UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)

|X|      QUARTERLY  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2006.

                                       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 PHARMACEUTICALS, INC.
           -----------------------------------------------------------

             (Exact name of registrant as specified in its charter)

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

                 One North End Avenue, New York, New York 10282
--------------------------------------------------------------------------------
  (Address of principal executive offices)           (Zip Code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.              Yes |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.

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|


<PAGE>

As of November 8, 2006,  14,085,134 shares of the Registrant's common stock, par
value $0.01 per share ("Common Stock"), were outstanding.



                                     - 2 -
<PAGE>


                                Table Of Contents

<TABLE>
<CAPTION>
                                                                                     Page(s)

<S>        <C>                                                                           <C>

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.....................................................22
Item 3       Quantitative and Qualitative Disclosures about Market Risk..................26
Item 4       Controls and Procedures.....................................................26


PART II    OTHER INFORMATION.............................................................27

Item 1       Legal Proceedings...........................................................27
Item 1A      Risk Factors................................................................28
Item 2       Unregistered Sales of Equity Securities and Use of Proceeds.................28
Item 3       Defaults Upon Senior Securities.............................................29
Item 4       Submission of Matters to a Vote of Security Holders.........................29
Item 5       Other Information...........................................................29
Item 6       Exhibits....................................................................29
</TABLE>


                               - i -

<PAGE>



                         PART I. FINANCIAL INFORMATION

        Item 1.  Condensed Consolidated Financial Statements.
                 -------------------------------------------

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

<TABLE>
<CAPTION>

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
------------------------------------------------------------------------------------------------------------

                                                                          September 30,       March 31,
ASSETS                                                                        2006              2006
<S>                                                                    <C>                  <C>

CURRENT ASSETS:
  Cash and cash equivalents                                            $    8,537,550       $   14,137,867
  Restricted funds on deposit                                               4,209,543              530,186
  Other receivables (see Note 5)                                            1,874,454
  Other current assets                                                        301,566              193,059
                                                                       --------------       --------------

           Total current assets                                            14,923,113           14,861,112

PROPERTY AND EQUIPMENT - Net                                                3,518,423            3,555,965

OTHER ASSETS                                                                   66,942              137,341
                                                                       --------------       --------------

TOTAL                                                                  $   18,508,478       $   18,554,418
                                                                       ==============       ==============


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                     $    1,996,044       $    2,328,965
  Accrued expenses                                                            252,513              226,749

  Deferred revenue                                                          3,611,747              395,779
                                                                       --------------       --------------

           Total current liabilities                                        5,860,304            2,951,493


           Total liabilities                                                5,860,304            2,951,493
                                                                       --------------       --------------


STOCKHOLDERS' EQUITY:
  Preferred stock, par value $0.01 per share, 3,913,000 shares
    authorized and unissued as of September 30, 2006 and
    March 31, 2006.
  Series A convertible preferred stock, par value $0.01 per share,
    stated value $25 per share, 320,000 shares authorized, 56,000
    and 58,400 shares issued and outstanding as of September 30,
    2006 and March 31, 2006, respectively; aggregate liquidation
    preference of $1,438,358 as of September 30, 2006.                      1,438,358            1,499,785
</TABLE>


                                     - 2 -

<PAGE>


<TABLE>
<CAPTION>

<S>                                                                    <C>                  <C>
  Series B convertible preferred stock, par value $0.01 per share,
    stated value $25 per share, 240,000 shares authorized, 13,464
    shares issued and outstanding as of September 30, 2006 and March
    31, 2006; aggregate liquidation preference of $348,694 as of
    September 30, 2006.                                                       348,694              348,621
  Series C convertible preferred stock, par value $0.01 per share,
    stated value $25 per share, 160,000 shares authorized, 45,536
    shares issued and outstanding as of September 30, 2006 and March
    31, 2006; aggregate liquidation preference of $1,180,594 as of
    September 30, 2006.                                                     1,180,594            1,180,345
  Series D convertible preferred stock, par value $0.01 per share,
    stated value $25 per share, 200,000 shares authorized, 117,200
    shares issued and outstanding as of September 30, 2006 and March
    31, 2006; aggregate liquidation preference of $3,011,396 as of
    September 30, 2006.                                                     3,011,396            3,010,914
  Series E convertible preferred stock, par value $0.01 per share,
    stated value $25 per share, 167,000 shares authorized, 110,600
    and 156,600 shares issued and outstanding as of September 30,
    2006 and March 31, 2006, respectively; aggregate liquidation
    preference of $2,841,847 as of September 30, 2006.                      2,841,847            3,975,528
  Common stock, par value $0.01 per share, 100,000,000 shares
    authorized, 14,032,356 and 13,758,506 shares issued and outstanding
    as of September 30, 2006 and March 31, 2006, respectively                 140,324              137,585
  Additional paid-in capital                                               97,026,664           94,292,235
  Deficit accumulated during the developmental stage                      (93,339,693)         (88,842,088)
                                                                       --------------       --------------

           Total stockholders' equity                                      12,648,174           15,602,925
                                                                       --------------       --------------

TOTAL                                                                  $   18,508,478       $   18,554,418
                                                                       ==============       ==============
</TABLE>


See notes to condensed consolidated financial statements.



                                     - 3 -

<PAGE>


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

<TABLE>
<CAPTION>

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------


                                                                                                                      October 15,
                                                                Three Months Ended             Six Months Ended           1984
                                                                   September 30,                 September 30,        (Inception) to
                                                           --------------------------------------------------------   September 30,
                                                               2006            2005           2006           2005         2006
<S>                                                        <C>             <C>           <C>           <C>            <C>
REVENUES                                                   $   491,330     $  879,721    $ 2,432,939   $  2,358,301   $  23,197,679
                                                            -----------    ----------    -----------   ------------   -------------

EXPENSES:

  Research and development                                   1,755,326      2,671,930      4,224,162      4,941,137      55,577,716
  General and administrative                                 2,363,796      3,329,233      4,583,651      6,061,506      59,466,451
  Other (see Note 5)                                        (1,874,454)                   (1,874,454)                    (1,874,454)
  Equity in loss of joint venture                                                                                           135,002
                                                           --------------------------------------------------------         -------



           Total expenses                                    2,244,668      6,001,163      6,933,359     11,002,643     113,304,715
                                                             ---------      ---------      ---------     ----------     -----------


LOSS FROM OPERATIONS                                        (1,753,338)    (5,121,442)    (4,500,420)    (8,644,342)    (90,107,036)
                                                            -----------    -----------    -----------    -----------   ------------

OTHER INCOME (EXPENSE):
  Interest income                                              132,334         42,931        282,695        100,518       1,226,882
  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                                        132,334         42,931        282,695        100,518         937,496
                                                               -------         ------        -------        -------         -------
</TABLE>


                                     - 4 -

<PAGE>


<TABLE>
<CAPTION>

<S>                                                        <C>             <C>           <C>           <C>            <C>
NET LOSS                                                    (1,621,004)    (5,078,511)    (4,217,725)    (8,543,824)    (89,169,540)

CONVERTIBLE PREFERRED STOCK DIVIDENDS AND CONVERTIBLE
  PREFERRED STOCK PREMIUM DEEMED DIVIDENDS                    (137,082)      (105,087)      (279,890)      (223,909)     (6,540,062)

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



NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS               $(1,758,086)   $(5,183,598)   $(4,497,615)  $ (8,767,733)  $ (93,339,703)
                                                           ============   ============   ============  =============  ==============

BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE
    TO COMMON STOCKHOLDERS:
  Net loss                                                 $     (0.12)    $    (0.44)   $     (0.30)  $      (0.74)
  Convertible preferred stock dividends and convertible
    preferred stock premium deemed dividends                     (0.01)         (0.01)         (0.02)         (0.02)
                                                           -----------     ----------    -----------   ------------

BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE
  TO COMMON STOCKHOLDERS                                   $     (0.13)    $    (0.45)   $     (0.32)  $      (0.76)
                                                           ============    ===========   ===========   ============

WEIGHTED AVERAGE SHARES USED IN COMPUTING
  BASIC AND DILUTED NET LOSS PER SHARE                      14,026,413     11,556,816     13,973,658     11,474,311
                                                            ==========     ==========     ==========     ==========
</TABLE>


See notes to condensed consolidated financial statements.


                                     - 5 -

<PAGE>


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

<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------


                                                                                                                      October 15,
                                                                Three Months Ended             Six Months Ended           1984
                                                                   September 30,                 September 30,        (Inception) to
                                                           --------------------------------------------------------   September 30,
                                                               2006            2005           2006           2005         2006
<S>                                                        <C>             <C>           <C>           <C>            <C>
OPERATING ACTIVITIES:
  Net loss                                                 $(1,621,004)    $(5,078,511)  $(4,217,725)  $(8,543,824)   $ (89,169,540)

  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                 557,307          7,571      1,233,387         44,852      28,974,914

    Depreciation and amortization of property and
      equipment                                                 37,951         39,390         77,213         77,712       1,113,633


    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 (see Note 5)                     (1,781,143)        81,639     (1,982,961)      (241,363)     (2,176,020)

      Other assets                                              70,000            207         70,399            335         (66,942)

      Accounts payable                                        (751,187)     2,495,116       (332,921)     1,679,012       2,323,579

      Accrued expenses                                          18,378       (495,780)        25,764        490,662         915,526

      Deferred revenue                                        (491,329)      (836,206)     3,215,968     (1,314,786)      3,611,747
                                                           -----------     -----------   -----------   -------------  -------------

           Net cash used in operating activities            (3,961,027)    (3,786,574)    (1,910,876)    (7,807,400)    (55,628,421)
                                                           -----------     -----------   -----------   -------------  -------------

INVESTING ACTIVITIES:
  Purchase of property and equipment                            (5,659)       (26,291)       (39,671)       (50,262)     (1,605,126)

  Restricted funds on deposit                                  557,628      1,152,254     (3,679,357)     1,440,168      (4,209,543)
</TABLE>


                                     - 6 -

<PAGE>
<TABLE>

<S>                                                        <C>             <C>           <C>           <C>            <C>
  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       551,969      1,125,963     (3,719,028)     1,389,906      (5,952,613)
                                                           -----------     -----------   -----------   -------------  -------------

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                                                                                                   17,085,434

  Payments of convertible preferred stock dividends and
    for fractional shares of common stock resulting from
    the conversions of convertible preferred stock                  (2)           (54)          (407)          (591)         (5,221)

  Net proceeds from issuance of common stock                     30,000        40,871         29,994         80,312      46,307,684

  Additional capital contributed by stockholders                     -              -              -              -         245,559
                                                           -----------     -----------   -----------   -------------  -------------

           Net cash provided by financing activities            29,998         40,817         29,587         79,721      70,118,584
                                                           -----------     -----------   -----------   -------------  -------------

NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS       (3,379,060)    (2,619,794)    (5,600,317)    (6,337,773)      8,537,550

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD              11,916,610      5,753,715     14,137,867      9,471,694               -
                                                           -----------     -----------   -----------   -------------  -------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                   $ 8,537,550     $3,133,921    $ 8,537,550   $  3,133,921   $   8,537,550
                                                           ===========     ==========    ===========   ============   =============
</TABLE>



See notes to condensed consolidated financial statements.



                                     - 7 -

<PAGE>


IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

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


1.    BASIS OF PRESENTATION

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

2.    COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

      The Company holds worldwide patents and patent applications,  and licenses
      and rights to license technology,  primarily from a scientific  consortium
      that has granted to the Company exclusive rights to commercialize products
      from, and license  rights to the  technology.  The  scientific  consortium
      includes  scientists  from The University of North Carolina at Chapel Hill
      ("UNC-CH"),  Georgia State University  ("Georgia State"),  Duke University
      ("Duke   University")   and  Auburn   University   ("Auburn   University")
      (collectively,  the "Scientific Consortium"). The Company is a development
      stage enterprise and, since its inception on October 15, 1984, has engaged
      in research and development  programs,  expanded its network of scientists
      and scientific advisors and licensing technology  agreements,  and 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, 2007, if at all.


                                     - 8 -
<PAGE>


      Since  inception,  the  Company  has  incurred  accumulated  net losses of
      approximately $89,170,000. Management expects the Company will continue to
      incur  significant  losses  during the next  several  years as the Company
      continues  development  activities,  clinical trials and commercialization
      efforts.  In addition,  the Company has various  research and  development
      agreements  with  third  parties  and  is  dependent  upon  such  parties'
      abilities  to perform  under these  agreements.  There can be no assurance
      that the Company's activities will lead to the development of commercially
      viable   products.   The  Company's   operations  to  date  have  consumed
      substantial  amounts of cash.  The negative  cash flow from  operations is
      expected to continue in the foreseeable  future.  The Company  believes it
      will  require  substantial  additional  funds  to  commercialize  its drug
      candidates. The Company's cash requirements may vary materially from those
      now planned when and if the following  become  known:  results of research
      and development efforts,  results of clinical testing,  responses to grant
      requests,  formation  and  development  of  relationships  with  strategic
      partners,  changes in the focus and  direction  of  development  programs,
      competitive  and  technological  advances,  requirements in the regulatory
      process and other factors.  Changes in  circumstances  in any of the above
      areas may require the  Company to allocate  substantially  more funds than
      are currently available or than management intends to raise.

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

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

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

      Restricted  Funds on Deposit - Restricted funds on deposit consist of cash
      in two  accounts  on  deposit at a bank  which are  restricted  for use in
      accordance with (i) a clinical research subcontract  agreement with UNC-CH
      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.

      Investment  -  The  Company   accounts  for  its   investment  in  NextEra
      Therapeutics,  Inc.  ("NextEra") on the equity method. As of September 30,
      2006 and March 31, 2006, the Company owned approximately 28% of the issued
      and outstanding shares of NextEra common 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 September 30, 2006 and March 31,
      2006.  Recognition  of any  investment  income on the equity method by the
      Company for its investment in NextEra will occur


                                     - 9 -
<PAGE>


      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.  Leasehold  improvements are amortized over the lesser of the
      life of the related lease or their useful life.

      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.
      Upfront cash payments from research and development grants are reported as
      deferred   revenue  until  such  time  as  the  research  and  development
      activities covered by the grant are performed.

      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  carry-forwards  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 six month periods ended September 30, 2006 and September
      30, 2005,  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.

      Comprehensive Loss - There were no differences between  comprehensive loss
      and net loss for the three and six month periods ended  September 30, 2006
      and 2005, respectively.



                                     - 10 -
<PAGE>


      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.

      New Accounting  Standards - In September  2006, the FASB issued  Statement
      No. 157,  Fair Value  Measurements  ("SFAS  157").  SFAS 157 defines  fair
      value, establishes a framework for measuring fair value in accordance with
      generally accepted  accounting  principles,  and expands disclosures about
      fair value measurements. SFAS 157 is effective for us in 2008. The Company
      is currently assessing the impact of the adoption of this statement.

3.    STOCKHOLDERS' EQUITY

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

      Series A Convertible  Preferred  Stock - On February 14, 2002, the Company
      filed a Certificate of Desigation with the Secretary of State of the State
      of  Delaware   designating  320,000  shares  of  the  Company's  5,000,000
      authorized  shares of preferred  stock as Series A  Convertible  Preferred
      Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
      accrue at a rate of 6.0% per annum on the  $25.00  stated  value per share
      and are  payable  semi-annually  on April 15 and  October  15 of each year
      while the shares are  outstanding.  The  Company has the option to pay the
      dividend  either  in cash or in  equivalent  shares of  common  stock,  as
      defined.  Included  in the  carrying  value of the  Series  A  Convertible
      Preferred Stock in the accompanying  condensed consolidated balance sheets
      are $38,358 and $39,785 of accrued  preferred stock dividends at September
      30,  2006 and  March  31,  2006,  respectively.  Each  share  of  Series A
      Convertible  Preferred  Stock may be  converted  by the holder at any time
      into  shares  of our  common  stock at a  conversion  rate  determined  by
      dividing the $25.00  stated value,  plus any accrued and unpaid  dividends
      (the  "Liquidation  Price"),  by a $4.42 conversion price (the "Conversion
      Price  A"),  subject to  certain  adjustments,  as defined in the Series A
      Certificate  of  Designation.  On April 15, 2006, the Company issued 5,547
      shares of common stock and paid $47 in lieu of fractional common shares as
      dividends on the preferred  shares.  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.  During the three and six
      month  periods  ended  September  30,  2006  and  2005  certain  preferred
      stockholders  converted  2,400  and 2,000  shares of Series A  Convertible
      Preferred Stock, including accrued dividends, for 13,690 and 11,409 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.

      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


                                     - 11 -
<PAGE>


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

      Series B Convertible  Preferred Stock - On September 25, 2002, the Company
      filed a  Certificate  of  Designation  with the  Secretary of State of the
      State of Delaware  designating  240,000 shares of the Company's  5,000,000
      authorized  shares of preferred  stock as Series B  Convertible  Preferred
      Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
      accrue at a rate of 8.0% per annum on the  $25.00  stated  value per share
      and are  payable  semi-annually  on April 15 and  October  15 of each year
      while the shares are  outstanding.  The  Company has the option to pay the
      dividend  either  in cash or in  equivalent  shares of  common  stock,  as
      defined.  Included  in the  carrying  value of the  Series  B  Convertible
      Preferred Stock in the accompanying  condensed consolidated balance sheets
      are  $12,094  and  $12,021  of accrued  preferred  stock  dividends  as of
      September 30, 2006 and March 31, 2006, respectively.  Each share of Series
      B Convertible  Preferred  Stock may be converted by the holder at any time
      into shares of common stock at a conversion  rate  determined  by dividing
      the $25.00  stated  value,  plus any  accrued  and unpaid  dividends  (the
      "Liquidation  Price"),  by a $4.00 conversion price (the "Conversion Price
      B"),  subject  to  certain  adjustments,   as  defined  in  the  Series  B
      Certificate  of  Designation.  On April 15, 2006, the Company issued 1,703
      shares of common stock and paid $31 in lieu of fractional common shares as
      dividends on the preferred  shares.  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.  During the three and six
      month periods ended September 2006 and 2005, there were no conversions.

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

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



                                     - 12 -
<PAGE>


      of  preferred  stock,  Series B  Convertible  Preferred  stockholders  and
      holders of any other outstanding  preferred stock shall vote together with
      the holders of common stock as a single class.

      Series  C  Convertible  Preferred  Stock  - On June 6,  2003,  we  filed a
      Certificate  of  Designation  with the  Secretary of State of the State of
      Delaware  designating 160,000 shares of the Company's 5,000,000 authorized
      shares of preferred stock as Series C Convertible  Preferred Stock,  $0.01
      par value, with a stated value of $25.00 per share.  Dividends accrue at a
      rate of 8.0% per  annum on the  $25.00  stated  value  per  share  and are
      payable  semi-annually  on April 15 and  October 15 of each year while the
      shares are  outstanding.  The Company  has the option to pay the  dividend
      either  in cash or in  equivalent  shares  of common  stock,  as  defined.
      Included in the carrying value of the Series C Convertible Preferred Stock
      in the accompanying  condensed consolidated balance sheets are $42,194 and
      $41,945 of accrued  preferred stock dividends as of September 30, 2006 and
      March 31, 2006, respectively. Each share of Series C Convertible Preferred
      Stock may be  converted  by the  holder at any time into  shares of common
      stock at a conversion rate determined by dividing the $25.00 stated value,
      plus any accrued and unpaid  dividends  (the  "Liquidation  Price"),  by a
      $4.42  conversion  price (the  "Conversion  Price C"),  subject to certain
      adjustments,  as defined in the Series C Certificate  of  Designation.  On
      April 15, 2006,  the Company  issued 5,761 shares of common stock and paid
      $95 in lieu of  fractional  common  shares as dividends  on the  preferred
      shares. 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.  During the three and six month periods ended September
      30, 2006 there were no  conversions.  During the three month  period ended
      September 30, 2005 certain preferred  stockholders  converted 4,800 shares
      of Series C Convertible Preferred Stock, including accrued dividends,  for
      27,354 shares of common stock. During the six month period ended September
      30, 2005 certain preferred  stockholders converted 13,916 shares of Series
      C Convertible  Preferred Stock,  including accrued  dividends,  for 78,976
      shares of common stock.

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

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



                                     - 13 -
<PAGE>


      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  $81,396  and  $80,914  of accrued  preferred  stock  dividends  as of
      September 30, 2006 and March 31, 2006, respectively.  Each share of Series
      D Convertible  Preferred  Stock may be converted by the holder at any time
      into shares of common stock at a conversion  rate  determined  by dividing
      the $25.00  stated  value,  plus any  accrued  and unpaid  dividends  (the
      "Liquidation  Price"),  by a $9.00 conversion price (the "Conversion Price
      D"),  subject  to  certain  adjustments,   as  defined  in  the  Series  D
      Certificate of  Designation.  On April 15, 2006, the Company issued 11,134
      shares of common stock and paid $79 in lieu of fractional common shares as
      dividends on the preferred  shares.  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.  During the three and six
      month periods ended September 30, 2006 there were no  conversions.  During
      the three and six month periods ended September 30, 2005 certain preferred
      stockholders  converted  43,080 shares of Series D  Convertible  Preferred
      Stock,  including accrued  dividends,  for 121,324 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 the Company is
      determined by (i) dividing the Liquidation Price by the Conversion Price D
      provided that the closing bid price for the Company's common stock exceeds
      $18.00 for 20 consecutive  trading days within 180 days prior to notice of
      conversion,  as defined,  or (ii) if the  requirements of (i) are not met,
      the number of shares of common stock is determined by dividing 110% of the
      Liquidation  Price by the Conversion  Price D. The  Conversion  Price D is
      subject  to  certain  adjustments,   as  defined  in  the  Certificate  of
      Designation.

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

      Series E Convertible  Preferred  Stock -On December 13, 2005,  the Company
      filed a  Certificate  of  Designation  with the  Secretary of State of the
      State of Delaware  designating  167,000 shares of the Company's  5,000,000
      authorized  shares of preferred  stock as Series E  Convertible  Preferred
      Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
      accrue at a rate of 6.0% per annum on the  $25.00  stated  value per share
      and are  payable  semi-annually  on April 15 and  October  15 of each year
      while the shares are  outstanding.  The  Company has the option to pay the
      dividend  either  in cash or in  equivalent  shares of  common  stock,  as
      defined.  Included  in the  carrying  value of the  Series  E  Convertible
      Preferred Stock in the accompanying  condensed


                                     - 14 -
<PAGE>


      consolidated  balance sheets are $76,847 and $60,528 of accrued  preferred
      stock dividends as of September 30, 2006 and March 31, 2006, respectively.
      Each share of Series E Convertible Preferred Stock may be converted by the
      holder  at any time  into  shares of  common  stock at a  conversion  rate
      determined  by  dividing  the $25.00  stated  value,  plus any accrued and
      unpaid dividends (the  "Liquidation  Price"),  by a $7.04 conversion price
      (the "Conversion Price E"), subject to certain adjustments,  as defined in
      the Series E Certificate  of  Designation.  On April 15, 2006, the Company
      issued 8,819  shares of common  stock and paid $135 in lieu of  fractional
      common shares as dividends on the preferred shares. During the three month
      period ended September 30, 2006 there were no conversions.  During the six
      month period ended  September  30, 2006,  certain  preferred  stockholders
      converted 46,000 shares of Series E Convertible Preferred Stock, including
      accrued dividends, for 163,847 shares of common stock.

      The Company may at any time after  December 1, 2006,  require  that any or
      all  outstanding  shares  of  Series  E  Convertible  Preferred  Stock  be
      converted  into shares of our common  stock,  provided  that the shares of
      common  stock  into  which the Series E  Convertible  Preferred  Stock are
      convertible   are  registered   pursuant  to  an  effective   registration
      statement, as defined. The number of shares of common stock to be received
      by  the  holders  of the  Series  E  Convertible  Preferred  Stock  upon a
      mandatory  conversion by us is determined by (i) dividing the  Liquidation
      Price by the  Conversion  Price E provided  that the closing bid price for
      the  Company's  common stock exceeds  $10.56 for 20 out of 30  consecutive
      trading days within 180 days prior to notice of conversion, as defined, or
      (ii) if the  requirements  of (i) are not met,  the  number  of  shares of
      common stock is determined by dividing  110% of the  Liquidation  Price by
      the  Conversion  Price E. The  Conversion  Price E is  subject  to certain
      adjustments, as defined in the Certificate of Designation.

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

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

      Common Stock - On May 26, 2006,  restricted  shares in the amount of 5,000
      shares of common  stock were  issued to Tulane  University  as part of the
      Tulane License  Agreement  granting to us an exclusive license to develop,
      manufacture  and  commercialize  a group of 4 -  aminoquinoline  drugs for
      treatment,  prophylaxis  and  diagnosis of infectious  diseases.  The lead
      candidate, AQ-13, is targeted as a candidate for treatment and prophylaxis
      for malaria.

      On May 26, 2006, restricted shares in the amount of 5,000 shares of common
      stock were issued to T.  Stephen  Thompson as part of his  retirement  and
      consulting agreement dated May 1, 2006.

      Warrants  - During the three and six month  periods  ended  September  30,
      2006,  warrants to purchase  5,000 shares of common stock were  exercised,
      resulting  in proceeds  to the Company of $30,000.  There were no warrants
      exercised in the three month period ended  September 30, 2005.  During the


                                     - 15 -
<PAGE>


      six month period ended  September  30,  2005,  warrants to purchase  1,800
      shares of common  stock  were  exercised,  resulting  in  proceeds  to the
      Company of $11,646.

      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.



      Incentive Stock Programs - At the stockholders'  meeting held November 12,
      2004,  the  stockholders  approved the second  amendment to the 2000 Stock
      Incentive  Plan  which  increased  the  number of  shares of common  stock
      reserved for issuance from 1,100,000 shares to 2,200,000  shares.  Options
      granted under the 2000 Stock  Incentive  Plan that expire are available to
      be reissued.  During the three month periods ended  September 30, 2006 and
      2005, 5,000 and 34,084 options, respectively, previously granted under the
      2000 Stock  Incentive  Plan  expired and were  available  to be  reissued.
      During the six month periods ended September 30, 2006 and 2005, 14,166 and
      76,834  options,  respectively,  previously  granted  under the 2000 Stock
      Incentive Plan expired and were available to be reissued. During the three
      month period ended September 30, 2006, no options were issued.  During the
      three month period ended  September  30, 2005,  8,500 options were issued.
      During  the six month  periods  ended  September  30,  2006 and 2005,  the
      Company issued 56,000 and 38,500 options, respectively, to purchase shares
      of common stock. Additionally,  the Company granted 5,000 restricted stock
      awards  during  the six month  period  ended  September  30,  2006.  As of
      September  30, 2006,  there were a total of 715,249  shares  available for
      grant.  The  purchase  price of shares  must be at least equal to the fair
      market  value of the common  stock on the date of grant,  and the  maximum
      term of an option is 10 years.  The options  generally  vest over  periods
      ranging from 0 to 4 years.  During the three month period ended  September
      30, 2006,  19,342 options were exercised on a cashless basis  resulting in
      18,000 common shares being issued,  while for the three month period ended
      September  30, 2005,  18,744  options were  exercised on a cashless  basis
      resulting in 18,000  common  shares  being issued and 16,028  options were
      exercised  with an exercise  price of $2.55.  During the six month  period
      ended  September  30, 2006,  51,605  options were  exercised on a cashless
      basis  resulting in 48,349 common  shares being issued,  while for the six
      month period ended September 30, 2005,  18,744 options were exercised on a
      cashless  basis  resulting in 18,000 common shares being issued and 26,928
      options were exercised with an exercise price of $2.55.


The following table summarizes information about stock options outstanding as of
September 30, 2006 and changes during the six months then ended:


<TABLE>
<CAPTION>
                                      Options Outstanding                             Options Exercisable
                                          Weighted                                           Weighted
                                          Average         Weighted                           Average
                                         Remaining        Average                           Remaining         Weighted
                          Shares        Contractual       Exercise         Shares          Contractual        Average
                          Outstanding    Life-Years        Price         Exercisable        Life-Years     Exercise Price
<S>                        <C>              <C>             <C>           <C>                 <C>              <C>
April 1, 2006              1,554,380        5.75            $9.25         1,115,167           5.75             $9.56
Granted                       56,000                         7.35
Exercised (aggregate
   intrinsic value was
   $342,101 ).......

                            (51,605)                         0.47
Lapsed                      (14,166)                         9.72
                        ------------ ----------------- ---------- ----------------- -------------------- -----------
September 30, 2006         1,544,609        5.94            $9.47         1,192,023           5.83             $9.85
                        ============ ================= ========== ================= ==================== ===========
</TABLE>


                                     - 16 -
<PAGE>


      The aggregate  intrinsic  value of options  outstanding and exercisable at
      September  30, 2006 was  approximately  $788,000.  The total  unrecognized
      compensation  cost  related  to  all  share-based  compensation  plans  at
      September 30, 2006 amounted to approximately $1,901,000 and is expected to
      be recognized over the next twenty one months.

      On April 1, 2006,  the company  adopted the  provisions  of  Statement  of
      Financial   Accounting   Standards   ("SFAS")  no.  123  (revised   2004),
      "Share-Based  Payment,"  which requires that the fair value of share-based
      awards be  recorded  in the  results  of  operations.  Under  the  revised
      standard,  awards  issued  prior to 2007 are charged to expense  under the
      prior rules, and awards issued after 2006 are charged to expense under the
      revised rules. Total non-cash  compensation expense charged against income
      in  the  three  and  six  month  periods  ended  September  30,  2006  for
      share-based   plans  totaled   approximately   $557,000  and   $1,162,000,
      respectively.  Through March 31, 2006, the Company  measured  compensation
      cost  using  the  intrinsic  value-based  method of  accounting  for stock
      options granted to employees and directors.  The Company used the modified
      prospective method of adoption.  Under this method, prior years' financial
      results do not include the impact of recording  stock  options  using fair
      value.  Had  compensation  cost been determined using the fair value-based
      accounting  method in the three and six month periods ended  September 30,
      2005,  pro forma net income and earnings per share  ("EPS")  amounts would
      have been as follows:





                                     - 17 -
<PAGE>


<TABLE>
<CAPTION>
                                                  Three Months Ended         Six Months Ended
                                                    September 30,             September 30,
                                                 ----------------           -----------------
                                                      2005                        2005
<S>                                                  <C>                        <C>

Net loss attributable to common shareholders -
  as reported                                        $(5,183,598)               $ (8,767,733)

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                             (1,035,536)                 (2,028,907)
                                                      -----------                 -----------

Net loss attributable to common stockholders -
  pro forma                                          $(6,219,134)              $ (10,796,640)
                                                     =============             ==============

Basic and diluted net loss per share attributable
  to common stockholders - as reported               $     (0.45)              $       (0.76)
                                                     ===========               =============

Basic and diluted net loss per share attributable
  to common stockholders - pro forma                 $     (0.54)              $       (0.94)
                                                     ===========               =============
</TABLE>



      The  weighted  average  fair  value of an option  granted in the six month
      periods  ended   September  30,  2006  and  2005  was  $7.35  and  $11.64,
      respectively.  The fair value of an option grant was  estimated  using the
      Black-Scholes option pricing model with the following assumptions:

                                               Six Months Ended September 30,

                                                        2006    2005

      Risk free interest rate                           4.89%   4.14%
      Average life of options (years)                   6.0     10.0
      Volatility                                        69%     92%
      Dividend yield                                    -0-     -0-



      The average risk-free interest rate is based on the U.S. Treasury security
      rate in effect over the estimated life of the grant date. The average life
      of the  options is based upon  historical  data.  The  Company  determined
      expected  volatility  in the  Black-Scholes  model  based  upon  two  year
      historical  data at the  end of  each  month  for  the  six  months  ended
      September 30, 2005,  and implied  volatility  based upon  exchange  traded
      options for the Company's  common stock for the six months ended September
      30, 2006.  Implied volatility better reflects future market conditions and
      better indicates  expected  volatility than purely historical  volatility.
      There is no dividend yield.



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


                                     - 18 -
<PAGE>


      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 UNC-CH, Georgia State University, Duke University and Auburn University
      pursuant  to an  agreement,  dated  January  15,  1997  (as  amended,  the
      "Consortium  Agreement")  among the Company,  UNC-CH and a third-party (to
      which  each of the other  members  of the  scientific  consortium  shortly
      thereafter  joined) (the "original  licensee").  The Consortium  Agreement
      commits  the  parties  to  collectively  research,  develop,  finance  the
      research and  development  of,  manufacture and market both the technology
      and compounds owned by the scientific  consortium and previously  licensed
      or  optioned  to the  original  licensee  and  licensed  to the Company in
      accordance with the Consortium  Agreement (the "Current  Compounds"),  and
      all technology and compounds developed by the 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").

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

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

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

      As  contemplated  by the  Consortium  Agreement,  on January 28, 2002, the
      Company  entered into a License  Agreement with the Scientific  Consortium
      whereby the Company received the exclusive  license to  commercialize  the
      aromatic cation technology platform and compounds developed or invented by
      one or more of the 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-CH on behalf of the Scientific Consortium  reimbursement of patent and
      patent-related fees, certain milestone payments and royalty payments based
      on  revenue  derived  from the  Scientific  Consortium's  aromatic  cation
      technology  platform.  Each month on behalf of the  inventor  scientist or
      university,  as the case may be, UNC-CH  submits an invoice to the Company
      for payment of patent-related  fees related to


                                     - 19 -
<PAGE>


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

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

      During the three and six month  periods  ended  September  30,  2006,  the
      Company expensed  approximately  $393,000 and $635,000,  respectively,  of
      other  payments  to  UNC-CH  and  certain  other   Scientific   Consortium
      universities for patent related costs and other contracted  research.  For
      the  corresponding  periods ended September 30, 2005, the Company expensed
      approximately  $255,000 and $466,000,  respectively.  Included in accounts
      payable as of September  30, 2006 and March 31, 2006,  were  approximately
      $311,000,  and  $601,000,  respectively,  due to UNC-CH and certain  other
      Scientific Consortium universities.

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

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

      During the three and six months ended  September  30, 2006,  approximately
      $379,000 and  $1,208,000  was utilized for clinical and research  purposes
      conducted  and  expensed,  respectively.  During  the three and six months
      ended  September  30,  2005,  approximately  $846,000 and  $1,698,000  was
      utilized  for  clinical  and research  purposes  conducted  and  expensed,
      respectively.   The  Company  has  recognized  revenues  of  approximately
      $379,000 and  $2,138,000  during the three and six months ended  September
      30,  2006,   respectively.   The  Company  has   recognized   revenues  of
      approximately  $17,000 and $869,000  during the three and six months ended
      September  30, 2005,



                                     - 20 -
<PAGE>


      respectively.   The  remaining  amount  (approximately  $3,511,000  as  of
      September  30, 2006) has been  deferred and will be  recognized as revenue
      over the term of the agreement as the services are performed.

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

      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  pafuramidine  to treat
      malaria.  In return  for MMV's  funding,  the  Company is  required,  when
      selling  malaria drugs  derived from this  research into  "malaria-endemic
      countries,"  as  defined,  to sell such  drugs at  affordable  prices.  An
      affordable  price is defined in the 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-CH 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 has received  approximately
      $5,636,000 under this contract.

      The Company  recognized  revenues of  approximately  $112,000 and $294,000
      during  the  three  and  six  month  periods  ended  September  30,  2006,
      respectively, for expenses incurred related to activities within the scope
      of the Testing  Agreement.  For the corresponding  periods ended September
      30,  2005,  the  recognized  revenues  were  approximately   $819,000  and
      $869,000,  respectively,  and  expenses  were  approximately  $961,000 and
      $1,446,000,   respectively.   At  September  30,  2006,  the  Company  has
      approximately  $101,000  recorded as deferred revenue with respect to this
      agreement.





5.    NEUROCHEM ARBITRATION


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




                                   * * * * * *


                                     - 21 -
<PAGE>


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

Forward Looking Statements
--------------------------

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

Results of Operations
---------------------

With the exception of certain research funding agreements and certain grants, we
have not generated any revenue from  operations.  For the period from  inception
(October 15, 1984) to September 30, 2006, we incurred  cumulative  net losses of
approximately  $89,170,000.  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     proceeds from 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
results  of  operations  for any  period  may be  unrelated  to the  results  of
operations for any other period.



                                     - 22 -
<PAGE>


Three Month Period Ended September 30, 2006 Compared with the Three Month Period
Ended September 30, 2005.

Revenues  under   collaborative   research  and   development   agreements  were
approximately  $491,000 and $880,000 for the three month periods ended September
30, 2006 and September 30, 2005, respectively.  For the three month period ended
September 30, 2006, we recognized revenues of approximately  $379,000 related to
a clinical research subcontract agreement between us and The University of North
Carolina at Chapel Hill ("UNC-CH") and approximately $112,000 related to a grant
from  Medicines  for  Malaria  Venture  ("MMV")  to fund  clinical  studies  and
licensure of DB289 for treatment of malaria  which has since  lapsed,  while for
the three  month  period  ended  September  30,  2005,  revenues  recognized  of
approximately  $17,000 related to the  abovementioned  UNC-CH clinical  research
subcontract and $819,000 related to the  abovementioned  MMV grant for treatment
of malaria.

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

Interest  income  for the  three  month  period  ended  September  30,  2006 was
approximately  $132,000.  Interest  income  during the three month  period ended
September 30, 2005 was approximately  $43,000.  The increase is primarily due to
an increase in funds invested from the prior corresponding  quarter.  There were
no interest expenses during the three month periods ended September 30, 2006 and
September 30, 2005.

Research and development  expenses  decreased to  approximately  $1,755,000 from
$2,672,000  for the three month periods  ended  September 30, 2006 and September
30, 2005,  respectively.  Expenses relating to the MMV testing agreement and the
UNC-CH  subcontract,  respectively,  decreased from  approximately  $961,000 and
$846,000 in the three month period  ended  September  30, 2005 to  approximately
$112,000  and  $379,000 in the three month  period  ended  September  30,  2006.
Additionally, contract services relating to trials for treatment of pneumocystis
pneumonia increased from approximately $557,000 to approximately $632,000 in the
same periods.  Non-cash options expense under research and development increased
from approximately  $8,000 in the three month period ended September 30, 2005 to
approximately  $174,000 in the three month  period  ended  September  30,  2006.
Adopting SFAS 123(R) accounted for approximately $142,000 of the $174,000 in the
three month period ended  September  30, 2006.  Other  research and  development
expenses  increased  approximately  $158,000  from the three month  period ended
September 30, 2005 to the three month period ended September 30, 2006.

General and administrative  expenses decreased to approximately  $2,364,000 from
approximately  $3,329,000  during the three month  periods  ended  September 30,
2006,  and  September  30, 2005,  respectively.  The decrease was largely due to
decreased legal fees, primarily concerning legal proceedings with Neurochem (see
Part II, Item 1), which  decreased  from  approximately  $1,975,000 in the three
month period ended  September 30, 2005, to  approximately  $137,000 in the three
month period ended  September  30, 2006.  Patent fees  increased  over the three
month periods ended September 30, 2005 and 2006,  with charges of  approximately
$138,000  and  $343,000,  respectively.  Payroll  and  related  costs  increased
slightly from  approximately  $333,000 in the three month period ended September
30, 2005 to approximately $348,000 in the three month period ended September 30,
2006. Non-cash general and administrative expenses increased from nothing in the
three month period ended  September  30, 2005 to  approximately  $383,000 in the
three month period ended September 30, 2006. Adopting SFAS 123 (R)


                                     - 23 -
<PAGE>


accounted for  approximately  $346,000 of the $383,000 in the three month period
ended September 30, 2006.  Other general and  administrative  costs increased by
approximately $270,000 over the same periods.

Our net loss decreased to approximately $1,621,000 from approximately $5,079,000
during the three month periods ended  September 30, 2006 and September 30, 2005,
respectively.  The decrease was primarily  attributable to the decrease in legal
costs and the other  receivable  (see  Note 5)  offset by the  adoption  of SFAS
123(R).

Six Month Period Ended  September  30, 2006  Compared  with the Six Month Period
Ended September 30, 2005.

Revenues  under   collaborative   research  and   development   agreements  were
approximately  $2,433,000  and  $2,358,000  for  the  six  month  periods  ended
September  30, 2006 and  September  30,  2005,  respectively.  For the six month
period  ended  September  30,  2006,  we  recognized  revenues of  approximately
$2,139,000 related to a clinical research  subcontract  agreement between us and
UNC-CH and  approximately  $294,000 related to a grant from MMV to fund clinical
studies and  licensure of DB289 for treatment of malaria which has since lapsed,
while for the six month period ended September 30, 2005,  revenues recognized of
approximately  $869,000 related to the  abovementioned  UNC-CH clinical research
subcontract and $1,446,000 related to the abovementioned MMV grant for treatment
of malaria.

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

Interest  income  for  the  six  month  period  ended  September  30,  2006  was
approximately  $283,000.  Interest  income  during  the six month  period  ended
September 30, 2005 was approximately  $101,000. The increase is primarily due to
an increase in funds  invested  from the prior  corresponding  six month period.
There were no interest expenses during the six month periods ended September 30,
2006 and September 30, 2005.

Research and development  expenses  decreased to  approximately  $4,224,000 from
$4,941,000 for the six month periods ended  September 30, 2006 and September 30,
2005,  respectively.  Expenses  relating  to the MMV testing  agreement  and the
UNC-CH subcontract,  respectively,  decreased from approximately  $1,588,000 and
$1,698,000  in the six month period ended  September  30, 2005 to  approximately
$294,000  and   $1,208,000  in  the  six  month  period  ended  June  30,  2006.
Additionally, contract services relating to trials for treatment of pneumocystis
pneumonia increased from approximately  $942,000 to approximately  $1,758,000 in
the same  periods.  Non-cash  options  expense  under  research and  development
increased from approximately $19,000 in the six month period ended September 30,
2005 to approximately $351,000 in the six month period ended September 30, 2006.
Adopting SFAS 123(R) accounted for approximately $285,000 of the $351,000 in the
six month  period  ended  September  30, 2006.  Other  research and  development
expenses  decreased  approximately  $81,000  from  the six  month  period  ended
September 30, 2005 to the six month period ended September 30, 2006.

General and administrative  expenses decreased to approximately  $4,584,000 from
approximately  $6,062,000 during the six month periods ended September 30, 2006,
and September 30, 2005, respectively.  The decrease was largely due to decreased
legal fees,  primarily concerning legal proceedings with Neurochem (see Part II,
Item 1), which decreased from  approximately  $3,375,000 in the six month period
ended  September  30, 2005,  to  approximately  $318,000 in the six month period
ended


                                     - 24 -
<PAGE>


September  30, 2006.  Patent fees  increased  over the six month  periods  ended
September  30,  2005 and  2006,  with  charges  of  approximately  $303,000  and
$506,000,  respectively.  Payroll and  related  costs also  remained  relatively
constant having  increased from  approximately  $724,000 in the six month period
ended September 30, 2005 to approximately $731,000 in the six month period ended
September 30, 2006. Non-cash general and administrative  expenses increased from
approximately  $26,000  in the six month  period  ended  September  30,  2005 to
approximately  $882,000 in the three month period ended June 30, 2006.  Adopting
SFAS 123 (R)  accounted  for  approximately  $759,000 of the $882,000 in the six
month period ended September 30, 2006.  Other general and  administrative  costs
which were primarily  commercial  development  costs increased by  approximately
$513,000 over the same periods.

Our net loss decreased to approximately $4,218,000 from approximately $8,544,000
during the six month  periods  ended  September 30, 2006 and September 30, 2005,
respectively.  The decrease was primarily  attributable to the decrease in legal
costs and the other  receivable  (see  Note 5)  offset by the  adoption  of SFAS
123(R).

Liquidity and Capital Resources

As  of  September  30,  2006,  cash  and  cash  equivalents  were  approximately
$8,538,000.

We spent approximately $6,000 and $40,000,  respectively, on equipment purchases
during the three and six month  periods ended  September  30, 2006,  compared to
$26,000 and $50,000 for  equipment  expenditures  during the same periods in the
previous  year.  No  significant  purchases of equipment are  anticipated  by us
during the year ending March 31, 2007.

We  periodically  receive  cash from the  exercise of common  stock  options and
warrants.  During the three month period ended  September  30, 2006, we received
$30,000  for the  exercise of  warrants.  During the three  month  period  ended
September  30,  2005,  we received  approximately  $41,000  from the exercise of
options.

We believe our existing unrestricted cash and cash equivalents and the grants we
have  received or have been  awarded and are awaiting  disbursement  of, will be
sufficient  to meet our planned  expenditures  through at least  November  2007,
although there can be no assurance we will not require additional funds.

Through September 30, 2006, we financed our operations with:

      o     proceeds  from  various  private   placements  of  debt  and  equity
            securities,  an initial public offering,  and other cash contributed
            from  stockholders,  which  in the  aggregate  raised  approximately
            $70,119,000;

      o     payments from research agreements, foundation grants and SBIR grants
            and STTR program grants of approximately $23,198,000; and

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

Our  cash   resources   have   been   used  to   finance,   develop   and  begin
commercialization  of drug product  candidates,  including  sponsored  research,
conduct of human clinical trials, capital expenditures, expenses associated with
development of product  candidates  pursuant to an agreement,  dated January 15,
1997, (the "Consortium  Agreement"),  among us and UNC-CH (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-CH,  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


                                     - 25 -
<PAGE>


the Consortium,  and general and administrative  expenses. Over the next several
years we expect to incur substantial  additional research and development costs,
including  costs  related to research  in  pre-clinical  (laboratory)  and human
clinical trials, administrative expenses to support our research and development
operations  and  marketing  expenses  to launch  the sale of any  commercialized
product that may be developed.

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

Management's  plans for the  remainder of the fiscal year, in addition to normal
operations,  include  continuing their efforts to create joint ventures,  obtain
additional  grants and to develop and enter into  research,  development  and/or
commercialization  agreements  with others.  Subject to  management's  strategic
development  plan,  we are going to  continue  our  efforts to raise  additional
capital.

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

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

        Item 4.  Controls and Procedures.
                 -----------------------

Disclosures and Procedures

We  maintain  controls  and  procedures  designed  to ensure that we are able to
collect the  information we are required to disclose in the reports we file with
the 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  Officer and Chief Financial
Officer  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: (1)  transactions  are executed in accordance with  management's
general or specific authorization and (2) transactions are recorded as necessary
to (a) permit  preparation of financial  statements in conformity with generally
accepted  accounting  principles  and (ii) maintain  accountability  for assets.
Access to assets is permitted only in accordance  with  management's  general or
specific  authorization and the recorded  accountability



                                     - 26 -
<PAGE>


for assets is compared  with the existing  assets at  reasonable  intervals  and
appropriate action is taken with respect to any differences.

Changes in Internal Controls

We have not made any  material  changes in our internal  control over  financial
reporting  during the quarter  ended  September  30,  2006 that have  materially
affected,  or are reasonably likely to materially  affect,  our internal control
over financial reporting.

                           PART II. OTHER INFORMATION

        Item 1.  Legal Proceedings.
                 -----------------

Immtech International, Inc., et al. v. Neurochem, Inc., et al.


On August  12,  2003,  the  Company  filed a  lawsuit  against  Neurochem,  Inc.
("Neurochem")  alleging  that  Neurochem  misappropriated  the  Company's  trade
secrets  by  filing  a series  of  patent  applications  relating  to  compounds
synthesized and developed by the scientific  consortium with whom Immtech has an
exclusive licensing  agreement.  The misappropriated  intellectual  property was
provided to  Neurochem  pursuant to a testing  agreement  under which  Neurochem
agreed to test the compounds to determine if they could be successfully  used to
treat amyloid diseases. Pursuant to the terms of the agreement, Neurochem agreed
to keep all information confidential, not to disclose or exploit the information
without  Immtech's prior written consent,  to immediately  advise Immtech if any
invention was discovered and to cooperate with Immtech and its counsel in filing
any patent applications.

Since the filing of the complaint,  Neurochem had aggressively sought to have an
International  Chamber of Commerce ("ICC")  arbitration panel hear this dispute,
as  opposed to the  federal  district  court in which the action was  originally
filed.  The Company  agreed to have a three  member ICC  arbitration  panel (the
"Arbitration  Panel") hear and rule on the dispute on the  expectation  that the
Arbitration  Panel  would  reach a more timely and  economical  resolution.  The
federal  district  court  litigation,  which  included  UNC  and  Georgia  State
University, was stayed pending the Arbitration Panel's award.

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

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

In  October  2003,  Gerhard  Von der Ruhr et al (the "Von der Ruhr  Plaintiffs")
filed a complaint in the United States District Court for the Northern  District
of Illinois against the Company and certain officers and directors.  The Von der
Ruhr Plaintiff's complaint alleged that (i) the Company refused to authorize the
Company's  transfer  agent to  remove  the  restrictive  legends  from the stock
certificates of the Von der Ruhr  Plaintiffs,  (ii) the Company refused to honor
the Von der Ruhr  Plaintiffs'  exercise of certain  stock  options and (iii) the
Company refused to honor an agreement regarding certain technology.  The Von der
Ruhr Plaintiffs also allege that certain officers and directors  interfered with
the Von der Ruhr  Plaintiffs'  contracts with the Company.  The complaint sought
unspecified  monetary  damages and  punitive  damages,



                                     - 27 -
<PAGE>



in addition to equitable  relief and costs.  In a filing made in late  February,
2005,  the Von der Ruhr  Plaintiffs  specified  damages of  approximately  $44.5
million in damages, which includes $42 million related to the alleged technology
agreement  claim  (the  "Technology  Claim"),  which  the  Company  believes  is
meritless.  In  2005,  one of the  counts  in the case  was  dismissed  upon the
Company's motion for summary  judgment.  The Company has filed pre-trial motions
regarding the evidence to be  introduced  at the trial of the remaining  counts,
including a motion to preclude  disclosure of evidence of Von der Ruhr's alleged
damages. On September 21, 2006, the Court issued an Order granting the Company's
motion to exclude  certain  evidence  relating  to damages.  The Court's  ruling
effectively  precludes plaintiffs from seeking any monetary damages with respect
to the $42 million Technology Claim. At the Court's instruction,  on October 16,
2006, defendants filed a Motion to Dismiss, or in the alternative,  to Sever the
Technology  Claim.  Plaintiffs  have until November 16, 2006 to file a response,
and the Company has until December 5, 2006 to file a reply brief.

        Item 1A. Risk Factors
                 ------------

There are no material changes in risk factors previously disclosed in Item 1A to
Part I of our Form  10-K for the  fiscal  year  ended  March 31,  2006.

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

Recent Sales of Unregistered Securities.
----------------------------------------

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

Option Exercise

On July 20, 2006,  options to purchase  19,342 shares with an exercise  price of
$0.47 per share were exercised on a cashless basis.  Common shares in the amount
of 18,000 were issued.

Warrant Exercise

On July 31, 2006,  warrants to purchase  5,000 shares with an exercise  price of
$6.00 per share were exercised, resulting in proceeds to the Company of $30,000.

Conversion of Preferred Stock to Common Stock.

During July 2006 a holder of Series A  Convertible  Preferred  Stock,  $0.01 par
value  ("Series E Stock")  converted  an  aggregate  of 2,400 shares of Series A
Preferred Stock into an aggregate of 13,690 shares of our common stock.

Preferred Stock Dividend Payment.

On October 15,  2006,  we issued  51,354  shares of common stock as payment of a
dividend earned on outstanding  preferred stock to the holders thereof:  holders
of Series A Stock  earned  7,929  shares of common  stock on 56,000  outstanding
shares;  holders of Series B Stock earned 2,542 shares of common stock on 13,464
outstanding  shares;  holders of Series C Stock  earned  8,602  shares of common
stock on 45,536  outstanding  shares;  holders of Series D Stock  earned  16,611
shares of common stock on 117,200  outstanding  shares;  and holders of Series E
Stock earned 15,670  shares of common stock on 110,600  outstanding  shares.  We
also paid  holders of our  outstanding  preferred  stock $367 in cash in lieu of
fractional shares.


                                     - 28 -
<PAGE>


        Item 3.  Defaults Upon Senior Securities.
                 -------------------------------
None

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

None

        Item 5.  Other Information.
                 -----------------

None

        Item 6.  Exhibits.
                 --------

Exhibits
--------


                                     - 29 -
<PAGE>



                                  Exhibit Index
                                  -------------



         3.1 (5)        Amended and Restated Certificate of Incorporation of the
                        Company, dated June 14, 2004

         3.2 (6)        Certificate    of   Correction   to    Certificate    of
                        Incorporation dated December 14, 2005.

         3.3 (7)        Certificate of Amendment (Name Change) to Certificate of
                        Incorporation dated March 22, 2006.

         3.4 (1)        Certificate  of  Designation  for  Series A  Convertible
                        Preferred  Stock Private  Placement,  dated February 14,
                        2002

         3.5 (2)        Certificate  of  Designation  for  Series B  Convertible
                        Preferred Stock Private  Placement,  dated September 25,
                        2002

         3.6 (3)        Certificate  of  Designation  for  Series C  Convertible
                        Preferred Stock Private Placement, dated June 6, 2003

         3.7 (4)        Certificate  of  Designation  for  Series D  Convertible
                        Preferred  Stock  Private  Placement,  dated January 15,
                        2004

         3.8 (6)        Certificate  of  Designation  for  Series E  Convertible
                        Preferred  Stock Private  Placement,  dated December 13,
                        2005

         3.9 (7)        Amended and Restated Bylaws of the Company  effective as
                        of March 22, 2006.

         10.44 (8)      Form of Incentive Stock Option Agreement

         10.45 (8)      Form of Non-qualified Stock Option Agreement

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

         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


                                     - 30 -
<PAGE>



(1)  Incorporated  by Reference to our Form 8-K (File No.  001-14907),  as filed
     with the Securities and Exchange Commission on February 14, 2002.

(2)  Incorporated  by Reference to our Form 8-K (File No.  001-14907),  as filed
     with the Securities and Exchange Commission on September 25, 2002.

(3)  Incorporated  by Reference to our Form 8-K (File No.  001-14907),  as filed
     with the Securities and Exchange Commission on June 10, 2003.

(4)  Incorporated  by Reference to our Form 8-K (File No.  001-14907),  as filed
     with the Securities and Exchange Commission on January 21, 2004.

(5)  Incorporated by Reference to our Form 10-K (File No.  001-14907),  as filed
     with the Securities and Exchange Commission on June 14, 2004.

(6)  Incorporated  by Reference to our Form 8-K (File No.  001-14907),  as filed
     with the Securities and Exchange Commission on December 14, 2005.

(7)  Incorporated  by Reference to our Form 8-K (File No.  001-14907),  as filed
     with the Securities and Exchange Commission on March 23, 2006.

(8)  Incorporated  by  Reference to our Form 8-K (File no.  001-14907)  as filed
     with the Securities Exchange Commission on October 16, 2006.


                                     - 31 -
<PAGE>


                                   SIGNATURES

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


                          IMMTECH PHARMACEUTICALS, INC.



Date:  November 9, 2006          By:   /s/ Eric L. Sorkin
                                       ------------------
                                       Eric L. Sorkin
                                       President and Chief Executive Officer



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