POTP Point Therapeutics (MM)

Cautionary Factors with Respect to Forward-Looking Statements

Readers are cautioned that certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations that are not related to historical results are “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995, as from time-to-time in effect. This information includes statements on the prospects for our drug development activities and results of operations based on our current expectations, such as statements regarding certain milestones with respect to our clinical program and our product candidates. Forward-looking statements are statements that are not historical facts, and can be identified by, among other things, the use of forward-looking language, such as “believe,” “expect,” “may,” “will,” “should,” “seeks,” “plans,” “schedule to,” “anticipates” or “intends” or the negative of those terms, or other variations of those terms of comparable language, or by discussions of strategy or intentions. A number of important factors could cause actual results to differ materially from those projected or suggested in the forward looking statement, including, but not limited to, our ability to (1) receive stockholder approvals and complete our merger with DARA, (2) successfully locate a buyer or partner for the purposes of effectuating a strategic transaction if our merger with DARA is not successful, (3) continue as a going concern, (4) comply with certain NASDAQ Marketplace Rules, and (5) enforce our intellectual property rights, as well as the risk factors discussed elsewhere in this report.

Overview

We are a biopharmaceutical company which has studied our lead product candidate, talabostat, in a number of human clinical trials in late-stage cancers. May 2007 interim clinical results caused our Independent Data Monitoring Committee to recommend stopping our most advanced clinical trials, two Phase 3 talabostat studies for patients in advanced non-small cell lung cancer. Subsequently, the talabostat clinical development program was put on clinical hold by the U.S. Food and Drug Administration (“FDA”). We have also studied talabostat in several Phase 2 trials, including as a single-agent and in combination with cisplatin in metastatic melanoma, in combination with rituximab in advanced chronic lymphocytic leukemia, and in combination with gemcitabine in Stage IV pancreatic cancer. Due to cash limitations, we are not currently funding any research or clinical operations.

On October 9, 2007, we entered into a definitive agreement to merge with DARA pursuant to which DARA will merge with DP Acquisition Corp., our newly-formed subsidiary, with DARA surviving as a wholly-owned subsidiary. After giving effect to the merger, DARA stockholders will hold 96.4% of our outstanding shares of common stock on a fully-diluted basis, and we will change our name to DARA BioSciences, Inc. and be based in Raleigh, North Carolina (see Note 9 to the Financial Statements found elsewhere in this Report on Form 10-Q).

To date, we have generated no revenues from product sales and have primarily depended upon equity financings, interest earned on invested funds, and collaboration payments received from pharmaceutical companies and government agencies to provide the working capital required to pursue our intended business activities. We have a net accumulated deficit of approximately $102,705,000 as of September 30, 2007. The accumulated deficit has resulted principally from our efforts to develop drug candidates and the associated administrative costs required to support these efforts.

Effective July 25, 2007, we terminated all but two of our employees. We are utilizing some of our recently terminated executives as part of a more variable-cost consulting team to assist us in completing the merger with DARA. In addition, on July 31, 2007, we terminated our lease at 155 Federal Street in Boston, Massachusetts and moved to a substantially smaller temporary location. We may be unable to successfully complete the merger with DARA or to locate another buyer or partner for the purposes of effecting another strategic transaction if the merger fails. Although we currently retain control over our intellectual property portfolio, we cannot make any assurances that these assets have or will continue to have any value. This uncertainty as to the value of our intellectual property portfolio and other assets may prevent us from locating another buyer or partner for the purposes of effecting another strategic transaction if the merger with DARA fails.

If our attempts to complete the merger with DARA fail and if no other strategic transaction can be completed, we will likely file for federal bankruptcy protection under Chapter 11 of the Bankruptcy Code. In the event that we do file for Chapter 11 protection, we will most likely not be able to raise any type of funding from any source. Upon filing for Chapter 11 protection, we would not meet the minimum standards required for remaining listed on the NASDAQ Capital Market. If we are delisted, our stock would no longer be tradable on the NASDAQ Capital Market.

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Our principal executive office is located at 70 Walnut Street, Wellesley Hills, Massachusetts, 02481 and our telephone number is (781) 239-7502. Our common stock trades on the NASDAQ Capital Market under the symbol “POTP”. Our website is www.pther.com.

Critical Accounting Policies and Significant Judgments and Estimates

Critical Accounting Policies

Clinical Trial Expenses.  We record the estimated cost of patient recruitment and related supporting functions for our clinical trial as patients are enrolled in the trial. We record the costs for the trials based on a percentage of completion basis. In the past, our estimates have been materially accurate with the actual billings received. These costs consist primarily of payments made to the outside clinical management organizations, clinical centers, investigators, testing facilities and patients for participating in our clinical trial. As actual or expected costs become known, they may differ from estimated costs previously accrued for and this clinical trial accrual or prepaid would be adjusted accordingly. At September 30, 2007, we had no prepaid and deposit balances related to clinical trials. At September 30, 2007, there was $36,000 of accrued expenses related to clinical trials. Clinical trial expenses were $0 and $2,493,000 for the three month periods ended September 30, 2007 and 2006, respectively and $2,377,000 and $7,797,000 for the nine month periods ended September 30, 2007 and 2006, respectively.

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

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

Results of Operations

Revenue

For the three and nine month periods ended September 30, 2007, we did not recognize any revenue.

For the three month period ended September 30, 2006, we recognized $220,000 in revenue. For the nine month period ended September 30, 2006, we recognized revenue totaling $359,000 relating to the $600,000 Orphan Drug Grant (the “Grant”) from the FDA to partially fund our Phase 2 CLL clinical trial. No future amounts are anticipated to be received under the Grant.

Operating Expenses

Research and Development

During the three and nine month periods ending September 30, 2007 and 2006, almost all of our research and development efforts were focused on the preclinical and clinical development of talabostat for the treatment of solid tumors and hematologic malignancies. In addition, during the nine month period ending September 30, 2007, the Company incurred costs associated with an interim analysis of its two Phase 3 studies and termination costs related to headcount reductions.

On May 21, 2007, we announced that the FDA has placed the clinical program for talabostat on clinical hold as a result of the interim analyses of our two Phase 3 talabostat studies as a potential treatment for patients with advanced non-small cell lung cancer (NSCLC). Our Independent Data Monitoring Committee recommended stopping both studies due to the primary endpoint of median progression-free survival (PFS) or the secondary endpoint of overall survival demonstrated no statistical improvement over the respective placebo groups. In addition, in the talabostat combination trial with docetaxal (Taxotere ^® : sanofi-aventis), the talabostat arm of the study demonstrated significantly lower overall survival than the placebo arm. Subsequent to us informing the FDA of the interim results, the FDA put our talabostat clinical program on hold.

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Research and development expenses decreased 94.4% to $375,000 for the three month period ended September 30, 2007 from $6,731,000 for the three month period ended September 30, 2006. Research and development expenses decreased 69.3% to $5,823,000 for the nine-month period ended September 30, 2007 from $18,984,000 for the nine-month period ended September 30, 2006.

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

Total clinical and drug development expenses decreased 98.9% to $60,000 for the three month period ended September 30, 2007 from $5,850,000 for the three month period ended September 30, 2006. The decrease was due to the termination of our clinical program during the second quarter of 2007.

For the nine month period ended September 30, 2007, clinical and drug development expenses decreased 69.6% to $4,784,000 from $15,762,000 for the nine month period ended September 30, 2006. The decrease of $10,978,000 was due to the termination of our clinical program and the termination of all employees in this area during the second quarter of 2007. During the nine month period ended September 30, 2007, we recorded retention bonuses of $306,000 which were paid to non-executive employees in May 2007 and severance in the amount of $160,000 for headcount reductions in this area.

During the remainder of 2007, we anticipate that we will not incur any costs in the clinical and drug development area.

Research:  Research includes expenses associated with research and testing of our product candidates supporting the clinical development of talabostat and our other preclinical candidates prior to reaching the clinical development stage. Such expenses primarily include the costs of internal personnel, outside contractors, facilities, including depreciation, and laboratory supplies.

Research expenses decreased 64.2% to $315,000 for the three month period ended September 30, 2007 from $881,000 for the three month period ended September 30, 2006. The decrease was primarily due to the shut-down of our internal research laboratory in December 2006. During the three month period ended September 30, 2007, we recorded severance totaling $304,000.

For the nine month period ended September 30, 2007, research expenses decreased 67.7% to $1,040,000 from $3,222,000 for the nine month period ended September 30, 2006. The decrease was due to the shut-down of our internal research laboratory in December 2006. During the nine month period ended September 30, 2007, we recorded retention bonuses of $12,000 which were paid to non-executive employees in May 2007 and severance totaling $404,000 for headcount reductions.

All operations in the Research area were terminated in June 2007. During the remainder of 2007, we anticipate that we will not incur any material costs in the research area with the exception of costs related to the upkeep of our mice population at an offsite facility.

General and Administrative

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

General and administrative expenses increased 33.2% to $2,072,000 during the three month period ended September 30, 2007 from $1,556,000 for the three month period ended September 30, 2006. The increase in general and administrative expenses resulted primarily from severance benefits incurred upon the reduction in headcount in July, 2007. During the three month period ended September 30, 2007, we recorded severance expenses totaling $1,138,000 for headcount reductions, legal and patent costs totaling $303,000 to pursue a strategic transaction and maintain our patent portfolio and salaries and related fringes of $187,000. We also recorded rent expense of $251,000 for our corporate headquarters at 155 Federal Street which included a charge to terminate the lease of approximately $220,000, which consisted of a payment of $330,000 offset by a reduction in accrued rent expense of approximately $114,000.

For the nine month period ended September 30, 2007, general and administrative expenses increased 2.0% to $5,391,000 from $5,287,000 for the nine month period ended September 30, 2006. The increase in general and administrative expenses primarily resulted from severance benefits incurred upon the reduction in headcount in July, 2007 offset by a reduction in Company’s operations. During the nine month period ended September 30, 2007, we recorded severance expenses totaling $1,168,000 for headcount reductions, legal and patent costs totaling $1,139,000 to pursue a strategic transaction and maintain our patent portfolio, a loss for the impairment of fixed assets of $123,000 and retention bonuses, which were paid to non-executive employees, of $68,000 in May 2007.

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During the remainder of 2007, we anticipate that general and administrative expenses will decrease depending on the strategic direction of the Company. We have recently terminated all but two employees in this area. We also retained certain members of our senior management team as part of a more variable-cost consultant team to assist us as we complete the proposed merger with DARA, or if the merger fails, to assist us in seeking a buyer or partner for our technology and related intellectual property and other assets, in bankruptcy or otherwise.

Non-Cash Stock Based Compensation

For the three month period ended September 30, 2007, we recorded a credit of non-cash stock-based compensation expense in accordance with SFAS No. 123R of $203,000 for stock options granted to employees and outside directors under our stock option plans, of which $56,000 was included in research and development expenses and $146,000 was included in general and administrative expenses. For the three month period ended September 30, 2006, we recorded non-cash stock-based compensation expense of $488,000 for stock options granted under our stock option plans, of which $262,000 was included in research and development expenses and $226,000 was included in general and administrative expenses.

For the nine month period ended September 30, 2007, we recorded non-cash stock-based compensation expense of $169,000 for stock options granted under our stock option plans, of which a credit in the amount of $186,000 was recorded in research and development expenses and a credit of $355,000 was recorded in general and administrative expenses. For the nine-month period ended September 30, 2006, we recorded non-cash stock-based compensation expense of $1,613,000 for stock options granted under our stock option plans, of which $778,000 was recorded in research and development expenses and $835,000 was included in general and administrative expenses.

Interest Income

Interest income includes interest earned on invested cash balances. During the three month periods ended September 30, 2007 and 2006, our investments consisted entirely of funds deposited in money market funds.

Interest income decreased 85.1% to $36,000 in the three month period ended September 30, 2007 from $241,000 in the three month period ended September 30, 2006. Interest income decreased 72.5% to $243,000 in the nine month period ended September 30, 2007 from $884,000 in the nine month period ended September 30, 2006. The decrease in interest income in both the three and nine month periods resulted primarily from a lower average cash balance.

Net loss

As a result of the foregoing, we incurred a net loss of $2,410,000, or $0.06 per common share, for the three month period ended September 30, 2007 compared to a net loss of $7,856,000, or $0.24 per common share, for the three month period ended September 30, 2006 and a net loss of $10,971,000, or $0.29 per common share, for the nine month period ended September 30, 2007 as compared to a net loss of $23,028,000, or $0.70 per common share, for the nine month period ended September 30, 2006.

Liquidity and Capital Resources

At September 30, 2007, our principal sources of liquidity were cash and cash equivalents which totaled $2,311,000.

During the nine month period ended September 30, 2007, our cash and cash equivalents decreased $7,487,000 as compared to December 31, 2006.

During the nine month period ended September 30, 2007, the decrease in net cash used in operations resulted primarily from a net loss of $9,656,000. Included in the net loss for the nine month period ended September 30, 2007 were non-cash stock-based compensation of $169,000, an impairment charge of $123,000 and depreciation of $76,000. Restricted cash decreased by $300,000 to $0 due to the termination of our lease for our corporate headquarters at 155 Federal Street effective July 31, 2007. Prepaid expenses, deposits and other assets, net, decreased $1,418,000 for the nine month period ended September 30, 2007, resulting primarily from a refund of prepaid costs we received from a clinical testing vendor when we terminated services for our clinical trials and an adjustment to the amount due to us from our clinical management organization for which payment was received in July 2007. Offsetting these decreases were insurance premiums paid. Our unbilled receivable decreased by $3,000 and accounts payable and accrued expenses decreased $2,998,000 during the nine month period ended September 30, 2007, resulting primarily from the payment of the majority of clinical and manufacturing related expenses for our Phase 3 clinical program, offset somewhat by an increase in contractual severance benefits incurred but not yet paid.

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During the nine month period ended September 30, 2007, we received $8,500 from the sale of a piece of laboratory equipment.

Our financing activities provided net cash of $4,384,000 for the nine month period ended September 30, 2007, primarily related to the registered direct offering (the “Offering”) from the sale of 6,523,776 shares of our common stock at a price of $0.73 per share. Gross proceeds from the February 7, 2007 Offering were $4,762,000. After placement agent fees of approximately $286,000 and other expenses related to the Offering totaling approximately $85,000, net proceeds to us were $4,391,000. We also received $4,000 from the exercise of stock options during the nine month period ended September 30, 2007.

Capital Resources

At September 30, 2007, we had $2,311,000 in cash and cash equivalents. We currently anticipate that our existing capital resources will be sufficient to allow us to maintain our current and planned operations into the first quarter of 2008 and the completion of the proposed merger with DARA. Our cash balance at September 30, 2007, and amounts we would receive, were we to liquidate all of our assets, after taking into account all anticipated uses of the cash, may not be sufficient to pay all amounts on or in respect of our obligations when such amounts are required to be paid. These conditions raise substantial doubt about our ability to continue as a going concern. The audit report prepared by our independent registered public accounting firm in connection with our financial statements for the year ended December 31, 2006 included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

Our expectations regarding our rate of spending and the sufficiency of our cash resources over future periods are forward-looking statements. Our funding requirements are dependent on our ability to seek a buyer or partner for our technology and related intellectual property and other assets. Effective July 25, 2007, we terminated all but two of our employees. We have retained certain members of our senior management team as consultants as part of a more variable-cost consulting team to assist us in completing the proposed merger with DARA, or, if the merger fails, to seek a buyer or partner for our technology and related intellectual property and other assets, in bankruptcy or otherwise. On July 31, 2007, we terminated our lease at 155 Federal Street for a substantially smaller temporary location. Given our limited staff and resources, if we are unable to successfully complete the merger with DARA, we may not be able to locate a buyer or partner for the purposes of effectuating another strategic transaction. Although we currently retain control over our intellectual property portfolio, we cannot make any assurances that these assets have or will continue to have any value. This uncertainty as to the value of our intellectual property portfolio and other assets may prevent us from locating another buyer or partner for the purposes of enacting another strategic transaction if the DARA merger cannot be successfully completed.

If our proposed merger with DARA fails, and our attempts to find another buyer or partner for our technology and related intellectual property and assets fail, and if no other strategic transaction can be effectuated, we will likely file for federal bankruptcy protection under Chapter 11 of the Bankruptcy Code. In the event we do file for Chapter 11 protection, we will most likely not be able to raise any type of funding from any source. Upon filing for Chapter 11 protection, we will not meet the minimum standards required for remaining listed on the NASDAQ Capital Market. If we are delisted, our stock would no longer be tradable on the NASDAQ Capital Market.

Contractual Obligations

As of September 30, 2007, we had future payments required under contractual obligations and other commitments approximately as follows:

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If we are able to complete the proposed merger with DARA or another strategic transaction, additional severance and related fringes in the amount of approximately $1,240,000 will be paid to certain former executives of Point in accordance with their employment contracts. At September 30, 2007, we have recorded this amount as a liability on our Consolidated Balance Sheet.

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

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2007 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

New Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48 , “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on subsequent derecognition of tax positions, financial statement classification, recognition of interest and penalties, accounting in interim periods, and disclosure and transition requirements. We adopted the provisions of FIN 48 on January 1, 2007. Previously, we had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, “ Accounting for Contingencies” . As required by FIN 48, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, we applied FIN 48 to all tax positions for which the statute of limitations remained open. The amount of unrecognized tax benefits as of January 1, 2007 was zero. There have been no material changes in unrecognized tax benefits since January 1, 2007. As of January 1, 2007, due to the carry forward of unutilized net operating losses and research and development credits, we are subject to U.S. Federal income tax examinations for the tax years 1994 through 2006, and to state income tax examinations for the tax years 2002 through 2006. We recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expense. No amounts were accrued for the payment of interest and penalties at January 1, 2007. Our adoption of FIN 48 did not have a material effect on our financial condition, results of operations or cash flows.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which will be effective for public entities no later than the beginning of the first fiscal year beginning after November 15, 2007. The new standard allows entities to voluntarily choose, at specific election dates, to measure many financial assets and financial liabilities (as well as certain nonfinancial instruments that are similar to financial instruments) at fair value (the “fair value” option). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the Statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings (or another performance indicator for entities such as not-for-profit organizations that do not report earnings). We will adopt this pronouncement on January 1, 2008 and are currently evaluating the impact that this pronouncement will have on our consolidated financial statements.