A virus is a cellular parasite that cannot reproduce by itself and therefore must infect a susceptible host cell to replicate. There are a wide variety of viruses, some of which are associated with a low rate of mortality, such as viruses causing the common cold, while others, including HBV, HCV and HIV, are associated with higher mortality rates.

The challenge in developing antiviral therapies is to inhibit viral replication without injuring the host cell. For many years, it appeared that the development of safe and effective antiviral therapies would not be possible because the processes of viral replication were so intertwined with the cell’s metabolic processes that the inhibition of viral functions would result in cell death. A breakthrough occurred with the identification of viral enzymes, such as viral polymerases, which are required for viral replication. These enzymes differ enough from cellular enzymes to permit their selective inhibition and thus prevent viral replication without harming the cell.

HBV, a DNA virus, has two such polymerase activities: a reverse transcriptase which makes one strand of viral DNA from an RNA template; and a DNA polymerase, which makes a second strand of viral DNA from a DNA template, whose activity is the primary target for the treatment of HBV. HCV, an RNA virus, has an RNA polymerase which makes new viral RNA strands from an RNA template. HIV, an RNA virus, has a reverse transcriptase which makes viral DNA from an RNA template.

HBV, HCV and HIV patients are classified as treatment-naïve or treatment-experienced. Treatment-naïve patients have not been exposed to antiviral therapies. Once viral mutations begin to occur and the virus develops resistance to the therapy, physicians either switch treatment regimens or add new drugs to existing regimens for the now treatment-experienced patients.

The Company’s research and development programs are focused on developing drugs that treat HBV, HCV and HIV infections.

Clevudine is an oral, once-daily pyrimidine nucleoside analog that the Company is developing for the treatment of HBV. Clevudine has been studied in twelve completed clinical trials in a total of more than 600 patients. The Company licensed clevudine from Bukwang, a Korean pharmaceutical company. Bukwang completed two Korean Phase 3 clinical trials, Studies 301 and 302, in which clevudine demonstrated the ability to significantly reduce HBV viral load in 337 patients. Based on the results of these trials, Bukwang received Korean approval in November 2006. Bukwang has recently initiated the commercial launch of clevudine in the Korean market under the brand name Levovir.

Roche and the Company are developing R7128 for the treatment of HCV. R7128 is a pro-drug of a molecule the Company discovered named PSI-6130, an oral cytidine nucleoside analog. A pro-drug is a chemically modified form of a molecule designed to enhance the absorption, distribution and metabolic properties of that molecule. PSI-6130 is the active component of R7128. At low concentrations, PSI-6130 was shown to be an inhibitor of HCV replication, specifically targeting the HCV RNA polymerase. In preclinical studies, no toxicity was observed in various human cells, including liver cells, bone marrow cells, and white blood cells.

Racivir is an oral, once-daily cytidine nucleoside analog that we are developing as an HIV therapy for use in combination with other approved HIV drugs. Racivir contains a racemic mixture, half of which is (–) – FTC and half of which is (+) – FTC. Racivir has been generally well-tolerated in three clinical trials. The Company is developing Racivir to be used with other HIV drugs for possible use in a combination therapy for patients failing their first treatment regimen and carrying the M184V mutation that commonly results from first-line therapeutic regimens containing lamivudine or emtricitabine.

Research and development expenses were $2.6 million in the three-month period ended December 31, 2006, and $2.2 million in the three-month period ended December 31, 2005.

General and administrative expenses were $2.1 million in the three months ended December 31, 2006, and $2.0 million in the three months ended December 31, 2005.

Investment income was $408,986 in the three months ended December 31, 2006, and $279,990 in the three months ended December 31, 2005.