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 December 31, 2005.

                                       or

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

                        Commission File Number: 000-25669

                           IMMTECH INTERNATIONAL, INC.
           ----------------------------------------------------------
             (Exact name of registrant as specified in its charter)


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


           150 Fairway Drive, Suite 150, Vernon Hills, Illinois 60061
           ----------------------------------------------------------
            (Address of principal executive offices)        (Zip Code)


                  Registrant's telephone number: (847) 573-0033

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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):

Large accelerated filer [_]   Accelerated filer [X]    Non-accelerated filer [_]

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

As of February 8, 2006, 11,738,056 shares of the Registrant's common stock, par
value $0.01 per share ("Common Stock"), were outstanding.


<PAGE>


                                Table of Contents

                                                                        Page No.
                                                                        --------

PART I. FINANCIAL INFORMATION .................................................2

Item 1.    Condensed Consolidated Financial Statements ........................2
Item 2.    Management's Discussion and Analysis of
           Financial Condition and Results of Operations .....................16
Item 3.    Quantitative and Qualitative Disclosures about Market Risk ........22
Item 4.    Controls and Procedures ...........................................22

PART II. OTHER INFORMATION ...................................................23

Item 1.    Legal Proceedings .................................................23
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds .......23
Item 3.    Defaults Upon Senior Securities ...................................24
Item 4.    Submission of Matters to a Vote of Security Holders ...............24
Item 5.    Other Information .................................................25
Item 6.    Exhibits ..........................................................25

EXHIBIT INDEX ................................................................25

SIGNATURES ...................................................................27


<PAGE>



<TABLE>
<CAPTION>
                                                    PART I. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements.

IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     December 31,          March 31,
ASSETS                                                                                                   2005                2005
                                                                                                     ------------          ---------
CURRENT ASSETS:
<S>                                                                                                  <C>               <C>
  Cash and cash equivalents                                                                          $  1,925,611      $  9,471,694
  Restricted funds on deposit                                                                           1,018,868         2,044,079
  Other current assets                                                                                    453,941            88,103
                                                                                                     ------------      ------------
      Total current assets                                                                              3,398,420        11,603,876

PROPERTY AND EQUIPMENT - Net                                                                            3,591,938         3,655,604

OTHER ASSETS                                                                                               15,932            16,594
                                                                                                     ------------      ------------
TOTAL                                                                                                $  7,006,290      $ 15,276,074
                                                                                                     ============      ============
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                                                   $  2,242,091      $  2,046,620
  Accrued expenses                                                                                        931,077           173,699
  Deferred revenue                                                                                        647,165         1,314,786
                                                                                                     ------------      ------------
      Total current liabilities                                                                         3,820,333         3,535,105

      Total liabilities                                                                                 3,820,333         3,535,105
                                                                                                     ------------      ------------
STOCKHOLDERS' EQUITY:

 Preferred stock, par value $0.01 per share, 3,913,000 and 4,080,000 shares
  authorized and unissued as of December 31, 2005 and March 31, 2005, respectively.

 Series A convertible preferred stock, par value $0.01 per share,
  stated value $25 per share, 320,000 shares authorized,
  58,400 and 60,400 shares outstanding as of December 31, 2005 and March 31, 2005,
  respectively; aggregate liquidation preference of $1,478,185 as of December 31, 2005.                 1,478,185         1,551,165

 Series B convertible preferred stock, par value $0.01 per share, stated value
  $25 per share, 240,000 shares authorized, 13,464 and 19,925 shares outstanding as of
  December 31, 2005 and March 31, 2005, respectively; aggregate liquidation preference
  of $341,981 as of December 31, 2005.                                                                    341,981           516,093

 Series C convertible preferred stock, par value $0.01 per share, stated value
  $25 per share, 160,000 shares authorized, 46,536 and 60,452 shares outstanding as of
  December 31, 2005 and March 31, 2005, respectively; aggregate liquidation preference
  of $1,182,617 as of December 31, 2005.                                                                1,182,617         1,566,976

 Series D convertible preferred stock, par value $0.01 per share, stated value
  $25 per share, 200,000 shares authorized, 117,200 and 160,280 shares outstanding as of
  December 31, 2005 and March 31, 2005, respectively; aggregate liquidation preference
  of $2,967,566 as of December 31, 2005.                                                                2,967,566         4,117,657

 Series E convertible preferred stock, par value $0.01 per share, stated value
  $25 per share, 167,000 shares authorized, 133,600 shares outstanding as of
  December 31, 2005, aggregate liquidation preference of $3,350,432 as of
  December 31, 2005.                                                                                    3,350,432

 Common stock, par value $0.01 per share, 100,000,000 shares
  authorized, 11,738,056 and 11,332,366 shares issued and outstanding
  as of December 31, 2005 and March 31, 2005, respectively.                                               117,381           113,324

 Additional paid-in capital                                                                            79,159,677        76,428,132

 Deficit accumulated during the developmental stage                                                   (85,411,882)      (72,552,378)
                                                                                                     ------------      ------------
      Total stockholders' equity                                                                        3,185,957        11,740,969
                                                                                                     ------------      ------------
TOTAL                                                                                                $  7,006,290      $ 15,276,074
                                                                                                     ============      ============
See notes to condensed consolidated financial statements.
</TABLE>

<PAGE>


IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)

<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     October 15,
                                                                                                                        1984
                                                        Three Months Ended               Nine Months Ended          (Inception) to
                                                          December 31,                     December 31,               December 31,
                                                 ------------------------------    ------------------------------    -------------
                                                      2005              2004              2005           2004             2005
<S>                                              <C>              <C>              <C>              <C>              <C>
REVENUES                                         $     965,355    $     325,160    $   3,323,656    $   2,887,406    $  20,513,354
                                                 -------------    -------------    -------------    -------------    -------------
EXPENSES:
 Research and development                            2,825,368        1,441,469        7,766,505        4,714,895       49,439,875
 General and administrative                          2,144,118        5,270,578        8,205,624        9,162,744       53,457,406
 Equity in loss of joint venture                            --               --               --               --          135,002
                                                 -------------    -------------    -------------    -------------    -------------
      Total expenses                                 4,969,486        6,712,047       15,972,129       13,877,639      103,032,283
                                                 -------------    -------------    -------------    -------------    -------------
LOSS FROM OPERATIONS                                (4,004,131)      (6,386,887)     (12,648,473)     (10,990,233)     (82,518,929)
                                                 -------------    -------------    -------------    -------------    -------------
OTHER INCOME (EXPENSE):
 Interest income                                        20,756           48,102          121,274           84,214          854,736
 Interest expense                                           --               --               --               --       (1,129,502)
 Loss on sales of investment securities - net               --               --               --               --           (2,942)
 Cancelled offering costs                                   --               --               --               --         (584,707)
 Gain on extinguishment of debt                             --               --               --               --        1,427,765
                                                 -------------    -------------    -------------    -------------    -------------

      Other income - net                                20,756           48,102          121,274           84,214          565,350

NET LOSS                                            (3,983,375)      (6,338,785)     (12,527,199)     (10,906,019)     (81,953,579)

CONVERTIBLE PREFERRED STOCK DIVIDENDS
 AND CONVERTIBLE PREFERRED STOCK
 PREMIUM DEEMED DIVIDENDS                             (108,396)        (144,968)        (332,305)        (441,564)      (5,828,202)

REDEEMABLE PREFERRED STOCK CONVERSION,
 PREMIUM AMORTIZATION AND DIVIDENDS                         --               --               --               --        2,369,899
                                                 -------------    -------------    -------------    -------------    -------------

NET LOSS ATTRIBUTABLE TO COMMON
 STOCKHOLDERS                                    $  (4,091,771)   $  (6,483,753)   $ (12,859,504)   $ (11,347,583)   $ (85,411,882)
                                                 =============    =============    =============    =============    =============

BASIC AND DILUTED NET LOSS PER SHARE
 ATTRIBUTABLE TO COMMON STOCKHOLDERS:

 Net loss                                        $       (0.34)   $       (0.59)   $       (1.08)   $       (1.04)

 Convertible preferred stock dividends
 and convertible preferred stock premium
 deemed dividends                                        (0.01)           (0.01)           (0.03)           (0.04)
                                                 -------------    -------------    -------------    -------------

BASIC AND DILUTED LOSS PER SHARE
 ATTRIBUTABLE TO COMMON STOCKHOLDERS             $       (0.35)   $       (0.60)   $       (1.11)   $       (1.08)
                                                 =============    =============    =============    =============

WEIGHTED AVERAGE SHARES USED IN COMPUTING
 BASIC AND DILUTED NET LOSS PER SHARE               11,690,823       10,893,365       11,546,744       10,458,073
                                                 =============    =============    =============    =============
</TABLE>


See notes to condensed consolidated financial statements.


<PAGE>

IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)

<TABLE>
<CAPTION>

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                       October 15,
                                                                                                                          1984
                                                           Three Months Ended            Nine Months Ended            (Inception) to
                                                             December 31,                   December 31,                December 31,
                                                      ----------------------------    ----------------------------
                                                           2005          2004            2005            2004             2005
OPERATING ACTIVITIES:

<S>                                                   <C>             <C>             <C>             <C>             <C>
 Net loss                                             $ (3,983,375)   $ (6,338,785)   $(12,527,199)   $(10,906,019)   $(81,953,579)

 Adjustments to reconcile net loss to net
  cash used in operating activities:

 Compensation recorded related to issuance
  of common stock, common stock options
  and warrants                                             132,604       3,517,468         177,456       4,863,047      27,715,438
 Depreciation and amortization of property
  and equipment                                             40,033          33,486         117,745          95,536         998,892
 Deferred rental obligation                                                 (1,592)                         (4,776)
 Equity in loss of joint venture                                                                                           135,002
 Loss on sales of investment securities - net                                                                                2,942
 Amortization of debt discounts and issuance costs                                                                         134,503
 Gain on extinguishment of debt                                                                                         (1,427,765)
 Changes in assets and liabilities:
 Other current assets                                     (124,475)         82,487        (365,838)        (97,089)       (453,941)
 Other assets                                                  327            (631)            662            (631)        (15,932)
 Accounts payable                                       (1,483,541)        (28,585)        195,471         120,534       2,569,626
 Accrued expenses                                          266,716         237,943         757,378         294,135       1,594,090
 Deferred revenue                                          647,165       1,019,073        (667,621)       (468,420)        647,165
                                                      ------------    ------------    ------------    ------------    ------------
      Net cash used in operating activities             (4,504,546)     (1,479,136)    (12,311,946)     (6,103,683)    (50,053,559)
                                                      ------------    ------------    ------------    ------------    ------------
INVESTING ACTIVITIES:
 Purchases of property and equipment                        (3,817)        (39,028)        (54,079)        (99,287)     (1,563,900)
 Restricted funds on deposit                              (414,957)       (413,021)      1,025,211         602,880      (1,018,868)
 Advances to joint venture                                                                                                (135,002)
 Proceeds from maturities of investment securities                                                                       1,800,527
 Purchases of investment securities                                                                                     (1,803,469)
                                                      ------------    ------------    ------------    ------------    ------------
      Net cash provided by (used in)
        investing activities                              (418,774)       (452,049)        971,132         503,593      (2,720,712)
                                                      ------------    ------------    ------------    ------------    ------------
FINANCING ACTIVITIES:
 Advances from stockholders and affiliates                                                                                 985,172
 Proceeds from issuance of notes payable                                                                                 2,645,194
 Principal 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                                                                                                        3,330,000
 Net proceeds from issuance of convertible
  preferred stock and warrants                           3,286,079                       3,286,079                      16,410,443

 Payments of convertible preferred stock
  dividends and for fractional shares of
  common stock resulting from the conversions
   of convertible preferred stock                             (644)           (430)         (1,235)         (1,790)         (4,800)

 Net proceeds from the issuance of common stock            429,575         335,940         509,887       8,775,608      31,563,552
 Additional capital contributed by stockholders                                                                            245,559
                                                      ------------    ------------    ------------    ------------    ------------
      Net cash provided by financing activities          3,715,010         335,510       3,794,731       8,773,818      54,699,882
                                                      ------------    ------------    ------------    ------------    ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS    (1,208,310)     (1,595,675)     (7,546,083)      3,173,728       1,925,611

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD           3,133,921      11,514,686       9,471,694       6,745,283
                                                      ------------    ------------    ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD              $  1,925,611    $  9,919,011    $  1,925,611    $  9,919,011    $  1,925,611
                                                      ============    ============    ============    ============    ============
</TABLE>

See notes to condensed consolidated financial statements.
<PAGE>



IMMTECH INTERNATIONAL, 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 International, 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 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 and its subsidiaries are pharmaceutical
companies working to commercialize oral drugs to treat infectious diseases by
applying their proprietary aromatic cation technology platform to the treatment
of cancer, diabetes and other diseases. The Company has advanced clinical
programs that include new treatments for malaria, Pneumocystis pneumonia ("PCP")
and African sleeping sickness (trypanosomiasis), and drug development programs
for fungal infections and tuberculosis. The Company has worldwide licensing and
exclusive commercialization rights to an aromatic cationic pharmaceutical
technology platform and is developing drugs intended for commercial use based on
that technology.

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"), 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 work 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, 2006, if at all.


                                      -1-
<PAGE>


Since inception, the Company has incurred accumulated net losses of
approximately $81,954,000. 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
product 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.

The Company is currently actively involved in discussions to obtain additional
funds through its traditional funding sources along with the potential recovery
of legal costs from the resolution of disputes described in this document. The
Company believes that it will be able to obtain the necessary funding to meet
its planned expenditures from December 31, 2005 through the next twelve-month
period, although there can be no assurance we will be able to acquire the funds
for current planned expenditures or that additional funds will not be required.

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
and, ultimately, to generate sufficient revenues for profitable operations.

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

Cash and Cash Equivalents - The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Cash and cash equivalents consist of an amount on deposit at a bank and an
investment in a money market mutual fund, stated at cost, which approximates
fair value.

Restricted Funds on Deposit - Restricted funds on deposit consist of cash in two
accounts on deposit at a bank which is restricted for use in accordance with (i)
a clinical research subcontract agreement with UNC and (ii) a malaria drug
development agreement with Medicines for Malaria Venture ("MMV").

Concentration of Credit Risk - The Company maintains its cash in commercial
banks. Balances on deposit are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to specified limits.

Balances in excess of FDIC limits (generally, $100,000 per depositor per insured
bank) are uninsured.

Investment - The Company accounts for its investment in NextEra Therapeutics,
Inc. ("NextEra") on the equity method. As of December 31, 2005 and March 31,
2005, according to NextEra's disclosure the Company owned approximately 28% of
the issued and outstanding shares of NextEra common


                                      -2-
<PAGE>


stock. The Company has recognized an equity loss in NextEra to the extent of the
basis of its investment, and the investment balance is zero as of December 31,
2005 and March 31, 2005. Recognition of any investment income on the equity
method by the Company for its investment in NextEra will occur only after
NextEra has earnings in excess of previously unrecognized equity losses. The
Company does not provide, and has not provided, any financial guarantees to
NextEra.

Property and Equipment - Property and equipment are recorded at cost and
depreciated and amortized using the straight-line method over the estimated
useful lives of the respective assets, ranging from three to fifty years.

Long-Lived Assets - The Company periodically evaluates the carrying value of its
property and equipment. Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of an asset, a loss is recognized for the asset which
is measured by the difference between the fair value and the carrying value of
the asset.

Revenue Recognition - Grants to perform research are 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. Cash payments from research and
development grants received in advance of delivery of services are reported as
deferred revenue until such time as the research and development activities
covered by the grant are performed.

Research and Development Costs - Research and development costs are expensed as
incurred and include costs associated with research performed pursuant to
collaborative agreements. Research and development costs consist of direct and
indirect internal costs related to specific projects as well as fees paid to
other entities that conduct certain research activities on the Company's behalf.

Income Taxes - The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. In addition, a valuation
allowance is recognized if it is more likely than not that some or all of the
deferred income tax assets will not be realized. A valuation allowance is used
to offset the related net deferred income tax assets due to uncertainties of
realizing the benefits of certain net operating loss and tax credit
carryforwards and other deferred income tax assets.

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 nine month periods ended
December 31, 2005 and December 31, 2004, 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.


                                      -3-
<PAGE>


Comprehensive Loss - There were no differences between comprehensive loss and
net loss for the three and nine month periods ended December 31, 2005 and 2004,
respectively.

Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
materially from these estimates.

3.    STOCKHOLDERS' EQUITY

Series A Convertible Preferred Stock - On February 14, 2002, the Company filed a
Certificate of Designation 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
$18,185 and $41,166 of accrued preferred stock dividends at December 31, 2005
and March 31, 2005, 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 October 15, 2005, the Company issued
4,213 shares of common stock and paid $206 in lieu of fractional common shares
as dividends on the preferred shares. On October 15, 2004, the Company issued
6,026 shares of common stock and paid $136 in lieu of fractional common shares
as dividends on the preferred shares. On April 15, 2005, the Company issued
3,469 shares of common stock and paid $117 in lieu of fractional common shares
as dividends on the preferred shares. On April 15, 2004, the Company issued
2,961 shares of common stock and paid $352 in lieu of fractional common shares
as dividends on the preferred shares. During the three month periods ended
December 31, 2005 and 2004 there were no conversions of Series A Convertible
Preferred Stock. During the nine month periods ended December 31, 2005 and 2004
certain preferred stockholders converted 2,000 and 8,400 shares of Series A
Convertible Preferred Stock, including accrued dividends, for 11,409 and 47,942
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 is subject to certain adjustments, as defined in the Series
A Certificate of Designation.


                                      -4-
<PAGE>


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.
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 $5,381 and $17,968 of accrued preferred stock dividends as of
December 31, 2005 and March 31, 2005, 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 October
15, 2005, the Company issued 1,805 shares of common stock and paid $48 in lieu
of fractional common shares as dividends on the preferred share. On October 15,
2004, the Company issued 2,213 shares of common stock and paid $34 in lieu of
fractional common shares as dividends on the preferred shares. On April 15,
2005, the Company issued 1,526 shares of common stock and paid $49 in lieu of
fractional common shares as dividends on the preferred shares. On April 15,
2004, the Company issued 974 shares of common stock and paid $107 in lieu of
fractional common shares as dividends on the preferred shares. During the three
month period ended December 31, 2005 certain preferred stockholders converted
5,261 shares of Series B Convertible Preferred Stock, including accrued
dividends, for 32,997 shares of common stock. There were no conversions of
Series B Convertible Preferred Stock during the three month period ended
December 31, 2004. During the nine month period ended December 31, 2005 certain
preferred stockholders converted 6,461 shares of Series B Convertible Preferred
Stock, including accrued dividends, for 40,569 shares of common stock. There
were no conversions of Series B Convertible Preferred Stock during the nine
month period ended December 31, 2004.

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


                                      -5-
<PAGE>


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.
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 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 $19,217 and $55,676
of accrued preferred stock dividends as of December 31, 2005 and March 31, 2005,
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 October 15, 2005, the Company issued 4,483
shares of common stock and paid $148 in lieu of fractional common shares as
dividends on the preferred shares. On October 14, 2004, the Company issued 7,161
shares of common stock and paid $86 in lieu of fractional common shares as
dividends on the preferred shares. On April 15, 2005, the Company issued 4,625
shares of common stock and paid $212 in lieu of fractional common shares as
dividends on the preferred shares. On April 15, 2004, the Company issued 3,534
shares of common stock and paid $397 in lieu of fractional common shares as
dividends on the preferred shares. There were no conversions of Series C
Convertible Preferred Stock during the three month periods ended December 31,
2005 and 2004. During the nine month periods ended December 31, 2005 and 2004
certain preferred stockholders converted 13,916 and 7,852 shares of Series C
Convertible Preferred Stock, including accrued dividends, for 78,976 and 44,611
shares of common stock, respectively.

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


                                      -6-
<PAGE>


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.
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 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
$37,566 and $110,657 of accrued preferred stock dividends as of December 31,
2005 and March 31, 2005, 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 October 15, 2005, the
Company issued 8,472 shares of common stock and paid $235 in lieu of fractional
common shares as dividends on the preferred shares. On October 15, 2004, the
Company issued 16,669 shares of common stock and paid $173 in lieu of fractional
common shares as dividends on the preferred shares. On April 15, 2005, the
Company issued 9,219 shares of common stock and paid $135 in lieu of fractional
common shares as dividends on the preferred shares. On April 15, 2004, the
Company issued 3,340 shares of common stock and paid $447 in lieu of fractional
common shares as dividends on the preferred shares. During the three month
period ended December 31, 2005 there were no conversions of Series D Convertible
Preferred Stock. During the three month period ended December 31, 2004 certain
preferred stockholders converted 2,520 shares of Series D Convertible Preferred
Stock, including accrued dividends, for 7,012 shares of common stock. During the
nine month periods ended December 31, 2005 and 2004 certain preferred
stockholders converted 43,080 and 2,520 shares of Series D Convertible Preferred
Stock, including accrued dividends, for 121,324 and 7,012 shares of common
stock, respectively.

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 us 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


                                      -7-
<PAGE>


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. 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
completed a private placement of 133,600 shares its Series E Convertible
Preferred Stock, $0.01 par value ("Series E Stock") at $25.00 per share, which
resulted in gross proceeds to the Company of approximately, $3,340,000, or
$3,286,000 of additional equity capital (net of approximately $54,000 of cash
offering costs). Each purchaser of the Series E Stock was granted (i) an option
to purchase, at $25.00 per share, up to an additional 25% of the number of
shares of Series E Stock purchased on December 13, 2005 (the option period will
terminate on March 10, 2006) and (ii) a warrant to purchase one share of common
stock for each $40 of Series E Stock purchased on December 13, 2005. The
warrants are exercisable during the three-year period commencing on December 13,
2005, at an exercise price of $10.00, subject to adjustment for stock splits,
dividends and similar events.

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 $10,432 of accrued
preferred stock dividends as of December 31, 2005. 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 "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.

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.


                                      -8-
<PAGE>


The Series E Convertible Preferred Stock has a preference in liquidation equal
to $25.00 per share, plus any accrued and unpaid dividends. Each issued and
outstanding share of Series E Convertible Preferred Stock shall be 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).

Secondary Public Offering - On July 30, 2004 the Company closed a secondary
public offering of its common stock. In the offering the Company issued 899,999
shares of common stock resulting in net proceeds to the Company of approximately
$8,334,000. The shares were sold to the public at $10.25 per share. Jeffries &
Company, Inc. acted as the sole book-running manager and underwriter of this
offering.

Common Stock Options - 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 three and
nine month periods ended December 31, 2005, no and 76,834 options previously
granted under the 2000 Stock Incentive Plan, respectively, expired and were
available to be reissued. No options expired in the three and nine month periods
ended December 31, 2004. As of December 31, 2005, there were a total of
1,042,584 shares available for grant.

The Company has granted options to purchase common stock to individuals who have
contributed to the Company in various capacities. The options contain various
provisions regarding vesting periods and expiration dates. The options generally
vest over periods ranging from 0 to 4 years and generally expire after five or
ten years. During the three and nine month periods ended December 31, 2005, the
Company issued 45,000 and 75,000 options, respectively, to purchase shares of
common stock to certain new employees, while for the three and nine month
periods ended December 31, 2004, 165,000 and 322,000 options, respectively, were
issued to employees and directors. During the three and nine month periods ended
December 31, 2005, 16,872 and 43,800 non compensatory options were exercised
with an average exercise price of $1.45 and $2.13, respectively, while for the
three and nine month periods ended December 31, 2004 no non compensatory options
were exercised.

At the stockholders' meeting held December 16, 2005, the stockholders approved a
third amendment to the Company's 2000 Stock Incentive Plan which permits the
board of directors, or an independent committee thereof, to amend, subject to
the board' or committee's initial authority, the terms of


                                      -9-
<PAGE>


outstanding awards granted under the 2000 Plan. During the three month period
ended December 31, 2005, 35,000 non compensatory options with an expiry date of
December 23, 2005 were extended to December 23, 2010 resulting in a SFAS 123
charge of approximately $159,000.

Compensatory Options Granted - During the three and nine month periods ended
December 31, 2005 the Company issued no options to non employees and recognized
expense of approximately $8,000 and $27,000, respectively, related to certain
options issued during prior years which vest over a four year service period,
while for the three and nine month periods ended December 31, 2004, the Company
issued zero and 20,000 options, respectively, to purchase shares of common stock
to non employees and recognized expense of approximately $19,000 and $322,000,
respectively, related to these options and certain options issued during prior
years which vest over a four year service period. The expense was determined
based on the estimated fair value of the options issued using the Black-Scholes
option valuation model.

On May 28, 2004, options to purchase 18,517 shares with an exercise price of
$0.4649 per share were exercised on a cashless basis. Based on the fair market
value calculated as of the date of exercise, the option holder received 18,000
shares of common stock.

On July 1, 2005, options to purchase 18,744 shares with an exercise price of
$0.4649 per share were exercised on a cashless basis. Based on the fair market
value calculated as of the date of exercise, the option holder received 18,000
shares of common stock.

The 20,000 stock options issued during the nine month period ended December 31,
2004 were granted to a consultant on May 12, 2004 as compensation for services
to develop relationships with Tsinghua University. Tsinghua University has
committed resources from its Department of Biological Sciences and Biotechnology
to assist the Company in its pre-clinical and clinical trials of the Company's
drug candidates targeting tuberculosis and diabetes in China.

Warrants - During the three month periods ended December 31, 2005 and 2004,
warrants to purchase 50,000 and 56,000 shares, respectively, of common stock
were exercised, resulting in proceeds to the Company of approximately $405,000
and $336,000, respectively. During the nine month period ended December 31,
2005, warrants to purchase 51,800 shares of common stock were exercised,
resulting in proceeds to the Company of approximately $417,000 while for the
nine month period ended December 31, 2004, warrants to purchase 76,390 shares of
common stock were exercised, resulting in proceeds to the Company of
approximately $442,000. Additionally, on May 11, 2004, a warrant holder
exercised a warrant to purchase 21,400 shares of common stock at an exercise
price of $16.00 per share on a cashless basis. Based on the fair market value
calculated as of the date of exercise, the warrant holder received 4,390 shares
of common stock.

On July 20, 2004, the Company's board of directors approved a four-year exercise
extension to warrants to purchase 225,000 shares of the Company's common stock
which were originally issued to RADE Management Corporation ("RADE") on July 24,
1998. The expiration dates for these warrants, which have an exercise price of
$6.47 per share, were extended from July 24, 2004 to July 24, 2008. The Company
has recorded a non-cash charge during the nine month period ended December 31,
2004 of $1,032,000, determined using the Black-Scholes option pricing model.

In connection with the secondary public offering completed on July 30, 2004, the
underwriter (Jeffries & Company, Inc.) was granted a warrant to purchase 80,100
shares of common stock at an exercise


                                      -10-
<PAGE>


price of $12.81 per share. The warrant is exercisable for five years from the
date of grant and has standard anti-dilution protection for recapitalizations.

In connection with services rendered to us, effective July 13, 2005, the company
issued to an investment bank and two of its affiliates, warrants to purchase
100,000 shares of our common stock. The warrants are exercisable at $13.11 per
share (the exercise price was set by calculating a 15% premium over the
Company's common stock volume weighted average price for the 10 day period
immediately preceding July 12, 2005). The warrants are exercisable beginning on
July 13, 2006 through July 12, 2010. The Company may redeem any outstanding
warrants, at $0.01 per share underlying each warrant, upon 30 day prior notice
if at any time prior to the expiration of the warrant the market closing price
of the Company's common stock meets or exceeds $26.22 for 20 consecutive trading
days. The warrant holder may exercise the warrant, pursuant to its terms, during
the 30 day notice period.

On November 2, 2005, the Company's board of directors approved a reduction in
the exercise price of 125,000 warrants given to Fulcrum Holdings of Australia
from $15.00 to $8.80 while concurrently shortening the expiry date from December
23, 2005 to November 5, 2005. The Company has recorded a non-cash charge during
the three month period ended December 31, 2005 of $125,000, determined using the
Black-Scholes option pricing model. Fulcrum Holdings exercised 35,000 warrants
resulting in proceeds to the Company of $308,000. The remaining 90,000 warrants
expired.

In connection with the Series E Convertible Preferred Stock offering of December
13, 2005, the Company entered into an Introductory Agreement with Ableguard
Investment Limited ("Ableguard") pursuant to which Ableguard assisted the
Company to identify qualified investors. For its services, the Company granted
to Ableguard a warrant to purchase 68,000 shares of common stock. The warrant is
exercisable during the three-year period commencing on December 13, 2005, at an
exercise price of $10.00, subject to adjustment for stock splits, dividends and
similar events.

Stock-Based Compensation - On December 16, 2004, the Financial Accounting
Standards Board ("FASB") issued Statement No. 123R, "Share-Based Payment" ("SFAS
123R"), which requires compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exceptions, the amount of the compensation cost is to be measured based on the
grant-date fair value of the equity or liability instruments issued. In
addition, liability awards are to be remeasured each reporting period.
Compensation cost is to be recognized over the period that an employee provides
service in exchange for the award. SFAS 123R replaces FASB Statement No. 123,
"Accounting for Stock-Based Compensation" and supersedes Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
123R is effective for all interim or annual periods beginning after the
Company's next fiscal year ending March 31, 2006. The Company has not yet
adopted this pronouncement and is evaluating the impact that the adoption of
SFAS 123R will have on its consolidated financial position, results of
operations and cash flows. The Company continues to adhere to the
disclosure-only provisions of SFAS No. 123, and applies APB Opinion No. 25 and
related interpretations in accounting for its employee stock option plans.

During the three and nine month periods ended December 31, 2005, the Company
issued 45,000 and 75,000 options, respectively, to certain new employees while
for the three and nine month periods ended December 31, 2004, 165,000 and
322,000 options, respectively, were issued to employees or directors. If the
Company had recognized compensation expense for the options granted and or
vesting during the three and nine months ended December 31, 2005 and 2004,
consistent with the method


                                      -11-
<PAGE>


prescribed by SFAS No. 123, net loss and net loss per share would have been
changed to the pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                                             Three Months Ended                 Nine Months Ended
                                                               December 31,                        December 31,
                                                       -----------------------------       -------------------------------
                                                           2005              2004             2005               2004

<S>                                                    <C>               <C>               <C>               <C>
Net loss attributable to common shareholders -
 as reported                                           $ (4,091,771)     $ (6,483,753)     $(12,859,504)     $(11,347,583)

Add: stock-based compensation expense to
 employees and directors included in reported
 net loss                                                        --                --                --                --

Deduct: total stock-based compensation expense
 determined under fair value method for awards to
 employees and directors                                   (928,850)         (904,251)       (2,957,757)       (2,477,995)
                                                      --------------    --------------    --------------    --------------
Net loss attributable to common stockholders -
 pro forma                                             $ (5,020,621)     $ (7,388,004)     $(15,817,261)     $(13,825,578)
                                                      =============      =============     =============     =============
Basic and diluted net loss per share attributable
 to common stockholders - as reported                  $      (0.35)     $      (0.60)     $      (1.11)     $      (1.08)
                                                      =============      =============     =============     =============
Basic and diluted net loss per share attributable
 to common stockholders - pro forma                    $      (0.43)     $      (0.68)     $      (1.37)     $      (1.32)
                                                      =============      =============     =============     =============
</TABLE>


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.

The Company initially acquired its rights to the aromatic cation technology
platform developed by a consortium of universities consisting of The University
of North Carolina at Chapel Hill ("UNC"), Georgia State University, Duke
University and Auburn University (the "Scientific Consortium") pursuant to an
agreement, dated January 15, 1997 (as amended, the "Consortium Agreement") among
the Company, UNC and a third-party (to which each of the other members of the
Scientific Consortium agreed shortly thereafter to become a party) (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
Scientific Consortium 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").


                                      -12-
<PAGE>


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, (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
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. 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 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
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 Consortium when it files its first
initial New Drug Application ("NDA") or an Abbreviated New Drug Application
("ANDA") based on Consortium technology. We are also required to pay to UNC 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 we receive
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 (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 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.


                                      -13-
<PAGE>


During the three and nine month periods ended December 31, 2005, the Company
expensed approximately $253,000 and $718,000, respectively, of other payments to
UNC and certain other Scientific Consortium universities for patent related
costs and other contracted research. For the corresponding periods ended
December 31, 2004, the Company expensed approximately $190,000 and $494,000,
respectively. Total payments expensed to UNC and certain other Scientific
Consortium universities were approximately $253,000 and $718,000 during the
three and nine months ended December 31, 2005. For the corresponding periods
ended December 31, 2004, the Company expensed approximately $208,000 and
$527,000, respectively. Included in accounts payable as of December 31, 2005 and
March 31, 2005, were approximately $65,000, and $136,000, respectively, due to
UNC and certain other Scientific Consortium universities.

In July 2004, the Company was awarded an SBIR grant from the NIH of $107,000 as
a grant to research on "Aromatic Dication Prodrugs for CNS Trypanosomiasis." No
revenues or expenses occurred during the three month period ended December 31,
2005 from this grant. During the nine month period ended December 31, 2005, the
Company recognized approximately $44,000 revenues and approximately $44,000
expenses from this grant. During the three month period ended December 31, 2004,
the Company recognized revenues of approximately $63,000 and expensed payments
of approximately $18,000. During the nine month period ended December 31, 2004,
the Company recognized revenues of approximately $63,000 and expensed payments
of approximately $63,000. Approximately $33,000 of the grant was paid to UNC and
certain other Scientific Consortium members for contracted research related to
the grant.

In November 2000, a philanthropic foundation (the "Foundation") awarded a
$15,114,000 grant to UNC to develop new drugs to treat Human Trypanosomiasis
(African sleeping sickness) and leishmaniasis (the "Foundation Grant"). On March
29, 2001, UNC entered into a clinical research subcontract agreement with the
Company, whereby the Company would receive up to $9,800,000, subject to certain
terms and conditions, over the succeeding five year period to conduct certain
clinical and research studies related to the Foundation Grant.

In April 2003, the Foundation increased the Foundation Grant by $2,713,124 for
the expansion of phase IIB/III clinical trials to treat human Trypanosomiasis
(African sleeping sickness) and improved manufacturing processes. The Company
has received, pursuant to the clinical research subcontract with UNC, inclusive
of its portion of the grant increase, a total amount of funding of approximately
$11,700,000. The Company and its research partners are working with existing and
new funding sources to develop next steps and to increase funding to advance the
development of a treatment for African sleeping sickness.

During the three and nine months ended December 31, 2005, approximately $786,000
and $2,484,000 was utilized for clinical and research purposes conducted and
expensed, respectively. During the three and nine months ended December 31,
2004, approximately $769,000 and $2,335,000 was utilized for clinical and
research purposes conducted and expensed, respectively. The Company has
recognized revenues of approximately zero and $869,000 during the three and nine
months ended December 31, 2005, respectively. The Company has recognized
revenues of approximately zero and $1,465,000 during the three and nine months
ended December 31, 2004, respectively. At December 31, 2005, the Company has
nothing recorded as deferred revenue with respect to this agreement.

On November 26, 2003, the Company entered into a testing agreement ("Testing
Agreement") with Medicines for Malaria Venture ("MMV"), a foundation established
in Switzerland, and UNC, pursuant


                                      -14-
<PAGE>


to which the Company, with the support of MMV and UNC, conducted a proof of
concept study of the dicationic drug candidate DB289 for the treatment of
malaria.

Under the terms of the 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 DB289 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 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 Testing
Agreement and amounts funded under a related discovery agreement between MMV and
UNC is refunded to MMV at face value. The Company and MMV agreed to terminate
the Testing Agreement effective as of February 10, 2006.

The Company and MMV have agreed to focus their collaborative efforts on a next
generation therapy for treatment of malaria which we believe will include a
dication drug from the Company's platform technology, in combination with
another anti-malarial drug in MMV's portfolio, a compound known as AQ13.

The Company recognized revenues of approximately $965,000 and $2,411,000 during
the three and nine month periods ended December 31, 2005, respectively, for
expenses incurred related to activities within the scope of the Testing
Agreement. For the corresponding periods ended December 31, 2004, the recognized
revenues and expenses were approximately $262,000 and $1,359,000, respectively.
The Company received approximately $2,613,000 during the nine month period ended
December 31, 2005, aggregating to approximately $5,636,000 to date under the
Testing Agreement. At December 31, 2005, the Company recorded approximately
$647,000 as deferred revenue with respect to this agreement.

5. SUBSEQUENT EVENTS

On February 8, 2006, the Company entered into a firm commitment underwriting
agreement to sell two million shares of its common stock, $0.01 par value, at
$8.00 per share. The Company also granted to the underwriter, pursuant to the
terms of the underwriting agreement, a thirty-day option to purchase up to an
additional 300,000 shares of common stock at the $8.00 price. The offering is
scheduled to close on February 13, 2006. Pursuant to the terms of the
underwriting agreement, at the initial closing, the Company will issue two
million shares of its common stock for gross proceeds to the Company of $16
million, or approximately $14,730,000 net of underwriter commissions and
expenses. If the underwriter exercises its option in full, the Company would
receive additional gross proceeds of $2.4 million, which would net to the
Company, after underwriting commissions and expenses, approximately an
additional $2,232,000.

                                   * * * * * *


                                      -15-
<PAGE>


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

The following discussion should be read in conjunction with our condensed
consolidated financial statements and related notes thereto included in Part I,
Item 1 of this quarterly report on Form 10-Q.

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 and in our annual report on Form 10-K, 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 may not 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 U.S. Food & Drug Administration ("FDA") and the FDA's
foreign counterparts, 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 not 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


                                      -16-
<PAGE>


December 31, 2005, we incurred cumulative net losses of approximately
$81,954,000. 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:

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

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

      o     the issuance of securities or borrowing of funds.

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

Three Month Period Ended December 31, 2005 Compared with the Three Month Period
Ended December 31, 2004.

Revenues under collaborative research and development agreements were
approximately $965,000 and $325,000 for the three month periods ended December
31, 2005 and December 31, 2004, respectively. For the three month periods ended
December 31, 2005 and 2004, there were no revenues recognized related to a
clinical research subcontract between us and The University of North Carolina at
Chapel Hill ("UNC"). The UNC clinical research subcontract agreement initiated
in March 2001 relates to a grant from a philanthropic foundation (the
"Foundation") to UNC to develop new drugs to treat trypanosomiasis (African
sleeping sickness) and leishmaniasis. For the three month period ended December
31, 2005, there were revenues recognized of approximately $965,000 related to
the testing agreement with the Medicines for Malaria Venture ("MMV"), compared
to revenues of $262,000 for the period ended December 31, 2004. The MMV testing
agreement was effective as of November 26, 2004 and terminates effective as of
February 10, 2006. For the three month period ended December 31, 2005, there
were no revenues recognized relating to an SBIR grant, compared to $63,000 for
the three month period ended December 31, 2004. Grant and research and
development agreement revenue is recognized as earned when the research and
development is complete under the terms of the respective agreements, according
to Company estimates. Research and development and grant funds received prior to
completion of the related services or tasks are recorded as deferred revenues.

Research and development expenses increased to approximately $2,825,000 from
approximately $1,441,000 for the three month periods ended December 31, 2005 and
December 31, 2004, respectively. Expenses related to the MMV testing agreement
increased from $261,000 in the three month period ended December 31, 2004 to
approximately $823,000 in the three month period ended December 31, 2005.
Expenses relating to the clinical research subcontract with UNC increased from
approximately $769,000 in the three month period ended December 31, 2004 to
approximately $786,000 for the three month period ended December 31, 2005. Other
pre-clinical and clinical trial expenses for the three month period ended
December 31, 2005


                                      -17-
<PAGE>


increased by approximately $805,000 from the corresponding three month period in
2004 due to the increased costs in anticipation of the Phase III trial in PCP.

General and administrative expenses decreased for the three month period ended
December 31, 2005 to approximately $2,144,000 from approximately $5,271,000 for
the corresponding three month period ended December 31, 2004. The decrease in
general and administrative expenses was primarily due to a decrease in non-cash
expenses for common stock, stock options and warrant issuances in the three
month period ended December 31, 2005 of approximately $125,000 as compared to
non-cash stock issuance in the three month period ended December 31, 2004, of
approximately $3,498,000. Non-cash expenses (1) for the three month period ended
December 31, 2005 included approximately $125,000 related to stock and warrant
issuances, as compared to (2) for the three month period ended December 31,
2004, which included approximately $3,497,000 primarily related to charges for
the extension of the exercise term of warrants to purchase 750,000 shares of
common stock originally issued to RADE Management. Legal fees increased from
approximately $504,000 during the three month period ended December 31, 2004 to
approximately $750,000 for the three month period ended December 31, 2005. Each
of accounting and patent fees decreased from approximately $35,000 and $88,000
for the three month period ended December 31, 2004, to $28,000 and $67,000,
respectively, for the same period ended December 31, 2005. Contract services and
public relations fees increased from approximately $347,000 to approximately
$457,000 during the three month periods ended December 31, 2004 and December 31,
2005, respectively. Business travel and insurance expenses decreased by
approximately $48,000 over the same periods. Other general and administrative
expenses decreased from approximately $233,000 for the three month period ended
December 31, 2004 to approximately $182,000 for the three month period ended
December 31, 2005.

Interest income for the three month period ended December 31, 2005 was
approximately $21,000. Interest income for the three month period ended December
31, 2004 was approximately $48,000. The decrease in interest income is due to a
decrease in available funds invested while the interest rate paid on invested
funds remained relatively unchanged. We had no interest expense during the three
month period ended December 31, 2005 and December 31, 2004.

We incurred a net loss of approximately $3,983,000 for the three month period
ended December 31, 2005 as compared with a net loss of approximately $6,339,000
for the three month period ended December 31, 2004. The decrease in net loss was
due primarily to a decrease in general and administrative expenses which was
predominately attributable to non-cash expenses in the three month period ended
December 31, 2004 related to stock and warrant issuances for services.

Nine Month Period Ended December 31, 2005 Compared with the Nine Month Period
ended December 31, 2004.


                                      -18-
<PAGE>


Revenues under collaborative research and development agreements were
approximately $3,324,000 and $2,887,000 for the nine month periods ended
December 31, 2005 and December 31, 2004, respectively. For the nine month period
ended December 31, 2005 there were revenues recognized of approximately $869,000
relating to the clinical research subcontract with UNC, and approximately
$2,411,000 relating to the testing agreement with MMV, while for the nine month
period ended December 31, 2004, there were revenues recognized of approximately
$1,465,000 relating to the clinical research subcontract and approximately
$1,359,000 relating to the MMV testing agreement. Additionally, for the nine
month period ended December 31, 2005, there were revenues recognized of
approximately $44,000 relating to an SBIR grant compared to $63,000 during the
nine month period ended December 31, 2004.

Research and development expenses increased to approximately $7,767,000 during
the nine month period ended December 31, 2005 from approximately $4,715,000 in
the nine month period ended December 31, 2004. Expenses relating to the clinical
research subcontract with UNC increased from approximately $2,331,000 in the
nine month period ended December 31, 2004 to approximately $2,479,000 for the
nine month period ended December 31, 2005. Expenses related to the MMV testing
agreement for the nine month period ended December 31, 2005 were approximately
$2,403,000, as compared to $1,354,000 for the same period in 2004. Expenses
relating to pre-clinical and clinical trial costs related primarily to
Pneumocystis pneumonia increased from approximately $138,000 in the nine month
period ended December 31, 2004 to approximately $1,670,000 in the nine month
period ended December 31, 2005. Pneumocystis pneumonia trial expenses were
related primarily to Phase II clinical trial patient enrollment, corresponding
sample analysis costs, and preparation for entry into Phase III. Other
pre-clinical and clinical trial expenses for the nine month period ended
December 31, 2005 increased by approximately $323,000 from the corresponding
nine month period in 2004.

      General and administrative expenses decreased during the nine month period
ended December 31, 2005 to approximately $8,206,000 from approximately
$9,163,000 for the nine month period ended December 31, 2004. The decrease in
general and administrative expenses was primarily due to a decrease in non-cash
expenses for common stock, stock options and warrant issuances in the nine month
period ended December 31, 2005 of approximately $151,000 as compared to non-cash
stock issuance in the nine month period ended December 31, 2004 of approximately
$4,773,000. Non-cash expenses (1) for the nine month period ended December 31,
2005 included (i) approximately $26,000 for a settlement with John Lux, and (ii)
approximately $125,000 for the acceleration of a warrant expiration and price
reduction of a Fulcrum Holdings of Australia warrant to compel exercise, as
compared to (2) for the nine month period ended December 31, 2004, which
included (i) approximately $4,530,000 for the extension of the exercise term of
warrants to purchase 975,000 shares of common stock originally issued to RADE
management, (ii) approximately $233,000 for the issuance of options to purchase
20,000 shares of common stock issued to an individual to assist in developing
relationships with Tsinghua University in China, and (iii) approximately $10,000
relating to the cashless exercise of warrants issued to underwriters in
connection with the Company's initial public offering. Patent expenses increased
from approximately $258,000 in the nine month period ended December 31, 2004 to
approximately $370,000 during the nine month period ended December 31, 2005.
Legal fees increased from approximately $1,060,000 in the nine month period
ended December 31, 2004, to approximately $4,125,000 during the nine month
period ended December


                                      -19-
<PAGE>


31, 2005. The increase in legal fees was primarily attributable to legal fees
related to the arbitration with Neurochem. Argument in that proceeding concluded
in September 2005. For the nine month period ended December 31, 2005 compared to
the nine month period ended December 31, 2004, payroll and payroll related
expenses increased by approximately $265,000 primarily due to increased
staffing; related business travel, insurance and contract services increased by
approximately $499,000 over the same period. Expenses relating to Immtech
Therapeutics, Super Insight, Immtech Life Science and Immtech Hong Kong
decreased to approximately $154,000 for the nine month period ended December 31,
2005 from approximately $336,000 for the nine month period ended December 31,
2004. Other general and administrative expenses decreased approximately $94,000
during the same periods.

Interest income for the nine month period ended December 31, 2005 was
approximately $121,000. Interest income for the nine month period ended December
31, 2004 was approximately $84,000. The increase in interest income is due to an
increase in average funds invested and an increase in the interest rate paid on
invested funds. We had no interest expense during the nine month period ended
December 31, 2005 and December 31, 2004.

We incurred a net loss of approximately $12,527,000 for the nine month period
ended December 31, 2005 as compared with a net loss of approximately $10,906,000
for the nine month period ended December 31, 2004.

Liquidity and Capital Resources

During the three and nine month periods ended December 31, 2005, cash and cash
equivalents were primarily invested in a money market mutual fund. Unrestricted
cash and cash equivalents were approximately $1,926,000 as of December 31, 2005
and restricted funds on deposit were approximately $1,019,000.

The Company has a working capital deficit of $421,913 as of December 31, 2005
compared to working capital of $8,068,771 as of March 31, 2005. The reduction in
working capital of $8,490,684 is a result of higher than anticipated legal costs
of $4,124,968 incurred primarily in connection with the resolution of the
disputes described below along with the Company's ongoing efforts to develop
drug candidates.

To date, the Company has spent a substantial amount of cash resources on legal
costs in respect of its suit against Neurochem. Pursuant to the terms of the
Confidentiality, Testing and Option Agreement between Immtech and Neurochem
dated April 22, 2002, each party is to bear its own attorneys' fees and costs
during an arbitration. In accordance with the ICC Rules which govern the
proceeding, however, the Arbitral Tribunal may award recovery of such attorneys'
fees and costs to the prevailing party. Management believes that it has the
potential to recover some or all of the legal costs it expended in resolution of
the disputes described herein. Future legal costs are not expected to be
significant as the argument portion of the above described arbitration ended on
September 20, 2005.

There were equipment expenditures of approximately $4,000 for the three month
period ended December 31, 2005 as compared to equipment expenditures of
approximately $39,000 for the three month period ended December 31, 2004. During
the nine month periods ended December 31, 2005 and December


                                      -20-
<PAGE>


31, 2004, equipment purchases were approximately $54,000 and $99,000,
respectively.

We periodically receive cash from the exercise of common stock options. During
the three month period ended December 31, 2005, 16,872 options were exercised
and during the nine month period ended December 31, 2005, options to purchase
62,544 shares of common stock were exercised, which included 18,744 on a
cashless basis, resulting in aggregate payments to us of $24,525 and $93,191.
During the three and nine month periods ended December 31, 2005, warrants to
purchase 50,000 and 51,800 shares of common stock, respectively, were exercised
resulting in aggregate payments to us of $405,050 and $416,696.

Through December 31, 2005, we have financed our operations with:

o     proceeds from various private placements of equity securities, an initial
      public offering, a secondary public offering, exercises of stock options
      and warrants and other cash contributed from stockholders, which in the
      aggregate raised approximately $54,700,000;

o     funding from research agreements, foundation grants, SBIR grants and Small
      Business Technology Transfer Program grants and testing agreements of
      approximately $20,513,000; and

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

We have focused or efforts and used our cash resources primarily to develop drug
product candidates (including sponsored research) pursuant to the terms of (1)
an agreement, dated January 15, 1997, (the "Consortium Agreement"), among us,
and UNC (to which each of Duke University, Auburn University and Georgia State
University agreed shortly thereafter to become a party, and all of which,
collectively with UNC, are referred to as the "Consortium") and, as contemplated
by the Consortium Agreement, under a license agreement dated January 28, 2002
("Consortium License Agreement") with the Consortium and (2) a recently
completed agreement, dated November 26, 2003, among us, UNC, and the Medicines
for Malaria Venture ("MMV"). Preparations are also underway to commence Company
sponsored clinical programs that include human clinical trials for the treatment
of PCP at multiple locations in North and South America. Over the next several
years we expect to incur 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), pre-clinical
testing and clinical trials, achievement of regulatory milestones, third party
collaborators fulfilling their obligations to us, the timing and cost of
obtaining 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 to provide funding to support these
activities, and other factors. In any event, we will require


                                      -21-
<PAGE>


additional funds in addition to our existing resources to develop product
candidates and to otherwise meet our business objectives.

The Company is currently actively involved in discussions to obtain additional
funds through its traditional funding sources along with the potential recovery
of legal costs from the resolution of disputes described earlier in this
document. The Company believes that it will be able to obtain the necessary
funding to meet its planned expenditures from December 31, 2005 through the next
twelve-month period, although there can be no assurance we will be able to
acquire the funds for current planned expenditures or that additional funds will
not be required.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

The exposure of market risk associated with risk-sensitive instruments is not
material to our business, 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 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, which took place as of the end of the period covered by this
Quarterly Report on Form 10-Q, our Chief Executive and Chief Financial Officers
believe that these procedures are effective 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: transactions are executed in accordance with management's
general or specific authorization; transactions are recorded as necessary (i) to
permit preparation of financial statements in conformity with generally accepted
accounting principles and (ii) to 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.

We have not made any material changes in our internal control over financial
reporting during the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

                           PART II. OTHER INFORMATION


                                      -22-
<PAGE>


Item 1.  Legal Proceedings.

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

On December 19, 2005, the Court held a final pre-trial conference. The Court
ordered plaintiffs to file, by January 23, 2006, a supplement to their response
to the Company's Motion in Limine to Exclude Gerhard Von der Ruhr's Testimony. A
hearing on the Company's motion is scheduled for April 7, 2006. No trial date
has been set.

Except as noted above and in Part I, Item 3, Legal Proceedings, of our Form 10-K
filed on June 14, 2005, we are not aware of any pending litigation.

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

Recent Sales of Unregistered Securities

Common Stock.

None

Option Exercises.

On November 14, 2005, a holder exercised an option to purchase 8,000 shares
which were exercisable at $2.55 per share resulting in proceeds to the Company
of $20,400.

On November 17, 2005, a holder exercised an option to purchase 8,872 shares
which were exercisable at $0.46 per share resulting in proceeds to the Company
of $4,125.

Conversion of Series B Preferred Stock to Common Stock.

On November 17, 2005, a holder of Series B Convertible Preferred Stock, $0.01
par value ("Series B Stock") converted 5,261 shares of Series B Stock into
32,997 shares of common stock.

Preferred Stock Dividend Payment.

On October 15, 2005, we issued 18,973 shares of common stock in the aggregate as
preferred stock dividends to the holders of outstanding shares of our Series A
Stock, Series B Stock, Series C Stock and Series D Stock, pro rata, based on the
number of the shares of preferred stock held.

Warrant Exercises.

The table below sets forth dates, shares of common stock purchased, exercise
prices paid and aggregate consideration received by us in connection with
warrant exercises during the quarter and prior to the filing of this quarterly
report on Form 10-Q.


                                      -23-
<PAGE>


                        Shares of Common        Per Share           Aggregate
  Date                   Stock Purchased      Exercise Price      Consideration
  ----                   ---------------      --------------      -------------
         11/2/05               35,000           $8.80            $308,000
        11/10/05                5,000           $6.47             $32,350
        11/14/05               10,000           $6.47             $64,700
                              --------                          ----------
                               50,000           $8.10            $405,050
Use of Proceeds.

We intend to use the proceeds from the exercise of warrants for general
corporate purposes.

Item 3.  Defaults Upon Senior Securities.

None.

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



                           Votes of the Stockholders.

We held our Annual Meeting on December 16, 2005 at the Hyatt Regency O'Hare in
Rosemont, Illinois. The following matters were presented to, and all were
approved or ratified by, the stockholders: (1) election of seven directors to
serve until the next annual meeting of the stockholders, (2) Proposal No. 1 - to
authorize the board of directors to amend the Company's certificate of
incorporation to change the Company's name to "Immtech Pharmaceuticals, Inc."
from "Immtech International, Inc.", (3) Proposal No. 2 - to authorize the board
of directors to amend the Company's certificate of incorporation to effect, on
or before December 15, 2007, a forward split of the Company's common stock of up
to three shares for each one share outstanding as of the record date for the
stock split, (4) Proposal No. 3 - to approve an amendment to the Immtech
International, Inc. 2000 Stock Incentive Plan, as amended and restated, (the
"2000 Plan") to permit the board of directors, or an independent committee
thereof, to amend the terms of outstanding awards granted under the 2000 Plan
and (5) Proposal No. 4 - to ratify the selection of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending March 31, 2006. The
results of the votes are as follows:

The following individuals were               Votes                 Authority
elected Directors by the Shareholders:        For                   Withheld
                                       --------------------- ------------------
T. Stephen Thompson                         7,719,105              1,277,972
Cecilia Chan                                7,695,714              1,301,636
Harvey M. Colten, M.D.                      8,252,849                744,228
Judy Lau                                    8,469,925                527,152
Levi Lee, M.D.                              8,520,704                476,373
Eric L. Sorkin                              8,643,784                353,293
Frederick W. Wackerle                       8,092,933                904,144


                                      -24-
<PAGE>

                                      Votes       Votes
                                       For       Against   Abstain*  Non-Votes**
                                    ---------  ---------   --------  -----------

Proposal 1 - Name Change            8,933,724     46,618    16,735       n/a

Proposal 2 - Stock Split            8,591,816    369,329    35,932       n/a

Proposal 3 - Amendment of the 2000
Stock Incentive Plan                2,463,951  1,808,610   243,409    4,481,107

Proposal 4 - Ratification of
Deloitte & Touche LLP as
independent auditors                8,603,440    167,148   226,489       n/a

* Per proxy statement, abstentions are considered votes against.
** Per proxy statement, non-votes are not entitled to vote.

Item 5.  Other Information.

Employee Update

In the nine months ended December 31, 2005, and to date, we have added six new
employees. Our new hires include Vice President Discovery Programs, Director
Clinical Operations, Director Regulatory Operations, Director Commercial
Development, Vice President, General and IP Counsel, and Senior Clinical Project
Manager. With our new hires, our staff has increased to 24 employees, 13 of whom
hold advanced degrees, 13 of whom work in support of clinical trials, research
and development and regulatory compliance and the other 11 work in general and
administrative capacities which includes business development, investor
relations, finance, legal and administration.

Underwriting Agreement

On February 8, 2006, the Company entered into a firm commitment underwriting
agreement to sell two million shares of its common stock, $0.01 par value, at
$8.00 per share. The Company also granted to the underwriter, pursuant to the
terms of the underwriting agreement, a thirty-day option to purchase up to an
additional 300,000 shares of common stock at the $8.00 price. The offering is
scheduled to close on February 13, 2006. Pursuant to the terms of the
underwriting agreement, at the initial closing, the Company will issue two
million shares of its common stock for gross proceeds to the Company of $16
million, or approximately $14,730,000 net of underwriter commissions and
expenses. If the underwriter exercises its option in full, the Company would
receive additional gross proceeds of $2.4 million, which would net the Company,
after underwriting commissions and expenses, approximately an additional
$2,232,000 of proceeds.

Item 6.  Exhibits.

                                  Exhibit Index

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

                                      -25-

<PAGE>


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.























                                      -26-
<PAGE>


                                   SIGNATURES

Pursuant to the requirements of Sections 13 and 15(d) 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 INTERNATIONAL, INC.



Date:  February 9, 2006                  By:   /s/ Eric L. Sorkin
                                            ------------------------------------
                                            Eric L. Sorkin
                                            Chief Executive Officer
                                            (Principal Executive Officer)


Date:  February 9, 2006                  By:   /s/ Gary C. Parks
                                            ------------------------------------
                                            Gary C. Parks
                                            Treasurer, Secretary and Chief
                                            Financial Officer
                                            (Principal Financial and Accounting
                                            Officer)