Alseres Pharmaceuticals 10Q 2007 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007


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

For the transition period from to

Commission File Number 0-6533

ALSERES PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		87-0277826
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)

85 Main Street, Hopkinton, Massachusetts		01748
(Address of Principal Executive Offices)		(Zip Code)

(508) 497-2360
(Registrant’s Telephone Number, Including Area Code)

Boston Life Sciences, Inc.
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

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

Large accelerated filero Accelerated filero Non-accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

As of November 5, 2007 there were 20,717,783 shares of Common Stock outstanding.

ALSERES PHARMACEUTICALS, INC.

INDEX TO FORM 10-Q


	Page
Part I Financial Information
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006		3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006, and for the period from inception (October 16, 1992) to September 30, 2007		4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006, and for the period from inception (October 16, 1992) to September 30, 2007		5
Notes to Condensed Consolidated Financial Statements		6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3 Quantitative and Qualitative Disclosures About Market Risk		26
Item 4 Controls and Procedures		26

Part II Other Information
Item 1A Risk Factors		26
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 6 Exhibits		47

SIGNATURES		48
Ex-10.1 Second Amended and Restated Convertible Promissory Note Purchase Agreement, by and among the Company and the purchasers listed therein, dated August 13, 2007
Ex-31.1 Certification of the Chief Executive Officer pursuant to Rule 13(a) - 14(a)/Rule 15(d) - 14(a) of the Securities Exchange Act of 1934, as amended
Ex-31.2 Certification of the Chief Financial Officer pursuant to Rule 13(a) - 14(a)/Rule 15(d) - 14(a) of the Securities Exchange Act of 1934, as amended
Ex-32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Ex-32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In this report, “we”, “us” and “our” refer to Alseres Pharmaceuticals, Inc. The following are registered trademarks of ours that are mentioned in this Quarterly Report on Form 10-Q: CETHRIN®, ALTROPANE® and FLUORATEC™. All other trade names, trademarks or service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners and are not the property of Alseres Pharmaceuticals, Inc. or any of our subsidiaries.

Part I — Financial Information

Item 1 — Financial Statements

Alseres Pharmaceuticals, Inc.
formerly Boston Life Sciences, Inc.
(A Development Stage Enterprise)

Condensed Consolidated Balance Sheets


	(Unaudited)
	September 30,			December 31,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	5,915,802		$	1,508,665
Marketable securities		2,328,766			—
Other current assets		1,064,007			342,651

Total current assets		9,308,575			1,851,316
Fixed assets, net		98,497			136,433
Other assets		349,300			381,138

Total assets	$	9,756,372		$	2,368,887


LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	3,829,550		$	10,673,898
Convertible notes payable (Note 5)		—			8,000,000
Accrued lease (Note 6)		39,103			30,752

Total current liabilities		3,868,653			18,704,650
Convertible notes payable (Note 5)		23,213,384			—
Accrued lease, excluding current portion (Note 6)		205,218			236,144

Total liabilities		27,287,255			18,940,794

Commitments and contingencies (Note 7)
Stockholders’ deficit:
Preferred stock, $.01 par value; 1,000,000 shares authorized; 25,000 shares designated Convertible Series A, 500,000 shares designated Convertible Series D, and 800 shares designated Convertible Series E; no shares issued and outstanding at September 30, 2007 and December 31, 2006		—			—
Common stock, $.01 par value; 80,000,000 shares authorized; 20,717,783 and 16,576,034 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively		207,178			165,760
Additional paid-in capital		139,870,428			126,765,862
Accumulated other comprehensive income		4,253			—
Deficit accumulated during development stage		(157,612,742	)		(143,503,529	)

Total stockholders’ deficit		(17,530,883	)		(16,571,907	)

Total liabilities and stockholders’ deficit	$	9,756,372		$	2,368,887

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

Alseres Pharmaceuticals, Inc.
formerly Boston Life Sciences, Inc.
(A Development Stage Enterprise)

Condensed Consolidated Statements of Operations
(Unaudited)


													From Inception
													(October 16,
	Three months ended September 30,						Nine months ended September 30,						1992) to
	2007			2006			2007			2006			September 30, 2007
Revenues	$	—		$	—		$	—		$	—		$	900,000
Operating expenses:
Research and development		2,511,154			2,167,532			7,768,339			6,481,875			98,221,386
General and administrative		1,959,883			1,859,073			6,025,890			5,560,039			49,262,208
Purchased in-process research and development		—			—			—			—			12,146,544

Total operating expenses		4,471,037			4,026,605			13,794,229			12,041,914			159,630,138

Loss from operations		(4,471,037	)		(4,026,605	)		(13,794,229	)		(12,041,914	)		(158,730,138	)
Other expenses		—			—			—			—			(1,582,878	)
Interest expense, net		(327,871	)		(12,500	)		(437,569	)		(12,500	)		(4,829,736	)
Investment income		63,585			26,623			122,585			152,808			7,530,010

Net loss		(4,735,323	)		(4,012,482	)		(14,109,213	)		(11,901,606	)		(157,612,742	)
Preferred stock beneficial conversion feature		—			—			—			—			(8,062,712	)
Accrual of preferred stock dividends and modification of warrants held by preferred stockholders		—			—			—			—			(1,229,589	)

Net loss attributable to common stockholders		(4,735,323	)		(4,012,482	)		(14,109,213	)		(11,901,606	)	$	(166,905,043	)

Basic and diluted net loss attributable to common stockholders per share	$	(0.23	)	$	(0.24	)	$	(0.77	)	$	(0.72	)

Weighted average common shares outstanding		20,698,931			16,522,554			18,245,465			16,510,738

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

Alseres Pharmaceuticals, Inc.
formerly Boston Life Sciences, Inc.
(A Development Stage Enterprise)

Condensed Consolidated Statements of Cash Flows
(Unaudited)


							From Inception
							(October 16,
							1992) to
	Nine months ended September 30,						September 30,
	2007			2006			2007
Cash flows from operating activities:
Net loss	$	(14,109,213	)	$	(11,901,606	)	$	(157,612,742	)
Adjustments to reconcile net loss to net cash used for operating activities:
Purchased in-process research and development		—			—			12,146,544
Write-off of acquired technology		—			—			3,500,000
Interest expense settled through issuance of notes payable		—			—			350,500
Non-cash interest expense		95,522			—			1,744,197
Loss on disposal of fixed assets		19,054			—			19,054
Non-cash charges related to options, warrants and common stock		1,259,882			1,593,389			7,413,570
Amortization and depreciation		73,721			144,164			2,654,853
Changes in operating assets and liabilities:
(Increase) decrease in other current assets		(665,772	)		11,577			(149,460	)
(Decrease) increase in accounts payable and accrued expenses		(6,844,348	)		224,532			3,056,885
(Decrease) increase in accrued lease		(22,575	)		(59,504	)		244,321

Net cash used for operating activities		(20,193,729	)		(9,987,448	)		(126,632,278	)
Cash flows from investing activities:
Cash acquired through Merger		—			—			1,758,037
Purchases of fixed assets		(54,839	)		(37,181	)		(1,526,929	)
Decrease (increase) in other assets		31,838			41,678			(702,935	)
Purchases of marketable securities		(3,359,879	)		(2,071,660	)		(132,004,923	)
Sales and maturities of marketable securities		1,035,366			10,834,865			129,680,410

Net cash (used for) provided by investing activities		(2,347,514	)		8,767,702			(2,796,340	)
Cash flows from financing activities:
Proceeds from issuance of common stock		6,102			4,905			63,589,195
Proceeds from issuance of preferred stock		—			—			35,022,170
Preferred stock conversion inducement		—			—			(600,564	)
Proceeds from issuance of promissory notes		27,000,000			2,000,000			41,585,000
Proceeds from issuance of convertible debentures		—			—			9,000,000
Principal payments of notes payable		—			—			(7,146,967	)
Dividend payments on Series E Cumulative Convertible Preferred Stock		—			—			(516,747	)
Payments of financing costs		(57,722	)		—			(5,587,667	)

Net cash provided by financing activities		26,948,380			2,004,905			135,344,420

Net increase in cash and cash equivalents		4,407,137			785,159			5,915,802
Cash and cash equivalents, beginning of period		1,508,665			578,505			—

Cash and cash equivalents, end of period	$	5,915,802		$	1,363,664		$	5,915,802


Supplemental cash flow disclosures:
Non-cash transactions (see Note 5)
Cash paid for interest	$	—		$	—		$	628,406

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

Alseres Pharmaceuticals, Inc.
formerly Boston Life Sciences, Inc.
(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2007

1. The Company and Basis of Presentation

Effective June 7, 2007, the stockholders of Boston Life Sciences, Inc. approved changing the name from Boston Life Sciences, Inc. to Alseres Pharmaceuticals, Inc. (the “ Company”).

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The interim unaudited condensed consolidated financial statements contained herein include, in management’s opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented. The results of operations for the interim period shown on this report are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The uncertainty inherent in the need to raise additional capital and the Company’s recurring losses from operations raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As of September 30, 2007, the Company has experienced total net losses since inception of approximately $157,613,000 and stockholders’ deficit of approximately $17,531,000. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows from operations as the Company’s management executes its current business plan. The cash and cash equivalents available at September 30, 2007 will not provide sufficient working capital to meet the Company’s anticipated expenditures for the next twelve months. The Company believes that the cash and cash equivalents available at September 30, 2007 combined with its ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable the Company to meet its anticipated cash expenditures through February 2008.

In order to continue as a going concern, the Company will therefore need to raise additional capital through one or more of the following: a debt financing, an equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. The Company is currently engaged in fundraising efforts. There can be no assurance that the Company will be successful in its fundraising efforts or that additional funds will be available on acceptable terms, if at all. The Company also cannot be sure that it will be able to obtain additional credit from, or effect additional sales of debt or equity securities to the Purchasers (Note 5). If the Company is unable to raise additional or sufficient capital, it will need to cease operations or reduce, cease or delay one or more of its research or development programs, adjust its current business plan and may not be able to continue as a going concern. If the Company violates a debt covenant or defaults under its second amended and restated convertible promissory note purchase agreement, entered into by the Company on August 13, 2007, (the “August 2007 Amended Purchase Agreement”) (Note 5), it may need to cease operations or reduce, cease or delay one or more of its research or development programs, adjust its current business plan and may not be able to continue as a going concern.

In connection with the common stock financing completed by the Company in March 2005 (the “March 2005 Financing”), the Company agreed with the purchasers in such financing, including Robert Gipson, Thomas Gipson and Arthur Koenig, each of whom are significant stockholders of the Company (the “March 2005 Investors”) that, subject to certain exceptions, it would not issue any shares of its common stock at a per share price less than $2.50 without the prior consent of the March 2005 Investors holding a majority of the shares issued in the March 2005 Financing. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by the Company should the price per share in such financing be set at less than $2.50.

2. Net Loss Per Share

Basic and diluted net loss per share attributable to common stockholders has been calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded from the calculation of weighted average common shares outstanding since their inclusion would be anti-dilutive.

Stock options and warrants to purchase approximately 4.6 million and 4.0 million shares of common stock were outstanding at September 30, 2007 and 2006, respectively, but were not included in the computation of diluted net loss per common share because they were anti-dilutive. The exercise of those stock options and warrants outstanding at September 30, 2007 could potentially dilute earnings per share in the future.

3. Comprehensive Loss

The Company had a total comprehensive loss of $4,731,070 and $4,011,511 for the three months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, total comprehensive loss was $14,104,960 and $11,889,233, respectively. The difference between total comprehensive loss and net loss is due to unrealized gains and losses on marketable securities.

4. Accounting for Stock-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS 123R”) using the modified prospective method, which results in the provisions of SFAS 123R only being applied to the consolidated financial statements on a going-forward basis (that is, the prior period results have not been restated). Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period or expected performance period. The Company recognizes stock-based compensation expense using the straight-line attribution method unless the award includes a performance condition. The Company recognizes stock-based compensation expense on awards with performance conditions in accordance with Financial Accounting Standards Board (“FASB”) Interpretation 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans”, as required under SFAS 123R. Previously the Company had followed Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, which resulted in the accounting for employee share options at their intrinsic value in the consolidated financial statements. All stock-based awards to non-employees are accounted for in accordance with SFAS No. 123 “Accounting for Stock-Based Compensation” and Emerging Issues Task Force 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling, Goods or Services.”

The Company has two stock option plans under which it can issue both nonqualified and incentive stock options to employees, officers, consultants and scientific advisors of the Company. At September 30, 2007, the 1998 Omnibus Plan provided for the issuance of options to purchase up to 1,220,000 shares of the Company’s common stock through April 2008. At September 30, 2007, the 2005 Stock Incentive Plan (the “2005 Plan”) provided for the issuance of options, restricted stock, restricted stock units, stock appreciation rights or other stock-based awards to purchase up to 2,650,000 shares of the Company’s common stock. The 2005 Plan contains a provision that allows for an annual increase in the number of shares available for issuance under the 2005 Plan on the first day of each of the Company’s fiscal years during the period beginning in fiscal year 2006 and ending on the second day of fiscal year 2014. The annual increase in the number of shares shall be equal to the lowest of 400,000 shares; 4% of the Company’s outstanding shares on the first day of the fiscal year; and an amount determined by the Board of Directors.

The Company also has outstanding stock options granted under two other stock option plans, the Amended and Restated Omnibus Stock Option Plan and the Amended and Restated 1990 Non-Employee Directors’ Non-Qualified Stock Option Plan. Both of these plans have expired and no future issuance of awards is permissible under these plans.

The Company’s Board of Directors determines the term, vesting provisions, price, and number of shares for each award that is granted. The term of each option cannot exceed ten years. The Company has outstanding options with performance conditions which, if met, would accelerate vesting upon achievement of the applicable milestones.

Stock-based employee compensation expense recorded during the three and nine months ended September 30, 2007 and 2006 is as follows:


	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Research and development	$	145,844		$	168,843		$	376,226		$	514,103
General and administrative		254,227			315,690			879,739			976,070

	$	400,071		$	484,533		$	1,255,965		$	1,490,173


Impact on basic and diluted net loss attributable to common stockholders per share	$	(0.02	)	$	(0.03	)	$	(0.07	)	$	(0.09	)

The Company uses the Black-Scholes option-pricing model to calculate the fair value of each option grant on the date of grant. The fair value of stock options granted during the three and nine months ended September 30, 2007 and 2006 was calculated using the following estimated weighted-average assumptions:


	Three months ended				Nine months ended
	September 30,				September 30,
	2007		2006		2007		2006
Expected term	6 years		6 years		6 years		6 years
Risk-free interest rate		4.1% - 4.3%		4.5% - 5.0%		4.1% - 5.0%		4.3% - 5.0%
Stock volatility		90%		90%		90%		90%
Dividend yield		0%		0%		0%		0%

Expected term — The Company determined the weighted-average expected term assumption based on the simplified method as described by Staff Accounting Bulletin No. 107, “Share-Based Payment” for “plain vanilla” options. The Company determined the weighted-average expected term assumption for performance-based option grants based on historical data on exercise behavior.

Risk-free interest rate — The risk-free interest rate used for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected term.

Expected volatility — The Company’s expected stock-price volatility assumption is based on historical volatilities of the underlying stock which is obtained from public data sources.

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

As of September 30, 2007, there remained approximately $3,008,000 of compensation costs related to non-vested stock options to be recognized as expense over a weighted-average period of approximately 1.31 years.

A summary of the Company’s outstanding stock options for the nine months ended September 30, 2007 and 2006 is presented below.


	Nine months ended					Nine months ended
	September 30, 2007					September 30, 2006
				Weighted-					Weighted-
				Average					Average
				Exercise					Exercise
	Shares			Price		Shares			Price
Outstanding at beginning of year		3,512,704		$	3.46		2,590,152		$	4.23
Granted		1,085,000			2.85		1,062,000			2.66

Exercised		(19,709	)		2.31		(750	)		2.22

Forfeited and expired		(194,874	)		2.37		(181,337	)		9.55

Outstanding at end of period		4,383,121		$	3.36		3,470,065		$	3.47

Options exercisable at end of period		2,501,608		$	3.79		1,943,670		$	4.03

The weighted-average fair value of options granted was $2.15 and $2.03 during the nine months ended September 30, 2007 and 2006, respectively.

The following table summarizes information about stock options outstanding at September 30, 2007:


	Options Outstanding					Options Exercisable
			Weighted-					Weighted
			Average	Weighted-				Average	Weighted-
			Remaining	Average				Remaining	Average
Range of	Number		Contractual	Exercise		Number		Contractual	Exercise
Exercise Prices	Outstanding		Life	Price		Exercisable		Life	Price
$1.35 — $2.00		100,500	7.9 years	$	1.97		77,306	7.9 years	$	1.97
$2.01 — $3.00		2,925,572	8.0 years		2.55		1,334,330	7.0 years		2.43
$3.10 — $4.65		1,038,363	7.5 years		3.62		771,286	7.4 years		3.61
$4.99 — $6.96		132,500	1.9 years		5.50		132,500	1.9 years		5.50
$8.95 — $13.06		80,740	1.0 years		10.63		80,740	1.0 years		10.63
$15.62 — $22.36		105,446	0.9 years		16.44		105,446	0.9 years		16.44

		4,383,121	7.4 years	$	3.36		2,501,608	6.4 years	$	3.79

The aggregate intrinsic value of outstanding options and exercisable options as of September 30, 2007 was $670,937 and $446,798, respectively. The intrinsic value of options vested during the nine months ended September 30, 2007 was $108,264. The intrinsic value of options exercised during the nine months ended September 30, 2007 was $7,884.

As of September 30, 2007, 836,667 shares of common stock are available for grant under the Company’s option plans.

5. Convertible Notes Payable

In August 2006, the Company issued to Robert Gipson an unsecured promissory note (the “RG Note”), pursuant to which the Company could borrow up to an aggregate principal amount of $3,000,000 from Robert Gipson. In October 2006, the Company issued an amended and restated unsecured promissory note (the “Amended RG Note”) to Robert Gipson to replace the RG Note. Under the Amended RG Note, (i) the aggregate principal amount that could be borrowed by the Company was increased from $3,000,000 to $4,000,000, and (ii) one of the dates triggering repayment under the definition of Maturity Date (as discussed below) was changed from December 31, 2007 to June 30, 2007.

In October 2006, the Company issued to Thomas Gipson (together with Robert Gipson, the “Lenders”) an unsecured promissory note, pursuant to which the Company could borrow up to an aggregate principal amount of $4,000,000 (the “TG Note,” together with Amended RG Note, the “First Amended Notes”). The Company borrowed a total of $8,000,000 pursuant to the First Amended Notes. The outstanding principal amount borrowed under the First Amended Notes was due and payable upon the earliest to occur of: (i) June 30, 2007; (ii) the date on which the Company consummates an equity financing in which the gross proceeds to the Company total at least $10,000,000; and (iii) the date on which a Lender declares an event of default (as defined in the First Amended Notes), the first of these three events to occur referred to as the “Maturity Date.” Interest accrued on the outstanding principal amount under the First Amended Notes was initially payable on the Maturity Date at a rate of 9% per annum from the date of advance to the Maturity Date.

In February 2007, the Company issued amended and restated unsecured promissory notes to the Lenders to replace the First Amended Notes (the “Second Amended Notes”). Under the Second Amended Notes, the aggregate principal amount that may be collectively borrowed by the Company was increased from $8,000,000 to $10,000,000. The Company borrowed an additional $2,000,000 from the Lenders, or $10,000,000 in the aggregate, pursuant to the Second Amended Notes.

In March 2007, the Company issued an amended and restated unsecured promissory note of $5,000,000 to each of the Lenders (the “Amended Notes”). The Amended Notes eliminated all outstanding principal and accrued interest due under the Second Amended Notes and the Company’s right to prepay any portion of the Amended Notes. The Amended Notes also required the Lenders to effect a conversion of the outstanding principal under the Amended Notes into shares of the Company’s common stock at a conversion price of $2.50 per share (the “Amended Notes Conversion”) upon approval by the Company’s stockholders of the conversion. The Company recorded a gain related to the forgiveness of interest of approximately $273,000 to net interest expense on the Company’s Condensed Consolidated Statement of Operations during the three months ended March 31, 2007. On June 7, 2007, the Company’s stockholders approved the Amended Notes Conversion. On June 15, 2007, the Lenders converted the outstanding principal under the Amended Notes into 4,000,000 shares of the Company’s common stock.

In March 2007, the Company entered into a convertible promissory note purchase agreement (the “March 2007 Purchase Agreement”) with Robert Gipson, Thomas Gipson and Arthur Koenig (the “Purchasers” and also referred to as the “March 2007 Note Holders”) pursuant to which the Company could borrow up to $15,000,000 prior to December 31, 2007. In March 2007, the Company issued convertible promissory notes to the March 2007 Note Holders (the “March Notes”) in the aggregate principal amount of $9,000,000.

In May 2007, the Company amended and restated the March 2007 Purchase Agreement (the “May 2007 Amended Purchase Agreement”) to (i) eliminate the requirement for the March 2007 Note Holders to make further advances under the March 2007 Purchase Agreement and (ii) add Highbridge International, LLC (“Highbridge”) as a Purchaser. In May 2007, the Company issued a convertible promissory note to Highbridge (the “Highbridge Note”) in the aggregate principal amount of $6,000,000 pursuant to the May 2007 Amended Purchase Agreement.

In August 2007, the Company amended and restated the May 2007 Amended Purchase Agreement (the “August 2007 Amended Purchase Agreement”) to (i) increase the amount the Company could borrow by $10,000,000 and (ii) add Ingalls & Snyder Value Partners LP (“ISVP”) as a Purchaser. In August 2007, the Company issued a convertible promissory note to ISVP (the “ISVP Note”) in the aggregate principal amount of $10,000,000 pursuant to the August 2007 Amended Purchase Agreement.

The amounts borrowed by the Company under the August 2007 Amended Purchase Agreement bear interest at the rate of 5% per annum and may be converted, at the option of the Purchasers, into (i) shares of the Company’s common stock at a conversion price per share of $2.50 at any time after December 31, 2007, (ii) the right to receive future payments related to the Company’s molecular imaging products (including ALTROPANE and FLUORATEC) in amounts equal to 2% of the Company’s pre-commercial revenue related to such products plus 0.5% of future net sales of such products for each $1,000,000 of outstanding principal and interest that a Purchaser elects to convert into future payments, or (iii) a combination of (i) and (ii). Any outstanding notes that are not converted into the Company’s common stock or into the right to receive future payments will become due and payable by the earlier of December 31, 2010 or the date on which a Purchaser declares an event of default (as defined in the August 2007 Amended Purchase Agreement). However, each Purchaser is prohibited from effecting a conversion if at the time of such conversion the common stock issuable to such Purchaser, when taken together with all shares of common stock then held or otherwise beneficially owned by such Purchaser exceeds 19.9%, or 9.99% for Highbridge and ISVP, of the total number of issued and outstanding shares of the Company’s common stock immediately prior to such conversion unless and until the Company’s stockholders approve the conversion of all of the shares of common stock issuable thereunder.

Pursuant to the August 2007 Amended Purchase Agreement, the Company agreed to file a registration statement (the “Registration Statement”) with the SEC within 60 days after the consummation of the August 2007 Amended Purchase Agreement to register for resale the shares of common stock issued or issuable upon conversion of the convertible promissory notes issued pursuant to the August 2007 Amended Purchase Agreement (the “Required Filing Date”) and use its reasonable best efforts to cause the Registration Statement to be declared effective prior to (A) the earlier of (i) 90 days after the Required Filing Date or (ii) five trading days after the Company receives notice from the SEC that the Registration Statement will not become subject to review, or if the SEC determines to review the Registration Statement, (B) the earlier of (i) 120 days after the Required Filing Date or (ii) five trading days after the Company receives notice from the SEC that the SEC has no further comment to the Registration Statement.

The Highbridge Note was issued with a conversion price of $2.50 which was below the market price of the Company’s common stock on the date the May 2007 Amended Purchase Agreement was entered into. In accordance with EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” the Company recorded a beneficial conversion feature (“BCF”) of $480,000 (the “Highbridge BCF”) which was recognized as a decrease in the carrying value of the Highbridge Note and an increase to additional paid-in capital. In accordance with EITF 00-27, “Application of EITF 98-5 To Certain Convertible Instruments” the value of the Highbridge BCF is being recognized as interest expense using the effective interest method through December 31, 2010. The Company recorded interest expense related to the Highbridge BCF in the accompanying Condensed Consolidated Statement of Operations of approximately $26,000 and $48,000 during the three and nine months ended September 30, 2007, respectively.

The ISVP Note was issued with a conversion price of $2.50 which was below the market price of the Company’s common stock on the date the August 2007 Amended Purchase Agreement was entered into. Accordingly, the Company recorded a BCF of $1,400,000 (the “ISVP BCF”) which was recognized as a decrease in the carrying value of the ISVP Note and an increase to additional paid-in capital. The ISVP BCF is being recognized as interest expense using the effective interest method through December 31, 2010. The Company recorded interest expense related to the ISVP BCF in the accompanying Condensed Consolidated Statement of Operations of approximately $45,000 during the three months ended September 30, 2007.

At September 30, 2007, the aggregate carrying value of the Highbridge Note, the March Notes and the ISVP Note of $23,213,384 was classified as a long-term liability.

The Company is subject to certain debt covenants pursuant to the August 2007 Amended Purchase Agreement. If the Company (i) fails to pay the principal or interest due under the August 2007 Amended Purchase Agreement, (ii) files a petition for action for relief under any bankruptcy or similar law or (iii) an involuntary petition is filed against the Company, all amounts borrowed under the August 2007 Amended Purchase Agreement may become immediately due and payable by the Company. In addition, without the consent of the Purchasers, the Company may not (i) create, incur or otherwise, permit to be outstanding any indebtedness for money borrowed (except for obligations under the August 2007 Amended Purchase Agreement), (ii) declare or pay any cash dividend, or make a distribution on, repurchase, or redeem, any class of the Company’s stock, subject to certain exceptions or sell, lease, transfer or otherwise dispose of any of the Company’s material assets or property or (iii) dissolve or liquidate.

According to a Schedule 13G/A filed with the SEC on June 12, 2007, Robert Gipson beneficially owned approximately 25.1% of the outstanding common stock of the Company on June 11, 2007. Robert Gipson, who serves as a Senior Director of Ingalls & Snyder LLC and a General Partner of ISVP, served as a director of the Company from June 15, 2004 until October 28, 2004. According to a Schedule 13G/A filed with the SEC on June 12, 2007, Thomas Gipson beneficially owned approximately 25.1% of the outstanding common stock of the Company on June 11, 2007. According to a Schedule 13G/A filed with the SEC on February 12, 2007, Arthur Koenig beneficially owned approximately 5.6% of the outstanding common stock of the Company on December 31, 2006.

6. Exit Activities

In September 2005, the Company relocated its headquarters to office space in Hopkinton, Massachusetts. In addition, the Company amended its lease agreement dated as of January 28, 2002 by and between the Company and

Brentwood Properties, Inc. (the “Landlord”) (the “Lease Amendment”) pursuant to which the Landlord consented to, among other things, the Company’s two sublease agreements and the Company agreed to increase its security deposit, subject to periodic reduction pursuant to a predetermined formula.

As a result of the Company’s relocation, an expense was recorded in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (“SFAS 146”). SFAS 146 requires that a liability be recorded for a cost associated with an exit or disposal activity at its fair value in the period in which the liability is incurred. The liability recorded for the Lease Amendment was calculated using discounted estimated cash flows described above for the Company’s two subleases. As prescribed by SFAS 146, an estimated credit-adjusted risk-free rate of 15% was used to discount the estimated cash flows. The expense and accrual recorded in accordance with SFAS 146 requires the Company to make significant estimates and assumptions. These estimates and assumptions will be evaluated and adjusted as appropriate on at least a quarterly basis for changes in circumstances. It is reasonably possible that such estimates could change in the future resulting in additional adjustments, and the effect of any such adjustments could be material.

The activity related to the lease accrual at September 30, 2007, is as follows:


	Accrual at		Cash Payments,
	December 31,		Net of Sublease		Accrual at
	2006		Receipts 2007		September 30, 2007
Lease Amendment	$	266,896	$	22,575	$	244,321
Short-term portion of lease accrual		30,752				39,103

Long-term portion of lease accrual	$	236,144			$	205,218

During the three and nine months ended September 30, 2007 the Company recorded approximately $9,400 and $28,900, respectively of expense related to the imputed cost of the lease expense accrual included in general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2006, the Company recorded approximately $11,000 and $33,000, respectively of expense related to the imputed cost of the lease expense accrual included in general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

In May 2007, the Company decided to consolidate certain activities, cease operations at its Baltimore, Maryland location and terminate the two employees working at that location effective June 30, 2007. In accordance with SFAS 146, the Company recognized approximately $186,000 related to one-time termination benefits and $6,300 related to the impairment of certain fixed assets in the accompanying Condensed Consolidated Statements of Operations during the nine months ended September 30, 2007.

7. Commitments and Contingencies

The Company recognizes and discloses commitments when it enters into executed contractual obligations with other parties. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

License Agreements

The Company has entered into two license agreements (the “CMCC Licenses”) with Children’s Medical Center Corporation (also known as Children’s Hospital Boston) (“CMCC”) to acquire the exclusive worldwide rights to certain axon regeneration technologies and to replace the Company’s former axon regeneration licenses with CMCC. The CMCC Licenses provide for future milestone payments of up to an aggregate of approximately $425,000 for each product candidate upon achievement of certain regulatory milestones. Additionally, the Company entered into two sponsored research agreements with CMCC which provide for a total of $550,000 in annual funding through May 2009.

The Company has entered into license agreements (the “Harvard License Agreements”) with Harvard University and its affiliated hospitals (“Harvard and its Affiliates”) to acquire the exclusive worldwide rights to certain technologies within its molecular imaging and neurodegenerative programs. The Harvard License Agreements

obligate the Company to pay up to an aggregate of approximately $2,520,000 in milestone payments in the future. The future milestone payments are generally payable only upon achievement of certain regulatory milestones.

The Company’s license agreements with Harvard and its Affiliates and CMCC generally provide for royalty payments equal to specified percentages of product sales, annual license maintenance fees and continuing patent prosecution costs.

In December 2006, the Company entered into a license agreement (the “CETHRIN License”) with BioAxone Therapeutic Inc., a Canadian corporation (“BioAxone”), pursuant to which the Company was granted an exclusive, worldwide license to develop and commercialize CETHRIN. Under the CETHRIN License, the Company agreed to pay $10,000,000 in up-front payments, of which the Company paid BioAxone $2,500,000 upon execution of the Agreement and $7,500,000 in March 2007. The Company has also agreed to pay BioAxone up to $25,000,000 upon the achievement of certain milestone events and royalties based on the worldwide net sales of licensed products, subject to specified minimums, in each calendar year until either the expiration of a valid claim covering a licensed product or a certain time period after the launch of a licensed product, in each case applicable to the specific country.

Contingencies

The Company is subject to legal proceedings in the ordinary course of business. Two such matters involve claims for cash and/or warrants to purchase shares of common stock of the Company in connection with certain of the Company’s private placements. One other such matter involves a claim for cash of $250,000 in connection with one of the Company’s license agreements. Management has responded to such claims and believes that there is no legal or equitable basis for payment of the claims and that the resolution of these matters and others will not have a material adverse effect on the consolidated financial statements.

Guarantor Arrangements

As permitted under Delaware law, the Company has entered into agreements whereby the Company indemnifies its executive officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.

The Company enters into arrangements with certain service providers to perform research, development and clinical services for the Company. Under the terms of these arrangements, such service providers may use the Company’s technologies in performing their services. The Company enters into standard indemnification agreements with those service providers, whereby the Company indemnifies them for any liability associated with their use of the Company’s technologies. The maximum potential amount of future payments the Company would be required to make under these indemnification agreements is unlimited; however, the Company has product liability and general liability policies that enable the Company to recover a portion of any amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.

8. Income taxes

On January 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109”, which was issued in July 2006. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. As of January 1, 2007, unrecognized tax benefits totalled approximately $758,000, which were accounted for as a reduction to deferred tax assets and a corresponding reduction to the valuation allowance. Substantially all of this amount, if recognized, would affect the effective tax rate. There was no change to our accumulated deficit as of December 31, 2006 as a result of the adoption of the recognition and measurement provisions of FIN 48.

For the three and nine months ended September 30, 2007 and 2006, the Company did not record any federal or state tax expense given its continued net operating loss position. As required by SFAS No. 109, “Accounting For Income Taxes”, the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating losses (“NOL”), capitalized research and development expenditures and research and development credits (“R&D credit”). Management has determined that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance was established at September 30, 2007 and December 31, 2006.

As of December 31, 2006, the Company had federal and state NOL carryforwards and federal and state R&D credit carryforwards, which may be available to offset future federal and state income tax liabilities which expire at various dates starting in 2007 and going through 2026. Utilization of the NOL and R&D credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future as provided by Section 382 of the Internal Revenue Code of 1986, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In fiscal year 1995 and in fiscal year 2005, the Company experienced a change in ownership as defined by Section 382 of the Internal Revenue Code. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the Company’s formation, it has raised capital through the issuance of capital stock on several occasions which, combined with shareholders’ subsequent disposition of those shares, has resulted in two changes of control, as defined by Section 382. As a result of the most recent ownership change, utilization of the Company’s NOLs is subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate resulting in an annual limitation amount of approximately $1,000,000. Any unused annual limitation may be carried over to later years, and the amount of the limitation may, under certain circumstances, be subject to adjustment if the fair value of the Company’s net assets are determined to be below or in excess of the tax basis of such assets at the time of the ownership change, and such unrealized loss or gain is recognized during the five-year period after the ownership change. Federal research and development tax credits were also impaired by the ownership change and were reduced accordingly. The Company does not expect to have any taxable income for the foreseeable future.

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company has no accrual for interest and penalties as of the date of adoption.

The Company is subject to both federal and state income tax for the jurisdictions within which it operates, which are primarily focused in Massachusetts. Within these jurisdictions, the Company is open to examination for tax years ended December 31, 2003 through December 31, 2006. However, because we are carrying forward income tax attributes, such as NOLs from 2002 and earlier tax years, these attributes can still be audited when utilized on returns filed in the future. There are currently no tax audits that have commenced with respect to income tax returns in any jurisdiction.

9. New Accounting Pronouncement

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for the Company as of January 1, 2008. The Company is currently reviewing SFAS 157 and has not yet determined the impact, if any, on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115,” (“SFAS 159”) which is effective for fiscal years beginning after November 15, 2007. SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company is currently reviewing SFAS 159 and has not yet determined the impact, if any, on its consolidated financial statements.

In June 2007, the FASB ratified a consensus opinion reached by the Emerging Issues Task Force (“EITF”) on EITF Issue 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities.” The guidance in EITF Issue 07-3 requires the Company to defer and capitalize nonrefundable advance payments made for goods or services to be used in research and development activities until the goods have been delivered or the related services have been performed. If the goods are no longer expected to be delivered nor the services expected to be performed, the Company would be required to expense the related capitalized advance payments. The consensus in EITF Issue 07-3 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2007 and is to be applied prospectively to new contracts entered into on or after December 15, 2007. Early adoption is not permitted. Retrospective application of EITF Issue 07-3 is also not permitted. The impact of applying this consensus will depend on the terms of the Company’s future research and development contractual arrangements entered into on or after December 15, 2007.

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

Our management’s discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See Item 1A, “Risk Factors.” The information in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2006.

Overview

Description of Company

We are a development stage biotechnology company engaged in the research and development of biopharmaceutical products that target unmet medical needs in the treatment and diagnosis of central nervous system, or CNS, disorders. Our clinical and preclinical product candidate pipeline is based on three proprietary technology platforms:

	•		Regenerative therapeutics program, primarily focused on nerve repair and restoring movement and sensory function in patients who have had significant loss of CNS function resulting from traumas or degenerative diseases, such as spinal cord injury, or SCI, stroke and optic nerve injury utilizing technology referred to as axon regeneration;

	•		Molecular imaging program focused on the diagnosis of Parkinsonian Syndromes, or PS, including Parkinson’s Disease, or PD, and Attention Deficit Hyperactivity Disorder, or ADHD; and

	•		Neurodegenerative program focused on treating the symptoms of PD and slowing or stopping the progression of PD.

At September 30, 2007, we were considered a “development stage enterprise” as defined in Statement of Financial Accounting Standards, or SFAS, No. 7, “Accounting and Reporting by Development Stage Enterprises.”

As of September 30, 2007, we have experienced total net losses since inception of approximately $157,613,000 and stockholders’ deficit of approximately $17,531,000. For the foreseeable future, we expect to experience continuing operating losses and negative cash flows from operations as our management executes our current business plan. The cash and cash equivalents available at September 30, 2007 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. We believe that the cash and cash equivalents available at September 30, 2007 and our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures through February 2008.

In order to continue as a going concern, we will therefore need to raise additional capital through one or more of the following: a debt financing, an equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. We are currently engaged in fundraising efforts. There can be no assurance that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all. We also cannot be sure that we will be able to obtain additional credit from, or effect additional sales of debt or equity securities to the Purchasers (described below). If we are unable to raise additional or sufficient capital, we will need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern. If we violate a debt covenant or default under our second amended and restated convertible promissory note purchase agreement, entered into by us on August 13, 2007, or the August 2007 Amended Purchase Agreement (described below), we may need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern.

In connection with our common stock financing completed by us in March 2005, or the March 2005 Financing, we agreed with the purchasers in such financing, including Robert Gipson, Thomas Gipson and Arthur Koenig, each

of whom are our significant stockholders, or the March 2005 Investors, that, subject to certain exceptions, we would not issue any shares of our common stock at a per share price less than $2.50 without the prior consent of the March 2005 Investors holding a majority of the shares issued in the March 2005 Financing. On November 5, 2007, the closing price of our common stock was $3.17. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50.

Our ability to continue to advance our clinical programs, including the development of CETHRIN and the ALTROPANE molecular imaging agent, and our preclinical programs will be affected by the availability of financial resources to fund each program. Financial considerations may cause us to modify planned development activities for one or more of our programs, and we may decide to suspend development of one or more programs until we are able to secure additional working capital. If we are not able to raise additional capital, we will not have sufficient funds to complete the clinical trial programs for CETHRIN or the ALTROPANE molecular imaging agent.

We continually evaluate possible acquisitions of, or investments in, businesses, technologies and products that are complementary to our technology platforms. Any consideration paid in connection with an acquisition would affect our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate any such acquisition or acquisitions. To the extent we issue shares of stock or other rights to purchase stock, including options or other rights, existing stockholders may be diluted. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs and restructuring charges. Acquisitions may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges. To the extent that we use common stock for all or a portion of the consideration to be paid for future acquisitions, our existing stockholders may experience significant dilution.

In order to effect an acquisition, we may need additional financing. We cannot be certain that any such financing will be available on terms favorable or acceptable to us, or at all. If we raise additional funds through the issuance of equity, equity-related or debt securities, these securities may have rights, preferences or privileges senior to those of the rights of our common stockholders, and our existing stockholders would experience dilution. There can be no assurance that we will be able to identify or successfully complete any acquisitions.

Convertible Notes Payable

In March 2007, we entered into a convertible promissory note purchase agreement, or the March 2007 Purchase Agreement, with Robert Gipson, Thomas Gipson and Arthur Koenig, referred to as the Purchasers and also the March 2007 Note Holders, pursuant to which we could borrow up to $15,000,000 prior to December 31, 2007. In March 2007, we issued convertible promissory notes to the March 2007 Note Holders in the aggregate principal amount of $9,000,000.

In May 2007, we amended and restated the March 2007 Purchase Agreement, or the May 2007 Amended Purchase Agreement, to (i) eliminate the requirement for the March 2007 Note Holders to make further advances under the March 2007 Purchase Agreement and (ii) add Highbridge International, LLC, or Highbridge, as a Purchaser. In May 2007, we issued a convertible promissory note, or the Highbridge Note, to Highbridge in the aggregate principal amount of $6,000,000 pursuant to the May 2007 Amended Purchase Agreement.

In August 2007, we amended and restated the May 2007 Amended Purchase Agreement, or the August 2007 Amended Purchase Agreement, to (i) increase the amount we could borrow by $10,000,000 and (ii) add Ingalls & Snyder Value Partners LP, or ISVP, as a Purchaser. In August 2007, we issued a convertible promissory note, or the ISVP Note, to ISVP in the aggregate principal amount of $10,000,000 pursuant to the August 2007 Amended Purchase Agreement.

The amounts borrowed by us under the August 2007 Amended Purchase Agreement bear interest at the rate of 5% per annum and may be converted, at the option of the Purchasers into (i) shares of our common stock at a conversion price per share of $2.50 any time after December 31, 2007, (ii) the right to receive future payments related to our molecular imaging products (including ALTROPANE and FLUORATEC) in amounts equal to 2% of

our pre-commercial revenue related to such products plus 0.5% of future net sales of such products for each $1,000,000 of outstanding principal and interest that a Purchaser elects to convert into future payments, or (iii) a combination of (i) and (ii). Any outstanding notes that are not converted into our common stock or into the right to receive future payments will become due and payable by the earlier of December 31, 2010 or the date on which a Purchaser declares an event of default (as defined in the August 2007 Amended Purchase Agreement). However, each Purchaser is prohibited from effecting a conversion if at the time of such conversion the common stock issuable to such Purchaser, when taken together with all shares of common stock then held or otherwise beneficially owned by a Purchaser exceeds 19.9%, or 9.99% for Highbridge and ISVP, of the total number of issued and outstanding shares of our common stock immediately prior to such conversion unless and until our stockholders approve the conversion of all of the shares of common stock issuable thereunder.

We are subject to certain debt covenants pursuant to the August 2007 Amended Purchase Agreement. If we (i) fail to pay the principal or interest due under the August 2007 Amended Purchase Agreement, (ii) file a petition for action for relief under any bankruptcy or similar law or (iii) an involuntary petition is filed against us, all amounts borrowed under the August 2007 Amended Purchase Agreement may become immediately due and payable by us. In addition, without the consent of the Purchasers, we may not (i) create, incur or otherwise, permit to be outstanding any indebtedness for money borrowed (except for obligations under the August 2007 Amended Purchase Agreement), (ii) declare or pay any cash dividend, or make a distribution on, repurchase, or redeem, any class of our stock, subject to certain exceptions or sell, lease, transfer or otherwise dispose of any of our material assets or property or (iii) dissolve or liquidate.

Product Development

Regenerative Therapeutics Program — Nerve Repair

Our nerve repair program is focused on restoring movement and sensory function in patients who have had significant loss of CNS function resulting from traumas or degenerative diseases such as SCI, stroke and optic nerve injury. Our efforts are aimed at the use of proprietary regenerative drugs and/or methods to induce nerve fibers called axons to regenerate and form new connections that restore lost abilities. We have acquired the rights to technologies aimed at two key and complementary pathways involved in nerve repair: the pro-regenerative and anti-regenerative pathways. We believe the pro-regenerative approach activates pathways that stimulate axon regeneration and the anti-regenerative approach deactivates pathways that inhibit axon regeneration. We also support sponsored research that may open new avenues for exploring combination therapies.

CETHRIN contains a proprietary protein that inactivates a key enzyme called Rho that prevents axon regeneration after SCI. In February 2005, enrollment began in our current open-label, non-placebo-controlled, dose-escalating Phase I/IIa trial in subjects with acute SCI at sites in the United States and Canada. The trial design includes a number of post-treatment evaluations of the subjects for safety and efficacy for up to one year after treatment. The efficacy measurements assess changes in subjects’ sensory and motor functions, as well as overall recovery as measured by the American Spinal Injury Association, or ASIA, Impairment Scale. The ASIA Impairment Scale is used to score subjects within five categories from A to E, with A being complete impairment with no sensory or motor function below the site of injury and E being normal. Grades B through E designate increasing levels of motor and sensory function. The subjects in the CETHRIN Phase I/IIa trial suffered a complete thoracic or cervical SCI and were thus classified as an A on the ASIA Impairment Scale at the time of enrollment in the trial.

In April 2007, interim 6-month follow-up results were reported on 37 subjects enrolled at four dose levels (0.3 mg, 1 mg, 3 mg and 6 mg). The data indicated that 27.0% (10 of 37) of the CETHRIN treated subjects experienced a frequency of post-treatment conversions from ASIA A to ASIA B or better, which is more than 400% greater than the conversion rate seen with the standard of care reported in the literature (6.7%, Burns, J. Neurotrauma, 2003). When cervical subjects treated with CETHRIN were analyzed separately, 46.2% (6 of 13) of the subjects with cervical injuries exhibited a conversion rate from ASIA A to ASIA B or better, which is 600% to 700% greater than the full patient group treated with the standard of care reported in the publication above. The data also indicated that the conversions experienced by CETHRIN treated subjects persisted over time. Further, 18.9% (7 of 37) of subjects overall and 38.5% (5 of 13) of subjects with cervical injuries improved over the six months to ASIA C or better. In subjects with cervical injuries, the interim efficacy data also suggest that the response rate observed is dose-dependent at the doses tested to date.

To date, the safety and tolerability data for each of the four dose levels (0.3 mg, 1 mg, 3 mg, and 6 mg) have indicated that CETHRIN appears to be safe and well tolerated. There have been no serious adverse events related to CETHRIN as determined by the investigators and the independent Data Safety Monitoring Board, or DSMB. There were two deaths of subjects enrolled in the trial. The DSMB and the clinical investigators attributed the two deaths to causes related to the subjects’ initial SCI, other injuries, or preexisting conditions and not related to CETHRIN.

In January 2007, enrollment was initiated at 9 mg dosage level for sites in Canada to determine the safety and efficacy of CETHRIN at higher doses. In June 2007, the Food and Drug Administration, or FDA, authorized an increase in the dose level to 9 mg for sites in the U.S. Each authorized dose level is first given to thoracic SCI subjects and then, following review by the DSMB, the dose level is extended to cervical subjects. In September 2007, the DSMB unanimously authorized expanding the 9 mg dose to include cervical subjects. We expect to conclude enrollment for the Phase I/IIa trial by the end of 2007 or early 2008. The results of the trial will be analyzed as the post-treatment evaluations are completed.

In September 2007, we had a preliminary meeting with the European Medicines Agency, or EMEA, to discuss our clinical development plan for CETHRIN. In October 2007, we met with the FDA to review the Phase I/IIa results and our CETHRIN clinical development plan. We plan to meet with Health Canada in early 2008. Based on discussions to date with the regulatory authorities and our expert advisors, we are planning to begin a Phase IIb trial at sites in North America and Europe in the first half of 2008.

We are also exploring the use of other nerve repair drug candidates in a variety of CNS conditions such as SCI, stroke, traumatic brain injury and ocular indications. Recently, we developed a high concentration formulation of our regenerative compound Inosine for intravenous administration. Using the high concentration formulation in a preclinical study in rats, brain levels of Inosine were observed to increase up to five-fold above baseline during a two hour intravenous infusion of Inosine. We plan to initiate a series of comparative studies in which the abilities of Inosine, Oncomodulin and other compounds to enhance nerve repair will be tested in parallel in a series of animal models of CNS disorders, which, if successful, will enable the most promising candidates and indications to be taken forward in development.

Regenerative Therapeutics Program — Bone Repair

We are evaluating our Rho inhibitors in animal models for additional indications in regenerative medicine including the ability to stimulate cells to regenerate bone.

Molecular Imaging Program

The ALTROPANE molecular imaging agent is being developed for the differential diagnosis of PS, including PD, and non-PS in patients with tremor. In September 2006, we announced statistically significant results of our Phase III trial, POET-1. In April 2007, we met with the FDA to review the POET-1 results and our design for the remaining Phase III clinical development. In July 2007, our collaborators completed enrollment in a study that optimized ALTROPANE’s image acquisition protocol which we believe will enhance ALTROPANE’s commercial use. Based on the available data and our discussions with the FDA and our expert advisors to date, we are planning a Phase III POET-2 program. As part of the customary process for clinical trials of molecular imaging agents, the POET-2 program will begin with a clinical study to acquire the set of ALTROPANE images used to train the expert readers. We plan to initiate this study in the fourth quarter of 2007. The second part of the planned POET-2 program involves two concurrent Phase III trials of approximately 150 subjects each using the optimized ALTROPANE imaging protocol developed for commercial use. These two concurrent trials, the final design of which is under discussion with the FDA, will be initiated once agreement on the final design of the two trials is reached with the FDA.

In addition to ALTROPANE, we are developing a second generation technetium-based molecular imaging agent for the diagnosis of PD and ADHD. We have identified two promising lead compounds. We are optimizing the radiolabeling procedure as a prelude to imaging studies in non-human primates. If the results are favorable, the next step will be to conduct exploratory imaging studies in humans.

We believe that engaging a partner for our molecular imaging program for the launch and commercialization of ALTROPANE will be the most effective means to maximize the value of the program. In April 2007, we enhanced our business development capability with the hiring of Frank Bobe, our Chief Business Officer. We have ongoing discussions with potential partners. We believe that we will be able to partner the molecular imaging program in the first half of 2008.

Neurodegenerative Program

We are assessing drug candidates that specifically bind to DAT and could have the potential to both treat the symptoms of PD and slow or stop its progression. Our lead compounds have been shown to enter the brain after oral dosing in rodents and shown in primate studies to alleviate the symptoms of PD. We are seeking a partner to advance our neurodegenerative program into clinical trials.

Sales and Marketing and Government Regulation

To date, we have not marketed, distributed or sold any products and, with the exception of ALTROPANE and CETHRIN, all of our other product candidates are in preclinical development. Our product candidates must undergo a rigorous regulatory approval process which includes extensive preclinical and clinical testing to demonstrate safety and efficacy before any resulting product can be marketed. The FDA has stringent standards with which we must comply before we can test our product candidates in humans or make them commercially available. Preclinical testing and clinical trials are lengthy and expensive and the historical rate of failure for product candidates is high. Clinical trials require sufficient patient enrollment which is a function of many factors. Delays and difficulties in completing patient enrollment can result in increased costs and longer development times. The foregoing uncertainties and risks limit our ability to estimate the timing and amount of future costs that will be required to complete the clinical development of each program. In addition, we are unable to estimate when material net cash inflows are expected to commence as a result of the successful completion of one or more of our programs.

Research and Development

Following is information on the direct research and development costs incurred on our principal scientific technology programs currently under development. These amounts do not include research and development employee and related overhead costs which total approximately $22,126,000 on a cumulative basis.


	Three months ended		Nine months ended
Program	September 30, 2007		September 30, 2007		Cumulative
Regenerative Therapeutics	$	1,114,000	$	2,492,000	$	23,068,000
Molecular Imaging	$	275,000	$	1,611,000	$	24,214,000
Neurodegenerative	$	—	$	72,000	$	1,062,000

Estimating costs and time to complete development of a specific program or technology is difficult due to the uncertainties of the development process and the requirements of the FDA which could require additional clinical trials or other development and testing. Results of any testing could lead to a decision to change or terminate development of a technology, in which case estimated future costs could change substantially. In the event we were to enter into a licensing or other collaborative agreement with a corporate partner involving sharing or funding by such corporate partner of development costs, the estimated development costs incurred by us could be substantially less than estimated. Additionally, research and development costs are extremely difficult to estimate for early-stage technologies due to the fact that there are generally less comprehensive data available for such technologies to determine the development activities that would be required prior to the filing of an NDA. As a result, we cannot reasonably estimate the cost and the date of completion for any technology that is not at least in Phase III clinical development due to the uncertainty regarding the number of required trials, the size of such trials and the duration of development. Even in Phase III clinical development, estimating the cost and the filing date for a New Drug Application, or NDA, can be challenging due to the uncertainty regarding the number and size of the required Phase III trials. We are currently analyzing what additional expenditures may be required to complete the POET-2 program for ALTROPANE for the diagnosis of PS and cannot reasonably estimate the cost of this POET-2 program at this time.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared by us in accordance with accounting principles generally accepted in

the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our estimates include those related to marketable securities, research contracts, the fair value and classification of equity instruments, our lease accrual and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Marketable Securities

Our marketable securities consist exclusively of investments in United States agency bonds and corporate debt obligations. These marketable securities are adjusted to fair value on the consolidated balance sheet through other comprehensive income. If a decline in the fair value of a security is considered to be other than temporary, the investment is written down to a new cost basis and the unrealized loss is removed from accumulated other comprehensive loss and recorded in the Consolidated Statement of Operations. We evaluate whether a decline in fair value is other than temporary based on factors such as the significance of the decline, the duration of time for which the decline has been in existence and our ability and intent to hold the security to maturity. To date, we have not recorded any other than temporary impairments related to our marketable securities. These marketable securities are classified as current assets because they are highly liquid and are available, as required, to meet working capital and other operating requirements.

Research Contracts

We regularly enter into contracts with third parties to perform research and development activities on our behalf in connection with our scientific technologies. Costs incurred under these contracts are recognized ratably over the term of the contract or based on actual enrollment levels which we believe corresponds to the manner in which the work is performed. Clinical trial, contract services and other outside costs require that we make estimates of the costs incurred in a given accounting period and record accruals at period end as the third party service periods and billing terms do not always coincide with our period end. We base our estimates on our knowledge of the research and development programs, services performed for the period, past history for related activities and the expected duration of the third party service contract, where applicable.

Fair Value and Classification of Equity Instruments

Historically, we have issued warrants to purchase shares of our common stock in connection with our debt and equity financings. We record each of the securities issued on a relative fair value basis up to the amount of the proceeds received. We estimate the fair value of the warrants using the Black-Scholes option pricing model. The Black-Scholes model is dependent on a number of variables and estimates including: interest rates; dividend yield; volatility and the expected term of the warrants. Our estimates are based on market interest rates at the date of issuance, our past history for declaring dividends, our estimated stock price volatility and the contractual term of the warrants. The value ascribed to the warrants in connection with debt offerings is considered a cost of capital and amortized to interest expense over the term of the debt.

We have, at certain times, issued preferred stock and notes, which were convertible into common stock at a discount from the common stock market price at the date of issuance. The discounted amount associated with such conversion rights represents an incremental yield, or “beneficial conversion feature” that is recorded when the consideration allocated to the convertible security, divided by the number of common shares into which the security converts, is below the fair value of the common stock at the date of issuance of the convertible instrument.

A beneficial conversion feature associated with the preferred stock is recognized as a return to the preferred stockholders and represents a non-cash charge in the determination of net loss available to common stockholders. The beneficial conversion feature is recognized in full immediately if there is no redemption date for the preferred stock, or over the period of issuance through the redemption date, if applicable. A beneficial conversion feature associated with debentures, notes or other debt instruments is recognized as a discount to the debt and is amortized as additional interest expense using the effective interest method over the remaining term of the debt instrument.

Lease Accrual

We are required to make significant judgments and assumptions when estimating the liability for our net ongoing obligations under our amended lease agreement relating to our former executive offices located in Boston, Massachusetts. In accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” we use a discounted cash-flow analysis to calculate the amount of the liability. We applied a discount rate of 15% representing our best estimate of our credit adjusted risk-free rate. The discounted cash-flow analysis is based on management’s assumptions and estimates of our ongoing lease obligations, and income from sublease rentals, including estimates of sublease timing and sublease rental terms. It is possible that our estimates and assumptions will change in the future, resulting in additional adjustments to the amount of the estimated liability, and the effect of any adjustments could be material. We will review our assumptions and judgments related to the lease amendment on at least a quarterly basis, until the outcome is finalized, and make whatever modifications we believe are necessary, based on our best judgment, to reflect any changed circumstances.

Stock-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), or SFAS 123R. SFAS 123R requires companies to measure compensation cost for all share-based awards at fair value on grant date and recognize it as expense over the requisite service period or expected performance period of the award. Prior to January 1, 2006, we accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. We also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation- Transition and Disclosure”. We elected to adopt the modified prospective transition method as provided by SFAS 123R and, accordingly, financial statement amounts for the prior periods have not been restated to reflect the fair value method of expensing share-based compensation.

We estimate the fair value of stock-based awards using the Black-Scholes valuation model on the grant date. Key input assumptions used to estimate the fair value of stock-based awards include the following:

Expected term — We determined the weighted-average expected term assumption based on the simplified method as described by Staff Accounting Bulletin No. 107, “Share-Based Payment” for “plain vanilla” options. We determined the weighted-average expected term assumption for performance-based option grants based on historical data on exercise behavior.

Risk-free interest rate — The risk-free interest rate used for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected term.

Expected volatility — Our expected stock-price volatility assumption is based on historical volatilities of the underlying stock which is obtained from public data sources.

Expected dividend yield — We have never declared or paid any cash dividends on our common stock and we do not expect to do so in the foreseeable future. Accordingly, we used an expected dividend yield of zero to calculate the grant-date fair value of a stock option.

Results of Operations

Three Months Ended September 30, 2007 and 2006

Our net loss and net loss attributable to common stockholders was $4,735,323 during the three months ended September 30, 2007 as compared with $4,012,482 during the three months ended September 30, 2006. Net loss attributable to common stockholders totaled $0.23 per share for the 2007 period as compared to $0.24 per share for the 2006 period. The increase in net loss in the 2007 period was primarily due to higher operating and interest expenses. The decrease in net loss attributable to common stockholders on a per share basis in the 2007 period was primarily due an increase in weighted average shares outstanding of approximately 4,176,000 shares, primarily the

result of the conversion of certain convertible promissory notes into common stock completed in June 2007 offset by the increase in net loss.

Research and development expenses were $2,511,154 during the three months ended September 30, 2007 as compared with $2,167,532 during the three months ended September 30, 2006. The increase in the 2007 period was primarily attributable to (i) higher compensation and related costs of approximately $189,000 primarily related to increased headcount offset by lower stock-based compensation expense, (ii) higher costs associated with our nerve repair program of approximately $780,000 primarily associated with costs related to CETHRIN which we licensed in December 2006 offset by lower costs related to our INOSINE product. The increase was partially offset by lower costs associated with our molecular imaging program of approximately $637,000 primarily related to decreased ALTROPANE clinical costs. We currently anticipate that our research and development expenses will increase over the next twelve months although there may be significant fluctuations on a quarterly basis. This expected increase is primarily related to higher CETHRIN and ALTROPANE clinical costs. Our working capital constraints may limit our planned expenditures.

General and administrative expenses were $1,959,883 during the three months ended September 30, 2007 as compared with $1,859,073 during the three months ended September 30, 2006. The increase in the 2007 period was primarily attributable to higher commercialization and communication costs of approximately $157,000. The increase was partially offset by lower costs of approximately $75,000 related to our collaboration and fundraising efforts. We currently anticipate that our general and administrative expenses will increase over the next twelve months although there may be significant fluctuations on a quarterly basis. This expected increase is primarily related to costs associated with our commercialization and communication efforts primarily related to our CETHRIN and ALTROPANE programs and costs associated with compliance with the Sarbanes-Oxley Act of 2002.

Interest expense was $327,871 during the three months ended September 30, 2007 as compared with $12,500 during the three months ended September 30, 2006. The increase in the 2007 period was attributable to the issuance of certain convertible promissory notes during the period and non-cash interest expense of approximately $74,000 primarily related to the Highbridge and ISVP Notes’ beneficial conversion features.

Investment income was $63,585 during the three months ended September 30, 2007 as compared with $26,623 during the three months ended September 30, 2006. The increase in the 2007 period was primarily due to higher average cash, cash equivalent, and marketable securities balances during the 2007 period.

Nine months ended September 30, 2007 and 2006

Our net loss and net loss attributable to common stockholders was $14,109,213 during the nine months ended September 30, 2007 as compared with $11,901,606 during the nine months ended September 30, 2006. Net loss attributable to common stockholders totaled $0.77 per share for the 2007 period as compared to $0.72 per share for the 2006 period. The increase in net loss in the 2007 period was primarily due to higher operating and interest expenses. The increase in net loss attributable to common stockholders on a per share basis for the 2007 period was primarily due to the increase in net loss.

Research and development expenses were $7,768,339 during the nine months ended September 30, 2007 as compared with $6,481,875 during the nine months ended September 30, 2006. The increase in the 2007 period was primarily attributable to (i) higher compensation and related costs of approximately $739,000 primarily related to increased headcount offset by lower stock-based compensation expense, (ii) severance costs of approximately $186,000 associated with the closing of our Baltimore facility, and (iii) higher costs associated with our nerve repair program of approximately $1,530,000 primarily associated with costs related to CETHRIN offset by lower costs related to our INOSINE product. The increase was partially offset by lower costs of approximately $1,286,000 associated with our molecular imaging program primarily related to decreased ALTROPANE clinical costs.

General and administrative expenses were $6,025,890 during the nine months ended September 30, 2007 as compared with $5,560,039 during the nine months ended September 30, 2006. The increase in the 2007 period was primarily related to (i) higher compensation and related costs of approximately $211,000 primarily related to increased headcount, (ii) higher commercialization and communication costs of approximately $154,000 and (iii) higher directors’ fees of approximately $116,000 due to the addition of three new board members since the beginning of the 2006 period.

Interest expense was $437,569 during the nine months ended September 30, 2007 as compared with $12,500 during the nine months ended September 30, 2006. The increase in the 2007 period was attributable to the issuance of certain convertible promissory notes during the period and non-cash interest expense of approximately $96,000 primarily related to the Highbridge and ISVP Notes’ beneficial conversion features. The increase in the 2007 period was partially offset by the gain recorded related to the forgiveness of interest of approximately $273,000 attributable to $10,000,000 in promissory notes issued in March 2007. The notes issued in March 2007 eliminated all outstanding principal and accrued interest due under notes previously issued.

Investment income was $122,585 during the nine months ended September 30, 2007 as compared with $152,808 during the nine months ended September 30, 2006. The decrease in the 2007 period was primarily due to lower average cash, cash equivalent, and marketable securities balances during the 2007 period.

Liquidity and Capital Resources

Net cash used for operating activities, primarily related to our net loss, totaled $20,193,729 during the nine months ended September 30, 2007 as compared to $9,987,448 during the nine months ended September 30, 2006. The increase in the 2007 period is primarily related to the $7,500,000 due under the CETHRIN License which was paid in March 2007. Net cash used for investing activities totaled $2,347,514 during the nine months ended September 30, 2007 as compared to net cash provided by investing activities of $8,767,702 during the nine months ended September 30, 2006. The change in net cash used by investing activities primarily reflects the purchase of marketable securities during the nine months ended September 30, 2007. Net cash provided by financing activities totaled $26,948,380 during the nine months ended September 30, 2007 as compared to $2,004,905 during the nine months ended September 30, 2006. The increase in financing activities principally reflects the increase in promissory notes issued in the 2007 period.

To date, we have dedicated most of our financial resources to the research and development of our product candidates, general and administrative expenses and costs related to obtaining and protecting patents. Since inception, we have primarily satisfied our working capital requirements from the sale of our securities through private placements. These private placements have included the sale and issuance of preferred stock, common stock, promissory notes and convertible debentures.

A summary of financings completed during the three years ended September 30, 2007 is as follows:


Date	Net Proceeds Raised	Securities or Debt Instrument Issued
August 2007	$10.0 million	Convertible Promissory Notes
May 2007	$ 6.0 million	Convertible Promissory Notes
March 2007	$ 9.0 million	Convertible Promissory Notes
February 2007	$ 2.0 million	Convertible Promissory Notes
October 2006	$ 6.0 million	Convertible Promissory Notes
August 2006	$ 2.0 million	Convertible Promissory Notes
September 2005	$12.8 million	Common Stock
March 2005	$ 5.0 million	Common Stock

In the future, our working capital and capital requirements will depend on numerous factors, including the progress of our research and development activities, the level of resources that we devote to the developmental, clinical, and regulatory aspects of our technologies, and the extent to which we enter into collaborative relationships with pharmaceutical and biotechnology companies.

At September 30, 2007, we had available cash, cash equivalents and marketable securities of approximately $8,245,000.

As of September 30, 2007, we have experienced total net losses since inception of approximately $157,613,000 and stockholders’ deficit of approximately $17,531,000. For the foreseeable future, we expect to experience continuing operating losses and negative cash flows from operations as our management executes our current business plan. The cash and cash equivalents available at September 30, 2007 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. We believe that the cash and cash equivalents available at September 30, 2007 combined with our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures through February 2008.

In order to continue as a going concern, we will therefore need to raise additional capital through one or more of the following: a debt financing, an equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. We are currently engaged in fundraising efforts. There can be no assurance that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all. We also cannot be sure that we will be able to obtain additional credit from, or effect additional sales of debt or equity securities to the Purchasers. If we are unable to raise additional or sufficient capital, we will need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern. If we violate a debt covenant or default under the August 2007 Amended Purchase Agreement, we may need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern.

In connection with our March 2005 Financing, we agreed with the March 2005 Investors that, subject to certain exceptions, we would not issue any shares of our common stock at a per share price less than $2.50 without the prior consent of the March 2005 Investors holding a majority of the shares issued in the March 2005 Financing. On November 5, 2007, the closing price of our common stock was $3.17. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50.

Contractual Obligations and Commitments

Except as set forth below, the disclosures relating to our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2006 have not materially changed since we filed that report.

In May 2007, we entered into the May 2007 Amended Purchase Agreement, which (i) eliminated the requirement for the March 2007 Note Holders to make further advances under the March 2007 Purchase Agreement and (ii) added Highbridge as a Purchaser. Pursuant to the May 2007 Amended Purchase Agreement, we issued a convertible promissory note to Highbridge in the aggregate principal amount of $6,000,000.

In August 2007, we entered into the August 2007 Amended Purchase Agreement thereby amending and restating the May 2007 Amended Purchase Agreement to (i) increase the amount we could borrow by $10,000,000 and (ii) add ISVP as a Purchaser. Pursuant to the August 2007 Amended Purchase Agreement, we issued a convertible promissory note to ISVP in the aggregate principal amount of $10,000,000.

In June 2007, we entered into an agreement with a current Good Manufacturing Practices, or cGMP, manufacturer to, among other things, produce cGMP CETHRIN for use in our future clinical development for approximately $1,700,000. The agreement calls for payments of approximately $1,400,000 over the first year and approximately $300,000 over the second through fifth year of the agreement.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for us as of January 1, 2008. We are currently reviewing SFAS 157 and have not yet determined the impact, if any, on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115”, or SFAS 159, which is effective for fiscal years beginning after November 15, 2007. SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We are currently reviewing SFAS 159 and have not yet determined the impact, if any, on our consolidated financial statements.

In June 2007, the FASB ratified a consensus opinion reached by the Emerging Issues Task Force, or EITF, on EITF Issue 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in

Future Research and Development Activities.” The guidance in EITF Issue 07-3 requires us to defer and capitalize nonrefundable advance payments made for goods or services to be used in research and development activities until the goods have been delivered or the related services have been performed. If the goods are no longer expected to be delivered nor the services expected to be performed, we would be required to expense the related capitalized advance payments. The consensus in EITF Issue 07-3 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2007 and is to be applied prospectively to new contracts entered into on or after December 15, 2007. Early adoption is not permitted. Retrospective application of EITF Issue 07-3 is also not permitted. The impact of applying this consensus will depend on the terms of our future research and development contractual arrangements entered into on or after December 15, 2007.

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the market risks reported in our Annual Report on Form 10-K for the year ended December 31, 2006. We generally maintain a portfolio of cash equivalents, and short-term and long-term marketable securities in a variety of securities which can include commercial paper, certificates of deposit, money market funds and government and non-government debt securities. The fair value of these available-for-sale securities are subject to changes in market interest rates and may fall in value if market interest rates increase. Our investment portfolio includes only marketable securities with active secondary or resale markets to help insure liquidity. We have implemented policies regarding the amount and credit ratings of investments. Due to the conservative nature of these policies, we do not believe we have material exposure due to market risk. We may not have the ability to hold our fixed income investments until maturity, and therefore our future operating results or cash flows could be affected if we are required to sell investments during a period in which increases in market interest rates have adversely affected the value of our securities portfolio.

Item 4 — Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2007. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2007, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information

Item 1A — Risk Factors

Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections, and the beliefs and assumptions of our management including, without limitation, our expectations regarding our product candidates, including the success and timing of our preclinical, clinical and development programs, the submission of regulatory filings and proposed partnering arrangements, collaboration, merger, acquisition and fund raising efforts, results of operations, selling, general and

administrative expenses, research and development expenses and the sufficiency of our cash for future operations. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “will,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms, variations of such terms or the negative of those terms.

We cannot assure investors that our assumptions and expectations will prove to be correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those factors discussed below. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer.

The following discussion includes five revised risk factors (“We are a development stage company. We have incurred losses from our operations since inception and anticipate losses for the foreseeable future. We will not be able to achieve profitability unless we obtain regulatory approval and market acceptance of our product candidates. We will need substantial additional funding in order to continue our business and operations. If we are unable to secure such funding on acceptable terms, we will need to cease operations, significantly reduce, delay or cease one or more of our research or development programs, or surrender rights to some or all of our technologies. If we violate a debt covenant or default under our debt agreements, we may need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern”, “If our preclinical testing and clinical trials are not successful, we will not obtain regulatory approval for commercial sale of our product candidates”, “If we are unable to maintain our key working relationships with our licensors, including BioAxone, Harvard and its Affiliates and CMCC, we may not be successful since substantially all of our current technologies were licensed from such licensors”, “We have no manufacturing capacity and limited marketing infrastructure and expect to be heavily dependent upon third parties to manufacture and market approved products” and “If we are unable to retain our key personnel and/or recruit additional key personnel in the future, then we may not be able to operate effectively”) that reflect developments subsequent to the discussion of risk factors included in our most recent Annual Report on Form 10-K. In addition, we have deleted the risk factor entitled “Changes in estimates under financial accounting standards related to share-based payments could have a material adverse impact on our reported results of operations.”

Risks Related to our Financial Results and Need for Additional Financing

WE ARE A DEVELOPMENT STAGE COMPANY. WE HAVE INCURRED LOSSES FROM OUR OPERATIONS SINCE INCEPTION AND ANTICIPATE LOSSES FOR THE FORESEEABLE FUTURE. WE WILL NOT BE ABLE TO ACHIEVE PROFITABILITY UNLESS WE OBTAIN REGULATORY APPROVAL AND MARKET ACCEPTANCE OF OUR PRODUCT CANDIDATES. WE WILL NEED SUBSTANTIAL ADDITIONAL FUNDING IN ORDER TO CONTINUE OUR BUSINESS AND OPERATIONS. IF WE ARE UNABLE TO SECURE SUCH FUNDING ON ACCEPTABLE TERMS, WE WILL NEED TO CEASE OPERATIONS, SIGNIFICANTLY REDUCE, DELAY OR CEASE ONE OR MORE OF OUR RESEARCH OR DEVELOPMENT PROGRAMS, OR SURRENDER RIGHTS TO SOME OR ALL OF OUR TECHNOLOGIES. IF WE VIOLATE A DEBT COVENANT OR DEFAULT UNDER OUR DEBT AGREEMENTS, WE MAY NEED TO CEASE OPERATIONS OR REDUCE , CEASE OR DELAY ONE OR MORE OF OUR RESEARCH OR DEVELOPMENT PROGRAMS, ADJUST OUR CURRENT BUSINESS PLAN AND MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.

Biotechnology companies that have no approved products or other sources of revenue are generally referred to as development stage companies. We have never generated revenues from product sales and we do not currently expect to generate revenues from product sales for at least the next three years. If we do generate revenues and operating profits in the future, our ability to continue to do so in the long term could be affected by the introduction of competitors’ products and other market factors. We expect to incur significant operating losses for at least the next three years. The level of our operating losses may increase in the future if more of our product candidates begin human clinical trials. We will never generate revenues or achieve profitability unless we obtain regulatory approval and market acceptance of our product candidates. This will require us to be successful in a range of challenging activities, including clinical trial stages of development, obtaining regulatory approval for our product candidates, and manufacturing, marketing and selling them. We may never succeed in these activities, and may never generate

revenues that are significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

We require significant funds to conduct research and development activities, including preclinical studies and clinical trials of our technologies, and to commercialize our product candidates. Because the successful development of our product candidates is uncertain, we are unable to estimate the actual funds we will require to develop and commercialize them. Our funding requirements depend on many factors, including:

	•		The scope, rate of progress and cost of our clinical trials and other research and development activities;

	•		Future clinical trial results;

	•		The terms and timing of any collaborative, licensing and other arrangements that we may establish;

	•		The cost and timing of regulatory approvals and of establishing sales, marketing and distribution capabilities;

	•		The cost of establishing clinical and commercial supplies of our product candidates and any products that we may develop;

	•		The cost of obtaining and maintaining licenses to use patented technologies;

	•		The effect of competing technological and market developments; and

	•		The cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights and other patent-related costs, including litigation costs and the results of such litigation.

Until such time, if ever, as we can generate substantial revenue from product sales or through collaborative arrangements with third parties, we will need to raise additional capital. To date, we have experienced negative cash flows from operations and have funded our operations primarily from equity and debt financings.

As of September 30, 2007, we have experienced total net losses since inception of approximately $157,613,000 and stockholders’ deficit of approximately $17,531,000. For the foreseeable future, we expect to experience continuing operating losses and negative cash flows from operations as our management executes our current business plan. The cash and cash equivalents available at September 30, 2007 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. We believe that the cash and cash equivalents available at September 30, 2007 combined with our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures through February 2008.

In order to continue as a going concern, we will therefore need to raise additional capital through one or more of the following: a debt financing, an equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. We are currently engaged in fundraising efforts. There can be no assurance that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all. We also cannot be sure that we will be able to obtain additional credit from, or effect additional sales of debt or equity securities to the Purchasers. If we are unable to raise additional or sufficient capital, we will need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern. If we violate a debt covenant or default under the August 2007 Amended Purchase Agreement, we may need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern.

consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50.

Alternatively, to secure funds, we may be required to enter financing arrangements with others that may require us to surrender rights to some or all of our technologies or grant licenses on terms that are not favorable to us. If the results of our current or future clinical trials are not favorable, it may negatively affect our ability to raise additional funds. If we are successful in obtaining additional equity and/or debt financing, the terms of such financing will have the effect of diluting the holdings and the rights of our stockholders. Estimates about how much funding will be required are based on a number of assumptions, all of which are subject to change based on the results and progress of our research and development activities. If we are unable to raise additional capital we will need to reduce, cease or delay one or more of our research or development programs and adjust our current business plan.

Our ability to continue development of our clinical programs, including the development of CETHRIN and the ALTROPANE molecular imaging agent, and our preclinical programs will be affected by the availability of financial resources to fund each program. Financial considerations may cause us to modify planned development activities for one or more of our programs, and we may decide to suspend development of one or more programs until we are able to secure additional working capital. If we are not able to raise additional capital, we will not have sufficient funds to complete the clinical trial programs for CETHRIN or the ALTROPANE molecular imaging agent.

OUR ESTIMATES OF OUR LIABILITY UNDER OUR BOSTON, MASSACHUSETTS LEASE MAY CHANGE.

Our lease in Boston, Massachusetts expires in 2012. We have entered into two sublease agreements covering all 6,600 square feet under this lease through the date of expiration. In determining our obligations under the lease that we do not expect to occupy, we have made certain assumptions for the discounted estimated cash flows related to the rental payments that our subtenants have agreed to pay. We may be required to change our estimates in the future as a result of, among other things, the default of one or both of our subtenants with respect to their payment obligations. Any such adjustments to the estimate of liability could be material.

Risks Related to Commercialization

OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP OUR PRODUCT CANDIDATES INTO COMMERCIAL
PRODUCTS.

To date, we have not marketed, distributed or sold any products and, with the exception of CETHRIN and the ALTROPANE molecular imaging agent, all of our technologies and early-stage product candidates are in preclinical development. The success of our business depends primarily upon our ability to successfully develop and commercialize our product candidates. Successful research and product development in the biotechnology industry is highly uncertain, and very few research and development projects produce a commercial product. In the biotechnology industry, it has been estimated that less than five percent of the technologies for which research and development efforts are initiated ultimately result in an approved product. If we are unable to successfully commercialize CETHRIN or the ALTROPANE molecular imaging agent or any of our other product candidates, our business would be materially harmed.

EVEN IF WE RECEIVE APPROVAL TO MARKET OUR DRUG CANDIDATES, THE MARKET MAY NOT BE RECEPTIVE TO OUR DRUG CANDIDATES UPON THEIR COMMERCIAL INTRODUCTION, WHICH COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING OUR PRODUCTS AND FROM BEING PROFITABLE.

Even if our drug candidates are successfully developed, our success and growth will also depend upon the acceptance of these drug candidates by physicians and third-party payors. Acceptance of our product development candidates will be a function of our products being clinically useful, being cost effective and demonstrating superior diagnostic or therapeutic effect with an acceptable side effect profile as compared to existing or future treatments. In addition, even if our products achieve market acceptance, we may not be able to maintain that market acceptance

over time. Factors that we believe will materially affect market acceptance of our drug candidates under development include:

	•		The timing of our receipt of any marketing approvals, the terms of any approval and the countries in which approvals are obtained;

	•		The safety, efficacy and ease of administration of our products;

	•		The competitive pricing of our products;

	•		The success of our education and marketing programs;

	•		The sales and marketing efforts of competitors; and

	•		The availability and amount of government and third-party payor reimbursement.

If our products do not achieve market acceptance, we will not be able to generate sufficient revenues from product sales to maintain or grow our business.

ACQUISITIONS PRESENT MANY RISKS, AND WE MAY NOT REALIZE THE ANTICIPATED FINANCIAL AND STRATEGIC GOALS FOR ANY SUCH TRANSACTIONS.

We may in the future acquire complementary companies, products and technologies. Such acquisitions involve a number of risks, including:

	•		We may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or that economic conditions change, all of which may generate a future impairment charge;

	•		We may have difficulty integrating the operations and personnel of the acquired business, and may have difficulty retaining the key personnel of the acquired business;

	•		We may have difficulty incorporating the acquired technologies;

	•		We may encounter technical difficulties or failures with the performance of the acquired technologies or drug products or may experience unfavorable results in the clinical studies related to such technologies or products;

	•		We may face product liability risks associated with the sale of the acquired company’s products;

	•		Our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing diverse locations;

	•		We may have difficulty maintaining uniform standards, internal controls, procedures and policies across locations;

	•		The acquisition may result in litigation from terminated employees or third-parties; and

	•		We may experience significant problems or liabilities associated with product quality, technology and legal contingencies.

These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as out-of-pocket costs.

The consideration paid in connection with an acquisition also affects our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate any acquisition. To the extent we issue shares of stock or other rights to purchase stock, including options or other rights, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs (such as acquired in-process research and development costs) and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.

Risks Related to Regulation

IF OUR PRECLINICAL TESTING AND CLINICAL TRIALS ARE NOT SUCCESSFUL, WE WILL NOT OBTAIN REGULATORY APPROVAL FOR COMMERCIAL SALE OF OUR PRODUCT CANDIDATES.

We will be required to demonstrate, through preclinical testing and clinical trials, that our product candidates are safe and effective before we can obtain regulatory approval for the commercial sale of our product candidates. Preclinical testing and clinical trials are lengthy and expensive and the historical rate of failure for product candidates is high. Product candidates that appear promising in the early phases of development, such as in preclinical study or in early human clinical trials, may fail to demonstrate safety and efficacy in clinical trials.

Except for CETHRIN and the ALTROPANE molecular imaging agent, we have not yet received IND approval from the FDA for our other product candidates which will be required before we can begin clinical trials in the United States. We may not submit INDs for our product candidates if we are unable to accumulate the necessary preclinical data for the filing of an IND. The FDA may request additional preclinical data before allowing us to commence clinical trials. The FDA or other applicable regulatory authorities may suspend clinical trials of a drug candidate at any time if we or they believe the subjects or patients participating in such trials are being exposed to unacceptable health risks or for other reasons. Adverse side effects of a drug candidate on subjects or patients in a clinical trial could result in the FDA or foreign regulatory authorities refusing to approve a particular drug candidate for any or all indications of use.

In September 2007, we had a preliminary meeting with the EMEA to discuss our clinical development plan for CETHRIN. In October 2007, we met with the FDA to review the Phase I/IIa results and our CETHRIN clinical development plan. We plan to meet with Health Canada in early 2008. Based on discussions to date with the regulatory authorities and our expert advisors, we are planning to begin a Phase IIb trial at sites in North America and Europe in the first half of 2008.

In September 2006, we announced statistically significant results of our Phase III trial, POET-1. In April 2007, we met with the FDA to review the POET-1 results and our design for the remaining Phase III clinical development. In July 2007, our collaborators completed enrollment in a study that optimized ALTROPANE’s image acquisition protocol which we believe will enhance ALTROPANE’s commercial use. Based on the available data and our discussions with the FDA and our expert advisors to date, we are planning a Phase III POET-2 program. As part of the customary process for clinical trials of molecular imaging agents, the POET-2 program will begin with a clinical study to acquire the set of ALTROPANE images used to train the expert readers. We plan to initiate this study in the fourth quarter of 2007. The second part of the planned POET-2 program involves two concurrent Phase III trials of approximately 150 subjects each using the optimized ALTROPANE imaging protocol developed for commercial use. These two concurrent trials, the final design of which is under discussion with the FDA, will be initiated once agreement on the final design of the two trials is reached with the FDA.

There is no assurance that the results obtained to date and/or any further work completed in the future will be sufficient to achieve the approvability of CETHRIN or the ALTROPANE molecular imaging agent.

Clinical trials require sufficient patient enrollment which is a function of many factors, including the size of the potential patient population, the nature of the protocol, the availability of existing treatments for the indicated disease and the eligibility criteria for enrolling in the clinical trial. Delays or difficulties in completing patient enrollment can result in increased costs and longer development times.

We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend those trials, or delay the analysis of data from our completed or ongoing clinical trials. Any of the following could delay the initiation or the completion of our ongoing and planned clinical trials:

	•		Ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;

	•		Delays in enrolling patients and volunteers into clinical trials;

	•		Lower than anticipated retention rate of patients and volunteers in clinical trials;

	•		Negative or inconclusive results of clinical trials or adverse medical events during a clinical trial could cause a clinical trial to be repeated or a program to be terminated, even if other studies or trials related to the program are successful;

	•		Insufficient supply or deficient quality of drug candidate materials or other materials necessary for the conduct of our clinical trials;

	•		Serious and unexpected drug-related side-effects experienced by participants in our clinical trials; or

	•		The placement of a clinical trial on hold.

OUR PRODUCT CANDIDATES ARE SUBJECT TO RIGOROUS REGULATORY REVIEW AND, EVEN IF APPROVED, REMAIN SUBJECT TO EXTENSIVE REGULATION.

Our technologies and product candidates must undergo a rigorous regulatory approval process which includes extensive preclinical and clinical testing to demonstrate safety and efficacy before any resulting product can be marketed. Our research and development activities are regulated by a number of government authorities in the United States and other countries, including the FDA pursuant to the Federal Food, Drug, and Cosmetic Act. The clinical trial and regulatory approval process usually requires many years and substantial cost. To date, neither the FDA nor any of its international equivalents has approved any of our product candidates for marketing.

The FDA regulates drugs in the United States, including their testing, manufacturing and marketing. Data obtained from testing is subject to varying interpretations which can delay, limit or prevent FDA approval. The FDA has stringent laboratory and manufacturing standards which must be complied with before we can test our product candidates in people or make them commercially available. Examples of these standards include Good Laboratory Practices and current Good Manufacturing Practices, or cGMP. Our compliance with these standards is subject to initial certification by independent inspectors and continuing audits thereafter. Obtaining FDA approval to sell our product candidates is time-consuming and expensive. The FDA usually takes at least 12 to 18 months to review an NDA which must be submitted before the FDA will consider granting approval to sell a product. If the FDA requests additional information, it may take even longer for the FDA to make a decision especially if the additional information that they request requires us to complete additional studies. We may encounter similar delays in foreign countries. After reviewing any NDA we submit, the FDA or its foreign equivalents may decide not to approve our products. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing our product candidates.

Other risks associated with the regulatory approval process include:

	•		Regulatory approvals may impose significant limitations on the uses for which any approved products may be marketed;

	•		Any marketed product and its manufacturer are subject to periodic reviews and audits, and any discovery of previously unrecognized problems with a product or manufacturer could result in suspension or limitation of approvals;

	•		Changes in existing regulatory requirements, or the enactment of additional regulations or statutes, could prevent or affect the timing of our ability to achieve regulatory compliance. Federal and state laws, regulations and policies may be changed with possible retroactive effect, and how these rules actually operate can depend heavily on administrative policies and interpretation over which we have no control, and we may possess inadequate experience to assess their full impact upon our business; and

	•		The approval may impose significant restrictions on the indicated uses, conditions for use, labeling, advertising, promotion, marketing and/or production of such product, and may impose ongoing requirements for post-approval studies, including additional research and development and clinical trials.

OUR PRODUCTS COULD BE SUBJECT TO RESTRICTIONS OR WITHDRAWAL FROM THE MARKET AND WE MAY BE SUBJECT TO PENALTIES IF WE FAIL TO COMPLY WITH REGULATORY REQUIREMENTS, OR IF WE EXPERIENCE UNANTICIPATED PROBLEMS WITH OUR PRODUCTS, WHEN AND IF ANY OF THEM ARE APPROVED.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory bodies. These requirements include submissions of safety and other post-marketing information and reports, registration requirements, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. The manufacturer and the manufacturing facilities we use to make any of our product candidates will also be subject to periodic review and inspection by the FDA. The subsequent discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on the product or manufacturer or facility, including withdrawal of the product from the market. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in:

	•		Restrictions on such products, manufacturers or manufacturing processes;

	•		Warning letters;

	•		Withdrawal of the products from the market;

	•		Refusal to approve pending applications or supplements to approved applications that we submit;

	•		Recall;

	•		Fines;

	•		Suspension or withdrawal of regulatory approvals;

	•		Refusal to permit the import or export of our products;

	•		Product seizure; and

	•		Injunctions or the imposition of civil or criminal penalties.

FAILURE TO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WOULD PREVENT US FROM MARKETING OUR PRODUCTS ABROAD.

Although we have not initiated any marketing efforts in foreign jurisdictions, we intend in the future to market our products outside the United States. In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The

time required to obtain approval abroad may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval and we may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or approval by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market outside the United States. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.

FOREIGN GOVERNMENTS TEND TO IMPOSE STRICT PRICE CONTROLS WHICH MAY ADVERSELY AFFECT OUR REVENUES, IF ANY.

The pricing of prescription pharmaceuticals is subject to governmental control in some foreign countries. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.

Risks Related to our Intellectual Property

IF WE ARE UNABLE TO SECURE ADEQUATE PATENT PROTECTION FOR OUR TECHNOLOGIES, THEN WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AS A BIOTECHNOLOGY COMPANY.

At the present time, we do not have patent protection for all uses of our technologies. There is significant competition in the field of CNS diseases, our primary scientific area of research and development. Our competitors may seek patent protection for their technologies, and such patent applications or rights might conflict with the patent protection that we are seeking for our technologies. If we do not obtain patent protection for our technologies, or if others obtain patent rights that block our ability to develop and market our technologies, our business prospects may be significantly and negatively affected. Further, even if patents can be obtained, these patents may not provide us with any competitive advantage if our competitors have stronger patent positions or if their product candidates work better in clinical trials than our product candidates. Our patents may also be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products.

Our patent strategy is to obtain broad patent protection, in the United States and in major developed countries, for our technologies and their related medical indications. Risks associated with protecting our patent and proprietary rights include the following:

	•		Our ability to protect our technologies could be delayed or negatively affected if the United States Patent and Trademark Office, or USPTO, requires additional experimental evidence that our technologies work;

	•		Our competitors may develop similar technologies or products, or duplicate any technology developed by us;

	•		Our competitors may develop products which are similar to ours but which do not infringe our patents or products;

	•		Our competitors may successfully challenge one or more of our patents in an interference or litigation proceeding;

	•		Our patents may infringe the patents or rights of other parties who may decide not to grant a license to us. We may have to change our products or processes, pay licensing fees or stop certain activities because of the patent rights of third parties which could cause additional unexpected costs and delays;

	•		Patent law in the fields of healthcare and biotechnology is still evolving and future changes in such laws might conflict with our existing and future patent rights, or the rights of others;

	•		Our collaborators, employees and consultants may breach the confidentiality agreements that we enter into to protect our trade secrets and proprietary know-how. We may not have adequate remedies for such breach; and

	•		There may be disputes as to the ownership of technological information developed by consultants, scientific advisors or other third parties which may not be resolved in our favor.

WE IN-LICENSE A SIGNIFICANT PORTION OF OUR INTELLECTUAL PROPERTY AND IF WE FAIL TO COMPLY WITH OUR OBLIGATIONS UNDER ANY OF THE RELATED AGREEMENTS, WE COULD LOSE LICENSE RIGHTS THAT ARE NECESSARY TO DEVELOP OUR PRODUCT CANDIDATES.

We are a party to and rely on a number of in-license agreements with third parties that give us rights to intellectual property that is necessary for our business. Our current in-license arrangements impose various development, royalty and other obligations on us. If we breach these obligations and fail to cure such breach in a timely manner, these exclusive licenses could be converted to non-exclusive licenses or the agreements could be terminated, which would result in our being unable to develop, manufacture and sell products that are covered by the licensed technology. In particular, the development of our nerve repair program is highly dependent upon CETHRIN which we licensed from BioAxone. If we are unable to meet our obligations in the time period specified in the CETHRIN License, including achieving the development and clinical milestones, obtaining a commercial agreement for the delivery of CETHRIN and the out-license of CETHRIN development in Japan, our business could be materially harmed.

In order to continue to expand our business we may need to acquire additional product candidates in clinical development through in-licensing that we believe will be a strategic fit with us. We may not be able to in-license suitable product candidates at an acceptable price or at all. In addition, we expect to enter into additional licenses in the future. Engaging in any in-license will incur a variety of costs, and we may never realize the anticipated benefits of any such in-license.

IF WE BECOME INVOLVED IN PATENT LITIGATION OR OTHER PROCEEDINGS RELATED TO A DETERMINATION OF RIGHTS, WE COULD INCUR SUBSTANTIAL COSTS AND EXPENSES, SUBSTANTIAL LIABILITY FOR DAMAGES OR BE REQUIRED TO STOP OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS.

A third party may sue us for infringing its patent rights. Likewise, we may need to resort to litigation to enforce a patent issued or licensed to us or to determine the scope and validity of third-party proprietary rights. In addition, a third party may claim that we have improperly obtained or used its confidential or proprietary information. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared against us by the USPTO, regarding intellectual property rights with respect to our products and technology. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.

If any parties successfully claim that our creation or use of proprietary technologies infringes upon their intellectual property rights, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a license. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license and are unable to design around a patent, we may be unable to effectively market some of our technology and products, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. We might be required to redesign the

formulation of a product candidate so that it does not infringe, which may not be possible or could require substantial funds and time. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect of our business operations if we are unable to enter into license agreements that are acceptable to us. Moreover, we expect that a number of our collaborations will provide that royalties payable to us for licenses to our intellectual property may be offset by amounts paid by our collaborators to third parties who have competing or superior intellectual property positions in the relevant fields, which could result in significant reductions in our revenues from products developed through collaborations.

CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION.

In order to protect our proprietary technology and processes, we rely in part on confidentiality agreements with our collaborators, employees, consultants, outside scientific collaborators and sponsored researchers, and other advisors. These agreements may be breached, may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such party. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Risks Related to our Dependence on Third Parties

IF ANY COLLABORATOR TERMINATES OR FAILS TO PERFORM ITS OR THEIR OBLIGATIONS UNDER AGREEMENTS WITH US, THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD BE DELAYED OR TERMINATED.

We are dependent on expert advisors and our collaborations with research and development service providers. Our business could be adversely affected if any collaborator terminates its collaboration agreement with us or fails to perform its obligations under that agreement. Most biotechnology and pharmaceutical companies have established internal research and development programs, including their own facilities and employees which are under their direct control. By contrast, we have limited internal research capability and have elected to outsource substantially all of our research and development, preclinical and clinical activities. As a result, we are dependent upon our network of expert advisors and our collaborations with other research and development service providers for the development of our technologies and product candidates. These expert advisors are not our employees but provide us with important information and knowledge that may enhance our product development strategies and plans. Our collaborations with research and development service providers are important for the testing and evaluation of our technologies, in both the preclinical and clinical stages.

Many of our expert advisors are employed by, or have their own collaborative relationship with Harvard and its Affiliates or CMCC. A summary of the key scientific, research and development professionals with whom we work, and a composite of their professional background and affiliations is as follows:

	•		Larry I. Benowitz, Ph.D., Director, Laboratories for Neuroscience Research in Neurosurgery, Children’s Hospital, Boston; Associate Professor of Neurosurgery, Harvard Medical School.

	•		Joseph R. Bianchine, M.D., Ph.D., F.A.C.P., F.A.C.C.P., Scientific Advisory Board Member, Alseres Pharmaceuticals, Inc.; former Senior Scientific Advisor, Schwarz Pharma AG.

	•		Zhigang He, Ph.D., BM, Research Associate, Department of Neurology, Children’s Hospital Boston; Associate Professor of Neurology, Department of Neurology, Harvard Medical School.

	•		Robert S. Langer, Jr., Sc.D., Director, Alseres Pharmaceuticals, Inc., Institute Professor of Chemical and Biomedical Engineering, Massachusetts Institute of Technology.

	•		Peter Meltzer, Ph.D., President, Organix, Inc., Woburn, MA.

Dr. Benowitz, Dr. Bianchine, Dr. He, and Dr. Langer provide scientific consultative services resulting in total payments of approximately $125,000 per year. Dr. Benowitz and Dr. He provide scientific consultative services primarily related to our nerve repair program. Dr. Bianchine provides scientific consultative services primarily related to our nerve repair and neurodegenerative programs. Dr. Langer provides consultative services primarily related to scientific and business services.

We do not have a formal agreement with Dr. Meltzer but do enter into research and development contracts from time to time with Organix, Inc., of which Dr. Meltzer is president.

Our significant collaborations include:

	•		Children’s Hospital in Boston, Massachusetts where certain of our collaborating scientists perform their research efforts;

	•		Harvard Medical School in Boston, Massachusetts where certain of our collaborating scientists perform their research efforts;

	•		MDS Nordion in Vancouver, British Colombia which manufactures the SPECT ALTROPANE molecular imaging agent;

	•		Molecular Neuroimaging, Inc. in New Haven, Connecticut which is optimizing our imaging protocol for commercial use; and

	•		Organix, Inc. in Woburn, Massachusetts which provides non-radioactive ALTROPANE for FDA mandated studies and synthesizes our compounds for the treatment of PD and for axon regeneration.

We generally have a number of collaborations with research and development service providers ongoing at any point in time. These agreements generally cover a specific project or study, are usually for a duration between one month to one year, and expire upon completion of the project. Under these agreements, we are usually required to make an initial payment upon execution of the agreement with the remaining payments based upon the completion of certain specified milestones such as completion of a study or delivery of a report.

�� We cannot control the amount and timing of resources our advisors and collaborators devote to our programs or technologies. Our advisors and collaborators may have employment commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. If any of our advisors or collaborators were to breach or terminate their agreement with us or otherwise fail to conduct their activities successfully and in a timely manner, the preclinical or clinical development or commercialization of our technologies and product candidates or our research programs could be delayed or terminated. Any such delay or termination could have a material adverse effect on our business, financial condition or results of operations.

Disputes may arise in the future with respect to the ownership of rights to any technology developed with our advisors or collaborators. These and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our technologies, or could require or result in litigation to resolve. Any such event could have a material adverse effect on our business, financial condition or results of operations.

Our advisors and collaborators sign agreements that provide for confidentiality of our proprietary information. Nonetheless, they may not maintain the confidentiality of our technology and other confidential information in connection with every advisory or collaboration arrangement, and any unauthorized dissemination of our confidential information could have a material adverse effect on our business, financial condition or results of operations.

IF WE ARE UNABLE TO MAINTAIN OUR KEY WORKING RELATIONSHIPS WITH OUR LICENSORS, INCLUDING BIOAXONE, HARVARD AND ITS AFFILIATES AND CMCC, WE MAY NOT BE SUCCESSFUL SINCE SUBSTANTIALLY ALL OF OUR CURRENT TECHNOLOGIES WERE LICENSED FROM SUCH LICENSORS.

Historically, we have been heavily dependent on our relationships with our licensors, including Harvard and its Affiliates and CMCC and more recently BioAxone and to date, substantially all of our technologies were licensed from these licensors.

Under the terms of our license agreements with BioAxone, Harvard and its Affiliates and CMCC, we acquired the exclusive, worldwide license to make, use, and sell the technology covered by each respective agreement. Among other things, the technologies licensed under these agreements include:

	•		CETHRIN compositions and methods of use;

	•		ALTROPANE molecular imaging agent compositions and methods of use;

	•		Technetium-based molecular imaging agent compositions and methods of use;

	•		INOSINE methods of use; and

	•		DAT blocker compositions and methods of use.

Generally, each of these license agreements is effective until the last patent licensed relating to the technology expires or at a fixed and determined date. The patents on CETHRIN expire beginning in 2022. The patents on the ALTROPANE molecular imaging agent expire beginning in 2013. The patents on the technetium-based molecular imaging agents expire beginning in 2017. The patents for INOSINE expire beginning in 2017. The patents for our DAT blockers expire beginning in 2012.

We are required to make certain payments under our license agreements with our licensors which generally include:

	•		An initial licensing fee payment upon the execution of the agreement and annual license maintenance fee;

	•		Reimbursement payments for all patent related costs incurred by the licensor, including fees associated with the filing of continuation-in-part patent applications;

	•		Milestone payments as licensed technology progresses through each stage of development (filing of IND, completion of one or more clinical stages and submission and approval of an NDA); and

	•		Royalty payments on the sales of any products based on the licensed technology.

In December 2006, we entered into the CETHRIN License pursuant to which we acquired the exclusive worldwide license to develop CETHRIN. Under the CETHRIN License, we agreed to $10,000,000 in up-front payments, of which we paid BioAxone $2,500,000 upon execution of the CETHRIN License and an additional $7,500,000 in March 2007. We also agreed to pay BioAxone up to $25,000,000 upon the achievement of certain milestone events and royalties based on the worldwide net sales of licensed products, subject to specified minimums, in each calendar year until either the expiration of a valid claim covering a licensed product or a certain time period after the launch of a licensed product, in each case applicable to the specific country. If we fail to launch a licensed product within twelve months of obtaining marketing approval for such product in the United States, at least two specified European countries or Japan, BioAxone may terminate our rights under the CETHRIN License in whole or in part in the United States, the European Union or Japan.

We have entered into the CMCC Licenses with CMCC to acquire the exclusive worldwide rights to certain axon regeneration technologies and to replace our former axon regeneration licenses with CMCC. The CMCC Licenses provide for future milestone payments of up to an aggregate of approximately $425,000 for each product candidate upon achievement of certain regulatory milestones. Additionally, we entered into two sponsored research agreements with CMCC which provide for a total of $550,000 in annual funding through May 2009.

We have entered into the Harvard License Agreements with Harvard and its Affiliates to acquire the exclusive worldwide rights to certain technologies within our molecular imaging and neurodegenerative programs. The Harvard License Agreements obligate us to pay up to an aggregate of approximately $2,520,000 in milestone payments in the future. The future milestone payments are generally payable only upon achievement of certain regulatory milestones.

Our license agreements with Harvard and its Affiliates and CMCC generally provide for royalty payments equal to specified percentages of product sales, annual license maintenance fees and continuing patent prosecution costs.

We have entered into sponsored research agreements with certain key collaborators, including Harvard and its Affiliates and CMCC. Under these agreements, we provide funding so that the sponsoring scientists can continue their research efforts. These payments are generally made in equal quarterly installments over the term of the agreements which are usually for one to three years.

Universities and other not-for-profit research institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology that they have developed. The loss of our relationship with one or more of our key licensors could adversely affect our ongoing development programs and could make it more costly and difficult for us to obtain the licensing rights to new scientific discoveries.

IF WE ARE UNABLE TO ESTABLISH, MAINTAIN AND RELY ON NEW COLLABORATIVE RELATIONSHIPS, THEN WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES.

To date, our operations have primarily focused on the preclinical development of most of our technologies, as well as conducting clinical trials for certain of our technologies. We currently expect that the continued development of our technologies will result in the initiation of additional clinical trials. We expect that these developments will require us to establish, maintain and rely on new collaborative relationships in order to successfully develop and commercialize our technologies. We face significant competition in seeking appropriate collaborators. Collaboration arrangements are complex to negotiate and time consuming to document. We may not be successful in our efforts to establish additional collaborations or other alternative arrangements, and the terms of any such collaboration or alternative arrangement may not be favorable to us. There is no certainty that:

	•		We will be able to enter into such collaborations on economically feasible and otherwise acceptable terms and conditions;

	•		Such collaborations will not require us to undertake substantial additional obligations or require us to devote additional resources beyond those we have identified at present;

	•		Any of our collaborators will not breach or terminate their agreements with us or otherwise fail to conduct their activities on time, thereby delaying the development or commercialization of the technology for which the parties are collaborating; and

	•		The parties will not dispute the ownership rights to any technologies developed under such collaborations.

IF ONE OF OUR COLLABORATORS WERE TO CHANGE ITS STRATEGY OR THE FOCUS OF ITS DEVELOPMENT AND COMMERCIALIZATION EFFORTS WITH RESPECT TO OUR RELATIONSHIP, THE SUCCESS OF OUR PRODUCT CANDIDATES AND OUR OPERATIONS COULD BE ADVERSELY AFFECTED.

There are a number of factors external to us that may change our collaborators’ strategy or focus with respect to our relationship with them, including:

	•		The amount and timing of resources that our collaborators may devote to the product candidates;

	•		Our collaborators may experience financial difficulties;

	•		We may be required to relinquish important rights such as marketing and distribution rights;

	•		Should a collaborator fail to develop or commercialize one of our product candidates, we may not receive any future milestone payments and will not receive any royalties for the product candidate;

	•		Business combinations or significant changes in a collaborator’s business strategy may also adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement;

	•		A collaborator may not devote sufficient time and resources to any collaboration with us, which could prevent us from realizing the potential commercial benefits of that collaboration;

	•		A collaborator may terminate their collaborations with us, which could make it difficult for us to attract new collaborators or adversely affect how we are perceived in the business and financial communities; and

	•		A collaborator could move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors.

If any of these occur, the development and commercialization of one or more drug candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.

Risks Related to Competition

WE ARE ENGAGED IN HIGHLY COMPETITIVE INDUSTRIES DOMINATED BY LARGER, MORE EXPERIENCED AND BETTER CAPITALIZED COMPANIES.

The biotechnology and pharmaceutical industries are highly competitive, rapidly changing, and are dominated by larger, more experienced and better capitalized companies. Such greater experience and financial strength may enable them to bring their products to market sooner than us, thereby gaining the competitive advantage of being the first to market. Research on the causes of, and possible treatments for, diseases for which we are trying to develop therapeutic or diagnostic products are developing rapidly and there is a potential for extensive technological innovation in relatively short periods of time. Factors affecting our ability to successfully manage the technological changes occurring in the biotechnology and pharmaceutical industries, as well as our ability to successfully compete, include:

	•		Many of our potential competitors in the field of CNS research have significantly greater experience than we do in completing preclinical and clinical testing of new pharmaceutical products, the manufacturing and commercialization process, and obtaining FDA and other regulatory approvals of products;

	•		Many of our potential competitors have products that have been approved or are in late stages of development;

	•		Many of our potential competitors may develop products or other novel technologies that are more effective, safer or less costly than any that we are developing;

	•		Many of our potential competitors have collaborative arrangements in our target markets with leading companies and research institutions;

	•		The timing and scope of regulatory approvals for these products;

	•		The availability and amount of third-party reimbursement;

	•		The strength of our patent position;

	•		Many of our potential competitors are in a stronger financial position than us, and are thus better able to finance the significant cost of developing, manufacturing and selling new products; and

	•		Companies with established positions and prior experience in the pharmaceutical industry may be better able to develop and market products for the treatment of those diseases for which we are trying to develop products.

To our knowledge, there is presently no approved therapeutic focused on the functional recovery from CNS disorders resulting from traumas, such as SCI. We are aware of other companies who are developing therapeutics to treat the CNS disorders resulting from SCI. These companies have significantly greater infrastructure and financial resources than us, and their decision to seek approval in the United States could significantly adversely affect our competitive position. Given the challenges of achieving functional recovery in severe CNS disorders, we believe some of these competitors are developing devices or drugs that could potentially be used in conjunction with the therapeutics we are developing.

To our knowledge, there is presently no approved diagnostic in the United States for PD and other movement disorders. To our knowledge, there is only one company, GE Healthcare (formerly Nycomed/Amersham), that has marketed a diagnostic imaging agent for PD, DaTSCAN™. To date, GE Healthcare has obtained marketing approval only in certain countries in Europe. To our knowledge, GE Healthcare is not presently seeking approval of DaTSCAN in the United States. To our knowledge, GE Healthcare is developing a technetium-based imaging agent that they may seek to have approved in both the United States and abroad. GE Healthcare has significantly greater infrastructure and financial resources than us, and their decision to seek approval in the United States could significantly adversely affect our competitive position. Their established market presence, and greater financial strength in the European market may make it difficult for us to successfully market ALTROPANE in Europe.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY, OUR PRODUCT CANDIDATES MAY BE RENDERED NONCOMPETITIVE OR OBSOLETE.

Our competitors may develop or commercialize more effective, safer or more affordable products, or obtain more effective patent protection, than we are able to. Accordingly, our competitors may commercialize products more rapidly or effectively than we are able to, which would adversely affect our competitive position, the likelihood that our product candidates will achieve initial market acceptance, and our ability to generate meaningful revenues from our product candidates. Even if our product candidates achieve initial market acceptance, competitive products may render our products obsolete, noncompetitive or uneconomical. If our product candidates are rendered obsolete, we may not be able to recover the expenses of developing and commercializing those product candidates.

IF THIRD-PARTY PAYORS DO NOT ADEQUATELY REIMBURSE OUR CUSTOMERS FOR ANY OF OUR PRODUCTS THAT ARE APPROVED FOR MARKETING, THEY MIGHT NOT BE ACCEPTED BY PHYSICIANS AND PATIENTS OR PURCHASED OR USED, AND OUR REVENUES AND PROFITS WILL NOT DEVELOP OR INCREASE.

Substantially all biotechnology products are distributed to patients by physicians and hospitals, and in most cases, such patients rely on insurance coverage and reimbursement to pay for some or all of the cost of the product. In recent years, the continuing efforts of government and third party payors to contain or reduce health care costs have limited, and in certain cases prevented, physicians and patients from receiving insurance coverage and reimbursement for medical products, especially newer technologies. We believe that the efforts of governments and third-party payors to contain or reduce the cost of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies. Obtaining reimbursement approval for a product from each governmental or other third-party payor is a time-consuming and costly process that could require us to provide to each prospective payor scientific, clinical and cost-effectiveness data for the use of our products. If we succeed in bringing any of our product candidates to market and third-party payors determine that the product is eligible for coverage; the third-party payors may nonetheless establish and maintain price levels insufficient for us to realize a sufficient return on our investment in product development. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases.

Our ability to generate adequate revenues and operating profits could be adversely affected if such limitations or restrictions are placed on the sale of our products. Specific risks associated with medical insurance coverage and reimbursement include:

	•		Significant uncertainty exists as to the reimbursement status of newly approved health care products;

	•		Third-party payors are increasingly challenging the prices charged for medical products and services;

	•		Adequate insurance coverage and reimbursement may not be available to allow us to charge prices for products which are adequate for us to realize an appropriate return on our development costs. If adequate coverage and reimbursement are not provided for use of our products, the market acceptance of these products will be negatively affected;

	•		Health maintenance organizations and other managed care companies may seek to negotiate substantial volume discounts for the sale of our products to their members thereby reducing our profit margins; and

	•		In recent years, bills proposing comprehensive health care reform have been introduced in Congress that would potentially limit pharmaceutical prices and establish mandatory or voluntary refunds. It is uncertain if any legislative proposals will be adopted and how federal, state or private payors for health care goods and services will respond to any health care reforms.

U.S. drug prices may be further constrained by possible Congressional action regarding drug reimportation into the United States. Some proposed legislation would allow the reimportation of approved drugs originally manufactured in the United States back into the United States from other countries where the drugs are sold at a lower price. Some governmental authorities in the U.S. are pursuing lawsuits to obtain expanded reimportation authority. Such legislation, regulations, or judicial decisions could reduce the prices we receive for any products that we may develop, negatively affecting our revenues and prospects for profitability. Even without legislation authorizing reimportation, increasing numbers of patients have been purchasing prescription drugs from Canadian and other non-United States sources, which has reduced the price received by pharmaceutical companies for their products.

The Centers for Medicare and Medicaid Services, or CMS, the agency within the Department of Health and Human Services that administers Medicare and that is responsible for setting Medicare reimbursement payment rates and coverage policies for any product candidates that we commercialize, has authority to decline to cover particular drugs if it determines that they are not “reasonable and necessary” for Medicare beneficiaries or to cover them at lower rates to reflect budgetary constraints or to match previously approved reimbursement rates for products that CMS considers to be therapeutically comparable. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and both Medicare and other third-party payors may have sufficient market power to demand significant price reductions.

Moreover, marketing and promotion arrangements in the pharmaceutical industry are heavily regulated by CMS, and many marketing and promotional practices that are common in other industries are prohibited or restricted. These restrictions are often ambiguous and subject to conflicting interpretations, but carry severe administrative, civil, and criminal penalties for noncompliance. It may be costly for us to implement internal controls to facilitate compliance by our sales and marketing personnel.

As a result of the trend towards managed healthcare in the United States, as well as legislative proposals to constrain the growth of federal healthcare program expenditures, third-party payors are increasingly attempting to contain healthcare costs by demanding price discounts or rebates and limiting both coverage and the level of reimbursement of new drug products. Consequently, significant uncertainty exists as to the reimbursement status of newly approved healthcare products.

MEDICARE PRESCRIPTION DRUG COVERAGE LEGISLATION AND FUTURE LEGISLATIVE OR REGULATORY REFORM OF THE HEALTH CARE SYSTEM MAY AFFECT OUR ABILITY TO SELL OUR PRODUCT CANDIDATES PROFITABLY.

A number of legislative and regulatory proposals to change the healthcare system in the United States and other major healthcare markets have been proposed in recent years. In addition, ongoing initiatives in the United States have exerted and will continue to exert pressure on drug pricing. In some foreign countries, particularly countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. Significant changes in the healthcare system in the United States or elsewhere, including changes resulting from the implementation of the Medicare prescription drug coverage legislation and adverse trends in third-party

reimbursement programs, could limit our ability to raise capital and successfully commercialize our product candidates.

In particular, the Medicare Prescription Drug Improvement and Modernization Act of 2003 established a new Medicare prescription drug benefit. The prescription drug program and future amendments or regulatory interpretations of the legislation could affect the prices we are able to charge for any products we develop and sell for use by Medicare beneficiaries and could also cause third-party payors other than the federal government, including the states under the Medicaid program, to discontinue coverage for any products we develop or to lower reimbursement amounts that they pay. The legislation changed the methodology used to calculate reimbursement for drugs that are administered in physicians’ offices in a manner intended to reduce the amount that is subject to reimbursement. In addition, the Medicare prescription drug benefit program that took effect in January 2006 directed the Secretary of Health and Human Services to contract with procurement organizations to purchase physician- administered drugs from manufacturers and provided physicians with the option to obtain drugs through these organizations as an alternative to purchasing from manufacturers, which some physicians may find advantageous. Because we have not received marketing approval or established a price for any product, it is difficult to predict how this new legislation will affect us, but the legislation generally is expected to constrain or reduce reimbursement for certain types of drugs.

Further federal, state and foreign healthcare proposals and reforms are likely. While we cannot predict the legislative or regulatory proposals that will be adopted or what effect those proposals may have on our business, including the future reimbursement status of any of our product candidates, the announcement or adoption of such proposals could have an adverse effect on potential revenues from product candidates that we may successfully develop.

WE HAVE NO MANUFACTURING CAPACITY AND LIMITED MARKETING INFRASTRUCTURE AND EXPECT TO BE HEAVILY DEPENDENT UPON THIRD PARTIES TO MANUFACTURE AND MARKET APPROVED PRODUCTS.

We currently have no manufacturing facilities for either clinical trial or commercial quantities of any of our product candidates and currently have no plans to obtain additional facilities. To date, we have obtained the limited quantities of drug product required for preclinical and clinical trials from contract manufacturing companies. We intend to continue using contract manufacturing arrangements with experienced firms for the supply of material for both clinical trials and any eventual commercial sale.

We will depend upon third parties to produce and deliver products in accordance with all FDA and other governmental regulations. We may not be able to contract with manufacturers who can fulfill our requirements for quality, quantity and timeliness, or be able to find substitute manufacturers, if necessary. The failure by any third party to perform their obligations in a timely fashion and in accordance with the applicable regulations may delay clinical trials, the commercialization of products, and the ability to supply product for sale. In addition, any change in manufacturers could be costly because the commercial terms of any new arrangement could be less favorable and because the expenses relating to the transfer of necessary technology and processes could be significant.

Under our CETHRIN License, we acquired cGMP CETHRIN that we are currently utilizing for our Phase I/IIa trial and plan to use in our Phase IIb trial. In June 2007, we entered into an agreement with a cGMP manufacturer to produce more cGMP CETHRIN for use in our future clinical development. We do not presently have arrangements with any other suppliers in the event this supplier is unable to manufacture CETHRIN for us. We could encounter a significant delay before another supplier could manufacture CETHRIN for us due to the time required to establish a cGMP manufacturing process for CETHRIN.

With respect to our most advanced product candidate, ALTROPANE molecular imaging agent, we have entered into an agreement with, and are highly dependent upon, MDS Nordion. Under the terms of the agreement, which currently expires on December 31, 2007, we paid MDS Nordion a one-time fee of $300,000 in connection with its commitment to designate certain of its facilities exclusively for the production of the ALTROPANE molecular imaging agent. We also paid MDS Nordion approximately $900,000 to establish a cGMP certified manufacturing process for the production of ALTROPANE. Finally, we agreed to minimum monthly purchases of ALTROPANE through December 31, 2007. We hope to sign an extension with MDS Nordion before December 31, 2007 but there can be no assurance that we will be able to or that the terms will be acceptable. The agreement provides for MDS Nordion to manufacture the ALTROPANE molecular imaging agent for our clinical trials. The agreement also

provides that MDS Nordion will compile and prepare the information regarding manufacturing that will be a required component of any NDA we file for ALTROPANE in the future. We do not presently have arrangements with any other suppliers in the event that Nordion is unable to manufacture ALTROPANE for us. We could encounter a significant delay before another supplier could manufacture ALTROPANE for us due to the time required to establish a cGMP manufacturing process for ALTROPANE.

We currently have a limited marketing infrastructure. In order to earn a profit on any future product, we will be required to invest in the necessary sales and marketing infrastructure or enter into collaborations with third parties with respect to executing sales and marketing activities. We may encounter difficulty in negotiating sales and marketing collaborations with third parties on favorable terms for us. Most of the companies who can provide such services are financially stronger and more experienced in selling pharmaceutical products than we are. As a result, they may be in a position to negotiate an arrangement that is more favorable to them. We could experience significant delays in marketing any of our products if we are required to internally develop a sales and marketing organization or establish collaborations with a partner. There are risks involved with establishing our own sales and marketing capabilities. We have no experience in performing such activities and could incur significant costs in developing such a capability.

USE OF THIRD PARTY MANUFACTURERS MAY INCREASE THE RISK THAT WE WILL NOT HAVE ADEQUATE SUPPLIES OF OUR PRODUCT CANDIDATES.

Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including:

	•		Reliance on the third party for regulatory compliance and quality assurance;

	•		The possible breach of the manufacturing agreement by the third party; and

	•		The possible termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us.

If we are not able to obtain adequate supplies of our product candidates and any approved products, it will be more difficult for us to develop our product candidates and compete effectively. Our product candidates and any products that we successfully develop may compete with product candidates and products of third parties for access to manufacturing facilities. Our contract manufacturers are subject to ongoing, periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their designees to ensure strict compliance with cGMP regulations and other governmental regulations and corresponding foreign standards. We cannot be certain that our present or future manufacturers will be able to comply with cGMP regulations and other FDA regulatory requirements or similar regulatory requirements outside the United States. We do not control compliance by our contract manufacturers with these regulations and standards. Failure of our third party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates and products.

Risks Related to Employees and Growth

IF WE ARE UNABLE TO RETAIN OUR KEY PERSONNEL AND/OR RECRUIT ADDITIONAL KEY PERSONNEL IN THE FUTURE, THEN WE MAY NOT BE ABLE TO OPERATE EFFECTIVELY.

Our success depends significantly upon our ability to attract, retain and motivate highly qualified scientific and management personnel who are able to formulate, implement and maintain the operations of a biotechnology company such as ours. We consider retaining Peter Savas, our Chairman and Chief Executive Officer, Mark Pykett, our President and Chief Operating Officer, Kenneth L. Rice, Jr., our Executive Vice President Finance and Administration and Chief Financial Officer and Frank Bobe, our Executive Vice President and Chief Business Officer to be key to our efforts to develop and commercialize our product candidates. The loss of the service of any

of these key executives may significantly delay or prevent the achievement of product development and other business objectives. We have entered into employment and non-compete agreements with Messrs. Savas, Pykett, Rice and Bobe. We do not presently carry key person life insurance on any of our scientific or management personnel.

We currently outsource most of our research and development, preclinical and clinical activities. If we decide to increase our internal research and development capabilities for any of our technologies, we may need to hire additional key management and scientific personnel to assist the limited number of employees that we currently employ. There is significant competition for such personnel from other companies, research and academic institutions, government entities and other organizations. If we fail to attract such personnel, it could have a significant negative effect on our ability to develop our technologies.

Risks Related to our Stock

OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE AND CAN BE AFFECTED BY FACTORS UNRELATED TO OUR BUSINESS AND OPERATING PERFORMANCE.

The market price of our common stock may fluctuate significantly in response to factors that are beyond our control. The stock market in general periodically experiences significant price and volume fluctuations. The market prices of securities of pharmaceutical and biotechnology companies have been volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could result in significant fluctuations in the price of our common stock, which could cause a decline in the value of your investment. The market price of our common stock may be influenced by many factors, including:

	•		Announcements of technological innovations or new commercial products by our competitors or us;

	•		Announcements in the scientific and research community;

	•		Developments concerning proprietary rights, including patents;

	•		Delay or failure in initiating, conducting, completing or analyzing clinical trials or problems relating to the design, conduct or results of these trials;

	•		Announcement of FDA approval or non-approval of our product candidates or delays in the FDA review process;

	•		Developments concerning our collaborations;

	•		Publicity regarding actual or potential medical results relating to products under development by our competitors or us;

	•		Failure of any of our product candidates to achieve commercial success;

	•		Our ability to manufacture products to commercial standards;

	•		Conditions and publicity regarding the life sciences industry generally;

	•		Regulatory developments in the United States and foreign countries;

	•		Changes in the structure of health care payment systems;

	•		Period-to-period fluctuations in our financial results or those of companies that are perceived to be similar to us;

	•		Departure of our key personnel;

	•		Future sales of our common stock;

	•		Investors’ perceptions of us, our products, the economy and general market conditions;

	•		Differences in actual financial results versus financial estimates by securities analysts and changes in those estimates; and

	•		Litigation.

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

On August 13, 2007, we amended the Amended and Restated Convertible Promissory Note Purchase Agreement dated May 1, 2007 among us and purchasers listed therein, or the Purchasers, to increase the aggregate principal amount under the agreement from $15,000,000 to $25,000,000, or the August 2007 Amended Purchase Agreement. In August 2007, we issued a convertible promissory note to Ingalls & Snyder Value Partners LP, or ISVP, in the aggregate principal amount of $10,000,000 pursuant to the August 2007 Amended Purchase Agreement.

Pursuant to the August 2007 Amended Purchase Agreement, we agreed to file a registration statement, or the Registration Statement, with the Securities and Exchange Commission, or the Commission, within 60 days after the consummation of the August 2007 Amended Purchase Agreement to register for resale the shares of common stock issuable upon conversion of the convertible promissory notes issued and issuable pursuant to the August 2007 Amended Purchase Agreement, or the Required Filing Date. We also agreed to use our reasonable best efforts to cause the Registration Statement to be declared effective prior to (A) the earlier of (i) 90 days after the Required Filing Date, or (ii) five trading days after we receive notice from the Commission that the Registration Statement will not become subject to review, or if the Commission determines to review the Registration Statement, (B) the earlier of (i) 120 days after the Required Filing Date or (ii) five trading days after we receive notice from the Commission that the Commission has no further comment to the Registration Statement.

The $25,000,000 borrowed by us under the August 2007 Amended Purchase Agreement bears interest at the rate of 5% per annum and may be converted, at the option of the Purchasers into (i) shares of our common stock at a conversion price per share of $2.50 at any time after December 31, 2007, (ii) the right to receive royalty payments related to our molecular imaging products (including ALTROPANE and FLUORATEC) in amounts equal to 2% of our pre-commercial revenue related to such products plus 0.5% of future net sales of such products for each $1,000,000 of outstanding principal and interest that a Purchaser elects to convert into royalty payments, or (iii) a combination of (i) and (ii). Any outstanding notes that are not converted into our common stock or into the right to receive future royalty payments will become due and payable by the earlier of December 31, 2010 or the date of which a Purchaser declares an event of default (as defined in the August 2007 Amended Purchase Agreement). However, each Purchaser is prohibited from effecting a conversion if at the time of such conversion the common stock issuable to such Purchaser, when taken together with all shares of common stock then held or otherwise beneficially owned a Purchaser exceeds 19.9%, or 9.99% in the case of Highbridge International, LLC, or Highbridge and ISVP, of the total number of issued and outstanding shares of our common stock immediately prior to such conversion unless and until our stockholders approve the conversion of all of the shares of common stock issuable thereunder.

All other terms of the August 2007 Amended Purchase Agreement remained unchanged.

The convertible promissory notes were offered and sold pursuant to the August 2007 Amended Purchase Agreement to selected institutional investors and other accredited investors without registration under the Securities Act, or state securities laws, in reliance on the exemptions provided by Section 4(2) of the Securities Act and Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws.

Item 6 — Exhibits

10.1		Second Amended and Restated Convertible Promissory Note Purchase Agreement, by and among the Company and the purchasers listed therein, dated August 13, 2007.

31.1		Certification of the Chief Executive Officer pursuant to Rule 13(a) — 14(a)/Rule 15(d) - 14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13(a) — 14(a)/Rule 15(d) - 14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


	ALSERES PHARMACEUTICALS, INC (Registrant)
DATE: November 14, 2007	/s/Peter G. Savas
	Peter G. Savas
	Chief Executive Officer (Principal Executive Officer)


DATE: November 14, 2007	/s/Kenneth L. Rice, Jr.
	Kenneth L. Rice, Jr.
	Executive Vice President Finance and Administration And Chief Financial Officer (Principal Financial and Accounting Officer)

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Alseres Pharmaceuticals Inactive 10-Q2007 Q3 Quarterly report

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