued 5,547
      shares of common stock and paid $47 in lieu of fractional common shares as
      dividends on the preferred shares.  During the three and six month
      periods ended September 30, 2007 and 2006 certain preferred stockholders
      converted 1,000 and 2,400 shares of Series A Convertible Preferred Stock,
      including accrued dividends, for 5,701 and 13,690 shares of common stock,
      respectively.




The
      Company may at any time require that any or all outstanding shares of Series
      A
      Convertible Preferred Stock be converted into shares of the Company’s common
      stock, provided that the shares of common stock into which the Series A
      Convertible Preferred Stock are convertible are registered pursuant to an
      effective registration statement, as defined.  The number of shares of
      common stock to be received by the holders of the Series A Convertible Preferred
      Stock upon a mandatory conversion by the Company is determined by (i) dividing
      the Liquidation Price by the Conversion Price A, provided that the closing
      bid
      price for the Company’s common stock exceeds $9.00 for 20 consecutive trading
      days within 180 days prior to notice of conversion, as defined, or (ii) if
      the
      requirements of (i) are not met, the number of shares of common stock is
      determined by dividing 110% of the Liquidation Price by the Conversion Price
      A.  The Conversion Price A is subject to certain adjustments, as
      defined in the Series A Certificate of Designation.




-10-


The
      Company may at any time, upon 30 days’ notice, redeem any or all outstanding
      shares of the Series A Convertible Preferred Stock by payment of the Liquidation
      Price to the holder of such shares, provided that the holder does not convert
      the Series A Convertible Preferred Stock into shares of common stock during
      the
      30 day period.  The Series A Convertible Preferred Stock has a
      preference in liquidation equal to $25.00 per share, plus any accrued and unpaid
      dividends, over the common stock and is pari passu with all other outstanding
      series of preferred stock.  Each issued and outstanding share of
      Series A Convertible Preferred Stock shall be entitled to 5.6561 votes (subject
      to adjustment) with respect to any and all matters presented to the Company’s
      stockholders for their action or consideration.  Except as provided by
      law or by the provisions establishing any other series of preferred stock,
      Series A Convertible Preferred stockholders and holders of any other outstanding
      preferred stock shall vote together with the holders of common stock as a single
      class.




*Series
      B Convertible Preferred Stock* - On September 25, 2002, the Company filed a
      Certificate of Designation with the Secretary of State of the State of Delaware
      designating 240,000 shares of the Company’s 5,000,000 authorized shares of
      preferred stock as Series B Convertible Preferred Stock, $0.01 par value, with
      a
      stated value of $25.00 per share.  Dividends accrue at a rate of 8.0%
      per annum on the $25.00 stated value per share and are payable semi-annually
      on
      April 15 and October 15 of each year while the shares are
      outstanding.  The Company has the option to pay the dividend either in
      cash or in equivalent shares of common stock, as defined.  Included in
      the carrying value of the Series B Convertible Preferred Stock in the
      accompanying condensed consolidated balance sheets are $12,095 and $12,021
      of
      accrued preferred stock dividends as of September 30, 2007 and March 31, 2007,
      respectively.  Each share of Series B Convertible Preferred Stock may
      be converted by the holder at any time into shares of common stock at a
      conversion rate determined by dividing the $25.00 stated value, plus any accrued
      and unpaid dividends (the “Liquidation Price”), by a $4.00 conversion price (the
“Conversion Price B”), subject to certain adjustments, as defined in the Series
      B Certificate of Designation.  On April 15, 2007, the Company issued
      2,040 shares of common stock and paid $30 in lieu of fractional common shares
      as
      dividends on the preferred shares.  On April 15, 2006, the Company
      issued 1,703 shares of common stock and paid $31 in lieu of fractional common
      shares as dividends on the preferred shares.  During the three and six
      month periods ended September 2007 and 2006, there were no
      conversions.




The
      Company may at any time require that any or all outstanding shares of Series
      B
      Convertible Preferred Stock be converted into shares of the Company’s common
      stock, provided that the shares of common stock into which the Series B
      Convertible Preferred Stock are convertible are registered pursuant to an
      effective registration statement, as defined.  The number of shares of
      common stock to be received by the holders of the Series B Convertible Preferred
      Stock upon a mandatory conversion by the Company is determined by (i) dividing
      the Liquidation Price by the Conversion Price B, provided that the closing
      bid
      price for the Company’s common stock exceeds $9.00 for 20 consecutive trading
      days within 180 days prior to notice of conversion, as defined, or (ii) if
      the
      requirements of (i) are not met, the number of shares of common stock is
      determined by dividing 110% of the Liquidation Price by the Conversion Price
      B.  The Conversion Price B is subject to certain adjustments, as
      defined in the Series B Certificate of Designation.




The
      Company may at any time, upon 30 days’ notice, redeem any or all outstanding
      shares of the Series B Convertible Preferred Stock by payment of the Liquidation
      Price to the holder of such shares, provided that the holder does not convert
      the Series B Convertible Preferred Stock into shares of common stock during
      the
      30 day period.  The Series B Convertible Preferred Stock has a
      preference in liquidation equal to $25.00 per share, plus any accrued and unpaid
      dividends over the common stock and is pari passu with all other outstanding
      series of preferred stock.  Each issued and outstanding share of
      Series B Convertible Preferred Stock shall be entitled to 6.25 votes (subject
      to
      adjustment) with respect to any and all matters presented to the Company’s
      stockholders for their




-11-


action
      or
      consideration.  Except as provided by law or by the provisions
      establishing any other series of preferred stock, Series B Convertible Preferred
      stockholders and holders of any other outstanding preferred stock shall vote
      together with the holders of common stock as a single class.




*Series
      C Convertible Preferred Stock* - On June 6, 2003, we filed a Certificate of
      Designation with the Secretary of State of the State of Delaware designating
      160,000 shares of the Company’s 5,000,000 authorized shares of preferred stock
      as Series C Convertible Preferred Stock, $0.01 par value, with a stated value
      of
      $25.00 per share.  Dividends accrue at a rate of 8.0% per annum on the
      $25.00 stated value per share and are payable semi-annually on April 15 and
      October 15 of each year while the shares are outstanding.  The Company
      has the option to pay the dividend either in cash or in equivalent shares of
      common stock, as defined.  Included in the carrying value of the
      Series C Convertible Preferred Stock in the accompanying condensed consolidated
      balance sheets are $42,194 and $41,945 of accrued preferred stock dividends
      as
      of September 30, 2007 and March 31, 2007, respectively.  Each share of
      Series C Convertible Preferred Stock may be converted by the holder at any
      time
      into shares of common stock at a conversion rate determined by dividing the
      $25.00 stated value, plus any accrued and unpaid dividends (the “Liquidation
      Price”), by a $4.42 conversion price (the “Conversion Price C”), subject to
      certain adjustments, as defined in the Series C Certificate of
      Designation.  On April 15, 2007, the Company issued 6,900 shares of
      common stock and paid $99 in lieu of fractional common shares as dividends
      on
      the preferred shares.  On April 15, 2006, the Company issued 5,761
      shares of common stock and paid $95 in lieu of fractional common shares as
      dividends on the preferred shares.  During the three and six month
      periods ended September 30, 2007 and 2006, there were no
      conversions.




The
      Company may at any time require that any or all outstanding shares of Series
      C
      Convertible Preferred Stock be converted into shares of the Company’s common
      stock, provided that the shares of common stock into which the Series C
      Convertible Preferred Stock are convertible are registered pursuant to an
      effective registration statement, as defined.  The number of shares of
      common stock to be received by the holders of the Series C Convertible Preferred
      Stock upon a mandatory conversion by the Company is determined by (i) dividing
      the Liquidation Price by the Conversion Price C provided that the closing bid
      price for the Company’s common stock exceeds $9.00 for 20 consecutive trading
      days within 180 days prior to notice of conversion, as defined, or (ii) if
      the
      requirements of (i) are not met, the number of shares of common stock is
      determined by dividing 110% of the Liquidation Price by the Conversion Price
      C.  The Conversion Price C is subject to certain adjustments, as
      defined in the Series C Certificate of Designation.




The
      Company may at any time, upon 30 days’ notice, redeem any or all outstanding
      shares of the Series C Convertible Preferred Stock by payment of the Liquidation
      Price to the holder of such shares, provided that the holder does not convert
      the Series C Convertible Preferred Stock into shares of common stock during
      the
      30 day period. The Series C Convertible Preferred Stock has a preference in
      liquidation equal to $25.00 per share, plus any accrued and unpaid dividends,
      over the common stock and is pari passu with all other outstanding series of
      preferred stock.  Each issued and outstanding share of Series C
      Convertible Preferred Stock shall be entitled to 5.6561 votes (subject to
      adjustment) with respect to any and all matters presented to the Company’s
      stockholders for their action or consideration.  Except as provided by
      law or by the provisions establishing any other series of preferred stock,
      Series C Convertible Preferred stockholders and holders of any other outstanding
      preferred stock shall vote together with the holders of common stock as a single
      class.




*Series
      D Convertible Preferred Stock*– On January 15, 2004, the Company filed
      a Certificate of Designation with the Secretary of State of the State of
      Delaware designating 200,000 shares of the Company’s 5,000,000 authorized shares
      of preferred stock as Series D Convertible Preferred Stock, $0.01 par value,
      with a stated value of $25.00 per share.  Dividends accrue at a rate
      of 6.0% per




-12-


annum
      on
      the $25.00 stated value per share and are payable semi-annually on April 15
      and October 15 of each year while the shares are
      outstanding.  The Company has the option to pay the dividend either in
      cash or in equivalent shares of common stock, as defined. Included in the
      carrying value of the Series D Convertible Preferred Stock in the accompanying
      condensed consolidated balance sheets are $80,007 and $80,914 of accrued
      preferred stock dividends as of September 30, 2007 and March 31, 2007,
      respectively.  Each share of Series D Convertible Preferred Stock may
      be converted by the holder at any time into shares of common stock at a
      conversion rate determined by dividing the $25.00 stated value, plus any accrued
      and unpaid dividends (the “Liquidation Price”), by a $9.00 conversion price (the
“Conversion Price D”), subject to certain adjustments, as defined in the Series
      D Certificate of Designation. On April 15, 2007, the Company issued 13,334
      shares of common stock and paid $95 in lieu of fractional common shares as
      dividends on the preferred shares.  On April 15, 2006, the Company
      issued 11,134 shares of common stock and paid $79 in lieu of fractional common
      shares as dividends on the preferred shares.  During the three and six
      month periods ended September 30, 2007 certain preferred stockholders converted
      2,000 shares of Series D Convertible Preferred Stock, including accrued
      dividends, for 5,653 shares of common stock, respectively. During the three
      and
      six month periods ended September 30, 2006 there were no
      conversions.




The
      Company may at any time, require that any or all outstanding shares of Series
      D
      Convertible Preferred Stock be converted into shares of our common stock,
      provided that the shares of common stock into which the Series D Convertible
      Preferred Stock are convertible are registered pursuant to an effective
      registration statement, as defined.  The number of shares of common
      stock to be received by the holders of the Series D Convertible Preferred Stock
      upon a mandatory conversion by the Company is determined by (i) dividing the
      Liquidation Price by the Conversion Price D provided that the closing bid price
      for the Company’s common stock exceeds $18.00 for 20 consecutive trading days
      within 180 days prior to notice of conversion, as defined, or (ii) if the
      requirements of (i) are not met, the number of shares of common stock is
      determined by dividing 110% of the Liquidation Price by the Conversion Price
      D.  The Conversion Price D is subject to certain adjustments, as
      defined in the Certificate of Designation.




The
      Series D Convertible Preferred Stock has a preference in liquidation equal
      to
      $25.00 per share, plus any accrued and unpaid dividends, over the common stock
      and is pari passu with all other series of preferred stock.  Each
      issued and outstanding share of Series D Convertible Preferred Stock shall
      be
      entitled to 2.7778 votes (subject to adjustment) with respect to any and all
      matters presented to the Company’s stockholders for their action or
      consideration. Except as provided by law or by the provisions establishing
      any
      other series of preferred stock, Series D Convertible Preferred stockholders
      and
      holders of any other outstanding preferred stock shall vote together with the
      holders of common stock as a single class.




*Series
      E Convertible Preferred Stock*–On December 13, 2005, the Company filed a
      Certificate of Designation with the Secretary of State of the State of Delaware
      designating 167,000 shares of the Company’s 5,000,000 authorized shares of
      preferred stock as Series E Convertible Preferred Stock, $0.01 par value, with
      a
      stated value of $25.00 per share.  Dividends accrue at a rate of 6.0%
      per annum on the $25.00 stated value per share and are payable semi-annually
      on
      April 15 and October 15 of each year while the shares are
      outstanding.  The Company has the option to pay the dividend either in
      cash or in equivalent shares of common stock, as defined.  Included in
      the carrying value of the Series E Convertible Preferred Stock in the
      accompanying condensed consolidated balance sheets are $74,069 and $76,116
      of
      accrued preferred stock dividends as of September 30, 2007 and March 31, 2007,
      respectively.  Each share of Series E Convertible Preferred Stock may
      be converted by the holder at any time into shares of common stock at a
      conversion rate determined by dividing the $25.00 stated value, plus any accrued
      and unpaid dividends (the




-13-


“Liquidation
      Price”), by a $7.04 conversion price (the “Conversion Price E”), subject to
      certain adjustments, as defined in the Series E Certificate of
      Designation.  On April 15, 2007, the Company issued 12,531 shares of
      common stock and paid $132 in lieu of fractional common shares as dividends
      on
      the preferred shares.  On April 15, 2006, the Company issued 8,819
      shares of common stock and paid $135 in lieu of fractional common shares as
      dividends on the preferred shares.  During the three and six month
      periods ended September 30, 2007, certain preferred stockholders converted
      1,600
      and 3,600 shares of Series E Convertible Preferred Stock, including accrued
      dividends, for 5,813 and 12,972 shares of common stock,
      respectively.  During the three month period ended September 30, 2006
      there were no conversions.  During the six month period ended
      September 30, 2006, certain preferred stockholders converted 46,000 shares
      of
      Series E Convertible Preferred Stock, including accrued dividends, for 163,847
      shares of common stock.




The
      Company may at any time, require that any or all outstanding shares of Series
      E
      Convertible Preferred Stock be converted into shares of our common stock,
      provided that the shares of common stock into which the Series E Convertible
      Preferred Stock are convertible are registered pursuant to an effective
      registration statement, as defined.  The number of shares of common
      stock to be received by the holders of the Series E Convertible Preferred Stock
      upon a mandatory conversion by us is determined by (i) dividing the Liquidation
      Price by the Conversion Price E provided that the closing bid price for the
      Company’s common stock exceeds $10.56 for 20 out of 30 consecutive trading days
      within 180 days prior to notice of conversion, as defined, or (ii) if the
      requirements of (i) are not met, the number of shares of common stock is
      determined by dividing 110% of the Liquidation Price by the Conversion Price
      E.  The Conversion Price E is subject to certain adjustments, as
      defined in the Certificate of Designation.




The
      Series E Convertible Preferred Stock has a preference in liquidation equal
      to
      $25.00 per share, plus any accrued and unpaid dividends, over the common stock
      and is parri passu with all other outstanding series of preferred
      stock.  Each issued and outstanding share of Series E Convertible
      Preferred Stock is entitled to 3.5511 votes (subject to adjustment) with respect
      to any and all matters presented to the Company’s stockholders for their action
      or consideration. Except as provided by law or by the provisions establishing
      any other series of preferred stock, Series E Convertible Preferred stockholders
      and holders of any other outstanding preferred stock shall vote together with
      the holders of common stock as a single class.




The
      Company will, on December 13, 2008, at the Company’s election, (i) redeem the
      Series E Convertible Preferred Stock plus any accrued and unpaid interest for
      cash, (ii) convert the Series E Convertible Preferred Stock and any accrued
      and
      unpaid interest into common stock, or (iii) redeem and convert the Series E
      Convertible Preferred Stock in any combination of (i) or (ii).




*Common
      Stock*–On May 26, 2006, restricted shares in the amount of 5,000 shares of
      common stock were issued and expensed with a grant date value of approximately
      $36,000 to Tulane University as part of the Tulane License Agreement granting
      to
      us an exclusive license to develop, manufacture and commercialize a group of
      four – aminoquinoline drugs for treatment, prophylaxis and diagnosis of
      infectious diseases.




On
      May
      26, 2006, restricted shares in the amount of 5,000 shares of common stock were
      issued and expensed with a grant date value of approximately $36,000 to T.
      Stephen Thompson as part of his retirement and consulting agreement dated May
      1,
      2006.




*Warrants*–
      During the three and six month periods ended September 30, 2007, warrants to
      purchase 48,312 shares of common stock were exercised, resulting in proceeds
      to
      the Company of $295,737.




-14-


During
      the three and six month periods ended September 30, 2006, warrants to purchase
      5,000 shares of common stock were exercised, resulting in proceeds to the
      Company of $30,000.




In
      connection with services rendered to us, effective July 17, 2007, the Company
      issued to an investor relations firm, warrants to purchase 30,000 shares of
      our
      common stock.  The warrants are exerciseable at $9.00 per
      share.  The warrants are exerciseable through July 17, 2011 as
      follows: (i) 10,000 vest immediately, (ii) 10,000 vest upon the Company’s stock
      trading at or above $10.00 per share for 20 consecutive trading days and (iii)
      10,000 vest upon the Company’s stock trading at or above $12.00 per share for 20
      consecutive trading days.  The warrants have been expensed using a
      grant date value as calculated using the Black-Scholes valuation model of
      approximately $118,000.




In
      connection with a consulting agreement, the Company issued warrants on September
      10, 2007 to purchase 50,000 shares of common stock.  The warrants are
      exerciseable at $10.00 per share.  The warrants are exerciseable
      through September 10, 2010.  The warrants have been expensed using a
      grant date value as calculated using the Black-Scholes valuation model of
      approximately $172,000.




*Incentive
      Stock Programs*– At the stockholders’ meeting held November 12, 2004, the
      stockholders approved the second amendment to the 2000 Stock Incentive Plan
      which increased the number of shares of common stock reserved for issuance
      from
      1,100,000 shares to 2,200,000 shares.  Options granted under the 2000
      Stock Incentive Plan that expire are available to be reissued.  During
      the six month periods ended September 30, 2007 and 2006, 81,000 and 14,166
      options, respectively, previously granted under the 2000 Stock Incentive Plan
      expired and were available to be reissued.  During the three month
      period ended September 30, 2007, the Company issued 167,168 options to purchase
      shares of common stock.  During the three month period ended September
      30, 2006, no options were issued. During the six month periods ended September
      30, 2007 and 2006, the Company issued 174,668 and 56,000 options, respectively,
      to purchase shares of common stock.  Additionally, the Company granted
      5,000 restricted stock awards in the three month****period
      ended June 30, 2006.  As of September 30, 2007, there were a total of
      345,845 shares available for grant. The purchase price of shares must be at
      least equal to the fair market value of the common stock on the date of grant,
      and the maximum term of an option is 10 years.  The options generally
      vest over periods ranging from 0 to 4 years.




The
      Company recognized approximately $611,000 and $1,104,000 of compensation cost
      for the three and six month periods ended September 30, 2007, and approximately
      $557,000 and $1,162,000 for the three and six month periods ended September
      30,
      2006. During the three month period ended September 30, 2007, 19,119 options
      were exercised on a cashless basis resulting in 18,000 common shares being
      issued with an exercise price of $0.47.  During the three and six
      month periods ended September 30, 2006, 19,342 and 32,263 options were exercised
      on a cashless basis resulting in 48,349 and 30,349 common shares being issued,
      respectively, with an exercise price of $0.47.




The
      fair
      value of each stock option award is estimated on the date of grant using the
      Black-Scholes valuation model.  The Company uses historical data
      regarding stock option exercise behaviors to estimate the expected term of
      options granted (based on the period of time that options granted are expected
      to be outstanding).  Expected implied volatility is based on the
      volatility of the Company’s exchange traded options for the Company’s common
      stock.  The risk-free interest rate is based on the U.S. treasury
      security rate in effect over the estimated life of the option. There is no
      dividend yield.  The following weighted-average assumptions were used
      in calculating the fair value of stock options granted during the three and
      six
      month periods ended September 30, 2007 and 2006.




-15-


Three
                  Months
              
              Six
                  MonthsEnded
                  September 30,
              
              Ended
                  September 30,2007
              2006
              
              2007
              2006Risk
                  free interest rate
              4.67%
              0%
              
              4.69%
              4.89%Average
                  life of options (years)
              10.0
              0
              
              10.0
              6.0Volatility
              77%
              0%
              
              76%
              69%Dividend
                  yield
              0
              0
              
              0
              0




A
      summary
      of stock option activity as of and for the six month period ended September
      30,
      2007, is presented below:




Shares
              
              
              Exercise
                  PricePer Share (*)
              
              
              RemainingContractualTerm
                  (*) inYearsOutstanding
                  at March 31, 2007
              
              
              1,800,609
              
              
              $
              8.92Granted
              
              
              174,668
              
              
              
              6.94Exercised
              
              
              (19,119
              )
              
              
              .47Forfeited
                  or expired
              
              
              (81,000
              )
              
              
              10.95Outstanding
                  at September 30, 2007
              
              
              1,875,158
              
              
              
              8.73
              
              
              
              6.79Exercisable
                  at September 30, 2007
              
              
              1,445,389
              
              
              
              9.32
              
              
              
              6.27




(*)
      Weighted-average




The
      weighted-average grant date fair value of options granted during the six month
      periods ended September 30, 2007 and 2006 was $6.94 and $7.35,
      respectively.  The intrinsic value of options exercised during the six
      month periods ended September 30, 2007 and 2006 was approximately $143,000
      and
      $121,000, respectively.  The intrinsic value of stock options vested
      during the six month periods ended September 30, 2007 and 2006 was approximately
      $2,263,000 and $788,000, respectively.  The intrinsic value of stock
      options outstanding during the six month periods ended September 30, 2007 and
      2006 was approximately $2,921,000 and $788,000, respectively.




As
      of
      September 30, 2007, there was approximately $1,985,000 of unrecognized
      compensation cost related to non-vested stock option compensation arrangements
      granted under the 2000 Plan that is expected to be recognized as a charge to
      earnings over a weighted-average period of 0.6 years.  As of September
      30, 2007, 1,734,203 options have vested or are expected to vest with a
      weighted-average exercise price of $10.52, a weighted-average remaining life
      of
      6.85 years, and with an intrinsic value of approximately
      $2,755,000.




**4.**
            **COLLABORATIVE
                RESEARCH AND DEVELOPMENT
                ACTIVITIES**




The
      Company earns revenue under various collaborative research
      agreements.  Under the terms of these arrangements, the Company
      generally has agreed to perform best efforts research and development and,
      in
      exchange, the Company may receive advanced cash funding, an allowance for
      management overhead, and may also earn additional fees for the attainment of
      certain milestones.




-16-


The
      Company initially acquired its rights to the aromatic cation technology platform
      developed by a consortium of universities consisting of UNC-CH, Georgia State
      University, Duke University and Auburn University pursuant to an agreement,
      dated January 15, 1997 (as amended, the “Consortium Agreement”) among the
      Company, UNC-CH and a third-party (to which each of the other members of the
      scientific consortium shortly thereafter joined) (the “original
      licensee”).  The Consortium Agreement commits the parties to
      collectively research, develop, finance the research and development of,
      manufacture and market both the technology and compounds owned by the scientific
      consortium and previously licensed or optioned to the original licensee and
      licensed to the Company in accordance with the Consortium Agreement (the
“Current Compounds”), and all technology and compounds developed by the
      consortium scientists after January 15, 1997, through use of Company-sponsored
      research funding or National Cooperative Drug Development grant funding made
      available to the scientific consortium (the “Future Compounds” and, collectively
      with the Current Compounds, the “Compounds”).




The
      Consortium Agreement contemplated that upon the completion of our initial public
      offering (“IPO”) of shares of its common stock with gross proceeds of at least
      $10,000,000 by April 30, 1999, the Company, with respect to the Current
      Compounds, and UNC-CH, (on behalf of the Scientific Consortium), with respect
      to
      Current Compounds and Future Compounds, would enter into license agreements
      for
      the intellectual property rights relating to the Compounds pursuant to which
      the
      Company would pay royalties and other payments based on revenues received for
      the sale of products based on the Compounds.




The
      Company completed an IPO on April 26, 1999, with gross proceeds in excess of
      $10,000,000 thereby earning a worldwide license and exclusive rights to
      commercially use, manufacture, have manufactured, promote, sell, distribute,
      or
      otherwise dispose of any products based directly or indirectly on all of the
      Current Compounds and Future Compounds.




As
      a
      result of the closing of the IPO, the Company issued an aggregate of 611,250
      shares of common stock, of which 162,500 shares were issued to the Scientific
      Consortium and 448,750 shares were issued to the original licensee or persons
      designated by the original licensee.




As
      contemplated by the Consortium Agreement, on January 28, 2002, the Company
      entered into a license agreement with the Scientific Consortium whereby the
      Company received the exclusive license to commercialize the aromatic cation
      technology platform and compounds developed or invented by one or more of the
      Scientific Consortium scientists after January 15, 1997, and which also
      incorporated into such license agreement the Company’s existing license with the
      Scientific Consortium with regard to the Current Compounds (the “Consortium
      License Agreement”).  Also pursuant to the Consortium Agreement, the
      original licensee transferred to the Company the worldwide license and exclusive
      right to commercially use, manufacture, have manufactured, promote, sell,
      distribute or otherwise dispose of any and all products based directly or
      indirectly on aromatic cations developed by the Scientific Consortium on or
      prior to January 15, 1997 and previously licensed (together with related
      technology and patents) to the third-party.




The
      Consortium Agreement provides that the Company is required to pay to UNC-CH
      on
      behalf of the Scientific Consortium reimbursement of patent and patent-related
      fees, certain milestone payments and royalty payments based on revenue derived
      from the Scientific Consortium’s aromatic cation technology
      platform.  Each month on behalf of the inventor scientist or
      university, as the case may be, UNC-CH submits an invoice to the Company for
      payment of patent-related fees related to current compounds or future compounds
      incurred prior to the invoice date.  The Company is also required to
      make milestone payments in the form of the issuance of 100,000 shares of its
      common stock to the Scientific Consortium when it files its first initial New
      Drug Application (“NDA”) or an




-17-


Abbreviated
      New Drug Application (“ANDA”) based on Scientific Consortium
      technology.  The Company is also required to pay to UNC-CH on behalf
      of the Scientific Consortium (other than Duke University) (i) royalty
      payments of up to 5% of our net worldwide sales of “current products” and
“future products” (products based directly or indirectly on current compounds
      and future compounds, respectively) and (ii) a percentage of any fees the
      Company receives under sublicensing arrangements.  With respect to
      products or licensing arrangements emanating from Duke University technology,
      the Company is required to negotiate in good faith with UNC-CH (on behalf of
      Duke University) royalty, milestone or other fees at the time of such event,
      consistent with the terms of the Consortium Agreement.




Under
      the
      Consortium License Agreement, the Company must also reimburse the cost of
      obtaining patents and assume liability for future costs to maintain and defend
      patents so long as the Company chooses to retain the license to such
      patents.




During
      the three and six month periods ended September 30, 2007, the Company expensed
      approximately $212,000 and $404,000, respectively, of other payments to UNC-CH
      and certain other Scientific Consortium universities for patent related costs
      and other contracted research.  For the corresponding periods ended
      September 30, 2006, the Company expensed approximately $393,000 and $635,000,
      respectively. Included in accounts payable as of September 30, 2007 and
      March 31, 2007, were approximately $90,000, and $174,000, respectively, due
      to UNC-CH and certain other Scientific Consortium universities.




In
      November 2000, The Bill & Melinda Gates Foundation (“Foundation”) awarded a
      $15,114,000 grant to UNC-CH to develop new drugs to treat African sleeping
      sickness and leishmaniasis (the “Foundation Grant”).  On March 29,
      2001, UNC-CH entered into a clinical research subcontract agreement with the
      Company, whereby the Company was to receive up to $9,800,000, subject to certain
      terms and conditions, over a five year period to conduct certain clinical and
      research studies related to the Foundation Grant.




In
      April
      2003, the Foundation awarded a supplemental grant of approximately $2,700,000
      to
      UNC-CH for the expansion of phase IIB/III clinical trials to treat African
      sleeping sickness and improved manufacturing processes.  The Company
      has received, pursuant to the clinical research subcontract with UNC-CH,
      inclusive of its portion of the supplemental grant, a total amount of funding
      of
      approximately $11,700,000.  Grant funds paid in advance of the
      Company’s delivery of services are treated as restricted funds and must be
      segregated from other funds and used for the purposes specified. In March 2006,
      the Company amended and restated the clinical research subcontract with UNC-CH
      and UNC-CH in turn obtained an expanded funding commitment for the Company
      of
      approximately $13,601,000 from the Foundation.  Under the amended and
      restated agreement, the Company received on May 24, 2006 the first payment
      of
      approximately $5,649,000 of the five year approximately $13,601,000
      contract.




During
      the three and six months ended September 30, 2007, approximately $626,000 and
      $1,304,000 was utilized for clinical and research purposes conducted and
      expensed, respectively.  During the three and six months ended
      September 30, 2006, approximately $379,000 and $1,208,000 was utilized for
      clinical and research purposes conducted and expensed, respectively. The Company
      has recognized revenues of approximately $626,000 and $1,304,000 during the
      three and six months ended September 30, 2006, respectively.  The
      Company has recognized revenues of approximately $379,000 and $2,138,000 during
      the three and six months ended September 30, 2006, respectively.  The
      remaining amount (approximately $423,000 as of September 30, 2007) has been
      deferred and will be recognized as revenue over the term of the agreement as
      the
      services are performed.




-18-


On
      November 26, 2003, the Company entered into a testing agreement with Medicines
      for Malaria Venture (“MMV”), a foundation established in Switzerland, and
      UNC-CH, pursuant to which the Company, with the support of MMV and UNC-CH,
      conducted a proof of concept study of the dicationic first drug candidate
      pafuramidine for the treatment of malaria (the “MMV Testing
      Agreement”).




Under
      the
      terms of the MMV Testing Agreement, MMV committed to pay for human clinical
      trials and, subject to certain milestones, regulatory preparation and filing
      costs for the approvals to market pafuramidine to treat malaria. In return
      for
      MMV’s funding, the Company is required, when selling malaria drugs derived from
      this research into “malaria-endemic countries,” as defined, to sell such drugs
      at affordable prices.  An affordable price is defined in the MMV
      Testing Agreement to mean a price not to be less than the cost to manufacture
      and deliver the drugs plus administrative overhead costs (not to exceed 10%
      of
      the cost to manufacture) and a modest profit. There are no price constraints
      on
      product sales into non-malaria-endemic countries.  The Company must,
      however, pay to MMV a royalty not to exceed 7% of net sales, as defined, on
      product sales into non-malaria-endemic countries, until the amount funded under
      the MMV Testing Agreement and amounts funded under a related discovery agreement
      between MMV and UNC-CH is refunded to MMV at face value.  The company
      and MMV agreed to terminate the MMV Testing Agreement effective as of February
      10, 2006.  The Company has received approximately $5,636,000 under
      this contract.




The
      Company recognized revenues of approximately $112,000 and $294,000 during the
      three and six month periods ended September 30, 2006, respectively, for expenses
      incurred related to activities within the scope of the MMV Testing
      Agreement.




On
      June
      8, 2007, the Company entered into an exclusive licensing agreement pursuant
      to
      which we have licensed to Par Pharmaceutical Companies, Inc. (“Par”)
      commercialization rights in the United States of America to pafuramidine for
      the
      treatment of PCP in AIDS patients (the “Par License Agreement”). The Company and
      Par may also collaborate on efforts to develop pafuramidine as a preventative
      therapy for patients at risk of developing PCP, including people living with
      HIV, cancer and other immunosuppressive conditions.




In
      return, we received an initial payment of $3 million.  Par will also
      pay us as much as $29 million in development milestones if pafuramidine advances
      through ongoing Phase III clinical trials and FDA regulatory review and
      approval.  In addition to royalties on sales, we may receive up to
      $115 million in additional milestone payments on future sales and will retain
      the right to co-market pafuramidine in the United States of
      America.  We have also granted Par a right of first offer to enter
      into a license agreement with us if we determine that pafuramidine can be used
      for the treatment and/or prophylaxis of malaria.




**5.**
            **NEUROCHEM
                ARBITRATION**




On
      June
      9, 2006, the International Court of Arbitration of the ICC notified the parties
      that (i) the Arbitral Panel found that Neurochem breached the testing agreement
      and awarded the Company approximately $1.9 million in damages and attorneys’
fees and costs, and (ii) denied all of Neurochem's claims against the Company.
      On July 10, 2006, the Company requested that the Arbitral Panel make certain
      corrections to the Award. On or about September 27, 2006, the Company received
      an Addendum to the Final Award, which did not alter the substance or amount
      of
      the Arbitral Panel’s Award. Subsequent to September 30, 2006, Neurochem
      disbursed funds representing the Final Award by the Arbitral Panel.




-19-




**6.**
            **LITIGATION**




In
      October 2003, Gerhard Von der Ruhr et al (the “Von der Ruhr Plaintiffs”) filed a
      complaint in the United States District Court for the Northern District of
      Illinois against the Company and certain officers and directors alleging
      breaches of a stock lock-up agreement, option agreements and a technology
      license agreement by the Company, as well as interference with the Von der
      Ruhr
      Plaintiffs’ contracts with the Company by its officers.  The complaint
      sought unspecified monetary damages and punitive damages, in addition to
      equitable relief and costs.  In 2005, one of the counts in the case
      was dismissed upon the Company’s motion for summary judgment.  A
      preliminary pre-trial conference was held on October 26, 2006 and the court
      granted the Company’s motions in limine to exclude plaintiffs’ claim for lost
      profits damages and to prohibit plaintiff Gerhard Von der Ruhr from offering
      expert testimony at trial.  The court subsequently granted a motion to
      sever the trial on Count V, regarding a technology license agreement, from
      the
      trial on the remaining counts.  The final pre-trial
      conference is scheduled for November 19, 2007 and the trial
      is set to begin on December 3, 2007.  At this time it is not
      possible to predict the outcome of this matter or to estimate the possible
      loss
      or range of loss.




**7.**
            **SUBSEQUENT
                EVENTS**




Pursuant
      to the March 2006 amended and restated clinical research subcontract with
      UNC-CH, on November 2, 2007, the Company received approximately
      $5,123,000.  The Foundation provided the funds to UNC-CH as part of
      the approximately $22.6 million Foundation Grant to fund Phase III clinical
      trials using the Company’s oral drug, pafuramidine maleate, to treat stage one
      of African sleeping sickness.





*
      * * * *
      *






-20-




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




Forward
      Looking Statements




Certain
      statements contained in this quarterly report and in the documents incorporated
      by reference herein constitute “forward-looking statements” within the meaning
      of the Private Securities Litigation Reform Act of 1995.  All
      statements other than statements of historical fact may be deemed to be
      forward-looking statements.  Forward-looking statements frequently,
      but not always, use the words “may”, “intends”, “plans”, “believes”,
“anticipates” or “expects” or similar words and may include statements
      concerning our strategies, goals and plans.  Forward-looking
      statements involve a number of significant risks and uncertainties that could
      cause our actual results or achievements or other events to differ materially
      from those reflected in such forward-looking statements.  Such factors
      include, among others described in this quarterly report, the following: (i)
      we
      are in an early stage of product development, (ii) the possibility that
      favorable relationships with collaborators cannot be established or, if
      established, will be abandoned by the collaborators before completion of product
      development, (iii) the possibility that we or our collaborators will not
      successfully develop any marketable products, (iv) the possibility that advances
      by competitors will cause our product candidates not to be viable, (v)
      uncertainties as to the requirement that a drug product be found to be safe
      and
      effective after extensive clinical trials and the possibility that the results
      of such trials, if completed, will not establish the safety or efficacy of
      our
      drug product candidates, (vi) risks relating to requirements for approvals
      by
      governmental agencies, such as the Food and Drug Administration, before products
      can be marketed and the possibility that such approvals will not be obtained
      in
      a timely manner or at all or will be conditioned in a manner that would impair
      our ability to market our product candidates successfully, (vii) the risk that
      our patents could be invalidated or narrowed in scope by judicial actions or
      that our technology could infringe upon the patent or other intellectual
      property rights of third parties, (viii) the possibility that we will not be
      able to raise adequate capital to fund our operations through the process of
      commercializing a successful product or that future financing will be completed
      on unfavorable terms, (ix) the possibility that any products successfully
      developed by us will not achieve market acceptance and (x) other risks and
      uncertainties that may not be described herein.  We undertake no
      obligation to update or revise any forward-looking statements, whether as a
      result of new information, future events or otherwise.




Results
      of Operations




With
      the
      exception of certain research funding agreements and certain grants, we have
      not
      generated any revenue from operations.  For the period from inception
      (October 15, 1984) to September 30, 2007, we incurred cumulative net losses
      of approximately $102,080,000.  We have incurred additional losses
      since such date and we expect to incur additional operating losses for the
      foreseeable future.  We expect that our cash sources for at least the
      next year will be limited to:




·
            payments
                from foundations and other collaborators under arrangements that
                may be
                entered into in the future;




·
            payments
                from license agreement milestones;




·
            grants
                from the United States government and other governments and entities;
                and




·
            the
                issuance of securities or borrowing of
                funds.




-21-


The
        timing and amounts of grant and payment revenues, if any, will likely fluctuate
        sharply and depend upon the achievement of specified milestones, and results
        of
        operations for any period may be unrelated to the results of operations for
        any
        other period.




*Three
      Month Period Ended September 30, 2007 Compared with the Three Month Period
      Ended
      September 30, 2006.*




Revenues
      under collaborative research and development, and license agreements were
      approximately $1,030,000 and $491,000 for the three month periods ended
      September 30, 2007 and September 30, 2006, respectively.  For the
      three month period ended September 30, 2007, we recognized revenues of
      approximately $626,000 related to a clinical research subcontract agreement
      between the Company and UNC-CH and approximately $404,000 related to the Par
      License Agreement, while for the three month period ended September 30, 2006,
      revenues recognized of approximately $379,000 related to the abovementioned
      UNC-CH clinical research subcontract and $112,000 related to a grant from MMV
      to
      fund clinical studies and licensure of DB289 for treatment of malaria which
      has
      since lapsed.




The
      clinical research subcontract agreement relates to a grant from the Foundation
      to UNC-CH to develop new drugs to treat African sleeping sickness and
      leishmaniasis.  MMV also receives funding from the
      Foundation.  Grant and research and development agreement revenue is
      recognized as completed under the terms of the respective agreements, according
      to Company estimates.  Grant and research and development funds
      received prior to completion under the terms of the respective agreements are
      recorded as deferred revenues.




Revenue
      from licensing arrangements is recorded when earned based on the performance
      requirements of the contract.  Nonrefundable upfront license fees, for
      product candidates where the Company is providing continuing services related
      to
      product development, are deferred and recognized as revenue over the development
      period or as the Company provides services required under the
      agreement.  The timing and amount of revenue the Company recognizes
      from licenses, either from upfront fees or milestones where the Company is
      providing continuing services related to product development, is dependent
      upon
      the Company’s estimates of filing dates.




Research
      and development expenses increased to approximately $2,283,000 from $1,755,000
      for the three month periods ended September 30, 2007 and September 30, 2006,
      respectively.  Expenses relating to the UNC-CH subcontract, increased
      to approximately $626,000 in the three month period ended September 30, 2007
      from approximately $379,000 in the three month period ended September 30, 2006
      while expenses relating to the MMV Testing Agreement decreased over the same
      periods to approximately $5,000 from $112,000.  Contract services
      relating to non-MMV supported malaria trials increased to approximately $322,000
      in the three month period ended September 30, 2007 from approximately $12,000
      in
      the three month period ended September 30, 2006. Additionally, contract services
      relating to trials for treatment of PCP decreased to approximately $529,000
      from
      approximately $620,000 in the same periods.  Discovery contract
      research expenses increased to approximately $408,000 in the three month period
      ended September 30, 2007 from approximately $165,000 in the period ended
      September 30, 2006. Non-cash options expense under research and development
      decreased to approximately $115,000 in the three month period ended September
      30, 2007 from approximately $174,000 in the three month period ended September
      30, 2006.  Other research and development expenses decreased
      approximately $15,000 from the three month period ended September 30, 2006
      to
      the three month period ended September 30, 2007.




General
      and administrative expenses decreased to approximately $2,214,000 from
      approximately $2,364,000 during the three month periods ended September 30,
      2007, and September 30, 2006, respectively.  The decrease was partly
      due to lower business development costs, which decreased to




-22-


approximately
      $7,000 in the three month period ended September 30, 2007, from approximately
      $319,000 in the three month period ended September 30, 2006.  Patent
      fees decreased to approximately $102,000 in the three month period ended
      September 30, 2007 from approximately $343,000 in the three month period ended
      September 30, 2006. Non-cash general and administrative expenses increased
      to
      approximately $786,000 in the three month period ended September 30, 2007,
      which
      includes (i) approximately $172,000 for 50,000 warrants issued to a consultant,
      (ii) approximately $118,000 for 30,000 warrants issued to an investor relations
      firm, and (iii) approximately $496,000 for expensing options, from approximately
      $383,000 in the three month period ended September 30, 2006, which relates
      to
      the expensing of options.




Our
      net
      loss increased to approximately $3,334,000 from approximately $1,621,000 during
      the three month periods ended September 30, 2007 and September 30, 2006,
      respectively.  The increase was primarily attributable to the
      receivable of approximately $1,874,000 posted during the three month period
      ended September 30, 2006 that related to the award from the Neurochem
      litigation.




*Six
      Month Period Ended September 30, 2007 Compared with the Six Month Period Ended
      September 30, 2006.*




Revenues
      under collaborative research and development agreements were approximately
      $1,857,000 and $2,433,000 for the six month periods ended September 30, 2007
      and
      September 30, 2006, respectively.  For the six month period ended
      September 30, 2007, we recognized revenues of approximately $1,304,000 related
      to a clinical research subcontract agreement between the Company and UNC-CH
      and
      approximately $553,000 related to the Par License Agreement, while for the
      six
      month period ended September 30, 2006, revenues recognized of approximately
      $2,139,000 related to the abovementioned UNC-CH clinical research subcontract
      and $294,000 related to a grant from MMV to fund clinical studies and licensure
      of DB289 for treatment of malaria which has since lapsed.




The
      clinical research subcontract agreement relates to a grant from the Foundation
      to UNC-CH to develop new drugs to treat African sleeping sickness and
      leishmaniasis.  MMV also receives funding from the
      Foundation.  Grant and research and development agreement revenue is
      recognized as completed under the terms of the respective agreements, according
      to Company estimates.  Grant and research and development funds
      received prior to completion under the terms of the respective agreements are
      recorded as deferred revenues.




Revenue
      from licensing arrangements is recorded when earned based on the performance
      requirements of the contract.  Nonrefundable upfront license fees, for
      product candidates where the Company is providing continuing services related
      to
      product development, are deferred and recognized as revenue over the development
      period or as the Company provides services required under the
      agreement.  The timing and amount of revenue the Company recognizes
      from licenses, either from upfront fees or milestones where the Company is
      providing continuing services related to product development, is dependent
      upon
      the Company’s estimates of filing dates.




Research
      and development expenses remained relatively the same by decreasing to
      approximately $4,201,000 from $4,224,000 for the six month periods ended
      September 30, 2007 and September 30, 2006, respectively.  Expenses
      relating to the UNC-CH subcontract, increased to approximately $1,221,000 in
      the
      six month period ended September 30, 2007 from approximately $1,208,000 in
      the
      three month period ended September 30, 2006 while expenses relating to the
      MMV
      Testing Agreement decreased over the same periods to approximately $15,000
      from
      $293,000.  Contract services relating to non-MMV supported malaria
      trials increased to approximately $782,000 in the six month period ended
      September 30, 2007 from approximately $12,000 in the six month period ended
      September 30, 2006. Additionally, contract services relating to trials for
      treatment of PCP decreased to approximately




-23-


$795,000
      from approximately $1,745,000 in the same periods. Discovery contract research
      expenses increased to approximately $606,000 in the six month period ended
      September 30, 2007 from approximately $172,000 in the period ended September
      30,
      2006. Non-cash options expense under research and development decreased to
      approximately $233,000 in the six month period ended September 30, 2007 from
      approximately $351,000 in the six month period ended September 30,
      2006.  Other research and development expenses increased approximately
      $106,000 from the six month period ended September 30, 2006 to the six month
      period ended September 30, 2007.




General
      and administrative expenses decreased to approximately $3,931,000 from
      approximately $4,584,000 during the six month periods ended September 30, 2007,
      and September 30, 2006, respectively.  The decrease was partly due to
      lower business development costs, which decreased to approximately $9,000 in
      the
      six month period ended September 30, 2007, from approximately $662,000 in the
      six month period ended September 30, 2006.  Patent fees decreased to
      approximately $173,000 in the six month period ended September 30, 2007 from
      approximately $506,000 in the six month period ended September 30, 2006.
      Non-cash general and administrative expenses increased to approximately
      $1,161,000 in the six month period ended September 30, 2007, which includes
      (i)
      approximately $172,000 for the 50,000 warrants issued to a consultant, (ii)
      approximately $118,000 for the 30,000 warrants issued to an investor relations
      firm, and (iii) approximately $871,000 for expensing options, from approximately
      $383,000 in the six month period ended September 30, 2006, which includes (i)
      approximately $36,000 for the issuance of 5,000 common shares to Tulane
      University, (ii) approximately $36,000 for the issuance of 5,000 common shares
      as part of a retirement and consulting agreement, and approximately $811,000
      for
      expensing options.  Other general and administrative expenses
      decreased approximately $445,000 over the same periods.




Our
      net
      loss increased to approximately $5,995,000 from approximately $4,218,000 during
      the six month periods ended September 30, 2007 and September 30, 2006,
      respectively.  The increase was primarily attributable to the
      receivable of approximately $1,874,000 posted during the six month period ended
      September 30, 2006 that related to the award from the Neurochem
      litigation.




*Liquidity
      and Capital Resources*




As
      of
      September 30, 2007, cash and cash equivalents were approximately
      $9,840,000.




We
      did
      not make any equipment purchases during the six month period ended
      September 30, 2007.  We spent approximately $6,000 and $40,000,
      respectively, on equipment purchases during the three and six month periods
      ended September 30, 2006.  No significant purchases of equipment are
      anticipated by us during the year ending March 31, 2008.




We
      periodically receive cash from the exercise of common stock options and
      warrants.  During the three and six month periods ended September 30,
      2007 we received approximately $296,000 from the exercise of
      warrants.  During the three month period ended September 30, 2006, we
      received $30,000 for the exercise of warrants.




We
      believe our existing unrestricted cash and cash equivalents and the grants
      we
      have received or have been awarded and are awaiting disbursement of, will be
      sufficient to meet our planned expenditures through at least November 2008,
      although there can be no assurance we will not require additional
      funds.




Through
      September 30, 2007, we financed our operations with:




-24-




·
            proceeds
                from various private placements of debt and equity securities, an
                initial
                public offering, and other cash contributed from stockholders, which
                in
                the aggregate raised approximately
                $77,419,000;




·
            payments
                from research agreements, license agreements, foundation grants,
                and SBIR
                grants and STTR program grants of approximately $26,939,000;
                and




·
            the
                use of stock, options and warrants in lieu of cash
                compensation.




Our
      cash
      resources have been used to finance, develop and begin commercialization of
      drug
      product candidates, including sponsored research, conduct of human clinical
      trials, capital expenditures, expenses associated with development of product
      candidates pursuant to the Consortium Agreement and, as contemplated by the
      Consortium Agreement, under the Consortium License Agreement with the
      Consortium, and general and administrative expenses.  Over the next
      several years we expect to incur substantial additional research and development
      costs, including costs related to research in pre-clinical (laboratory) and
      human clinical trials, administrative expenses to support our research and
      development operations and marketing expenses to launch the sale of any
      commercialized product that may be developed.




Our
      future working capital requirements will depend upon numerous factors, including
      the progress of research, development and commercialization programs (which
      may
      vary as product candidates are added or abandoned), results of pre-clinical
      testing and human clinical trials, achievement of regulatory milestones, third
      party collaborators fulfilling their obligations to us, the timing and cost
      of
      seeking regulatory approvals, the level of resources that we devote to the
      engagement or development of manufacturing capabilities including the build-out
      of our subsidiary’s facility in China, our ability to maintain existing and to
      establish new collaborative arrangements with others to provide funding to
      support these activities, and other factors.  In any event, we will
      require substantial additional funds in addition to our existing resources
      to
      develop product candidates and to otherwise meet our business
      objectives.




Management’s
      plans for the remainder of the fiscal year, in addition to normal operations,
      include continuing their efforts to create joint ventures, obtain additional
      grants and to develop and enter into research, development and/or
      commercialization agreements with others.




**Item
                3.**
            **Quantitative
                and Qualitative Disclosures about Market
                Risk.**






The
      exposure of market risk associated with risk-sensitive instruments is not
      material, as our operations are conducted primarily in U.S. dollars and we
      invest primarily in short-term government obligations and other cash
      equivalents.  We intend to develop policies and procedures to manage
      market risk in the future if and when circumstances require.




**Item
                4.**
            **Controls
                and Procedures.**




**Disclosures
      and Procedures**




We
      maintain controls and procedures designed to ensure that we are able to collect
      the information we are required to disclose in the reports we file with the
      United States Securities and Exchange Commission (the “SEC”), and to process,
      summarize and disclose this information within the time periods specified in
      the
      rules of the SEC.  Our Chief Executive Officer and Chief Financial
      Officer are responsible for establishing and maintaining these procedures and,
      as required by the rules of the SEC, evaluate their
      effectiveness.  Based on their evaluation of our disclosure controls
      and procedures, our Chief Executive Officer and Chief Financial Officer have
      concluded that these procedures were effective as of




-25-


the
      end
      of the period covered by this Quarterly Report on Form 10-Q to ensure that
      we
      are able to collect, process and disclose the information we are required to
      disclose in the reports we file with the SEC within the required time
      periods.




**Internal
      Controls**




We
      maintain a system of internal controls designed to provide reasonable assurance
      that: (1) transactions are executed in accordance with management’s general
      or specific authorization and (2) transactions are recorded as necessary to
      (a) permit preparation of financial statements in conformity with generally
      accepted accounting principles and (b) maintain accountability for
      assets.  Access to assets is permitted only in accordance with
      management’s general or specific authorization and the recorded accountability
      for assets is compared with the existing assets at reasonable intervals and
      appropriate action is taken with respect to any differences.




**Changes
      in Internal Controls**




We
      have
      not made any material changes in our internal control over financial reporting
      during the quarter ended September 30, 2007 that have materially affected,
      or
      are reasonably likely to materially affect, our internal control over financial
      reporting.




**PART
          II.**




**Item
                1.**
            **Legal
                Proceedings.**




**Gerhard
      Von der Ruhr et al. v. Immtech International, Inc. et. al.**




In
      October 2003, Gerhard Von der Ruhr et al (the “Von der Ruhr Plaintiffs”) filed a
      complaint in the United States District Court for the Northern District of
      Illinois against the Company and certain officers and directors alleging
      breaches of a stock lock-up agreement, option agreements and a technology
      license agreement by the Company, as well as interference with the Von der
      Ruhr
      Plaintiffs’ contracts with the Company by its officers.  The complaint
      sought unspecified monetary damages and punitive damages, in addition to
      equitable relief and costs.  In 2005, one of the counts in the case
      was dismissed upon the Company’s motion for summary judgment.  A
      preliminary pre-trial conference was held on October 26, 2006 and the court
      granted the Company’s motions in limine to exclude plaintiffs’ claim for lost
      profits damages and to prohibit plaintiff Gerhard Von der Ruhr from offering
      expert testimony at trial.  The court subsequently granted a motion to
      sever the trial on Count V, regarding a technology license agreement, from
      the
      trial on the remaining counts.  The final pre-trial
      conference is scheduled for November 19, 2007 and the trial
      is set to begin on December 3, 2007.  At this time it is not
      possible to predict the outcome of this matter or to estimate the possible
      loss
      or range of loss.




**Item
                1A.**
            **Risk
                Factors**




There
      are
      no material changes in risk factors previously disclosed in Item 1A to Part
      I of
      our Form 10-K for the fiscal year ended March 31, 2007.




-26-




**Item
                2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds.**




**Recent
      Sales of Unregistered Securities.**




All
      such
      shares of common stock herein described as issuances below were made pursuant
      to
      Section 4(2) of the Securities Act of 1933, as amended.




*Option
      Exercise*




On
      July
      20, 2007, a consortium scientist exercised options on a cashless basis to
      purchase 19,119 shares of Common Stock with an exercise price of $0.47 per
      share.  Common shares in the amount of 18,000 were
      issued.




*Warrant
      Exercise*




On
      September 17, 2007, a warrant holder exercised warrants to purchase 5,000 shares
      of Series B Convertible Preferred Stock, $0.01 par value ("Series B Preferred
      Stock") with an exercise price of $6.125 per share, resulting in proceeds
      to the Company of $30,625.




On
      September 21, 2007, a warrant holder exercised warrants to purchase 5,000 shares
      of Series B Preferred Stock with an exercise price of $6.125 per share,
      resulting in proceeds to the Company of $30,625.




On
      September 24, 2007, a warrant holder exercised warrants to purchase 36,000
      shares of Series B Preferred Stock with an exercise price of $6.125 per share,
      resulting in proceeds to the Company of $220,500.




On
      September 25, 2007, an executive officer exercised warrants to purchase 2,312
      shares of Series B Preferred Stock with an exercise price of $6.125 per share,
      resulting in proceeds to the Company of $14,161.




*Conversion
      of Preferred Stock to Common Stock.*




On
      July
      12, 2007, a holder of Series A Convertible Preferred Stock, $0.01 par value
      (“Series A Preferred Stock”) converted 1,000 shares of Series A Preferred Stock
      into 5,701 shares of our common stock.




On
      July
      18, 2007, a holder of Series D Convertible Preferred Stock, $0.01 par value
      (“Series D Preferred Stock”) converted 2,000 shares of Series D Preferred Stock
      into 5,653 shares of our common stock.




On
      September 28, 2007, holders of Series E Convertible Preferred Stock, $0.01
      par
      value (“Series E Preferred Stock”) converted an aggregate of 1,600 shares of
      Series E Preferred Stock into an aggregate of 5,813 shares of our common
      stock.




*Preferred
      Stock Dividend Payment.*




On
      October 17, 2007, we issued 33,281 shares of common stock as payment of a
      dividend earned on outstanding convertible preferred stock to the holders
      thereof: holders of Series A Preferred Stock earned 5,106 shares of common
      stock
      on 54,500 outstanding shares; holders of Series B Preferred Stock earned 1,682
      shares of common stock on 13,464 outstanding shares; holders of Series C
      Convertible Preferred Stock, $0.01 par value, earned 5,694 shares of common
      stock on 45,536 outstanding shares; holders of Series D Preferred Stock earned
      10,804 shares of common stock on 115,200 outstanding shares; and holders of
      Series E Preferred Stock earned 9,995 shares of common stock on 106,600
      outstanding shares.  We also paid holders of our outstanding
      convertible preferred stock $507 in cash in lieu of fractional
      shares.






-27-




**Item
                3.**
            **Defaults
                Upon Senior
                Securities.**




None




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




None




**Item
                5.**
            **Other
                Information.**




None




**Item
                6.**
            **Exhibits.**






Exhibit
      Number                                           Exhibit
      Description




3.1
            Amended
                and Restated Certificate of Incorporation of the Company, dated June
                14,
                2004 (incorporated by reference from the Company's Form 10-K for
                fiscal
                year ended March 31, 2004) *3.2
            Certificate
                of Correction to Certificate of Incorporation dated December 14,
                2005
                (incorporated by reference from the Company's Form 8-K, filed
                December 14, 2005) *3.3
            Certificate
                of Amendment (Name Change) to Certificate of Incorporation dated
                March 22,
                2006 (incorporated by reference from the Company's Form 8-K, filed
                March 23, 2006) *3.4
            Certificate
                of Amendment (Number of Members of the Board of Directors) to Certificate
                of Incorporation dated April 17, 2007 (incorporated by reference
                from the
                Company's Form 10-K for fiscal year ended March 31, 2007) *3.5
            Certificate
                of Designation for Series A Convertible Preferred Stock Private Placement,
                dated February 14, 2002 (incorporated by reference from the Company's
                Form
                8-K, filed February 14, 2002) *3.6
            Certificate
                of Designation for Series B Convertible Preferred Stock Private Placement,
                dated September 25, 2002 (incorporated by reference from the Company's
                Form 8-K, filed September 25, 2002) *3.7
            Certificate
                of Designation for Series C Convertible Preferred Stock Private Placement,
                dated June 6, 2003 (incorporated by reference from the Company's
                Form
                8-K, filed June 10, 2003) *3.8
            Certificate
                of Designation for Series D Convertible Preferred Stock Private Placement,
                dated January 15, 2004 (incorporated by reference from the Company's
                Form
                8-K, filed January 21, 2004) *3.9
            Certificate
                of Designation for Series E Convertible Preferred Stock Private Placement,
                dated December 13, 2005 (incorporated by reference from the Company's
                Form
                8-K, filed December 14, 2005) *3.10
            Amended
                and Restated Bylaws of the Company effective as of June 8, 2007
                (incorporated by reference from the Company's Form 8-K, filed June
                12, 2007) *31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002 **




-28-




31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002 **32.1
            Certification
                of Chief Executive Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002 **32.2
            Certification
                of Chief Financial Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002 **




*
              These
                  items are hereby incorporated by reference from the exhibits of
                  the filing
                  or report indicated (Commission File No. 001-14907) and are hereby
                  made a
                  part of this Report.
  **
              Filed
                    herewith.


-29-


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.




IMMTECH
                    PHARMACEUTICALS, INC.Date:  November
                      8, 2007
                By:
                /s/
                  Eric L. SorkinEric
                    L. SorkinPresident
                      and Chief Executive Officer




Date:  November
                  8, 2007
            By:
            /s/
              Gary C. ParksGary
                C. ParksTreasurer,
                Secretary and Chief Financial Officer
              (Principal
                Financial and Accounting Officer)