**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark one)**

**ý****                 ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005**

 

**OR**

 

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

 

**CommissionFile Number: 0-19410**

 

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**POINT THERAPEUTICS, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

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

 

**(617) 933-2130**

Registrant’sTelephone Number, Including Area Code

 

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Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.    ý  Yes    o  No

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Securities Exchange Actof 1934).    ý  Yes    o  No

 

As of August 5, 2005, there were 23,465,340 sharesof the Registrant’s Common Stock, $0.01 par value per share, outstanding.

 

 

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**POINTTHERAPEUTICS, INC. AND SUBSIDIARIES**

(A Development StageCompany)

 

**QUARTERLYREPORT ON FORM 10-Q**

**INDEX**

 
| PART I. FINANCIAL INFORMATION                                                                                                                                                                           |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                         |   |
| Item 1. Financial Statements  (unaudited)                                                                                                                                                                    |   |
|                                                                                                                                                                                                         |   |
| Consolidated Balance Sheets as of  June 30, 2005 and December 31, 2004                                                                                                                             |   |
|                                                                                                                                                                                                         |   |
| Consolidated  Statements of Operations For The Three and Six Month Periods Ended  June 30, 2005 and 2004 and For The Period From September 3, 1996  (Date of Inception) Through June 30, 2005 |   |
|                                                                                                                                                                                                         |   |
| Consolidated  Statements of Cash Flows for the Six Month Periods Ended June 30, 2005  and 2004 and For The Period From September 3, 1996 (Date of Inception)  Through June 30, 2005           |   |
|                                                                                                                                                                                                         |   |
| Notes to Consolidated  Financial Statements                                                                                                                                                                  |   |
|                                                                                                                                                                                                         |   |
| Item 2. Management’s Discussion  and Analysis of Financial Condition and Results of Operations                                                                                                          |   |
|                                                                                                                                                                                                         |   |
| Item 3. Quantitative and  Qualitative Disclosures About Market Risk                                                                                                                                          |   |
|                                                                                                                                                                                                         |   |
| Item 4. Controls and Procedures                                                                                                                                                                              |   |
|                                                                                                                                                                                                         |   |
| PART II. OTHER INFORMATION                                                                                                                                                                              |   |
|                                                                                                                                                                                                         |   |
| Item 6. Exhibits                                                                                                                                                                                             |   |
|                                                                                                                                                                                                         |   |
| SIGNATURES                                                                                                                                                                                                   |   |

 

Inthis report, “Point,” “the Company,” “we,” “us” and “our” refer to PointTherapeutics, Inc. and Subsidiaries.

 

2

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**POINTTHERAPEUTICS, INC. AND SUBSIDIARIES**

**(ADevelopment Stage Company)**

 

**CONSOLIDATED BALANCE SHEETS**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                         | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                                                                         |       |                    |       |                        |       |
| Current assets:                                                                                                                                                                                                                    |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                          |       | $                       | 23,622,454 |                        | $          | 13,905,993 |   |
| Restricted cash                                                                                                                                                                                                                    |       | 386,001                 |       | 86,001                      |       |
| Prepaid expenses and other current assets                                                                                                                                                                                          |       | 422,718                 |       | 288,511                     |       |
| Total current assets                                                                                                                                                                                                               |       | 24,431,173              |       | 14,280,505                  |       |
| Office and laboratory equipment, net                                                                                                                                                                                               |       | 221,459                 |       | 205,323                     |       |
| Deposits and other assets                                                                                                                                                                                                          |       | 2,562                   |       | 10,247                      |       |
| Total assets                                                                                                                                                                                                                       |       | $                       | 24,655,194 |                        | $          | 14,496,075 |   |
|                                                                                                                                                                                                                               |       |                    |       |                        |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                                                                     |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                                                                               |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                                                                   |       | $                       | 1,150,528  |                        | $          | 912,942 |   |
| Accrued clinical and drug development                                                                                                                                                                                              |       | 1,829,422               |       | 1,106,057                   |       |
| Accrued expenses                                                                                                                                                                                                                   |       | 617,228                 |       | 378,815                     |       |
| Total current liabilities                                                                                                                                                                                                          |       | 3,597,178               |       | 2,397,814                   |       |
| Patent liability, less current portion                                                                                                                                                                                             |       | 42,364                  |       | 47,604                      |       |
| Stockholders’ equity:                                                                                                                                                                                                         |       |                    |       |                        |       |
| Preferred stock, $0.01 par value, 1,000,000  shares authorized; no shares issued or outstanding as of June 30, 2005  and December 31, 2004                                                                               |       | —                  |       | —                      |       |
| Common stock, $0.01 par value, 75,000,000  shares authorized, 23,520,330 shares issued and 23,348,253 outstanding at  June 30, 2005 and 18,435,375 shares issued and 18,263,298 shares  outstanding at December 31, 2004 |       | 235,203                 |       | 184,353                     |       |
| Treasury stock, 172,077 shares at cost, as  of June 30, 2005 and December 31, 2004                                                                                                                                       |       | (794,611                | )          | (767,338                    | )          |
| Additional paid-in capital                                                                                                                                                                                                         |       | 71,328,114              |       | 52,328,072                  |       |
| Deficit accumulated during the development  stage                                                                                                                                                                                  |       | (49,753,054             | )          | (39,694,430                 | )          |
| Total stockholders’ equity                                                                                                                                                                                                    |       | 21,015,652              |       | 12,050,657                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                    |       | $                       | 24,655,194 |                        | $          | 14,496,075 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

3

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**POINTTHERAPEUTICS, INC. AND SUBSIDIARIES**

**(ADevelopment Stage Company)**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                              | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** | **Period from  September 3, 1996  (date of inception)  through June 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005**                                                                                 | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Revenues**                                            |       |                                 |       |                               |       |                                                                                     |       |   |   |   |   |
| License revenue                                         |       | $                                    | —     |                               | $          | —                                                                                   |       | $ | — |   | $ | — |   | $ | 5,115,041 |   |
| Sponsored research revenue                              |       | —                               |       | —                             |       | —                                                                                   |       | — |   | 2,400,000 |   |
|                                                         |       |                                      |       |                                    |       |                                                                                          |       |  |   |   |   |
| Total revenues                                          |       | —                               |       | —                             |       | —                                                                                   |       | — |   | 7,515,041 |   |
|                                                         |       |                                      |       |                                    |       |                                                                                          |       |  |   |   |   |
| **Operating expenses**                                  |       |                                 |       |                               |       |                                                                                     |       |   |   |   |   |
| Research and development                                |       | 4,060,603                            |       | 2,204,776                          |       | 7,613,587                                                                                |       | 4,230,393 |   | 39,836,982 |   |
| General and administrative                              |       | 1,227,307                            |       | 837,152                            |       | 2,670,939                                                                                |       | 1,964,833 |   | 18,713,715 |   |
|                                                         |       |                                      |       |                                    |       |                                                                                          |       |  |   |   |   |
| Total operating expenses                                |       | 5,287,910                            |       | 3,041,928                          |       | 10,284,526                                                                               |       | 6,195,226 |   | 58,550,697 |   |
|                                                         |       |                                      |       |                                    |       |                                                                                          |       |  |   |   |   |
| Net loss from operations                                |       | (5,287,910                           | )          | (3,041,928                         | )          | (10,284,526                                                                              | )          | (6,195,226 | ) | (51,035,656 | ) |
|                                                         |       |                                      |       |                                    |       |                                                                                          |       |  |   |   |   |
| **Interest income, net**                                |       |                                 |       |                               |       |                                                                                     |       |   |   |   |   |
| Interest income                                         |       | 144,631                              |       | 33,603                             |       | 225,902                                                                                  |       | 52,389 |   | 1,365,254 |   |
| Interest expense                                        |       | —                               |       | —                             |       | —                                                                                   |       | — |   | (82,652 | ) |
|                                                         |       |                                      |       |                                    |       |                                                                                          |       |  |   |   |   |
| Total interest income, net                              |       | 144,631                              |       | 33,603                             |       | 225,902                                                                                  |       | 52,389 |   | 1,282,602 |   |
|                                                         |       |                                      |       |                                    |       |                                                                                          |       |  |   |   |   |
| **Net loss**                                            |       | $                                    | (5,143,279 | )                                  | $          | (3,008,325                                                                               | )          | $ | (10,058,624 | ) | $ | (6,142,837 | ) | $ | (49,753,054 | ) |
|                                                         |       |                                      |       |                                    |       |                                                                                          |       |  |   |   |   |
| **Net loss per common share**                           |       |                                 |       |                               |       |                                                                                     |       |   |   |   |   |
| ** **                                              |       |                                 |       |                               |       |                                                                                     |       |   |   |   |   |
| Basic and diluted                                       |       | $                                    | (0.23      | )                                  | $          | (0.17                                                                                    | )          | $ | (0.48 | ) | $ | (0.37 | ) |   |   |
|                                                         |       |                                      |       |                                    |       |                                                                                          |       |   |   |   |   |
| **Shares used in computing net loss per  common share** |       |                                 |       |                               |       |                                                                                     |       |   |   |   |   |
| ** **                                              |       |                                 |       |                               |       |                                                                                     |       |   |   |   |   |
| Basic and diluted                                       |       | 22,456,565                           |       | 18,186,742                         |       | 20,956,429                                                                               |       | 16,677,824 |   |   |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

4

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**POINTTHERAPEUTICS, INC. AND SUBSIDIARIES**

**(ADevelopment Stage Company)**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(unaudited)

 
| ** **                                                     | ** ** | **Six months ended  June 30,** | ** **  | **Period from  inception  (September 3,  1996) through  June 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------|-------------|------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                            | ** **  | **2004**                                                                     | ** ** | **2005** | ** ** |
| **Operating Activities**                                       |       |                                |        |                                                                         |       |   |   |
| Net loss                                                       |       | $                                   | (10,058,624 | )                                                                            | $          | (6,142,837 | ) | $ | (49,753,054 | ) |
| Adjustments to reconcile net loss to net  cash used:           |       |                                |        |                                                                         |       |   |   |
| Depreciation                                                   |       | 55,368                              |        | 54,614                                                                       |       | 388,839 |   |
| Stock-based compensation                                       |       | 144,233                             |        | 32,808                                                                       |       | 840,425 |   |
| 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                                                |       | (300,000                            | )           | (5,833                                                                       | )          | (386,001 | ) |
| Prepaid expenses and other assets                              |       | (126,522                            | )           | (188,227                                                                     | )          | (444,557 | ) |
| Accounts payable and accrued expenses                          |       | 1,199,364                           |        | 265,463                                                                      |       | 3,594,734 |   |
| Net cash used in operating activities                          |       | (9,086,181                          | )           | (5,984,012                                                                   | )          | (44,690,728 | ) |
|                                                           |       |                                |        |                                                                         |       |   |   |
| **Investing activities**                                       |       |                                |        |                                                                         |       |   |   |
| Purchase of office and laboratory equipment                    |       | (71,504                             | )           | (60,304                                                                      | )          | (610,298 | ) |
| Net cash used in investing activities                          |       | (71,504                             | )           | (60,304                                                                      | )          | (610,298 | ) |
|                                                           |       |                                |        |                                                                         |       |   |   |
| **Financing activities**                                       |       |                                |        |                                                                         |       |   |   |
| Proceeds from issuance of common stock, net  of issuance costs |       | 15,031,218                          |        | 12,157,527                                                                   |       | 48,133,931 |   |
| Proceeds from merger between Point and HMSR  Inc.              |       | —                              |        | —                                                                       |       | 14,335,285 |   |
| Proceeds from issuance of convertible note                     |       | —                              |        | —                                                                       |       | 1,892,904 |   |
| Proceeds from warrant exercises                                |       | 3,659,255                           |        | 717,991                                                                      |       | 4,390,756 |   |
| Proceeds from stock option exercises                           |       | 188,913                             |        | —                                                                       |       | 201,353 |   |
| Principal payments of patent liability                         |       | (5,240                              | )           | (4,763                                                                       | )          | (30,749 | ) |
| Net cash provided by financing activities                      |       | 18,874,146                          |        | 12,870,755                                                                   |       | 68,923,480 |   |
|                                                                |       |                                     |        |                                                                              |       |   |   |
| **Net increase in cash and cash equivalents**                  |       | 9,716,461                           |        | 6,826,439                                                                    |       | 23,622,454 |   |
| ** **                                                     |       |                                |        |                                                                         |       |   |   |
| **Cash and cash equivalents, beginning of period**             |       | 13,905,993                          |        | 14,062,104                                                                   |       | — |   |
| ** **                                                     |       |                                |        |                                                                         |       |   |   |
| **Cash and cash equivalents, end of period**                   |       | $                                   | 23,622,454  |                                                                         | $          | 20,888,543 |   | $ | 23,622,454 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

5

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**POINTTHERAPEUTICS, INC. AND SUBSIDIARIES**

**(ADevelopment Stage Company)**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2005**

**(unaudited)**

 

**1. Nature of the Business**

 

PointTherapeutics, Inc. (the “Company” or “Point”) is a Boston-basedbiopharmaceutical company developing a family of dipeptidyl peptidase (DPP)inhibitors for use in cancer, type 2 diabetes and as vaccine adjuvants. Point’slead product candidate, talabostat (PT-100), is a small molecule drug in Phase2 clinical trials. Talabostat is orally-active and, through a novel mechanismof action, has the potential to inhibit the growth of malignant tumors and tosupport the reconstitution of the hematopoietic system.

 

        Pointbelieves that talabostat represents a large market opportunity because of itswide range of potential applications in oncology. Talabostat is currently beingtested in clinical trials in combination with several chemotherapeutic agents,a monoclonal antibody and as a single agent to potentially treat both solidtumors and hematologic malignancies. Talabostat could also potentially be usedin combination with cancer vaccines and to support the reconstitution of thehematopoietic system.

 

        Thestrategy of Point’s current clinical development program is to develop the fullrange of potential commercial applications of talabostat with priorities givento the fastest-to-market applications. In 2004, Point initiated four Phase 2clinical trials studying talabostat in combination with docetaxel in metastaticnon-small cell lung cancer (NSCLC), talabostat as a single agent in metastaticmelanoma, talabostat in combination with cisplatin in metastatic melanoma andtalabostat in combination with rituximab in advanced chronic lymphocyticleukemia (CLL).  The trials aresingle-arm studies using the Simon method which utilizes a two-stage design todetermine potential clinical activity (tumor response rate) as compared tohistorical rates. In 2005, Point initiated a fifth Phase 2 clinical trialstudying talabostat in combination with gemcitabine in metastatic pancreaticcancer.  The trial is also a single-armstudy using the Fleming method which also utilizes a two-stage design todetermine potential clinical activity (six month survival).

 

        Inaddition, Point’s portfolio includes two other DPP inhibitors in preclinicaldevelopment—PT-630 for type 2 diabetes, and PT-510 as a vaccine adjuvant. PT-630has a high affinity for DPP-4 which is a target that numerous pharmaceuticalcompanies are exploring as potential promising therapies to treat type 2diabetes. Point believes that PT-630 potentially has differentiatingcharacteristics from other DPP-4 inhibitors currently being clinicallydeveloped.   Some of thesedifferentiating characteristics include possible once-a-day dosage, higherpotency, better glycemic control, reduced triglyceride levels and improvedinsulin sensitivity.  Point’s second DPPinhibitor preclinical candidate, PT-510, is being developed as a potentialvaccine adjuvant for both cancer and infectious disease. Point has preclinicalproof of principle data that indicates PT-510 upregulates both cytokines andchemokines which are believed to be critical for the induction of an immuneresponse.

 

        Inaddition to these product opportunities, Point from time to time evaluates newtechnologies to broaden its portfolio of potential products, includingin-licensing and collaboration arrangements, as well as more expansivecorporate relationships, including mergers and acquisitions.

 

**2. Significant Accounting Policies**

 

**Unaudited Interim Financial Statements**

 

The accompanying unaudited interim financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States and applicable Securities and ExchangeCommission (the “SEC”) regulations for interim financial information. Thesefinancial statements are unaudited and, in the opinion of management, includeall adjustments normal and recurring in nature necessary to present fairly thebalance sheets, statements of operations, and statements of cash flows for theperiods presented in accordance with accounting principles generally acceptedin the United States. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been condensed oromitted pursuant to SEC rules and regulations. It is presumed that usersof this interim financial information have read or have access to the auditedfinancial statements and footnote disclosure of Point for the year ended December 31,2004, contained in a Form 10-K filed with the Securities and ExchangeCommission on March 15, 2005. Operating results for the quarter ended June 30,2005 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2005.

 

**Use of Estimates**

 

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Actual results could differ fromthose estimates.

 

6

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**Reclassifications**

 

Certain amounts in 2004 have been reclassified toconform to the 2005 presentation, including the reclassification of patentexpenses from research and development to general and administrative expensesin the Company’s statement of operations.

 

**Net Loss Per Common Share**

 

Basic and diluted net loss per common share amounts are presented inconformity with Statement of Financial Accounting Standards No. (“SFAS”)128, “Earnings per Share”, for all periods presented. In accordance with SFAS128, basic and diluted net loss per common share amounts have been computedusing the weighted-average number of shares of common stock outstanding for thethree and six month periods ended June 30, 2005 and 2004. Potentiallydilutive securities, consisting of stock options of 3,930,737 and warrants of 2,716,944outstanding at June 30, 2005 have been excluded from the diluted earningsper share calculations since their effect is antidilutive.

 

**Stock-Based Compensation**

 

The Company has elected to follow Accounting Principles Board (“APB”)Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”),in accounting for its stock-based employee compensation plans using theintrinsic value method, rather than the alternative fair value accountingmethod provided for under SFAS No. 123, Accounting for Stock Based Compensation(“SFAS No. 123”), as SFAS No. 123 requires the use of optionvaluation models that were not developed for use in valuing employee stockoptions. Under APB No. 25, when the exercise price of options granted toemployees under these plans equals the market price of the underlying stock onthe date of grant, no compensation expense is required. The reconciliation ofnet loss and net loss per share, as reported, to pro forma net loss and netloss per share giving effect to employee stock-based compensation accounted forusing the fair value accounting method, is as follows:

 

 
| ** **                                                                                                                                                                         | ** ** | **Three Months Ended June 30,** | ** **  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|-------------|
| ** **                                                                                                                                                                         | ** ** | **2005**                             | ** **  | **2004** | ** ** |
| Net loss, as reported                                                                                                                                                              |       | $                                    | (5,143,279  | ) | $ | (3,008,325 | ) |
| Less: 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                             | )           | (599,656 | ) |
| Pro Forma Net loss                                                                                                                                                                 |       | $                                    | (5,649,023  | ) | $ | (3,607,981 | ) |
| Net loss per common share, as reported                                                                                                                                             |       | $                                    | (0.23       | ) | $ | (0.17 | ) |
| Net loss per common share, pro forma                                                                                                                                               |       | $                                    | (0.25       | ) | $ | (0.20 | ) |
|                                                                                                                                                                               |       |                                 |        |   |   |
| ** **                                                                                                                                                                         | ** ** | **Six Months Ended June 30,**   | ** **  |
| ** **                                                                                                                                                                         | ** ** | **2005**                             | ** **  | **2004** | ** ** |
| Net loss, as reported                                                                                                                                                              |       | $                                    | (10,058,624 | ) | $ | (6,142,837 | ) |
| Less: 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 |       | (927,741                             | )           | (852,148 | ) |
| Pro Forma Net loss                                                                                                                                                                 |       | $                                    | (10,986,365 | ) | $ | (6,994,985 | ) |
| Net loss per common share, as reported                                                                                                                                             |       | $                                    | (0.48       | ) | $ | (0.37 | ) |
| Net loss per common share, pro forma                                                                                                                                               |       | $                                    | (0.52       | ) | $ | (0.42 | ) |

 

These pro forma amounts disclosed above may not be representative ofthe effects for future years as options vest over several years and additionalawards are generally made each year.

 

The fair value of the stock options at the date of grant was estimatedusing the Black-Scholes option pricing model with the following averageassumptions:

 
| ** **              | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------|------------|--------------------------------------|------------|
| ** **              | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Expected life (years)   |       | 4.00                                 |       | 4.00 |   |
| Risk-free interest rate |       | 3.8                                  | %          | 3.2%-3.6 | % |
| Volatility              |       | 93                                   | %          | 93 | % |
| Dividends               |       | None                                 |       | None |   |

 

7

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| ** **              | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Expected life (years)   |       | 4.00                               |       | 4.00 |   |
| Risk-free interest rate |       | 3.8                                | %          | 3.2%-3.6 | % |
| Volatility              |       | 93                                 | %          | 93 | % |
| Dividends               |       | None                               |       | None |   |

 

**3. New Accounting Pronouncement**

 

        In December 2004,the FASB issued SFAS 123(R), “Share-Based Payment,” which will be effective forpublic entities no later than the beginning of the first fiscal year beginningafter June 15, 2005.   SFAS 123(R) replaces SFAS 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” The new standard requires that the compensationcost relating to share-based payment be recognized in financial statements atfair value. As such, reporting employee stock options under the intrinsicvalue-based method prescribed by APB 25 will no longer be allowed. The Companyhas historically elected to use the intrinsic value method and has notrecognized expense for employee stock options granted. The Company will adoptthis pronouncement on January 1, 2006 and is currently evaluating theimpact that this pronouncement will have on its consolidated financialstatements.

 

**4. Common Stock**

 

        On March 4,2005, the Company consumated a registered direct placement of 3,650,000 sharesof its common stock at a price of $4.50 per share, resulting in gross proceedsto the Company of $16,425,000. After placement agent fees of $1,149,500 andother expenses for legal, accounting and printing fees of $244,500, netproceeds to the Company were $15,031,000. The offered shares are registeredpursuant to Point’s $50,000,000 shelf registration statement that was declaredeffective by the Securities and Exchange Commission on January 12, 2005.

 

        Asa result of this offering, 900,000 warrants with an initial exercise price of$6.25 have been repriced to $6.02 per share. These warrants were originallyissued in March 2004 and expire in 2009.

 

        Forthe first six months of 2005, the Company also received proceeds of $3,659,000from the exercise of 1,379,971 warrants and proceeds of $189,000 from theexercise of 54,984 stock options.

 

**5. Lease**

 

OnMarch 16, 2005, the Company entered into a lease agreement with KNH RealtyTrust, initially for approximately 15,000 square feet of office space at155 Federal Street, Boston, MA. The lease term begins on July 9,2005 and expires on July 8, 2010 with the option for extension. TheCompany relocated its corporate headquarters from 125 Summer Street, Boston, MAto 155 Federal Street, Boston, MA in July 2005.  In connection with this lease, the Company obtaineda letter of credit in the amount of $300,000 on March 28, 2005.  The letter of credit is renewable annuallyfor the term of the sublease with the landlord and is collateralized by cashheld in money market funds at the Company's financial institution.

 

AForm 8-K, with a copy of the lease agreement, was filed with the SEC on March 17,2005.

 

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**Item 2.**                                      **MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Cautionary Factors with Respect to Forward-LookingStatements**

 

Readers are cautioned that certain statementscontained in this Management’s Discussion and Analysis of Financial Conditionand 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 theprospects for our drug development activities and results of operations basedon our current expectations, such as statements regarding certain milestoneswith respect to our clinical program and our product candidates.Forward-looking statements are statements that are not historical facts, andcan 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 variationsof those terms of comparable language, or by discussions of strategy orintentions. A number of important factors could cause actual results to differmaterially from those projected or suggested in the forward looking statement,including, but not limited to, our ability to (i) successfully develop andmanufacture products, (ii) obtain the necessary governmental approvals, (iii) obtainexternal funding to finance the operations, and (iv) obtain and enforce intellectualproperty rights, as well as the risk factors discussed below under the captiontitled “Certain Factors That May Affect Future Operating Results”.

 

**Overview**

 

Weare a Boston-based biopharmaceutical company developing a family of dipeptidylpeptidase (DPP) inhibitors for use in cancer, type 2 diabetes and as vaccineadjuvants. Our lead product candidate, talabostat (PT-100), is a small moleculedrug in Phase 2 clinical trials. Talabostat is orally-active and, through anovel mechanism of action, has the potential to inhibit the growth of malignanttumors and to support the reconstitution of the hematopoietic system.

 

Webelieve that talabostat represents a large market opportunity because of itswide range of potential applications in oncology. Talabostat is currently beingtested in clinical trials in combination with several chemotherapeutic agents,a monoclonal antibody and as a single agent to potentially treat both solidtumors and hematologic malignancies. Talabostat could also potentially be usedin combination with cancer vaccines and to support the reconstitution of thehematopoietic system.

 

The strategy of our current clinicaldevelopment program is to develop the full range of potential commercialapplications of talabostat with priorities given to the fastest-to-marketapplications. In 2004, we initiated four Phase 2 clinical trials studyingtalabostat in combination with docetaxel in metastatic non-small cell lungcancer (NSCLC), talabostat as a single agent in metastatic melanoma, talabostatin combination with cisplatin in metastatic melanoma and talabostat incombination with rituximab in advanced chronic lymphocytic leukemia (CLL).  The trials are single-arm studies using theSimon method which utilizes a two-stage design to determine potential clinicalactivity (tumor response rate) as compared to historical rates. In 2005, Pointinitiated a fifth Phase 2 clinical trial studying talabostat in combinationwith gemcitabine in metastatic pancreatic cancer.  The trial is also a single-arm study usingthe Fleming method which also utilizes a two-stage design to determinepotential clinical activity (six month survival).

 

In addition, our portfolio includes two otherDPP inhibitors in preclinical development—PT-630 for type 2 diabetes, and PT-510as a vaccine adjuvant. PT-630 has a high affinity for DPP-4 which is a targetthat numerous pharmaceutical companies are exploring as potential promisingtherapies to treat type 2 diabetes. Point believes that PT-630 potentially hasdifferentiating characteristics from other DPP-4 inhibitors currently beingclinically developed.   Some of thesedifferentiating characteristics include possible once-a-day dosage, higherpotency, better glycemic control, reduced triglyceride levels and improvedinsulin sensitivity.  Our second DPPinhibitor preclinical candidate, PT-510, is being developed as a potentialvaccine adjuvant for both cancer and infectious disease. We have preclinicalproof of principle data that indicates PT-510 upregulates both cytokines andchemokines which are believed to be critical for the induction of an immuneresponse.

 

Inaddition to these product opportunities, we from time to time evaluate newtechnologies to broaden our portfolio of potential products, includingin-licensing and collaboration arrangements, as well as more expansivecorporate relationships, including mergers and acquisitions.

 

Our principal executive office is located at 155 FederalStreet, Boston, MA, 02110 and our telephone number is (617) 933-2130. Ourcommon stock trades on the NASDAQ SmallCap Market under the symbol “POTP”. Ourwebsite is www.pther.com.

 

To date, we have generated no revenues from product sales and haveprimarily depended upon equity financings, interest earned on invested funds,and collaboration payments received from pharmaceutical companies to providethe working capital required to pursue our intended business activities. Wehave a net accumulated deficit of $49,753,000 through June 30, 2005. Theaccumulated deficit has resulted principally from our efforts to develop drugcandidates and the associated administrative costs

 

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required to support theseefforts. We expect to incur significant additional operating losses over thenext several years due to our ongoing developmental and clinical efforts. Ourpotential for future profitability is dependent on our ability to effectivelydevelop our current pharmaceutical product candidate, talabostat, to developother currently in-licensed product candidates, and to license and develop newpharmaceutical compounds.

 

**Critical Accounting Policies and Significant Judgmentsand Estimates**

 

***Critical AccountingPolicies***

 

In December 2001, the Securities and Exchange Commission (the “SEC”)requested that all registrants list their most “critical accounting policies”in Management’s Discussion and Analysis of Financial Condition and Results ofOperations. The SEC indicated that a “critical accounting policy” is one whichis both important to the portrayal of our financial condition and results andrequires management’s most difficult, subjective or complex judgments, often asa result of the need to make estimates about the effect of matters that areinherently uncertain. Our significant accounting policies are fully describedin Note 2 to our consolidated financial statements, included in our AnnualReport on Form 10-K filed with the SEC on March 15, 2005.

 

***Revenue Recognition***

 

Revenue is deemed earned when all of the following have occurred: thereis persuasive evidence of an arrangement; all of our obligations relating tothe revenue have been met and the earning process is complete; the moniesreceived or receivable are not refundable, irrespective of research results;and there are neither future obligations nor future milestones to be met by uswith respect to such revenue incurred.

 

Revenue from corporate collaborations is earned based upon researchexpenses incurred and milestones achieved. Non-refundable payments uponinitiation of contracts are deferred and amortized over the period which we areobligated to participate on a continuing and substantial basis in the researchand development activities outlined in each contract. Amounts received inadvance of reimbursable expenses are recorded as deferred revenue until therelated expenses are incurred. Milestone payments are recognized as revenue inthe 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 therelated receivable is reasonably assured. For the three and six month periodsended June 30, 2005 and 2004, we recognized no revenue.

 

***Clinical TrialAccrual***

 

We accrue the estimated cost of patient recruitment and relatedsupporting functions for our clinical trial as patients are enrolled in thetrial. We accrue the costs for the trials based on percentage of completion ofthe contract entered into. In the past, our estimates have been materially accuratewith the actual billings received. These costs consist primarily of paymentsmade to the clinical centers and investigators for participating in ourclinical trial. As actual or expected costs become known, they may differ fromestimated costs previously accrued for and this clinical trial accrual would beadjusted accordingly.

 

***SignificantJudgments and Estimates***

 

The preparation of our consolidated financial statements in conformitywith accounting principles generally accepted in the United States requiresthat we make estimates and assumptions that affect the reported amounts anddisclosure of certain assets and liabilities at our balance sheet date and theamount of revenue and expenses during the period. Such estimates include thecarrying value of property and equipment and the value of certain liabilities.Actual results may differ from such estimates.

 

**Results of Operations**

 

***Three-month period ended June 30,2005 as compared to the three-month period ended June 30, 2004***

 

| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** | **Percent Change** | ** ** |
|----------------------------|------------|--------------------------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2005**                             | ** ** | **2004**           | ** ** | **2005/2004** | ** ** |
|                       |       |                                 |       |               |       |   |   |
| Revenue                    |       | $                                    | —     |               | $          | — |   | — | % |
| Total revenue              |       | —                               |       | —             |       | — |   |
| Research and development   |       | 4,060,603                            |       | 2,204,776          |       | 84.2 |   |
| General and administrative |       | 1,227,307                            |       | 837,152            |       | 46.6 |   |
| Total operating expenses   |       | 5,287,910                            |       | 3,041,928          |       | 73.8 |   |
| Interest income            |       | 144,631                              |       | 33,603             |       | 330.4 |   |
| Net loss                   |       | $                                    | (5,143,279 | )                  | $          | (3,008,325 | ) | 71.0 | % |

 

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***Six-month period ended June 30, 2005 as compared to the six-monthperiod ended June 30, 2004***

 

| ** **                 | ** ** | **Six Months Ended June 30,** | ** **  | **Percent Change** | ** ** |
|----------------------------|------------|------------------------------------|-------------|--------------------|------------|
| ** **                 | ** ** | **2005**                           | ** **  | **2004**           | ** ** | **2005/2004** | ** ** |
|                       |       |                               |        |               |       |   |   |
| Revenue                    |       | $                                  | —      |               | $          | — |   | — | % |
| Total revenue              |       | —                             |        | —             |       | — |   |
| Research and development   |       | 7,613,587                          |        | 4,230,393          |       | 80.0 |   |
| General and administrative |       | 2,670,939                          |        | 1,964,833          |       | 35.9 |   |
| Total operating expenses   |       | 10,284,526                         |        | 6,195,226          |       | 66.0 |   |
| Interest income            |       | 225,902                            |        | 52,389             |       | 331.2 |   |
| Net loss                   |       | $                                  | (10,058,624 | )                  | $          | (6,142,837 | ) | 63.7 | % |

 

***Revenue***

 

We recorded no revenue during the three and six-monthperiods ended June 30, 2005 and 2004.

 

***Operating Expenses***

 

***Research anddevelopment***

 

During the three and six month periods ending June 30, 2005 and2004, almost all of our research and development efforts have been focused onthe preclinical and clinical development of talabostat. The expenses disclosedfor research and development in our financial statements has primarily beendirected towards developing talabostat, with the exception of approximately $397,000and $77,000 spent during the first six months of 2005 and 2004 respectively, onexternal experiments for one of our other DPP inhibitors in preclinicaldevelopment—PT-630 for type 2 diabetes.

 

In 2004, we initiated four Phase 2 clinical trials of talabostat. Thetrials are studying talabostat in combination with docetaxel in metastatic NSCLC,talabostat as a single agent in metastatic melanoma, talabostat in combinationwith cisplatin in metastatic melanoma, and talabostat in combination withrituximab in advanced CLL.In June 2005, we initiated a fifth Phase 2 clinical trial to studytalabostat in combination with gemcitabine in patients with metastaticpancreatic cancer.

 

Inaddition, during 2004 and 2005, we incurred expenses related to our two otherDPP inhibitors in preclinical development—PT-630 for type 2 diabetes, and PT-510as a vaccine adjuvant.

 

Research and development expenses increased 84.2% to$4,061,000 for the three-month period ended June 30, 2005 from $2,205,000for the three-month period ended June 30, 2004. Research and developmentexpenses increased 80.0% to $7,614,000 for the six-month period ended June 30,2005 from $4,230,000 for the six-month period ended June 30, 2004.

 

 
| ** **                     | ** ** | **Three-months ended June 30,** | ** ** | **Percent Change** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|--------------------|------------|
| **Research and development**   | ** ** | **2005**                             | ** ** | **2004**           | ** ** | **2005/2004** | ** ** |
| Drug development               |       | $                                    | 3,177,162  |               | $          | 1,587,155 |   | 100.2 | % |
| Preclinical development        |       | 883,441                              |       | 617,621            |       | 43.0 |   |
| Total research and development |       | $                                    | 4,060,603  |               | $          | 2,204,776 |   | 84.2 | % |

 
| ** **                     | ** ** | **Six-months ended June30,** | ** ** | **Percent Change** | ** ** |
|--------------------------------|------------|------------------------------|------------|--------------------|------------|
| **Research and development**   | ** ** | **2005**                     | ** ** | **2004**           | ** ** | **2005/2004** | ** ** |
| Drug development               |       | $                            | 5,772,259  |               | $          | 2,822,586 |   | 104.5 | % |
| Preclinical development        |       | 1,841,328                    |       | 1,407,807          |       | 30.8 |   |
| Total research and development |       | $                            | 7,613,587  |               | $          | 4,230,393 |   | 80.0 | % |

 

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

 

Drug development expenses increased 100.2% to $3,177,000for the three-month period ended June 30, 2005 from $1,587,000 for thethree-month period ended June 30, 2004.  The increase was primarily due to increasedexternal clinical and manufacturing

 

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costs ($1,230,000) due tothe costs incurred for analytical development activities related to our clinicaldrug supply and activities related to our five Phase 2 clinical trials. We alsoadded six employees during the first six months of 2005 in order to internallymanage the clinical trial process for talabostat bringing the total employeesin this area to fifteen.

 

For the six-month period ended June 30, 2005,drug development expenses increased 104.5% to $5,772,000 from $2,823,000 forthe six-month period ended June 30, 2004. The increase was primarily due to increased external clinical andmanufacturing costs ($2,307,000) due to the costs incurred for clinical trialcosts related to our five Phase 2 clinical trials currently under way andanalytical development activities related to our clinical drug supply and costsrelated to increased employeesin this area, as noted above.

 

During the remainder of 2005, we anticipate that our drug development costswill continue to increase due to ongoing costs of our five Phase 2 talabostatclinical studies and costs related to a Phase 3 clinical trial in NSCLC which weplan to initiate in the fourth quarter of 2005. In addition, we currently anticipatehiring seven additional employees in this area to manage our planned Phase 3clinical program, bringing the total employees in the drug development area totwenty-two.

 

*Preclinical Development:* Preclinical development includes expensesassociated with research and testing of our product candidates prior toreaching the clinical development stage. Such expenses primarily include thecosts of internal personnel, outside contractors, facilities, includingdepreciation, and lab supplies.

 

Preclinical development expenses increased 43.0% to$883,000 for the three-month period ended June 30, 2005 from $618,000 forthe three-month period ended June 30, 2004. The increase was primarily dueto an increase in external research activities to support the preclinicalresearch of PT-630 ($130,000) and external research collaborations ($79,000).  In addition, we added one employee to ourpreclinical development group bringing the total employees in this area toeight.

 

Preclinical development expenses increased 30.8% to$1,841,000 for the six-month period ended June 30, 2005 from $1,408,000for the six-month period ended June 30, 2004. The increase was primarilydue to an increase in external research activities to support our preclinicalresearch for PT-630 ($320,000) and external research collaborations($79,000).  In addition, as mentionedabove, we added one employee to our preclinical development group bringing the totalemployees in this area to eight.

 

During the remainder of 2005, we anticipate that preclinical expenseswill increase over 2004 levels due to additional external researchcollaborations to support our clinical program. We also anticipate increasing the total employees in this area fromeight to ten.

 

***General and administrative***

 

*General and administrative:* General and administrative costs include theassociated administrative costs required to support the clinical developmentand research efforts including legal, patent, finance & accounting,business development, investor relations and other administrative supportfunctions.

 

General and administrative expenses increased 46.6%to $1,227,000 during the three-month period ended June 30, 2005 from $837,000for the three-month period ended June 30, 2004. The increase was primarilydue to increased salaries and fringes ($110,000) due to the hiring of three newemployees and increased patent and legal expenses ($94,000) resulting fromcosts related to patent activity.

 

Generaland administrative expenses increased 35.9% to $2,671,000 during the six-monthperiod ended June 30, 2005 from $1,965,000 for the six-month period ended June 30,2004.   The increase was primarily due tosalaries and related fringe costs ($324,000) due to the hiring of three employeesand increased bonuses in 2005 as compared to 2004 and increased legal and patentexpenses ($129,000) resulting from costs related to patent activity.  In addition, we recorded non-cash charges forstock compensation ($187,000) relating to the extension of the exercise periodfor a former executive’s stock option award and a stock option grant to aconsultant.

 

During the remainder of 2005, we anticipate that general andadministrative expenses will increase moderately from 2004 levels as we plan tocontinue to expand our business development and investor relations efforts.  We also anticipate hiring two additionalemployees to support our phase 3 clinical program and other administrativefunctions in the general and administrative area bringing the total employees inthis area to eleven.

 

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***Interest Income***

 

Interest income includes interest earned on investedcash balances. During the six-month periods ended June 30, 2005 and 2004,our investments consisted entirely of funds deposited in money market funds.

 

Interest income increased to $145,000 in thethree-month period ended June 30, 2005 from $34,000 in the three-monthperiod ended June 30, 2004. Interest income increased to $226,000 in thesix-month period ended June 30, 2005 from $52,000 in the six-month periodended June 30, 2004. The increase in interest income in both periodsresulted from a higher average cash balance and a slightly higher interest rate.

 

***Net loss***

 

As a result of the foregoing, we incurred a net lossof $5,143,000, or $0.23 per common share, for the three-month period ended June 30,2005 compared to a net loss of $3,008,000, or $0.17 per common share, for thethree-month period ended June 30, 2004 and a net loss of $10,059,000 or $0.48per common share for the six-month period ended June 30, 2005 as comparedto a net loss of $6,143,000 or $0.37 per common share for the six-month periodended June 30, 2004.

 

**Liquidity and Capital Resources**

 

We have financed our operations since inception principally through thesale of equity securities and collaboration payments received frompharmaceutical companies. Since our inception in September 1996, we haveraised approximately $50,027,000, net of costs of raising capital, in equityfinancings and $7,515,000 from licensing and sponsored research collaborations withpharmaceutical companies. In addition, we received $14,335,000 as a result ofthe merger between Point Massachusetts and HMSR in March 2002. We havealso received $1,365,000 from interest earned in invested cash balances and$4,592,000 in proceeds from warrant and stock option exercises.

 

On March 4, 2005, we consumated a registered direct placement of3,650,000 shares of our common stock at a price of $4.50 per share, resultingin gross proceeds to us of $16,425,000. After placement agent fees of $1,149,500and other expenses for legal, accounting and printing fees of $244,500, netproceeds to us were $15,031,000. The offered shares are registered pursuant toour $50,000,000 shelf registration statement that was declared effective by theSecurities and Exchange Commission on January 12, 2005.

 

At June 30, 2005, our cash and cash equivalents increased by$9,716,000 as compared to December 31, 2004. The increase was primarilydue to net proceeds totaling $15,031,000 resulting from the sale of 3,650,000shares of common stock in the recent placement and proceeds from warrant andstock option exercises of $3,848,000 offset in part by $9,086,000 used inoperations for the six month period ended June 30, 2005, primarily to fundthe clinical program for talabostat and our other research and developmentinitiatives. We also increased our investment in office and laboratoryequipment by $71,000 from $539,000 at December 31, 2004 to $610,000 at June 30,2005. The increase resulted from purchases of laboratory equipment, computersand furniture.

 

Since inception, we have incurred $39,837,000 in expenses on researchand development activities. Almost all of our research and development effortshave primarily been focused on the preclinical and clinical development of talabostatfor the treatment of solid tumors, hematologic malignancies and hematopoieticdisorders with the exception of approximately $704,000 incurred during 2004 and2005 for our two other DPP inhibitors.

 

Since inception, we have incurred operating expensesof $58,551,000 and have accumulated a deficit as of June 30, 2005 of $49,753,000.At June 30, 2005, we had $23,622,000 in cash and cash equivalents. Wecurrently anticipate that our existing capital resources and interest to bereceived on invested cash balances should enable us to maintain our current andplanned operations into the first half of 2006. Therefore, the accompanyingfinancial statements have been prepared assuming that we will continue as agoing concern. We are currently considering several strategic options in orderto ensure the continued funding of our operations including, but not limitedto, the sale of securities in both public and private offerings as the marketsallow, raising additional funds through corporate collaborations and merger andacquisition activities and consolidations. There can be no assurance that atransaction will be consummated in a reasonable time frame or on termsacceptable to us. Should we be unable to raise sufficient funds, we may berequired to curtail our operations during 2006. In addition, increases inexpenses or delays in product development not currently forecasted oranticipated may adversely impact our cash position and require further costreductions.

 

Our expectations regarding our rate of spending andthe sufficiency of our cash resources over future periods are forward-lookingstatements. Our funding requirements are expected to increase over the nextseveral years as we continue with the clinical development of talabostat andinitiate human clinical trials for additional clinical indications fortalabostat, PT-630 and PT-510 and

 

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additional productcandidates. The rate of spending and sufficiency of such resources will beaffected by numerous factors including the success of our clinical trials andthe rate of acquisition of new products and technologies. Success inearly-stage clinical trials or acquisition of new products and technologieswould lead to an increase in working capital requirements. Our actual cashrequirements may vary materially from those now planned because of the resultsof research and development, clinical trials, product testing, relationshipswith strategic partners, acquisition of new products and technologies, changes inthe focus and direction of our research and development programs, competitiveand technological advances, the process of obtaining United States Food andDrug Administration or other regulatory approvals and other factors.

 

**Contractual Obligations**

 

As of June 30, 2005, we had future paymentsrequired under contractual obligations and other commitments approximately asfollows:

 
| ** **               | ** ** | **Payments Due By Year** | ** ** |
|--------------------------|------------|--------------------------|------------|
| ** **               | ** ** | **Q3- Q4 2005**          | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
| Operating Leases         |       | $                        | 76,344     |   | $ | 414,010 |   | $ | 402,457 |   | $ | 391,311 |   | $ | 391,311 |   | $ | 195,656 |   |
| Licensing Obligations    |       | —                   |       | 10,000 |   | 10,000 |   | 10,000 |   | 10,000 |   | 27,895 |   |
| Total Future Obligations |       | $                        | 76,344     |   | $ | 424,010 |   | $ | 412,457 |   | $ | 401,311 |   | $ | 401,311 |   | $ | 223,551 |   |
|                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In connection with the subleases for our offices at 125 Summer Streetin Boston, we issued two letters of credit on April 11, 2002 and January 8,2004 in the amounts of $80,168 and $5,833, respectively. The letters of creditare renewable annually on April 11 and January 8, respectively forthe terms of the subleases with the landlords.   Both of thesesubleases terminate in 2005 and we anticipate the letters of credit will becancelled upon the termination of the subleases.   In addition, on March 28,2005, in connection with our lease for our new corporate offices at 155 FederalStreet, we issued a letter of credit in the amount of $300,000 which isrenewable annually for the term of the lease with the landlord.  All ofthe above described letters of credit are collateralized by cash held in moneymarket funds held at our financial institution and are classified as restrictedcash on our balance sheet at June 30, 2005.

 

In addition,in accordance with the license agreement between us and Tufts University Schoolof Medicine (“Tufts”), we are required to make payments totaling $300,000 toTufts upon commencement of the first Phase 3 trial, marketing applicationof the first licensed product and marketing approval of the first licensedproduct, in addition to a royalty based on future sales of products coveredunder the license agreement.

 

**Off-Balance Sheet Arrangements**

 

We had no off-balance sheet arrangements as of June 30, 2005 thathave or are reasonably likely to have a current or future effect on ourfinancial condition, changes in financial condition, revenue or expenses,results of operations, liquidity, capital expenditures or capital resourcesthat is material to investors.

 

**New Accounting Pronouncement**

 

In December 2004, the FASB issued SFAS 123(R), “Share-BasedPayment,” which will be effective for public entities no later than thebeginning of the first fiscal year beginning after June 15, 2005.  SFAS 123(R) replaces SFAS 123, “Accounting for Stock-Based Compensation,”and supersedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees.” The new standard requires that the compensation cost relating toshare-based payment be recognized in financial statements at fair value. Assuch, reporting employee stock options under the intrinsic value-based methodprescribed by APB 25 will no longer be allowed. We have historically elected touse the intrinsic value method and have not recognized expense for employeestock options granted. We will adopt this pronouncement on January 1, 2006and are currently evaluating the impact that this pronouncement will have onour consolidated financial statements.

 

**Certain Factors that May Effect FutureOperating Results**

 

We operate in a rapidly changing environment that involves a number ofrisks, some of which are beyond our control. The following discusses theserisks. The risks and uncertainties described below are those that we currentlybelieve may materially affect us. Additional risks and uncertainties that weare unaware of or that we currently deem immaterial also may become importantfactors that affect us.

 

***If we fail to obtainthe capital necessary to fund our operations, we will be unable to successfullydevelop or commercialize talabostat***

 

As of June 30, 2005, we had a cash balance of approximately $23.6 million.We currently anticipate spending approximately $2.0 million per month tofund our preclinical and clinical programs and related general andadministrative activities.  Our current cash balance is expected to besufficient to allow us to maintain our current and planned operations into the firsthalf of 2006. It is difficult to estimate at this time the additional fundsrequired to finance our operations as we are currently uncertain about thetherapeutic indications that we will continue to clinically develop into laterstages, the extent of the clinical program required to

 

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successfully develop a selectedtherapeutic indication, and if any of these programs will eventually befinanced through a collaboration with a better funded partner. Also, we do notknow whether additional funding will be available when needed, or that, ifavailable, we will be able to obtain funding on satisfactory terms. We haveincurred approximately $58.6 million of expenses since inception through June 30,2005, and expect our capital outlays and operating expenditures to increaseover the next several years as we expand our infrastructure and preclinical andclinical trial activities. We may raise these funds through corporatepartnerships, additional sales of securities in both public and privateofferings as the markets allow, and merger and acquisition activities andconsolidations.

 

In addition to the progress of our preclinical and clinical effort, ourfuture capital requirements depend on many other factors, including: the costand timing of regulatory approvals of talabostat, technological advances, thereevaluation of the commercial potential of talabostat in light of developmentsin our industry or market, the status of competitive products, the establishmentof a sales force and the development of manufacturing capacity. Unexpectedevents or other factors beyond our control could also impact our capitalrequirements.

 

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

 

***Our lead productcandidate, talabostat, is in human clinical development, and its safety andeffectiveness are still being determined***

 

Our lead product candidate, talabostat, is currently undergoingevaluation in clinical trials for the treatment of certain solid tumors and hematologicmalignancies. To obtain regulatory approval for the commercial sale oftalabostat for its intended therapeutic applications, we must demonstrate incarefully controlled and well-designed clinical trials that talabostat is safeand effective in humans for the proposed therapeutic indications. In additionto animal safety studies, we have conducted Phase 1 human clinical safetystudies, both in single and multiple doses, which have provided us sufficientsafety information to select dose ranges for our Phase 1 human clinical dosefinding studies. These Phase 1 dose finding studies have, in turn, provided ussafety and effectiveness information to select doses for our Phase 2 humanclinical studies which are evaluating safety and effectiveness of talabostat inlarger cohort groups. Although with the completion of each of our humanclinical studies we are learning more about the safety profile of talabostat,we cannot yet predict whether subjects in clinical trials will sufferunacceptable health consequences related to talabostat. Our clinical trials maybe suspended at any time if the FDA or we believe that the participatingsubjects are exposed to unacceptable health risks. In addition, we cannot yetpredict whether talabostat will be effective treating the therapeuticapplications for which the human clinical studies we are conducting have beendesigned or that physicians or the FDA will consider talabostat effective forsuch therapeutic applications. In addition, even if talabostat is shown to beeffective in our clinical trials, we cannot predict whether the FDA willdetermine that the therapeutic benefits of talabostat outweigh any perceivedadverse effects of the drug.

 

If talabostat is not safe or effective, or is perceived as not beingsafe or effective by the FDA or physicians, our business, financial condition,results of operations and prospects will be harmed.

 

***Our lead productcandidate, talabostat, is in human clinical development, and we may not be ableto design or implement an effective clinical development plan which will resultin timely FDA approval for the selected therapeutic applications***

 

Our lead product candidate, talabostat, is currently undergoingevaluation in clinical trials for the treatment of certain solid tumors and hematologicmalignancies. Conducting clinical trials is a lengthy and highly uncertainprocess. The length of time to complete clinical trials varies according to thetype, complexity, novelty and intended use of the product candidate. We may nothave designed our clinical trials in a way that results in their fastestcompletion because of unforeseen safety or effectiveness issues. Our trials maytake longer to complete than we anticipate because of a slower than expectedrate of eligible subject recruitment in the trials. If our clinical trials takelonger than we expect, we may have greater expenses than we project and mayhave a more difficult time raising additional capital to fund future or evenexisting 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 affectour chances of obtaining FDA approval. We may not be able to adequately followor evaluate the subjects of the clinical trials after their treatment toestablish a positive therapeutic effect. We may not be able to maintain adatabase of sufficient integrity to track safety and effectiveness informationof treated subjects that would withstand appropriate FDA scrutiny. We, or ourchosen vendors, may fail to comply with FDA regulations for good clinicalpractices.

 

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

 

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***If talabostat is nota successful drug candidate, we may be unable to obtain other potential drugcandidates***

 

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

 

***We have had ahistory of losses, and expect to continue to incur losses and may not achieveor maintain profitability***

 

As of June 30, 2005, we had an accumulated deficit ofapproximately $49.8 million. The extent of our future losses and thetiming of profitability are highly uncertain, and we may never achieveprofitable operations. We have not had any products that have generated anysales revenue, and welikely will not until talabostat or any other of our products becomecommercially available, if ever. We expect to incur losses at least until webegin commercial sales of our first approved product, if any. We expect thatour operating expenses will increase and accelerate as our preclinical, clinicaland support operations expand, even if we succeed in developing one or morecommercial products. Our ability to achieve product revenue and profitabilityis dependent on our capability, alone or with partners, to successfullycomplete the development of talabostat, conduct clinical trials, obtainnecessary regulatory approvals, and manufacture, distribute, market and selltalabostat. We cannot provide assurance that we will generate product revenuesor achieve profitability.

 

***If Tufts UniversitySchool of Medicine terminates our license, we could experience delays or beunable to complete the development and commercialization of our potentialproducts***

 

We license key technology including the rights to talabostat, our leadproduct, from Tufts University School of Medicine (“Tufts”). The underlyinglicenses for this technology terminate on the later of the date of thelast-to-expire patents, or 15 years from the date of initial commercialsale of the licensed product. Termination of these licenses prior to or uponexpiration of the term could force us to delay or discontinue our developmentand commercialization programs. Pursuant to the terms of the license, Tufts hasthe right to terminate the license prior to expiration of the term upon amaterial breach of the license by us, our ceasing to do business or becominginsolvent, or our failure to sell a licensed product in the U.S. market by May 2009.We have no assurance that we would be able to license substitute technology inthe future. Our inability to do so could impair our ability to conduct ourbusiness because we may lack the technology, the necessary rights to suchtechnology, or the finances required, in each case, to develop andcommercialize our potential products.

 

***If we fail to obtainregulatory approval for talabostat in a timely manner, our operating resultsand business may be adversely affected***

 

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

 

In the U.S., we must obtain FDA approval for talabostat and eachindication that we intend to commercialize. The FDA approval process istypically lengthy and expensive, and such approval is never certain and entailsa high degree of risk. Products marketed, manufactured or distributed abroadare also subject to foreign government regulation. Talabostat has not receivedregulatory approval to be commercially marketed and sold for any therapeuticindication. If we fail to obtain regulatory approval, we will be unable tomarket and sell talabostat. We cannot predict with certainty if or when wemight submit talabostat for regulatory approval for any therapeutic indication.Once we submit talabostat for review, we cannot assure you that the FDA orother regulatory agencies will grant approvals on a timely basis or at all. Ifregulatory approval for any therapeutic application for talabostat is delayed,our business, financial condition or results of operations would be materiallyadversely affected.

 

***Because we rely onthird parties to conduct human clinical studies, we may encounter delays inproduct development and commercialization***

 

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

 

Although we continue to increase our internal clinical developmentcapability, including our ability to supervise, manage and, as necessary,replace outside vendors, we still outsource a substantial amount of theclinical trial development process. Thus, we may

 

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lose control over the cost of and time required to conduct thesestudies. In addition, these third parties might not conduct our clinical trialsin accordance with regulatory requirements. Currently, we rely on a smallnumber of contractors for conducting clinical trials of talabostat, although webelieve we can replace these contractors, as necessary, on terms acceptable tous. The failure of any contractor to carry out its contractual duties coulddelay or increase the cost of the successful development and commercializationof talabostat.

 

***We may fail toadequately protect or enforce our intellectual property rights, and ourproducts and processes may infringe the intellectual property rights of others***

 

Protection of our compounds and technology owned or licensed by us isessential to our business. Our policy is to protect our technology by, amongother things, filing or causing to be filed on our behalf patent applicationsfor technology relating to the development of our business. We own or havelicensed 15 issued U.S. patents and 18 pending U.S. patent applications. Thesepatents and patent applications relate to our oncology, diabetes and vaccineadjuvant technologies. If regulatory extensions are not taken into account, oneU.S. patent expires in 2007; one U.S. patent and two applications expire in2011; and the remaining patents and applications expire in 2016 and beyond. Wealso own or have licensed foreign patents and patent applications correspondingto most of the U.S. patents and patent applications. It is possible that nopatents will be issued on our pending patent applications, and it is possiblethat our patent claims, now or in the future issued, will not be sufficient toprotect our products and technology, will not be sufficient to provideprotection against competitive products, or otherwise will not be commerciallyvaluable.

 

Our commercial success will also depend in part on our ability tocommercialize talabostat without infringing on patents or other proprietaryrights of others. Any patents issued to or licensed by us could be challenged,invalidated, infringed, circumvented or held unenforceable. Talabostat or ourother lead drug candidates may infringe current or future patents or otherproprietary rights of others. To date, we have not received any communicationsfrom third parties nor are we aware of any claims by third parties thattalabostat or any of our other activities infringe upon the patent or otherproprietary rights of any third party. However, we cannot assure you that othercompanies or individuals have not or will not independently develop substantiallyequivalent proprietary rights or that other parties have not or will not beissued patents that may prevent the sale of our products or require licensingand the payment of significant fees or royalties in order for us to be able tocarry on our business. If we are successful in the preclinical and clinicaldevelopment of PT-630, our lead drug candidate for the treatment of type 2diabetes, to market and sell that drug we may need to obtain at least anon-exclusive license for relevant use patents from third parties. We from timeto time engage in discussions with Tufts, other licensors, vendors and otherparties about the scope and enforcability of our contractual rights that mayinclude utilization of dispute resolution procedures contained in applicableagreements. Otherwise, we have not notified any third party that they areinfringing any of our proprietary rights.

 

Litigation or other legal proceedings could result in substantial coststo us and may be necessary to enforce any of our patents or other proprietaryrights or to determine the scope and validity or enforceability of otherparties’ proprietary rights. The defense and enforcement of patent andintellectual property claims are both costly and time consuming, even if thelegal outcome is favorable to us. Any adverse legal outcome could subject us tosignificant liabilities to third parties, require disputed rights to belicensed from third parties, or require us to cease manufacturing or sellingour future products.

 

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

 

***If our competitorsreach the market sooner or develop products and technologies that are moreeffective or have reduced side effects, our commercial opportunity will bereduced or eliminated***

 

The pharmaceutical and biotechnology industries are intenselycompetitive. There are existing products on the market, including generics,that are used for the treatment of subjects with the same indications that wehave 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®, Amgen Inc.’s Aranesp®, Neupogen® and Neulasta®, GSK’sBexxar®, OSI Pharmaceutical’s Tarceva®, Eli Lilly’s Alimta® and Gemzar®,Genzyme’s Campath®, JNJ’s Procrit®, and Biogen-IDEC’s Zevalin®. There are alsoseveral other potential competitive products in development at other companies.If any of these products are successful in the clinic, we may experienceadditional competition. Because talabostat is still in clinical development, wedo not have the sales, marketing, manufacturing or distribution capabilitiesnecessary to compete with well-established companies. If talabostat is approvedby the FDA for one or more therapeutic applications, we may enter intocollaboration agreements with one or more established companies in order tocompete in the marketplace. There can be no assurances that we would be able tosuccessfully enter into any such collaborations with third parties or that anysuch collaborations would be entered into on terms satisfactory to us.

 

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There are also many public and private pharmaceutical companies,biotechnology companies, public and private universities, governmental agenciesand research organizations actively engaged in drug discovery and research anddevelopment of products for the treatment of subjects with the same indicationsthat we have targeted. Many of these organizations have financial, technical,regulatory, patenting, manufacturing and marketing resources that are fargreater than ours. If a competitor were to successfully develop or acquire rightsto a similar or more effective treatment of subjects with the same indicationstargeted by us or one that has reduced side effects or offers significantlylower costs of treatment, or were to successfully enter the market in advanceof us with a similar or superior therapy, our business, financial condition orresults of operations could be materially adversely affected.

 

We cannot provide assurances that research and development by otherswill not render our technology or talabostat obsolete or non-competitive orresult in treatments superior to any therapy or drug developed by us, or thatany drug or therapy developed by us will be preferred to any existing or newlydeveloped technologies.

 

***Our manufacturingstrategy presents a number of risks***

 

We do not currently have our own manufacturing facilities. We expect inthe future to depend on outside contractors for the manufacture of talabostat.Completion of our clinical trials and the commercialization of talabostat willrequire access to, or development of, manufacturing capabilities. We haveentered into short-term arrangements with third parties with respect to themanufacture of the quantities necessary for preclinical and clinicaldevelopment. As we approach later-stage clinical development and commercializationof a product candidate, however, our intention is to enter into longer-termarrangements with multiple manufacturing sources. We may not be able to enterinto additional third-party manufacturing arrangements on acceptable terms, ifat all. An outside contractor may give greater priority to other products orfor other reasons may fail to manufacture or deliver the required supply oftalabostat in a cost-effective or timely manner. Our current and futuremanufacturers are and will be subject to ongoing periodic unannouncedinspection by the FDA and corresponding state and foreign agencies forcompliance with strictly enforced good manufacturing practice regulations andsimilar state and foreign standards, and we do not have control over our third-partymanufacturers’ compliance with these regulations and standards.

 

Any of these factors could in the future delay clinical trials orcommercialization of talabostat, interfere with sales, entail higher costs orresult in us being unable to effectively sell our products. To the extent thatwe are reliant on a sole source of supply of a drug, any interruption in thatsupply could delay us in effectively developing, testing and commercializingthe drug.

 

***Our ability togenerate revenues will be diminished if talabostat is not accepted in themarketplace, if we fail to obtain acceptable prices or if adequatereimbursement is not available for talabostat from third-party payors***

 

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

 

Our ability to commercialize our drugs may be limited due to thecontinuing efforts of government and third-party payors to contain or reducethe costs of health care through various means. For example, in many marketsoutside the U.S., the pricing and profitability of prescription pharmaceuticalsare subject to government control. In the U.S., we expect that there willcontinue to be federal and state proposals to implement additional governmentcontrol. For example, the recently enacted Medicare Prescription Drug,Improvement, and Modernization Act of 2003 provides a new Medicare prescriptiondrug benefit beginning in 2006 and mandates other reforms. Although we cannotpredict the full effects on our business of the implementation of this newlegislation, it is possible that the new benefit will result in decreasedreimbursement for prescription drugs which may further exacerbate industry-widepressure to reduce the prices charged for prescription drugs. This could harmour ability to market talabostat and generate revenues.

 

Also, increasing emphasis on managed care in the U.S. and thepossibility of government regulation of prescription drug prices will likelycontinue to put additional pressure on the pricing of pharmaceutical products.Cost control initiatives could decrease the price that we might otherwiseachieve for talabostat in the future. Further, cost control initiatives couldadversely affect our ability to commercialize talabostat and our ability torealize profits and revenues from this commercialization.

 

Our ability to commercialize pharmaceutical products, alone or withdistributors or others, may depend in part on the extent to which reimbursementfor the products will be available from:

 

•government and health administration authorities;

• privatehealth insurers; and

• otherthird-party payors.

 

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Significant uncertainty exists as to the reimbursement status of newlyapproved healthcare products. Third-party payors, including Medicare, arechallenging the prices charged for medical products and services. Governmentand other third-party payors increasingly are attempting to contain healthcarecosts by limiting both coverage and the level of reimbursement for new drugsand by refusing, in some cases, to provide coverage for uses of approvedproducts for disease indications for which the FDA has not granted labelingapproval. Third-party insurance coverage may not be available to subjects forany products we discover and develop, alone or with our strategic alliancepartners. If government and other third-party payors do not provide adequatecoverage and reimbursement levels for talabostat, the market acceptance ofthese products may be reduced.

 

***We use hazardouschemicals and radioactive and biological materials in our business; anydisputes relating to improper use, handling, storage or disposal of thesematerials could be time-consuming and costly***

 

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

 

***We may be sued forproduct or operational liability***

 

We may be held liable if any of our products or operations cause injuryor death or are found otherwise unsuitable during product testing,manufacturing, marketing or sale. We currently maintain a $2 milliongeneral liability policy and a $5 million annual aggregate productliability insurance related to our clinical trials consistent with industrystandards which we believe is adequate to insure us against such potentiallosses. When necessary for our products, we intend to obtain additional productliability insurance. Insurance coverage may be prohibitively expensive, may notfully cover our potential liabilities or may not be available in the future.Inability to obtain sufficient insurance coverage at an acceptable cost orotherwise to protect against potential product liability claims could preventor inhibit the commercialization of our products. If we are sued for any injurycaused by our products, the litigation could consume substantial time andattention of our management and our liability could exceed our total assets.

 

***If we lose keypersonnel or are unable to attract or retain additional personnel, we may beunable 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 VicePresident, Chief Financial Officer and Treasurer, Margaret J. Uprichard, ourSenior Vice President and Chief Development Officer, Michael P. Duffy, ourSenior Vice President, General Counsel and Secretary, Barry Jones, our SeniorVice President for Research, as well as other key members of our management andscientific staff. To date, we have not maintained key-man liability insuranceto 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 ofthese personnel may have a disruptive effect on our operations until they arereplaced, and may have a material adverse effect on our product development andcommercialization efforts if we are not able to attract qualified replacements.

 

Our success depends on our continued ability to attract, retain andmotivate highly qualified management and scientific personnel. In particular,our preclinical and clinical operations depend on our ability to attract andretain highly skilled scientists and clinical development and regulatoryaffairs personnel. In addition, we will need to hire additional personnel anddevelop additional collaborations as we continue to expand our preclinical andclinical operations. To date, we have been able to attract and retain keypersonnel when needed. We are not aware of any key employee who plans to retireor terminate his or her employment with us in the near future. Despite ourability in the past in attracting and retaining key personnel, we cannotprovide assurances that we will be able to continue to attract, retain ormotivate personnel or develop or maintain such outside relationships in thefuture.

 

***We have contingentliabilities relating to our historical discontinued operations that could giverise to liability risks in the future***

 

Prior to the sale of substantially all of our non-cash assets toWhatman in May of 2001, we were engaged in the business of developing andsupplying blood filtration devices. Although Whatman contractually assumed andagreed to indemnify us and hold us

 

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harmless from and against mostliabilities and obligations arising out of the conduct of our blood filtrationbusiness, we retained certain known and unknown risks that were notcontractually assumed by Whatman including without limitation, (i) any ofour liabilities under any benefit plan, (ii) tax liabilities incurredwhich relate to periods prior to the closing of the Whatman transaction, (iii) accountspayable arising prior to the closing of the Whatman transaction, (iv) anyof our liabilities which were owed to our security holders in their capacity assuch, and (v) our liabilities which were owed to Gambro Inc. orSepracor, Inc. arising or resulting from their respective contractualrelationships with us. If for any reason Whatman is not able to satisfy any ofthe assumed liabilities, such outcome could have a material and adverse effecton our financial condition. Accordingly, there can be no assurances that claimsarising out of our historical business and operations would not be assertedagainst us in the future and, if asserted, there can be no assurances that wewould prevail.

 

***If we are unable tomaintain compliance with NASDAQ listing requirements, our stock could bedelisted***

 

As of April 2, 2004, our common stock began trading on the NASDAQSmallCap Market. Previously, our common stock was traded on the OTC BulletinBoard. There can be no assurances, however, that we will be able to maintaincompliance with NASDAQ’s present listing standards, or that NASDAQ will notimplement additional listing standards with which we will be unable to comply.Failure to maintain compliance with NASDAQ listing requirements could result inthe delisting of our shares from trading on the NASDAQ system, which could havea material adverse effect on the trading price, volume and marketability of ourcommon stock.

 

***Our stock pricecould be volatile and our trading volume may fluctuate substantially***

 

The price of our common stock has been and may in the future continueto be extremely volatile, with the sale price fluctuating from a low of $1.35 to a high of $6.95 in the two-year period ended August 5,2005. Factors such as the announcements of results from our clinical trials,technological innovations or new products of our competitors, governmentalregulation, health care legislation, developments in patent or otherproprietary rights of us or our competitors, including litigation, fluctuationsin operating results and market conditions for health care and life sciencesstocks in general could have a significant impact on the future price of ourcommon stock. In addition, the stock market has from time to time experiencedextreme price and volume fluctuations which may be unrelated to the operatingperformance of particular companies. For the three-month period ended August 5,2005, the daily trading volume for shares of our common stock ranged from 6,700to 328,600 shares traded per day, and the average daily trading volume duringsuch three-month period was only 46,898 shares traded per day. Accordingly, ourinvestors who wish to dispose of their shares of common stock on any giventrading day may not be able to do so or may be able to dispose of only a portionof their shares of common stock.

 

***The subsequent saleof a substantial number of shares of our common stock could cause our stockprice to decline and cause our stockholders to experience substantial dilution***

 

In total, certain entities and individuals hold existing warrants topurchase up to 2,600,418 shares of our common stock at a weighted averageexercise price of $4.09 as of August 5, 2005. In addition, certainentities and individuals hold existing options to purchase 4,059,853 shares ofour common stock at an average exercise price of $3.82. The exercise andsubsequent sale of a substantial amount of these warrants and options couldadversely affect the market price of our common stock. To the extent we raiseadditional capital by issuing equity securities, all stockholders mayexperience substantial dilution.

 

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**Item 3.**                                      **QUANTATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Our proceeds to date have been invested in moneymarket funds that invest primarily in short-term, highly-rated investments,including U.S. Government securities, commercial paper and certificates ofdeposit guaranteed by banks. Currently, we do not use interest rate derivativeinstruments to manage exposure to interest rate changes. Because of theshort-term maturities of our investments, we do not believe that a change inmarket rates would have a significant impact on the value of our investmentportfolio. Declines in interest rates will reduce our interest income whileincreases in interest rates will increase our interest income.

 

**Item 4.**                                      **CONTROLS AND PROCEDURES**

 

(a) Evaluation of disclosure controls and procedures. Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, evaluated the effectiveness of our “disclosure controls andprocedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and15d-14(c)) as of June 30, 2005. Based on this evaluation, our chiefexecutive officer and chief financial officer concluded that as of June 30,2005, our disclosure controls and procedures were (1) designed to ensurethat material information relating to us is made known to our chief executiveofficer and chief financial officer by others, particularly during the periodin which this report was prepared and (2) effective, in that they providereasonable assurance that information required to be disclosed by us in thereports we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms.

 

(b) Changes in internal controls. No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fiscal quarter endedJune 30, 2005 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 6.Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                           |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification  of Donald R. Kiepert, Jr. pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002, dated August 9, 2005, filed herewith. |
|                |       |                                                                                                                                                      |
| 31.2                |       | Certification  of Richard N. Small pursuant to Section 302 of the Sarbanes-Oxley Act of  2002, dated August 9, 2005, 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 SecuritiesExchange Act of 1934, as amended, the Registrant has duly caused this QuarterlyReport on Form 10-Q to be signed on its behalf by the undersigned,thereunto duly authorized.**

 
|                       | **POINT THERAPEUTICS, INC.** |
|----------------------------|----------------------------------------|
|                       | ** **                             |
| Date:  August 9, 2005 | By:                                    | /s/   DONALD R. KIEPERT, JR. |
|                       |                                   | **Donald R.  Kiepert, Jr.****Chief Executive  Officer** |
|                       |                                   | ** ** |
|                       | **POINT THERAPEUTICS, INC.** |
|                       |                                   | ** ** |
| Date:  August 9, 2005 | By:                                    | /s/   RICHARD N. SMALL |
|                       |                                   | **Richard N.  Small****Chief Financial  Officer** |

 

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