UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10-K/AAmendment No. 1





x
              ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2008o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
File Number   001-33426





NEURO-HITECH,
INC.


(Exact
name of Registrant as Specified in its Charter)





Delaware
              
              20-4121393(State
      or Other Jurisdiction of
              
              (I.R.S.
      EmployerIncorporation
      or Organization)
              
              Identification
      No.)





16255 Aviation Loop Drive,
Brooksville, FL 34604


(Address
of Principal Executive Offices)





(352)
754-8587


(Registrant’s
Telephone Number, Including Area Code)





Securities
registered under Section 12(b) of the Exchange Act: None





Securities registered under Section
12(g) of the Exchange Act:





Title of
each class





Common Stock, $0.001 par
value per share





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o      No
x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes o      No
x





Indicate
by check mark whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.Yes x      No
o





Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K.  o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):





Large
      Accelerated Filer   ̈
              Accelerated
      Filer  ̈Non-Accelerated
      Filer   ̈
              Smaller
      reporting company  x


(Do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  o
Yes   x No





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as ofJune 30, 2008, the last
business day of the registrant’s most recently completed second fiscal quarter,
was approximately $8,995,340.





The
number of shares outstanding of each of the registrant’s common stock, as of
March 18, 2009 is:


Common
      Stock
                      
                      
                      31,520,186





DOCUMENTS
INCORPORATED BY REFERENCE





None.









EXPLANATORY
NOTE
 
 We are
filing this Amendment No. 1 to our Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 31, 2009, to include Items 10, 11,
12, 13 and 14, which we had originally intended to include in our Proxy
Statement and a correction to calculation of the basic and diluted (loss) per
weighted average common shares outstanding and weighted average common shares
outstanding on our consolidated statement of operations.  We intend to
file our Proxy Statement next month.  This Form 10-K/A does not
reflect events occurring after the filing of the original Form 10-K, or modify
or update those disclosures in any way other than as required to reflect the
effects of the inclusion of the above referenced items.







NEURO-HITECH,
INC.





FORM
10-K





FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008





PagePART
      IItem
      1. Business
                      
                      1Item
      2. Properties
                      
                      14Item
      3. Legal Proceedings
                      
                      14Item
      4. Submission of Matters to a Vote of Security Holders
                      
                      14PART
      IIItem
      5. Market for Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      
                      15Item
      6. Selected Financial Data
                      
                      15Item
      7. Management’s Discussion and Analysis or Plan of
    Operations
                      
                      16Item
      8. Financial Statements
                      
                      21Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosures
                      
                      21Item
      9A(T). Controls and Procedures
                      
                      22PART
      IIItem
      10. Directors, Executive Officers and Corporate Governance
                      
                      23Item
      11. Executive Compensation
                      
                      25Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
                      
                      30Item
      13. Certain Relationships and Related Transactions, and Director
      Independence
                      
                      31Item
      14. Principal Accountant Fees and Services
                      
                      32PART
      IIIItem
      15. Exhibits
                      
                      34





PART
I





Item
      1.
            Description
      of Business





Description
of the Company





Neuro-Hitech,
Inc. (the “Company” or “Neuro-Hitech”) is a specialty pharmaceutical company
focused on developing, marketing and distributing branded and generic
pharmaceutical products primarily in the cough and cold markets.  The
Company’s principal business is operated through two subsidiaries, one of which
focuses on branded pharmaceuticals and the other which focuses on the generic
pharmaceutical equivalents of the Company’s branded pharmaceuticals
products.  The Company sells its products domestically through U.S.
based distributors.





The
Company’s subsidiary MCR American Pharmaceuticals (“MCR”) is focused on the
acquisition, development, marketing and distribution of cough and cold, prenatal
and pain management pharmaceutical products that provide quick and low-cost
market entry through the ANDA, and OTC monograph regulatory approval
pathways.  Typically, these products are referred to as “branded
generics”.





MCR
believes it has established a strong niche in marketing and distributing
effective and conveniently dosed branded generics.  MCR’s marketing of
its pharmaceutical products is focused within targeted niche pharmaceutical
markets. The pharmaceutical products the Company markets typically have low
representative selling activity relative to large market blockbuster drugs and
low brand loyalty among physicians for these products.  MCR’s strategy
is to market its products aggressively through it sales force by building brand
loyalty among high-prescribing physicians.





MCR
markets its products primarily to general practice, family practice, internal
medicine, pediatric and ENT physicians.  MCR currently has a national
sales platform with 25 full-time sales representatives and regional sales
managers covering high-prescribing physicians in key markets.  MCR
believes that it has attained strong prescription volume and strong repeat
prescription volume for its product introductions over the past several years,
because of its strategic market focus.





MCR
believes it provides physicians with a comprehensive offering of products within
the cough, cold, allergy, mild pain management and pre-natal health
areas.  MCR believes its product portfolio provides significant value
to physicians as these products provide prescription treatment options for
physicians with patients that might otherwise revert to Over-The-Counter (“OTC”)
treatment options.





AMBI
Pharmaceuticals, Inc. (“AMBI”) is focused on the distribution of generic
equivalent pharmaceutical products to pharmaceutical wholesalers, distributors
and chain pharmacies.  AMBI currently has an account manager serving
its customer base of distributors, wholesalers and retailers.  Given
the highly consolidated nature of the generic pharmaceutical distribution /
wholesaler industry, the success of smaller generic distributors, such as AMBI,
depends on the strength of the relationships that a company has with these large
wholesalers, distributors and national chain pharmacies.





The
Company believes it has very strong relationships, both in the branded and
generic divisions, with large distributors and wholesalers and a significant
opportunity to gain distribution for additional products through these
channels.  Typically, it is extremely difficult for new manufacturers
and distributors to gain access to large national wholesaler and distribution
networks without an existing business relationship.  MCR has developed
significant relationships with the top three pharmaceutical wholesalers and many
other significant distributors and wholesalers in the U.S. because of AMBI sales
of generic versions of MCR’s “Branded Generics” in the cough and cold
area.  Additionally, as MCR and AMBI grow and introduce additional
products, including ANDA products, AMBI believes it will be able to leverage its
current distribution agreements to introduce additional products.





Products
– Branded Pharmaceuticals





MCR’s
branded pharmaceutical products include:


1


·
            Maxiphen
      – Phenylephrine and guaifenesin-based DESI regulated prescription
      decongestant / expectorant tablet product line for cough and cold offering
      five products with varying dosage strengths and ingredient
      combinations.  Several formulations contain dextromethorphan and
      chlorpheniramine.


·
            Maxifed
      – Pseudoephedrine and guaifenesin-based DESI regulated prescription
      decongestant / expectorant tablet product line for cough and cold offering
      four products with varying dosage strengths and ingredient combinations.
      Several formulations contain
dextromethorphan.


·
            Maxi-Tuss
      – Hydrocodone-based DESI regulated prescription antitussive product line
      offering three products with varying dosage strengths and active
      ingredients. Certain formulations contain guaifenesin, phenylephrine and
      chlorpheniramine.


·
            Allfen
      – Guaifenesin-based DESI regulated prescription expectorant product line
      offering three products with varying dosage strengths and active
      ingredients.  Certain formulations contain dextromethorphan and
      carbetapentane.


·
            Promacet
      – FDA approved prescription tablet containing butalbital and acetaminophen
      for the relief of moderate to moderately severe
  pain.


·
            Maxinate
      – DESI regulated and patented prescription pre-natal vitamin containing
      DHA and choline.


·
            Time-Hist
      – Pseudoephedrine-based DESI regulated prescription decongestant /
      antihistamine / antispasmodic tablet with pseudoephedrine,
      chlorpheniramine and
methscopolamine.


·
            Ambifed
      – Pseudoephedrine and guaifenesin-based DESI regulated prescription
      decongestant / expectorant tablet product line for cough and cold
      treatment.  This product line offers two products with varying
      dosage strengths and ingredient
combinations.





Licenses
& Permits





The
pharmaceutical business is subject to various regulations.  MCR holds
the required federal and state licenses to distribute prescription
pharmaceuticals within the U.S.  The Company’s licenses are all
currently valid and in good standing.





The
Company’s licenses include:





·
            Drug
      Enforcement Administration: Controlled Substance Registration
      Certificate


§
            Schedules
      3, 3N, 4


·
            Drug
      Enforcement Administration: Domestic Chemical Diversion Control
      Registration Certificate


·
            State
      of Florida Department of Health – Drugs, Devices, and
      Cosmetics





Its
permits include:





·
            Complimentary
      Drug Distributor and Prescription Drug
  Wholesaler





Manufacturing
& Logistics





MCR
outsources manufacturing of its products to one third party contract
manufacturer, TG United Pharmaceuticals, Inc.
(“TG United”), an entity that is wholly-owned by
David Ambrose, the Company’s Chief Executive Officer and President,
and beneficial owner of the greatest number of shares of the Company’s capital stock.  TG
Unitedis
responsible for receipt and storage of raw materials and the production,
packaging and labeling of finished goods.




TG United and the Company are parties to
aManufacturing and Distribution Agreement dated June 6, 2008, as amended
on November 18, 2008 (the “Supply Agreement”).  The initial term of
the Supply Agreement is through June 6, 2013, and permits additional one-year
renewals based upon the parties’ written agreement.  Under the terms
of the Supply Agreement, TG United will manufacture specified products for the
Company, including branded products acquired on June 6, 2008 that will be
manufactured exclusively for the Company.  On November 18, 2008, the
Companywas provided aninventory credit of $1.26
million.The Company is required to make minimum monthly
payments of $100,000 to TG United with respect to inventory purchases, subject
to a quarterly reconciliation against amounts due.  The $1.26 million
inventory credit may be applied by MCR and AMBI against invoices issued by TG
United at a rate of up to $100,000 per month, after any required minimum monthly
cash payments are made.  Approximately $1.025 million and $0.9 million
of the inventory credit remained
available to the Company as of December 31, 2008 and March 31, 2009,
respectively.




The
Company manages the storage and distribution of its products to its customers
from its 2,000 square foot warehouse facility in Brooksville,
FL.  This air-conditioned facility is equipped with a DEA controlled
substance cage for the Scheduled products within the MCR and AMBI
portfolio.  This facility is licensed by the appropriate state and
federal governments and agencies for the storage and distribution of
prescription pharmaceuticals.





Nationwide
Distribution Outlets





Virtually
all pharmaceutical products in the United States are distributed through an
established network of wholesale distributors.  Similar to its peers
MCR generates prescriptions at the physician level which are filled at local
pharmacies.  Local pharmacies purchase prescription pharmaceuticals
from the established drug wholesaler network.  In addition to the drug
wholesale networks, MCR sells its pharmaceutical products to specialty retailers
and distributors, including large chain drug stores, hospitals, clinics,
government agencies and managed healthcare providers such as health maintenance
organizations and other institutions.




2




Largest
      CustomersMCR
                  AMBICardinal Health,
      Inc.
                  32%
                  78%McKesson
      Corporation
                  52%
                  *AmeriSourceBergen Corp.
                  7%
                  *North Carolina
      Mutual
                  *
                  8%


History
of the Company





The
Company was initially formed in February 2005.





Marco
Hi-Tech JV Ltd.





In
January 2006, the Company acquired Marco Hi-Tech JV Ltd. (“Marco”), a company
focused primarily on licensing proprietary Huperzine A technology from
independent third-party developers and investigators, and conducting analytical
work and clinical trials of Huperzine A.  In addition, from time to
time, Marco imported and sold inventories of natural Huperzine and other dietary
supplement ingredients to vitamin and supplement suppliers to generate
revenues.  After our acquisition of Marco, the Company undertook
studies for the development and commercialization of Huperzine A, including
securing rights to third-party transdermal patch technology.





Q-RNA,
LLC





In
November 2006, the Company acquired Q-RNA, Inc., a New York-based biotechnology
company focused on diseases such as Alzheimer’s, epilepsy and Parkinson’s
disease.  The acquisition of Q-RNA provided the Company with a
pipeline of compounds, many of which have been discovered and developed
internally.  Among the compounds that Q-RNA believed were ready to
move to optimization and pre-clinical development were NHT0012, which is one of
a number of second generation disease modifying drugs for Alzheimer’s disease
that inhibit A-beta and Tau oligomerization and NHT1107, which is one of a large
pharmaceutical library of drugs designed for the treatment of epilepsy that
offer both anti-ictogenci (ability to treat epilepsy) and anti-epileptogenic
(ability to prevent epilepsy) properties.





MCR
American Pharmaceuticals, Inc.





In June
2008, the Company acquired MCR, which was founded in 1991.  MCR’s
operations are located in the Company’s Brooksville, Florida
offices.  MCR is focused on the acquisition, development, marketing
and distribution of cough and cold, prenatal and pain management pharmaceutical
products that provide quick and low-cost market entry through the ANDA, and OTC
monograph regulatory approval pathways.  These products are referred
to as “Branded Generics.”





AMBI
Pharmaceuticals, Inc.





In June
2008, the Company acquired AMBI.  AMBI is focused on the distribution
of generic equivalent pharmaceutical products to pharmaceutical wholesalers,
distributors and chain pharmacies.  AMBI’s operations are located in
the Company’s Brooksville, Florida offices





Other
Information





The
Company was originally formed on February 1, 2005, as Northern Way Resources,
Inc., a Nevada corporation, for the purpose of acquiring exploration and early
stage natural resource properties.  The Company’s name was changed in
January 2006 to Neuro-Hitech Pharmaceuticals, Inc.  The Company
subsequently changed its name to Neuro-Hitech, Inc. in August 2006.




3




Prior to
its acquisition of MCR and AMBI, the Company had been focused primarily on
technologies that address investigational compounds that have the potential to
show clinical improvements versus current treatments for Alzheimer’s disease,
Epilepsy and other central nervous system applications.  The Company’s
most advanced product candidate targeting these needs is Huperzine A which
completed a Phase II clinical trial in the U.S. earlier this year for
efficacy and safety in the treatment of mild to moderate Alzheimer’s
disease.  In addition to Huperzine A, the Company has worked on
two pre-clinical development programs: one for second generation anti-amyloid
compounds or disease modifying drugs for Alzheimer’s disease and, secondly,
development of a series of compounds targeted to treat and prevent
epilepsy.





In view
of the results of the Phase II clinical trial, the cost associated with
additional trials, and the acquisition of MCR and AMBI, the Company is
principally focusing on the development, marketing and distribution of branded
and generic pharmaceutical products targeted to the cough and cold
markets.  The Company continues to explore the potential development
of collaborative, joint and strategic alliances and licensing arrangements with
one or more pharmaceutical companies for the further development of Huperzine A
and its pipeline of other compounds.





Employees





As of
March 10, 2009, the Company had 30 full-time employees, including 25 sales
representatives and sales managers.  MCR and AMBI operations are
housed within the same buildings, which include a 3,000 square foot office
building and a 2,000 square foot distribution facility, both in Brooksville,
Florida.





Corporate
Information





The
Company’s corporate headquarters are located at 16255 Aviation Loop Drive,
Brooksville, FL 34604.  The Company’s telephone number is (352)
754-8587, and its fax number is (352) 754-8507.





Executive
Officers and Significant Employees of the Registrant





The
following sets forth certain information with regard to the executive officers
of the Company as of March 13, 2009 (ages are as of December 31,
2008):





Name
                    
                    Age
                    
                    PositionDavid
      Ambrose
                    
                    42
                    
                    President,
      Chief Executive Officer and DirectorDavid
      Barrett
                    
                    33
                    
                    Chief
      Financial OfficerGary
      Dutton
                    
                    35
                    
                    Chief
      Operating Officer and
Director





David Ambrosehas been serving
as Chief Executive Officer of the Company since January 2009 and a Director of
the Company since November 2008.  During the past five years, Mr.
Ambrose has been the Chief Executive Officer of TG United Pharmaceuticals, Inc.
(“TG United”) and during that time, until June 6, 2008, he was also serving as
the President and Chief Executive Officer of MCR and AMBI.





David Barrett has been serving
as Chief Financial Officer since April 2006.  Between January 2005 and
April 2006, Mr. Barrett had been serving as Chief Financial Officer of Overture
Financial Services, LLC, a company specializing in construction and management
of investment platforms for financial intermediaries. Between September 2003 and
January 2005, Mr. Barrett served in a variety of capacities, most recently as
Chief Financial Officer of Overture Asset Managers, LLC, an asset management
holding company that partners, acquires and manages investment managers with
complementary investment products.  Between June 1999 and September
2003, Mr. Barrett was employed by Deloitte & Touche where he served in a
variety of capacities, most recently as Senior Consultant in merger and
acquisition services.





Gary Dutton has been serving
as Chief Operations Officer since January 2009 and as a Director since November
2008. During the past five years, Mr. Dutton has served as Chief Operations
Officer of TG United.  From 1999 to January 2008 Mr. Dutton served a
variety of roles with MCR American and AMBI Pharmaceuticals, Inc., most recently
as a Sales representative, Director of Sales and Vice-President of
Sales.





4




The
Company is committed to legal and ethical conduct in fulfilling its
responsibilities. The Board expects all directors, as well as officers and
employees, to act ethically at all times. Additionally, the Board expects the
Chief Executive Officer, the Chief Financial Officer, and all senior financial
and accounting officials to adhere to the Company’s Code of Ethics which was
adopted on February 23, 2006.  The Code of Ethics incorporates the
Company’s expectations of its executive officers that enable the Company to
provide accurate and timely disclosure in its filings with the SEC and other
public communications.  In addition, they incorporate the Company’s
guidelines pertaining to topics such as complying with applicable laws, rules,
and regulations; reporting of code violations; and maintaining accountability
for adherence to the code.





The full
text of the Code of Ethics is published on the investor relations portion of our
website at www.neurohitech.com.  The
Company intends to disclose any amendments to provisions of its Code of Ethics,
or waivers of such provisions granted to executive officers and directors, on
this website within four business days following the date of any such amendment
or waiver.





Risk
Factors





Investing
in the Company’s common stock involves a high degree of risk. Prospective
investors should carefully consider the risks described below, together with all
of the other information included or referred to in this Annual Report on Form
10-K, before purchasing shares of the Company’s common stock. There are numerous
and varied risks, known and unknown, that may prevent the Company from achieving
its goals. The risks described below are not the only ones the Company will
face. If any of these risks actually occur, the Company’s business, financial
condition or results of operation may be materially adversely affected. In such
case, the trading price of the Company’s common stock could decline and
investors in the Company’s common stock could lose all or part of their
investment.





Risks
Related to the Company and the Company’s Business





The
Company has limited cash available, and it may not have sufficient cash to
continue its business operations.





As of
December 31, 2008 the Company had $397,147 available in cash and cash
equivalents. The Company may continue to incur losses in future months as the
Company engages in further expenditures as it pursues its business
plan.





The
Company has relied almost entirely on external financing to fund its operations
to date. Such financing has historically come from the sale of common stock to
third parties. The Company may need to raise additional capital in the future to
fund its operations and there is no guarantee that financing from external
sources will be available if needed or on favorable terms. The sale of the
Company’s common stock to raise capital may cause dilution to its existing
stockholders. If additional financing is not available when required or is not
available on acceptable terms, the Company may be unable to fund its operations
and expansion, successfully develop its products, take advantage of business
opportunities or respond to competitive market pressures, any of which could
make it more difficult for the Company to continue operations. Any financing on
unfavorable terms or a reduction in the Company’s operations may result in a
lower stock price.





Presently,
the Company expects that its available cash, cash equivalents and interest
income earned may not be sufficient to meet its operating expenses and capital
requirements for the next 12 months.  If the Company fails to raise
additional capital it may not have sufficient cash to meet future operating
expenses and capital requirements during this period or in future periods. Even
with additional capital, the Company may not be able to execute its current
business plan nor fund its operations long enough to achieve positive cash flow.
Furthermore, the Company may be forced to implement more significant reductions
of its expenses and cash expenditures, which would impair the Company’s ability
to execute its business operations.




A
small number of customers account for a large portion of the Company’s sales and
the loss of one of them, or changes in their purchasing patterns, could hurt the
Company’s business.
 
 While the
Company markets its products to a large number of doctors and pharmacists, the
Company sells its products to a small number of wholesale drug distributors and
a limited number of pharmacies.  In 2008, McKesson HBOC, Inc. and
Cardinal Health, Inc. represented approximately 52% and 32% of MCR’s sales,
respectively, and 78% of AMBI’s sales, respectively. The loss of either of these
distributors could have an adverse effect on the Company’s business, financial
condition and results of operations. A change in purchasing patterns or a
reduction in inventory carrying levels by either of these distributors could
have a material adverse impact on the Company’s results of operations.
Additionally, the distribution network for pharmaceutical products has been
subject to increasing consolidation. As a result, a few large wholesale
distributors control a large share of the market. Further consolidation or
financial difficulties of these distributors could result in the combination or
elimination of warehouses that could increase product returns or delay product
purchases to reduce inventory levels at the distributor.





5




The
Company may require significant additional funding and may have difficulty
raising needed capital in the future.





The
Company has not historically generated significant revenue and may not generate
sufficient revenue from its operations to meet its future capital requirements.
The Company has expended and may continue to expend substantial funds in the
operation of its business. The Company will require additional funds to provide
for the marketing and distribution of its products. The Company may also require
additional funds if it elects to engage in any acquisitions. Additional funds
may not be available on acceptable terms, if at all. If adequate funds are
unavailable, the Company may have to delay, reduce the scope of or eliminate
some of its product development or marketing efforts or forego acquisition
opportunities which may materially harm the Company’s business, financial
condition and results of operations. The Company’s long term capital
requirements are expected to depend on many factors, including:




·
            the number of potential products
      in development;


·
            costs of developing sales,
      marketing and distribution channels and the Company’s ability to sell its
      drugs;


·
            competing technological and
      market developments;


·
            market acceptance of the
      Company’s products; and


·
            costs for recruiting and
      retaining management, employees and
  consultants.





The
Company may consume available resources more rapidly than currently anticipated,
resulting in the need for additional funding. The Company may seek to raise any
necessary additional funds through the issuance of equity securities or debt
financings, collaborative arrangements with corporate partners or other sources,
which may be dilutive to existing stockholders or otherwise have a material
effect on the Company’s current or future business prospects. In addition, in
the event that additional funds are obtained through arrangements with
collaborative partners or other sources, the Company may have to relinquish
economic and/or proprietary rights to some of the Company’s technologies or
products under development that the Company would otherwise seek to develop or
commercialize by itself. If adequate funds are not available, the Company may be
required to significantly reduce or refocus its development
efforts.




Product
returns, product liability claims and product recalls could hurt our
profits.





The
Company permits customers to return pharmaceutical products under certain
conditions and the amount of product returns may be material. Although the
Company has experienced product returns in the past, it is difficult to estimate
what level of product returns it will experience in the future. The Company
believes product returns may represent 10% of the revenue of comparable
companies. If the Company fails to properly estimate the amount of product
returns or experience a material increase in product returns the Company’s
results could be adversely affected.





The
Company also faces the risk of exposure to product liability claims. Although
the Company carries product liability insurance; this insurance may not be
sufficient to cover potential claims. This insurance may not be available to the
Company in the future at an acceptable cost.





Even
after the Company receives regulatory approval for a product and markets it,
identification of side effects or manufacturing problems could result in
withdrawal of marketing approval or recall of the product or some other
corrective action by the FDA or other government agencies that could
require:





·
            reformulation of the
      product;


·
            additional
      testing;


·
            clinical trials;
      or


·
            changes in the labeling or
      marketing of the product.





In
addition, the Company may have to issue market withdrawals or take other
corrective actions. In May 2007, the FDA announced that companies must stop
manufacturing and distributing unapproved time-release dosage forms containing
guaifenesin. In anticipation of this announcement, MCR withdrew its products
including guaifenesin and reformulated all affected products. If a product
recall or withdrawal occurs, it could affect the Company’s profits, financial
condition and results of operations.





6




If
third-party payors do not reimburse patients for the Company’s products, the
Company’s sales and profits could decline.





Third-party
payors, such as the government, private healthcare insurers and managed care
organizations, continuously challenge the pricing of medical products and
services through their reimbursement policies. If reimbursement for the
Company’s products is low or non-existent, patients and pharmacies may not
continue to choose them. Competition among pharmaceutical companies to place
their products on the list of products approved for third-party reimbursement
creates downward pricing pressure in the industry. In the past several years
there have been federal and state government initiatives or reforms affecting
the payment for healthcare services and products, including proposals that would
limit reimbursement under the Medicare and Medicaid programs. The Company
anticipates that federal and state governments will continue to review and
assess healthcare delivery systems and payment methods especially in light of
the anticipated increase in healthcare costs caused by the aging of the
population. Reforms may include:





·
            controls on healthcare spending
      through limitations on the growth of private health insurance premiums and
      Medicare and Medicaid
spending;


·
            the increased use of managed care
      contractors by government payors;
and


·
            price controls on pharmaceutical
      products.





Any of
these reforms could adversely affect the Company’s revenues and ability to
achieve profitability.





Because
the Company currently has no commercial manufacturing capabilities of its own,
the Company is and will continue to be dependent upon TG United  to
manufacture products for it.





The
Company has no commercial manufacturing experience and currently outsources all
of its product manufacturing to one third−party contract manufacturer, TG
United. Although the Company has received sufficient material from TG
United to meet its current needs, it does not have any contracts with any
other third parties. The termination of its agreement with or any loss of
services under that agreement would be difficult for the Company to replace. The
Company expects to continue to rely on TG United to produce materials required
for the commercial production of the Company’s products.





There are
a limited number of third−party manufacturers that operate under the FDA’s
current Good Manufacturing Practices (“GMP”), regulations and that have the
necessary expertise and capacity to manufacture the Company’s products.
Additionally, the Company’s current manufacturing needs may not be a large
enough volume to appeal to many potential manufacturers. As a result, it may be
difficult for the Company to locate manufacturers for the Company’s anticipated
future needs. If the Company is unable to arrange for third−party manufacturing
of its products, or to do so on commercially reasonable terms, the Company may
not be able market and sell its products.





7




Reliance
on third−party manufacturers entails risks to which the Company would not be
subject if it manufactured its own products, including reliance on the third
party for regulatory compliance and quality assurance, the possibility of breach
of the manufacturing agreement by the third party, and the possibility of
termination or non−renewal of the agreement by the third party. Dependence upon
third parties for the manufacture of the Company’s products may reduce the
Company’s profit margins, or the sale of the Company’s products, and may limit
the Company’s ability to develop and deliver products on a timely and
competitive basis.




The
Company is dependent uponTG
United as its solesource
of operating credit.
 
 On November 18, 2008, TG United provided
the Company a $1.26 million inventory credit.The Company is
required to make minimum monthly payments of $100,000 to TG United with respect
to inventory purchases, subject to a quarterly reconciliation against amounts
due.  The $1.26 million inventory credit may be applied by MCR and
AMBI against invoices issued by TG United at a rate of up to $100,000 per month,
after any required minimum monthly cash payments are
made.  Approximately $1.025 million and $0.9 million of the inventory credit remained
available to the Company as of December 31, 2008 and March 31, 2009,
respectively.


If
the Company’s third−party manufacturer does not operate in accordance with
current Good Manufacturing Practices, the Company could be subject to FDA
enforcement actions, including the seizure of the Company’s products and the
halting of production.





The
third−party manufacturer that the Company currently relies on or any third-party
manufacturers the Company will rely on in the future must continuously adhere to
the GMPs set forth in the FDA’s regulations. In complying with GMPs, the Company
and its third−party manufacturer must expend significant time, money and effort
in development, testing, production, record keeping and quality control to
assure that the Company’s products meet applicable specifications and other
regulatory requirements. The failure to comply with these specifications and
other requirements could result in an FDA enforcement action, including the
seizure of products and shutting down of production. If the Company’s
third−party manufacturer is unable to comply with GMPs, the Company’s ability to
develop, produce and sell its products would be impaired.





The
Company is dependent on its manufacturer party for the development of the
Company’s products.





The
Company currently relies on its manufacturer for the development of the
Company’s products. The Company’s ability to commercialize the products that it
develops and generate revenues from product sales depends on its partner’s
ability to assist the Company in establishing the safety and efficacy of the
Company’s product candidates, obtaining and maintaining regulatory approvals and
achieving market acceptance of the products once commercialized.   If
the Company’s partner fails to perform as expected, the Company’s potential for
revenue from products developed through its strategic relationship could be
dramatically reduced.





If the
Company utilizes other partners for the development of its products, those
partners may elect to delay or terminate development of one or more product
candidates, independently develop products that could compete with the Company’s
products or fail to commit sufficient resources to the distribution of products
developed through their strategic relationships with the Company.





The
Company may engage in strategic transactions or acquisitions that fail to
enhance stockholder value.





From time
to time, the Company may consider possible strategic transactions, including the
potential acquisition or licensing of products or technologies or acquisition of
companies.




Strategic
transactions involve numerous risks, including the following:




•
            Difficulties in integrating the
      operations, technologies, products and personnel of the acquired
      companies;




•
            Diversion of management’s
      attention from normal daily operations of the business;




•
            Difficulties in entering markets
      in which the Company has no or limited direct prior experience and where
      competitors in such markets have stronger market positions;




•
            Initial dependence on unfamiliar
      partners;




•
            Insufficient revenues to offset
      increased expenses associated with acquisitions; and




•
            The potential loss of key
      employees of the acquired
      companies.




Acquisitions
may also cause the Company to:




•
            Issue common stock that would
      dilute the Company’s current shareholders’ percentage
      ownership;




8




•
            Assume
      liabilities;




•
            Record goodwill and
      non-amortizable intangible assets that will be subject to impairment
      testing on a regular basis and potential periodic impairment
      charges;




•
            Incur amortization expenses
      related to certain intangible
      assets;




•
            Incur large and immediate
      write-offs, and restructuring and other related expenses; or




•
            Become subject to
      litigation.





Mergers
and acquisitions of pharmaceutical companies are inherently risky, and no
assurance can be given that the Company’s previous or future acquisitions will
be successful and will not materially adversely affect its business, operating
results or financial condition. Failure to manage and successfully integrate
acquisitions the Company makes could harm its business and operating results in
a material way.





The
loss of key executives and failure to attract qualified management could limit
the Company’s growth and negatively impact its results of
operations.





The
Company depends highly upon its senior management team, primarily David Ambrose,
its Chief Executive Officer and President, and David Barrett, its Chief
Financial Officer.  The Company will continue to depend on management
personnel with pharmaceutical industry experience.  At this time, the
Company does not know of the availability of such experienced management
personnel or how much it may cost to attract and retain such
personnel.  The loss of the services of any member of senior
management or the inability to hire experienced management personnel could have
a material adverse effect on the Company’s financial condition and results of
operations.





Because
none of the Company’s products have been approved by the FDA or subject of
FDA-approved new drug applications, the Company could be subject to FDA
enforcement actions.





New drugs
must be the subject of a U.S. Food and Drug Administration (“FDA”) approved New
Drug Application (“NDA”) or Abbreviated New Drug Application (“ANDA”)
demonstrating safety and effectiveness before they may be marketed in the United
States.  Some prescription and other drugs marketed by pharmaceutical
companies have not been the subject of an FDA-approved marketing application
because NDAs or ANDAs requiring demonstration of safety and effectiveness were
not required at the time that these active ingredients were initially
marketed.  While the FDA reviewed classes of these products in the
1960s and 1970s as part of its Drug Efficacy Study Implementation (“DESI”)
program, there are several types of drugs, including some cold and cough drugs,
that the FDA has not yet evaluated and remain on the market without FDA
approval.





The
Company’s products are marketed in the United States without an FDA-approved
marketing application because they have been considered by the Company to be
identical, related or similar to products that have existed in the market
without an NDA or ANDA.  These products are marketed subject to the
FDA’s regulatory discretion and/or enforcement policies.  The FDA has
adopted a risk-based enforcement policy concerning unapproved
drugs.  The agency has articulated that, in enforcing the NDA
requirements, it prioritizes drugs that pose potential safety risks, lack
evidence of effectiveness and prevent patients from seeking effective therapies,
and those that are marketed fraudulently.  In addition, the FDA has
indicated that approval of an NDA for one drug within a class of drugs marketed
without FDA approval may also trigger agency enforcement of the other drugs in
that class.  Once the FDA issues an approved NDA for one of the drug
products at issue or completes the efficacy review for that drug product, it may
require the Company to also file an NDA or ANDA for other drugs in the same
class of drugs in order to continue marketing them in the United
States.  While the FDA generally allows a one-year grace period, it is
not statutorily required to do so.  In addition, although the Company
may be given time to submit a marketing application for a product before the FDA
would take enforcement action, the time it takes us to complete the necessary
clinical studies and submit an application to the FDA may exceed the one-year
grace period, resulting in an interruption of marketing and sales.  It
is also possible that the FDA could disagree with our determination that some or
all of these products are identical, related or similar to products that have
existed in the marketplace without an NDA or ANDA.  In the event the
FDA disagrees with our determination that these products are identical, the FDA
may file an enforcement action which could result in these products being pulled
off the market.  If this were to occur it would have a substantial,
negative impact on the Company’s business.





9




The
regulatory status of some of the Company’s products makes these products subject
to increased competition and other regulatory risks, which could result in
reduced sales or enforcement actions against the Company.





The
regulatory status of the Company’s products may allow third parties to more
easily introduce competitive products.  Several of the Company’s lines
of products are marketed in the United States without an FDA-approved marketing
application because they have been considered by the Company to be identical,
related or similar to products that have existed in the market without an NDA or
ANDA.    On several occasions, the FDA has considered
changing the classification of certain single entity and combination product
types of drugs from prescription to over-the-counter use, and permitting
sponsors to utilize foreign over-the-counter experience data to establish a
product as safe and effective for over-the-counter use in the United
States.  If the FDA changes such classification, the Company may have
to reformulate certain of its products or submit safety and efficacy data on
such products, which would be costly, or the Company may have to discontinue
selling certain products if the FDA does not approve any marketing application
for such products.





In
addition, the FDA considers certain products to be new drugs, but has indicated
its intent to exercise enforcement discretion and not pursue regulatory action
unless certain conditions occur.  If these conditions were to
materialize, or the FDA disagreed with the Company’s conclusions about the
regulatory status of such products, the Company might be required to submit an
NDA and/or cease marketing until the FDA grants approval to do
so.  The FDA could also, at any time, promulgate new regulations or
policies to require the submission of an NDA for each of these
products.





The
Company’s business is heavily regulated by governmental authorities, and failure
to comply with such regulation or changes in such regulations could negatively
impact the Company’s financial results.





The
Company’s business is regulated by many government authorities, including, among
others, the FDA, the U.S. Drug Enforcement Agency (“DEA”), the Consumer Product
Safety Commission, the Department of Health and Human Services (“HHS”) and the
Centers for Medicare and Medicaid Services.  The Company may incur
significant expenses to comply with regulations imposed by these
authorities.  Also, the Company’s future results of operations could
be negatively impacted by changes in governmental regulation over the
pharmaceutical industry, including regulation of Medicare, Medicaid and similar
programs, by reducing the Company’s revenue and profits and/or increasing its
costs and expenses in order to comply with such regulations.  In
addition, the Company’s third-party manufacturer and other partners are subject
to inspection by the FDA and, in appropriate cases, the DEA and other
regulators.  If the Company’s third-party manufacturer and other
partners do not comply with FDA or DEA regulations in the future, they may not
deliver products to the Company or deliver samples to the Company’s
representatives, or the Company may have to recall products.  Even if
deficiencies observed by the FDA or DEA do not relate to the Company’s products,
its third-party manufacturer and other partners may be delayed in manufacturing
and in supplying the Company’s products to it in a timely manner until they
address their compliance issues with the FDA and/or DEA.





Any
regulatory approvals that the Company or its partners receive for its product
candidates may also be subject to limitations on the indicated uses for which
the drug may be marketed or contain requirements for potentially costly
post-marketing follow-up studies.  The subsequent discovery of
previously unknown problems with the drug, including adverse effects of
unanticipated severity or frequency, may result in restrictions on the marketing
of the drug, and could include withdrawal of the drug from the
market.





Period−to−period
comparisons of the Company’s operating results are not meaningful due to its
acquisition of MCR American Pharmaceuticals, Inc. and AMBI Pharmaceuticals,
Inc.





The
Company completed its acquisition of MCR American Pharmaceuticals, Inc. and AMBI
Pharmaceuticals, Inc. in June 2008, which makes it difficult to analyze its
pre−acquisition and post−acquisition results of operations and to compare them
from period to period. Period−to−period comparisons of the Company’s results of
operations may not be meaningful due to these acquisitions and are not
indications of the Company’s future performance. Any future acquisitions will
also make the Company’s future results difficult to compare from period to
period.





10




The
Company’s financial results may fluctuate due to factors outside its control,
which fluctuations may have an adverse affect on the Company’s stock
price.





The
Company’s quarterly results of operations will be highly dependent upon the
results of its subsidiaries MCR American Pharmaceuticals, Inc. and AMBI
Pharmaceuticals, Inc. The results of operations for these subsidiaries have
fluctuated in the past with the majority of their sales recorded in the first
and fourth quarters. The Company’s results are likely to continue to fluctuate
significantly in the future. The factors that contribute to these fluctuations
are largely out of the Company’s control, and include:





·
            seasonality of sales of cough,
      cold and allergy products;


·
            demand for and market acceptance
      of the Company’s products;


·
            insufficient demand in the
      marketplace causing the Company’s distributors to return
      product;


·
            the development of new
      competitive products by
others;


·
            changes in treatment practices of
      physicians who currently prescribe the Company’s
      products;


·
            the timing, release and
      competitiveness of the Company’s
  products;


·
            the mix of products that the
      Company sells during any time
period;


·
            increased price
      competition;


·
            increased expenses, whether
      related to marketing, product development, administration or otherwise;
      and


·
            adverse changes in the level of
      economic activity in the United States and other major regions in which
      the Company does business.





Due to
the factors summarized above, the Company does not believe that period−to−period
comparisons of its results of operations are necessarily meaningful and should
not necessarily be relied upon to predict future results of operations. It is
also possible that in future periods the Company’s results of operations will
not meet the expectations of investors.





The Company’s
limited operating history makes evaluating its common stock more difficult, and
therefore, investors have limited information upon which to rely.





An
investor can only evaluate the Company’s business based on a limited operating
history. The Company’s operations have changed dramatically since its inception
and may continue to change. This limited history may not be adequate to enable
an investor to fully assess the Company’s ability to execute its business plan,
and achieve market acceptance of the Company’s products and respond to
competition, or conduct such affairs as are presently
contemplated.




Some
of the Company’s products contain controlled substances, which are subject to
extensive regulation by the Drug Enforcement Agency and other regulatory
agencies.





Some of
the Company’s products contain codeine as an active
ingredient.  Codeine is a controlled substance and is subject to
extensive regulation by the Drug Enforcement Agency and other
agencies.  These regulations apply to the manufacture, shipment, sale
and use of products containing controlled substances.  These
regulations are also imposed on prescribing physicians and other third parties,
and could make the storage, transport and use of such products relatively
complicated and expensive.  The DEA is also involved in the review of
labeling, promotion and risk management plans with the FDA for certain
controlled substances.  With the increased concern for safety by the
FDA and the DEA with respect to products containing controlled substances, it is
possible that these regulatory agencies could impose additional restrictions on
marketing or even withdraw regulatory approval for such products.





In
addition, adverse publicity may result in rejection of the product by the
medical community.  If the DEA, FDA or any other regulatory authority
withdrew the approval of, or placed additional significant restrictions on these
products, the Company’s product sales could be adversely affected.  In
addition, there can be no assurance that the DEA will not, in the future, seek
to regulate other ingredients in the Company’s products as controlled
substances.





11




If
physicians and patients do not accept the Company’s current or future products,
the Company may be unable to generate significant additional revenue, if
any.





The
Company’s future financial performance will depend upon the acceptance of the
Company’s products by physicians, patients, third-party payors and the broader
medical community. The degree of market acceptance will depend upon a number of
factors, including:




·
            timing of market introduction of
      competitive drugs;


·
            lower demonstrated clinical
      safety and efficacy compared to other
  drugs;


·
            lack of
      cost-effectiveness;


·
            pricing and reimbursement
      policies of government and third party payors such as insurance companies,
      health maintenance organizations and other health plan
      administrators;


·
            lack of convenience or ease of
      administration;


·
            prevalence and severity of
      adverse side effects;


·
            other potential advantages of
      alternative treatment methods;
and


·
            ineffective marketing and
      distribution support.




If the
Company’s products fail to achieve market acceptance, the Company would not be
able to generate significant revenue.




The
market for products and services in the pharmaceuticals industry is highly
competitive, and the Company may not be able to compete
successfully.





The
market for products and services in the pharmaceuticals industry is highly
competitive.  Most of the Company’s competitors in the industry have
longer operating histories and significantly greater financial, technical,
marketing and other resources than the Company, and may be able to respond more
quickly than the Company can to new or changing opportunities and customer
requirements.  Also, many competitors have greater name recognition
and more extensive customer bases that they can leverage to gain market
share.  Such competitors are able to undertake more extensive
promotional activities, adopt more aggressive pricing policies and offer more
attractive terms to purchasers than the Company can.





Recent
federal legislation may increase the pressure to reduce prices of pharmaceutical
products paid for by Medicare, which may adversely affect the Company’s
revenues, if any.





The
Medicare Prescription Drug Improvement and Modernization Act of 2003 (“MMA”)
changed the way that Medicare covers and pays for pharmaceutical
products.  The legislation expanded Medicare coverage for drug
purchases by the elderly and will eventually introduce a new reimbursement
methodology based on average sales prices for drugs.  In addition,
this legislation provides authority for limiting the number of drugs that will
be covered in any therapeutic class.  As a result of this legislation
and the expansion of federal coverage of drug products, the Company expects that
there will be additional pressure to contain and reduce costs.  These
cost reduction initiatives and other provisions of this legislation could
decrease the coverage and price that the Company receives for any approved
products and could seriously harm its business.  While the MMA applies
only to drug benefits for Medicare beneficiaries, private payors often follow
Medicare coverage policy and payment limitations in setting their own
reimbursement rates, and any reduction in reimbursement that results from the
MMA may result in a similar reduction in payments from private
payors.





12




The
Company’s compliance with the reporting requirements of federal securities laws
and SEC rules concerning internal controls may be time consuming, difficult and
expensive.





The
Company is a public reporting company and, accordingly, subject to the
information and reporting requirements of the Exchange Act and other federal
securities laws, including compliance with the Sarbanes-Oxley Act. It may be
time consuming, difficult and costly for the Company to develop and implement
the internal controls and reporting procedures required by the Sarbanes-Oxley
Act. The costs of preparing and filing annual and quarterly reports, proxy
statements and other information with the SEC and furnishing audited reports to
stockholders will cause the Company’s expenses to be higher than they would be
if the Company had remained privately-held. The Company may need to hire
additional financial reporting, internal controls and other finance personnel in
order to develop and implement appropriate internal controls and reporting
procedures. If the Company is unable to comply with the internal controls
requirements of the Sarbanes-Oxley Act, the Company may not be able to obtain
the independent accountant certifications required by the Sarbanes-Oxley
Act.





If
the Company is unable to hire and retain additional qualified personnel, the
Company’s business may be harmed.





The
Company is small and if unable to continue to attract, retain and motivate
highly qualified management and sales personnel, may not be able to achieve its
objectives. Competition for management and sales personnel is
intense.





The
Company competes for qualified individuals with numerous pharmaceutical
companies and other emerging entrepreneurial companies. Competition for such
individuals is intense and the Company cannot be certain that the Company’s
search for such personnel will be successful. Attracting and retaining qualified
personnel will be critical to the Company’s success. Skilled employees in the
Company’s industry are in great demand. The Company is competing for employees
against companies that are larger, more established than the Company is and
companies that have the ability to pay more compensation than the Company. If
the Company is unable to hire and retain needed personnel, operating results and
future prospects could be materially adversely affected.




Risks
Relating to the Market and the Company’s Common Stock





The
market price of the Company’s common stock has been, and is likely to continue
to be, highly volatile and subject to wide fluctuations.





The
market price of the Company’s common stock has been, and is likely to continue
to be, highly volatile and could be subject to wide fluctuations in response to
a number of factors, some of which are beyond the Company’s control,
including:




·
            announcements
      or developments related to the products of the Company’s
      competitors;





·
            quarterly
      variations in the Company’s operating
expenses;





·
            issuances
      or sales of capital stock by the Company;
and





·
            sales
      of the common stock by the Company’s founders or other selling
      stockholders.




Applicable
SEC rules governing the trading of “penny stocks” may limit the trading and
liquidity of the Company’s common stock in the future, which could affect its
trading price.





The
Company’s common stock is currently traded on the OTC Bulletin Board market
under the symbol “NHPI.”





The
Company’s common stock may be considered a “penny stock” and subject to SEC
rules and regulations which impose limitations upon the manner in which such
shares may be publicly traded. These regulations require the delivery, prior to
any transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the associated risks. Under these regulations, certain
brokers who recommend such securities to persons other than established
customers or certain accredited investors must make a special written
suitability determination regarding such a purchaser and receive such
purchaser’s written agreement to a transaction prior to sale. These regulations
have the effect of limiting the trading activity of the common stock and
reducing the liquidity of an investment in the common stock.





13




There is currently very little liquidity in the trading
market for the Company’s common stock and the Company cannot ensure that a
liquid trading market will ever develop or be sustained.




To date
there has been a very limited trading market for the Company’s common stock. The
Company cannot predict how liquid the market for its common stock might become.
The Company’s common stock is currently trading on the OTC Bulletin Board. In
addition, the price at which the Company’s common stock may be sold is hard to
predict because of the limited liquidity of its common stock. Because the
Company’s common stock is so thinly traded, a large block of shares traded can
lead to dramatic fluctuations in the share price.




The
Company has not paid dividends in the past and does not expect to pay dividends
in the future. Any return on investment may be limited to the value of the
Company’s common stock.




The
Company currently intends to retain any future earnings to support the
development and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future. Any payment of future dividends will be at
the discretion of the board of directors after taking into account various
factors, including but not limited to the Company’s financial condition,
operating results, cash needs, growth plans and the terms of any credit
agreements that the Company may be a party to at the time. If the Company does
not pay dividends, its common stock may be less valuable because a return on
your investment will only occur if the Company’s stock price
appreciates.





Item
      2.
            Description
      of Property.




The
Company leases office and warehouse space from an affiliate of David Ambrose, at
16255 Aviation Loop Drive, Brooksville, FL 34604.  Each of those
leases is subject to a month-to-month lease.





Item
      3.
            Legal
      Proceedings.





On
January 7, 2009, the Company terminated the employment of its former chief
executive officer, Matthew Colpoys.  In terminating his employment,
the Company asserted, pursuant to Section 5(d) of his employment agreement, that
the termination was for “cause” as defined in the agreement.  On
January 26, 2009, Mr. Colpoys filed suit in Supreme Court in Erie County, New
York, asserting that prior to his termination his salary had been reduced in
violation of the agreement and that his termination was without “without cause”
under his employment agreement.  He is seeking the payment of the
amount of the salary reduction ($55,000), two year’s salary and benefits
pursuant to the provision of the agreement pertaining to termination without
“cause” ($664,000) and indemnification for his legal fees.  The
Company believes that Mr. Colpoys’ suit is without merit and intends to
vigorously defend it.  The Company has answered the complaint denying
the claims and has asserted counterclaims for breach of fiduciary duty based
upon various acts of misconduct prior to his termination.





On
November 20, 2008, the Company terminated the employment of its former officers,
David Benharris, Patrick Sullivan and Brendan Carney as part of a reorganization
and down-sizing of its executive staff.  Messrs. Benharris, Sullivan
and Carney have asserted various claims for allegedly unpaid vacation benefits
and unreimbursed business expenses.  In addition, they have asserted
that they were terminated following a “change in control” as that term is
defined in the change in control agreement entered in connection with their
employment and have asserted claims for two year’s salary and benefits pursuant
to the termination provisions of those agreements (approximately $550,000 in the
aggregate).  Messrs. Benharris, Sullivan and Carney submitted a demand
for arbitration on March 4, 2009.  The Company believes that their
claims are without merit and intends to vigorously defend them.





Item
      4.
            Submission
      of Matters to a Vote of Security
Holders.





The
Company did not submit any matter to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year ended December 31, 2008.


14


PART
II





Item
      5.
            Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities





The
Company’s common stock is currently traded on the OTC Bulletin Board market
under the symbol “NHPI.”





The
Company’s common stock was first traded on the OTCBB market on February 2, 2006
until the common stock began trading on the NASDAQ Capital Market on April 24,
2007. The Company’s common stock was delisted from the NASDAQ Capital Market on
April 2, 2008. The following table sets forth the high and low sales prices for
the period during which the common stock has been traded on the NASDAQ Capital
Market and the range of the high and low bid prices for the period during which
the common stock was traded on the OTCBB market. The information provided for
trading on the OTCBB market, as reported by the National Quotation Bureau,
represents interdealer quotations, without retail markup, markdown or commission
and may not be reflective of actual transactions.





Bid Price Per ShareHigh
                
                
                LowJanuary
      2007 - March 2007
                
                $
                7.25
                
                
                $
                4.75April
      2007 – June 2007
                
                $
                8.15
                
                
                $
                5.82July
      2007 – September 2007
                
                $
                6.47
                
                
                $
                4.25October
      2007 – December 2007
                
                $
                5.50
                
                
                $
                3.01January
      2008 – March 2008
                
                $
                4.40
                
                
                $
                0.40April
      2008 – June 2008
                
                $
                0.51
                
                
                $
                0.22July
      2008 – September 2008
                
                $
                0.45
                
                
                $
                0.20October
      2008 – December 2008
                
                $
                0.20
                
                
                $
                0.04





Stockholders





As of
March 2, 2009, the Company believes there were approximately 126holders of record of its
common stock. The Company believes that a greater number of holders of its
common stock are “street name” or beneficial holders, whose shares are held of
record by banks, brokers and other financial institutions.





Dividends





The
Company has never declared or paid any cash dividends on its common stock. The
Company currently intends to retain all available funds and any future earnings
to fund the development and growth of its business and does not anticipate
declaring or paying any cash dividends on its common stock in the foreseeable
future.





Recent
Sales of Unregistered Securities





The
Company did not sell any unregistered equity securities during the year ended
December 31, 2008 that were not previously reported on a Quarterly Report on
Form 10-Q or a Current Report on Form 8-K.





Item
      6.
            Selected
      Financial Data





Not
applicable.


15





Item
      7.
            Management’s
      Discussion and Analysis or Plan of
Operation





FORWARD-LOOKING
STATEMENTS





This
Annual Report on Form 10-K contains forward-looking statements (as defined in
Section 27A of the Securities Act and Section 21E of the Exchange Act). To the
extent that any statements made in this Report contain information that is not
historical, these statements are essentially forward-looking. Forward-looking
statements can be identified by the use of words such as “expects,” “plans”
“will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates,”
“projects” and other words of similar meaning. These statements are subject to
risks and uncertainties that cannot be predicted or quantified and consequently,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include those outlined
in “Risk Factors” found within our Annual Report on Form 10-K and include,
without limitation, the Company’s limited history, limited revenues, limited
cash and ability to raise capital to finance the growth of the Company’s
operations, the ability of the Company to develop its products and obtain
necessary governmental approvals, the Company’s ability to protect its
proprietary information, the Company’s ability to attract or retain qualified
personnel, including scientific and technical personnel and other risks detailed
from time to time in the Company’s filings with the SEC, or
otherwise.





THE
FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE INFORMATION CONTAINED IN
THE FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL
REPORT ON FORM 10-K.





Neuro-Hitech,
Inc. (the “Company” or “Neuro-Hitech”) is a specialty pharmaceutical company
focused on developing, marketing and distributing branded and generic
pharmaceutical products primarily in the cough and cold markets. The Company
sells its products domestically through U.S. based distributors.





Prior to
June 6, 2008, the Company had been focused primarily on technologies that
address investigational compounds that have the potential to show clinical
improvements versus current treatments for Alzheimer’s disease, epilepsy and
other central nervous system applications.





As a
result of the acquisition of MCR and AMBI, the Company is now a specialty
pharmaceutical company principally focused on developing, marketing and
distributing branded and generic pharmaceutical products primarily in the cough
and cold markets.  The Company sells its products domestically through
U.S. based distributors.





Until its
acquisition of MCR and AMBI, the Company’s revenue was a result of the
importation and sale of inventories of natural Huperzine to vitamin and
supplement suppliers.  The majority of the Company’s operations to
date have been funded through the Company’s private placement of equity
securities.





In view
of the results of the Phase II clinical trial, the cost associated with
additional trials, and the acquisition of MCR and AMBI, the Company is
principally focusing on the development, marketing and distribution of branded
and generic pharmaceutical products primarily in the cough and cold markets. The
Company continues to explore the potential development of collaborative, joint
and strategic alliances and licensing arrangements with one or more
pharmaceutical companies for the further development of Huperzine A and its
pipeline of other compounds.  The Company continually evaluates merger
and/or acquisition opportunities.





16




Results
of Operations





The
following discussion provides a comparison of the Company’s results of
operations for the year ended December 31, 2008 to the year ended December 31,
2007.  The Company’s results of operations reported herein reflect the
acquisition of MCR and AMBI since June 5, 2008.  Accordingly, the
results of operations for the periods prior to the acquisition of MCR and AMBI
are not comparable to periods after the acquisition of MCR and
AMBI.





For
      the twelve-monthperiod
      endedDecember 31
                          
                          
                          2008
      vs 2007
                          
                          
                          2008
      vs 20072008
                          
                          
                          2007
                          
                          
                          ($)
                          
                          
                          (%)Revenues
                          
                          $
                          4,129,612
                          
                          
                          $
                          458,870
                          
                          
                          $
                          3,670,742
                          
                          
                          
                          800
                          %Cost
      of goods sold
                          
                          
                          1,827,160
                          
                          
                          
                          215,854
                          
                          
                          
                          1,611,306
                          
                          
                          
                          746
                          %Gross
      Profit
                          
                          
                          2,302,452
                          
                          
                          
                          243,016
                          
                          
                          
                          2,059,436
                          
                          
                          
                          847
                          %Operating
      expenses:Selling,
      general & administrative expenses
                          
                          
                          5,788,983
                          
                          
                          
                          2,561,402
                          
                          
                          
                          3,227,581
                          
                          
                          
                          126
                          %Research
      & development costs
                          
                          
                          1,549,879
                          
                          
                          
                          3,523,954
                          
                          
                          
                          (1,974,075
                          )
                          
                          
                          -56
                          %Share
      Based Compenssation
                          
                          
                          5,331,308
                          
                          
                          
                          2,427,904
                          
                          
                          
                          2,903,404
                          
                          
                          
                          120
                          %Amortization
      of Deferred comp
                          
                          
                          589,874
                          
                          
                          
                          242,447
                          
                          
                          
                          347,427
                          
                          
                          
                          143
                          %Registration
      Rights payments
                          
                          
                          0
                          
                          
                          
                          490,550
                          
                          
                          
                          (490,550
                          )
                          
                          
                          -100
                          %Total
      operating expenses
                          
                          
                          13,260,044
                          
                          
                          
                          9,246,257
                          
                          
                          
                          4,013,787
                          
                          
                          
                          43
                          %Operating
      loss
                          
                          
                          (10,957,592
                          )
                          
                          
                          (9,003,241
                          )
                          
                          
                          (1,954,351
                          )
                          
                          
                          22
                          %Other
      income (expense):Interest
      income (expense)
                          
                          
                          (143,616
                          )
                          
                          
                          206,804
                          
                          
                          
                          (350,420
                          )
                          
                          
                          -169
                          %Forgiveness
      of debt
                          
                          
                          375,338
                          
                          
                          
                          0
                          
                          
                          
                          375,338
                          
                          
                          NMNet
      loss
                          
                          
                          (10,725,870
                          )
                          
                          
                          (8,796,437
                          )
                          
                          
                          (1,929,433
                          )
                          
                          
                          22
                          %





17




Revenues





Revenues
consist of sales of pharmaceutical products adjusted for any allowance for
product returns and sales of natural Huperzine to vitamin and supplement
suppliers.





The
Company had revenues from operations of $4,129,612 for the year ended December
31, 2008, a 800% increase from the $458,870 in revenue achieved for the year
ended December 31, 2007.  The increase in revenue was attributable to
revenues generated by MCR and AMBI following the Company’s acquisition of those
companies.





Cost of Goods
Sold





Cost of
goods sold as a percentage of the Company’s revenue was 44.2% for the year ended
December 31, 2008, compared with 47% for the year ended December 31,
2007.  The change in the cost of goods sold as a percentage of the
Company’s revenue was attributable to the higher margins associated with the
sales of the Company’s pharmaceutical products following its acquisition of MCR
and AMBI compared to the margins associated with the sales of Huperzine A in the
prior period.  A comparison to the prior period is not meaningful in
light of the change in the composition of the Company’s business.





Selling, general and
administrative expenses





Selling,
general and administrative expenses generally consist of share-based and cash
compensation to our employees and consultants who support our operations as well
as professional fees, insurance costs and investor relations.





The
Company’s total selling, general and administrative expenses increased from
$2,561,402 for the year ended December 31, 2007 to $5,788,983 for the year ended
December 31, 2008.  The increase in these expenses was attrituable to
increases in salaries and employee benefit expenses following the acquisition of
MCR and AMBI.





Share
based compensation for the year ended December 31, 2008 was $5,331,308, an
increase from the $2,427,904 for the year ended December 31,
2007.  The increase in share based compensation expense was
attrituable to share-based payments of approximately $3.1 million associated
with the forefeiture of options granted to officers, employees and consultants
in prior years, and the grant of options and stock appreciation
rights.





Research and development
costs





The
Company’s research and development costs decreased from $3,523,954 for the year
ended December 31, 2007 to $1,549,879 for the year ended December 31,
2008.  The decrease in research and development expenses is
attributable to the conclusion of the Company’s clinical development programs
following the announcement of its Phase II results for Huperzine A.





Georgetown





In
December 2003, the Company entered into a clinical research agreement, which was
amended in November 2005 and October 2007, with Georgetown pursuant to which
Georgetown provided the Company with Phase II research on Huperzine
A.  The costs associated with this agreement totaled $5,336,842 and
were partially funded by the National Institutes of Health.  The
Company’s portion of the total cost was $4,036,842 and payable in installments
upon the achievement of certain milestones.   For the years ended
December 31, 2008 and 2007, the payments made by the Company to Georgetown under
the terms of the clinical research agreement were approximately $785,305 and
$1,183,167, respectively, and the total payments made by the Company to
Georgetown since inception of the agreement were approximately
$3,895,972.  These costs are reflected in the Research and Development
caption of the Statement of Operations. The Company expects to make final
payments in 2009 to Georgetown in the amount of $80,000.





18




XEL
Herbaceuticals, Inc.





On March
15, 2006, the Company entered into a development agreement with XEL for the
development of the Huperzine A Transdermal Delivery System
(“Product”).  For the years ended December 31, 2008 and 2007, the
payments made by the Company to XEL were approximately $92,500 and $1,111,250,
respectively, and are reflected in the Research and Development caption of the
Statement of Operations. The Company does not expect to make any additional
payments in 2009.





Dalhousie
License Agreements (PARTEQ)





As part
of the acquisition of Q-RNA, the Company assumed exclusive license agreements
with PARTEQ Research and Development Innovations (“PARTEQ”), the technology
licensing arm of Queens University, Kingston, Ontario, Canada.





Under the
terms of the exclusive PARTEQ Licensing Agreement with PARTEQ, which was amended
in early 2007, the Company was obligated to pay fixed annual fees of
C$283,000.  Under the terms of the Exclusive Patent License Option
Agreement with PARTEQ which was amended in early 2007, the Company was obligated
to pay fixed annual fees of C$151,000.  For the years ended December
31, 2008 and December 31, 2007 the payments made by the Company to PARTEQ under
these agreements have been approximately $122,000 and $457,115,
respectively.  The Company expects to make final payments in 2009 to
PARTEQ in the amount of C$60,000.





Interest income
(expense)





The
Company invests any cash and cash equivalents not used for working capital in
short-term, interest-bearing, investment-grade securities or
accounts.  For the year ended December 31, 2008, the Company incurred
an expense of $143,616 related to interest accrued on notes payable to David
Ambrose issued in connection with the Company’s acquisition of
MCR and AMBI in June 2008, compared to $206,804 in interest income generated in
the year ended December 31, 2007.  The decrease is attributable to a
decrease in the balance of the Company’s cash and cash equivalents during the
2008 fiscal year and a decrease in the rate of interest paid on the Company’s
cash and cash equivalents.





Liquidity
and Capital Resources





Presently,
the Company expects that its available cash, cash equivalents and interest
income earned may not be sufficient to meet its operating expenses and capital
requirements for the next 12 months, although its financial condition has been
improved since November 2008.  In November 2008, the Company and David
Ambrose and an affiliate of Mr. Ambrose modified certain terms of the agreement
pursuant to which the Company purchased MCR and AMBI, pursuant to a Modification
Agreement and Release (“Modification Agreement”).  Pursuant to the
Modification Agreement the Company issued 1,500,000 shares of the Company’s
Series A Preferred Stock and 1,397,463 shares of the Company’s Series B
Preferred Stock (i) to satisfy its obligations to Mr. Ambrose under a
Convertible Note and a Subordinated Note aggregating approximately $6.1 million
and payables aggregating approximately $1 million and (ii) to receive products
from an affiliate of Mr. Ambrose valued at up to $1,257,717. Each share of the
Series A and B Preferred Stock is convertible in 10 shares of the Company’s
common stock. Additionally, the features of the Series A Preferred Stock
include, among other things, a non-participating liquidation preference of
$4,500,000.




The Company is dependent uponTG United asits solesource of operating
credit.  As part of the Modification Agreement, the Company was
provided a $1.26 million inventory credit by TG United.The
Company is required to make minimum monthly payments of $100,000 to TG United
with respect to inventory purchases, subject to a quarterly reconciliation
against amounts due.  The $1.26 million inventory credit may be
applied by MCR and AMBI against invoices issued by TG United at a rate of up to
$100,000 per month, after any required minimum monthly cash payments are
made.  Approximately $1.025 million and $0.9 million of the inventory credit remained
available to the Company as of December 31, 2008 and March 31, 2009,
respectively.




Prior to
the Company’s acquisition of MCR and AMBI, the Company generated limited revenue
from operations.  The Company expects that it will generate most of
its revenue from the sale of its pharmaceutical products and limited operating
revenue from the sale of natural Huperzine.  If the sale of its
pharmaceutical products is not sufficient to meet its working capital needs, the
Company may need to raise capital through the sale of its securities or debt
offerings.  The Company also intends to expand its business operations
in several respects, but it will need additional capital to pursue these
opportunities. If the Company fails to generate sufficient cash flow or raise
additional capital it may not have sufficient cash to pursue its business
expansion plans and meet capital requirements during this period or in future
periods.





19




Historically,
the principal uses of the Company’s cash and cash equivalents have been
conducting the Phase II clinical trials, developing alternative delivery
technologies, improving on the synthetic processes, and continuing to fund
pre-clinical compounds associated with the agreements with
PARTEQ.  The Company expects that the principal use of its cash and
cash equivalents now, following its acquisition of MCR and AMBI, will be related
to the sale of its pharmaceutical products to the cough and cold markets, and
the expansion of its business.  Although the Company has developed
plans related to its operations, management continues to retain significant
flexibility for the uses of Company funds.  In addition to meeting its
working capital needs, the Company may also use its cash and cash equivalents to
acquire additional products, technologies or businesses.





During
the year ended December 31, 2008 the Company used approximately $4.3 million in
its operating activities.  The cash used in operating activities
consisted primarily of the following:





·
            Net loss of approximately $10.7
      million, adjusted for share-based payments aggregating $5.3 million and
      the amortization of intangible assets acquired pursuant to the MCR and
      AMBI acquisition amounting to approximately $0.6
      million;


·
            An increase in accounts
      receivable of approximately $1.25 million which is primarily due to sales
      of products sold in late November and early December 2008
      ;


·
            A decrease in accounts payable of
      approximately $0.3 million;
and


·
            An increase in inventory of
      approximately $0.1 million





During
the year ended December 31, 2008, the net cash consideration paid for MCR and
AMBI amounted to approximately $5million.





During
the year ended December 31, 2008, the Company issued 13,172,000 shares of its
Common Stock in private placements of the Company’s securities, raising gross
proceeds of $3,279,828.





The
Company expects to incur additional expenses in 2009 payable to Georgetown of
$80,000 related to the open label extension of the Phase II Clinical Trial and
$60,000 payable to Dalhouise related to the preclinical licensing
agreement.





The
Company may also incur additional expenses in connection with its agreement with
Numoda Corporation (“Numoda”). Following Numoda’s delivery of its analysis of
the Phase II clinical trials, the Company paid Numoda $100,000.





To fund
the implementation of its business plan, the Company has historically engaged in
equity financing through existing investors and potential new investors. If the
Company does not enter into a transaction that provides it additional liquidity,
or the sales of its pharmaceutical products are not sufficient to provide it
needed liquidity, it may engage in additional financing efforts. Additional
funds may not be available or not available on acceptable terms, if at all.
Given the anticipated cash expenditures, the potential cash requirements and the
lack of sufficient cash to fully fund those expenses, the Company is continually
analyzing alternative ways in which it can preserve its cash and cash
equivalents. If the Company is unable to raise additional financing and is
forced to take such measures, they may materially harm the Company’s prospects,
financial condition and future operations.





Critical
Accounting Policies





Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. Preparing financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions which affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the balance sheet dates, and the recognition of revenues and
expenses for the reporting periods. These estimates and assumptions are affected
by management’s application of accounting policies.





20




Revenue
Recognition





Revenue
is recognized when it is earned. The Company’s revenue recognition policies are
in compliance with the Securities and Exchange Commission’s (“SEC”) Staff
Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition”. The Company
recognizes revenues from the sale of pharmaceutical products, including shipping
fees, if any, upon shipment, provided that a purchase order has been received or
a contract has been executed, there are no uncertainties regarding customer
acceptance, the sales price is fixed or determinable and collection is deemed
probable. If uncertainties regarding customer acceptance exist, the Company
recognizes revenue when those uncertainties are resolved and title has been
transferred to the customer, which is generally upon delivery to the destination
point.





Revenue
from sales of the Company’s products are recorded, net of returns and other
sales allowances.  Other sales allowances include cash discounts, rebates,
trade promotions, and sales incentives.  According to the terms of a sales
contract, and consistent with industry practices, a customer may return products
up to a maximum amount and under certain conditions.  Allowances are
calculated based upon current economic conditions, the underlying contractual
terms with both direct and indirect customers, the remaining time to expiration
of the products and an evaluation of the levels of inventories held by the
Company’s distributors.  The excess of allowance for returns over the gross
amount of receivables is recorded as accrued sales allowance.





Research
and Development Costs





All
research and development costs are expensed as incurred and include costs paid
to sponsored third parties to perform research and conduct clinical
trials.





Share-Based
Compensation





Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R), (“SFAS No. 123(R)”), “Share-Based Payment,” which requires the
Company to record as an expense in its financial statements the fair value of
all stock-based compensation awards. The Company currently utilizes the
Black-Scholes option pricing model to measure the fair value of stock options
granted to employees using the “modified prospective” method. Under the
“modified prospective” method, compensation cost is recognized in the financial
statements beginning with the effective date, based on the requirements of SFAS
No. 123(R) for all share-based payments granted after that date, and based on
the requirements of SFAS No. 123(R) for all unvested awards granted prior to the
effective date of SFAS No. 123(R).





Deferred
Compensation





In
accordance with EITF Abstract No. 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 initially measures the fair value of
any equity granted to consultants on the date of grant and subsequently
remeasures such grants in accordance with promulgated accounting principles
using the Black-Scholes pricing model. Amounts are initially recorded as
Deferred Compensation in the Stockholders’ Equity section of the balance sheet
and are subsequently charged to the appropriate expense over the period to which
the service relates.





Item
      8.
            Financial
      Statements





The
Company’s Consolidated Financial Statements and the Report of the Independent
Registered Public Accounting Firm appears at the end of this annual report and
are incorporated herein by reference.





Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure





None





21


Item
      9A.
            Controls
      and Procedures





Evaluation of Disclosure Controls and
Procedures





Based on
management’s evaluation (with the participation of our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”)), as of the end of the period
covered by this report, the Company’s CEO and CFO have concluded that the
Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), are effective to provide reasonable assurance that information required
to be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in SEC rules and forms, and is accumulated and communicated to
management, including the Company’s principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.





Changes in Internal Control Over
Financial Reporting





There
were no changes to our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





Management Report on Internal Control
Over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding
the reliability of its financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted
accounting principles.





Management
assessed the Company’s internal control over financial reporting as of
December 31, 2008, the end of the Company’s fiscal
year.  Management based its assessment on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management’s assessment included
evaluation of elements such as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting policies, and
the Company’s overall control environment.





Based on
the Company’s assessment, management has concluded that the Company’s internal
control over financial reporting was effective as of the end of the fiscal year
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting
principles.  The Company reviewed the results of management’s
assessment with the Audit Committee of the Company’s Board of
Directors.




This
report does not include an attestation report of the Company’s registered public
accounting firm regarding the Company’s internal controls over financial
reporting.  The disclosure contained under this Item 9A was not
subject to attestation by the Company’s independent registered public
accounting firm pursuant to temporary rules of the SEC that permit the Company
to provide only the disclosure under this Item 9A in this Report.





Inherent Limitations on Effectiveness
of Controls





The
Company’s management, including its CEO and CFO, does not expect that the
Company’s disclosure controls or its internal control over financial reporting
will prevent or detect all errors and all fraud.  A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be
met.  The design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs.  Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, have been detected.  These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.




Item
      9B.
              Other
      Information
 
 None.




22




PART III
  Item
      10.
              Directors,
      Executive Officers and Corporate
  Governance
  The
following sets forth certain information with regard to the directors and
executive officers of the Company as of April 28, 2009 (ages are as of December
31, 2008):
 
 Name
                  Age
                  PositionDavid
      Ambrose
                  42
                  President,
      Chief Executive Officer and DirectorDavid
      Barrett
                  33
                  Chief
      Financial OfficerGary
      Dutton
                  35
                  Chief
      Operating Officer and DirectorJohn
      Abernathy
                  71
                  DirectorMark
      Auerbach
                  70
                  DirectorDavid
      Dantzker
                  65
                  DirectorKevin
      Esval
                  45
                  DirectorReuben
      Seltzer
                  52
                  Director
 
 David Ambrosehas been serving
as Chief Executive Officer of the Company since January 2009 and a Director of
the Company since November 2008.  During the past five years, Mr.
Ambrose has been the Chief Executive Officer of TG United Pharmaceuticals, Inc.
(“TG United”) and during that time, until June 6, 2008, he was also serving as
the President and Chief Executive Officer of MCR and AMBI.
 
 David Barrett has been serving
as Chief Financial Officer since April 2006. Between January 2005 and April
2006, Mr. Barrett served as Chief Financial Officer of Overture Financial
Services, LLC, a company specializing in construction and management of
investment platforms for financial intermediaries. Between September 2003 and
January 2005, Mr. Barrett served in a variety of capacities, most recently as
Chief Financial Officer of Overture Asset Managers, LLC, an asset management
holding company that partners, acquires and manages investment managers with
complementary investment products. Between June 1999 and September 2003, Mr.
Barrett was employed by Deloitte & Touche where he served in a variety of
capacities, most recently as Senior Consultant in merger and acquisition
services.
 
 Gary Dutton has been serving
as Chief Operations Officer since January 2009 and as a Director since November
2008. During the past five years, Mr. Dutton has served as Chief Operations
Officer of TG United.  From 1999 to January 2008 Mr. Dutton served a
variety of roles with MCR American and AMBI Pharmaceuticals, Inc., most recently
as a sales representative, Director of Sales and Vice-President of
Sales.
 
 John Abernathy has been a
director of Neuro-Hitech since January 2006. Mr. Abernathy served as Chief
Operating Officer of Patton Boggs LLP, a law firm, from January 1995 until his
retirement in May 2004, and as managing partner of the accounting firm BDO
Seidman from 1983 to 1990. Since July 2001, Mr. Abernathy has served on the
board of directors of Par Pharmaceutical Company, Inc. (“Par”) and as a chairman
of its audit committee since September 2003. Mr. Abernathy is also a director of
Sterling Construction Company, Inc., a civil construction company and chairs its
audit committee.
  Mark Auerbach has been
Chairman of the board of directors of Neuro-Hitech since January 2006. Mr.
Auerbach has served as Executive Chairman of the board of directors of Par since
September 2003, and as director of Par since 1990, and as a director of Optimer
Pharmaceuticals, Inc., a biopharmaceutical company with a portfolio of
late-stage anti-infective products and a range of preclinical antibiotics from
carbohydrate drug discovery platform, since May 2005. From June 1993 through
December 2005, Mr. Auerbach has served as Senior Vice President and Chief
Financial Officer of Central Lewmar L.P., a distributor of fine
papers.  Mr. Auerbach is also a director of Collexis Holdings, Inc., a
software company.
 
 David Dantzker has been
serving as a director of Neuro-Hitech since November 2006. Dr. Dantzker has been
a general partner at Wheatley MedTech Partners, L.P., a New York-based venture
capital firm since January 2001. He has served on the faculty and in leadership
positions of four major research-oriented medical schools and has authored or
co-authored 130 research papers and five textbooks. He is an internationally
recognized expert in the area of pulmonary medicine and critical care. Prior to
serving with Wheatley Partners, Dr. Dantzker served as Chief Executive Officer
of Redox Pharmaceuticals Corporation from November 2000 until October 2001. Dr.
Dantzker served as President of Long Island Jewish Medical Center from July 1993
to October 1997 and President of North Shore—LIJ Health System from October 1997
until May 2000. Dr. Dantzker is currently chairman of the board of directors of
Versamed, Inc. and Oligomerix and a director of CNS, Visionsense, Ltd., Advanced
Biohealing Inc. and Novaray Medical, Inc.
  23
 Kevin Esval has been serving
as a director of Neuro-Hitech since June 2008.  Mr. Esval has been
serving as the President of VelocityHealth Securities, Inc., a Nashville,
Tennessee boutique investment bank and focused exclusively on health care growth
companies, since he founded the company in 2000.
 
 Reuben Seltzer has been
serving as a director of Neuro-Hitech since January 2006 and since August 2007
as Vice Chairman.  Mr. Seltzer also served as the Company’s President
and Chief Executive Officer between January 2006 and August 2007. Mr. Seltzer
has been Chief Executive and President of Marco since 1996, president of Marco
LLC, since January 2002 and a director and consultant for Hi-Tech Pharmacal Co.,
Inc., a pharmaceutical company since 1992.
 
 Section 16(a)
Beneficial Ownership Reporting Compliance. Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires the Company’s directors
and executive officers, among others, to file with the SEC and NASDAQ an initial
report of ownership of the Company’s stock on Form 3 and reports of changes in
ownership on Form 4 or Form 5. Persons subject to Section 16 are required by SEC
regulations to furnish us with copies of all Section 16(a) forms that they file.
Under SEC rules, some forms of indirect ownership and ownership of Company stock
by family members are covered by these reporting requirements. Based solely on a
review of the copies of such forms in the Company’s possession, and any written
representations received from reporting persons, we believe that during fiscal
2008 each of the Company’s executive officers and directors filed the required
reports on a timely basis under Section 16(a), except as follows:
 
 ·
              Philip J.
      Young filed one late report on Form 3 to report his initial
      ownership;
 ·
              Kevin
      Esval filed one late report on Form 3 to report his initial
      ownership;
 ·
              John
      Abernathy filed one late report on Form 4 in respect of one
      transaction;
 ·
              Mark
      Auerbach filed one late report on Form 4 in respect of one
      transaction;
 ·
              Matthew
      Colpoys filed one late report on Form 4 in respect of one
      transaction;
 ·
              David
      Dantzker filed two late reports on Form 4 in respect of ten
      transactions;
 ·
              Gary E.
      Dutton, Jr. filed one late report on Form 4 in respect of two
      transactions ;
 ·
              Reuben
      Seltzer filed one late report on Form 4 in respect of five
      transactions;
 ·
              Alan
      Kestenbaum filed one late report on Form 5 in respect of one
      transaction.
 
 Code of
Ethics. The Company is committed to legal and ethical conduct in
fulfilling its responsibilities. The Board expects all directors, as well as
officers and employees, to act ethically at all times. Additionally, the Board
expects the Chief Executive Officer, the Chief Financial Officer, and all senior
financial and accounting officials to adhere to the Company’s Code of Ethics
which was adopted on February 23, 2006. The Code of Ethics incorporates the
Company’s expectations of its executive officers that enable the Company to
provide accurate and timely disclosure in its filings with the SEC and other
public communications. In addition, they incorporate the Company’s guidelines
pertaining to topics such as complying with applicable laws, rules, and
regulations; reporting of code violations; and maintaining accountability for
adherence to the code.
  The full
text of the Code of Ethics is published on the investor relations portion of the
Company’s website at www.neurohitech.com.  The
Company intends to disclose any amendments to provisions of its Code of Ethics,
or waivers of such provisions granted to executive officers and directors, on
this website within four business days following the date of any such amendment
or waiver.
  Audit
Committee. The Company has an Audit Committee that assists the Board in
its general oversight of the Company’s financial reporting, internal controls,
and audit functions and is responsible for the appointment, retention,
compensation, and oversight of the work of the Company’s independent registered
public accounting firm. The Audit Committee is composed of Messrs. Abernathy,
Auerbach and Dantzker, each of which has been determined by the Board, to meet
the relevant definition of “independent director.” The Board has determined that
Messrs. Abernathy and Auerbach each meet the SEC’s qualifications to be an
“audit committee financial expert.” The Board determined that each Audit
Committee member has sufficient knowledge in reading and understanding the
Company’s financial statements to serve on the Audit Committee.
 
 Compensation
Committee.  The Company has a Compensation Committee that is
responsible for developing and maintaining appropriate compensation programs for
the Company’s executive officers, including the Company’s named executive
officers.  The Compensation Committee is composed of Messrs. Dantzker
and Abernathy.
  24
  Item
      11.
                Executive
      Compensation
  Summary
Compensation Table
  The
following table shows the total compensation awarded to, earned by or paid to
each Named Executive Officer during 2008 and 2007 for service to the Company and
its subsidiaries for the year ended December 31, 2008 and December 31, 2007,
respectively.
 
 Name
      and
                              Principal
      Position (a)
                            
                            Year
                              (b)
                            
                            Salary
                              ($)
                              (c)
                            
                            Stock
                              Awards
      (1)
                              ($)
                              (e)
                            
                            Option
                              Awards
      (1)
                              ($)
                              (f)
                            
                            Total
                              ($)
                              (j)Gary
      Shearman (2)
                              Former
      President, Chief Executive Officer and Director
                            
                            
                            2008
                              2007
                            
                            
                            479,018
                              159,375
                            
                            
                            —
                              —
                            
                            
                            1,351,027
                              820,266
                            
                            
                            1,830,045
                              979,641Matt
      Colpoys (3)
                              Former
      President, Chief Executive Officer and Director
                            
                            
                            2008
                              2007
                            
                            
                            130,833
                              —
                            
                            
                            —
                              —
                            
                            
                            292,487
                              —
                            
                            
                            423,320
                              —David
      J. Barrett (4)
                              Chief
      Financial Officer
                            
                            
                            2008
                              2007
                            
                            
                            300,750
                              212,700
                            
                            
                            140,800
                              39,063
                            
                            
                            244,202
                              374,936
                            
                            
                            685,752
                              626,699
  (1) Represents the dollar amounts recognized
for financial statement reporting purposes with respect to the fiscal year
covered in accordance with FAS 123R. For discussions of the relevant assumptions
made in calculating these amounts, see Note 8 to the Company’s consolidated
financial statements.
 
 (2) Dr.
Shearman joined the Company in August 2007 and resigned on June 5,
2008.  Under the terms of a Resignation Agreement, Dr. Shearman
received a lump sum payment of $275,000, accrued salary and $9,375 of accrued
vacation pay, approximately $5,000 in reimbursable business expenses,
approximately $22,560 representing payment of medical and dental coverage
premiums for 12 months, and approximately $4,000 in attorney’s fees associated
with the negotiation of his Resignation Agreement.  The Company
recognized the full value of the stock options in 2008.
 
 (3) Matt
Colpoys joined the Company on June 6, 2008 and on January 7, 2009 the Company
terminated his employment.
 
 (4) On
June 24, 2008 the Company approved a payment of $90,000 to Mr. Barrett partly in
consideration of deferred salary and earned bonus and granted 360,000 shares of
the Company's common stock.
  Outstanding
Equity Awards at Fiscal Year-End
  The
following table presents information on outstanding equity awards held by the
named executive officers as of December 31, 2008.
    Option
      Awards
                                                                                      
                                                                                      
                                                                                      Stock
      AwardsName(a)
                                                                                      
                                                                                      Number
      of
                                                                                        Securities
                                                                                        Underlying
                                                                                        Unexercised
                                                                                        Options
                                                                                        (#)
                                                                                        Exercisable
                                                                                        (b)
                                                                                      
                                                                                      
                                                                                      Number
      of
                                                                                        Securities
                                                                                        Underlying
                                                                                        Unexercised
                                                                                        Options
                                                                                        (#)
                                                                                        Unexercisable
                                                                                        (c)
                                                                                      
                                                                                      
                                                                                      Equity
                                                                                        Incentive
                                                                                        Plan
                                                                                        Awards:
                                                                                        Number
                                                                                        of
                                                                                        Securities
                                                                                        Underlying
                                                                                        Unexercised
                                                                                        Unearned
                                                                                        Options
                                                                                        (#)
                                                                                        (d)
                                                                                      
                                                                                      
                                                                                      Option
                                                                                        Exercise
                                                                                        Price
                                                                                        ($)
                                                                                        (e)
                                                                                      
                                                                                      Option
                                                                                        Expiration
                                                                                        Date
                                                                                        (f)
                                                                                      
                                                                                      
                                                                                      Number
      of
                                                                                        Shares
                                                                                        Or
      Units That Have Not Vested
                                                                                        (#)
                                                                                        (g)
                                                                                      
                                                                                      
                                                                                      Market
      Value of
                                                                                        Shares
                                                                                        Or
      Units That Have Not Vested
                                                                                        ($)
                                                                                        (h)Matt
      Colpoys (1)
                                                                                      
                                                                                      
                                                                                      500,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,500,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.00
                                                                                      
                                                                                      
                                                                                      6/6/2020David
      Barrett (2)
                                                                                      
                                                                                      
                                                                                      60,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      40,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      7.97
                                                                                      
                                                                                      
                                                                                      6/26/20166,250
                                                                                      
                                                                                      
                                                                                      
                                                                                      18,750
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      3.88
                                                                                      
                                                                                      
                                                                                      12/07/201737,500
                                                                                      
                                                                                      
                                                                                      $
                                                                                      5,625120,000
                                                                                      
                                                                                      
                                                                                      $
                                                                                      18,000
  25
 (1) The
Company issued Mr. Colpoys a stock option to purchase up to 2,000,000 shares of
NHI common stock, at an exercise price of $2.00 per share.  The option
immediately vested as to 500,000 shares on June 6, 2008 and the remaining
1,500,000 shares were to vest in equal one-third increments on the first, second
and third anniversaries of the commencement of the term of Mr. Colpoys’
employment.  Mr. Colpoys was terminated on January 7,
2009.
 
 (2) Mr.
Barrett’s option to purchase 100,000 shares at an exercise price of $7.97 per
share vests as to 40,000 shares on May 10, 2009. Mr. Barrett’s option to
purchase 25,000 shares at an exercise price of $3.88 per share will vest as to
8,333 shares on December 1, 2009 and 8,334 shares on December 1,
2010.  Mr. Barrett’s restricted stock grant of 50,000 shares vested as
to 12,500 shares on May 10, 2008 and vests as to an additional 12,500 shares on
each of the first, second and third anniversaries of May 10,
2008.  Mr. Barrett’s restricted stock grant of 360,000 shares vested
as to 120,000 shares on June 30, 2008, an additional 120,000 shares on September
30, 2008 and the remaining 120,000 shares on January 1, 2009.
 
 Officers
Deferral Program
 
 The
Officers Deferral Program allows officers to elect, in respect of up to 50
percent of their salary, to receive, in lieu of a payment in cash, options for
shares of common stock. Any salary amount subject to an election will not be
paid to the officer and will accumulate during a calendar quarter. This total
quarterly amount will be multiplied by 1.5 (the “Deferral Amount”), and the
officer shall be issued on the day following the last day of the calendar
quarter, options for a number of whole shares of common stock determined by
dividing the Deferral Amount by the Black-Scholes “value” of the last fair
market value option grant made in the preceding fiscal year, as set forth in the
Company’s audited financial statements for that preceding fiscal year. The
Board, however, reserves the right to determine the “value” of an option, for
purposes of calculating the number of options to be granted, by utilizing the
fair market value price of the Company’s common stock on the last trading day
prior to the grant date and the other Black-Scholes assumptions set forth in the
Company’s audited financial statements for the preceding fiscal year. None of
the officers deferred any portion of their salary in 2008.
 
 Employment Agreements, Severance and
Change of Control Arrangements
  The
following is a description of the employment agreements and severance and change
of control arrangements with respect to each named executive officer serving in
that capacity at December 31, 2008. The amount of compensation payable to each
named executive officer upon termination without cause, termination for good
reason and termination following a change of control is shown below. The amounts
shown assume that such terminations were effective as of December 31, 2008,
and are estimates of the amounts which would be paid to the named executives
upon their termination. The actual amounts to be paid can only be determined at
the time of such executive’s actual separation from the Company.
  Employment
Agreements and Severance Arrangements, including Change of Control
Benefits
  Matt
Colpoys
 
 Mr.
Colpoys served as the Company’s Chief Executive Officer and President between
June 6, 2008 and January 7, 2009.  On June, 6, 2008, the Company
entered into an employment agreement with Mr. Colpoys, the initial term of which
was three years, unless earlier terminated in accordance with the terms
therein.  Pursuant to the terms of Mr. Colpoys’ employment agreement,
the Company initially paid Mr. Colpoys an annual base salary of
$332,200.  Mr. Colpoys annual base salary in effect on December 31,
2008 was $125,000.  In addition to his annual base salary, Mr. Colpoys
was entitled to receive an annual cash bonus with respect to such fiscal year in
an amount equal to 0.75% of the Company’s consolidated annual gross profits (net
revenues less cost of goods sold) for such fiscal year.  The Company
also issued Mr. Colpoys a stock option to purchase up to 2,000,000 shares of NHI
common stock, at an exercise price of $2.00 per share.  The option
immediately vested as to 500,000 shares on June 6, 2008 and the remaining
1,500,000 shares would have vested in equal one-third increments on the first,
second and third anniversaries of the commencement of the term of Mr. Colpoys’
employment.
 
 Mr.
Colpoys’ employment agreement provided for certain severance payments and
benefits in the event that Mr. Colpoys’ employment was terminated “without
cause,” he resigned for “good reason”, he was terminated without reason or
terminated for good reason subsequent to a “change in control transaction” or he
died or became disabled.  If Mr. Colpoys was terminated other than for
cause or terminated his employment for good reason, except with respect to a
change in control transaction, Mr. Colpoys would be entitled to receive
(i) the lesser of (A) two years of base salary at the then current
rate, payable in a lump sum, less withholding of applicable taxes or any other
compensation or benefits, or (B) base salary at the then current rate,
payable in a lump sum, less withholding of applicable taxes or any other
compensation or benefits for the remaining months left in the term of his
employment agreement, (ii) the lesser of (X) his average annual bonus since
the start of the agreement multiplied by two, payable in a lump sum, less
withholding of applicable taxes or any other compensation or benefits, or (Y)
his average bonus pro-rated for the remaining term of the agreement, and (iii)
all unvested options would immediately vest and become exercisable. In the event
Mr. Colpoys was terminated within 12 months of a change in control transaction,
and Mr. Colpoys terminated his employment for good reason or the Company
terminated his employment without cause, Mr. Colpoys would be entitled to
receive (i) one year’s base salary at the then current rate, payable in a lump
sum, less withholding of applicable taxes or any other compensation or benefits,
(ii) the average bonus, payable in a lump sum, less withholding of
applicable taxes or any other compensation or benefits, and (iii) all
unvested options would immediately vest and become exercisable.
 
 26
  “Good
Reason” pursuant to Mr. Colpoys employment agreement means Mr. Colpoys has
resigned due to (i) any material diminution of his responsibilities that is not
cured within 15 days; (ii) any reduction of or failure to pay his compensation
provided for herein, except to the extent he consents in writing to any
reduction, deferral or waiver of compensation, which non-payment continues for a
period of 15 days following written notice to the Company by Mr. Colpoys of such
non-payment; or (iii) any material violation by the Company of its obligations
under the employment agreement that is not cured within 60 days after receipt of
written notice thereof from Mr. Colpoys.
 
 “Cause”
is defined pursuant to Mr. Colpoys employment agreement as:  (i) the
willful or continued failure by Mr. Colpoys to substantially perform his duties,
including, but not limited to, acts of fraud, willful misconduct, gross
negligence or other act of dishonesty (provided that the Company shall have
delivered to Mr. Colpoys a notice of such failure, specifying the particulars
thereof and giving Mr. Colpoys a 15-day period to cure such conduct if such
conduct is capable of being cured); (ii) a material violation or material breach
of the employment agreement which is not cured within 10 days written notice to
Employee; (iii) misappropriation of funds, properties or assets of the Company
by Mr. Colpoys or any action which has a materially adverse effect on the
Company or its business; (iv) the conviction of, or plea of guilty or no contest
to, a felony or any other crime involving moral turpitude, fraud, theft,
embezzlement or dishonesty; or (v) abuse of drugs or alcohol which impairs Mr.
Colpoys ability to perform his duties.
 
 The term
“Change in Control Transaction” pursuant to Mr. Colpoys employment agreement
means the sale of the Company to an un-affiliated person or entity or group of
un-affiliated persons or entities pursuant to which such person, entity or group
acquires (i) shares of capital stock of the Company representing at least fifty
percent (50%) of outstanding capital stock (whether by merger, consolidation,
sale or transfer of shares (other than a merger where the Company is the
surviving corporation and the shareholders and directors of the Company prior to
the merger constitute a majority of the shareholders and directors,
respectively, of the surviving corporation (or its parent))) or (ii) all or
substantially all of the Company’s assets determined on a consolidated
basis.
 
 David
Barrett
 
 Mr.
Barrett has served as the Company’s Chief Financial Officer since April
2006.  On December 7, 2007, the Company entered into an employment
agreement with Mr. Barrett.
  The
employment agreement provides Mr. Barrett with an annual base salary of
$250,000.  The agreement was effective as of December 1, 2007 and
expires on November 30, 2010, unless further extended or sooner
terminated.  In addition to his base compensation, Mr. Barrett will be
eligible to receive bonus compensation of up to 25% of his base salary, in
amounts to be determined by the Chief Executive Officer and approved by the
Compensation Committee following Mr. Barrett’s achievement of certain
performance objectives.  The performance objectives shall be
established by the Chief Executive Officer and Mr. Barrett at the beginning of
each fiscal year, and the achievement of such goals shall be reviewed at the
beginning of the ensuing fiscal year.  In connection with the
execution of the employment agreement, the Company issued Mr. Barrett stock
options to purchase up to 25,000 shares of the Company’s common stock, at an
exercise price of $3.88 per share. These options vested as to 8,333 on December
1, 2008 and shall vest as to an additional 8,333 on December 1, 2009 and 8,334
on December 1, 2010.  Mr. Barrett is also eligible to receive options
to purchase up to 17,000 shares of the Company’s common stock on each
anniversary of the commencement of the term of his employment.
 
 Pursuant
to the terms of his employment agreement, Mr. Barrett will serve in his
respective executive position until (i) his death or disability,
(ii) his decision to terminate his employment relationship with the Company
for or without good reason, or (iii) the decision by the Company’s board of
directors to terminate his employment with or without cause.
 
 Mr.
Barrett’s employment agreement provides that if his employment with the Company
is terminated under certain circumstances during the period of 24 months after a
Change of Control, he will be entitled to the payment of cash benefits, the
continuation of health, retirement and fringe benefits as well as the immediate
vesting of any outstanding stock options and restricted stock, as
described.
 
 If Mr.
Barrett’s employment with the Company is terminated during the 24-month period
after a Change of Control for cause or resigns (other than for good reason), we
will have no obligation to provide the benefits described below.
 
 Pursuant
to his respective employment agreement, in the event Mr. Barrett’s employment
with us is terminated during the 24 month period after a Change of Control due
to disability or death or without cause, or he resigns for good reason, the
executive shall be entitled to (provided that he executes and delivers to us a
general release instrument): (i) receive a lump sum payment of an amount equal
to six months of base salary then in effect and vacation pay (for vacation not
taken); (ii) the immediate vesting of all outstanding stock options, and (iii)
receive the continuation of certain insurance and other fringe benefits for six
months.
 
 In the
event Mr. Barrett becomes entitled to any payments and benefits related to a
termination of employment after the occurrence of a Change of Control and if
such payments equal or exceed 110% of three times the executive’s “base amount”
determined for IRS purposes, we shall pay to the executive an additional amount
equal to the sum of any excise tax imposed by the IRS to place the executive in
the same after-tax position as if no such excise tax had been imposed and no
additional amount had been made to him.
 
 27
  “Change
of Control” under Mr. Barrett’s employment agreement means an event that would
be required to be reported under the Securities and Exchange Act of 1934, as
amended, whether or not we are then subject to such reporting requirements;
provided that, without limitation, a change in control shall be deemed to have
occurred if (i) any person is or becomes beneficial owner, directly or
indirectly, of 25 percent or more of the Company’s voting securities; (ii)
during any period of two consecutive years, the following persons cease for any
reason to constitute a majority of the board of directors: individuals who at
the beginning of such period constitute the board of directors and new directors
each of whose election to the board of directors or nomination for election to
the board of directors by the Company’s security holders was approved by a vote
of at least two thirds of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved; (iii) the Company’s security holders
approve a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation that would result in the voting securities
of the Company outstanding immediately before the merger or consolidation
continuing to represent a majority of the Company’s voting securities or of such
surviving entity outstanding immediately after such merger or consolidation; or
(iv) the Company’s security holders approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by us of all or
substantially all of the Company’s assets.
 
 Under Mr.
Barrett’s employment agreement, “good reason” (other than in the context of a
change of control) means that we: (i) move the Company’s offices to an area
other than the New York or Philadelphia Standard area; (ii) assign duties
to Mr. Barrett that are substantially inconsistent with the responsibilities of
his position or we substantially alter the nature or status of such
responsibilities; (iii) diminish his title; (iv) reduce Mr. Barrett’s base
salary as in effect on the date his agreement was executed; or (v) materially
reduce the benefits provided to Mr. Barrett, other than in connection with a
reduction in benefits generally applicable to senior executives of the Company.
Under the employment agreements, “cause” is defined as: (i) the commission by
Mr. Barrett of a felony or a crime involving moral turpitude or the commission
of any other act or omission involving dishonesty or fraud with respect to the
Company or any of its affiliates or any of their customers or suppliers; (ii)
substantial failure on the part of Mr. Barrett in his performance of the duties
of the office held by him as reasonably directed by the board of directors
(other than any such failure resulting from Mr. Barrett’s incapacity due to
physical or mental illness), after notice to Mr. Barrett and a reasonable
opportunity to cure; (iii) gross negligence or willful misconduct by Mr. Barrett
with respect to the Company or any of its affiliates (including, without
limitation, disparagement that adversely affects the reputation of the Company
or any of its affiliates); or (iv) any material breach by Mr. Barrett of the
sections of his employment agreement pertaining to his duties, non-competition
or confidentiality.
 
 “Good
reason” (in the context of a Change of Control) under Mr. Barrett’s employment
agreement means (i) the assignment to Mr. Barrett of any duties inconsistent
with Mr. Barrett’s position or any other action that results in a diminution in
such position; (ii) a reduction by us in Mr. Barrett’s base salary; (iii) a
failure by us to maintain plans providing benefits at least as beneficial as
those provided by any benefit or compensation plan in which Mr. Barrett was
participating immediately before the beginning of the 24 month period after the
occurrence of a Change of Control; (iv) a requirement by us to base Mr. Barrett
at any office or location in excess of 25 miles from his office location
immediately before the beginning of the 24 month period after the occurrence of
a Change of Control; (v) any purported termination by us for cause otherwise
than as provided in his employment agreement; or (vi) any failure by us to
obtain the assumption of the obligations contained in his employment agreement
by any successor.
 
 The
employment agreements provide that if Mr. Barrett is terminated without cause or
if he resigns for good reason (outside the context of a change of control), he
would be entitled to receive (i) payment of his then current base salary for six
months thereafter, (ii) payment of other accrued compensation, (iii)
continuation of certain insurance and other fringe benefits for six months, and
(iv) the immediate vesting of all outstanding stock options.
 
 Each of
Mr. Barrett and Mr. Colpoys agreed to protect the confidentiality of the
Company’s proprietary and confidential information. Each executive also agreed
not to compete with us or solicit the Company’s employees or customers for a
period of two years if he is terminated without cause or resigns for good
reason, or for a period of one year if he is terminated for any other
reason.
 
 Director
Compensation
 
 The
general policy of the Board of Directors is that compensation for independent
directors should be equity-based compensation. The Company does not pay employee
directors for Board service in addition to their regular employee
compensation.
  Annual
Option Grants to Non-Management Directors
 
 The
Compensation Committee unanimously approved the following grants to each
independent director: (i) options for 50,000 shares when an independent director
is first elected to the Board and (ii) annual option grant equal to the whole
number of shares calculated by dividing $25,000 by the Black-Scholes “value” of
the last fair market value option grant made in the preceding fiscal year, as
set forth in the Company’s audited financial statements for that preceding
fiscal year. The Board, however, reserves the right to determine the “value” of
an option, for purposes of calculating the number of options to be granted, by
utilizing the fair market value price of the Company’s common stock on the last
trading day prior to the grant date and the other Black-Scholes assumptions set
forth in the Company’s audited financial statements for the preceding fiscal
year.
 
 28
  The
options will be granted at the Board meeting following the annual stockholders
meeting. Twenty-five percent (25%) will vest upon grant and 25% will vest on
each of the next three anniversaries, provided the holder is still a director of
the Company. The options shall become exercisable six months after the date of
grant. The options have a term of 10 years and an exercise price equal to the
fair market value of the common stock on the date of grant.
 
 In
recognition of the appointments of Philip J. Young and Kevin Esval to the Board
on June 6, 2008, the Board also approved, on June 24, 2008, a grant of 150,000
stock appreciation rights to each of Mr. Young and Mr. Esval, which rights are
exercisable, at the Company's option, for cash or the Company's common stock, at
an exercise price of $0.44. The stock appreciation rights shall expire on June
24, 2018, and shall vest in equal one-third increments on June 24, 2009, June
24, 2010 and June 24, 2011.  Mr. Young’s stock appreciation rights
were accelerated in November 2008, when he resigned from the Board of
Directors.
 
 Deferral
Programs for Non-Management Directors and Officers
 
 On May
10, 2007, the Board approved deferral programs for officers and non-management
directors. The Non-Management Directors Deferral Program was subsequently
amended on December 31, 2007. The Board intended that all options to be issued
pursuant to the programs will be granted under the Company’s 2006 Equity
Incentive Plan (the “Plan”). Some of the key terms of the options are: (i) the
exercise price is the closing price of the common stock on the last trading day
prior to the issuance date, (ii) the options have a ten year term, (iii) the
options are transferable only upon death, (iv) the options shall become
exercisable six months after the issuance date and (v) the options have no
vesting requirement.  None of the directors deferred any portion of
their fees for the 2009 calendar year.
  Non-Management
Directors Deferral Program
 
 Prior to
December 31, 2007, the Non-Management Directors Deferral Program allowed
directors who are not employees of the Company or any of its subsidiaries to
elect to receive compensation for their service as members of the Board in part
or in whole in the form of options on Company common stock in lieu of cash. Each
non-management director was permitted to elect, in respect of all or any portion
of the payment of their retainer or fee, to receive, in lieu of a payment in
cash, options for shares of common stock. The amount of a retainer or fee earned
during a calendar quarter that was subject to the plan was multiplied by 1.5
(the “Deferral Amount”), and the non-management director was issued on the day
following the last day of the calendar quarter for which the retainer or fee
otherwise would have been paid, options for a number of shares of common stock
determined by dividing the Deferral Amount by the Black-Scholes “value” of the
last fair market value option grant made in the preceding fiscal year, as set
forth in the Company’s audited financial statements for that preceding fiscal
year. The Board, however, reserved the right to determine the “value” of an
option, for purposes of calculating the number of options to be granted, by
utilizing the fair market value price of the Company’s common stock on the last
trading day prior to the grant date and the other Black-Scholes assumptions set
forth in the Company’s audited financial statements for the preceding fiscal
year. For 2007, the election was made within 30 days from the effective date of
the program and applied only to payments in respect of service performed after
the date of the election and for the remainder of 2007.
 
 On
December 31, 2007, the Board amended the Deferral Program and adopted the
Amended and Restated Non-Management Directors Deferral Program (the “Amended
Program”). Under the terms of the Amended Program, the total amount of retainer
or fee payable to the non-management director during a calendar year that is
subject to the program shall be multiplied by 1.5 (the “Amended Program Deferral
Amount”), and the non-management director shall be issued on the first business
day of the calendar year for which the retainer or fee otherwise would have been
paid (the “Issue Date”), options for a number of shares of common stock
determined by dividing the Amended Program Deferral Amount by the Black-Scholes
“value” of an option as of the Issue Date. The options are subject to monthly
vesting and are exercisable six months after the Issue Date. The election must
be made prior to the year in which the services are to be performed.   The
Amended Program was amended to provide that instead of receiving options on a
quarterly basis, the non-management director will receive one option for the
Deferral Amount at the beginning of the calendar year, which option is subject
to vesting. Additionally, the exercise price of the option shall be determined
on the first business day of the calendar year instead of the last trading day
prior to the beginning of each calendar quarter.
 
 None of
the directors deferred any portion of their fees for the 2009 calendar
year.
 
 The table
below sets forth the compensation paid to each non-employee member of the
Company’s Board during the fiscal year ended December 31, 2008 for services
rendered as a director.
 
 Name
                              
                              Fees
      Earned
                                or
      Paid in Cash
                                ($)
                              
                              Option
                                Awards
      (1)
                                ($)
                              
                              All
      Other
                                Compensation
                                ($)
                              
                              Total
                                ($)Mark
      Auerbach (2)
                              
                              
                              —
                              
                              
                              
                              947,822
                              
                              
                              
                              140,800
                              
                              1,088,622John
      Abernathy (3)
                              
                              
                              —
                              
                              
                              
                              160,363
                              
                              
                              
                              70,400
                              
                              230,763David
      Dantzker (4)
                              
                              
                              —
                              
                              
                              
                              142,843
                              
                              
                              
                              70,400
                              
                              213,243Kevin
      Esval (5)
                              
                              
                              —
                              
                              
                              
                              10,592
                              
                              
                              
                              —
                              
                              10,592
 
 (1) The
value represents the dollar amounts recognized for financial statement reporting
purposes in 2008 in accordance with FAS 123R for awards made during
2008.
 (2)
During the year ended December 31, 2008, 140,891 options vested.  Mr.
Auerbach was also granted 300,000 shares of the Company’s common stock in
2008.
 (3)
During the year ended December 31, 2008, 42,232 options vested.  Mr.
Abernathy was also granted 150,000 shares of the Company’s common stock in
2008.
 (4)
During the year ended December 31, 2008, 42,400 options vested.  Mr.
Dantzker was also granted 150,000 shares of the Company’s common stock in
2008.
 (5)
During the year ended December 31, 2008, Mr. Esval was granted a stock
appreciation right exercisable at $0.44 per share for up to 150,000
shares.  The stock appreciation right vests as to 50,000 shares on
June 24, 2009, 50,000 shares on June 24, 2010 and 50,000 shares on June 24,
2011.




29




Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters




The
following table sets forth certain information, as of December 31, 2008,
concerning securities authorized for issuance under the Company’s 2006
Non-Employee Directors Stock Option Plan, 2006 Incentive Stock Plan and
individual compensation arrangements approved by the Board of Directors of the
Company:
 
 Number
      of securities to be
                    issued
      upon exercise of
                    outstanding
      options, warrants
                    and
      rights
                  
                  Weighted-average
      exercise
                    price
      of outstanding options,
                    warrants
      and rights
                  
                  Number
      of securities remaining
                    available
      for future issuance
                    under
      equity compensation
                    plans
      (excluding securities
                    reflected
      in column (a))(a)
                  
                  (b)
                  
                  (c)Equity
      compensation plans approved by security holders (1)
                  1,312,043
                  
                  $
                  2.85
                  
                  1,437,957Equity
      compensation plans not approved by security holders (2)
                  4,000,000
                  
                  $
                  2.00
                  
                  1,825,000Total
                  5,312,043
                  
                  $
                  
                  
                  3,262,957
  (1)
Includes 400,000 shares authorized for issuance under the Company’s 2006
Non-Employee Directors Stock Option Plan and 2,350,000 shares authorized
issuance under the Company’s 2006 Incentive Stock Plan.
 
 (2)
Includes 1,825,000 shares authorized for issuance under the Company’s 2006
Incentive Stock Plan by the Board and 4,000,000 granted by the Board as
compensation to certain employees of the Company.
 
 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
 
 The
following table sets forth the information that we know regarding ownership of
the Company’s common stock on April 27, 2009 by (i) each person who is
known to us to own 5% or more of the Company’s common stock, (ii) each of
the Company’s directors and (iii) each of the Company’s named executive
officers.  All of the outstanding shares of the Company’s Series A
Preferred Stock, $0.001 par value per share are wholly owned by Mr.
Ambrose.  All of the outstanding shares of the Company’s Series B
Preferred Stock, $0.001 par value per share are wholly owned by TG United for
which Mr. Ambrose is the sole stockholder.
 
 Stockholder
                                
                                Number
      of Shares of
                                  Common
      Stock
                                  Beneficially
      Owned at
                                  April
      27, 2009 (1)
                                
                                
                                Percentage
                                  of
      Shares
                                  Beneficially
                                  Owned
      (1)5%
      or Greater StockholdersDavid
      Ambrose
                                
                                
                                30,363,763
                                (2)
                                
                                
                                50.2
                                %Wheatley
      New York Partners, LP (3)
                                
                                
                                3,167,857
                                (4)
                                
                                
                                9.8
                                %Wheatley
      MedTech Partners, L.P. (3)
                                
                                
                                2,169,592
                                (5)
                                
                                
                                6.8
                                %Alan
      Kestenbaum
                                
                                
                                2,007,008
                                (6)
                                
                                
                                6.4
                                %Directors
      and Executive Officers:John
      D. Abernathy, Director
                                
                                
                                724,217
                                (8)
                                
                                
                                2.3
                                %Mark
      Auerbach, Director
                                
                                
                                1,897,416
                                (9)
                                
                                
                                5.9
                                %David
      J. Barrett, Chief Financial Officer
                                
                                
                                587,778
                                (10)
                                
                                
                                1.9
                                %David
      Dantzker, Director
                                
                                
                                230,647
                                (11)
                                
                                
                                *Gary
      Dutton, Director
                                
                                
                                43,333
                                (12)
                                
                                
                                *Kevin
      Esval, Director
                                
                                
                                50,000
                                (13)
                                
                                
                                *Reuben
      Seltzer, Director
                                
                                
                                1,706,047
                                (14)
                                
                                
                                5.4
                                %All
      directors and executive officers as a group (8
individuals)
                                
                                
                                35,603,201
                                (16)
                                
                                
                                57.8
                                %
  * Less
than 1%.
  30
  (1)
Unless otherwise indicated, includes shares owned by a spouse, minor children
and relatives sharing the same home, as well as entities owned or controlled by
the named person. Unless otherwise noted, shares are owned of record and
beneficially by the named person. Based upon 31,520,186 shares of Common Stock
outstanding on April 27, 2009.
 
 (2)
Includes 1,389,133 shares of Common Stock and 15,000,000 shares of Common Stock
to be issued upon conversion of 1,500,000 shares of the Company’s Series A
Preferred Stock, $0.001 par value per share owned by Mr. Ambrose and 13,974,630
shares of Common Stock to be issued upon conversion of 1,397,463 shares of the
Company’s Series B Preferred Stock, $0.001 par value per share owned by TG
United.
 
 (3) David
Dantzker is a director of Wheatley MedTech Partners, L.P. and Wheatley New York
Partners, LP and disclaims beneficial ownership as to any of the shares owned by
each of those entities.
 
 (4)
Includes 692,022 shares of Common Stock issuable upon the exercise of currently
exercisable warrants.
 
 (5)
Includes 486,646 shares of Common Stock issuable upon the exercise of currently
exercisable warrants.
 
 (6) Includes
15,000 shares of Common Stock issuable upon the exercise of currently
exercisable warrants.
 
 (7) Includes
206,641 shares of Common Stock issuable upon the exercise of currently
exercisable warrants.
 
 (8)
Includes options to purchase 140,446 shares of Common Stock exercisable within
sixty (60) days of April 27, 2009.
 
 (9)
Includes options to purchase 392,170 shares of Common Stock exercisable within
sixty (60) days of April 27, 2009.
 
 (10)
Includes options to purchase 177,778 shares of Common Stock exercisable within
sixty (60) days of April 27, 2009.
 
 (11)
Includes options to purchase 80,647 shares of Common Stock exercisable within
sixty (60) days of April 27, 2009.
 
 (12)
Includes 3,333 shares of common stock subject to a stock appreciation right
exercisable within sixty (60) days of April 27, 2009.
 
 (13)
Includes 50,000 shares of common stock subject to a stock appreciation right
exercisable within sixty (60) days of April 27, 2009.
 
 (14)
Includes 220000 shares of Common Stock issuable upon the exercise of currently
exercisable within sixty (60) days of April 27, 2009.
 
 (15)
Includes shares of Common Stock issuable upon the exercise of currently
exercisable warrants and options to purchase Common Stock exercisable within
sixty (60) days of April 27, 2009 and common stock subject to stock appreciation
rights exercisable within sixty (60) days of April 27, 2009.




Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence


The
Board’s Audit Committee is responsible for review, approval, or ratification of
“related-person transactions” between the Company or its subsidiaries and
related persons. Under SEC rules, a related person is a director, officer,
nominee for director, or 5% stockholder of the Company since the beginning of
the last fiscal year and their immediate family members. The Audit Committee
determines whether the related person has a material interest in a transaction
and may approve, ratify, rescind, or take other action with respect to the
transaction in its discretion.
 
 In the
year ended December 31, 2008, the following related party transactions
occurred:
 
 31
  In
November 2008, pursuant to the terms of the Modification Agreement, the Company
issued 1,500,000 shares of the Company’s Series A Preferred Stock and 1,397,463
shares of the Company’s Series B Preferred Stock to David Ambrose (i) to
satisfy its obligations under the promissory notes payable to him aggregating
approximately $6.1 million, including interest, and accounts payable aggregating
approximately $1 million and (ii) to receive products from an affiliate of
Mr. Ambrose valued at up to $1,257,717.  Each share of the Series A
and B Preferred Stock is convertible into 10 shares of the Company’s common
stock.  Additionally, the features of the Series A Preferred Stock
include, among other things, a non-participating liquidation preference of
$4,500,000.
 
 Since
June 6, 2008, the Company has been a party to a Manufacturing and Distribution
Agreement with TG United (the “Supply Agreement”), a corporation wholly-owned by
Mr. Ambrose.  Since the execution of that agreement, the Company has
been completely dependent upon TG United as the sole supplier of the Company’s
products.  The initial term of the Supply Agreement is through June 6,
2013, and permits additional one-year renewals based upon the parties’ written
agreement.  Under the terms of the Supply Agreement, TG United will
manufacture specified products for the Company, including branded products
acquired on June 6, 2008 that will be manufactured exclusively for the
Company.  On November 18, 2008, the Company was provided an inventory
credit of $1.26 million.   The Company is required to make minimum
monthly payments of $100,000 to TG United with respect to inventory purchases,
subject to a quarterly reconciliation against amounts due.  The $1.26
million inventory credit may be applied by MCR and AMBI against invoices issued
by TG United at a rate of up to $100,000 per month, after any required minimum
monthly cash payments are made.  Approximately $1.025 million and $0.9
million of the inventory credit remained available to the Company as of December
31, 2008 and March 31, 2009, respectively.
 
 On June
6, 2008, the Company issued to certain individual investors, private equity
firms and their affiliates in a private offering 12,100,000 shares of its common
stock, par value $0.001 per share, sold at a price of $0.25 per share for a
total of $3,025,000 (the “Financing”). Messrs. Abernathy, Auerbach and Seltzer,
directors of NHI, each participated in the Financing: Mr. Abernathy purchased
400,000 shares of NHI common stock; Mr. Auerbach’s spouse purchase 400,000
shares of NHI common stock; and Mr. Seltzer’s spouse and children purchased an
aggregate of 400,000 shares of NHI common stock.
  Director Independence. Each
of the following non-employee directors qualifies as “independent” in accordance
with the published listing requirements of NASDAQ: Mr. Abernathy, Mr. Auerbach
and Dr. Dantzker.  Messrs. Ambrose and Dutton do not qualify as
independent because they are both employees of the Company.  Mr.
Seltzer does not qualify as independent because he was an employee within the
past 3 years. The NASDAQ rules have both objective tests and a subjective test
for determining who is an “independent director.” The objective tests state, for
example, that a director is not considered independent if he is an employee of
the Company or is a partner in or executive officer of an entity to which the
Company made, or from which the Company received, payments in the current or any
of the past three fiscal years that exceed 5% of the recipient’s consolidated
gross revenue for that year. The subjective test states that an independent
director must be a person who lacks a relationship that, in the opinion of the
Board, would interfere with the exercise of independent judgment in carrying out
the responsibilities of a director.
 
 None of
the non-employee directors were disqualified from “independent” status under the
objective tests.  In assessing independence under the subjective test,
the Board took into account the standards in the objective tests, and reviewed
and discussed additional information provided by the directors and the Company
with regard to each director’s business and personal activities as they may
relate to the Company and its management. Based on all of the foregoing, as
required by NASDAQ rules, the Board made a subjective determination as to each
non-employee director, except Mr. Esval, that no relationships exists which, in
the opinion of the Board, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.  Because
Mr. Esval serves as a director of a company that has supplied products
distributed by the Company, the Company has not concluded that Mr. Esval is
independent.Accordingly, Mr. Esval
cannot be considered one of the Company’s “independent”
directors.  The Board has not established categorical standards or
guidelines to make these subjective determinations, but considers all relevant
facts and circumstances.
 
 In
addition to the board-level standards for director independence, the directors
who serve on the Audit Committee each satisfy standards established by the SEC
providing that to qualify as “independent” for the purposes of membership on
that committee, members of audit committees may not accept directly or
indirectly any consulting, advisory, or other compensatory fee from the Company
other than their director compensation.




Item
      14.
              Principal
      Accountant Fees and
Services


The table
below sets forth the aggregate audit fees, audit-related fees, tax fees and all
other fees billed for services rendered by the Company’s principal accountant in
our fiscal years ended December 31, 2008 and December 31, 2007.
 
 2008
                  
                  
                  2007Audit
      Fees
                  
                  $
                  46,000
                  
                  
                  $
                  28,000Audit
      Related Fees
                  
                  $
                  28,500
                  
                  
                  $
                  --Tax
      Fees
                  
                  $
                  10,921
                  
                  
                  $
                  6,000All
      Other Fees
                  
                  $
                  22,048
                  
                  
                  $
                  9,000
  32
 Audit Fees. Consists of fees
billed for professional services rendered for the audit of our annual
consolidated financial statements and review of the quarterly consolidated
financial statements and services that are normally provided by Sherb & Co.,
LLP and prior to the appointment of Sherb & Co., LLP, Moore Stephens, P.C.,
in connection with statutory and regulatory filings or engagements.
  Audit-Related Fees. Consists
of fees billed for assurance and related services that are reasonably related to
the performance of the audit or review of our consolidated financial statements
and are not reported under “Audit Fees.”
 
 Tax Fees. Consists of fees
billed for professional services for tax compliance, tax advice and tax
planning.
  All Other Fees. Consists of
fees for products and services other than the services reported above, including
fees associated with the review of the Company’s periodic reports and reports on
Form 8-K.
 
 The Audit
Committee requires that management obtain the prior approval of the Audit
Committee for all audit and permissible non-audit services to be provided. The
Audit Committee considers and approves at its first meeting of each year,
anticipated audit and permissible non-audit services to be provided during the
year, as well as the projected fees for those services. The Audit Committee
considers and pre-approves additional audit and permissible non-audit services
and fees as needed at each meeting. The Audit Committee has delegated authority
to its Chair to pre-approve audit and permissible non-audit services between
meetings, provided that the Chair reports any such pre-approval to the Audit
Committee at its next meeting. The Audit Committee will not approve non-audit
engagements that would violate SEC rules or impair the independence of Sherb
& Co., LLP. All audit and permissible non-audit services rendered to the
Company in 2008 and 2007 were pre-approved in accordance with these
procedures.
 
 All of
the services relating to the fees described in the table above were approved by
the Audit Committee.
  33


PART
IV





Item 15.
              Exhibits





Exhibit
                              
                              
                              
                              Incorporated
      by Reference
                              
                              FiledNumber
                              
                              Exhibit
      Description
                              
                              Form
                              
                              Exhibit
                              
                              Filing Date
                              
                              Herewith2.1
                              
                              Agreement
      and Plan of Merger, dated January 17, 2006, between Northern Way
      Resources, Inc., a Nevada corporation and Northern Way Resources, Inc., a
      Delaware corporation
                              
                              8-K
                              
                              2.1
                              
                              1/23/062.2
                              
                              Certificate
      of Ownership and Merger merging Northern Way Resources, Inc., a Nevada
      corporation into Northern Way Resources, Inc., a Delaware
      corporation
                              
                              8-K
                              
                              2.2
                              
                              1/23/062.3
                              
                              Articles
      of Merger merging Northern Way Resources, Inc., a Nevada corporation into
      Northern Way Resources, Inc., a Delaware corporation
                              
                              8-K
                              
                              2.3
                              
                              1/23/062.4
                              
                              Agreement
      of Merger and Plan of Reorganization, dated as of January 24, 2006, by and
      among Neurotech Pharmaceuticals, Inc., Marco Hi-Tech JV Ltd., and Marco
      Acquisition I, Inc.
                              
                              8-K
                              
                              2.1
                              
                              1/30/062.5
                              
                              Agreement
      and Plan of Merger, dated as of November 16, 2006, by and among
      Neuro-Hitech, Inc., QA Acquisition Corp., QA Merger LLC, Q-RNA, Inc., and
      Dr. David Dantzker, as the Representative of the Q-RNA, Inc. security
      holders.
                              
                              8-K
                              
                              2.1
                              
                              12/5/062.6
                              
                              Agreement
      and Plan of Merger, dated as of June 5, 2008, by and among Neuro-Hitech,
      Inc., GKI Acquisition Sub, Inc., GKI Acquisition Corporation and Timothy
      J. Ryan, Matthew Colpoys, Jr. and Philip J. Young.
                              
                              8-K
                              
                              2.1
                              
                              6/11/082.7
                              
                              Amended
      and Restated Stock Purchase Agreement, dated as of June 6, 2008, by and
      among, Neuro-Hitech, Inc., GKI Acquisition Corporation, and David
      Ambrose.
                              
                              8-K
                              
                              2.2
                              
                              6/11/082.8
                              
                              Modification
      Agreement and Release by and among the Company, TG United Pharmaceuticals,
      Inc. and David Ambrose
                              
                              10-Q
                              
                              2.1
                              
                              11/19/083.1
                              
                              Certificate
      of Incorporation of Neurotech Pharmaceuticals, Inc.
                              
                              8-K
                              
                              3.1
                              
                              1/23/063.2
                              
                              Certificate
      of Merger of Marco Acquisition I, Inc. with and into Marco Hi-Tech JV
      Ltd.
                              
                              8-K
                              
                              3.5
                              
                              1/30/06


34





3.3
                
                Certificate
      of Merger of Marco Acquisition I, Inc. with and into Marco Hi-Tech JV
      Ltd.
                
                8-K
                
                3.6
                
                1/30/063.4
                
                Certificate
      of Amendment of Certificate of Incorporation of Neurotech Pharmaceuticals,
      Inc., changing name to Neuro-Hitech Pharmaceuticals, Inc.
                
                8-K
                
                3.7
                
                1/30/063.5
                
                Certificate
      of Ownership and Merger effective August 11, 2006
                
                8-K
                
                3.1
                
                8/11/063.6
                
                By-laws
      of the Company
                
                8-K
                
                3.2
                
                1/23/063.7
                
                Certificate
      of Designation of Series A Preferred Stock
                
                10-Q
                
                3.1
                
                11/19/083.8
                
                Certificate
      of Designation of Series B Preferred Stock
                
                10-Q
                
                3.2
                
                11/19/084.1
                
                Form
      of Common Stock Purchase Warrant Certificate
                
                8-K
                
                4.1
                
                1/30/064.2
                
                Form
      of Marco Hi-Tech JV Ltd. Registration Rights Agreement
                
                8-K
                
                10.4
                
                1/30/064.3
                
                Registration
      Rights Agreement, dated as of November 29, 2006, by and among
      Neuro-Hitech, Inc. and David Dantzker as the Representative of the Q-RNA,
      Inc. security holders
                
                8-K
                
                4.1
                
                12/5/064.4
                
                Registration
      Rights Agreement, dated as of November 29, 2006, by and among
      Neuro-Hitech, Inc. and individuals and entities that are parties to the
      Securities Purchase Agreement dated as of November 16,
2006
                
                8-K
                
                4.2
                
                12/5/064.5
                
                Form
      of $13 Warrant issued pursuant to the Merger.
                
                8-K
                
                4.3
                
                12/5/064.6
                
                Form
      of $18 Warrant issued pursuant to the Merger.
                
                8-K
                
                4.4
                
                12/5/064.7
                
                Form
      of Warrant issued in connection with private offering
                
                8-K
                
                4.5
                
                12/5/064.8
                
                Stock
      and Warrant Purchase Agreement, dated as of November 29, 2007, by and
      among Neuro-Hitech, Inc. and the investors identified
    therein
                
                8-K
                
                4.1
                
                12/19/074.9
                
                Registration
      Rights Agreement, dated as of November 29, 2007, by and among
      Neuro-Hitech, Inc. and the investors identified therein
                
                8-K
                
                4.2
                
                12/19/07


35





4.10
                
                Form
      of Warrant issued in connection with private offering
                
                8-K
                
                4.3
                
                12/19/074.11
                
                Registration
      Rights Agreement, dated as of November 18, 2008, by and between
      Neuro-Hitech, Inc. and David Ambrose
                
                10-Q
                
                4.1
                
                11/19/0810.1
                
                Neurotech
      Pharmaceuticals, Inc. 2006 Incentive Stock Plan
                
                8-K
                
                10.1
                
                1/30/0610.2
                
                Neurotech
      Pharmaceuticals, Inc. 2006 Non-Employee Directors Stock Option
      Plan
                
                8-K
                
                10.2
                
                1/30/0610.3
                
                Form
      of Private Placement Subscription Agreement
                
                8-K
                
                10.3
                
                1/30/0610.4
                
                Securities
      Purchase Agreement, dated January 5, 2006, by and between Marco Hi-Tech JV
      Ltd. and the investors signatory thereto
                
                8-K
                
                10.5
                
                1/30/0610.5
                
                Director
      and Officer Indemnification Agreement dated January 24, 2006, between
      Neurotech Pharmaceuticals, Inc. and Reuben Seltzer
                
                8-K
                
                10.6
                
                1/30/0610.6
                
                Director
      and Officer Indemnification Agreement dated January 24, 2006, between
      Neurotech Pharmaceuticals, Inc. and John Abernathy
                
                8-K
                
                10.8
                
                1/30/0610.7
                
                Director
      and Officer Indemnification Agreement dated January 24, 2006, between
      Neurotech Pharmaceuticals, Inc. and Mark Auerbach
                
                8-K
                
                10.9
                
                1/30/0610.8
                
                Technology
      License Contract, dated as of June 1, 1997, by and between Mayo Foundation
      for Medical Education and Research and Marco Hi-Tech JV
    Ltd.
                
                8-K
                
                10.12
                
                1/30/0610.9
                
                Clinical
      Research Agreement, dated March 1, 2002, by and between Georgetown
      University and Marco Hi-Tech JV Ltd.
                
                8-K
                
                10.13
                
                1/30/0610.10
                
                Offer
      Letter, dated January 6, 2006, to John Abernathy from Marco Hi-Tech JV
      Ltd.
                
                8-K
                
                10.14
                
                1/30/0610.11
                
                Offer
      Letter, dated January 5, 2006, to Mark Auerbach from Marco Hi-Tech JV
      Ltd.
                
                8-K
                
                10.15
                
                1/30/06


36





10.12
                
                Development
      Agreement dated February 1, 2006, between the Company and Org Syn
      Laboratory, Inc
                
                10-QSB
                
                10.1
                
                5/15/0610.13
                
                Development
      Agreement dated March 15, 2006, between the Company and Xel
      Herbaceuticals, Inc
                
                10-QSB
                
                10.2
                
                5/15/0610.14
                
                Securities
      Purchase Agreement, dated as of November 16, 2006, by and among
      Neuro-Hitech, Inc. and the investors identified therein.
                
                8-K
                
                2.2
                
                12/5/0610.15
                
                Amendment
      No. 1 to 2006 Incentive Stock Plan
                
                8-K
                
                4.6
                
                12/5/0610.16
                
                Amendment
      No. 2 to 2006 Incentive Stock Plan
                
                8-K
                
                4.7
                
                12/5/0610.17
                
                Consultant
      Agreement, dated as of November 29, 2006, by and between Neuro-Hitech,
      Inc., and D.F. Weaver Medical, Inc., Donald F. Weaver, Principal
      Consultant.
                
                8-K
                
                10.1
                
                12/5/0610.18
                
                2002
      Q-RNA, Inc. Stock Incentive Plan
                
                S-8
                
                10.1
                
                12/13/0610.19
                
                2006
      Stock Incentive Plan
                
                DEF
      14A
                
                
                
                6/05/0710.20
                
                Non-Management
      Directors Deferral Program
                
                10-QSB
                
                10.2
                
                8/08/0710.21
                
                Officers
      Deferral Program
                
                10-QSB
                
                10.3
                
                8/08/0710.22
                
                Employment
      Agreement, dated August 22, 2007, between Neuro-Hitech, Inc. and Gary
      Shearman
                
                8-K
                
                10.1
                
                8/29/0710.23
                
                Employment
      Agreement, dated December 7, 2007, between Neuro-Hitech, Inc. and David
      Barrett
                
                8-K
                
                10.1
                
                12/11/0710.24
                
                Securities
      Purchase Agreement, dated as of June 6, 2008, by and among Neuro-Hitech,
      Inc. and each of the investors identified therein.
                
                8-K
                
                10.1
                
                6/11/0810.25
                
                Consulting
      Agreement, dated as of June 6, 2008, by and among Neuro-Hitech, Inc. and
      David Ambrose.
                
                8-K
                
                10.2
                
                6/11/0810.26
                
                Resignation
      Agreement and Mutual Release, dated as of June 5, 2008, by and among
      Neuro-Hitech, Inc. and Gary T. Shearman.
                
                8-K
                
                10.3
                
                6/11/08


37





10.27
                        
                        Employment
      Agreement between NHI and Matthew E. Colpoys, dated June 6,
      2008.
                        
                        8-K
                        
                        10.4
                        
                        6/11/0810.28
                        
                        Manufacturing
      and Distribution Agreement, effective June 6, 2008, between TG United
      Pharmaceuticals, Inc. and Neuro-Hitech, Inc.*
                        
                        10-Q
                        
                        10.5
                        
                        8/12/0814.1
                        
                        Code
      of Ethics
                        
                        10-KSB
                        
                        14.1
                        
                        3/31/0616.1
                        
                        Letter
      of MSPC, Certified Public Accountants and Advisors, a Professional
      Corporation, dated July 11, 2008, regarding change in independent
      registered public accounting firm.
                        
                        8-K
                        
                        16.1
                        
                        7/11/0821.1
                        
                        Subsidiaries
                        
                        10-K
                        
                        21.1
                        
                        3/31/0931.1
                        
                        Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
                        
                        
                        
                        
                        
                        
                        
                        X31.2
                        
                        Certification
      of the Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
                        
                        
                        
                        
                        
                        
                        
                        X32.1
                        
                        Certification
      of the Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
                        
                        
                        
                        
                        
                        
                        
                        X




* Confidential treatment requested for
certain information.


38


NEURO-HITECH,
INC. AND SUBSIDIARIES





INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS





PageReport
      of Independent Registered Public Accounting Firm
                
                F-1Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                
                F-3Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and
      2007
                
                F-4Consolidated
      Statements of Changes in Stockholders’ Equity for the Years Ended December
      31, 2008 and 2007
                
                F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
                
                F-6Notes
      to the Consolidated Financial Statements
                
                F-7




39




1900
      NW Corporate Blvd., East Suite 210
                      Boca
      Raton, Florida 33431
                      Tel.
      561-886-4200
                      Fax.
      561-886-3330
                      e-mail:info@sherbcpa.com
                      Offices
      in New York and
Florida
 
 Certified
Public Accountants
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Audit Committee
 Neuro-Hitech,
Inc.
 Brooksville,
Florida
  We have
audited the accompanying consolidated balance sheet of Neuro-Hitech, Inc. as of
December 31, 2008 and the related consolidated statements of operations, changes
in stockholders’ equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purposes
of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used, and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Neuro-Hitech, Inc. as of
December 31, 2008, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
  The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company has experienced losses
from operations in 2008 and 2007. These matters raise substantial doubt about
the Company’s ability to continue as a going concern. Management’s plans in
regards to these matters are discussed in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
  /s/ Sherb & Co., LLPBoca Raton, Florida
                
                Certified
      Public AccountantsMarch
      24, 2009


F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Board of Directors and
Stockholders
 Neuro-Hitech,Inc.
 New York, New York
 
 We have audited theaccompanying consolidated balance sheet
of Neuro-Hitech, Inc. and Subsidiaries as of December 31, 2007 and the relatedconsolidated
statements ofoperations,changes instockholders’equity, and cash flows for the year
ended December 31,2007, ofNeuro-Hitech, Inc.and subsidiaries.  These
financial statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial
statements based on our audit.
 
 We conducted our audit in accordance
with standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit
to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audit provides a
reasonable basis for our opinion.
 
 In our opinion, the consolidated
financial statements
referred to above present fairly, in all material respects,the consolidated financial position of
Neuro-Hitech, Inc. and subsidiaries as of December 31, 2007, and the
consolidatedresults oftheiroperations and their cash flows for the
year ended December 31,2007, in conformity with U.S. generally
accepted accounting principles.
  /s/ MSPCCertified
      Public Accountants and Advisors,A
      Professional
Corporation
  New York,New York
 March 28,
2008
 F-2




Neuro-Hitech,
Inc. and Subsidiaries


Consolidated
Balance Sheets





December 31, 2008
                  
                  
                  December 31, 2007ASSETS:Current
      Assets:Cash
      and Cash Equivalents
                  
                  $
                  397,147
                  
                  
                  $
                  6,137,592Accounts
      Receivable
                  
                  
                  1,310,852
                  
                  
                  
                  63,300Inventory
                  
                  
                  326,946
                  
                  
                  
                  33,821Prepaid
      Inventory
                  
                  
                  1,025,059Prepaid
      Expenses
                  
                  
                  38,054
                  
                  
                  
                  11,861Total
      Current Assets
                  
                  
                  3,098,058
                  
                  
                  
                  6,246,574Property
      and Equipment, net
                  
                  
                  9,472
                  
                  
                  
                  4,248Other
      Assets:Security
      Deposit
                  
                  
                  -
                  
                  
                  
                  13,226Intangible
      Asset, net
                  
                  
                  6,021,751
                  
                  
                  
                  -Total
      assets
                  
                  $
                  9,129,281
                  
                  
                  $
                  6,264,048LIABILITIES
      AND STOCKHOLDERS' EQUITY:Current
      Liabilities:Accounts
      payable and accrued expenses
                  
                  $
                  830,588
                  
                  
                  $
                  1,000,399Accrued
      Returns and Chargebacks
                  
                  
                  408,307Total
      current liabilities
                  
                  
                  1,238,895
                  
                  
                  
                  1,000,399Stockholders'
      Equity:Preferred
      stock, $.001 par value, 5,000,000 shares authorized:Series
      A Preferred Stock,1,500,000 issued and outstanding at
      December 31, 2008
                  
                  
                  1,500
                  
                  
                  
                  -Series
      B Preferred Stock,1,397,463 issued and outstanding at
      December 31, 2008
                  
                  
                  1,397
                  
                  
                  
                  -Common
      stock, $.001 par value, 44,999,990 shares authorized, 31,520,186 and
      14,004,853 issued and outstanding at December 31, 2008 and December 31,
      2007, respectively
                  
                  
                  31,520
                  
                  
                  
                  14,005Subscriptions
      receivable
                  
                  
                  (15,000
                  )
                  
                  
                  -Deferred
      Compensation
                  
                  
                  (15,936
                  )
                  
                  
                  (1,190,654
                  )Additional
      paid-in capital
                  
                  
                  51,443,428
                  
                  
                  
                  39,270,951Accumulated
      deficit
                  
                  
                  (43,556,523
                  )
                  
                  
                  (32,830,653
                  )Total
      stockholders' equity
                  
                  
                  7,890,386
                  
                  
                  
                  5,263,649Total
      liabilities and stockholders' equity
                  
                  $
                  9,129,281
                  
                  
                  $
                  6,264,048





The
accompanying notes are an integral part of these consolidated financial
statements





F-3





Neuro-Hitech,
Inc. and Subsidiaries


Consolidated
Statements of Operations





Years Ended December 31,2008
                  
                  
                  2007Sales
                  
                  $
                  4,129,612
                  
                  
                  $
                  458,870Cost
      of Goods Sold
                  
                  
                  1,827,160
                  
                  
                  
                  215,854Gross
      Profit
                  
                  
                  2,302,452
                  
                  
                  
                  243,016Operating
      Expenses:Selling,
      General and Administrative Expenses
                  
                  
                  5,788,983
                  
                  
                  
                  2,561,402Research
      and Development Costs
                  
                  
                  1,549,879
                  
                  
                  
                  3,523,954Share-Based
      Compensation
                  
                  
                  5,331,308
                  
                  
                  
                  2,427,904Amortization
      of Intangibles
                  
                  
                  589,874
                  
                  
                  
                  242,447Registration
      Payment Arrangement
                  
                  
                  -
                  
                  
                  
                  490,550Total
      Operating Expenses
                  
                  
                  13,260,044
                  
                  
                  
                  9,246,257(Loss)
      from Operations
                  
                  
                  (10,957,592
                  )
                  
                  
                  (9,003,241
                  )Other
      Income:Forgiveness
      of Debt
                  
                  
                  375,338
                  
                  
                  
                  -Interest
      and Dividend Income
                  
                  
                  21,150
                  
                  
                  
                  206,804Interest
      Expense
                  
                  
                  (164,766
                  )
                  
                  
                  -Total
      Other Income
                  
                  
                  231,722
                  
                  
                  
                  206,804(Loss)
      Before Provision for IncomeTaxes
                  
                  
                  (10,725,870
                  )
                  
                  
                  (8,796,437
                  )Provision
      for Income Taxes
                  
                  
                  -
                  
                  
                  
                  -Net
      (Loss)
                  
                  $
                  (10,725,870
                  )
                  
                  $
                  (8,796,437
                  )Basic
      and Diluted (Loss) per Weighted Average Common Shares
      Outstanding
                  
                  $
                  (0.45
                  )
                  
                  $
                  (0.71
                  )Weighted
      Average - Common Shares Outstanding
                  
                  
                  23,910,380
                  
                  
                  
                  12,351,746





The
accompanying notes are an integral part of these consolidated financial
statements





F-4




Neuro-Hitech,
Inc. and Subsidiaries
 Consolidated
Statement of Changes in Stockholders' Equity
 
 Class
      A -
                                Common
                                Stock
                              
                              
                              
                              
                              
                              Preffered
      Stock
                              
                              
                              Common
      Stock
                              
                              
                              Additional
      Paid-
                                In
      Capital
                              
                              
                              Subscription
                                Receivable
                              
                              
                              Deferred
                                Compensation
                              
                              
                              AccumulatedDeficitShares
                              
                              
                              Amount
                              
                              
                              Class
      A
                              
                              
                              Class
      B
                              
                              
                              Shares
                              
                              
                              Amount
                              
                              
                              
                              
                              
                              
                              
                              
                              (Deficit)
                              
                              
                              (Deficit)
                              
                              
                              TotalsBalance
      as of December 31, 2006
                              
                              
                              100
                              
                              
                              $
                              -
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              11,855,135
                              
                              
                              $
                              11,855
                              
                              
                              $
                              28,891,967
                              
                              
                              
                              
                              
                              $
                              (1,178,147
                              )
                              
                              $
                              (24,034,216
                              )
                              
                              $
                              3,691,459Private
      Placement of Common Stock, net of issuance costs of
    $376,548
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,016,930
                              
                              
                              
                              2,017
                              
                              
                              
                              7,000,440
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              7,002,457Repurchase
      of Class A Common Stock
                              
                              
                              (100
                              )Exercise
      of Stock Options
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              12,059
                              
                              
                              
                              12
                              
                              
                              
                              45,812
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              45,824Share-Based
      Compensation Expense
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,427,904
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,427,904Recognition
      of Common Stock or Warrants in connection with services to be
      rendered
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              20,000
                              
                              
                              
                              20
                              
                              
                              
                              375,934
                              
                              
                              
                              
                              
                              
                              (254,954
                              )
                              
                              
                              
                              
                              
                              
                              121,000Remeasurement
      of Common Stock or Warrants in connection with services
      rendered
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              38,445
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              38,445Amortization
      of Deferred Compensation
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              242,447
                              
                              
                              
                              
                              
                              
                              
                              242,447Penalty
      shares issued in connection with Registration Rights
    Agreement
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              100,729
                              
                              
                              
                              101
                              
                              
                              
                              490,449
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              490,550Net
      (Loss)
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (8,796,437
                              )
                              
                              
                              (8,796,437
                              )Balance
      as of December 31, 2007
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              14,004,853
                              
                              
                              
                              14,005
                              
                              
                              
                              39,270,951
                              
                              
                              
                              
                              
                              
                              (1,190,654
                              )
                              
                              
                              (32,830,653
                              )
                              
                              
                              5,263,649Private
      Placement of Common Stock
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              13,172,000
                              
                              
                              
                              13,172
                              
                              
                              
                              3,279,828
                              
                              
                              
                              (15,000
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3,278,000Share-Based
      Compensation, net of Deferred Compensation and Stock
Grants
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              4,215,976
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              4,215,976Common
      Stock & Warrants Issued in connection with mergers
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3,333,333
                              
                              
                              
                              3,333
                              
                              
                              
                              1,360,717
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,364,050Preffered
      Shares Issued in connection with mergers
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,500
                              
                              
                              
                              1,397
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,894,566
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,897,463Stock
      Grants Issued on June 26, 2008
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,010,000
                              
                              
                              
                              1,010
                              
                              
                              
                              421,390
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              422,400Amortization
      of Deferred Compensation
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              1,174,718
                              
                              
                              
                              
                              
                              
                              
                              1,174,718Net
      (Loss)
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (10,725,870
                              )
                              
                              
                              (10,725,870
                              )Balance
      as of December 31, 2008
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              $
                              1,500
                              
                              
                              $
                              1,397
                              
                              
                              
                              31,520,186
                              
                              
                              $
                              31,520
                              
                              
                              $
                              51,443,428
                              
                              
                              $
                              (15,000
                              )
                              
                              $
                              (15,936
                              )
                              
                              $
                              (43,556,523
                              )
                              
                              $
                              7,890,386




F-5





Neuro-Hitech,
Inc. and Subsidiaries


Consolidated
Statements of Cash Flows





For
      The Years EndedDecember
      31,2008
                        
                        
                        2007Cash
      flows used in operating activities:Net
      (Loss)
                        
                        $
                        (10,725,870
                        )
                        
                        $
                        (8,796,437
                        )Adjustments
      to Reconcile Net (Loss) to Net Cash (Used In) Operating
      Activities:Fair
      Value of Options, Warrants, and Stock Appreciation Rights
                        
                        
                        4,215,976
                        
                        
                        
                        2,427,904Fair
      Value of Shares Issued for Service
                        
                        
                        421,390Amortization
      of Deferred Compensation
                        
                        
                        1,174,718
                        
                        
                        
                        242,447Amortization
      of Intangibles
                        
                        
                        589,874
                        
                        
                        
                        -Gain
      on Sale of Net Assets
                        
                        
                        2,765
                        
                        
                        
                        -Registration
      Payment Arrangement
                        
                        
                        -
                        
                        
                        
                        490,550Depreciation
      Expense
                        
                        
                        3,021
                        
                        
                        
                        2,998Other
      Share-Based Selling, General and Administrative Expenses
                        
                        
                        -
                        
                        
                        
                        225,808Change
      in operating assets and liabilities:(Increase)
      Decrease in Assets:Accounts
      Receivable
                        
                        
                        (1,247,552
                        )
                        
                        
                        (37,500
                        )Inventory
                        
                        
                        (80,253
                        )
                        
                        
                        (2,530
                        )Prepaid
      Expenses
                        
                        
                        206,465
                        
                        
                        
                        (1,166
                        )Deferred
      Charges
                        
                        
                        -
                        
                        
                        
                        93,750Security
      Deposits
                        
                        
                        13,226
                        
                        
                        
                        -Increase
      (Decrease) in Liabilities:Accounts
      Payable and Accrued Expenses
                        
                        
                        (269,813
                        )
                        
                        
                        (261,707
                        )Deferred
      revenue
                        
                        
                        1,393,805
                        
                        
                        
                        -Net
      cash (used in) Operating activities
                        
                        
                        (4,302,248
                        )
                        
                        
                        (5,615,883
                        )Cash
      flows from investing activities:Business
      Acquisition and Related CostsInvestment
      in Property and Equipment
                        
                        
                        (11,000
                        )
                        
                        
                        -Cash
      Used in Acquistion,net
                        
                        
                        (4,703,581
                        )
                        
                        
                        -Net
      cash (used in) Investing activities
                        
                        
                        (4,714,581
                        )
                        
                        
                        -Cash
      flows from financing activities:Net
      Proceeds from Private Placement Offering of Common Stock
                        
                        
                        3,279,828
                        
                        
                        
                        7,002,456Net
      Payments to Related Party
                        
                        
                        (3,444
                        )Proceeds
      from the Sale of Stock
                        
                        
                        -
                        
                        
                        
                        45,824Net
      cash provided by Financing activities
                        
                        
                        3,276,384
                        
                        
                        
                        7,048,280Net
      (decrease) increase in cash and cash equivalents
                        
                        
                        (5,740,445
                        )
                        
                        
                        1,432,397-Cash
      and cash equivalents, beginning of year
                        
                        
                        6,137,592
                        
                        
                        
                        4,705,195Cash
      and cash equivalents, end of year
                        
                        $
                        397,147
                        
                        
                        $
                        6,137,592Cash Paid For:Income
      Taxes
                        
                        $
                        -
                        
                        
                        $
                        -Interest
                        
                        $
                        -
                        
                        
                        $
                        -





Supplemental Disclosure of
Non-Cash Investing and Financing Activities:




During
the twelve months ended December 31, 2008, options held by the Company's
executive officers and board of directors vested as to 2,449,653 shares of the
Company's common stock.  The Company recognized an aggregate
compensation cost of approximatly $4,216,000 for the vesting of the
aforementioned options for the twelve months ended December 31,
2008.





During
the third quarter of 2008, 960,000 shares of common stock were issued to
directors and employees.  The Company recognized an aggregate
compensation cost of approximatly $422,000 for the aforemetioned
shares





In
connection with the Q-RNA merger, the Company entered into a consulting
agreement and issued 500,000 non-qualified stock options valued at their grant
date fair value as of the date of the merger closing.  During 2008,
the Company recognized approximately $1,178,000 of expense for the amortization
of Deferred Compensation.





The
Company entered into a service agreement and issued 100,000 warrants measured at
fair value as of February 14, 2007, the date the service agreement was ratified
by the Company's board of directors.  During 2008, the Company ratably
recognized approximately $128,000 of expenses for the amortization of Deferred
Compensation in accordance with the service term.





In
connection with the MCR merger, the Company determined the future value of
purchased property and allocated a portion to an intangible
asset.   Approximately $590,000 amortization of purchased
intanbile assets was expensed during 2008.





The
accompanying notes are an integral part of these consolidated financial
statements





F-6




NEURO-HITECH,
INC. AND SUBSIDIARIES


NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


[1]
Nature of Operations





Neuro-Hitech,
Inc. (the “Company” or “Neuro-Hitech”) is a specialty pharmaceutical company
focused on developing, marketing and distributing branded and generic
pharmaceutical products primarily in the cough and cold markets. The Company
sells its products domestically through U.S. based distributors.





On June
6, 2008, the Company acquired the capital stock of MCR American Pharmaceuticals,
Inc., a Florida corporation (“MCR”) and AMBI Pharmaceuticals, Inc., a Florida
corporation (“AMBI”) pursuant to an Amended and Restated Stock Purchase
Agreement (the “Purchase Agreement”), by and among the Company, GKI Acquisition
Corporation, the Company’s wholly-owned subsidiary (“GKI”), and David Ambrose
(“Seller”), the sole stockholder of MCR and AMBI.





Prior to
June 6, 2008, the Company had been focused primarily on technologies that
address investigational compounds that have the potential to show clinical
improvements versus current treatments for Alzheimer’s disease, Epilepsy and
other central nervous system applications. The Company’s most advanced product
candidate targeting these needs is Huperzine A which completed a Phase II
clinical trial in the U.S. earlier this year for efficacy and safety in the
treatment of mild to moderate Alzheimer’s disease. In addition to
Huperzine A, the Company has worked on two pre-clinical development
programs: one for second generation anti-amyloid compounds or disease modifying
drugs for Alzheimer’s disease and, secondly, development of a series of
compounds targeted to treat and prevent Epilepsy.





In view
of the results of the Phase II clinical trial, the cost associated with
additional trials, and the acquisition of MCR and AMBI, the Company is
principally focusing on the development, marketing and distribution of branded
and generic pharmaceutical products targeted to the cough and cold markets. The
Company continues to explore the potential development of collaborative, joint
and strategic alliances and licensing arrangements with one or more
pharmaceutical companies for the further development of Huperzine A and its
pipeline of other compounds.





Liquidity





The
accompanying consolidated financial statements have been prepared on a
going-concern basis, which contemplates the continuation of operations,
realization of assets, and liquidation of liabilities in the ordinary course of
business. For the twelve-month period ended December 31, 2008 the Company
generated a net loss of approximately $10 million. Until its acquisition of MCR
and AMBI, the Company’s revenue was a result of the importation and sale of
inventories of natural Huperzine to vitamin and supplement suppliers. The
majority of the Company’s working capital requirements to date have been funded
through the Company’s private placement of equity securities to founders and to
institutional and individual investors. Management intends to fund future
operations through the sale of its products as well as additional equity or debt
offerings.





There can
be no assurance that the Company will be successful in obtaining additional
funds at the level needed for long-term operations or on terms acceptable to the
Company. In addition, there can be no assurance, assuming the Company is
successful in distributing its products, realizing revenues and obtaining new
equity or debt offerings that the Company will achieve profitability or positive
operating cash flow. The Company is incurring significant losses, which give
rise to questions about its ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





[2]
Summary of Significant Accounting Policies





Cash
and Cash Equivalents





The
Company considers all highly liquid temporary cash investments with an original
maturity of three months or less when purchased, to be cash
equivalents.




F-7


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
  Intangible
Assets





Intangible
assets, net consists of the aquired customer relationships, vendor relationships
and product formulations.  The Company capitalizes and amortizes the
cost of aquired intangible assets over their useful lives on a straight-line
basis.  The estimated useful lives of the Company’s intangible
assets are 5 years.





Accounts
receivable





Accounts
receivable are recorded based on our revenue recognition policy. Our allowance
for doubtful accounts


provides
for specific doubtful receivables, as well as general counterparty credit risk
evaluated using observable market information and internal
assessments.





Largest
      Customers2008McKesson
      Corporation
                        
                        
                        39
                        %Cardinal
      Health, Inc.
                        
                        
                        53
                        %




Concentration
of Credit Risks





The
Company is subject to concentrations of credit risk primarily from cash and cash
equivalents and accounts receivable.





The
Company’s cash and cash equivalents accounts are held at financial institutions
and are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to
$100,000. During the twelve-month period ended December 31, 2008, the Company
had bank balances exceeding the FDIC insurance limit. Effective October 3, 2008
through December 31, 2009, federally insured limits have been increased from
$100,000 to $250,000 per account. While the Company periodically evaluates the
credit quality of the financial institutions in which it has deposits, it cannot
eliminate the risk associated with the sudden possible failure of such financial
institutions.





Product
Concentration





Most of
the Company’s revenues were derived from the sale of its products in the United
States to the following customers:


Largest
      CustomersMCR
                  AMBICardinal Health,
      Inc.
                  32%
                  78%McKesson
      Corporation
                  52%
                  *AmeriSourceBergen Corp.
                  7%
                  *North Carolina
      Mutual
                  *
                  8%




Principles
of Consolidation





The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All inter-company balances and transactions have been
eliminated.





Fair
Value of Financial Instruments





The
carrying value of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses, approximate their fair value due to their
short-term maturities.





F-8


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




Income
Taxes





Income
taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income
Taxes”. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the Company’s financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company’s assets and liabilities result in a deferred tax asset, SFAS No.
109 requires an evaluation of the probability of being able to realize the
future benefits indicated by such assets. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some or all
deferred tax assets will not be realized. Penalties and interest on underpayment
of taxes are reflected in the Company’s effective tax rate.





Use
of Estimates





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates made by management include, but are not
limited to, the realization of receivables, the valuation of share-based
payments, the impairment valuation of intangible assets, the allocation of the
purchase price of the acquisition among various types of intangible assets and
accrued sales allowance. Actual results will differ from these
estimates.





Revenue
Recognition





Revenue
is recognized when it is earned. The Company’s revenue recognition policies are
in compliance with the Securities and Exchange Commission’s (“SEC”) Staff
Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition”. The Company
recognizes revenues from the sale of pharmaceutical products, including shipping
fees, if any, upon shipment, provided that a purchase order has been received or
a contract has been executed, there are no uncertainties regarding customer
acceptance, the sales price is fixed or determinable and collection is deemed
probable.  If uncertainties regarding customer acceptance exist, the
Company recognizes revenue when those uncertainties are resolved and title has
been transferred to the customer, which is generally upon delivery to the
destination point.





Revenue
from sales of the Company’s products are recorded, net of returns and other
sales allowances.  Other sales allowances include cash discounts, rebates,
trade promotions, and sales incentives.  According to the terms of a sales
contract, and consistent with industry practices, a customer may return products
up to a maximum amount and under certain conditions.  Allowances are
calculated based upon current economic conditions, the underlying contractual
terms with both direct and indirect customers, the remaining time to expiration
of the products and an evaluation of the levels of inventories held by the
Company’s distributors.   The Company continually monitors its
assumptions, giving considerations to pricing trends, seasonality of its product
lines and estimated trade inventory levels and makes adjustments to these
estimates when it believes that its actual sales returns and sales allowances in
the future will differ from its estimate.





Inventories
and Cost of Goods Sold





The
Company maintains an inventory of pharmaceutical products and samples. 
Inventories are stated at the lower of cost or market. Cost has been determined
using the first-in, first-out method. Sample costs are charged to cost of goods
sold.





During
the year end, the Company recognized cost of goods sold of $1,827,160 for
products by MCR and AMBI.  Substantially all of our cost of goods sold
relate to the cost of the pharmaceutical products, fees paid to our contract
manufacturers and samples provided to our sales representatives.





F-9


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
  Basic
and Diluted Earnings Per Share





Basic
earnings per share are calculated by dividing income available to stockholders
by the weighted-average number of common shares outstanding during each period.
Diluted earnings per share are computed using the weighted average number of
common shares and dilutive common share equivalents outstanding during the
period. Dilutive common share equivalents consist of shares issuable upon the
exercise of stock options and warrants (calculated using the modified-treasury
stock method). The options and warrants outstanding at December 31, 2008 and
2007 have been excluded from the computation of diluted earnings per share due
to their antidilutive effect.





Common
share equivalent are as follows:




December
      31,
                                      2008
                                    
                                    
                                    December
      31,
                                      2007Options
                                    
                                    
                                    5,312,043
                                    
                                    
                                    
                                    2,775,319Warrants
                                    
                                    
                                    3,255,357
                                    
                                    
                                    
                                    3,255,357Preferred
      Stock (if converted)
                                    
                                    
                                    28,974,630
                                    
                                    
                                    
                                    -37,542,030
                                    
                                    
                                    
                                    6,030,676





Share-Based
Payments





In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123(R), “Share-Based Payment,” which replaces SFAS No. 123 and supersedes APB
Opinion No. 25. Under SFAS No. 123(R), companies are required to measure the
compensation costs of share-based compensation arrangements based on the
grant-date fair value and recognize the costs in the financial statements over
the period during which employees are required to provide services. Share-based
compensation arrangements include stock options, restricted shares,
performance-based awards, share appreciation rights and employee share purchase
plans. In March 2005, the SEC issued SAB 107. SAB 107 expresses views of the
staff regarding the interaction between SFAS No. 123(R) and certain SEC rules
and regulations and provides the staff’s views regarding the valuation of
share-based payment arrangements for public companies. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods. On April
14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS
123(R). Companies may elect to apply this statement either prospectively, or on
a modified version of retrospective application under which financial statements
for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods under SFAS 123. Effective January 1,
2006, the Company has fully adopted the provisions of SFAS No. 123(R) and
related interpretations as provided by SAB 107 prospectively. As such,
compensation cost is measured on the date of grant as its fair value. The
Company currently utilizes the Black-Scholes option pricing model to measure the
fair value of equity awards, including stock options and stock appreciation
rights granted to employees using the “modified prospective” method. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company applies this statement
prospectively.





Research
and Development Costs




All
research and development costs are expensed as incurred and include costs paid
to sponsored third parties to perform research and conduct clinical
trials.





Impairment
of Long-Lived Assets





The
Company reviews long-lived assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recovered. In such circumstances, the Company will estimate the future
cash flows expected to result from the use of the asset and its eventual
disposition. Future cash flows are the future cash inflows expected to be
generated by an asset less the future outflows expected to be necessary to
obtain those inflows. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the asset, the
Company will recognize an impairment loss to adjust to the fair value of the
asset.





F-10


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS




Deferred
Compensation





In
accordance with EITF Abstract No. 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 uses the Black-Scholes pricing model to
value options granted in connection with services rendered, which are recorded
as Deferred Compensation in the Stockholders’ Equity section of the balance
sheet and are subsequently remeasured and charged to the appropriate expense for
which the service relates.





[3]
Property and Equipment





Property
and equipment is stated at cost, net of accumulated
depreciation.  Depreciation is provided using the straight-line method
over the estimated useful lives of the related assets.  The estimated
useful lives are 3 years.




December 31,
                    2008Office
      Equipment
                  
                  $
                  11,000Less:
      Accumulated depreciation
                  
                  
                  1,528Net
      Office Equipment
                  
                  $
                  9,472





[4]
Operating Lease





The
Company leases office and warehouse space at 16255 Aviation Loop Drive,
Brooksville, FL 34604.  Each of those leases is subject to a
month-to-month lease.





[5]
Business Combinations and Intangible Assets and Private Placement
Offerings





On June
5, 2008, the Company acquired GKI pursuant to the Merger Agreement. The Merger
Agreement provided for, among other things, the issuance of an aggregate of
1,700,000 shares of the Company’s common stock to three individuals, one of whom
became our chief executive officer and another who became a director immediately
following the merger. Pursuant to the Merger Agreement, the Company acquired
rights to acquire MCR and AMBI. The shares issued to these three stockholders
are subject to a lock-up agreement which restricts, for each of them, the sale
of 25% of the issued shares until September 5, 2009, an additional 25% of the
issued shares until February 5, 2010, an additional 25% of the issued shares
until July 5, 2010 and the remaining 25% of the issued shares until December 5,
2010. Subsequently, one of the three stockholders has been released from the
lock-up agreement.





On June
6, 2008, the Company acquired all of the capital stock of MCR and AMBI pursuant
to the Purchase Agreement. The consideration paid to Seller pursuant to the
Purchase Agreement consisted of: (i) $4,410,000 in cash, (ii) 1,333,333
shares of the Company’s common stock, (iii) a Convertible Note in the principal
amount of $3,000,000 (the “Convertible Note”) and (iv) a Subordinated Note in
the amount of $3,000,000 (the “Subordinated Note”). The shares issued to the
Seller are subject to a lock-up agreement which restricts the Seller from
selling the shares prior to June 6, 2009. Subsequently, this date was shortened
to March 31, 2009.





Concurrent
with the completion of the aforementioned transactions, the Company issued
300,000 shares of its common stock to an individual in lieu of payment for
services rendered in connection with the transactions.





The
acquisition of the operations of MCR and AMBI was accounted for pursuant to the
Financial Accounting Standard (“FAS”) No. 141R, Business Combinations, which
provides that the assets and liabilities acquired and the equity interest issued
are initially recognized at the date of acquisition and measured at the fair
value of the net assets acquired and consideration exchanged. Additionally, FAS
No. 141R provides that the results of operations of the acquired entity after
the effective date of acquisition be consolidated in the results of operations
of the acquirer.





F-11


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
  The total
aggregate purchase price, including professional fees of $492,624 incurred in
connection with the acquisition, amounts to $7,953,934. The aggregate purchase
price consists of the following:




Pre-Modification
                  
                  
                  Adjustments
                  
                  
                  Post-ModificationCash
                  
                  $
                  4,492,624
                  
                  
                  
                  400,000
                  
                  
                  
                  4,892,624Notes
                  
                  
                  6,000,000
                  
                  
                  
                  (6,000,000
                  )
                  
                  
                  -Fair
      value of shares
                  
                  
                  1,366,666
                  
                  
                  
                  2,897,463
                  
                  
                  
                  4,264,130Assumption
      of liabilities
                  
                  
                  1,518,161
                  
                  
                  
                  (2,403,660
                  )
                  
                  
                  (885,499
                  )$
                  13,377,451
                  
                  
                  
                  (5,106,196
                  )
                  
                  
                  8,271,255




The
purchase price has initially been allocated as follows:




Pre-Modification
                  
                  
                  Adjustments
                  
                  
                  Post-ModificationCash
                  
                  $
                  189,042
                  
                  
                  
                  -
                  
                  
                  
                  189,042Inventory
                  
                  
                  212,872
                  
                  
                  
                  1,257,717
                  
                  
                  
                  1,470,589Intangible
      assets
                  
                  
                  12,975,537
                  
                  
                  
                  (6,363,912
                  )
                  
                  
                  6,611,625$
                  13,377,451
                  
                  
                  
                  (5,106,196
                  )
                  
                  
                  8,271,255





The fair
value of the shares issued pursuant to this transaction was based on the quoted
closing price per share of the Company’s common stock on the acquisition
date.





The
intangible assets resulting from this transaction are primarily attributable to
the customer contracts and related relationships, noncontractual customer
relationships, royalty agreements, supply contracts, drug formulas, brand names,
distribution networks, and governmental registrations.





During
November 2008, the Company and the Seller and an affiliate of the Seller agreed
to modify certain terms of the Purchase Agreement pursuant to a Modification
Agreement and Release (“Modification Agreement”). Pursuant thereto the Company
issued 1,500,000 shares of the Company’s Series A Preferred Stock and 1,397,463
shares of the Company’s Series B Preferred Stock (i) to satisfy its
obligations under the Convertible Note and the Subordinated Note aggregating
approximately $6.1 million, including interest, and accounts payable aggregating
approximately $1 million and (ii) to receive products from an affiliate of
Seller valued at up to $1,257,717. Each shares of the Series A and B Preferred
Stock is convertible into 10 shares of the Company’s common stock. Additionally,
the features of the Series A Preferred Stock include, among other things, a
non-participating liquidation preference of $4,500,000. The fair value of the
consideration issued to the Seller pursuant to the Modification Agreement
amounted to approximately $2.8 million. The excess of the carrying value of the
satisfied obligations and the right to receive future products from an affiliate
of the Seller over the consideration issued to the Seller, which amounts to
approximately $4.5 million will be recorded as a reduction of the intangible
assets.





F-12


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
  Had these
acquisitions occurred on January 1, 2007, the results would be as
follows:




For
      the Year
                        Ended
                        December
      31,
                      
                      
                      For
      the Year
                        Ended
                        December
      31,2008
                      
                      
                      2007Total
      Revenue
                      
                      $
                      8,084,170
                      
                      
                      $
                      6,288,450Net
      [Loss]
                      
                      $
                      (9,842,433
                      )
                      
                      $
                      (9,308,275
                      )Basic
      & Diluted [Loss] Per Common Share
                      
                      $
                      (0.31
                      )
                      
                      $
                      (0.75
                      )




Intangible
Assets





Intangible
assets consisted of the following:





Useful Life
                    (Years)
                    Weighted
                    Average
                  
                  
                  At December
                    31,2008
                  
                  
                  At December
                    31, 2007MCR
      and AMBI Pharmaceuticals
                  
                  
                  4.87
                  
                  
                  $
                  6,611,625
                  
                  
                  $
                  0$
                  6,611,625
                  
                  
                  $
                  0Less:
      accumulated amortization
                  
                  
                  
                  
                  
                  $
                  (589,874
                  )$
                  6,021,751
                  
                  
                  $
                  0





For the
years ended December 31 2008 and 2007, amortization expense was $589,875 and $0
respectively.





Amortization
expense subsequent to the period ended December 31, 2008 is as
follows:





2009
                  
                  $
                  1,322,3252010
                  
                  $
                  1,322,3252011
                  
                  $
                  1,322,3252012
                  
                  $
                  1,322,3252013
                  
                  $
                  732,451$
                  6,021,751





Private
Placement Offerings





During
the twelve-month period ended December 31, 2008, the Company issued 13,172,000
shares of its common stock pursuant to two private placements, which generated
proceeds of $3,278,000, net of subscription receivable of $15,000.





During
the twelve-month period ended December 31, 2007, the Company issued 464,196
shares of its common stock and warrants to purchase 232,098 shares pursuant to a
private placement, which generated gross proceeds of $2,220,805. The warrants
issued in this private placement are exercisable at a price of $7 per share and
expire on November 29, 2011.





Between
January 2007 and March 2007, the Company received total gross proceeds of
$2,379,005 from the private placement with accredited investors of an aggregate
of 464,196 shares of the Company’s common stock and warrants to purchase 232,098
shares of the Company’s common stock. The common stock was sold in the offering
at $5.125 per share and the exercise price of the warrants was $7.00 per share.
The warrants expire on November 29, 2011.





F-13


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
  In
December 2007, the Company received total gross proceeds of $5,000,000 from the
private placement with accredited investors receiving an aggregate of 1,250,000
shares of the Company’s common stock and warrants to purchase 625,000 shares of
the Company’s common stock. The common stock was sold in the offering at $4.00
per share and the exercise price of the warrants was $7.00 per share. The
warrants expire on December 14, 2012.





In
connection with these private placement offerings, placement agent, legal,
accounting, printing and other costs in the aggregate amount of $376,548 and
$353,127, were charged to Additional Paid-In Capital in the year ended December
31, 2007 and December 31, 2006, respectively.





Registration
Rights Payment Arrangement





During
2007, 100,729 shares of common stock were issued to investors that purchased
common stock and warrants from the Company in the private offerings that the
Company conducted in 2006 and 2007. The shares were issued in accordance with
the provisions of a Registration Rights Agreement dated as of January 5, 2006
between the Company and the purchasers of securities in the 2006 Private
Offering and a Registration Rights Agreement dated November 29, 2006 between the
Company and the purchasers of securities in the 2007 Private Offering. The
aforementioned registration rights agreements, required the Company to pay an
amount equal to 1% payable in the Company’s common stock, up to a maximum 6%, of
the aggregate dollar amount of securities purchased by such investors if the
Company did not file a resale registration statement or have such registration
statement declared effective by the dates set forth in each agreement. The
shares of common stock issued to these investors had an aggregate value of
approximately $491,000 and were expensed as a Registration Payment Arrangement
which is reflected in the Selling, General and Administrative Expense caption of
the 2007 Statement of Operations. The Company issued the maximum 6% of shares
and is under no obligation to issue any additional shares pursuant to the terms
of the registration rights agreements previously described.





Option
Exercises





In
addition to the aforementioned private placements, the Company received
approximately $46,000 from the exercise of options to purchase 12,059 during
2007.





Class A
Common Stock





On April
24, 2007, immediately prior to listing of the Company’s Common Stock on the
NASDAQ Capital Market, the Chief Executive Officer and Executive Vice President
of the Company surrendered all of the Class A Common Stock they owned. The
shares were repurchased for $2 and as of December 31, 2007, no Class A Common
Stock remains outstanding.





[6]
Research and License Agreements





Georgetown
University





In
December 2003, the Company entered into a clinical research agreement, which was
amended in November 2005 and October 2007, with Georgetown pursuant to which
Georgetown provided the Company with Phase II research on Huperzine
A.  The costs associated with this agreement totaled $5,336,842 and
were partially funded by the National Institutes of Health.  The
Company’s portion of the total cost was $4,036,842 payable in installments upon
the achievement of certain milestones.  For the years ended December
31, 2008 and 2007, the payments made or accrued by the Company to Georgetown
under the terms of the clinical research agreement were approximately $785,305
and $1,183,167, respectively, and the total payments made by the Company to
Georgetown since inception of the agreement were approximately
$3,895,972.  These costs are reflected in the Research and Development
caption of the Statement of Operations. The Company expects to make an
additional payments in 2009 to Georgetown in the amount of $80,000.





F-14


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
  Xel
Herbaceuticals, Inc.





On March
15, 2006, the Company entered into a development agreement with XEL for the
development of the Huperzine A Transdermal Delivery System
(“Product”).  For the years ended December 31, 2008 and 2007, the
payments made to XEL under this agreement were approximately $92,500 and
$1,111,250, respectively, and are reflected in the Research and Development
caption of the Statement of Operations.  The Company does not expect
to make any additional payments in 2009.





Dalhousie
License Agreements (PARTEQ)





As part
of the acquisition of Q-RNA, the Company assumed exclusive License Agreements
with PARTEQ Research and Development Innovations (“PARTEQ”), the technology
licensing arm of Queens University, Kingston, Ontario, Canada.





Under the
terms of the Exclusive Patent License Agreement with PARTEQ which was amended in
early 2007, the Company was obligated to pay fixed annual fees of
C$282,944.  Under the terms of the Exclusive Patent License Option
Agreement with PARTEQ which was amended in early 2007, the Company was obligated
to pay fixed annual fees of C$150,800.  For the years ended December
31, 2008 and 2007, the payments made or accrued by the Company to PARTEQ under
these agreements have been approximately $122,000 and $475,115, respectively,
and are reflected in the Research and Development caption of the Statement of
Operations.  The Company expects to make additional payments in 2009
to PARTEQ in the amount of C$60,000.





Numoda
Corporation





On March
3, 2008, the Company entered into an agreement with Numoda corporation
(“Numoda”) pursuant to which Numoda reviewed the results of the Company’s
recently completed Phase II clinical trial of Huperzine A. Following Numoda’s
delivery of its analysis of the Phase II clinical trials, the Company paid
Numoda $100,000.





The
Company does not expect to incur any fixed annual research and development costs
for the foreseeable future.





[7]
Employee, Director and Third Party Stock-Based Compensation





As of
December 31, 2008 the Company had two stock-based compensation plans, which are
described below. Effective January 1, 2006, the Company adopted the fair value
method of recording stock-based compensation in accordance with the modified
prospective method of SFAS No. 123(R), “Share-Based Payment.”





The
Company’s Incentive Plan provides for the issuance of options and other
equity-based awards for the Company’s common stock. Shares issued upon exercise
of equity-based awards are shares held in treasury that have been reserved for
issuance under the plan. The Company’s Incentive Plan is administered by the
Company’s board of directors, or a committee appointed by the Board, which
determines recipients and types of awards to be granted, including the number of
shares subject to the awards, the exercise price and the vesting schedule.
Options generally have an exercise price equal to the fair market value of the
Company’s common stock as of the grant date.





Non-Employee
Directors Stock Option Plan





On
January 24, 2006, Neuro-Hitech’s shareholders approved the Company’s 2006
Non-Employee Directors Stock Option Plan (the “Directors Plan”). Key features of
this Plan include:





·
            Non-employee
      directors of the Company and its subsidiaries are eligible to participate
      in the Directors Plan. The term of the Directors Plan is ten years.
      400,000 shares of common stock have been reserved for issuance under the
      Directors Plan.




·
            Options
      may only be issued as non-qualified stock
  options.




·
            Stockholder
      approval is required in order to replace or reprice
    options.




F-15
 
 NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


·
            The
      Directors Plan is administered by a committee designated by the
      board.




·
            Options
      shall be granted within ten years from the effective
  date.




·
            Upon
      a “change in control” any unvested options shall vest and become
      immediately exercisable.




The fair
value used in calculating the stock option expense has been estimated using
Black-Scholes pricing model which takes into account as of the grant date, the
exercise price, expected life of the option, contractual term, current price of
the underlying stock, expected volatility, expected dividends on the stock and
the risk-free interest rate based on expected term of the option. The risk-free
rate is estimated based on U.S. Treasury security rates for the applicable
terms.





The
following is the average of the data used for the aforementioned
assumptions:




Year Ended December 31,
                  
                  Risk-Free
                    Interest Rate
                  
                  Expected Term
                  
                  Expected
                    Volatility
                  
                  Expected
                    Dividends2008
                  
                  
                  3.20
                  %
                  
                  
                  5
                  
                  121.0
                  %
                  None2007
                  
                  
                  3.45
                  %
                  
                  
                  5
                  
                  55.16
                  %
                  None





A summary
of the stock option activity under the Company’s Non-Employee Directors Stock
Option Plan during the year ended December 31, 2008 is presented
below:




Options Outstanding as of 12/31/2008
                            
                            
                            Options ExercisableExercise Price Range
                            
                            Number of
                              Shares
                              Outstanding
                            
                            
                            Remaining
                              Contractual Life
                            
                            
                            WeightedAverageExercise Price
                              Per Share
                            
                            
                            As of
                              12/31/2008
                            
                            
                            WeightedAverage
                              Exercise Price
                              Per Share
                            
                            
                            Aggregate
                              Intrinsic
                              Value$0
      to $2.50 per share
                            
                            
                            350,000
                            
                            
                            
                            1.00
                            
                            
                            $
                            2.50
                            
                            
                            
                            350,000
                            
                            
                            $
                            2.50
                            
                            
                            $
                            0




Number of
                    Options
                  
                  
                  Weighted
                    Average
      Exercise
                    Price
      Per Share
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at December 31, 2006
                  
                  
                  350,000
                  
                  
                  
                  2.50
                  
                  
                  $
                  0Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at December 31, 2007
                  
                  
                  350,000
                  
                  
                  
                  2.50
                  
                  
                  $
                  -Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at December 31, 2008
                  
                  
                  350,000
                  
                  
                  $
                  2.50
                  
                  
                  $
                  0





Incentive
Stock Plan





The
Company’s 2006 Incentive Stock Plan was initially approved by the Company’s
stockholders on January 24, 2006. Amendments to the 2006 Incentive Stock Plan
(as amended, the “Incentive Plan”) were approved by the Company’s stockholders
at a meeting of the Company’s stockholders on June 26, 2007.  Key
features of the Incentive Plan include:





F-16


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


·
            Company’s
      officers, directors, key employees and consultants of the Company and its
      subsidiaries are eligible to participate in the Incentive Plan. The term
      of the Incentive Plan is ten years. 4,575,000 shares of common stock are
      reserved for issuance under the Incentive
Plan.




·
            Both
      incentive and nonqualified stock options may be granted under the
      Incentive Plan, as well as Stock Appreciation Rights, Restricted Stock,
      Restricted Stock Units and Unrestricted
Stock.




·
            The
      Incentive Plan terminates on January 23,
2016.




·
            The
      Incentive Plan is administered by a committee designated by the
      board.




On June
24, 2008, Kevin Esval and Philip J. Young, were each granted a stock
appreciation right to purchase 365,000 shares of the Company’s common stock, at
an exercise price of $.44 per share.  The fair value of the stock
appreciation rights was approximately $127,000 and was calculated using the
Black-Scholes option pricing model.





On June
24, 2008, the Company granted 1,010,000 shares of the Company’s common stock to
3 members of the Board and 1 employee in consideration of services for the
year. The fair value of the stock grants was approximately $422,000 and was
calculated using the Black-Scholes option pricing model.





During
2008, compensation costs on vested awards totaled approximately $4,089,000, and
are reflected in Share-Based Compensation caption of the Statement of
Operations.  Total compensation cost related to non-vested awards not
yet recognized is approximately $1,127,000 and the weighted period of
recognition is approximately 1.4 years.





In
connection with the Q-RNA merger, the Company entered into a consulting
agreement with Dr. Donald Weaver and issued 500,000 non-qualified stock options
valued at their grant date fair value as of the date of the merger closing. The
total fair value of these options approximated $1,309,000 and was recognized as
Deferred Compensation in the Stockholders' Equity section of the Balance Sheet.
During 2008, the Company parted ways with Dr. Weaver and recognized
approximately $1,175,000 of expense for the amortization of Deferred
Compensation.





Options
      Outstanding as of 12/31/2008
                                
                                
                                Options
      ExercisableExercise
      Price Range
                                
                                Number of
                                  Shares
                                  Under
                                  Option
                                
                                
                                Remaining
                                  Contractual
      Life
                                
                                
                                WeightedAverageExercise
      Price
                                  Per
      Share
                                
                                
                                As of
                                  12/31/2007
                                
                                
                                WeightedAverage
                                  Exercise
      Price
                                  Per
      Share
                                
                                
                                Aggregate
                                  Intrinsic
                                  Value$0
      to $2.50 per share
                                
                                
                                585,000
                                
                                
                                
                                8.06
                                
                                
                                $
                                1.21
                                
                                
                                
                                280,833
                                
                                
                                $
                                2.05
                                
                                
                                $
                                0$2.51
      to $4.25 per share
                                
                                
                                51,940
                                
                                
                                
                                8.95
                                
                                
                                $
                                4.05
                                
                                
                                
                                35,967
                                
                                
                                $
                                4.12
                                
                                
                                
                                -$4.26
      to $6.25 per share
                                
                                
                                325,104
                                
                                
                                
                                6.02
                                
                                
                                $
                                5.97
                                
                                
                                
                                289,680
                                
                                
                                $
                                5.96
                                
                                
                                
                                -962,043
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                606,480
                                
                                
                                
                                
                                
                                
                                
                                0




F-17


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


Number of
                                  Options
                                
                                Weighted
                                  AverageExercise
                                  Price
      Per Share
                                
                                Aggregate
                                  Intrinsic
                                  ValueOutstanding
      at December 31, 2006
                                
                                1,240,000
                                
                                $
                                5.07Granted
                                
                                1,185,319
                                
                                $
                                5.46Exercised
                                
                                -
                                
                                
                                -Expired
                                
                                -
                                
                                
                                -Outstanding
      at December 31, 2007
                                
                                2,425,319
                                
                                $
                                5.26
                                
                                -Granted
                                
                                365,000
                                
                                $
                                .44
                                
                                -Exercised
                                
                                -
                                
                                
                                -
                                
                                -Expired
                                
                                1,828,276
                                
                                
                                5.50
                                
                                -Outstanding
      at December 31, 2008
                                
                                962,043
                                
                                $
                                2.98
                                
                                -





Non-Plan
Grants





As part
of the acquisition of MCR and AMBI, the Company granted the following
options:





Options Outstanding as of
      12/31/2008
                                  
                                  Options
      ExercisableExercise
      Price Range
                                  
                                  Number of
                                    Option
                                  
                                  Remaining
                                    Contractual
      Life
                                  
                                  WeightedAverageExercise
      Price
                                    Per
      Share
                                  
                                  As
      of
                                    12/31/2008
                                  
                                  WeightedAverage
                                    Exercise
      Price
                                    Per
      Share
                                  
                                  Aggregate
                                    Intrinsic
                                    Value$0
      to $2.00 per share
                                  
                                  
                                  4,000,000
                                  
                                  9.50
                                  
                                  
                                  2.00
                                  
                                  1,583,333
                                  
                                  
                                  2.00
                                  
                                  04,000,000
                                  
                                  
                                  
                                  
                                  2.00
                                  
                                  1,583,333
                                  
                                  
                                  2.00





Warrants
to Non-Employees





There
were no warrants issued in 2008.




Options Outstanding as of
      12/31/2008
                  
                  
                  Options ExercisableNumber
      of
                  
                  
                  
                  
                  
                  WeightedAverage
                  
                  
                  
                  
                  
                  WeightedAverageShares
      Under
                  
                  
                  Remaining
                  
                  
                  Exercise
      Price
                  
                  
                  As
      of
                  
                  
                  Exercise
      PriceExercise Price Range
                  
                  Option
                  
                  
                  Contractual Life
                  
                  
                  Per Share
                  
                  
                  12/31/2007
                  
                  
                  Per Share$0.00
      to $2.50 per share
                  
                  
                  100,000
                  
                  
                  
                  1.00
                  
                  
                  $
                  2.50
                  
                  
                  
                  100,000
                  
                  
                  $
                  2.50$2.51
      to $5.00 per share
                  
                  
                  437,500
                  
                  
                  
                  2.10
                  
                  
                  $
                  5.00
                  
                  
                  
                  437,500
                  
                  
                  $
                  5.00$5.01
      to $7.00 per share
                  
                  
                  1,517,145
                  
                  
                  
                  3.35
                  
                  
                  $
                  7.05
                  
                  
                  
                  1,517,145
                  
                  
                  $
                  7.05*$7.01
      to $13.00 per share
                  
                  
                  600,356
                  
                  
                  
                  7.92
                  
                  
                  $
                  13.00
                  
                  
                  
                  600,356
                  
                  
                  $
                  13.00*$13.01
      to $18.00 per share
                  
                  
                  600,356
                  
                  
                  
                  7.92
                  
                  
                  $
                  18.00
                  
                  
                  
                  600,356
                  
                  
                  $
                  18.003,255,357
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,255,357




Year Ended December 31,
2007WeightedNumber
      of
                  
                  
                  Average
      ExerciseWarrants
                  
                  
                  Price Per ShareBeginning
      of year
                  
                  
                  3,255,357
                  
                  
                  $
                  9.75Granted
                  
                  
                  0
                  
                  
                  $
                  0Exercised
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  0
                  
                  
                  $
                  0Outstanding
      at end of year
                  
                  
                  3,255,357
                  
                  
                  $
                  9.75




F-18


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
  *On November 29, 2006, the
Company completed an acquisition by merger of Q-RNA, Inc. a privately held New
York-based biotechnology company. In connection with the acquisition, the
Company issued (i) 1,800,000 shares of the Company’s common stock, (ii) warrants
to purchase 600,356 shares of the Company’s common stock at an exercise price of
$13 per share, and (iii) warrants to purchase 600,356 shares of the Company’s
common stock at an exercise price of $18 per share.





[8]
Related Party Transaction





In
November 2008, pursuant to the terms of the Modification Agreement, the Company
issued 1,500,000 shares of the Company’s Series A Preferred Stock and 1,397,463
shares of the Company’s Series B Preferred Stock to the Seller (i) to
satisfy its obligations under the Convertible Note and the Subordinated Note
aggregating approximately $6.1 million, including interest, and accounts payable
aggregating approximately $1 million and (ii) to receive products from an
affiliate of Seller valued at up to $1,257,717.  Each share of the
Series A and B Preferred Stock is convertible into 10 shares of the Company’s
common stock.  Additionally, the features of the Series A Preferred
Stock include, among other things, a non-participating liquidation preference of
$4,500,000. The fair value of the consideration issued to the Seller pursuant to
the Modification Agreement amounted to approximately $2.8 million. The excess of
the carrying value of the satisfied obligations and the right to receive future
products from an affiliate of the Seller over the consideration issued to the
Seller, which amounts to approximately $4.5 million will be recorded as a
reduction of the intangible assets.





Since
June 6, 2008, the Company has been a party to a Manufacturing and Distribution
Agreement with TG United Pharmaceuticals, Inc. (“TG United”), a corporation
wholly-owned by the Company’s CEO.  Since the execution of that
agreement, the Company has been completely dependent upon TG United as the sole
supplier of the Company’s products.





The
Company leases office and warehouse space at 16255 Aviation Loop Drive,
Brooksville, FL 34604 from TG United.  Each of those leases is subject
to a month-to-month lease.





[9]
Income Taxes





For 2008
and 2007, the Company had no current or deferred income tax provision. Deferred
taxes are based upon differences between the financial statement and tax basis
of assets and liabilities and available net operating loss carryforwards
summarized as follows:




December 31,2008
                    
                    
                    2007Deferred
      Tax Asset - Non-Current:Net
      Operating Loss Carryforwards
                    
                    $
                    1,246,000
                    
                    
                    $
                    3,613,600Valuation
      Allowance
                    
                    
                    (1,246,000
                    )
                    
                    
                    (3,613,600
                    )$
                    -
                    
                    
                    $
                    -





A full
valuation allowance has been established due to the uncertainty about the
realization of the deferred tax asset. The net change during 2008 and 2007 in
the total valuation allowance was approximately ($2,367,000) and $1,138,000,
respectively.





As of
December 31, 2008, the Company’s cumulative net operating losses are subject to
an annual limitation pursuant to IRC Section 382 whereby the maximum amount of
taxable income in any give year that can be offset by net operating losses is
approximately $155,700.  Such amount can be utilized in tax years 2009
through 2028.  The total of such carryforwards available is $3,114,000
at December 31, 2008.





The
following table reconciles the Company’s expected tax rate to its effective
income tax rate (actual):




F-19
 
 NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


For
      the Years Ended December 31,
                    
                    2008
                    
                    
                    2007Federal
      statutory tax rate
                    
                    
                    -35.0
                    %
                    
                    
                    -35.0
                    %Changes
      to valuation allowance
                    
                    
                    12.0
                    %
                    
                    
                    12.9
                    %Effective
      state tax rate, net of federal benefits
                    
                    
                    5.0
                    %
                    
                    
                    0.1
                    %Permanent
      differences
                    
                    
                    18.0
                    %
                    
                    
                    22.0
                    %Effective
      Income tax rate
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %




[10]
Supply Concentrations





On June
6, 2008, the Company entered into a Manufacturing and Distribution Agreement
with TG United.  Since the execution of that agreement, the Company
has been completely dependent upon TG United as the sole supplier of the
Company’s products.





[11]
Recent Accounting Pronouncements





In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115”. This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. Most of the provisions of SFAS No. 159 apply only to entities
that elect the fair value option. However, the amendment to SFAS No. 115
“Accounting for Certain Investments in Debt and Equity Securities” applies to
all entities with available-for-sale and trading securities. SFAS No. 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provision of SFAS No. 157, “Fair Value Measurements”. The adoption
of this statement is not expected to have a material effect on the Company’s
financial statements.





In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 (revised 2007), "Business Combinations" (SFAS 141(R)), which replaces SFAS
No. 141, "Business Combinations." SFAS 141(R) retains the underlying concepts of
SFAS 141 in that all business combinations are still required to be accounted
for at fair value under the acquisition method of accounting but SFAS 141(R)
changed the method of applying the acquisition method in a number of significant
aspects. Acquisition costs will generally be expensed as incurred;
noncontrolling interests will be valued at fair value at the acquisition date;
in-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; restructuring costs
associated with a business combination will generally be expensed subsequent to
the acquisition date; and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date generally will affect income
tax expense. SFAS 141(R) is effective on a prospective basis for all business
combinations for which the acquisition date is on or after the beginning of the
first annual period subsequent to December 15, 2008, with the exception of the
accounting for valuation allowances on deferred taxes and acquired tax
contingencies. SFAS 141(R) amends SFAS 109 such that adjustments made to
valuation allowances on deferred taxes and acquired tax contingencies associated
with acquisitions that closed prior to the effective date of SFAS 141(R) would
also apply the provisions of SFAS 141(R). Early adoption is not permitted. We
are currently evaluating the effects, if any, that SFAS 141(R) may have on our
financial statements and believe it could have a significant impact if business
combinations are consummated. However, the effect is indeterminable as of
December 31, 2007.





In
December 2007, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standards No. 160, "Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51." This statement is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008, with earlier adoption prohibited. This statement
requires the recognition of a noncontrolling interest (minority interest) as
equity in the consolidated financial statements and separate from the parent's
equity. The amount of net income attributable to the noncontrolling interest
will be included in consolidated net income on the face of the income statement.
It also amends certain of ARB No. 51's consolidation procedures for consistency
with the requirements of SFAS 141(R). This statement also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. We are currently evaluating this new statement and
anticipate that the statement will not have a significant impact on the
reporting of our results of operations.





F-20


NEURO-HITECH,
INC. AND SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
  In March
2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
161, Disclosures about Derivative Instruments and Hedging Activities. The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. The Company is currently evaluating the impact of
adopting SFAS. No. 161 on its financial statements.


F-21


SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly
caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized..





NEURO-HITECH,
      INC.
                    (Registrant)Date:
      April 30, 2009/s/
      David J. BarrettDavid
      J. Barrett
                    Chief
      Financial Officer




40