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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 JUNE 30, 2006

OR



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

Commission File Number: 0-19410

POINT THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Its Charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 04-3216862                         
|(State or Other Jurisdiction ofIncorporation or Organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|155 FEDERAL STREET, BOSTON, MA                                |  | 02110                              
|(Address of Principal Executive Offices)                      |  | (Zip Code)                         

(617) 933-2130

Registrants Telephone Number, Including Area Code

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

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

Large accelerated filer ̈Accelerated filer  x             Non-accelerated
filer ̈

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

As of August 4, 2006, there were 32,764,059
shares of the Registrants Common Stock, $0.01 par value per share, outstanding.



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POINT THERAPEUTICS, INC. AND SUBSIDIARIES

(A Development Stage Company)

QUARTERLY REPORT ON FORM 10-Q

INDEX



|                              |  |                                                                                                                                                                                            |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                                                                           
|                              |  |                                                                                                                                                                                           
|Item 1.                       |  | Financial Statements (unaudited)                                                                                                                                                           |  |   
|                              |  |                                                                                                                                                                                           
|                              |  | Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005                                                                                                                      |  | 3 
|                              |  |                                                                                                                                                                                           
|                              |  | Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 2006 and 2005 and for the Period From September 3, 1996 (Date of Inception) Through June 30, 2006 |  | 4 
|                              |  |                                                                                                                                                                                           
|                              |  | Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2006 and 2005 and for the Period From September 3, 1996 (Date of Inception) Through June 30, 2006           |  | 5 
|                              |  |                                                                                                                                                                                           
|                              |  | Notes to Consolidated Financial Statements                                                                                                                                                 |  | 6 
|                              |  |                                                                                                                                                                                           
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                      |  | 11
|                              |  |                                                                                                                                                                                           
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                 |  | 19
|                              |  |                                                                                                                                                                                           
|Item 4.                       |  | Controls and Procedures                                                                                                                                                                    |  | 19
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                                                                           
|                              |  |                                                                                                                                                                                           
|Item 1A.                      |  | Risk Factors                                                                                                                                                                               |  | 20
|                              |  |                                                                                                                                                                                           
|Item 4.                       |  | Submission of Matter to a Vote of Security Holders                                                                                                                                         |  | 28
|                              |  |                                                                                                                                                                                           
|Item 6.                       |  | Exhibits                                                                                                                                                                                   |  | 28
|                              | 
|SIGNATURES                    |  | 29                                                                                                                                                                                        

In this report, Point, the Company, we, us and
our refer to Point Therapeutics, Inc. and Subsidiaries.



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PART I. FINANCIAL INFORMATION



|Item 1. | FINANCIAL STATEMENTS
|------- | --------------------

POINT THERAPEUTICS, INC.
AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

(unaudited)



|                                                                                                                                                                                                                                                                   |  |              |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                                                                                                   |  | June 30,2006 |             |   | December 31,2005 |  
|Assets                                                                                                                                                                                                                                                             |  |              |             |   |                  |   |             |  
|Current assets:                                                                                                                                                                                                                                                    |  |              |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                                                                                                          |  | $            | 22,822,726  |   |                  | $ | 37,328,396  |  
|Cash and cash equivalentsrestricted                                                                                                                                                                                                                               |  |              | 300,000     |   |                  |   | 305,834     |  
|Unbilled receivable                                                                                                                                                                                                                                                |  |              |            |   |                  |   | 161,205     |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                          |  |              | 2,105,157   |   |                  |   | 1,417,235   |  
|                                                                                                                                                                                                                                                                   |  |              |             |   |                  |   |             |  
|Total current assets                                                                                                                                                                                                                                               |  |              | 25,227,883  |   |                  |   | 39,212,670  |  
|Property and equipment, net                                                                                                                                                                                                                                        |  |              | 294,358     |   |                  |   | 344,432     |  
|Deposits and other assets                                                                                                                                                                                                                                          |  |              | 339,531     |   |                  |   | 843,497     |  
|                                                                                                                                                                                                                                                                   |  |              |             |   |                  |   |             |  
|Total assets                                                                                                                                                                                                                                                       |  | $            | 25,861,772  |   |                  | $ | 40,400,599  |  
|                                                                                                                                                                                                                                                                   |  |              |             |   |                  |   |             |  
|                                                                                                                                                                                                                                                                   |  |             
|Liabilities and stockholders equity                                                                                                                                                                                                                               |  |              |             |   |                  |   |             |  
|Current liabilities:                                                                                                                                                                                                                                               |  |              |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                                                                                                                   |  | $            | 1,337,446   |   |                  | $ | 2,719,319   |  
|Accrued manufacturing and drug development                                                                                                                                                                                                                         |  |              | 1,037,116   |   |                  |   | 1,581,318   |  
|Accrued clinical trial costs                                                                                                                                                                                                                                       |  |              | 1,346,919   |   |                  |   | 913,421     |  
|Accrued expenses                                                                                                                                                                                                                                                   |  |              | 980,735     |   |                  |   | 734,090     |  
|Short-term portion of capital lease                                                                                                                                                                                                                                |  |              | 6,802       |   |                  |   | 6,396       |  
|                                                                                                                                                                                                                                                                   |  |              |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                                                                                                          |  |              | 4,709,018   |   |                  |   | 5,954,544   |  
|Patent liability, less current portion                                                                                                                                                                                                                             |  |              | 36,601      |   |                  |   | 42,364      |  
|Long-term portion of capital lease                                                                                                                                                                                                                                 |  |              | 1,217       |   |                  |   | 4,723       |  
|Stockholders equity:                                                                                                                                                                                                                                              |  |              |             |   |                  |   |             |  
|Preferred stock, $0.01 par value, 1,000,000 shares authorized; no shares issued or outstanding as of June 30, 2006 and December 31,
2005                                                                                                                           |  |              |            |   |                  |   |            |  
|Common stock, $0.01 par value, 75,000,000 shares authorized, 32,982,604 shares issued at June 30, 2006 and 32,970,604 shares issued at
December 31, 2005 and 32,764,059 shares outstanding at June 30, 2006 and 32,752,059 shares outstanding at December 31, 2005 |  |              | 329,826     |   |                  |   | 329,706     |  
|Treasury stock, 218,545 shares at June 30, 2006 and December 31, 2005, at cost                                                                                                                                                                                     |  |              | (978,290    | ) |                  |   | (978,290    | )
|Additional paid-in capital                                                                                                                                                                                                                                         |  |              | 99,334,336  |   |                  |   | 97,415,931  |  
|Deficit accumulated during the development stage                                                                                                                                                                                                                   |  |              | (77,570,936 | ) |                  |   | (62,368,379 | )
|                                                                                                                                                                                                                                                                   |  |              |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                                                                                                         |  |              | 21,114,936  |   |                  |   | 34,398,968  |  
|                                                                                                                                                                                                                                                                   |  |              |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                         |  | $            | 25,861,772  |   |                  | $ | 40,400,599  |  
|                                                                                                                                                                                                                                                                   |  |              |             |   |                  |   |             |  

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



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POINT THERAPEUTICS, INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                                   |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|-------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------ | - | ---------- | -------------------------------------------------------------------- |  | - | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                   |  | Three months endedJune 30, |            |   | Six months endedJune 30, |   |            | Period
fromSeptember 3, 1996(date of inception)through June 30, 2006 | 
|                                                   |  | 2006                       |            |   | 2005                     |   |            | 2006                                                                 |  |   | 2005        |   | 
|Revenues                                           |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|License revenue                                    |  | $                          |           |   |                          | $ |           |                                                                      |  | $ |            |   |  | $ |            |   |  | $ | 5,115,041   |  
|Sponsored research revenue                         |  |                            |           |   |                          |   |           |                                                                      |  |   | 138,795     |   |  |   |            |   |  |   | 2,700,000   |  
|                                                   |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Total revenues                                     |  |                            |           |   |                          |   |           |                                                                      |  |   | 138,795     |   |  |   |            |   |  |   | 7,815,041   |  
|                                                   |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Operating expenses                                 |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Research and development                           |  |                            | 5,934,937  |   |                          |   | 4,060,603  |                                                                      |  |   | 12,253,300  |   |  |   | 7,613,587   |   |  |   | 62,722,958  |  
|General and administrative                         |  |                            | 1,712,555  |   |                          |   | 1,227,307  |                                                                      |  |   | 3,730,952   |   |  |   | 2,670,939   |   |  |   | 24,968,759  |  
|                                                   |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Total operating expenses                           |  |                            | 7,647,492  |   |                          |   | 5,287,910  |                                                                      |  |   | 15,984,252  |   |  |   | 10,284,526  |   |  |   | 87,691,717  |  
|                                                   |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Net loss from operations                           |  |                            | (7,647,492 | ) |                          |   | (5,287,910 | )                                                                    |  |   | (15,845,457 | ) |  |   | (10,284,526 | ) |  |   | (79,876,676 | )
|                                                   |  |                            |            |   |                         
|Other income and expense                           |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Interest income                                    |  |                            | 301,548    |   |                          |   | 144,631    |                                                                      |  |   | 642,900     |   |  |   | 225,902     |   |  |   | 2,388,392   |  
|Interest expense                                   |  |                            |           |   |                          |   |           |                                                                      |  |   |            |   |  |   |            |   |  |   | (82,652     | )
|                                                   |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Total other income, net                            |  |                            | 301,548    |   |                          |   | 144,631    |                                                                      |  |   | 642,900     |   |  |   | 225,902     |   |  |   | 2,305,740   |  
|                                                   |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Net loss                                           |  | $                          | (7,345,944 | ) |                          | $ | (5,143,279 | )                                                                    |  | $ | (15,202,557 | ) |  | $ | (10,058,624 | ) |  | $ | (77,570,936 | )
|                                                   |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Net loss per common share                          |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Basic and diluted                                  |  | $                          | (0.22      | ) |                          | $ | (0.23      | )                                                                    |  | $ | (0.46       | ) |  | $ | (0.48       | ) |  |   |             |  
|                                                   |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Shares used in computing net loss per common share |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  
|Basic and diluted                                  |  |                            | 32,763,564 |   |                          |   | 22,456,565 |                                                                      |  |   | 32,759,246  |   |  |   | 20,956,429  |   |  |   |             |  
|                                                   |  |                            |            |   |                          |   |            |                                                                      |  |   |             |   |  |   |             |   |  |   |             |  

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



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POINT THERAPEUTICS, INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                     |  |                          |             |   |                                                             |   |             |   |  |   |             |  
|---------------------------------------------------- |  | ------------------------ | ----------- | - | ----------------------------------------------------------- | - | ----------- | - |  | - | ----------- | -
|                                                     |  | Six months endedJune 30, |             |   | Period
frominception(September 3,1996) throughJune 30, 2006 |  
|                                                     |  | 2006                     |             |   | 2005                                                        |   |            
|Operating activities                                 |  |                          |             |   |                                                             |   |             |   |  |   |             |  
|Net loss                                             |  | $                        | (15,202,557 | ) |                                                             | $ | (10,058,624 | ) |  | $ | (77,570,936 | )
|                                                     |  |                          |            
|Adjustments to reconcile net loss to net cash used:  |  |                          |             |   |                                                             |   |             |   |  |   |             |  
|Depreciation                                         |  |                          | 68,700      |   |                                                             |   | 55,368      |   |  |   | 511,699     |  
|                                                     |  |                          |            
|Stock-based compensation                             |  |                          | 1,124,575   |   |                                                             |   | 144,233     |   |  |   | 2,070,104   |  
|Common stock issued under license agreement          |  |                          |            |   |                                                             |   |            |   |  |   | 910,677     |  
|Accrued interest on convertible notes                |  |                          |            |   |                                                             |   |            |   |  |   | 82,652      |  
|Patent costs                                         |  |                          |            |   |                                                             |   |            |   |  |   | 75,557      |  
|Changes in assets and liabilities:                   |  |                          |             |   |                                                             |   |             |   |  |   |             |  
|Restricted cash                                      |  |                          | 5,834       |   |                                                             |   | (300,000    | ) |  |   | (300,000    | )
|Unbilled accounts receivable                         |  |                          | 161,205     |   |                                                             |   |            |   |  |   |            |  
|Prepaid expenses and other assets                    |  |                          | (183,956    | ) |                                                             |   | (126,522    | ) |  |   | (2,463,965  | )
|Accounts payable and accrued expenses                |  |                          | (1,245,932  | ) |                                                             |   | 1,199,364   |   |  |   | 4,699,772   |  
|                                                     |  |                          |             |   |                                                             |   |             |   |  |   |             |  
|Net cash used in operating activities                |  |                          | (15,272,131 | ) |                                                             |   | (9,086,181  | ) |  |   | (71,984,440 | )
|                                                     |  |                          |            
|Investing activities                                 |  |                          |             |   |                                                             |   |             |   |  |   |             |  
|Purchase of office and laboratory equipment          |  |                          | (26,931     | ) |                                                             |   | (71,504     | ) |  |   | (814,362    | )
|Proceeds from disposal of property and equipment     |  |                          | 8,305       |   |                                                             |   |            |   |  |   | 8,305       |  
|                                                     |  |                          |             |   |                                                             |   |             |   |  |   |             |  
|Net cash used in investing activities                |  |                          | (18,626     | ) |                                                             |   | (71,504     | ) |  |   | (806,057    | )
|                                                     |  |                          |            
|Financing activities                                 |  |                          |             |   |                                                             |   |             |   |  |   |             |  
|Proceeds from issuance of common stock, net          |  |                          |            |   |                                                             |   | 15,031,218  |   |  |   | 73,650,055  |  
|Proceeds from merger between Point and HMSR Inc.     |  |                          |            |   |                                                             |   |            |   |  |   | 14,335,285  |  
|Dividend from HemaSure A/S                           |  |                          | 785,150     |   |                                                             |   |            |   |  |   | 785,150     |  
|Proceeds from issuance of convertible note           |  |                          |            |   |                                                             |   |            |   |  |   | 1,892,904   |  
|Proceeds from warrant exercises                      |  |                          |            |   |                                                             |   | 3,659,255   |   |  |   | 4,512,425   |  
|Proceeds from stock option exercises                 |  |                          | 8,800       |   |                                                             |   | 188,913     |   |  |   | 465,897     |  
|Proceeds from capital lease financing                |  |                          |            |   |                                                             |   |            |   |  |   | 13,082      |  
|Payments on capital leases                           |  |                          | (3,100      | ) |                                                             |   |            |   |  |   | (5,063      | )
|Principal payments of patent liability               |  |                          | (5,763      | ) |                                                             |   | (5,240      | ) |  |   | (36,512     | )
|                                                     |  |                          |             |   |                                                             |   |             |   |  |   |             |  
|Net cash provided by financing activities            |  |                          | 785,087     |   |                                                             |   | 18,874,146  |   |  |   | 95,613,223  |  
|                                                     |  |                          |            
|Net increase (decrease) in cash and cash equivalents |  |                          | (14,505,670 | ) |                                                             |   | 9,716,461   |   |  |   | 22,822,726  |  
|                                                     |  |                          |             |   |                                                             |   |             |   |  |   |             |  
|Cash and cash equivalents, beginning of period       |  |                          | 37,328,396  |   |                                                             |   | 13,905,993  |   |  |   |            |  
|                                                     |  |                          |             |   |                                                             |   |             |   |  |   |             |  
|Cash and cash equivalents, end of period             |  | $                        | 22,822,726  |   |                                                             | $ | 23,622,454  |   |  | $ | 22,822,726  |  
|                                                     |  |                          |             |   |                                                             |   |             |   |  |   |             |  

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



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POINT THERAPEUTICS, INC. AND SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006

(unaudited)



|1. | Nature of the Business
|-- | ----------------------

Point Therapeutics, Inc.
(Point or the Company) is a Boston-based biopharmaceutical company developing a family of dipeptidyl peptidase (DPP) inhibitors for use in cancer, type 2 diabetes and as vaccine adjuvants. Point is currently studying its lead
product candidate, talabostat, in two Phase 3 double blind, placebo-controlled trials in metastatic non-small cell lung cancer (NSCLC), including talabostat in combination with docetaxal and talabostat in combination with pemetrexed. Point is also
studying talabostat in four Phase 2 trials, including as a single-agent in metastatic melanoma, in combination with cisplatin in metastatic melanoma, in combination with rituximab in advanced chronic lymphocytic leukemia (CLL), and in combination
with gemcitabine in metastatic pancreatic cancer.



|2. | Significant Accounting Policies
|-- | -------------------------------

Unaudited Interim Financial
Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting
principles for the complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period
ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.

The
condensed consolidated balance sheet at December 31, 2005 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes
thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2005.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Net Loss Per
Common Share

Basic and diluted net loss per common share amounts are presented in conformity with Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share, for all periods presented. In accordance with SFAS No. 128, basic and diluted net loss per common share amounts have been computed using the weighted-average number of
shares of common stock outstanding for the six-month periods ended June 30, 2006 and 2005. Potentially dilutive securities, consisting of stock options of 5,372,853 and warrants of 2,592,500 outstanding at June 30, 2006 and stock options
of 3,930,731 and warrants of 2,716,944 outstanding at June 30, 2005 have been excluded from the diluted earnings per share calculations since their effect is antidilutive.



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Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based PaymentAn Amendment of FASB Statements No. 123 and 95 (SFAS
No. 123R), which requires all companies to measure compensation cost for all share-based payments, including employee stock options, at fair value. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial
statements based on their fair value over the requisite service period. Pro forma disclosure is no longer an alternative. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107 (SAB
No. 107), which expressed the views of the SEC regarding the interaction between SFAS No. 123R and certain rules and regulations of the SEC. SAB No. 107 provides guidance related to the valuation of share-based payment
arrangements for public companies, including assumptions such as expected volatility and expected term.

Effective January 1, 2006,
the Company adopted the fair value recognition provisions of SFAS No. 123R, using the modified prospective transition method. Under this transition method, compensation cost recognized in the statement of operations for the three and
six-month periods ended June 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123; and (b) compensation cost for all share-based payments granted, modified or settled subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of
SFAS No. 123R. In accordance with the modified prospective transition method, results for prior periods have not been restated.

For the three-month period ended June 30, 2006, the Company recorded non-cash stock-based compensation expense of $572,000 for stock options granted under the Companys stock option plans, of which $273,000 was included in
research and development expenses and $299,000 was included in general and administrative expenses. For the six-month period ended June 30, 2006, the Company recorded non-cash stock-based compensation expense of $1,125,000 for stock options
granted under the Companys stock option plans, of which $516,000 was included in research and development expenses and $609,000 was included in general and administrative expenses. No amounts relating to stock-based compensation have been
capitalized.

The Companys stock option plans allow for the granting of incentive and nonqualified options and awards to purchase
shares of the Companys common stock. Historically, incentive options granted to employees under the Companys stock option plans generally vest over a four-year period, with 25% vesting on each anniversary date of the grant. Nonqualified
options issued to non-employee directors and consultants under the Companys stock option plans generally vest during their period of service with the Company. Options granted under the Companys stock option plans have a maximum term of
ten years from the date of grant. At June 30, 2006, a total of 7,615,976 shares of common stock were approved for issuance under the Companys stock option plans and 1,998,983 shares underlying options were available for future grant under
the Companys stock option plans.

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



|                        |  |         |   |  |      |  
|----------------------- |  | ------- | - |  | ---- | -
|                        |  | 2006    |   |  | 2005 |  
|Expected term (years)   |  | 4.0     |   |  | 4.0  |  
|Volatility              |  | 6793   | % |  | 93   | %
|Risk-free interest rate |  | 4.35.1 | % |  | 3.8  | %
|Expected dividend yield |  |        |   |  |     |  

Expected termThe expected term of options granted represents the period of time for
which the options are expected to be outstanding and is derived from the Companys stock option exercise experience and option



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expiration data. The Company believes that this is currently the best estimate of the expected term of a new option. In addition, for purposes of
estimating the expected term, the Company has aggregated all individual option awards into one group as the Company does not expect substantial differences in exercise behavior among its employees.

Expected volatilityThe expected volatility is a measure of the amount by which the Companys stock price is expected to fluctuate
during the expected term of options granted. The Company determines the expected volatility based upon the historical volatility of the Companys common stock over a period commensurate with the options expected term, as
adjusted. The Company also reviewed the volatility of other similar stage companies in the biotechnology industry.

Risk-free
interest rateThe risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the options expected term on the grant date.

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

The Company recognizes compensation expense on a straight-line basis over the requisite service period based upon options that are ultimately expected to vest, and accordingly, such compensation expense has been
adjusted by an amount of estimated forfeitures. Forfeitures represent only the unvested portion of a surrendered option. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Prior to the adoption of SFAS No. 123R, the Company accounted for forfeitures upon occurrence as permitted under SFAS No. 123. Based on an analysis of historical data, the
Company has calculated a 2.56 annual forfeiture rate, which it believes is a reasonable assumption to estimate forfeitures. However, the estimation of forfeitures requires significant judgment, and to the extent actual results or updated estimates
differ from the Companys current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.

The weighted average per share fair value of stock options granted under the Companys stock option plans during the six-month periods ended June 30, 2006 and 2005 was $3.07 and $4.28, respectively.

Prior to January 1, 2006, the Company applied the pro forma disclosure requirements under SFAS No. 123 and accounted for its stock-based
employee compensation plans using the intrinsic value method under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations.

Accordingly, no stock-based employee compensation cost was recognized in the statement of operations for the three and six month periods
ended June 30, 2005, as all stock options granted under the Companys stock option plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

As a result of the adoption of SFAS 123R, the Companys net loss for the three and six-month periods ended June 30, 2006 was $572,000, or $0.02 per
share, and $1,125,000, or $0.03 per share, respectively, greater than if it had continued to account for share-based compensation under APB 25.



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The following table illustrates the effect on net loss and net loss per share if the Company had applied
the fair value recognition provisions of SFAS No. 123 to options granted under the Companys stock option plans for the three and six-month periods ended June 30, 2005. Since stock-based compensation expense for the three and
six-month periods ended June 30, 2006 were calculated under the provisions of SFAS No. 123R, there is no disclosure of pro forma net loss and net loss per share for those periods. For purposes of the pro forma disclosure for the three
and six-month periods ended June 30, 2005 set forth in the table below, the value of the options is estimated using a Black-Scholes option pricing model and amortized on a straight-line basis to expense over the options vesting periods.



|                                                                                                                                                                               |  |                            |            |   |                          |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ---------- | - | ------------------------ | - | ----------- | -
|                                                                                                                                                                               |  | Three MonthsEnded June 30, |            |   | Six MonthsEnded June 30, |  
|                                                                                                                                                                               |  | 2005                       |            |   | 2005                     |  
|Net loss, as reported                                                                                                                                                          |  | $                          | (5,143,279 | ) |                          | $ | (10,058,624 | )
|Add: Stock based employee compensation cost that would have been included in the determination of net loss as reported if the fair value
method had been applied to all awards |  |                            | (505,744   | ) |                          |   | (927,741    | )
|                                                                                                                                                                               |  |                            |            |   |                          |   |             |  
|Pro forma net loss                                                                                                                                                             |  | $                          | (5,649,023 | ) |                          | $ | (10,986,365 | )
|                                                                                                                                                                               |  |                            |            |   |                          |   |             |  
|Net loss per common share, as reported                                                                                                                                         |  | $                          | (0.23      | ) |                          | $ | (0.48       | )
|                                                                                                                                                                               |  |                            |            |   |                          |   |             |  
|Net loss per common share, pro forma                                                                                                                                           |  | $                          | (0.25      | ) |                          | $ | (0.52       | )
|                                                                                                                                                                               |  |                            |            |   |                          |   |             |  

Information regarding option activity for the six-month period ended June 30, 2006 under the
Companys stock option plans is summarized below:



|                                                |  |                    |   |  |                                        |        |                                                  |      |                         |   |          
|----------------------------------------------- |  | ------------------ | - |  | -------------------------------------- | ------ | ------------------------------------------------ | ---- | ----------------------- | - | ---------
|                                                |  | OptionsOutstanding |   |  | Weighted-AverageExercisePrice PerShare |        | Weighted-AverageRemainingContractualTerm inYears |      | AggregateIntrinsicValue
|Options outstanding at January 1, 2006          |  | 4,214,728          |   |  | $                                      | 3.61   |                                                  |      |                         |   |          
|Granted                                         |  | 1,172,000          |   |  | $                                      | 3.07   |                                                  |      |                         |   |          
|Exercised                                       |  | (12,000            | ) |  | $                                      | 0.73   |                                                  |      |                         |   |          
|Forfeited                                       |  |                   |   |  |                                        |       |                                                  |      |                         |   |          
|Expired                                         |  | (1,875             | ) |  | $                                      | 123.75 |                                                  |      |                         |   |          
|                                                |  |                    |   |  |                                        |        |                                                  |      |                         |   |          
|Options outstanding at June 30, 2006            |  | 5,372,853          |   |  | $                                      | 3.50   |                                                  | 7.50 |                         | $ | 1,610,786
|                                                |  |                    |   |  |                                        |        |                                                  |      |                         |   |          
|Options vested and exercisable at June 30, 2006 |  | 2,775,166          |   |  | $                                      | 3.16   |                                                  | 6.19 |                         | $ | 1,352,280
|                                                |  |                    |   |  |                                        |        |                                                  |      |                         |   |          

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
difference between the closing price of the Companys common stock on June 30, 2006 of $2.48 and the exercise price of each in-the-money option) that would have been received by the option holders had all option holders exercised their
options on June 30, 2006. Total cash received for stock options exercised during the six-month period ended June 30, 2006 was $8,800. Total intrinsic values of stock options exercised under the Companys stock option for the
six-month period ended June 30, 2006 and 2005 were $30,120 and $67,301, respectively.

As of June 30, 2006, there was $5,551,000
total unrecognized compensation cost related to unvested share-based awards. That cost is expected to be recognized over a period of 4.0 years with a weighted-average of 1.46 years.

Revenue Recognition

Revenue is deemed earned when all of the following have occurred: there is
persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the receivable is reasonably assured, all



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obligations of the Company relating to the revenue have been met and the earning process is complete; the monies received or receivable are not refundable,
irrespective of research results; and there are neither future obligations nor future milestones to be met by the Company with respect to such revenue incurred.

Revenues from corporate collaborations and government grants are earned based upon research expenses incurred and milestones achieved. Non-refundable payments upon initiation of contracts are deferred and amortized
over the period which the Company is obligated to participate on a continuing and substantial basis in the research and development activities outlined in each contract. Amounts received in advance of reimbursable expenses are recorded as deferred
revenue until the related expenses are incurred. Milestone payments are recognized as revenue in the period in which the parties agree that the milestone has been achieved.



|3. | Hemasure A/S Dividend
|-- | ---------------------

In June 2006, the Company
received a cash dividend of $785,000 from HemaSure A/S, a wholly-owned foreign subsidiary of the Company located in Denmark. HemaSure A/S was previously a subsidiary of HMSR Inc. which discontinued operations in 1997 and entered into bankruptcy
proceedings at that time. The cash dividend resulted from the final settlement of the bankruptcy. The Company recorded the dividend as an increase to additional paid-in capital in the Companys balance sheet as of June 30, 2006.



|4. | New Accounting Pronouncement
|-- | ----------------------------

In July 2006,
the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), which provides
criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is more likely than not that the position is sustainable based
on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company does not expect that FIN 48 will have a material effect on its consolidated financial condition or results of
operations.

We have implemented all new accounting pronouncements that are in effect and that may impact our consolidated financial
statements and do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our consolidated financial statements.



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|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Cautionary Factors with Respect to Forward-Looking Statements

Readers are cautioned that certain
statements contained in this Managements Discussion and Analysis of Financial Condition and Results of Operations that are not related to historical results are forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995, as from time-to-time in effect. This information includes statements on the prospects for our clinical trial and drug development activities and results of operations based on our current expectations, such as
statements regarding certain milestones with respect to our clinical program and our product candidates. Forward-looking statements are statements that are not historical facts, and can be identified by, among other things, the use of
forward-looking language, such as believe, expect, may, will, should, seeks, plans, schedule to, anticipates or intends or
the negative of those terms, or other variations of those terms of comparable language, or by discussions of strategy or intentions. A number of important factors could cause actual results to differ materially from those projected or suggested in
the forward looking statement, including, but not limited to, our ability to (i) successfully develop and manufacture products, (ii) obtain the necessary governmental approvals, (iii) obtain external funding to finance the operations,
and (iv) obtain and enforce intellectual property rights, as well as the risk factors discussed elsewhere in this report.

Overview

We are a Boston-based biopharmaceutical company developing a family of dipeptidyl peptidase (DPP) inhibitors for use in cancer, type 2 diabetes and as
vaccine adjuvants. We are currently studying our lead product candidate, talabostat, in two Phase 3 double blind, placebo-controlled trials in metastatic non-small cell lung cancer (NSCLC), including talabostat in combination with docetaxal and
talabostat in combination with pemetrexed. We are also studying talabostat in four Phase 2 trials, including as a single-agent in metastatic melanoma, in combination with cisplatin in metastatic melanoma, in combination with rituximab in advanced
chronic lymphocytic leukemia (CLL), and in combination with gemcitabine in metastatic pancreatic cancer.

In preclinical models and
clinical studies, talabostat has demonstrated activity in combination with several chemotherapeutic agents, monoclonal antibodies and as a single-agent. Talabostat has also shown activity in a number of different cancer indications including both
solid tumors and hematologic malignancies.

Talabostat is an oral agent, which if approved by the United States Food and Drug
Administration (FDA) could potentially offer patients and physicians convenience and dosing flexibility. The most frequently reported adverse events observed in clinical studies include edema (fluid retention) and fatigue. We believe talabostat has
a novel dual mechanism of action that inhibits key dipeptidyl peptidases (DPPs), potentially disrupting the tumor stroma and reducing metastases, and also stimulates both the innate and acquired immune systems, thereby stimulating the bodys
own immune system to fight the tumor.

In June 2006, we received Fast Track Designation for talabostat for the treatment of Stage IIIB/IV
NSCLC patients who have failed prior platinum-based chemotherapy from the FDA. Under the FDA Modernization Act of 1997, the Fast Track program is designed to facilitate the development and expedite the review of a new drug that is intended for the
treatment of a serious or life-threatening condition, and demonstrates the potential of a drug candidate to address unmet medical needs for such a condition. Fast Track Designation relates to the processing of the application and does not change the
approval standards nor does it imply anything regarding whether the FDA ultimately will approve the drug for marketing. Under the FDA guidance, drugs that are granted Fast Track Designation status typically represent a significant improvement in the
safety or effectiveness over existing therapies.

In addition to our oncology program, we have two other DPP inhibitors in preclinical
developmentPT-630 for type 2 diabetes, and PT-510 as a vaccine adjuvant. PT-630 has a high affinity for DPP-4 which is a widely known target that numerous pharmaceutical companies are exploring as a potential promising therapy to treat



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type 2 diabetes. Our second preclinical DPP inhibitor candidate, PT-510, is being developed as a potential vaccine adjuvant for both cancer and infectious
disease.

In addition to these product opportunities, we from time to time evaluate new technologies to broaden our portfolio of potential
products, including in-licensing and collaboration arrangements, as well as more expansive corporate relationships, including mergers and acquisitions.

To date, we have generated no revenues from product sales and have primarily depended upon equity financings, interest earned on invested funds, and collaboration payments received from pharmaceutical companies and
government agencies to provide the working capital required to pursue our intended business activities. We have a net accumulated deficit of approximately $77,571,000 as of June 30, 2006. The accumulated deficit has resulted principally from
our efforts to develop drug candidates and the associated administrative costs required to support these efforts. We expect to incur significant additional operating losses over the next several years due to our ongoing developmental and clinical
efforts. Our potential for future profitability is dependent on our ability to clinically develop our current lead pharmaceutical product candidate, talabostat, to successfully develop our other preclinical product candidates, and to license and
develop new pharmaceutical compounds.

Our principal executive office is located at 155 Federal Street, Boston, MA 02110 and our telephone
number is (617) 933-2130. Our common stock trades on the NASDAQ Capital Market under the symbol POTP. Our website is www.pther.com.

Critical Accounting Policies and Significant Judgments and Estimates

Critical Accounting Policies

Revenue Recognition.    Revenue is deemed earned when all of the following have occurred: there is persuasive evidence of an
arrangement, the fee is fixed or determinable and collection of the receivable is reasonably assured, all of our obligations relating to the revenue have been met and the earning process is complete; the monies received or receivable are not
refundable, irrespective of research results; and there are neither future obligations nor future milestones to be met by us with respect to such revenue incurred.

Revenues from corporate collaborations and government grants are earned based upon research expenses incurred and milestones achieved. Non-refundable license fees upon initiation of contracts are deferred and
amortized over the period which we are obligated to participate on a continuing and substantial basis in the research and development activities outlined in each contract. Amounts received in advance of reimbursable expenses are recorded as deferred
revenue until the related expenses are incurred. Milestone payments are recognized as revenue in the period in which the parties agree that the milestone has been achieved.

Royalty revenue is recognized upon the sale of the related products, provided the royalty amounts are fixed or determinable and collection of the related
receivable is reasonably assured.

For the three-month period ended June 30, 2006, we did not recognize any revenue. For the six-month
period ending June 30, 2006, we recognized revenue of $139,000 relating to our $600,000 Orphan Drug Grant which will partially fund our Phase 2 clinical trial in patients with CLL. To date, we have recognized $300,000 in revenues from this
grant. For the three and six-month periods ending June 30, 2005, we did not recognize any revenue.

Clinical Trial
Expenses.    We record the estimated cost of patient recruitment and related supporting functions for our clinical trial as patients are enrolled in the trial. We record the costs for the trials based on
percentage of completion of the contract entered into. In the past, our estimates have been materially accurate with the actual billings received. These costs consist primarily of payments made to the outside clinical management organizations,
clinical centers, investigators, testing facilities and patients for participating in our



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clinical trial. As actual or expected costs become known, they may differ from estimated costs previously accrued for and this clinical trial accrual or
prepaid would be adjusted accordingly. At June 30, 2006, prepaid and deposit balances related to clinical trials were approximately $1,782,000 resulting from payments made in connection with our two Phase 3 clinical trials in NSCLC. At
June 30, 2006, accrued expense related to clinical trials was approximately $1,347,000 related primarily to our four ongoing Phase 2 clinical trials. Clinical trial expenses were $2,712,000, and $1,282,000 for the three-month periods ended
June 30, 2006 and 2005, respectively, and $5,304,000 and $2,309,000 for the six-month periods ended June 30, 2006 and 2005, respectively.

Drug Development Expenses.    We rely on outside vendors to manufacture and test our drug supply used in our clinical trials and plan to continue this arrangement for drug supply that will be used
for commercialization if talabostat is approved for sale. We record the estimated cost of drug development expenses as the drug and or raw materials are received or as the analytical services are performed based on contracts entered into with
external vendors. In the past, our estimates have been materially accurate with the actual billings received. As actual or expected costs become known, they may differ from estimated costs previously accrued for and the accrual would be adjusted
accordingly. At June 30, 2006, accrued expense related to drug supply was approximately $1,037,000 related primarily to validation batches of talabostat and toxicology studies being performed on talabostat. Drug development expenses were
$659,000, and $1,164,000 for the three-month periods ended June 30, 2006 and 2005, respectively, and $1,687,000 and $2,002,000 for the six-month periods ended June 30, 2006 and 2005, respectively.

Stock-based Compensation.    Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123R, Share-Based PaymentAn Amendment of FASB Statements No. 123 and 95,or SFAS No. 123R. SFAS No. 123R requires companies to measure compensation cost for all share-based awards
at fair value on grant date and recognize it as expense ratably over the requisite service period of the award. We use the Black-Scholes option pricing model to calculate the fair value of share-based awards on the grant date. This option
pricing model requires the input of highly subjective assumptions, including the term during which the awards are expected to be outstanding and the price volatility of the underlying stock. In addition, SFAS No. 123R requires forfeitures,
which represent only the unvested portion of a surrendered award, to be estimated at the time of the grant and revised, if necessary, in subsequent periods. Please refer to Note 2Summary of Significant Accounting Principles, included in
the condensed consolidated financial statements appearing elsewhere in this report, for additional information regarding our adoption of SFAS No. 123R.

Significant Judgments and Estimates.    The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires
that we make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at our balance sheet date. Such estimates include the carrying value of property and equipment and the value of certain
liabilities. Actual results may differ from such estimates.



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Results of Operations

Three-month period ended June 30, 2006 as compared to the three-month period ended June 30, 2005



|                                                                                             |  |                            |             |   |                |   |             |           |  |       |  
|-------------------------------------------------------------------------------------------- |  | -------------------------- | ----------- | - | -------------- | - | ----------- | --------- |  | ----- | -
|                                                                                             |  | Three Months EndedJune 30, |             |   | Percent Change |  
|                                                                                             |  | 2006                       |             |   | 2005           |   |             | 2006/2005 | 
|License revenue                                                                              |  | $                          |            |   |                | $ |            |           |  |      | %
|Sponsored research revenue                                                                   |  |                            |            |   |                |   |            |           |  |      |  
|                                                                                             |  |                            |             |   |                |   |             |           |  |       |  
|Total revenue                                                                                |  |                            |            |   |                |   |            |           |  |      |  
|Research and development                                                                     |  |                            | 5,934,937   |   |                |   | 4,060,603   |           |  | 46.2  |  
|General and administrative                                                                   |  |                            | 1,712,555   |   |                |   | 1,227,307   |           |  | 39.5  |  
|                                                                                             |  |                            |             |   |                |   |             |           |  |       |  
|Total operating expenses                                                                     |  |                            | 7,647,492   |   |                |   | 5,287,910   |           |  | 44.6  |  
|Interest income                                                                              |  |                            | 301,548     |   |                |   | 144,631     |           |  | 108.5 |  
|                                                                                             |  |                            |             |   |                |   |             |           |  |       |  
|Net loss                                                                                     |  | $                          | (7,345,944  | ) |                | $ | (5,143,279  | )         |  | 42.8  | %
|                                                                                             |  |                            |             |   |                |   |             |           |  |       |  
|Six-month period ended June 30, 2006 as compared to the
six-month period ended June 30, 2005 | 
|                                                                                             |  | Six Months EndedJune 30,   |             |   | Percent Change |  
|                                                                                             |  | 2006                       |             |   | 2005           |   |             | 2006/2005 | 
|License revenue                                                                              |  | $                          |            |   |                | $ |            |           |  |      | %
|Sponsored research revenue                                                                   |  |                            | 138,795     |   |                |   |            |           |  | 100.0 |  
|                                                                                             |  |                            |             |   |                |   |             |           |  |       |  
|Total revenue                                                                                |  |                            | 138,795     |   |                |   |            |           |  | 100.0 |  
|Research and development                                                                     |  |                            | 12,253,300  |   |                |   | 7,613,587   |           |  | 60.9  |  
|General and administrative                                                                   |  |                            | 3,730,952   |   |                |   | 2,670,939   |           |  | 39.7  |  
|                                                                                             |  |                            |             |   |                |   |             |           |  |       |  
|Total operating expenses                                                                     |  |                            | 15,984,252  |   |                |   | 10,284,526  |           |  | 55.4  |  
|Interest income                                                                              |  |                            | 642,900     |   |                |   | 225,902     |           |  | 184.6 |  
|                                                                                             |  |                            |             |   |                |   |             |           |  |       |  
|Net loss                                                                                     |  | $                          | (15,202,557 | ) |                | $ | (10,058,624 | )         |  | 51.1  | %
|                                                                                             |  |                            |             |   |                |   |             |           |  |       |  

Revenue

For the three-month period ended June 30, 2006, we did not recognize any revenue. For the six-month period ended June 30, 2006, we recognized
revenue totaling $139,000 relating to our $600,000 Orphan Drug Grant (the Grant) from the FDA to partially fund our Phase 2 clinical trial in patients with CLL. To date, we have received $300,000 under the Grant and we currently
anticipate recognizing the remaining revenue under the Grant during the remainder of 2006 as additional expenses will be eligible for funding from the Grant after July 1, 2006.

For the three and six-month periods ending June 30, 2005, we did not recognize any revenue.

Operating Expenses

Research and development

During the three and six-month periods ending June 30, 2006 and 2005, the majority of
our research and development efforts have been focused on the preclinical and clinical development of talabostat. The expense disclosed for research and development in our financial statements has primarily been directed towards developing
talabostat, with the exception of approximately $423,000 and $397,000 incurred during the first six months of 2006 and 2005, respectively, on external experiments for one of our other DPP inhibitors in preclinical developmentPT-630 for type 2
diabetes.



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We are currently studying our lead product candidate, talabostat, in two double blind, placebo-controlled
Phase 3 trials in metastatic non-small cell lung cancer (NSCLC), including talabostat in combination with docetaxal and talabostat in combination with pemetrexed. We are also studying talabostat in four Phase 2 trials, including as a single-agent in
metastatic melanoma, in combination with cisplatin in metastatic melanoma, in combination with rituximab in advanced CLL, and in combination with gemcitabine in metastatic pancreatic cancer.

Research and development expenses increased 46.2% to $5,935,000 for the three-month period ended June 30, 2006 from $4,061,000 for the three-month
period ended June 30, 2005. Research and development expenses increased 60.9% to $12,253,000 for the six-month period ended June 30, 2006 from $7,614,000 for the six-month period ended June 30, 2005.



|                               |  |                            |            |                |   |           |  |      |  
|------------------------------ |  | -------------------------- | ---------- | -------------- | - | --------- |  | ---- | -
|                               |  | Three Months EndedJune 30, |            | Percent Change |  
|Research and development       |  | 2006                       |            | 2005           |   | 2006/2005 | 
|Drug development               |  | $                          | 4,691,590  |                | $ | 3,177,162 |  | 47.7 | %
|Preclinical development        |  |                            | 1,243,347  |                |   | 883,441   |  | 40.7 |  
|                               |  |                            |            |                |   |           |  |      |  
|Total research and development |  | $                          | 5,934,937  |                | $ | 4,060,603 |  | 46.2 | %
|                               |  |                            |            |                |   |           |  |      |  
|                               |  |                           
|                               |  | Six Months EndedJune 30,   |            | Percent Change |  
|Research and development       |  | 2006                       |            | 2005           |   | 2006/2005 | 
|Drug development               |  | $                          | 9,911,889  |                | $ | 5,772,259 |  | 71.7 | %
|Preclinical development        |  |                            | 2,341,411  |                |   | 1,841,328 |  | 27.2 |  
|                               |  |                            |            |                |   |           |  |      |  
|Total research and development |  | $                          | 12,253,300 |                | $ | 7,613,587 |  | 60.9 | %
|                               |  |                            |            |                |   |           |  |      |  

Drug development:    Drug development expenses include costs of drug
development and conducting clinical trials. Such costs include costs of personnel (including salary, fringe benefits, recruiting and relocation costs), external clinical testing and monitoring, drug supply, analytical testing costs and facility
expenses, including depreciation.

Drug development expenses increased 47.7% to $4,692,000 for the three-month period ended June 30,
2006 from $3,177,000 for the three-month period ended June 30, 2005. The increase of $1,515,000 was primarily due to an increase in external clinical expenses of $2,141,000 for our Phase 3 clinical trial program which was initiated in the
fourth quarter of 2005, offset in part by a reduction in expenses for our Phase 1 and 2 clinical trial programs of $711,000 and reduced expenses for clinical trial related drug supply of $329,000. We also added seven employees during the first six
months of 2006 in order to internally manage the clinical trial process for talabostat, bringing the total employees in this area to twenty-seven. In addition, during the three-month period ended June 30, 2006, we recorded $184,000 in non-cash
stock-based compensation expense for employee stock options in accordance with SFAS No. 123R.

For the six-month period ended
June 30, 2006, drug development expenses increased 71.7% to $9,912,000 from $5,772,000 for the six-month period ended June 30, 2005. The increase of $4,140,000 was primarily due to an increase in external clinical expenses of $3,977,000
for our Phase 3 clinical trial program which was initiated in the fourth quarter of 2005 and increased expenses for clinical trial related drug supply of $234,000, offset in part by a reduction in expenses for our Phase 1 and 2 clinical trial
programs of $982,000. We also added seven employees during the first six months of 2006 in order to internally manage the clinical trial process for talabostat bringing the total employees in this area to twenty-seven. In addition, during the
six-month period ended June 30, 2006, we recorded $338,000 in non-cash stock-based compensation expense for employee stock options in accordance with SFAS No. 123R.



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During the remainder of 2006, we anticipate that our clinical development costs will increase moderately
as our Phase 3 clinical program spending increase will be offset by a decrease in spending for our Phase 2 clinical studies. We currently anticipate hiring three additional employees bringing total employees in the clinical development area to
thirty.

Preclinical Development:    Preclinical development includes expenses associated with research and
testing of our product candidates prior to reaching the clinical development stage. Such expenses primarily include the costs of internal personnel, outside contractors, facilities, including depreciation, and lab supplies.

Preclinical development expenses increased 40.7% to $1,243,000 for the three-month period ended June 30, 2006 from $883,000 for the three-month
period ended June 30, 2005. The increase of $360,000 was primarily due to an increase in external studies of $144,000 to support the preclinical research of PT-630, an increase in external research collaborations for talabostat of $84,000, and
non-cash stock-based compensation expense for employee stock options in accordance with SFAS No. 123R of $89,000. In addition, we added one employee during the six-month period ended June 30, 2006, bringing total employees in this area to
ten.

Preclinical development expenses increased 27.2% to $2,341,000 for the six-month period ended June 30, 2006 from $1,841,000 for
the six-month period ended June 30, 2005. The increase of $500,000 was primarily due to external research collaborations for talabostat of $203,000 and non-cash stock-based compensation expense for employee stock options in accordance with SFAS
No. 123R of $221,000. In addition, we added one employee during the six-month period ended June 30, 2006, bringing total employees in this area to ten.

During the remainder of 2006, we currently anticipate that research expenses will remain at current levels. We do not currently anticipate adding any employees in this area for the remainder of 2006.

General and administrative

General and administrative:    General and administrative costs include the associated administrative costs required to support the clinical development and research efforts such as legal, finance and
accounting, business development, investor relations and other administrative support functions.

General and administrative expenses
increased 39.5% to $1,713,000 during the three-month period ended June 30, 2006 from $1,227,000 for the three-month period ended June 30, 2005. The increase of $486,000 was primarily due to non-cash stock-based compensation expense for
employee and director stock options in accordance with SFAS No. 123R of $267,000 and increased investor relations and outside consulting costs of $118,000. In addition, we added one employee during the six-month period ended June 30, 2006,
bringing total employees in this area to thirteen.

General and administrative expenses increased 39.7% to $3,731,000 during the six-month
period ended June 30, 2006 from $2,671,000 for the six-month period ended June 30, 2005. The increase of $1,060,000 was primarily due to non-cash stock-based compensation expense for employee and director stock options in accordance with
SFAS No. 123R $421,000 and increased investor relations and outside consulting costs of $280,000. In addition, we added one employee during the six-month period ended June 30, 2006, bringing total employees in this area to thirteen.

During 2006, we currently anticipate that general and administrative expenses will remain at current levels. We do not currently
anticipate adding any employees in this area for the remainder of 2006.

Other Income and Expenses

Interest income includes interest earned on invested cash balances. During the three and six-month periods ended June 30, 2006 and 2005, our
investments consisted entirely of funds deposited in money market funds.



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Interest income increased 108.5% to $302,000 in the three-month period ended June 30, 2006 from
$145,000 in the three-month period ended June 30, 2005. The increase in interest income resulted from a higher average interest rates earned on invested balances.

Interest income increased 184.6% to $643,000 in the six-month period ended June 30, 2006 from $226,000 in the six-month period ended June 30, 2005. The increase in interest income resulted from a higher
average interest rates earned on invested balances.

Net loss

As a result of the foregoing, we incurred a net loss of $7,346,000 or $0.22 per common share, for the three-month period ended June 30, 2006 compared
to a net loss of $5,143,000, or $0.23 per common share, for the three-month period ended June 30, 2005 and a net loss of $15,203,000 or $0.46 per common share for the six-month period ended June 30, 2006 as compared to a net loss of
$10,059,000 or $0.48 per common share for the six-month period ended June 30, 2005.

Liquidity and Capital Resources

We have financed our operations since inception principally through the sale of equity securities and collaboration payments received from pharmaceutical
companies. Since our inception in September 1996, we have raised approximately $75,543,000, net of costs of raising capital, in equity financings and $7,815,000 from licensing and sponsored research collaborations with pharmaceutical companies
and government agencies. In addition, we received $14,335,000 as a result of the merger between Point Massachusetts and HMSR in March 2002. We have also received $4,978,000 in proceeds from warrant and stock option exercises, $2,388,000 from
interest earned in invested cash balances and $785,000 in dividends resulting from a bankruptcy settlement of a foreign subsidiary.

At
June 30, 2006, our cash and cash equivalents decreased by $14,505,000 to $22,823,000 as compared to $37,328,000 at December 31, 2005. The decrease was primarily due to cash used in operations of $15,272,000 for the six-month period ended
June 30, 2006, primarily to fund our clinical program for talabostat and other research and development initiatives. We increased our investment in equipment by $19,000 from $787,000 at December 31, 2005 to $806,000 at June 30, 2006.
The increase resulted from purchases of computer equipment. We also received $9,000 in proceeds from the exercise of stock options totaling 12,000 shares. In addition, we received $785,000 in dividends resulting from a bankruptcy settlement of a
foreign subsidiary (see Footnote 3 to enclosed Financial Statements).

At June 30, 2006, we had prepaid expenses and other assets
totaling $2,105,000, an increase of $688,000 as compared to December 31, 2005. In addition, we had $340,000 in deposits and other assets, a decrease of $504,000 as compared to December 31, 2005. These balances relate primarily to upfront
payments made to our clinical trial centers and supporting clinical organizations for our two recently initiated Phase 3 clinical trials in NSCLC which are being expensed over the clinical trial period.

At June 30, 2006, our current liabilities totaled $4,709,000, a decrease of $1,246,000 as compared to December 31, 2005 due to the payment of
expenses previously accrued.

Since inception, we have incurred $62,723,000 in expenses on research and development activities. Almost all
of our research and development efforts have primarily been focused on the preclinical and clinical development of talabostat for the treatment of solid tumors, hematologic malignancies and hematopoietic disorders, with the exception of
approximately $1,330,000 incurred during fiscal years 2004 and 2005 and the first six months of 2006 to preclinically develop two early-staged DPP inhibitors.



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Since inception, we have incurred operating expenses of $87,692,000 and have accumulated a deficit as of
June 30, 2006 of $77,571,000. At June 30, 2006, we had $22,823,000 in cash and cash equivalents. We currently anticipate that our existing capital resources and interest to be received on invested cash balances should enable us to maintain
our current and planned operations into the first half of 2007. We are currently considering several strategic options in order to ensure the continued funding of our operations including, but not limited to, raising additional funds through
corporate collaborations, merger and acquisition activities and consolidations, the sale of securities in both public and private offerings as the markets allow. There can be no assurance that a transaction will be consummated in a reasonable
timeframe, on terms acceptable to us, or at all. Should we be unable to raise sufficient funds, we may be required to curtail our operations. In addition, increases in expenses or delays in product development not currently forecasted or anticipated
may adversely impact our cash position and require further cost reductions.

Our expectations regarding our rate of spending and the
sufficiency of our cash resources over future periods are forward-looking statements. Our funding requirements are expected to increase over the next several years as we continue with the clinical development of talabostat and potentially initiate
human clinical trials for additional clinical indications for talabostat, PT-630, PT-510 and any other additional product candidates we may have from time to time. The rate of spending and sufficiency of such resources will be affected by numerous
factors including the success of our clinical trials and the rate of acquisition of new products and technologies. Success in early-stage clinical trials or acquisition of new products and technologies would lead to an increase in working capital
requirements. Our actual cash requirements may vary materially from those now planned because of the results of research and development, clinical trials, product testing, relationships with strategic partners, acquisition of new products and
technologies, changes in the focus and direction of our research and development programs, competitive and technological advances, the process of obtaining FDA or other regulatory approvals and other factors.

Contractual Obligations

As of June 30, 2006, we
had future payments required under contractual obligations and other commitments approximately as follows:



|                         |  |                      |         |      |   |         |  |      |         |      |   |            |  |       |         |  |   |        |  |   |          
|------------------------ |  | -------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ---------- |  | ----- | ------- |  | - | ------ |  | - | ---------
|                         |  | Payments Due By Year
|                         |  | Q3-Q4 2006           |         | 2007 |   | 2008    |  | 2009 |         | 2010 |   | Thereafter |  | Total
|Operating Leases         |  | $                    | 209,000 |      | $ | 417,000 |  | $    | 415,000 |      | $ | 391,000    |  | $     | 202,000 |  | $ |       |  | $ | 1,634,000
|Capital Leases           |  |                      | 4,000   |      |   | 5,000   |  |      |        |      |   |           |  |       |        |  |   |       |  |   | 9,000    
|Licensing Obligations    |  |                      |        |      |   | 10,000  |  |      | 10,000  |      |   | 10,000     |  |       | 10,000  |  |   | 18,000 |  |   | 58,000   
|                         |  |                      |         |      |   |         |  |      |         |      |   |            |  |       |         |  |   |        |  |   |          
|Total Future Obligations |  | $                    | 213,000 |      | $ | 432,000 |  | $    | 425,000 |      | $ | 401,000    |  | $     | 212,000 |  | $ | 18,000 |  | $ | 1,701,000
|                         |  |                      |         |      |   |         |  |      |         |      |   |            |  |       |         |  |   |        |  |   |          

In addition, in accordance with the license agreement between us and Tufts University School of
Medicine (Tufts), we are required to make payments totaling $250,000 to Tufts upon marketing application of the first licensed product and marketing approval of the first licensed product. We are also required to pay a royalty based on
future sales of products covered under the license agreement.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of June 30, 2006 that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

New Accounting Pronouncement

In July 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), which



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provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position
may be recognized only if it is more likely than not that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We do not expect
that FIN 48 will have a material effect on our consolidated financial condition or results of operations.



|Item 3. | QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | --------------------------------------------------------

Our proceeds to date have been invested in money market funds that invest primarily in short-term, highly-rated investments, including U.S. Government securities, commercial paper and certificates of deposit guaranteed by banks. Currently,
we do not use interest rate derivative instruments to manage exposure to interest rate changes. Because of the short-term maturities of our investments, we do not believe that a change in market rates would have a significant impact on the value of
our investment portfolio. Declines in interest rates will reduce our interest income while increases in interest rates will increase our interest income.



|Item 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

(a) Evaluation of
disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of June 30, 2006. Based on this evaluation, our chief executive officer and chief financial officer concluded that as of June 30, 2006, our disclosure controls and procedures
were (1) designed to ensure that material information relating to us is made known to our chief executive officer and chief financial officer by others, particularly during the period in which this report was prepared, and (2) effective,
in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms.

(b) Changes in internal controls. No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



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PART II. OTHER INFORMATION



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

If we fail to obtain the
capital necessary to fund our operations, we will be unable to successfully develop or commercialize talabostat

As of June 30,
2006, we had a cash balance of approximately $22.8 million. We currently anticipate spending during the remainder of 2006 an average of at least $8.0 million per quarter to fund our preclinical and clinical programs and related general and
administrative activities. Our current cash balance is expected to be sufficient to allow us to maintain our current and planned operations into the first half of 2007. It is difficult to estimate at this time the additional funds required to
finance our operations as we are currently uncertain about the therapeutic indications that we will continue to clinically develop into later stages, the extent of the clinical program required to successfully develop a selected therapeutic
indication, and if any of these programs will eventually be financed through a collaboration with a better funded partner. Also, we do not know whether additional funding will be available when needed, or that, if available, we will be able to
obtain funding on satisfactory terms. We have incurred approximately $87.7 million of expenses since inception through June 30, 2006, and expect our capital outlays and operating expenditures to increase over the next several years as we
expand our infrastructure and clinical and preclinical trial activities. We may raise these funds through corporate collaborations, merger and acquisition activities and additional sales of securities in both public and private offerings as the
markets allow.

In addition to the progress of our preclinical and clinical effort, our future capital requirements depend on many other
factors, including: the cost and timing of regulatory approvals of talabostat, technological advances, the reevaluation of the commercial potential of talabostat in light of developments in our industry or market, the status of competitive products
and the establishment of a sales force. Unexpected events or other factors beyond our control could also impact our capital requirements.

We may be required to relinquish rights to our technologies or talabostat, or grant licenses on terms that are not favorable to us, in order to raise additional funds through alliance, joint venture and licensing arrangements. If adequate
funds are not available, we will be required to delay, reduce the scope of or eliminate one or more of our preclinical and clinical programs.

Our lead product candidate, talabostat, is in human clinical development, and its safety and effectiveness are still being determined

Our lead product candidate, talabostat, is currently undergoing evaluation in clinical trials for the treatment of certain solid tumors and hematologic malignancies. To obtain regulatory approval for the commercial
sale of talabostat for its intended therapeutic applications, we must demonstrate in carefully controlled and well-designed clinical trials that talabostat is safe and effective in humans for the proposed therapeutic indications. In addition to
animal safety studies, we have conducted Phase 1 human clinical safety studies, both in single and multiple doses, which have provided us sufficient safety information to select dose ranges for our Phase 1 human clinical dose finding studies. These
Phase 1 dose finding studies have, in turn, provided us safety and effectiveness information to select doses for our Phase 2 human clinical studies which are evaluating safety and effectiveness of talabostat in larger cohort groups. We have also
commenced two Phase 3 human clinical studies in which we are evaluating talabostat in double-blind placebo controlled studies. Although with the completion of each of our human clinical studies we are learning more about the safety profile of
talabostat, we cannot yet predict whether subjects in clinical trials will suffer unacceptable health consequences related to talabostat. In addition, success in preclinical testing and early clinical trials do not necessarily predict final results.
A number of biotechnology companies have suffered significant setbacks in advanced clinical trials, even after promising results in earlier clinical trials. Our clinical trials may be suspended at any time if the FDA or we believe that the
participating subjects are exposed to unacceptable health risks. In addition, we cannot yet predict whether talabostat will be effective treating the therapeutic applications for which the human clinical studies we are conducting have been designed
or that physicians or the FDA will consider talabostat effective for such



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therapeutic applications. In addition, even if talabostat is shown to be effective in our clinical trials, we cannot predict whether the FDA will determine
that the therapeutic benefits of talabostat outweigh any perceived adverse effects of the drug. If talabostat is not safe or effective, or is perceived as not being safe or effective by the FDA or physicians, our business, financial condition,
results of operations and prospects will be harmed.

Our lead product candidate, talabostat, is in human clinical development, and we
may not be able to design or implement an effective clinical development plan which will result in timely FDA approval for the selected therapeutic applications

Our lead product candidate, talabostat, is currently undergoing evaluation in clinical trials for the treatment of certain solid tumors and hematologic malignancies. Conducting clinical trials is a lengthy and highly
uncertain process. The length of time to complete clinical trials varies according to the type, complexity, novelty and intended use of the product candidate. We may not have designed our clinical trials in a way that results in their fastest
completion because of unforeseen safety or effectiveness issues. Our trials may take longer to complete than we anticipate because of a slower than expected rate of eligible subject recruitment in the trials. If our clinical trials take longer than
we expect, we may have greater expenses than we project and may have a more difficult time raising additional capital to fund future or even existing capital requirements.

Even if we are able to conduct our clinical trials in a timely manner, other factors related to the conduct of the trials could still adversely affect
our chances of obtaining FDA approval. The FDA may not be satisfied with certain aspects of our clinical trial design. We may not be able to adequately follow or evaluate the subjects of the clinical trials after their treatment to establish a
positive therapeutic effect. We may not be able to maintain a database of sufficient integrity to track safety and effectiveness information of treated subjects that would withstand appropriate FDA scrutiny. We, or our chosen vendors, may fail to
comply with FDA regulations for good clinical practices.

If we obtain FDA approval for one or more therapeutic indications, we may then
elect to perform further clinical studies intended to broaden the labeling indications. If such studies do not support expanding the labeling indications, our ability to promote and market such products will be limited.

If talabostat is not a successful drug candidate, and we are unable to obtain or successfully develop other potential drug candidates, we may be
adversely affected

In addition to our substantial efforts developing talabostat on a preclinical and clinical basis, we from time
to time evaluate new technology opportunities to broaden our portfolio of potential drug candidates, including in-licensing opportunities, collaboration arrangements as well as more expansive corporate relationships, such as mergers, acquisitions
and consolidations. However, we may not be able to consummate a transaction to broaden our portfolio of potential drug candidates on terms satisfactory to us. If talabostat is not ultimately a successful drug candidate and we cannot obtain other
potential drug candidates through one or more strategic transactions, our business, financial condition and results of operations and prospects will be harmed.

We have had a history of losses, and expect to continue to incur losses and may not achieve or maintain profitability

As of June 30, 2006, we had an accumulated deficit of approximately $77.6 million. The extent of our future losses and the timing of profitability are highly uncertain, and we may never achieve profitable
operations. We have not had any products that have generated any sales revenue, and we likely will not until talabostat or any other of our product candidates become commercially available, if ever. We expect to incur losses at least until we begin
commercial sales of our first approved product, if any. We expect that our operating expenses will increase and accelerate as our preclinical, clinical and support operations expand, even if we succeed in developing one or more commercial products.
Our ability to achieve product revenue and profitability is dependent on our capability, alone or with partners, to successfully complete the development of talabostat, conduct clinical trials, obtain necessary regulatory approvals, and manufacture,
distribute, market and sell talabostat. We cannot provide assurance that we will generate product revenues or achieve profitability.



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If Tufts University School of Medicine terminates our license, we could experience delays or be
unable to complete the development and commercialization of our potential products

We license key technology including the rights
to talabostat, our lead product, from Tufts University School of Medicine (Tufts). The underlying licenses for this technology terminate on the later of the date of the last-to-expire patents, or 20 years from the date of initial
commercial sale of the licensed product. Termination of these licenses prior to or upon expiration of the term could force us to delay or discontinue our development and commercialization programs. Pursuant to the terms of the license, Tufts has the
right to terminate the license prior to expiration of the term upon a material breach of the license by us, our ceasing to do business or becoming insolvent, or our failure to sell a licensed product in the U.S. market by May 2011. If we do not
meet our current clinical development, regulatory and commercialization milestones prior to May 2011, it is possible that Tufts could seek to terminate or modify the terms of the license in a way which could have a material adverse effect on us. We
have no assurance that we would be able to license substitute technology in the future. Our inability to do so could impair our ability to conduct our business because we may lack the technology, the necessary rights to such technology, or the
finances required, in each case, to develop and commercialize our potential products.

If we fail to obtain regulatory approval for
talabostat in a timely manner, our operating results and business may be adversely affected

We must obtain regulatory approval
before marketing or selling talabostat in any major world pharmaceutical market for any therapeutic application for talabostat. Due to risks and uncertainties inherent in clinical testing and the regulatory process, we are not able to estimate when
talabostat may be commercially available for any application, if at all.

In the U.S., we must obtain FDA approval for talabostat and each
indication that we intend to commercialize. The FDA approval process is typically lengthy and expensive, and such approval is never certain and entails a high degree of risk. Products marketed, manufactured or distributed abroad are also subject to
foreign government regulation. Talabostat has not received regulatory approval to be commercially marketed and sold for any therapeutic indication. If we fail to obtain regulatory approval, we will be unable to market and sell talabostat. We cannot
predict with certainty if or when we might submit talabostat for regulatory approval for any therapeutic indication. Once we submit talabostat for review, we cannot assure you that the FDA or other regulatory agencies will grant approvals on a
timely basis or at all. If regulatory approval for any therapeutic application for talabostat is delayed, our business, financial condition or results of operations would be materially adversely affected.

Because we rely on third parties to conduct human clinical studies, we may encounter delays in product development and commercialization

We have relatively few employees and do not have sufficient internal resources or experience to conduct human clinical trials
completely on our own. We must therefore contract with third parties to perform the clinical trials needed for us to submit talabostat to the FDA for marketing approval.

Although we continue to increase our internal clinical development capability, including our ability to supervise, manage and, as necessary, replace outside vendors, we still outsource a substantial amount of the
clinical trial development process. Thus, we may lose control over the cost of and time required to conduct these studies. In addition, these third parties might not conduct our clinical trials in accordance with regulatory requirements. The failure
of any contractor to carry out its contractual duties could delay or increase the cost of the successful development and commercialization of talabostat.

We may fail to adequately protect or enforce our intellectual property rights, and our products and processes may infringe the intellectual property rights of others

Protection of our compounds and technology owned or licensed by us is essential to our business. Our policy is to protect our technology by, among other
things, filing or causing to be filed on our behalf patent



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applications for technology relating to the development of our business. We own or have licensed 18 issued U.S. patents and 18 pending U.S. patent
applications. Most of these patents and patent applications relate to our oncology, diabetes and vaccine adjuvant technologies. If regulatory extensions are not taken into account, one U.S. patent expires in 2007; one U.S. patent and one application
expire in 2011; one U.S. patent expires in 2012; and the remaining patents and applications expire in 2016 and beyond. We also own or have licensed foreign patents and patent applications corresponding to most of the U.S. patents and patent
applications. It is possible that no patents will be issued on our pending patent applications, and it is possible that our patent claims, now or in the future issued, will not be sufficient to protect our products and technology, will not be
sufficient to provide protection against competitive products, or otherwise will not be commercially valuable. Any patents issued to or licensed by us could be challenged, invalidated, infringed, circumvented or held unenforceable.

Our commercial success will also depend in part on our ability to commercialize talabostat without infringing on patents or other proprietary rights of
others. Talabostat or our other drug candidates may infringe current or future patents or other proprietary rights of others. To date, we have not received any communications from third parties nor are we aware of any claims by third parties that
our use of talabostat or any of our other activities infringe upon the patent or other proprietary rights of any third party. However, we cannot assure you that other companies or individuals have not or will not independently develop substantially
equivalent proprietary rights or that other parties have not or will not be issued patents that may prevent the sale of our products or require licensing and the payment of significant fees or royalties in order for us to be able to carry on our
business. If we are successful in the preclinical and clinical development of PT-630, our lead drug candidate for the treatment of type 2 diabetes, to market and sell that drug we may need to obtain at least a non-exclusive license for relevant use
patents from third parties, and there can be no assurance that we will be able to obtain that license on economically favorable terms, or at all. We from time to time engage in discussions with Tufts, other licensors, vendors and other parties about
the scope and enforceability of our contractual rights that may include utilization of dispute resolution procedures contained in applicable agreements. Otherwise, we have not notified any third party that they are infringing any of our proprietary
rights.

Litigation or other legal proceedings could result in substantial costs to us and may be necessary to enforce any of our patents
or other proprietary rights or to determine the scope and validity or enforceability of other parties proprietary rights. The defense and enforcement of patent and intellectual property claims are both costly and time consuming, even if the
legal outcome is favorable to us. Any adverse legal outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties, or require us to cease manufacturing or selling our future products.

Our employees, consultants and advisors are required to enter into written confidentiality agreements that prohibit the disclosure or use
of confidential information. We also have entered into written confidentiality agreements that are intended to protect our confidential information delivered to third parties for research and other purposes. However, these agreements could be
breached, and we may not have adequate remedies for any breach, or our trade secrets and proprietary information could otherwise become known or be independently discovered by others. We have not notified any person of a violation of a
confidentiality agreement that has materially harmed our business.

If our competitors reach the market sooner or develop products
and technologies that are more effective, less costly, or have reduced side effects, our commercial opportunity will be reduced or eliminated

The pharmaceutical and biotechnology industries are intensely competitive. There are existing products on the market, including generics, that are used for the treatment of subjects with the same indications that we
have targeted including, among others, Chirons Proleukin®, Bayers DTIC-Dome®, Sanofi-Aventis Taxotere®, Bristol-Myers Squibbs Paraplatin® and Platinol AQ®,
AstraZenecas Iressa®, GSKs Bexxar®, OSI Pharmaceuticals / Genentechs
Tarceva®, Eli Lillys Alimta® and Gemzar®, Genzymes / Berlexs Campath®, Biogen-IDECs Zevalin® and Roche / Genentech / Biogen-IDECs Rituxan® / MabThera®. There are also several other potential competitive novel products in development at other companies as well as
currently approved products that are being developed for additional indications that may be competitive with our products



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indications including, among others, Genentechs Avastin®, ImClones Erbitux®, Sanofi-Aventis Eloxatin®, and Millenniums Velcade®. If any of these products are successful in the clinic, we may experience additional competition. Because talabostat is still in clinical development,
we do not have the sales, marketing, manufacturing or distribution capabilities necessary to compete with well-established companies. If talabostat is approved by the FDA for one or more therapeutic applications, we may enter into collaboration
agreements with one or more established companies in order to compete in the marketplace. There can be no assurances that we would be able to successfully enter into any such collaboration with third parties or that any such collaborations would be
entered into on terms satisfactory to us.

There are also many public and private pharmaceutical companies, biotechnology companies, public
and private universities, governmental agencies and research organizations actively engaged in drug discovery and research and development of products for the treatment of subjects with the same indications that we have targeted. Many of these
organizations have financial, technical, regulatory, patenting, manufacturing and marketing resources that are far greater than ours. If a competitor were to successfully develop or acquire rights to a similar or more effective treatment of subjects
with the same indications targeted by us or one that has reduced side effects or offers significantly lower costs of treatment, or were to successfully enter the market in advance of us with a similar or superior therapy, our business, financial
condition or results of operations could be materially adversely affected. We cannot provide assurances that research and development by others will not render our technology or talabostat obsolete or non-competitive or result in treatments superior
to any therapy or drug developed by us, or that any drug or therapy developed by us will be preferred to any existing or newly developed technologies.

Our manufacturing strategy presents a number of risks

We do not currently have our own
manufacturing facilities. We depend on outside contractors for the manufacture of talabostat. Completion of our clinical trials and the commercialization of talabostat will require sufficient access to these external manufacturing capabilities.

Our outside contractors may give greater priority to other products or for other reasons may fail to manufacture or deliver the required
supply of talabostat in a cost-effective or timely manner. Our current and future manufacturers are and will be subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign agencies for compliance with strictly
enforced good manufacturing practice regulations and similar state and foreign standards, and we do not have control over our third-party manufacturers compliance with these regulations and standards.

Any of these factors could in the future delay clinical trials or commercialization of talabostat, interfere with sales, entail higher costs or result in
us being unable to effectively sell our products. To the extent that we are reliant on a sole source of supply of a drug, any interruption in that supply could delay us in effectively developing, testing and commercializing the drug.

Our ability to generate revenues will be diminished if talabostat is not accepted in the marketplace, if we fail to obtain acceptable prices or if
adequate reimbursement is not available for talabostat from third-party payors

There are competing products to talabostat already
in the market for the treatment of each therapeutic indication we are currently pursuing in clinical trials. Even if approved for sale and distribution for one or more therapeutic indications, talabostat might not achieve market acceptance for such
indications or remain on the market. Talabostat may be rejected by the marketplace due to many factors, including cost and the perceived risks versus the benefits of talabostat. Physicians, subjects, payors or the medical community in general may be
unwilling to accept, prescribe, utilize, recommend or reimburse for talabostat for such indications.

Our ability to commercialize our
drugs may be limited due to the continuing efforts of government and third-party payors to contain or reduce the costs of health care through various means. For example, in many



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markets outside the U.S., the pricing and profitability of prescription pharmaceuticals are subject to government control. In the U.S., we expect that there
will continue to be federal and state proposals to implement additional government control. For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 provides a new Medicare prescription drug benefit that began in 2006
and mandates other reforms. Although we cannot predict the full effects on our business of the implementation of this new legislation, it is possible that the new benefit will result in decreased reimbursement for prescription drugs which may
further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs. This could harm our ability to market talabostat and generate revenues.

Also, increasing emphasis on managed care in the U.S. and the possibility of government regulation of prescription drug prices will likely continue to put additional pressure on the pricing of pharmaceutical products.

Cost control initiatives could decrease the price that we might otherwise achieve for talabostat in the future. Further, cost control
initiatives could adversely affect our ability to commercialize talabostat and our ability to realize profits and revenues from this commercialization.

Our ability to commercialize pharmaceutical products, alone or with distributors or others, may depend in part on the extent to which reimbursement for the products will be available from:



| |  |  | government and health administration authorities;
| | - |  | -------------------------------------------------



| |  |  | private health insurers; and
| | - |  | ----------------------------



| |  |  | other third-party payors.
| | - |  | -------------------------

Significant uncertainty exists
as to the reimbursement status of newly approved healthcare products. Third-party payors, including Medicare, are challenging the prices charged for medical products and services. Government and other third-party payors increasingly are attempting
to contain healthcare costs by limiting both coverage and the level of reimbursement for new drugs and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling
approval. Third-party insurance coverage may not be available to subjects for any products we discover and develop, alone or with our strategic alliance partners. If government and other third-party payors do not provide adequate coverage and
reimbursement levels for talabostat, the market acceptance of these products may be reduced.

We use hazardous chemicals and
radioactive and biological materials in our business; any disputes relating to improper use, handling, storage or disposal of these materials could be time-consuming and costly

Our preclinical and clinical operations involve the use of certain hazardous materials, including certain chemicals and radioactive and biological
materials. The hazardous materials used most frequently by us in our operations include sodium chromate containing chromium-51 (51 Cr), nucleotides containing phosphorus-32 (32 P) and phenol. Our operations also produce hazardous waste
products. We are subject to the risk of accidental contamination or discharge or any resultant injury from these materials, and we do not maintain liability insurance for contamination or injury resulting from the use of the materials. Federal,
state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to damages, fines and penalties in the event of an improper or unauthorized release of, or exposure of
individuals to, these hazardous materials, and our liability could exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our business. To date, our
compliance costs with respect to environmental laws and regulations have been minimal.

We may be sued for product or operational
liability

We may be held liable if any of our products or operations cause injury or death or are found otherwise unsuitable during
product testing, manufacturing, marketing or sale. We currently maintain a $2 million general liability policy and a $5 million annual aggregate product liability insurance related to our clinical trials



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consistent with industry standards. When necessary for our products, we intend to obtain additional product liability insurance. Insurance coverage may be
prohibitively expensive, may not fully cover our potential liabilities or may not be available in the future. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims
could prevent or inhibit the commercialization of our products. If we are sued for any injury caused by our products, the litigation could consume substantial time and attention of our management and our liability could exceed our total assets.

If we lose key personnel or are unable to attract or retain additional personnel, we may be unable to develop talabostat or achieve
commercialization objectives

We are highly dependent on Donald R. Kiepert, Jr., our Chairman, President and Chief Executive
Officer, Richard N. Small, our Senior Vice President, Chief Financial Officer and Treasurer, Margaret J. Uprichard, our Senior Vice President and Chief Development Officer, Michael P. Duffy, our Senior Vice President, General Counsel and
Secretary, Barry Jones, our Senior Vice President and Chief Scientific Officer, as well as other key members of our management and scientific staff. To date, we have not maintained key-man liability insurance to protect against the loss of any of
these personnel, with the exception of Mr. Kiepert, for whom we maintain a key-man liability insurance policy. The loss of any of these personnel may have a disruptive effect on our operations until they are replaced, and may have a material
adverse effect on our product development and commercialization efforts if we are not able to attract qualified replacements.

Our success
depends on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. In particular, our preclinical and clinical operations depend on our ability to attract and retain highly skilled scientists and
clinical development and regulatory affairs personnel. In addition, we will need to hire additional personnel and develop additional collaborations as we continue to expand our preclinical and clinical operations. We are not aware of any key
employee who plans to retire or terminate his or her employment with us in the near future. Despite our ability in the past in attracting and retaining key personnel, we cannot provide assurances that we will be able to continue to attract, retain
or motivate personnel or develop or maintain such outside relationships in the future.

We have contingent liabilities relating to
our historical discontinued operations that could give rise to liability risks in the future

Prior to the sale of substantially all
of our non-cash assets to Whatman in May of 2001, we were engaged in the business of developing and supplying blood filtration devices. Although Whatman contractually assumed and agreed to indemnify us and hold us harmless from and against most
liabilities and obligations arising out of the conduct of our blood filtration business, we retained certain known and unknown risks that were not contractually assumed by Whatman including without limitation, (i) any of our liabilities under
any benefit plan, (ii) tax liabilities incurred which relate to periods prior to the closing of the Whatman transaction, (iii) accounts payable arising prior to the closing of the Whatman transaction, (iv) any of our liabilities which
were owed to our security holders in their capacity as such, and (v) our liabilities which were owed to Sepracor, Inc. arising or resulting from its respective contractual relationships with us. If for any reason Whatman, or its
successors, is not able to satisfy any of the assumed liabilities, such outcome could have a material and adverse effect on our financial condition. Accordingly, there can be no assurances that claims arising out of our historical business and
operations would not be asserted against us in the future and, if asserted, there can be no assurances that we would prevail.

If we
are unable to maintain compliance with NASDAQ listing requirements, our stock could be delisted, and the trading price, volume and marketability of our stock could be adversely affected

As of April 2, 2004, our common stock began trading on the NASDAQ Capital Market. Previously, our common stock was traded on the OTC Bulletin Board.
There can be no assurances, however, that we will be able to maintain compliance with NASDAQs present listing standards, or that NASDAQ will not implement additional listing standards with which we will be unable to comply. Failure to maintain
compliance with



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NASDAQ listing requirements could result in the delisting of our shares from trading on the NASDAQ system, which could have a material adverse effect on the
trading price, volume and marketability of our common stock.

The subsequent sale of a substantial number of shares of our common
stock could cause our stock price to decline and cause our stockholders to experience substantial dilution

In total, certain
entities and individuals hold existing warrants to purchase up to 2,592,500 shares of our common stock at a weighted average exercise price of $3.78 as of August 4, 2006. In addition, certain entities and individuals hold existing options to
purchase 5,353,478 shares of our common stock at an average exercise price of $3.45 as of August 4, 2006. The exercise and subsequent sale of a substantial amount of these warrants and options could adversely affect the market
price of our common stock. To the extent we raise additional capital by issuing equity securities, all stockholders may experience substantial dilution.

Our stock price could be volatile and our trading volume may fluctuate substantially

The
price of our common stock has been and may in the future continue to be extremely volatile, with the sale price fluctuating from a low of $1.91 to a high of $6.75 in the two-year period ended August 4, 2006. Many factors could
have a significant impact on the future price of our common stock, including:



| |  |  | progress or results of any of our clinical trials, in particular any announcements regarding the progress or results of our clinical trials for talabostat;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | progress of regulatory approval of our product candidate, talabostat, and compliance with ongoing regulatory requirements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to consumate a strategic transaction to ensure the continued funding of our operations, including corporate collaborations, merger and acquisition activities and
consolidations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to raise additional capital to fund our operations, whether through the issuance of equity securities or debt;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | market acceptance of our product candidates;
| | - |  | --------------------------------------------



| |  |  | technological innovations, new commercial products or drug discovery efforts and preclinical and clinical activities by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in our intellectual property portfolio or developments or disputes concerning the proprietary rights of our product candidates;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain component materials and successfully enter into and maintain manufacturing relationships for our product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | maintenance of our existing licensing agreement with Tufts University;
| | - |  | ----------------------------------------------------------------------



| |  |  | changes in government regulations;
| | - |  | ----------------------------------



| |  |  | issuance of new or changed securities analysts reports or recommendations;
| | - |  | ---------------------------------------------------------------------------



| |  |  | general economic conditions and other external factors;
| | - |  | -------------------------------------------------------



| |  |  | actual or anticipated fluctuations in our quarterly financial and operating results; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | degree of trading liquidity in our common stock.
| | - |  | ------------------------------------------------

In
addition, the stock market has from time to time experienced extreme price and volume fluctuations which may be unrelated to the operating performance of particular companies. For the three-month period ended August 4, 2006, the daily trading
volume for shares of our common stock ranged from 5,300 to 249,800 shares traded per day, and the average daily trading volume during such three-month period was only 46,712 shares traded per day. Accordingly, our investors
who wish to dispose of their shares of common stock on any given trading day may not be able to do so or may be able to dispose of only a portion of their shares of common stock.



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|Item 4. | Submission of Matter to a Vote of Security Holders
|------- | --------------------------------------------------

The Annual Meeting of Stockholders was held on June 20, 2006. The holders of more than a majority of the shares entitled to vote were represented at the meeting in person or by proxy, constituting a quorum. At the meeting, the
following matter was voted upon by the stockholders, receiving the number of affirmative (for) and withheld or negative (withheld) votes set forth below each matter.

1. To consider and act upon a proposal to elect seven directors for a term ending at the next annual meeting and until each such directors
successor is duly elected and qualified:



|                       |  |            |  |         
|---------------------- |  | ---------- |  | --------
|                       |  | For        |  | Withheld
|Donald R. Kiepert, Jr. |  | 27,475,933 |  | 91,868  
|Timothy J. Barberich   |  | 27,199,511 |  | 368,290 
|Richard J. Benjamin    |  | 27,473,933 |  | 93,868  
|Thomas M. Claflin, II  |  | 27,436,237 |  | 131,564 
|Larry G. Pickering     |  | 27,476,033 |  | 91,768  
|Daniel T. Roble        |  | 26,776,141 |  | 791,660 
|William J. Whelan, Jr. |  | 27,437,971 |  | 129,830 



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



|              |  |                                                                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                             
|              | 
|31.1          |  | Certification of Donald R. Kiepert, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 8, 2006, filed herewith.
|              | 
|31.2          |  | Certification of Richard N. Small pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August, 8, 2006, filed herewith.     
|              | 
|32.1          |  | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant
has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |  |  |                          |  |                               |  |                        
|-------------------- |  |  |  | ------------------------ |  | ----------------------------- |  | -----------------------
|                     |  |  |  | POINT THERAPEUTICS, INC.
|                     |  |  | 
|Date: August 8, 2006 |  |  |  | By:                      |  | /S/    DONALD R. KIEPERT, JR.
|                     |  |  |  |                          |  |                               |  | Donald R. Kiepert, Jr. 
|                     |  |  |  |                          |  |                               |  | Chief Executive Officer
|                     |  | 
|                     |  |  |  | POINT THERAPEUTICS, INC.
|                     |  |  | 
|Date: August 8, 2006 |  |  |  | By:                      |  | /S/    RICHARD N. SMALL      
|                     |  |  |  |                          |  |                               |  | Richard N. Small       
|                     |  |  |  |                          |  |                               |  | Chief Financial Officer



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