Special Note Regarding Forward-Looking Statements

This document contains statements that do not relate strictly to historical fact, any of which may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When we use the words "anticipates," "plans," "expects" and similar expressions, we are identifying forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. While it is impossible to identify or predict all such matters, this may result from, among other things, the inherent uncertainty of the timing and success of, and expense associated with, research, development, regulatory approval and commercialization of our products and product candidates, including the risks that clinical trials will not commence or proceed as planned; products appearing promising in early trials will not demonstrate efficacy or safety in larger-scale trials; clinical trial data on our products and product candidates will be unfavorable; our products will not receive marketing approval from regulators or, if approved, do not gain sufficient market acceptance to justify development and commercialization costs; we, our collaborators or others might identify side effects after the product is on the market; or efficacy or safety concerns regarding marketed products, whether or not originating from subsequent testing or other activities by us, governmental regulators, other entities or organizations or otherwise, and whether or not scientifically justified, may lead to product recalls, withdrawals of marketing approval, reformulation of the product, additional pre-clinical testing or clinical trials, changes in labeling of the product, the need for additional marketing applications, declining sales or other adverse events.

We are also subject to risks and uncertainties associated with the actions of our corporate, academic and other collaborators and government regulatory agencies; potential product liability; intellectual property, litigation, environmental and other risks; the risk that licenses to intellectual property may be terminated for our failure to satisfy performance milestones; the risk of difficulties in, and regulatory compliance relating to, manufacturing products; and the uncertainty of our future profitability.

Risks and uncertainties also include general economic conditions, including interest and currency exchange rate fluctuations and the availability of capital; changes in generally accepted accounting principles; the impact of legislation and regulatory compliance; the highly regulated nature of our business, including government cost-containment initiatives and restrictions on third-party payments for our products; trade buying patterns; the competitive climate of our industry; and other factors set forth in our Annual Report on Form 10-K and other reports filed with the U.S. Securities and Exchange Commission. In particular, we cannot assure you that our lead product, RELISTOR®, will be commercially successful or be approved in the future in other formulations, indications or jurisdictions, or that any of our other programs will result in a commercial product.

We do not have a policy of updating or revising forward-looking statements and assume no obligation to update any statements as a result of new information or future events or developments. Thus, it should not be assumed that our silence over time means that actual events are bearing out as expressed or implied in forward-looking statements.

Overview

General and Outlook

We are a biopharmaceutical company focusing on the development and commercialization of innovative therapeutic products to treat the unmet medical needs of patients with debilitating conditions and life-threatening diseases. Our principal programs are directed toward gastroenterology, virology and oncology. We commenced principal operations in late 1988, and since that time we have been engaged primarily in research and development efforts, development of our manufacturing capabilities, establishment of corporate collaborations and raising capital. We have only recently begun to derive revenue from a commercial product. In order to commercialize the principal products that we have under development, we have been and continue to address a number of technological and clinical challenges and comply with comprehensive U.S. and non-U.S. regulatory requirements. We expect to incur additional operating losses in the future, which could increase significantly as we expand our clinical trial programs and other product development efforts.

Gastroenterology

Our lead product is RELISTOR (methylnaltrexone bromide). In April 2008 RELISTOR subcutaneous injection was approved by the U.S. Food and Drug Administration ("FDA") for sale in the United States for the treatment of opioid-induced constipation ("OIC") in patients with advanced illness who are receiving palliative care, when response to laxative therapy has not been sufficient. Our collaboration partner, Wyeth Pharmaceuticals ("Wyeth"), launched the sale of RELISTOR subcutaneous injection in the U.S. in June 2008.

Prior to U.S. approval in April 2008, RELISTOR subcutaneous injection had received marketing approval in March 2008 from Health Canada for the treatment of OIC in patients with advanced illness receiving palliative care, and in July 2008, it received marketing approval from the European Commission for the treatment of OIC in advanced illness patients who are receiving palliative care when response to usual laxative therapy has not been sufficient. Commercial launches have begun in these areas. Marketing applications for RELISTOR subcutaneous injection are also pending in Australia and other countries.

Development and commercialization of RELISTOR is being conducted under a license and co-development agreement ("Collaboration Agreement") between us and Wyeth. Under that agreement, we (i) have received an upfront payment from Wyeth, (ii) have received, and are entitled to receive, further additional payments as certain developmental milestones for RELISTOR are achieved, (iii) have been, and will be, reimbursed by Wyeth for expenses we incur in connection with the development of RELISTOR under an agreed-upon development plan and budget, and
(iv) have received, and will receive, royalties and commercialization milestone payments. These payments will depend on continued success in development and commercialization of RELISTOR, which are in turn dependent on the actions of Wyeth and the FDA and other regulatory bodies, as well as the outcome of clinical and other testing of RELISTOR. Many of these matters are outside our control. Manufacturing and commercialization expenses for RELISTOR are funded by Wyeth. Wyeth has elected, as it was entitled to do under the Collaboration Agreement, not to develop RELISTOR in Japan, and as provided in that Agreement returned to us the rights to RELISTOR in Japan. As discussed below, we have out-licensed the rights to subcutaneous RELISTOR in Japan which we reacquired from Wyeth as a result of its election.

In May 2007, we earned $9.0 million in milestone payments under Wyeth Collaboration Agreement for having made filings seeking marketing approval for RELISTOR subcutaneous injection in the U.S. and Europe. In April 2008, we earned a $15.0 million milestone payment from Wyeth for the FDA approval of subcutaneous RELISTOR, and in July 2008, we earned a $10.0 million milestone payment from Wyeth for European approval of subcutaneous RELISTOR.

We are also developing, in collaboration with Wyeth, an intravenous formulation of RELISTOR for the management of post-operative ileus ("POI"), a temporary impairment of the gastrointestinal tract function. Development of the intravenous formulation of RELISTOR for POI has been granted "Fast Track" status from the FDA, which facilitates development and expedites regulatory review of drugs intended to address an unmet medical need for serious or life-threatening conditions.

We and Wyeth have conducted two global pivotal phase 3 clinical trials to evaluate the safety and efficacy of intravenous RELISTOR for the treatment of POI in patients recovering from segmental colectomy surgical procedures. In October 2006, we earned a $5.0 million milestone payment under the Collaboration Agreement in connection with the initiation of the first phase 3 clinical trial.

In March 2008, we reported that preliminary results from the phase 3 segmental colectomy clinical trial conducted by Wyeth showed that treatment did not achieve the primary end point of the study: a reduction in time to recovery of gastrointestinal function (i.e., time to first bowel movement) as compared to placebo. The study also did not show that secondary measures of surgical recovery, including time to discharge eligibility, were superior to placebo. We led the second phase 3 trial of intravenous methylnaltrexone for management of POI, which was similar in design to the Wyeth study. As previously announced, this second study did not meet the primary or secondary end points, confirming the earlier findings of the Wyeth phase 3 intravenous POI study. Progenics and Wyeth are analyzing the results of both studies to determine whether and how to continue development of this formulation of RELISTOR for this indication.

In addition, the companies are currently conducting a third phase 3 trial evaluating an intravenous formulation of RELISTOR in patients following abdominal hernia repair.

We and Wyeth are also developing an oral formulation of RELISTOR for the treatment of OIC in patients with chronic pain. In March 2007, Wyeth began clinical testing of a new oral formulation of methylnaltrexone for the treatment of OIC, and in July 2007, we and Wyeth announced positive preliminary results from this phase 1 clinical trial. Commencing in October 2007, two proprietary oral formulations of RELISTOR were tested in separate four-week, double-blind, randomized, placebo-controlled phase 2 trials each consisting of approximately 120 patients with chronic, non-malignant pain who were receiving opioids for pain management. In comparing the activity and tolerability of these oral formulations of RELISTOR, both were generally well tolerated; however, one formulation was identified as having a more favorable clinical profile, while the other did not demonstrate sufficient clinical activity to warrant its continued study. As previously announced, the formulation with the more favorable clinical profile demonstrated statistically significant results after once daily dosing, as assessed by the occurrence of spontaneous bowel movements and other efficacy measures. Further improvement upon this oral formulation through clinical optimization studies is ongoing, with next steps in the development plan for oral RELISTOR to be decided in early 2009.

Finally, the companies are also developing the subcutaneous form of RELISTOR for the treatment of OIC in patients with chronic pain. In the third quarter of 2008, enrollment was completed in a phase 3 clinical study of the subcutaneous form of RELISTOR for the treatment of OIC in patients with chronic pain not related to cancer, such as chronic severe back pain.

At inception of the Collaboration Agreement, Wyeth paid to us a $60 million non-refundable upfront payment. Wyeth has made $39.0 million in milestone payments since that time and is obligated to make up to $295.0 million in additional payments to us upon the achievement of milestones and contingent events in the development and commercialization of RELISTOR, taking into account the Ono transaction discussed below and in Note 1, above. Costs for the development of RELISTOR incurred by Wyeth or us starting January 1, 2006 are paid by Wyeth. We are being reimbursed for our out-of-pocket development costs by Wyeth and receive reimbursement for our efforts based on the number of our full-time equivalent employees devoted to the development project. Wyeth has the right once annually to engage an independent public accounting firm to audit expenses for which we have been reimbursed during the prior three years. If the accounting firm concludes that any such expenses have been understated or overstated, a reconciliation will be made. Wyeth is obligated to pay to us royalties on the net sales of RELISTOR by Wyeth throughout the world during the applicable royalty periods.

In January 2006, we began recognizing revenue from Wyeth for reimbursement of our development expenses for RELISTOR as incurred during each quarter under the development plan agreed to by us and Wyeth. We also began recognizing revenue for a portion of the $60 million upfront payment we received from Wyeth, based on the proportion of the expected total effort for us to complete our development obligations, as reflected in the most recent development plan and budget approved by us and Wyeth, that was actually performed during that quarter. Starting June 2008, we began recognizing royalty income based on the net sales of RELISTOR, as defined, by Wyeth.

In October 2008, we entered into an exclusive license agreement with Ono Pharmaceutical Co., Ltd. ("Ono"), Osaka, Japan under which we licensed to Ono the rights to subcutaneous RELISTOR in Japan. Under that agreement, we are entitled to receive from Ono an upfront payment of $15.0 million, potential development milestones of up to $20.0 million, and commercial milestones and royalties on sales by Ono of subcutaneous RELISTOR in Japan. These payments will depend on continued success in development and commercialization of RELISTOR, which are in turn dependent on the actions of Wyeth, Ono, the FDA and other regulatory bodies, as well as the outcome of clinical and other testing of RELISTOR. Many of these matters are outside our control. Ono also has the option to acquire from us the rights to develop and commercialize in Japan other formulations of RELISTOR, including intravenous and oral forms, on terms to be negotiated separately. Supervision of and consultation with respect to Ono's development and commercialization responsibilities will be carried out by joint committees consisting of members from both Ono and us.

As a result of the return of the Japanese rights, we will not receive from Wyeth milestone payments that were to be triggered by the development of RELISTOR formulations in Japan. These potential future milestone payments would have totaled $22.5 million (of which $7.5 million related to the subcutaneous formulation of RELISTOR and the remainder to the intravenous and oral formulations). Taking these adjustments into account, we now have the potential to receive a total of $334.0 million in development and commercialization milestone payments from Wyeth under the Collaboration Agreement, of which $39.0 million have been paid to date.

Virology

In the area of virology, we are developing viral-entry inhibitors for Human Immunodeficiency Virus ("HIV"), the virus that causes AIDS, and for Hepatitis C virus infection ("HCV"). These inhibitors are molecules designed to inhibit a virus' ability to enter certain types of immune cells and liver cells, respectively. In May 2007, we announced positive results in HIV-infected individuals from a phase 1b trial examining a single dose of an intravenous formulation of our monoclonal antibody, PRO 140. We are also investigating a subcutaneous formulation of PRO 140 with the goal of developing a long-acting, self-administered therapy for HIV infection. In October 2008, we announced positive interim results from two phase 2 studies, separately evaluating intravenous and subcutaneous dosage forms of PRO 140. Results from all patients enrolled in both of these studies are expected to be obtained in early 2009 and the data are expected to be used to select a dosage form (intravenous or subcutaneous) for further clinical development.

We are also engaged in research regarding a product candidate for HCV, and in November 2008, announced the selection of a proprietary small-molecule drug candidate, designated PRO 206, for clinical development as a treatment of HCV infection. The candidate, an orally available viral-entry inhibitor designed to prevent HCV from entering and infecting healthy liver cells, achieved favorable results in pre-clinical and in vitro studies.

Oncology

In the area of prostate cancer, we are developing a human monoclonal antibody-drug conjugate ("ADC"), consisting of a selectively targeted cytotoxic antibody directed against prostate specific membrane antigen ("PSMA"), a protein found on the surface of prostate cancer cells. In September 2008, we announced the initiation of a phase 1 dose-escalation clinical study to assess PSMA ADC's safety, tolerability and initial clinical activity. We are also developing therapeutic vaccines designed to stimulate an immune response to PSMA. Our PSMA programs are conducted through our wholly owned subsidiary, PSMA Development Company LLC ("PSMA LLC").

In the second quarter of 2007, we discontinued our GMK melanoma vaccine program. An independent data monitoring committee recommended that treatment in the European-based phase 3 trial, which began in 2001, be stopped because lack of efficacy was observed after an interim analysis. We have subsequently terminated our license agreement with Memorial Sloan-Kettering Cancer Center relating to this program.

Results of Operations (amounts in thousands)

Revenues:

Our sources of revenue during the three and nine months ended September 30, 2008
and 2007 included our collaboration with Wyeth, which was effective on January
1, 2006, our research grants and contract from the National Institutes of Health
(the "NIH"), royalty income from sales of RELISTOR, and, to a small extent, our
sale of research reagents.



                               For the Three Months Ended                   For the Nine Months Ended
                                     September 30,                                September 30,
                                                       Percent                                      Percent
                            2008            2007        Change          2008            2007         Change
Sources of Revenue

Research from
collaborator            $   16,015     $   14,540          10%       $   54,896     $   52,987          4%
Royalty income                  44              -          N/A               86              -          N/A
Research grants and
contract                     1,377          2,471         (44%)           5,689          7,077         (20%)
Other revenues                  61              7         771%              172             48         258%
Total                   $   17,497     $   17,018          3%        $   60,843     $   60,112          1%

Research revenue from collaborator

Research revenue from collaborator relates to our Collaboration Agreement with Wyeth. From the inception of the Collaboration Agreement through September 30, 2008 we recognized as revenue: (i) in October 2006, $5,000 milestone payment in connection with the initiation of the first phase 3 clinical trial of intravenous RELISTOR, (ii) in May 2007, $9,000 in milestone payments related to the acceptance for review of applications submitted for marketing approval of a subcutaneous formulation of RELISTOR in the U.S and European Union, (iii) in April 2008, $15,000 milestone payment related to the FDA approval of subcutaneous RELISTOR and (iv) in July 2008, $10,000 milestone payment related to the European approval of subcutaneous formulation of RELISTOR. We have analyzed the facts and circumstances of the five milestones achieved since inception of the Collaboration Agreement through September 30, 2008, and believe that they met those criteria for revenue recognition upon achievement of the respective milestones. See Critical Accounting Policies -Revenue Recognition, below.

During the three months ended September 30, 2008 and 2007, we recognized $16,015 and $14,540, respectively, of revenue from Wyeth, consisting of (i) $2,092 and $3,219, respectively, of the $60,000 upfront payment we received upon entering into the Collaboration Agreement in December 2005, (ii) and $3,923 and $11,321, respectively, as reimbursement of our development expenses, and (iii) $10,000 of non-refundable milestone payment in July 2008.

During the nine months ended September 30, 2008 and 2007, we recognized $54,896 and $52,987, respectively, of revenue from Wyeth, consisting of (i) $8,132 and $13,138, respectively, of the $60,000 upfront payment we received upon entering into the Collaboration Agreement, (ii) $21,764 and $30,849, respectively, as reimbursement of our development expenses, and (iii) $25,000 and $9,000, respectively, of non-refundable milestone payments.

From the inception of our Collaboration Agreement through September 30, 2008, we recognized $43,341 of revenue from the $60,000 upfront payment, $96,425 as reimbursement for our development costs, and a total of $39,000 for non-refundable milestone payments.

We recognize a portion of the upfront payment in a reporting period in accordance with the proportionate performance method, which is based on the percentage of actual effort performed on our development obligations in that period relative to total effort expected for all of our performance obligations under the arrangement, as reflected in the most recent development plan and budget approved by Wyeth and us. During the third quarter of 2007, a revised budget was approved, which extended our performance period to the end of 2009 and, thereby, decreased the amount of revenue we are recognizing in each reporting period. As a result, the amount of revenue recognized from the upfront payment in the first three quarters of 2008 declined by $5,006 as compared to the first three quarters of 2007.

Royalty income

We began earning royalties from net sales by Wyeth of subcutaneous RELISTOR in June 2008. During the three and nine month periods ended September 30, 2008, we earned $117 and $438, respectively, of royalty receivables, based on the net sales of RELISTOR, as defined. During the three and nine months ended September 30, 2008, we recognized $44 and $86, respectively, of royalty income. As of September 30, 2008, we have recorded a cumulative total of $352 as deferred revenue ($293 in deferred revenue - current and $59 in deferred revenue - long term). The $352 of deferred royalty revenue is expected to be recognized as royalty income over the period of our development obligations relating to RELISTOR. Our royalties from net sales by Wyeth of RELISTOR, as defined, are based on royalty rates under our Collaboration Agreement. These rates can range up to 30% of U.S. and 25% of foreign net sales at the highest sales levels. Royalty rates will increase on incremental sales as net sales in a calendar year exceed specified levels.

Research grants and contract

In September 2003, we were awarded a contract (the "NIH Contract") by the NIH to develop a prophylactic vaccine ("ProVax") designed to prevent HIV from becoming established in uninfected individuals exposed to the virus. Funding under the NIH Contract provides for pre-clinical research, development and early clinical testing. These funds are being used principally in connection with our ProVax HIV vaccine program. The NIH Contract originally provided for up to $28,562 in funding to us, subject to annual funding approvals and compliance with its terms, over five years. The total of our approved award under the NIH Contract through December 2008 is $15,509. Funding under this contract includes the payment of an aggregate of $1,617 in fees, subject to achievement of specified milestones. Through September 30, 2008, we had recognized revenue of $14,804 from this contract, including $180 for the achievement of two milestones. We have been informed by the NIH that it has decided to fund the NIH Contract only through December 2008. To continue to develop the HIV vaccine after that time, therefore, we will need to provide funding on our own or obtain new governmental or other funding. If we choose not to provide our own or cannot secure governmental or other funding, we will discontinue this project.

Revenues from research grants and contract from the NIH decreased to $1,377 for the three months ended September 30, 2008 from $2,471 for the same period of 2007; these amounts consisted of $1,009 and $1,676, respectively, from grants and $368 and $795, respectively, from the NIH Contract for the three months ended September 30, 2008 and 2007. The decrease in grant and contract revenue resulted from fewer reimbursable expenses in 2008 than in 2007 on new and continuing grants.

Revenues from research grants and contract from the NIH decreased to $5,689 for the nine months ended September 30, 2008 from $7,077 for the same period of 2007; these amounts consisted of $4,185 and $4,256, respectively, from grants and $1,504 and $2,821, respectively, from the NIH Contract for the nine months ended September 30, 2008 and 2007. The decrease in grant and contract revenue resulted from fewer reimbursable expenses in 2008 than in 2007 on new and continuing grants.

Other revenues

Other revenues primarily from higher orders for research reagents increased to $61 for the three months ended September 30, 2008 from $7 for the three months ended September 30, 2007. Other revenues primarily from higher orders for research reagents increased to $172 for the nine months ended September 30, 2008 from $48 for the nine months ended September 30, 2007.

Expenses:

Research and Development Expenses:

Research and development expenses include scientific labor, supplies, facility
costs, clinical trial costs, product manufacturing costs, royalty payments and
license fees. Research and development expenses decreased to $21,788 for the
three months ended September 30, 2008 from $24,247 for the same period of 2007,
and decreased to $69,988 for the nine months ended September 30, 2008 from
$69,999 for the same period of 2007, as follows:

                            Three Months Ended          Percent            Nine Months Ended             Percent
                               September 30,            Change               September 30,               Change
                             2008          2007                            2008              2007

   Salaries and
benefits (cash)          $    6,138      $   5,939             3 %   $      19,311     $     17,876             8 %

Three Months: The increase was due to company-wide compensation increases and an increase in average headcount to 195 from 189 for the three months ended September 30, 2008 and 2007, respectively, in the research and development, manufacturing and clinical departments.

Nine Months: The increase was due to compensation increases and an increase in average headcount to 197 from 186 for the nine months ended September 30, 2008 and 2007, respectively, in the same departments.

                                    Three Months Ended               Percent               Nine Months Ended              Percent
                                       September 30,                 Change                  September 30,                Change
                                   2008                  2007                            2008                 2007

Share-based compensation . . .