UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM 10-K





x
            ANNUAL REPORT UNDER SECTION 13
      OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934


For
      the fiscal year ended December 31,
2008





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


For
      the transition period from ______ to ______





Commission
file number:  000-51476





LIXTE
BIOTECHNOLOGY HOLDINGS, INC.


(Name of
registrant in its charter)





Delaware
              
              20-2903526(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      Number)248
      Route 25A, No. 2
                East
      Setauket, New York
              
              11733(Address
      of principal executive offices)
              
              (Zip
      Code)


Issuer’s
telephone number:  (631) 942-7959





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





Securities
registered under Section 12(g) of the Act:  Common
Stock.





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





Indicate
by check mark whether the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.   ̈





Indicate
by check mark whether the registrant (1) has 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 issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.  Yes x  No  ̈





Indicate
by check mark if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.   ̈





Indicate
by check mark whether registrant is a “large accelerated filer, “accelerated
filer,” non-accelerated filer” or “smaller reporting company reporting company”
as such terms are defined  in Rule 12b-2 of the Exchange Act (check
one):  Large Accelerated Filer  ̈  Accelerated
Filer  ̈  Non-Accelerated
Filer  ̈  Smaller
Reporting Company  x





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





Issuer’s
revenues for its fiscal year ended December 31, 2008:  $0





Aggregate
market value of the common stock held by non-affiliates of the registrant as of
June 30, 2008 was approximately $3,273,177.





There
were 28,852,178 shares of the Company’s common stock outstanding on March 25,
2009.





TABLE OF
CONTENTS





PagePART
      IITEM
      1.
                                                                    BUSINESS
                                                                    1ITEM
      1A.
                                                                    RISK
      FACTORS
                                                                    13ITEM
      1B.
                                                                    UNRESOLVED
      STAFF COMMENTS
                                                                    26ITEM
      2.
                                                                    PROPERTIES
                                                                    26ITEM
      3.
                                                                    LEGAL
      PROCEEDINGS
                                                                    26ITEM
      4.
                                                                    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                                                    26PART
      IIITEM
      5.
                                                                    MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                                                                    26ITEM
      6
                                                                    SELECTED
      FINANCIAL DATA
                                                                    28ITEM
      7.
                                                                    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                                                    28ITEM
      7A.
                                                                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                                    39ITEM
      8.
                                                                    FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                                                                    40ITEM
      9.
                                                                    CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                                                                    40ITEM
      9A(T).
                                                                    CONTROLS
      AND PROCEDURES
                                                                    40ITEM
      9B.
                                                                    OTHER
      INFORMATION
                                                                    41PART
      IIIITEM
      10.
                                                                    DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                                                                    41ITEM
      11.
                                                                    EXECUTIVE
      COMPENSATION
                                                                    45ITEM
      12.
                                                                    SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                                                                    47ITEM
      13.
                                                                    CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                                                                    48ITEM
      14.
                                                                    PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                                                                    49ITEM
      15.
                                                                    EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                                                                    49SIGNATURES
                                                                    
                                                                    51








i


Introductory
Comment




Throughout
this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “our company,”
“Company” and “the Registrant” refer to Lixte Biotechnology Holdings, Inc.., a
Delaware corporation formerly known as SRKP 7, Inc.




FORWARD-LOOKING
STATEMENTS




This
Annual Report on Form 10-K (the “Report”) contains certain forward-looking
statements.  For example, statements regarding our financial position,
business strategy and other plans and objectives for future operations, and
assumptions and predictions about future product demand, supply, manufacturing,
costs, marketing and pricing factors are all forward-looking
statements.  These statements are generally accompanied by words such
as “intend,” “anticipate,” “believe,” “estimate,” “potential(ly),” “continue,”
“forecast,” “predict,” “plan,” “may,” “will,” “could,” “would,” “should,”
“expect” or the negative of such terms or other comparable
terminology.  We believe that the assumptions and expectations
reflected in such forward-looking statements are reasonable, based on
information available to us on the date hereof, but we cannot assure you that
these assumptions and expectations will prove to have been correct or that we
will take any action that we may presently be planning.  However,
these forward-looking statements are inherently subject to known and unknown
risks and uncertainties.  Actual results or experience may differ
materially from those expected or anticipated in the forward-looking
statements.  Factors that could cause or contribute to such
differences include, but are not limited to, regulatory policies, competition
from other similar businesses, and market and general policies, competition from
other similar businesses, and market and general economic
factors.  This discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in this
Report.




If one or
more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary materially from what
we project.  Any forward-looking statement you read in this Report
reflects our current views with respect to future events and is subject to these
and other risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy, and liquidity.  All subsequent
forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this
paragraph.  You should specifically consider the factors identified in
this prospectus, which would cause actual results to differ before making an
investment decision.  We are under no duty to update any of these
forward-looking statements after the date of this Report or to conform these
statements to actual results.




PART
I




ITEM
1.                DESCRIPTION
OF BUSINESS




Company
Overview




We were
organized as a blank check company formed for the purpose of effecting a
business combination with an operating business.  On June 30, 2006,
pursuant to a Share Exchange Agreement dated as of June 8, 2006 among us, Dr.
John S. Kovach and Lixte Biotechnology, Inc., we issued 19,021,786 shares of our
common stock to Dr. Kovach in exchange for all of the issued and outstanding
shares of Lixte Biotechnology, Inc.  As a result of this transaction,
Lixte is now our wholly owned subsidiary, though from an historical perspective
it was deemed to have been the acquirer in the reverse merger and the survivor
of the reorganization.  On December 7, 2006, we changed our name from
SRKP 7, Inc. to Lixte Biotechnology Holdings, Inc.  Throughout this
Report, when we refer to Lixte, we are referring to Lixte Biotechnology, Inc.,
our operating subsidiary.




Lixte was
created to capitalize on opportunities for the Company to develop low cost,
specific and sensitive tests for the early detection of cancers to better
estimate prognosis, to monitor treatment response, and to reveal targets for
development of more effective treatments. Over the past two and one half years,
however, the Company has evolved into what is now primarily a cancer drug
discovery company, using biomarker technology to develop new potentially more
effective anti-cancer drugs for life-threatening diseases.





BUSINESS




The
Company is developing new treatments for several human cancers for which better
treatments are urgently needed. The primary focus is on the most common and most
aggressive type of brain cancer of adults, glioblastoma multiforme
(“GBM”).  The Company, however, has expanded the scope of its drug
development program to other cancers of neural tissue (nerve and brain),
including medulloblastoma, the most common brain tumor of children, and
neuroblastoma, the most common cancer of children, and to several of the most
common cancers.  The expansion of the scope of the program is based on
documentation that each of two distinct types of drugs being developed by the
Company inhibits the growth of cell lines of GBM, medulloblastoma,
neuroblastoma, and pancreatic cancer in animal models of these diseases and is
also active against breast, colon, lung, prostate, ovary, stomach and liver
cancer and the major types of leukemias in cell culture.  The Company
has also recently shown that certain of its compounds are active against fungi
that cause life-threatening diseases and other compounds are active against
fungi responsible for the majority of skin and nail infections.  In
addition, the Company found that still other of its compounds affect biochemical
pathways such that they may be potentially useful for the treatment of common
neurodegenerative diseases such as Alzheimer’s disease.  These
non-cancer applications are under evaluation in collaboration with outside
experts.




The
research on brain tumors is being conducted with the National Institute of
Neurological Disorders and Stroke (“NINDS”) of the National Institutes of Health
(“NIH”) under a Cooperative Research and Development Agreement (“CRADA”)
initiated on March 22, 2006.  The research at NINDS is led by
Dr. Zhengping Zhuang, an internationally recognized investigator in the
molecular pathology of cancer.  Dr. Zhuang is aided by two senior
research technicians supported by the Company under the CRADA.  The
goal of the CRADA is to develop more effective drugs for the treatment of GBM
through the steps needed to gain Food and Drug Administration (“FDA”) approval
for clinical trials.   The Company’s $200,000 financial
obligation due under the CRADA as of March 22, 2007 was paid on June 29, 2007,
and funded ongoing research and development activities through June 30,
2008.  In June 2008, the CRADA was extended to September 30, 2009 with
no additional funding required for the period between July 1, 2008 and September
30, 2008.  For the period from October 1, 2008 through September 30,
2009, the Company has agreed to provide additional funding under the CRADA of
$200,000, to be paid in four quarterly installments of $50,000 commencing on
October 1, 2008.




Patent
applications on work done under the CRADA are jointly owned by NIH and
Lixte.  NIH co-inventors assign their rights to NIH.  Under
the CRADA, Lixte is entitled to negotiate an exclusive license from NIH to all
claims in these patent applications.  The Company and NIH concluded
negotiations and executed an exclusive license on seven patent filings effective
September 19, 2008.Pursuant to the Agreement,
PHS has granted an exclusive license of all of PHS’ rights in seven patent
applications filed by the Company.  The majority of these patent
applications are related to the use of certain compounds of the Company for the
treatment of glioblastoma multiforme, neuroblastoma, and medulloblastoma as well
as the potential use of two biomarkers as either diagnostic tests or in assays
for the screening of compounds for anti-cancer activity.  The Company
requested that PHS grant to the Company full rights to these inventions in order
to develop processes, methods or marketable products for public use and
benefit.  The Agreement provides for an initial license fee, minimum
annual royalty payments, payments at various milestones in the clinical
development of the licensed compounds, and a percentage of net sales of the
licensed compounds.The Company has also filed
patent applications for intellectual property owned solely by the
Company.  These applications concern two series of new anti-cancer
agents referred to as the LB-100 series and the LB-200 series.  The
applications include identification of the structure of molecules, their
synthesis, and their anti-cancer, anti-fungal, and potential neuroprotective
activities. In February 2008, the Company converted provisional patent
applications relating to the nature and activity of the LB-100 series of drugs
with the filing of a U.S. non-provisional and a PCT patent application and is in
the process of converting provisional patent applications for the LB-200
series.


2


The
Company filed five patent applications on August 1, 2008.  Two of
these filings deal with applications filed earlier jointly with NIH for work
done under the CRADA:  (1) a filing entering the regional stage of a
PCT application involving the use of certain compounds to treat human tumors
expressing a biomarker for brain and other human cancers, and (2) an application
for the treatment of the pediatric tumors, medulloblastoma (the most common
brain tumor in children) and neuroblastoma (a tumor arising from neural cells
outside the brain that is the most common cancer of children).  The
three new patent applications include (1) a joint application with NIH
identifying a new biomarker for many common human cancers that when targeted by
compounds developed by the Company result in inhibition of growth and death of
cancer cells; (2) an application by the Company regarding the structure,
synthesis and use of a group of new homologs of its LB-1 compounds; and (3) an
application by the Company for the use of certain homologs of its drugs as
neuroprotective agents with potential application to common neurodegenerative
conditions such as Alzheimer’s and Parkinson’s diseases.




During
2007, the Company also documented that some of its compounds have activity
against several types of fungi that cause serious infections, particularly in
immuno-compromised individuals, such as those with HIV-AIDS and those having
bone marrow transplantations.  This finding extends the potential use
of some of Lixte’s compounds to the large and important field of therapy of
life-threatening mycotic infections.




On April
23, 2008, the Company announced that its CRADA collaborators, Dr. Jie Lu and Dr.
Zhengping Zhuang of the Surgical Neurology Branch, NINDS, reported the activity
of compound, LB-100, against human glioblastoma multiforme cells in a mouse
model of cancer at the Annual Meeting of the American Association of Cancer
Research.  On August 8, 2008, the Company announced that lead
compounds from both the LB-100 and LB-200 series inhibit human pancreatic cancer
cells growing in mice.  The pancreatic cancer studies are early and
there is no evidence that these drugs are able to eliminate pancreatic cancers
but rather may slow their growth.




The
Company expects that its products will derive directly from the intellectual
property generated by its research.  Progress to date has borne out
this expectation.  The development of lead compounds with different
mechanisms of action that have now been shown to have activity against brain
tumors and several other more common cancers as well as serious fungal
infections, originated from the discovery of a biomarker most prominent in
GBM.  The Company continues to use biomarker discovery to provide
insights as to the potential biochemical vulnerabilities of cancers expressing
the biomarker.




The
Company elected to exercise its right to terminate the second year of an
agreement with the University of Regensburg, Germany, for collection of certain
numbers of tumors and other biological samples for research programs in the
future.  Under the agreement, the University of Regensburg will
complete ascertainment of 50% of the original number of
samples.  Lixte estimates that this collection will be sufficient for
its needs for the next two to three years.  In addition, Lixte has
identified a commercial source of such materials that can be purchased in
quantities as needed.  Cancellation of the second year of the
agreement resulted in a saving of Euro 36,000 (about $52,000).




The
Company faces several potential challenges to its goal of commercial
success.  These include raising sufficient capital to fund its
business plan, achieving commercially applicable results from its research
programs, competition from more established, well-funded companies with
competitive technologies, and future competition from companies developing new
competitive technologies.  Because of these challenges, there is
substantial uncertainty as to the Company’s ability to fund its operations and
continue as a going concern (see “ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Going Concern” ).


3


The
Company expects to participate in clinical trials of new therapies in
partnership with an organization experienced in such
undertakings.  The partnering organization may be either a clinical
branch of NIH or a pharmaceutical company with expertise in the conduct of
clinical trials.  The Company’s present position is to take one or
more of its new therapies for the treatment of glioblastoma multiforme through
pre-clinical evaluation as part of the CRADA with the NINDS of the
NIH.  After completing pre-clinical evaluation, the Company will
consider partnering with the NIH to conduct a Phase I Trial or jointly with
the NIH to seek a third party, most probably a large pharmaceutical company, to
carry the new therapies into Phase I trials.  After completion of
Phase I trials, the Company, potentially in partnership with the NIH, would
collaborate with the third party to carry new therapies found to be safe for
administration to humans in the Phase I trials into Phase II
trials.




Phase II
trials test the safety and effectiveness, as well as the best estimate of the
proper dose of the new therapies, in a group of patients with the same type of
cancer at the same stage.  For the Company’s initial studies, the
focus will be brain tumors.  The duration of Phase II trials may
run from 6 to 24 months.  New regimens showing beneficial activity in
Phase II trials may then be considered for evaluation in Phase III
trials.  Phase III trials for the evaluation of new cancer
treatments are comparative trials in which the therapeutic benefit of a new
regimen is compared to the therapeutic benefit of the best standard regimen in a
randomized study.




Whether
the Company will participate in or be in a position to participate in any
clinical trials will depend upon partnerships and specific licensing
agreements.  However, in all cases of clinical trial participation,
the Company will be subject to FDA regulation.  These regulations are
specific and form the basis for assessing the potential clinical benefit of new
therapeutic regimens while safeguarding the health of patients participating in
investigational studies.  Even after a drug receives approval from the
FDA for sale as a new treatment for a specific disease indication, the sponsors
of the drug are subject to reporting potentially adverse effects of the new
regimen to the FDA.




Given the
progress in identifying two lead compounds with activity in animal models of
GBM, medulloblastoma, and neuroblastoma, the Company is devoting its resources
to bring the agents to a point at which an Investigational New Drug (“IND”)
application can be submitted to the FDA for a Phase I clinical
trial.  One lead compound (LB-100) is the most advanced in the process
and the Company plans to be ready for IND submission by [early
2009].  The other lead compound will be selected from among several
variants of the LB-200 series that have comparable anti-cancer activity but
differ in properties that favor administration by oral or intravenous
routes.




GLOSSARY




The
following technical terms are used in this Report:




Assay




An assay is a method to
determine the presence, absence, or the amount of a particular substance in a
sample.  Assays of body fluids
such as blood and urine can be used to detect specific products (biomarkers) that
indicate the presence of a specific type of cancer.




Biomarker




A biomarker is a
component of a cell that is uniquely or strongly associated with a particular
feature of that cell.  The detection of the biomarker in body fluid by
an assay
indicates that a particular cell is very likely to be present in the
body.  In this memorandum, “biomarkers” refer primarily to
proteins that
are uniquely produced by specific types of cancer cells or that are produced in
excess by the cancer cells compared to non-cancer cells of the same tissue or
organ.


4


Cancer




A disease
characterized by loss or enhancement of one or more mechanisms that regulate the
growth of cells of a specific tissue.  Loss of these control
mechanisms or gain of abnormal mechanisms in a single cell that put cell growth into
overdrive allows that cell to grow, invade local tissue, and to spread to other
regions of the body.  This spreading of altered cells to distant sites
is the process called metastasis.




Cell
Growth




Cell growth is the
ability of an individual cell to reproduce by dividing into two
cells.  During normal development and subsequently during the life of
the adult, this process is highly controlled.  Loss of this control is
the distinguishing feature of cancer cells.  Although all cancer cells
gain the capacity for uncontrolled growth, in most instances they retain many of
the highly specialized features (and associated specific molecular components)
that were characteristic of the normal tissue before loss of growth
control.  For example, breast cancer cells and brain cancer cells have
lost control of growth and may be unrecognizable by their appearance under the
microscope but
identifiable by the presence of biomarkers specific to breast or brain
cells.




CRADA




A CRADA (Cooperative
Research and Development Agreement) is a formal contractual mechanism by which a
variety of federal government agencies may agree to work collaboratively with a
non-governmental entity to study and advance a particular idea, observation, or
process under a defined plan of work.




Gene




A gene is a unit of
information that specifies the structure of one or more gene
products.  Collectively, genes determine the precise
composition of all molecules needed for maintenance of the functions of life:
reproduction, development, organization, growth and metabolism.  Genes are often
referred to as units of heredity because they pass on the information necessary
for all characteristics of an individual.  For mammals like ourselves,
one set of genes is received from each parent.




Gene
Products




The
products of genes are the thousands of different chemical structures, called
molecules, needed for development of all cells.  Most gene products
are proteins.  Most proteins are enzymes, molecules that can carry out
work such as digesting and utilizing food for energy, signaling the cell to
produce other gene products in response to changing conditions in the body, and
controlling cell
growth.  When proteins controlling cell growth are altered, as
occurs in all cancers, they become prime candidates for biomarkers that
reveal the presence of cancer.




Glioblastoma
Multiforme (GBM)




GBM is the most
common and most aggressive type of primary human brain cancer.  The
name derives from the fact that the brain cell that loses growth control and
becomes a brain cancer cell is a glial cell (glioblastoma); as the altered glial
cells grow without restraint, they take on many different shapes
(multiforme).  Recent studies suggest, however, that GBMs may arise
from primitive brain stem cells rather than from glial cells.  GBM is the initial
target of Lixte Biotechnology, Inc.




Metastasis




Metastasis is the
process by which cancers acquire the ability to spread to other parts of the
body by entry and dissemination through the blood and/or lymph
systems.  The devastating aspect of metastasis is the ability of the
cancer cells to grow in a new environment (new tissue) Examples are the
metastasis of breast cancer cells to the brain and liver and prostate cancer
cells to bone.


5


Cure of
cancers is much more difficult to achieve after metastasis has
occurred.  A major goal of our biomarker research is to develop assays for detection
of cancers before they have invaded extensively or metastasized,
allowing complete removal by surgery.




Mutation




A mutation is a change
in one or more building blocks of a gene.  Some changes can be
tolerated without altering the integrity (function) of the product of the gene
but other changes can result in cancer.




For the
purposes of the cancer projects described in this memorandum, it is important to
distinguish between inherited mutations (inborn mutations) and acquired
(environmentally caused) mutations.




Some
inborn mutations predispose an individual to development of one or more kinds of
cancer.  Because these mutations are inherited, they are present in
every cell in the body.  Such mutations are responsible for the higher
frequency of certain cancers in particular families and ethnic
groups.  Examples are the breast cancer predisposing genes known as
BRCA I and BRCA II.




Research
on biomarkers,
however, is directed at finding the gene products (proteins) of acquired
mutations.  Acquired mutations that change a single cell to a cancer
cell are present ONLY in that cell and cells arising from its uncontrolled cell
growth.  If the products of the altered genes in these cancer cells
are detectable in the body, they may reveal the presence of the cancer at a
stage when it is curable by surgery.




Prognosis




Prognosis refers to
the likely course of a disease at specific stage of development.  For
example, a breast or prostate cancer that is not confined to the tissue of
origin, e.g. is also present in a lymph node when first detected, has a greater
likelihood of recurrence, a worse prognosis, than if it were confined to the
tissue of origin.




Thus, the
presence of lymph node metastases is an indicator of poor
prognosis.




It is
hoped that specific biomarkers for
cancers will be found that have prognostic value.  With assays for
such markers, patients with poor prognoses could consider more aggressive
treatments before obvious spread of disease and patients with good prognoses
could be spared unnecessary treatment.




Proteins




Proteins are
molecules that have many functions important to the nature and behavior of the
cell.  Many proteins are enzymes that regulate and integrate a myriad
of biochemical processes essential to life.




Certain
enzymes are critical to an integrated system of cellular signaling that
regulates cell behavior in response to a constantly changing environment and
maintains the specialized nature of different types of cells.  It is
likely that some biomarkers of cancers have perverted signaling functions that
perpetuate the abnormal behavior of the cancer.




Thus,
discovery of biomarkers of known function that are unique or overly abundant in
specific types of cancers may provide clues as to the biochemical
vulnerabilities of these cancers, weaknesses that can be attacked selectively by
specific classes of drugs.


6


Intellectual
Property




The
Company filed five patent applications August 1, 2008.  Two of these
filings deal with applications filed earlier jointly with NIH for work done
under the CRADA:  (1) a filing entering the regional stage of a PCT
application involving the use of certain compounds to treat human tumors
expressing a biomarker for brain and other human cancers, and (2) an application
for the treatment of the pediatric tumors, medulloblastoma (the most common
brain tumor in children) and neuroblastoma (a tumor arising from neural cells
outside the brain that is the most common cancer of children).  The
three new patent applications include:  (1) a joint application with
NIH identifying a new biomarker for many common human cancers that when targeted
by compounds developed by the Company result in inhibition of growth and death
of cancer cells; (2) an application by the Company regarding the structure,
synthesis and use of a group of new homologs of its LB-1 compounds; and (3) an
application by the Company for the use of certain homologs of its drugs as
neuroprotective agents with potential application to common neurodegenerative
conditions such as Alzheimer’s and Parkinson’s diseases.




During
2007, the Company also documented that some of its compounds have activity
against several types of fungi that cause serious infections, particularly in
immuno-compromised individuals, such as those with HIV-AIDS and those having
bone marrow transplantations.  This finding extends the potential use
of some of Lixte’s compounds to the large and important field of therapy of
life-threatening mycotic infections.




Development
of New Drugs




On
February 5, 2007, the Company entered into an agreement with Chem-Master
International, Inc. pursuant to which we engaged Chem-Master to synthesize the
compounds designated the LB-100 series and other compounds subsequently named
the LB-2 series    pursuant to our request, which have
potential use in treating a disease, including, without limitation, cancers such
as glioblastomas.  Pursuant to the Agreement, we agreed to grant to
Chem-Master a five-year option to purchase 100,000 shares of our common stock
with an exercise price of $0.333 per share.  Additionally, provided
that the Agreement is not terminated by us without cause or by any party for
cause prior to the second anniversary of the Agreement, we agreed to grant to
Chem-Master a five-year option to purchase an additional 100,000 shares of the
Company’s common stock at $0.333 share.  We have agreed to reimburse
Chem-Master for the cost of materials, labor and expenses in providing the
synthesis.




On
January 29, 2008, the Chem-Master Agreement was amended to extend its term to
February 15, 2014, and to expressly provide for the design and synthesis of a
new series of compounds designated as “LB-3”.  Pursuant to the
amendment, Lixte issued 100,000 shares of its restricted common stock, valued at
$75,000, and granted an option to Chem-Master to purchase 200,000 shares of the
Company’s common stock.




The
Market




Lixte’s
Anti-cancer Drugs





Lixte has
developed 2 series of pharmacologically active drugs, the LB-100 series and the
LB-200 series.  Lead compounds from each series have activity against
a broad spectrum of common and rarer human cancers in cell culture
systems.  In addition, compounds from both series have anti-cancer
activity in animal models of glioblastoma multiforme, neuroblastoma, and
medulloblastoma, all cancers of neural tissue.  Lead compounds of both
series also have activity against human pancreatic cancer in an animal
model.  Furthermore, lead compounds of the LB-100 and LB-200 series
have been shown to enhance the effectiveness of commonly used anti-cancer drugs
in model systems.  It is hoped, therefore, that some of the compounds,
when combined with standard anti-cancer regimens against many tumor types, will
improve therapeutic benefit without enhancing toxicity.  It remains to
be seen whether only therapeutic activity will be enhanced without increased
toxicity.  However, the mechanism by which compounds of the LB-100
series affect cancer cell growth is different from all cancer agents currently
approved for clinical use and drugs of the LB-200 series have only one competing
agent in that it has a similar mechanism of action in clinical
use.


7


If
compounds of either series are active against glioblastoma multiforme in the
clinic, the potential market for such a drug is estimated to be approximately
$800 million annually.  This estimate is based on the current use and
pricing of the drug, Temozolomide.  This drug is given to almost every
patient with a diagnosis of glioblastoma multiforme, some 40,000 individuals in
the United States and Europe annually.  The Lixte compounds may be
used in conjunction with Temozolomide and/or following relapse after treatment
with Temozolomide, since unfortunately almost all patients with this disease
relapse regardless of therapy with current drugs.





If, as
experimental data in model systems suggest, the Lixte compounds are active
against other tumor types, this will dramatically enhance their
value.  If the Lixte compounds enhance the therapeutic benefit of
other standard cancer regimens for common cancers such as those of the lung and
breast, Lixte believes that their potential market is substantial.





Lixte’s
Diagnostic Biomarkers




Lixte has
filed patents on two biomarkers, one associated primarily with cancers of neural
tissue such as glioblastoma multiforme and a second biomarker that is present
not only in brain cancers but also in the more common human
cancers.





Discovery
of the biomarker associated with GBMs provided the insight to Lixte’s team that
led to the synthesis and development of the LB-100 and LB-200
series.  Apart from therapeutic considerations, a biomarker for GBMs
reflecting the presence of the disease in cerebrospinal fluid may be valuable
for confirming diagnosis and/or documenting effectiveness of treatment and
recurrence of disease.  The second biomarker may be useful as a tool
for screening new compounds for anti-cancer activity in general because it
appears to be present in many human cancers.





Marketing
Plan





The
primary goal of the Company is development of its lead compounds through
approval by the FDA for Phase I trials.  Once FDA approval is
obtained, because of the novelty and spectrum of activity of both types of
drugs, the Company believes it is likely it will find a partner in the
pharmaceutical industry with interest in these agents.  It is also
possible that a major company will be interested in licensing the drugs before
FDA approval, but the Company would prefer to delay partnering/licensing until
the potential value of its products is augmented by demonstrating there is no
impediment to clinical evaluation.





Development
of biomarkers for diagnostic purposes will require a partner for
development.  Resources permitting, however, the Company will develop
assays for the biomarkers through service contracts and samples of serum and/or
cerebrospinal fluid will be analyzed for the biomarker.  The goal will
be to show that the biomarker(s) is present in a high percentage of samples from
patients with the same type of cancer, a requirement for a potentially useful
diagnostic test.





Research
and Development




Founded
as a cancer biomarker company, Lixte has evolved into what is primarily a cancer
drug discovery company. This transition was achieved by adding capabilities in
medicinal chemistry and pharmacology (including efficient low-cost synthesis of
small molecules) to expertise in clinical cancer drug development and molecular
and cellular biology.  Lixte’s current intellectual property includes
lead compounds from each of two different types of pharmacological
agents.  The LB-100 series has the potential to be the first of its
type in clinical cancer treatment (first-in-class) and a lead compound from the
LB-200 series has the potential to be competitive for
best-in-class.  Lixte believes that there is only one approved drug
with a mechanism of action similar to the LB-200 series in the clinic at
present.


8


Activity
of lead compounds from both series has been demonstrated against a broad
spectrum of human cancer cell types in cell culture and in animal models
including glioblastoma multiforme (the most common and aggressive brain cancer
of adults), medulloblastoma (the most common brain cancer of children),
neuroblastoma (the most common cancer of children), and pancreatic cancer (a
devastating cancer of adults).  In addition to anti-cancer activity as
single agents, lead compounds of both types enhance the activity of widely used
chemotherapeutic drugs.  The Lixte compounds are likely to be able to
be combined with many standard anti-cancer regimens to enhance therapeutic
effectiveness without enhancing toxicity. These features have the potential for
generating significant commercial value.  Other important features of
Lixte’s lead compounds are the possibilities that some homologs have
neuroprotective, anti-inflammatory, and anti-infective
activities.  Lixte is initially exploring these potential applications
with academic collaborators.




On
October 9, 2008, LixteengagedSouthern Research
Institute, Birmingham, Alabama, to assess one lead compound from each of its two
classes of proprietary pharmacological agents for effects on normal
neuronal cells and to determine if the compounds protect normal brain cells from
injury in several different models of chemical and traumatic brain injury.The goal is to determine if
these agents have promise as drugs potentially useful for the prevention,
amelioration, or delay of progression ofneurodegenerative
diseasessuch as
Alzheimer’s disease and other neurological diseases or impairments resulting
from trauma and/or other diverse or unknown origins.





Further
development of lead compounds from each group now requires
pharmacokinetic/pharmacodynamic characterization (how long a drug persists in
the blood and how long the drug is active at the intended target) and large
animal toxicologic evaluation under conditions meeting FDA
requirements.  Most anti-cancer drugs fail in development because of
unacceptable toxicity.  By analogy with mechanistically related
compounds, there is good reason to believe, however, that lead compounds of both
series of drugs will be able to be given to human beings safely by routes and at
doses resulting in concentration of drug producing anti-cancer activity in
animal model systems.  Lixte has demonstrated that lead compounds of
both types affect their intended targets at doses that produce anti-cancer
activity without discernable toxicity in animal models.





A
secondary objective is to develop sensitive and specific assays for
identification of potential therapeutic targets and for the early detection for
several common cancers.  Most cancers produce abnormal proteins or
abnormal amounts of normal proteins.  How many of these potential
biomarkers are present at detectable concentrations in the blood is not
known.  Using stringent criteria for biomarker selection, analysis of
small numbers of a given type of cancer is sufficient for detection of relevant
biomarkers.  If potential biomarkers for early diagnosis are
discovered for several types of cancer, such as the one already identified for
GBMs, we will prioritize their development in the following
order:  stomach, ovary, prostate, colon, bladder, and
kidney.




The
Company’s most valuable resource, however, is its scientific team, a coalition
of various experts brought together through contracts and other collaborative
arrangements.  The team has expertise in cancer biology, proteomics
(cancer biomarkers), medicinal and synthetic chemistry, pharmacology, clinical
oncology, and drug evaluation.  In a short period of time and at very
low cost, this group has developed lead compounds of two different classes of
drugs that are poised for development as new treatments for several types of
cancer.  The initial cancer target(s) is expected to be neuroblastoma,
medulloblastoma, and /or glioblastoma multiforme. The choice will depend in part
upon pre-IND discussions with the FDA.


9


Product
Overview




Our
products will derive directly from our intellectual property consisting of
patent applications.  These patents now cover sole rights to the
composition and synthesis of the LB-100 and LB-200 series of
drugs.  Joint patent applications with NIH have been filed for the
treatment of glioblastoma multiforme, medulloblastoma, and
neuroblastoma.  Lixte has also filed claims for the use of certain
homologs of both series of drugs for the potential treatment on
neurodegenerative diseases such as Alzheimer’s disease and of homologs of the
LB-200 series for treatment of serious systemic fungal infections and for the
treatment of common fungal infections of the skin and nails. Other claims cover
biomarkers uniquely associated with specific types of cancer that may provide
the bases for assays suitable for cancer detection and patents for development
of a tool for screening new compounds for anti-cancer activity.




We
believe that there are four main markets for potential products that may be
developed by Lixte.




1.           Improved Anti-Cancer
Treatments.Improved chemotherapy regimens for cancers not
curable by surgery or radiation.  This is the primary focus of the
Company.




2.           Improved Anti-Fungal Treatments.New drug treatments for the management of life-threatening fungal
infections in immuno-suppressed patients such as those with HIV-AIDS or
undergoing bone marrow transplantation are needed due to the constant
development of drug resistance in these organisms.  More effective and
less toxic drugs are also needed for the management of skin and particularly
nail fungi that affect tens of millions of people worldwide. The Company is
actively evaluating the activity of several compounds against different fungal
pathogens.




3.           Treatments for Neurodegenerative
Diseases.  Most experts believe that at present there are no
significantly effective drugs available for the delay of progression as well as
prevention of the common neurodegenerative diseases, including Alzheimer’s and
Parkinson’s diseases, among a host of rarer chronic diseases of the
brain.  The Company is exploring mechanisms to evaluate its compounds
for these activities with experts in the field, in academic or other
not-for–profit settings.




4.           Biomarker Assays for Diagnosis,
Prognosis, and Assessing Treatment Benefit.Improved assays
for biomarkers of specific cancers in the body fluids, primarily blood, for the
diagnosis of cancers at stages when cure is possible through surgery and/or
radiotherapy. Such assays might also be useful for assessing therapeutic
effectiveness of treatment before gross reappearance of disease; and, assays for
the molecular classification of otherwise indistinguishable tumor types would be
helpful for selection of treatment and also potentially for estimation of
prognosis.  Resources permitting, the Company will determine whether
the biomarkers of interest are present in the serum (other fluids) in most if
not all of a small number of patients with the same cancer and will explore the
interest of a large diagnostic company to undertake clinical
development.  Development of biomarkers for useful clinical assays is
a complex and expensive process.




Product
Development




We will
become subject to FDA regulations at such time as we pursue development of
clinical trials.  Additionally, any product for which we obtain
marketing approval, along with the manufacturing processes, post-approval
clinical data and promotional activities for such product, will be subject to
continual review and periodic inspections by the FDA and other regulatory
bodies.  Even if regulatory approval of a product is granted, the
approval may be subject to limitations on the indicated uses for which the
product may be marketed or contain requirements for costly post-marketing
testing and surveillance to monitor the safety or efficacy of the
product.  Later discovery of previously unknown problems with our
products, including unanticipated adverse events or adverse events of
unanticipated severity or frequency, manufacturer or manufacturing processes, or
failure to comply with regulatory requirements, may result in restrictions on
such products or manufacturing processes, withdrawal of the products from the
market, voluntary or mandatory recall, fines, suspension of regulatory
approvals, product seizures, injunctions or the imposition of civil or criminal
penalties.


10


Competition




The life
sciences industry is highly competitive and subject to rapid and profound
technological change.  We believe that several companies are
investigating biomarkers for every human cancer.  These companies
include firms seeking a better understanding of molecular variability in human
brain tumors with the objective to be able to use such information to design
better treatments.  Our present and potential competitors include
major pharmaceutical companies, as well as specialized biotechnology and life
sciences firms in the United States and in other countries.  Most of
these companies have considerably greater financial, technical and marketing
resources than we do.  Additional mergers and acquisitions in the
pharmaceutical and biotechnology industries may result in even more resources
being concentrated in our competitors.  Our existing or prospective
competitors may develop processes or products that are more effective than ours
or be more effective at implementing their technologies to develop commercial
products faster.  Our competitors may succeed in obtaining patent
protection and/or receiving regulatory approval for commercializing products
before us.  Developments by our competitors may render our product
candidates obsolete or non-competitive.




We also
experience competition from universities and other research institutions, and we
are likely to compete with others in acquiring technology from those
sources.  There can be no assurance that others will not develop
technologies with significant advantages over those that we are seeking to
develop.  Any such development could harm our business.




We face
competition from other companies seeking to identify and commercialize cancer
biomarkers.  We also compete with universities and other research
institutions engaged in research in these areas.  Many of our
competitors have greater technical and financial resources than we
do.




Our
ability to compete successfully is based on numerous factors,
including:




·
            the
      cost-effectiveness of any product we ultimately commercialize relative to
      competing products;




·
            the
      ease of use and ready availability of any product we bring to
      market;




·
            the
      accuracy of a diagnostic test designed by us in detecting cancers,
      including overcoming the propensity for “false positive” results;
      and




·
            the
      relative speed with which we are able to bring any product resulting from
      our research to market in our target
markets.




If we are
unable to distinguish our products from competing products, or if competing
products reach the market first, we may be unable to compete successfully with
current or future competitors.




Employees




As of
December 31, 2008, we had no full-time employees.  Dr. Kovach
is  a Professor (part-time) in the Department of Preventive Medicine
at State University of New York, Stony Brook, New York.  He received
approvals from the School of Medicine of Stony Brook University and from the New
York State Ethics Commission to operate the Company and to hold greater than 5%
of our outstanding shares.


11


Our
investment commitments in the research efforts pursuant to the CRADA fund two
full-time technical assistants who work under the supervision of Dr. Zhuang on
the aims of the CRADA.  Dr. Kovach devotes approximately 20% of his
efforts per year to research planning and design and is monitoring the
research progress under the CRADA.  Dr. Kovach’s contributions are
made outside of his academic responsibilities.  He directs,
coordinates, and manages scientific and business development with the advice of
the Company’s Board, the advisory committee, and a consultant with expertise in
corporate development.  The Company is considering adding another
board member with specific expertise in cancer biotechnology development
and intends to add a Chief Operating Officer, at least part time, to
assist in management once an IND is approved.




Government
Regulation




At its
present stage of development, our business is not subject to any specific
government regulation with respect to its ongoing research and plan service
agreement.  Our only collaborator at present is National Institute of
Neurological Diseases and Stroke (NINDS), National Institutes of
Health.  This collaboration is defined in CRADA 2165 under which NINDS
evaluates compounds for their ability to inhibit the growth of brain tumor
cells.  The NINDS laboratory that is carrying out this activity is a
research laboratory that operates in compliance with various federal and state's
statutes and regulations including OSHA.  All activities of this
laboratory are monitored by the compliance office of NINDS.  There are
no other regulations affecting the pursuit of the goals of the
business.




Studies
done under the CRADA are carried out in compliance with applicable Statutes,
Executive Capital Orders, HHS regulations and all FDA, CDC, and NIH policies as
specified in Article 13, 13.1 and 13.2, of the PHS CRADA agreement.




Our
business will become subject to the regulations of the FDA when we begin to
pursue development of clinical trials.  Clinical trials are research
studies to answer specific questions about new therapies or new ways of using
known treatments.  Clinical trials determine whether new drugs or
treatments are both safe and effective and the FDA has determined that carefully
conducted clinical trials are the fastest and safest way to find treatment that
work in people.




The
ultimate objective of our CRADA is to identify, characterize, and bring to
clinical trial regimens for the treatment of human brain tumors
(GBMs).  We estimate that we are at least one year from being in a
position to begin discussing development of a clinical trial.  Such a
clinical trial would most likely be conducted by us in association with a
pharmaceutical company in association with NIH under the existing CRADA or under
a new CRADA or with a pharmaceutical company without association with
NIH.  In either case, we would be primarily responsible for filing and
obtaining approval from the FDA of an Investigational New Drug Application
(IND).  In the event that we seek to raise sufficient capital to
conduct a phase I clinical trial without a partner in the pharmaceutical
industry in collaboration with NIH or independently, we would become subject to
FDA regulation as we sought to obtain an IND for clinical evaluation of a
therapeutic regimen with the long-range goal of receiving FDA approval of the
drug for commercial use.  Approval of an IND from the FDA is the
process that triggers FDA review and oversight as federal law requires that a
drug be the subject of an approved marketing application before it is
transported to clinical investigations, unless exempted.  The IND is
the means through which we would obtain such exemption.  During a new
drug's early preclinical development, our primary goal is to determine if the
product is reasonably safe for initial use in humans, and if the compound
exhibits pharmacological activity that justifies commercial
development.  When a product is identified as a viable candidate for
further development, we would then focus on collecting the data and information
necessary to establish that the product will not expose humans to unreasonable
risks when used in limited, early-stage clinical studies.  The FDA's
role in the development of a new drug begins when we, having screened the new
molecule for pharmacological activity and acute toxicity potential in animals,
want to test its diagnostic or therapeutic potential in humans.  At
that point, the molecule changes in legal status under the Federal Food, Drug,
and Cosmetic Act and becomes a new drug subject to specific requirements of the
drug regulatory system.  Once the IND is submitted, we must wait 30
calendar days before initiating any clinical trials.  During this
time, the FDA has an opportunity to review the IND for safety to assure that
research subjects will not be subjected to unreasonable risk.


12


The first
phase of clinical trials, Phase I trials, are the initial studies to determine
the metabolism and pharmacologic action of drugs in humans, the side effects
associated with increasing doses, and to gain early evidence of
effectiveness.  If we were to conduct clinical trials on our own, it
is likely that only a Phase I type trial would be done.  In such a
trial a new investigational drug or combination of drugs is first introduced
into humans.  For the evaluation of anti-cancer drugs, patients
entering such trials are those for whom no means of therapy is known to be
associated with benefit.  Such studies are closely monitored and
require approval from the FDA, including a proposal for the conduct of the
clinical trial.




The FDA
also requires that an independent review body consider the benefits and risks of
a clinical trial and grant approval for the proposed study including selecting
of initial doses, plans for escalation of dose, plans for modification of dose
if toxicity is encountered, plans for monitoring the well being of individuals
participating in the study and for defining and measuring to the extent possible
any untoward effects related to drug administration.  Serious adverse
effects such as life-threatening toxicities and death are immediately reportable
to the review body and to the FDA.  To minimize risk when studying a
new drug, the initial dose is well below that expected to cause any
toxicity.  No more than three patients are entered at a given
dose.  In general, dose is not escalated within
patients.  Once safety is established by the absence of toxicity or
low toxicity in a group of three patients, a planned higher dose is then
evaluated in a subsequent group of three individuals and so on until
dose-limiting toxicity is encountered.  The dose level producing
definite but acceptable toxicity is then selected as the dose level to be
evaluated in Phase II trials.  Thus, the goal of Phase I studies is to
determine the appropriate dose level for evaluation of drug efficacy in patients
with the same type of tumor at comparable stages of progression for whom no
beneficial treatment is established.




The
duration of a Phase I trial is generally from 4 to 9 months.




In
addition to regulations imposed by the FDA, depending on our future activities,
we may become subject to regulation under various federal and state statutes and
regulations such as the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Research Conservation and
Recovery Act, national restrictions on technology transfer, and import, export
and customs regulations.  From time to time, other federal agencies
and congressional committees have indicated an interest in implementing further
regulation of biotechnology applications.  We are not able to predict
whether any such regulations will be adopted or whether, if adopted, such
regulations will apply to our business, or whether we or our collaborators would
be able to comply with any applicable regulations.




In
addition, as we intend to market our products in international markets, we may
be required to obtain separate regulatory approvals from the European Union and
many other foreign jurisdictions.  Approval by the FDA does not ensure
approval by regulatory authorities in other countries, and approval by one
foreign regulatory authority does not ensure approval by regulatory authorities
in other foreign countries or by the FDA.  We may not be able to file
for regulatory approvals and may not receive necessary approvals to
commercialize our products in any market.  As we are currently in the
development stage, we cannot predict the impact on us from any such
regulations.




ITEM
1A.              RISK
FACTORS




Please
consider the following risk factors together with the other information
presented in this Report, including the financial statements and the notes
thereto.




Risks
Related to Business




We
are engaged in early stage research and as such may not be successful in our
efforts to develop a portfolio of commercially viable products.




A key
element of our strategy is to discover, develop and commercialize a portfolio of
new drugs and diagnostic tests.  We are seeking to do so through our
internal research programs.  A significant portion of the research
that we are conducting involves new and unproven
technologies.  Research programs to identify new disease targets and
product candidates require substantial technical, financial and human resources
whether or not any candidates or technologies are ultimately
identified.  Our research programs may initially show promise in
identifying potential product candidates, yet fail to yield product candidates
for clinical development for any of the following reasons:


13


·
            the
      research methodology used may not be successful in identifying potential
      product candidates;




·
            product
      candidates for diagnostic tests may on further study be shown to not
      obtain an acceptable level of accuracy;
or




·
            product
      candidates for drugs may on further study be shown to have harmful side
      effects or other characteristics that indicate they are unlikely to be
      effective drugs.




Although
we have identified one potential product candidate in the area of brain tumors,
the work needed to demonstrate its commercial viability is at a very early
stage.  The follow-up research needed to demonstrate the viability of
the product is costly and time-consuming and may reveal that the product does
not function as expected or that it is otherwise not commercially
viable.




If we are
unable to discover suitable potential product candidates, develop additional
delivery technologies through internal research programs or in-license suitable
products or delivery technologies on acceptable business terms, our business
prospects will suffer.




Our
auditors have included a going concern assumption in their opinion; we do not
expect to obtain any revenues for several years and there is no assurance that
we will ever generate revenue or be profitable.




The
Company’s consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business.  The
Company is in the development stage and has not generated any revenues from
operations to date.  Furthermore, the Company has experienced
recurring losses and has a stockholders’ deficiency at December 31,
2008.  As a result, the Company’s independent registered public
accounting firm, in their report on the Company’s 2008 consolidated financial
statements, have raised substantial doubt about the Company’s ability to
continue as a going concern.





Because
the Company is currently engaged in research at an early stage, it will likely
take a significant amount of time to develop any product or intellectual
property capable of generating revenues.  As such, the Company’s
business is unlikely to generate any revenue in the next several years and may
never do so.  Even if the Company is able to generate revenues in the
future through licensing its technologies or through product sales, there can be
no assurance that the Company will be able to generate a profit.





The
Company does not have sufficient resources to fund its operations, including the
Company’s research activities with respect to its intellectual property, for the
next twelve months.  In addition, the Company does not have sufficient
resources to fully develop and commercialize any products that may arise from
its research.  Accordingly, the Company needs to raise additional
funds in order to satisfy its future working capital requirements.





The
Company estimates that it will require minimum funding in calendar 2009 of
approximately $750,000 in order to fund operations and continuing drug discovery
and to attempt to bring two drugs through the pre-clinical evaluation process
needed for submission of an Investigational New Drug (“IND”) application.
Towards that objective, the Company recently initiated a private placement,
which generated net proceeds from two closings in February and March 2009
aggregating approximately $382,000.  The Company utilized a portion of
such net proceeds to repay a $100,000 short-term note in February
2009.  The Company is continuing its efforts in 2009 to raise
approximately $500,000 of additional funds under the private
placement.  There can be no assurances that the Company will have
further success in this regard.  The amount and timing of future cash
requirements will depend on the market’s evaluation of the Company’s technology
and products, if any, and the resources that it devotes to developing and
supporting its activities.  The Company will need to fund these cash
requirements from a combination of additional debt or equity financings, or the
sale, licensing or joint venturing of its intellectual
properties.


14


Current
market conditions present uncertainty as to the Company’s ability to secure
additional funds, as well as its ability to reach
profitability.  There can be no assurances that the Company will be
able to secure additional financing, or obtain favorable terms on such financing
if it is available, or as to the Company’s ability to achieve positive earnings
and cash flows from operations.  Continued negative cash flows and
lack of liquidity create significant uncertainty about the Company’s ability to
fully implement its operating plan, as a result of which the Company may have to
reduce the scope of its planned operations.  If cash resources are
insufficient to satisfy the Company’s liquidity requirements, the Company would
be required to scale back or discontinue its technology and product development
programs, or obtain funds, if available, through strategic alliances that may
require the Company to relinquish rights to certain of its technologies
products, or to discontinue its operations entirely.





If
we are unable to secure licenses to technologies or materials vital to our
business, or if the rights to technologies that we have licensed terminate, our
commercialization efforts could be delayed or fail.




In
February 2006, a provisional patent application was filed covering certain
methods and classes of molecules that we expect to be the foundation of our
product development and commercialization efforts with respect to human brain
tumors that are subject to the CRADA.  In February 2007, a PCT
international patent covering all countries participating in the Patent
Cooperation Treaty was filed and a similar non-provisional patent was filed in
the United States, containing all claims in the provisional patent plus
additional claims.  Any patents resulting from these applications will
be jointly owned by us and the U.S. Government.  We have executed an
agreement with the government granting to us exclusive commercialization rights
with respect to those patents.  If those licenses terminate and we are
unable to renew them, or must renew them only on unfavorable terms, such events
could require us to cease providing products or services using such licensed
technology and, therefore, would likely result in loss of revenue for our
business.




If
we were to materially breach our present collaboration agreement or any future
license or collaboration agreements, we could lose our ability to commercialize
the related technologies, and our business could be materially and adversely
affected.




We are
party to a research collaboration agreement and intend to enter into
intellectual property licenses and agreements, all of which will be integral to
our business.  These licenses and agreements impose various research,
development, commercialization, sublicensing, royalty, indemnification,
insurance and other obligations on us.  If we or our collaborators
fail to perform under these agreements or otherwise breach obligations imposed
by them, we could lose intellectual property rights that are important to our
business.




We
may not be successful in establishing additional strategic collaborations, which
could adversely affect our ability to develop and commercialize
products.




In the
future, we may seek opportunities to establish new collaborations, joint
ventures and strategic collaborations for the development and commercialization
of products we discover.  We face significant competition in seeking
appropriate collaborators and the negotiation process is time-consuming and
complex.  We may not be successful in our efforts to establish
additional strategic collaborations or other alternative
arrangements.  Even if we are successful in our efforts to establish a
collaboration or agreement, the terms that we establish may not be favorable to
us.  Finally, such strategic alliances or other arrangements may not
result in successful products and associated revenue.


15


The
life sciences industry is highly competitive and subject to rapid technological
change.




The life
sciences industry is highly competitive and subject to rapid and profound
technological change.  Our present and potential competitors include
major pharmaceutical companies, as well as specialized biotechnology and life
sciences firms in the United States and in other countries.  Most of
these companies have considerably greater financial, technical and marketing
resources than we do.  Additional mergers and acquisitions in the
pharmaceutical and biotechnology industries may result in even more resources
being concentrated in our competitors.  Our existing or prospective
competitors may develop processes or products that are more effective than ours
or be more effective at implementing their technologies to develop commercial
products faster.  Our competitors may succeed in obtaining patent
protection and/or receiving regulatory approval for commercializing products
before us.  Developments by our competitors may render our product
candidates obsolete or non-competitive.




We also
experience competition from universities and other research institutions, and we
are likely to compete with others in acquiring technology from those
sources.  There can be no assurance that others will not develop
technologies with significant advantages over those that we are seeking to
develop.  Any such development could harm our business.




We
may be unable to compete successfully with our competitors.




We face
competition from other companies seeking to identify and commercialize cancer
biomarkers.  We also compete with universities and other research
institutions engaged in research in these areas.  Many of our
competitors have greater technical and financial resources than we
do.




Our
ability to compete successfully is based on numerous factors,
including:




·
            the
      cost-effectiveness of any product we ultimately commercialize relative to
      competing products;




·
            the
      ease of use and ready availability of any product we bring to
      market;




·
            the
      accuracy of a diagnostic test designed by us in detecting cancers,
      including overcoming the propensity for “false positive” results;
      and




·
            the
      relative speed with which we are able to bring any product resulting from
      our research to market in our target
markets.




If we are
unable to distinguish our products from competing products, or if competing
products reach the market first, we may be unable to compete successfully with
current or future competitors.  This would cause our revenues to
decline and affect our ability to achieve profitability.




We
depend on certain key scientific personnel for our success who do not work full
time for us.  The loss of any such personnel could adversely affect
our business, financial condition and results of operations.




Our
success depends on the continued availability and contributions of our Chief
Executive Officer and founder, Dr. John S.  Kovach, as well as the
continued availability and contributions of Dr. Zhengping Zhuang and other
collaborators at the NIH.  In particular, Dr. Kovach is 72 years old,
and, because of his arrangement with the State University of New York, does not
devote his full time to us, although Dr. Kovach generally devotes a minimum of
twenty hours a week to our business.  The loss of services of any of
these persons could delay or reduce our product development and
commercialization efforts.  Furthermore, recruiting and retaining
qualified scientific personnel to perform future research and development work
will be critical to our success.  The loss of members of our
scientific personnel, or our inability to attract or retain other qualified
personnel or advisors, could significant weaken our management, harm our ability
to compete effectively and harm our business.


16


Our
key personnel are involved in other business activities and may face a conflict
in selecting between their other business interests and our
business.




Dr. John
Kovach, our Chief Executive Officer, also is a Professor (part-time) in the
Department of Preventive Medicine at State University of New York, Stony Brook,
New York.  He may also become involved in the future with other
business opportunities, which may become available.  Accordingly, our
key personnel may face a conflict in selecting between us and their other
business interests.  We have not formulated a policy for the
resolution of such conflicts.  Dr. Zhengping Zhuang is a full-time
employee of NIH.  He participates with the Company under a CRADA with NIH
that defines the scope of his collaboration, and he does not face a conflict of
interest.




We
expect to rely heavily on third parties for the conduct of clinical trials of
our product candidates.  If these clinical trials are not successful,
or if we or our collaborators are not able to obtain the necessary regulatory
approvals, we will not be able to commercialize our product
candidates.




In order
to obtain regulatory approval for the commercial sale of our product candidates,
we and our collaborators will be required to complete extensive preclinical
studies as well as clinical trials in humans to demonstrate to the FDA and
foreign regulatory authorities that our product candidates are safe and
effective.




Dr.
Kovach is experienced in the design and conduct of early clinical cancer trials,
having been the lead investigator for a National Cancer Institute Phase I
contract for ten years at the Mayo Clinic, Rochester,
Minnesota.  Lixte, however, has no experience in conducting clinical
trials and expects to rely heavily on collaborative partners and contract
research organizations for their performance and management of clinical trials
of our product candidates.




Clinical
development, including preclinical testing, is a long, expensive and uncertain
process.  Prior to conducting preclinical studies and clinical trials
in humans, we anticipate that the following steps will be
taken:  Identification of lead compounds in vitro studies, followed by
documentation of activity in an animal model of a particular disease entity, and
determination of toxicity of the new therapy(s) in an animal system usually
consisting of the mouse and often the dog.  For new diagnostic tests,
pre-clinical studies involve demonstration of recognition of specific endpoints
associated with the presence or progression of disease in a manner that suggest
relevance to clinical diagnosis and/or assessment of prognosis.  It is
expected that for us to carry its new treatments to clinical trials, an
agreement will be negotiated with (1) NIH to conduct the trial as part of a new
CRADA or (2) a pharmaceutical company, most probably in conjunction with NIH as
co-inventor of the new therapies.  Accordingly, preclinical testing
and clinical trials, if any, of our product candidates under development may not
be successful.  We and our collaborators could experience delays in
preclinical or clinical trials of any of our product candidates, obtain
unfavorable results in a development program, or fail to obtain regulatory
approval for the commercialization of a product.  Preclinical studies
or clinical trials may produce negative, inconsistent or inconclusive results,
and we or our collaborators may decide, or regulators may require us, to conduct
additional preclinical studies or clinical trials.  The results from
early clinical trials may not be statistically significant or predictive of
results that will be obtained from expanded, advanced clinical
trials.




Furthermore,
the timing and completion of clinical trials, if any, of our product candidates
depend on, among other factors, the number of patients we will be required to
enroll in the clinical trials and the rate at which those patients are
enrolled.  Any increase in the required number of patients, decrease
in recruitment rates or difficulties retaining study participants may result in
increased costs, program delays or both.


17


Also,
our products under development may not be effective in treating any of our
targeted disorders or may prove to have undesirable or unintended side effects,
toxicities or other characteristics that may prevent or limit their commercial
use.  Institutional review boards or regulators, including the FDA,
may hold, suspend or terminate our clinical research or the clinical trials of
our product candidates for various reasons, including non-compliance with
regulatory requirements or if, in their opinion, the participating subjects are
being exposed to unacceptable health risks.  Additionally, the failure
of third parties conducting or overseeing the operation of the clinical trials
to perform their contractual or regulatory obligations in a timely fashion could
delay the clinical trials.  Failure of clinical trials can occur at
any stage of testing.  Any of these events would adversely affect our
ability to market a product candidate.




The
development process necessary to obtain regulatory approval is lengthy, complex
and expensive.  If we and our collaborative partners do not obtain
necessary regulatory approvals, then our business would not be successful and
the market price of our common stock would be expected to decline
substantially.




To the
extent that we, or our collaborative partners, are able to successfully advance
a product candidate through the clinic, we, or such partner, will be required to
obtain regulatory approval prior to marketing and selling such
product.




The
process of obtaining FDA and other required regulatory approvals is
expensive.  The time required for FDA and other approvals is uncertain
and typically takes a number of years, depending on the complexity and novelty
of the product.




Any
regulatory approval to market a product may be subject to limitations on the
indicated uses for which we, or our collaborative partners, may market the
product.  These limitations may restrict the size of the market for
the product and affect reimbursement by third-party payors.  In
addition, regulatory agencies may not grant approvals on a timely basis or may
revoke or significantly modify previously granted approvals.




We, or
our collaborative partners, also are subject to numerous foreign regulatory
requirements governing the manufacturing and marketing of our potential future
products outside of the United States.  The approval procedure varies
among countries, additional testing may be required in some jurisdictions, and
the time required to obtain foreign approvals often differs from that required
to obtain FDA approvals.  Moreover, approval by the FDA does not
ensure approval by regulatory authorities in other countries, and vice
versa.




As a
result of these factors, we or our collaborators may not successfully begin or
complete clinical trials in the time periods estimated, if at
all.  Moreover, if we or our collaborators incur costs and delays in
development programs or fail to successfully develop and commercialize products
based upon our technologies, we may not become profitable and our stock price
could decline.




Even
if our products are approved by regulatory authorities, if we fail to comply
with ongoing regulatory requirements, or if we experience unanticipated problems
with our products, these products could be subject to restrictions or withdrawal
from the market.




Any
product for which we obtain marketing approval, along with the manufacturing
processes, post-approval clinical data and promotional activities for such
product, will be subject to continual review and periodic inspections by the FDA
and other regulatory bodies.  Even if regulatory approval of a product
is granted, the approval may be subject to limitations on the indicated uses for
which the product may be marketed or contain requirements for costly
post-marketing testing and surveillance to monitor the safety or efficacy of the
product.  Later discovery of previously unknown problems with our
products, including unanticipated adverse events or adverse events of
unanticipated severity or frequency, manufacturer or manufacturing processes, or
failure to comply with regulatory requirements, may result in restrictions on
such products or manufacturing processes, withdrawal of the products from the
market, voluntary or mandatory recall, fines, suspension of regulatory
approvals, product seizures, injunctions or the imposition of civil or criminal
penalties.


18


Failure
to obtain regulatory approval in foreign jurisdictions will prevent us from
marketing our products abroad.




We intend
to market our products in international markets.  In order to market
our products in the European Union and many other foreign jurisdictions, we must
obtain separate regulatory approvals.  The approval procedure varies
among countries and can involve additional testing, and the time required to
obtain approval may differ from that required to obtain FDA
approval.  The foreign regulatory approval process may include all of
the risks associated with obtaining FDA approval.  We may not obtain
foreign regulatory approvals on a timely basis, if at all.  Approval
by the FDA does not ensure approval by regulatory authorities in other
countries, and approval by one foreign regulatory authority does not ensure
approval by regulatory authorities in other foreign countries or by the
FDA.  We may not be able to file for regulatory approvals and may not
receive necessary approvals to commercialize our products in any
market.




We
are subject to uncertainty relating to health care reform measures and
reimbursement policies which, if not favorable to our product candidates, could
hinder or prevent our product candidates’ commercial success.




The
continuing efforts of the government, insurance companies, managed care
organizations and other payors of health care costs to contain or reduce costs
of health care may adversely affect:




·
            our
      ability to generate revenues and achieve
  profitability;




·
            the
      future revenues and profitability of our potential customers, suppliers
      and collaborators; and




·
            the
      availability of capital.




In
certain foreign markets, the pricing of prescription pharmaceuticals is subject
to government control.  In the United States, given recent federal and
state government initiatives directed at lowering the total cost of health care,
the U.S. Congress and state legislatures will likely continue to focus on health
care reform, the cost of prescription pharmaceuticals and on the reform of the
Medicare and Medicaid systems.  While we cannot predict the effects of
the implementation of any new legislation or whether any current legislative or
regulatory proposals affecting our business will be adopted, the implementation
of new legislation or the announcement or adoption of current proposals could
have a material and adverse effect on our business, financial condition and
results of operations.




Our
ability to commercialize our product candidates successfully will depend in part
on the extent to which governmental authorities, private health insurers and
other organizations establish appropriate reimbursement levels for the cost of
our products and related treatments.  Third-party payors are
increasingly challenging the prices charged for medical products and
services.  Also, the trend toward managed health care in the United
States, which could significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care or reduce
government insurance programs, may result in lower prices for our product
candidates or exclusion of our product candidates from reimbursement
programs.  The cost containment measures that health care payors and
providers are instituting and the effect of any health care reform could
materially and adversely affect our results of operations.




If
physicians and patients do not accept the products that we may develop, our
ability to generate product revenue in the future will be adversely
affected.




The
product candidates that we may develop may not gain market acceptance among
physicians, healthcare payors, patients and the medical
community.  This will adversely affect our ability to generate
revenue.  Market acceptance of and demand for any product that we may
develop will depend on many factors, including:


19


·
            our
      ability to provide acceptable evidence of safety and
    efficacy;




·
            convenience
      and ease of administration;




·
            prevalence
      and severity of adverse side
effects;




·
            availability
      of alternative treatments or diagnostic
tests;




·
            cost
      effectiveness;




·
            effectiveness
      of our marketing strategy and the pricing of any product that we may
      develop;




·
            publicity
      concerning our products or competitive products;
  and




·
            our
      ability to obtain third-party coverage or
  reimbursement.




We
face the risk of product liability claims and may not be able to obtain
insurance.




Our
business exposes us to the risk of product liability claims that is inherent in
the testing, manufacturing, and marketing of drugs and related
devices.  Although we will obtain product liability and clinical trial
liability insurance when appropriate, this insurance is subject to deductibles
and coverage limitations.  We may not be able to obtain or maintain
adequate protection against potential liabilities.  In addition, if
any of our product candidates are approved for marketing, we may seek additional
insurance coverage.  If we are unable to obtain insurance at
acceptable cost or on acceptable terms with adequate coverage or otherwise
protect against potential product liability claims, we will be exposed to
significant liabilities, which may harm our business.  These
liabilities could prevent or interfere with our product commercialization
efforts.  Defending a suit, regardless of merit, could be costly,
could divert management attention and might result in adverse publicity or
reduced acceptance of our products in the market.




We
cannot be certain we will be able to obtain patent protection to protect our
product candidates and technology.




We cannot
be certain that any patent or patents will be issued based on the pending
provisional patent application we recently filed.  If a third party
has also filed a patent application relating to an invention claimed by us or
our licensors, we may be required to participate in an interference proceeding
declared by the U.S. Patent and Trademark Office to determine priority of
invention, which could result in substantial uncertainties and cost for us, even
if the eventual outcome is favorable to us.  The degree of future
protection for our proprietary rights is uncertain.  For
example:




·
            we
      or our licensors might not have been the first to make the inventions
      covered by our pending or future patent
  applications;




·
            we
      or our licensors might not have been the first to file patent applications
      for these inventions;




·
            others
      may independently develop similar or alternative technologies or duplicate
      any of our technologies;




·
            it
      is possible that our patent applications will not result in an issued
      patent or patents, or that the scope of protection granted by any patents
      arising from our patent applications will be significantly narrower than
      expected;


20


·
            any
      patents under which we hold ultimate rights may not provide us with a
      basis for commercially-viable products, may not provide us with any
      competitive advantages or may be challenged by third parties as not
      infringed, invalid, or unenforceable under United States or foreign
      laws;




·
            any
      patent issued to us in the future or under which we hold rights may not be
      valid or enforceable; or




·
            we
      may develop additional proprietary technologies that are not patentable
      and which may not be adequately protected through trade secrets; for
      example if a competitor independently develops duplicative, similar, or
      alternative technologies.




If
we are not able to protect and control our unpatented trade secrets, know-how
and other technological innovation, we may suffer competitive harm.




We also
rely on proprietary trade secrets and unpatented know-how to protect our
research and development activities, particularly when we do not believe that
patent protection is appropriate or available.  However, trade secrets
are difficult to protect.  We will attempt to protect our trade
secrets and unpatented know-how by requiring our employees, consultants and
advisors to execute a confidentiality and non-use agreement.  We
cannot guarantee that these agreements will provide meaningful protection, that
these agreements will not be breached, that we will have an adequate remedy for
any such breach, or that our trade secrets will not otherwise become known or
independently developed by a third party.  Our trade secrets, and
those of our present or future collaborators that we utilize by agreement, may
become known or may be independently discovered by others, which could adversely
affect the competitive position of our product candidates.




We
may incur substantial costs enforcing our patents, defending against third-party
patents, invalidating third-party patents or licensing third-party intellectual
property, as a result of litigation or other proceedings relating to patent and
other intellectual property rights.




We may
not have rights under some patents or patent applications that may cover
technologies that we use in our research, drug targets that we select, or
product candidates that we seek to develop and commercialize.  Third
parties may own or control these patents and patent applications in the United
States and abroad.  These third parties could bring claims against us
or our collaborators that would cause us to incur substantial expenses and, if
successful against us, could cause us to pay substantial
damages.  Further, if a patent infringement suit were brought against
us or our collaborators, we or they could be forced to stop or delay research,
development, manufacturing or sales of the product or product candidate that is
the subject of the suit.  We or our collaborators therefore may choose
to seek, or be required to seek, a license from the third-party and would most
likely be required to pay license fees or royalties or both.  These
licenses may not be available on acceptable terms, or at all.  Even if
we or our collaborators were able to obtain a license, the rights may be
nonexclusive, which would give our competitors access to the same intellectual
property.  Ultimately, we could be prevented from commercializing a
product, or forced to cease some aspect of our business operations, as a result
of patent infringement claims, which could harm our business.




There has
been substantial litigation and other proceedings regarding patent and other
intellectual property rights in the pharmaceutical and biotechnology
industries.  Although we are not currently a party to any patent
litigation or any other adversarial proceeding, including any interference
proceeding declared before the United States Patent and Trademark Office,
regarding intellectual property rights with respect to our products and
technology, we may become so in the future.  We are not currently
aware of any actual or potential third party infringement claim involving our
products.  The cost to us of any patent litigation or other
proceeding, even if resolved in our favor, could be substantial.  The
outcome of patent litigation is subject to uncertainties that cannot be
adequately quantified in advance, including the demeanor and credibility of
witnesses and the identity of the adverse party, especially in biotechnology
related patent cases that may turn on the testimony of experts as to technical
facts upon which experts may reasonably disagree.  Some of our
competitors may be able to sustain the costs of such litigation or proceedings
more effectively than we can because of their substantially greater financial
resources.  If a patent or other proceeding is resolved against us, we
may be enjoined from researching, developing, manufacturing or commercializing
our products without a license from the other party and we may be held liable
for significant damages.  We may not be able to obtain any required
license on commercially acceptable terms or at all.


21


Uncertainties
resulting from the initiation and continuation of patent litigation or other
proceedings could harm our ability to compete in the
marketplace.  Patent litigation and other proceedings may also absorb
significant management time.




If
our products were derived from tissue or other samples from a patient without
the patient’s consent, we could be forced to pay royalties or cease selling our
products.




An
essential component of our business is our ability to obtain well-characterized
tissue and other samples from patients.  To that end, on January 5,
2007, we entered into an agreement with the Institute of Pathology at the
University of Regensburg in Germany to collect samples of colon, kidney,
bladder, stomach, breast, prostate, and ovarian cancers for biomarker discovery
programs focused on these cancers.  The Agreement has now been
terminated.  Although we believe that all necessary consents have been
and will be obtained from any patient who donates samples for our research
purposes, there is a risk that, without our knowledge and through inadvertence
or neglect, proper consents will not be obtained from all
patients.  The responsibility for obtaining the consents is vested in
the physicians at the University.  If a patient does not give a proper
consent and we develop a product using a sample obtained from him or her, we
could be forced to pay royalties or to cease selling that
product.  All tissue samples are de-identified when they are sent to
us.  We have no way to link any of our studies to an individual
patient.  Therefore, the risk of an individual patient objecting to
development of any product is extremely remote.




If
we are unable to protect our intellectual property rights, our competitors may
develop and market products with similar features that may reduce demand for our
potential products.




The
following factors are important to our success:




·
            receiving
      patent protection for our product
candidates;




·
            preventing
      others from infringing our intellectual property rights;
    and




·
            maintaining
      our patent rights and trade
secrets.




We will
be able to protect our intellectual property rights in patents and trade secrets
from unauthorized use by third parties only to the extent that such intellectual
property rights are covered by valid and enforceable patents or are effectively
maintained as trade secrets.




To date,
we have sought to protect our proprietary position by filing for a Patent
Cooperation Treaty patent and a non-provisional patent in the U.S. related to
inventions that form the basis of our research arrangements with the NIH and
potential pipeline of future products.  We also filed new patent
applications in the U.S. in February 2007 relating to a lead compound that has
activity against glioblastoma multiform cell lines in vitro.  We
anticipate that we will apply for further patents based on our ongoing
research.  Because issues of patentability involve complex legal and
factual questions, the issuance, scope and enforceability of patents cannot be
predicted with certainty.  Patents, if issued, may be challenged,
invalidated or circumvented.  U.S. patents and patent applications may
also be subject to interference proceedings, and U.S. patents may be subject to
reexamination proceedings in the U.S. Patent and Trademark Office and foreign
patents may be subject to opposition or comparable proceedings in corresponding
foreign patent offices, which proceedings could result in either loss of the
patent or denial of the patent application or loss or reduction in the scope of
one or more of the claims of the patent or patent application.  In
addition, such interference, reexamination and opposition proceedings may be
costly.  Thus, any patents that we own or license from others may not
provide any protection against competitors.  Furthermore, an adverse
decision in an interference proceeding can result in a third-party receiving the
patent rights sought by us, which in turn could affect our ability to market a
potential product to which that patent filing was directed.  Our
pending patent applications, those that we may file in the future, or those that
we may license from third parties may not result in patents being
issued.  If issued, they may not provide us with proprietary
protection or competitive advantages against competitors with similar
technology.  Furthermore, others may independently develop similar
technologies or duplicate any technology that we have developed.  Many
countries, including certain countries in Europe, have compulsory licensing laws
under which a patent owner may be compelled to grant licenses to third
parties.  For example, compulsory licenses may be required in cases
where the patent owner has failed to “work” the invention in that country, or
the third-party has patented improvements.  In addition, many
countries limit the enforceability of patents against government agencies or
government contractors.  In these countries, the patent owner may have
limited remedies, which could materially diminish the value of the
patent.  Moreover, the legal systems of certain countries,
particularly certain developing countries, do not favor the aggressive
enforcement of patent and other intellectual property protection, which makes it
difficult to stop infringement.


22


In
addition, our ability to enforce our patent rights depends on our ability to
detect infringement.  It is difficult to detect infringers who do not
advertise the compounds that are used in their products.  Any
litigation to enforce or defend our patent rights, even if we prevail, could be
costly and time-consuming and would divert the attention of management and key
personnel from business operations.




We will
also rely on trade secrets, know-how and technology, which are not protected by
patents, to maintain our competitive position.  We will seek to
protect this information by entering into confidentiality agreements with
parties that have access to it, such as strategic partners, collaborators,
employees and consultants.  Any of these parties may breach these
agreements and disclose our confidential information or our competitors might
learn of the information in some other way.  If any trade secret,
know-how or other technology not protected by a patent were disclosed to, or
independently developed by, a competitor, our business, financial condition and
results of operations could be materially adversely affected.




If
our third-party manufacturers’ facilities do not follow current good
manufacturing practices, our product development and commercialization efforts
may be harmed.




There are
a limited number of manufacturers that operate under the FDA’s and European
Union’s good manufacturing practices regulations and are capable of
manufacturing products.  Third-party manufacturers may encounter
difficulties in achieving quality control and quality assurance and may
experience shortages of qualified personnel.  A failure of third-party
manufacturers to follow current good manufacturing practices or other regulatory
requirements and to document their adherence to such practices may lead to
significant delays in the availability of products for commercial use or
clinical study, the termination of, or hold on, a clinical study, or may delay
or prevent filing or approval of marketing applications for our
products.  In addition, we could be subject to sanctions being imposed
on us, including fines, injunctions and civil penalties.  Changing
manufacturers may require additional clinical trials and the revalidation of the
manufacturing process and procedures in accordance with FDA mandated current
good manufacturing practices and will require FDA approval.  This
revalidation may be costly and time consuming.  If we are unable to
arrange for third-party manufacturing of our products, or to do so on
commercially reasonable terms, we may not be able to complete development or
marketing of our products.




If
we fail to obtain an adequate level of reimbursement for our products by
third-party payors, there may be no commercially viable markets for our products
or the markets may be much smaller than expected.




The
availability and levels of reimbursement by governmental and other third-party
payors affect the market for our products.  The efficacy, safety and
cost-effectiveness of our products as well as the efficacy, safety and
cost-effectiveness of any competing products will determine the availability and
level of reimbursement.  These third-party payors continually attempt
to contain or reduce the costs of healthcare by challenging the prices charged
for healthcare products and services.  In certain countries,
particularly the countries of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control.  In these
countries, pricing negotiations with governmental authorities can take six to
twelve months or longer after the receipt of regulatory marketing approval for a
product.  To obtain reimbursement or pricing approval in some
countries, we may be required to conduct clinical trials that compare the
cost-effectiveness of our products to other available therapies.  If
reimbursement for our products is unavailable, limited in scope or amount or if
pricing is set at unsatisfactory levels, our revenues would be reduced and our
results of operations would be negatively impacted.


23


Another
development that may affect the pricing of drugs is regulatory action regarding
drug reimportation into the United States.  The Medicare Prescription
Drug, Improvement and Modernization Act of 2003, which became law in December
2003, requires the Secretary of the U.S. Department of Health and Human Services
to promulgate regulations allowing drug reimportation from Canada into the
United States under certain circumstances.  These provisions will
become effective only if the Secretary certifies that such imports will pose no
additional risk to the public’s health and safety and result in significant cost
savings to consumers.  To date, the Secretary has made no such
finding, but he could do so in the future.  Proponents of drug
reimportation may also attempt to pass legislation that would remove the
requirement for the Secretary’s certification or allow reimportation under
circumstances beyond those anticipated under current law.  If
legislation is enacted, or regulations issued, allowing the reimportation of
drugs, it could decrease the reimbursement we would receive for any products
that we may commercialize, negatively affecting our anticipated revenues and
prospects for profitability.




Risks
Related to Capital Structure




There
is no assurance of an established public trading market, which would adversely
affect the ability of our investors to sell their securities in the public
market.




Although
our common stock is registered under the Exchange Act and our stock is listed on
the OTC Bulletin Board, an active trading market for the securities does not yet
exist and may not exist or be sustained in the future.  The OTC
Bulletin Board is an inter-dealer, over-the-counter market that provides
significantly less liquidity than the NASD’s automated quotation system (the
“NASDAQ Stock Market”).  Quotes for stocks included on the OTC
Bulletin Board are not listed in the financial sections of newspapers as are
those for the NASDAQ Stock Market.  Therefore, prices for securities
traded solely on the OTC Bulletin Board may be difficult to obtain and holders
of common stock may be unable to resell their securities at or near their
original offering price or at any price.  Market prices for our common
stock will be influenced by a number of factors, including:




·
            the
      issuance of new equity securities pursuant to a future offering or
      acquisition;




·
            changes
      in interest rates;




·
            competitive
      developments, including announcements by competitors of new products or
      services or significant contracts, acquisitions, strategic partnerships,
      joint ventures or capital
commitments;




·
            variations
      in quarterly operating results;




·
            changes
      in financial estimates by securities
analysts;




·
            the
      depth and liquidity of the market for our common
  stock;




·
            investor
      perceptions of our company and the medical device industry generally;
      and


24


·
            general
      economic and other national
conditions.




Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.




Dr. John
Kovach, our current Chief Executive Officer, was the former stockholder of
Lixte, our operating subsidiary, and received shares of our stock in the Reverse
Merger.  He is currently eligible to sell some of his shares of common
stock by means of ordinary brokerage transactions in the open market pursuant to
Rule 144 promulgated under the Securities Act (“Rule 144”), subject to certain
limitations.  Rule 144 also permits the sale of securities, without
any limitations, by a non-affiliate that has satisfied a six-month holding
period.  Any substantial sale of common stock pursuant to Rule 144 may
have an adverse effect on the market price of our common stock by creating an
excessive supply.  In this connection, we have sold an aggregate of
3,555,220 shares of Common Stock in private placements occurring in June and
July 2006, and 999,995 shares in a December 2007 private placement, all of which
are currently eligible to be sold under Rule 144.




Our
common stock is considered a “penny stock” and may be difficult to
sell.




Our
common stock is considered to be a “penny stock” since it meets one or more of
the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of
the Exchange Act.  These include but are not limited to the
following:  (i) the stock trades at a price less than $5.00 per share;
(ii) it is NOT traded on a “recognized” national exchange; (iii) it is NOT
quoted on the NASDAQ Stock Market, or even if so, has a price less than $5.00
per share; or (iv) it is issued by a company with net tangible assets less than
$2.0 million, if in business more than a continuous three years, or with average
revenues of less than $6.0 million for the past three years.  The
principal result or effect of being designated a “penny stock” is that
securities broker-dealers cannot recommend the stock but must trade in it on an
unsolicited basis.




Additionally,
Section 15(g) of the Exchange Act and Rule 15g-2 promulgated thereunder by the
SEC require broker-dealers dealing in penny stocks to provide potential
investors with a document disclosing the risks of penny stocks and to obtain a
manually signed and dated written receipt of the document before effecting any
transaction in a penny stock for the investor’s account.




Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be “penny
stock.”  Moreover, Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor.  This procedure requires the
broker-dealer to:  (i) obtain from the investor information concerning
his or her financial situation, investment experience and investment objectives;
(ii) reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor’s financial
situation, investment experience and investment
objectives.  Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.




Our
principal stockholder has significant influence over our company.




As a
result of the Reverse Merger, Dr. John Kovach, our principal stockholder and our
Chief Executive Officer, beneficially owns approximately 59% of our outstanding
voting stock at the current time.  As a result, Dr. Kovach possesses
significant influence, giving him the ability, among other things, to elect all
of the members of the Board of Directors and to approve significant corporate
transactions.  Such stock ownership and control may also have the
effect of delaying or preventing a future change in control, impeding a merger,
consolidation, takeover or other business combination or discourage a potential
acquirer from making a tender offer or otherwise attempting to obtain control of
us.


25


We
do not foresee paying cash dividends in the foreseeable future.




We have
not paid cash dividends on our stock and do not plan to pay cash dividends on
our common stock in the foreseeable future.




ITEM
1B.             UNRESOLVED
STAFF COMMENTS




None.




ITEM
2.                DESCRIPTION
OF PROPERTY




At
present, we conduct all laboratory activities at NIH under the CRADA
agreement.  The Company maintains a single office in a designated area
of Dr. Kovach's residence and receives mail at the post office depot, 248 Route
25A, No.  2, East Setauket, New York 11733.




ITEM
3.                LEGAL
PROCEEDINGS




We are
not a party to any legal proceedings.




ITEM
4.                SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS




There
were no matters submitted to a vote of the Company’s security holders during the
quarterly period ended December 31, 2008.




PART
II




ITEM5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY
SECURITIES




Our
common stock trades on the OTC Bulletin Board under the symbol
“LIXT.”  There is very limited trading of our stock on the Bulletin
Board.  The stock market in general has experienced extreme stock
price fluctuations in the past few years.  In some cases, these
fluctuations have been unrelated to the operating performance of the affected
companies.  Many companies have experienced dramatic volatility in the
market prices of their common stock.  We believe that a number of
factors, both within and outside our control, could cause the price of our
common stock to fluctuate, perhaps substantially.  Factors such as the
following could have a significant adverse impact on the market price of our
common stock:




·
            Our
      ability to obtain additional financing and, if available, the terms and
      conditions of the financing;




·
            Our
      financial position and results of
operations;




·
            Concern
      as to, or other evidence of, the safety or efficacy of any future proposed
      products and services or our competitors’ products and
      services;




·
            Announcements
      of technological innovations or new products or services by us or our
      competitors;




·
            U.S.  and
      foreign governmental regulatory
actions;




26


·
            The
      development of litigation against
us;




·
            Period-to-period
      fluctuations in our operating
results;




·
            Changes
      in estimates of our performance by any securities
  analysts;




·
            Possible
      regulatory requirements on our
business;




·
            The
      issuance of new equity securities pursuant to a future
      offering;




·
            Changes
      in interest rates;




·
            Competitive
      developments, including announcements by competitors of new products or
      services or significant contracts, acquisitions, strategic partnerships,
      joint ventures or capital
commitments;




·
            Variations
      in quarterly operating results;




·
            Change
      in financial estimates by securities
analysts;




·
            The
      depth and liquidity of the market for our common
  stock;




·
            Investor
      perceptions of us; and




·
            General
      economic and other national
conditions.




The
following table sets forth the range of reported closing prices of the Company’s
Common Stock during the periods that the Stock began to trade on the Bulletin
Board.  Such quotations reflect prices between dealers in securities
and do not include any retail mark-up, markdown or commissions, and may not
necessarily represent actual transactions




Year
      Ended December 31, 2008
                      
                      High
                      
                      
                      LowFirst
      Quarter
                      
                      $
                      1.10
                      
                      
                      $
                      0.74Second
      Quarter
                      
                      $
                      1.10
                      
                      
                      $
                      0.30Third
      Quarter
                      
                      $
                      0.80
                      
                      
                      $
                      0.22Fourth
      Quarter
                      
                      $
                      1.10
                      
                      
                      $
                      0.15Year
      Ended December 31, 2007Third
      Quarter
                      
                      $
                      1.05
                      
                      
                      $
                      0.75Fourth
      Quarter
                      
                      $
                      1.10
                      
                      
                      $
                      0.75




Holders




As of
March 25, 2009, we have 28,852,178 shares of our common stock
outstanding.  As of December 31, 2008, our shares of common stock
are held by approximately 80 stockholders of record.  This does not
include an indeterminate number of beneficial owners of securities whose shares
are held in the names of various dealers and clearing agencies.


27


Dividends




Our
dividend policy will be determined by our Board of Directors and will depend
upon a number of factors, including our financial condition and performance, our
cash needs and expansion plans, income tax consequences, and the restrictions
that applicable laws and our credit arrangements then impose.




SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY INCENTIVE PLANS




Set forth
in the table below is information regarding awards made through compensation
plans or arrangements through December 31, 2008, the most recently completed
fiscal year.




Plan Category
                          
                          Number of
                            Securities to be
                            issued upon
                            exercise of
                            outstanding
                            options,
                            warrants and
                            rights
                            (a)
                          
                          
                          Weighted
                            average price of
                            outstanding
                            options,
                            warrants and
                            rights
                            (b)
                          
                          
                          Number of
                            securities
                            remaining
                            available for
                            future issuance
                            under equity
                            compensation
                            plans (excluding
                            securities
                            reflected in
                            column (a))
                            (c)Equity
      Compensation Plans Approved by Security Holders
                          
                          
                          N/A
                          
                          
                          
                          N/A
                          
                          
                          
                          N/AEquity
      Compensation Plans Not Approved by Security Holders
                          
                          
                          400,000
                          
                          
                          $
                          0.42
                          
                          
                          
                          2,100,000





ITEM
      6.
            SELECTED
      FINANCIAL DATA




Not
Applicable.




ITEM
      7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




Overview




On June
30, 2006, Lixte Biotechnology, Inc., a privately held Delaware corporation
(“Lixte”), completed a reverse merger transaction with SRKP 7, Inc. (“SRKP”), a
non-trading public shell company, whereby Lixte became a wholly owned subsidiary
of SRKP.  On December 7, 2006, SRKP amended its Certificate of
Incorporation to change its name to Lixte Biotechnology Holdings, Inc.
(“Holdings”).  Unless the context indicates otherwise, Lixte and
Holdings are hereinafter referred to as the “Company”.




For
financial reporting purposes, Lixte was considered the accounting acquirer in
the merger and the merger was accounted for as a reverse
merger.  Accordingly, the historical financial statements presented
herein are those of Lixte and do not include the historical financial results of
SRKP.  The stockholders’ equity section of SRKP has been retroactively
restated for all periods presented to reflect the accounting effect of the
reverse merger transaction.  All costs associated with the reverse
merger transaction were expensed as incurred.


28


Lixte was
incorporated in Delaware on August 9, 2005 to capitalize on opportunities to
develop low cost, specific and sensitive tests for the early detection of
cancers to better estimate prognosis, to monitor treatment response, and to
reveal targets for development of more effective treatments.




The
Company is considered a “development stage company” as defined in Statement of
Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by
Development Stage Enterprises”, as it has not yet commenced any
revenue-generating operations, does not have any cash flows from operations, and
is dependent on debt and equity funding to finance its
operations.  The Company has selected December 31 as its fiscal year
end.





Going
Concern




The
Company’s consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business.  The
Company is in the development stage and has not generated any revenues from
operations to date.  Furthermore, the Company has experienced
recurring losses and has a stockholders’ deficiency at December 31,
2008.  As a result, the Company’s independent registered public
accounting firm, in their report on the Company’s 2008 consolidated financial
statements, have raised substantial doubt about the Company’s ability to
continue as a going concern.





The
Company’s ability to continue as a going concern is dependent upon its ability
to develop additional sources of capital and to ultimately achieve profitable
operations.  The Company’s consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.





At
December 31, 2008, the Company had not yet commenced any revenue-generating
operations.  All activity through December 31, 2008 has been related
to the Company’s formation, capital raising efforts and research and development
activities.  As such, the Company has yet to generate any cash flows
from operations, and is dependent on debt and equity funding from both related
and unrelated parties to finance its operations. Prior to June 30, 2006, the
Company’s cash requirements were funded by advances from the Company’s
founder.





Because
the Company is currently engaged in research at an early stage, it will likely
take a significant amount of time to develop any product or intellectual
property capable of generating revenues.  As such, the Company’s
business is unlikely to generate any revenue in the next several years and may
never do so.  Even if the Company is able to generate revenues in the
future through licensing its technologies or through product sales, there can be
no assurance that the Company will be able to generate a profit.





The
Company does not have sufficient resources to fund its operations, including the
Company’s research activities with respect to its intellectual property, for the
next twelve months.  In addition, the Company does not have sufficient
resources to fully develop and commercialize any products that may arise from
its research.  Accordingly, the Company needs to raise additional
funds in order to satisfy its future working capital requirements.





The
Company estimates that it will require minimum funding in calendar 2009 of
approximately $750,000 in order to fund operations and continuing drug discovery
and to attempt to bring two drugs through the pre-clinical evaluation process
needed for submission of an Investigational New Drug (“IND”) application.
Towards that objective, the Company recently initiated a private placement,
which generated net proceeds from two closings in February and March 2009
aggregating approximately $382,000.  The Company utilized a portion of
such net proceeds to repay a $100,000 short-term note in February
2009.  The Company is continuing its efforts in 2009 to raise
approximately $500,000 of additional funds under the private
placement.  There can be no assurances that the Company will have
further success in this regard.  The amount and timing of future cash
requirements will depend on the market’s evaluation of the Company’s technology
and products, if any, and the resources that it devotes to developing and
supporting its activities.  The Company will need to fund these cash
requirements from a combination of additional debt or equity financings, or the
sale, licensing or joint venturing of its intellectual
properties.


29


Current
market conditions present uncertainty as to the Company’s ability to secure
additional funds, as well as its ability to reach
profitability.  There can be no assurances that the Company will be
able to secure additional financing, or obtain favorable terms on such financing
if it is available, or as to the Company’s ability to achieve positive earnings
and cash flows from operations.  Continued negative cash flows and
lack of liquidity create significant uncertainty about the Company’s ability to
fully implement its operating plan, as a result of which the Company may have to
reduce the scope of its planned operations.  If cash resources are
insufficient to satisfy the Company’s liquidity requirements, the Company would
be required to scale back or discontinue its technology and product development
programs, or obtain funds, if available, through strategic alliances that may
require the Company to relinquish rights to certain of its technologies
products, or to discontinue its operations entirely.




Recent
Developments




On
January 30, 2009, the Company sold an aggregate of 658,000 common stock units to
accredited investors in a first closing of a third private placement at a per
unit price of $0.50, resulting in aggregate gross proceeds to the Company of
$329,000.  Net cash proceeds to the Company were
$269,790.




On March
2, 2009, the Company sold an aggregate of 262,000 common stock units to
accredited investors in a second closing of the third private placement at a per
unit price of $0.50, resulting in aggregate gross proceeds to the Company of
$131,000.  Net cash proceeds to the Company were
$112,460.




Each unit
consists of one share of the Company’s common stock and a five-year warrant to
purchase an additional share of the Company’s common stock on a cashless
exercise basis at an exercise price of $0.50 per common share.  The
Company paid to WestPark Capital, Inc., as placement agent, a commission of 10%
and a non-accountable fee of 4% of the gross proceeds of the private placement
and issued five-year warrants to purchase common stock equal to (a) 10% of the
number of shares sold in the private placement exercisable at $0.50 per share
and 10% of the number of shares issuable upon exercise of warrants issued in the
private placement exerciseable at $0.50 per share; and (b) an additional 2% of
the number of shares sold in the private placement also exercisable at $0.50 per
share and 2% of the number of shares issuable upon exercise of the warrants
issued in the private placement exerciseable at $0.50 per share.




On
February 7, 2009, the Company repaid a $100,000 unsecured demand promissory
note, including interest at the rate of 5% per annum, to Gil Schwartzberg, a
consultant to the Company.




Adoption
of New Accounting Policies in 2008




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a
formal framework for measuring fair value under Generally Accepted Accounting
Principles (“GAAP”). SFAS No. 157 defines and codifies the many
definitions of fair value included among various other authoritative literature,
clarifies and, in some instances, expands on the guidance for implementing fair
value measurements, and increases the level of disclosure required for fair
value measurements. Although SFAS No. 157 applies to and amends the
provisions of existing FASB and American Institute of Certified Public
Accountants (“AICPA”) pronouncements, it does not, of itself, require any new
fair value measurements, nor does it establish valuation standards.
SFAS No. 157 applies to all other accounting pronouncements requiring
or permitting fair value measurements, except for: SFAS No. 123R,
“Share-Based Payment”, and related pronouncements, the practicability exceptions
to fair value determinations allowed by various other authoritative
pronouncements, and AICPA Statements of Position 97-2 and 98-9 that deal with
software revenue recognition. The Company adopted SFAS No. 157 on
January 1, 2008.


30


In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”), which
provides companies with an option to report selected financial assets and
liabilities at fair value. The objective of SFAS No. 159 is to reduce
both complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently.
Generally accepted accounting principles have required different measurement
attributes for different assets and liabilities that can create artificial
volatility in earnings. SFAS No. 159 helps to mitigate this type of
accounting-induced volatility by enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 requires
companies to provide additional information that will help investors and other
users of financial statements to more easily understand the effect of the
company’s choice to use fair value on its earnings. SFAS No. 159 also
requires companies to display the fair value of those assets and liabilities for
which the company has chosen to use fair value on the face of the balance sheet.
SFAS No. 159 does not eliminate disclosure requirements included in
other accounting standards, including requirements for disclosures about fair
value measurements included in SFAS No. 157 and
SFAS No. 107. The Company adopted SFAS No. 159 on January 1,
2008.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162,
“The Hierarchy of Generally Accepted Accounting Principles” (“SFAS
No. 162”). SFAS No. 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP. SFAS No. 162 became effective on November 15,
2008.





On
October 10, 2008, the FASB issued FASB Staff Position No. 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active” (“FSP FAS No. 157-3”). FSP FAS No. 157-3 clarifies the application
of SFAS No. 157, “Fair Value Measurements”, in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP FAS No. 157-3 became effective immediately, and includes prior
period financial statements that have not yet been issued, and therefore the
Company became subject to the provisions of FSP FAS No. 157-3 on October 10,
2008.





The
adoption and/or implementation of the aforementioned accounting pronouncements
did not have any effect on the Company’s consolidated financial statement
presentation or disclosures.





Recently
Issued Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS No. 141(R)”), which requires an acquirer to recognize in
its financial statements as of the acquisition date (i) the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, measured at their fair values on the acquisition date, and
(ii) goodwill as the excess of the consideration transferred plus the fair
value of any noncontrolling interest in the acquiree at the acquisition date
over the fair values of the identifiable net assets acquired.
Acquisition-related costs, which are the costs an acquirer incurs to effect a
business combination, will be accounted for as expenses in the periods in which
the costs are incurred and the services are received, except that costs to issue
debt or equity securities will be recognized in accordance with other applicable
GAAP. SFAS No. 141(R) makes significant amendments to other Statements
and other authoritative guidance to provide additional guidance or to conform
the guidance in that literature to that provided in SFAS No. 141(R).
SFAS No. 141(R) also provides guidance as to what information is to be
disclosed to enable users of financial statements to evaluate the nature and
financial effects of a business combination. SFAS No. 141(R) is
effective for financial statements issued for fiscal years beginning on or after
December 15, 2008. Early adoption is prohibited. The adoption of
SFAS No. 141(R) on January 1, 2009 will affect how the Company
accounts for a business combination concluded after December 31,
2008.


31


In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51”
(“SFAS No. 160”), which revises the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards that require (i) the ownership interests in subsidiaries held by
parties other than the parent be clearly identified, labeled, and presented in
the consolidated statement of financial position within equity, but separate
from the parent’s equity, (ii) the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income,
(iii) changes in a parent’s ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently
as equity transactions, (iv) when a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be initially
measured at fair value, with the gain or loss on the deconsolidation of the
subsidiary being measured using the fair value of any noncontrolling equity
investment rather than the carrying amount of that retained investment, and
(v) entities provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 amends FASB No. 128 to
provide that the calculation of earnings per share amounts in the consolidated
financial statements will continue to be based on the amounts attributable to
the parent. SFAS No. 160 is effective for financial statements issued
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Early adoption is prohibited.
SFAS No. 160 shall be applied prospectively as of the beginning of the
fiscal year in which it is initially applied, except for the presentation and
disclosure requirements, which shall be applied retrospectively for all periods
presented. The Company does not currently anticipate that the adoption of SFAS
No. 160 on January 1, 2009 will have any impact on its consolidated financial
statement presentation or disclosures.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS No.
161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No.
133”). The objective of SFAS No. 161 is to provide users of financial statements
with an enhanced understanding of how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under SFAS No. 133 and its related interpretations, and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS No. 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS No. 161 applies to all derivative financial
instruments, including bifurcated derivative instruments (and nonderivative
instruments that are designed and qualify as hedging instruments pursuant to
paragraphs 37 and 42 of SFAS No. 133) and related hedged items accounted for
under SFAS No. 133 and its related interpretations. SFAS No. 161 also amends
certain provisions of SFAS No. 131. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. SFAS No. 161 encourages, but does
not require, comparative disclosures for earlier periods at initial adoption.
The Company does not currently anticipate that the adoption of SFAS No. 161 on
January 1, 2009 will have any impact on its consolidated financial statement
presentation or disclosures.





In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-05,
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity's Own Stock" (“EITF 07-05”). EITF 07-05 mandates a two-step process for
evaluating whether an equity-linked financial instrument or embedded feature is
indexed to the entity's own stock. Warrants that a company issues that contain a
strike price adjustment feature, upon the adoption of EITF 07-05, results in the
instruments no longer being considered indexed to the company's own stock.
Accordingly, adoption of EITF 07-05 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-05 is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The Company does not
currently anticipate that the adoption of EITF 07-05 on January 1, 2009 will
have any impact on its consolidated financial statement presentation or
disclosures.


32


Management
does not believe that any other recently issued, but not yet adopted, accounting
pronouncements issued by the FASB (including its Emerging Issues Task Force),
the AICPA, and/or the Securities and Exchange Commission will have a material
impact on the Company's consolidated financial statement presentation or
disclosures in future periods.




Critical
Accounting Policies and Estimates




The
Company prepared its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments made.
Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates as a result of different
assumptions or conditions.




The
following critical accounting policies affect the more significant judgments and
estimates used in the preparation of the Company’s consolidated financial
statements.




Research
and Development




Research
and development costs are expensed as incurred.  Research and
development expenses consist primarily of fees paid to consultants and outside
service providers, patent fees and costs, and other expenses relating to the
acquisition, design, development and testing of the Company's treatments and
product candidates.




Amounts
due, pursuant to contractual commitments, on research and development contracts
with third parties are recorded as a liability, with the related amount of such
contracts recorded as advances on research and development contract services on
the Company’s balance sheet. Such advances on research and development contract
services are expensed over their life on the straight-line basis, unless the
achievement of milestones, the completion of contracted work, or other
information indicates that a different expensing schedule is more appropriate.
The Company accounts for its research and development contracts in accordance
with EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities”.





Patent
Costs




Due to
the significant uncertainty associated with the successful development of one or
more commercially viable products based on the Company's research efforts and
any related patent applications, all patent costs, including patent-related
legal fees, are expensed as incurred.




Stock-Based
Compensation




The
Company accounts for share-based payments pursuant to SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 123R"), a revision to SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123R requires that the
Company measure the cost of employee services received in exchange for equity
awards based on the grant date fair value of the awards, with the cost to be
recognized as compensation expense in the Company’s financial statements over
the vesting period of the awards.


33


The
Company accounts for stock option and warrant grants issued and vesting to
non-employees in accordance with EITF No. 96-18, “Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services”, and EITF 00-18, “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees”, whereas the value of the stock compensation is based upon
the measurement date as determined at either (a) the date at which a performance
commitment is reached or (b) at the date at which the necessary performance to
earn the equity instruments is complete. In accordance with EITF 96-18, options
granted to Scientific Advisory Board committee members and outside consultants
are revalued each reporting period to determine the amount to be recorded as an
expense in the respective period. As the options vest, they are valued on each
vesting date and an adjustment is recorded for the difference between the value
already recorded and the then current value on the date of vesting.




Income
Taxes




The
Company accounts for income taxes pursuant to SFAS No. 109, “Accounting for
Income Taxes” (“SFAS No. 109”), which establishes financial accounting and
reporting standards for the effects of income taxes that result from an
enterprise’s activities during the current and preceding years. SFAS No. 109
requires an asset and liability approach for financial accounting and reporting
for income taxes. Accordingly, the Company recognizes deferred tax assets and
liabilities for the expected impact of differences between the financial
statements and the tax basis of assets and liabilities.




The
Company records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. In the event the Company was
to determine that it would be able to realize its deferred tax assets in the
future in excess of its recorded amount, an adjustment to the deferred tax
assets would be credited to operations in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its deferred tax assets in the future, an adjustment to
the deferred tax assets would be charged to operations in the period such
determination was made.




Plan
of Operation




General
Overview of Plans




The
Company is concentrating on developing new treatments for the most common and
most aggressive type of brain cancer of adults, glioblastoma multiforme (“GBM”)
and the most common cancer of children, neuroblastoma. The Company has expanded
the scope of its anti-cancer investigational activities to include the most
common brain tumor of children, medulloblastoma, and also to several other types
of more common cancers. This expansion of activity is based on documentation
that each of two distinct types of drugs being developed by the Company inhibits
the growth of cell lines of breast, colon, lung, prostate, pancreas, ovary,
stomach and liver cancer, as well as the major types of leukemias. Activity of
lead compounds of both types of drugs was recently demonstrated against human
pancreatic cancer cells in a mouse model. Because there is a great need for any
kind of effective treatment for pancreatic cancer, this cancer will be studied
concomitantly with the primary target of the Company’s research program focused
on brain cancers.




The
research on brain tumors is proceeding in collaboration with the National
Institute of Neurological Disorders and Stroke (“NINDS”) of the National
Institutes of Health (“NIH”) under a Cooperative Research and Development
Agreement (“CRADA”) entered into on March 22, 2006, as amended. The research at
NINDS continues to be led by Dr. Zhengping Zhuang, an internationally recognized
investigator in the molecular pathology of cancer. Dr. Zhuang is aided by two
senior research technicians supported by the Company as part of the CRADA. The
goal of the CRADA is to develop more effective drugs for the treatment of GBM
through the processes required to gain Food and Drug Administration (“FDA”)
approval for clinical trials. The CRADA was extended and is presently scheduled
to end on September 30, 2009.


34


The
Company filed five patent applications on August 1, 2008. Two of these patent
filings deal with applications filed earlier jointly with NIH for work done
under the CRADA as follows: (1) a filing entering the regional stage of a PCT
application involving the use of certain compounds to treat human tumors
expressing a biomarker for brain and other human cancers; and (2) an application
for the treatment of the pediatric tumors, medulloblastoma (the most common
brain tumor in children) and neuroblastoma (a tumor arising from neural cells
outside the brain that is the most common cancer of children). The three new
patent applications include: (1) a joint application with NIH identifying a new
biomarker for many common human cancers that when targeted by compounds
developed by the Company result in inhibition of growth and death of cancer
cells; (2) an application by the Company regarding the structure, synthesis and
use of a group of new homologs of its LB-1 compounds; and (3) an application by
the Company for the use of certain homologs of its drugs as neuroprotective
agents with potential application to common neurodegenerative conditions such as
Alzheimer’s and Parkinson’s diseases.




The
Company continues to evaluate compounds for activity against several types of
fungi that cause serious infections, particularly in immuno-compromised
individuals, such as those with HIV-AIDS, and those having bone marrow
transplantations. The Company is also exploring indications that its compounds
have against strains of fungi that cause the most common fungal infections of
the skin and nails. Discussions are in progress with experts in fungal
infections regarding the most reliable methods of assessing the potential of new
agents for the management of common fungal diseases.




The
Company expects that its products will derive directly from the intellectual
property from its research activities. The development of lead compounds with
different mechanisms of action that have activity against brain tumors and other
common human cancers, as well as against serious fungal infections, originated
from the discovery of a biomarker in GBM. The Company will continue to use
discovery and/or recognition of molecular variants characteristic of specific
human cancers as a guide to drug discovery and potentially new diagnostic tests.
Examples of the productivity of this approach to discovery of new therapeutics
are: (1) the recent patent application filing for a new biomarker of several
common cancers that when targeted by certain of the Company’s drugs results in
inhibition of growth and death of cancer cells displaying the marker; and (2)
the filing of a patent on certain homologs of one group of compounds as
potentially useful for the treatment of neurodegenerative diseases.




Plans
for 2009 and Beyond




The
Company’s primary objective is to raise funds to cover ongoing operations and
development of its lead compounds for the treatment of brain cancers of adults
and neuroblastoma in children and to expand its research to include another
devastating human cancer, pancreatic cancer. The Company also wishes to raise
sufficient capital to explore, most likely in partnership with a pharmaceutical
company, recently discovered activity of some derivatives of its lead drugs for
the treatment of fungal diseases and neurodegenerative diseases.  In
this regard, the Company has made preliminary presentations to several large
pharmaceutical companies with respect to one or both of its lead
compounds.




The first
goal is to initiate preclinical studies of two of its lead compounds required
for submission of an application to the FDA for evaluation in clinical trials.
The initial target cancers will be glioblastoma multiforme, neuroblastoma and/or
medulloblastoma. The final choice will depend in part upon discussions at a
pre-IND meeting with the FDA. Subject to the availability of sufficient
resources, the Company will also initiate preclinical evaluation of a second
compound.




The
second goal is further characterization of the fungal activity of certain
homologs of drugs of the LB-200 series. These studies will be done in
collaboration with academic partners. Recently, the Company confirmed that its
lead compound of the LB-200 series is curative of two types of fungi that are
representative of the most common skin infections of humans and domestic
animals.  Cure was achieved by topical application of the drug on a
daily basis for 14 days, with no evidence of toxicity.


35


The
Company is also screening other homologs of lead compounds of the LB-100 and
LB-200 series for neuroprotective activity in laboratory models of brain cell
injury.  During October 2008, the Company engaged Southern Research
Institute, Birmingham, Alabama, to assess one lead compound from each of two
classes of its proprietary pharmacological agents for effects on normal neuronal
cells and to determine if the compounds protect normal brain cells from injury
in several different models of chemical and traumatic brain injury. The goal is
to determine if these agents have promise as potentially useful for the
prevention, amelioration or delay of progression of neurodegenerative diseases
such as Alzheimer’s disease and other neurological diseases or impairments
resulting from trauma and/or other diverse or unknown origins.  The
initial studies in the test tube support the Company’s hypothesis that one of
its lead compounds appears to have a beneficial effect upon the growth and
differentiation of normal brain cells.




Given the
progress in identifying two lead compounds with activity in animal models of
GBM, the Company is devoting its resources to bring the agents to a point at
which an Investigational New Drug (“IND”) application can be submitted to the
FDA for a Phase I clinical trial. One lead compound (LB-1) is the most advanced
in the process and the Company plans to be ready for IND submission in mid-2010.
The other lead compound (LB-2.5), which inhibits cancer cells by a mechanism
distinct from that of LB-1, is anticipated to complete its evaluation by the end
of 2010.  If the Company is able to achieve support from and/or
partnership with a large pharmaceutical company to co-develop its compounds,
this schedule may be accelerated.  The drugs are well characterized
from the standpoints of activity and mechanism of action.  The
pre-clinical activity toxicology and pharmacokinetic characterization, which are
elements needed for IND submission, could be accomplished quickly with adequate
financial resources or by a partner with expertise in characterization of drugs
for introduction into the clinic.




On
January 29, 2008, the Chem-Master Agreement was amended to extend its term to
February 15, 2014, pursuant to which Chem-Master was engaged to synthesize
certain compounds, and to expressly provide for the expansion of the Company’s
drug development program, through consultation with the medicinal chemists at
Chem-Master. The Company is exploring the synthesis of additional novel
anti-cancer drugs. Several targets for anti-cancer drug development are under
consideration. When the next group of compounds is developed, it will be
designated as “LB-3”, as distinguished from the first two classes of compounds
that were designated as “LB-1” and “LB-2”. This process is currently in the
planning stage and no compounds have been made as yet.




Existing
resources will not permit evaluation of activity of the Company’s lead drugs
against all the common cancers against which the Company’s compounds may have
anti-cancer activity. Current resources also will not be sufficient to carry out
pre-clinical studies necessary to apply to the FDA for approval of drug
evaluations in Phase I trials.




The
Company estimates that it will require minimum funding in calendar 2009 of
approximately $750,000 in order to fund operations and continuing drug discovery
and to attempt to bring two drugs through the pre-clinical evaluation process
needed for submission of an Investigational New Drug (“IND”) application.
Towards that objective, the Company recently initiated a private placement,
which generated net proceeds from two closings in February and March 2009
aggregating approximately $382,000. The Company utilized a portion of such net
proceeds to repay a $100,000 short-term note in February 2009. The Company is
continuing its efforts in 2009 to raise approximately $500,000 of additional
funds under the private placement.  If additional funds in excess of
$500,000 are raised in 2009, the detailed characterization of the Company’s
drugs in preparation for submission of an IND will be
initiated.  There can be no assurances that the Company will have
further success in this regard. The amount and timing of future cash
requirements will depend on the market’s evaluation of the Company’s technology
and products, if any, and the resources that it devotes to developing and
supporting its activities. The Company will need to fund these cash requirements
from a combination of additional debt or equity financings, or the sale,
licensing or joint venturing of its intellectual properties.


36


The
Company faces several potential challenges in its efforts to achieve commercial
success, including raising sufficient capital to fund its business plan,
achieving commercially applicable results of its research programs, competition
from more established, well-funded companies with competitive technologies, and
future competition from companies that are developing new competitive
technologies, some of whom are larger companies with greater capital resources
than the Company. Because of these challenges, there is substantial uncertainty
as to the Company’s ability to fund its operations and continue as a going
concern (see “Going Concern” above). Should the Company be unable to raise the
required capital on a timely basis, the Company’s business plans would be
materially adversely affected, and the Company may not be able to continue to
conduct operations.




Results
of Operations




The
Company is a development stage company and had not commenced revenue-generating
operations at December 31, 2008.




Years
Ended December 31, 2008 and 2007




General and Administrative
Expenses.  For the year ended December 31, 2008, general and
administrative expenses were $664,202, which consisted of stock-based
compensation of $357,987, the initial payment of $25,000 made in connection with
the Company’s exclusive license agreement with NIH, consulting and professional
fees of $192,473, insurance expense of $23,821, travel and entertainment costs
of $31,221, and other operating costs of $33,700.




For the
year ended December 31, 2007, general and administrative expenses were
$1,203,722, which consisted of stock-based compensation of $890,444, consulting
and professional fees of $248,903, insurance expense of $27,312, travel and
entertainment costs of $7,278, and other operating costs of
$29,785.




Depreciation.  For
the years ended December 31, 2008 and 2007, depreciation expense was $615 and
$592, respectively.




Research and Development
Costs.  For the year ended December 31, 2008, research and
development costs were $608,733, which consisted of the fair value of restricted
common stock issued to a vendor of $75,000, the vested portion of the fair value
of stock options issued to a consultant and a vendor of $138,061, patent costs
of $164,782, laboratory supplies of $45,750, and other costs of
$185,140.




For the
year ended December 31, 2007, research and development costs were $454,723,
which consisted of the vested portion of the fair value of stock options issued
to a vendor of $50,836, patent costs of $94,232, laboratory supplies of $30,895,
and other costs of $278,760.




Interest
Income.  For the year ended December 31, 2008, interest income
was $3,261, as compared to interest income of $10,549 for the year ended
December 31, 2007.




Net
Loss.  For the year ended December 31, 2008, the Company
incurred a net loss of $1,271,522, as compared to a net loss of $1,648,488 for
the year ended December 31, 2007.




Liquidity
and Capital Resources - December 31, 2008




The
Company’s financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company is in the development
stage and has not generated any revenues from operations to
date.  Furthermore, the Company has experienced recurring losses and
has a stockholders’ deficiency at December 31, 2008.  The Company’s
ability to continue as a going concern is dependent upon its ability to develop
additional sources of capital and to ultimately achieve profitable operations.
The Company’s financial statements do not include any adjustments that might
result from the outcome of these uncertainties (see “Going Concern”
above”).


37


Operating
Activities.  For the year ended December 31, 2008, operating
activities utilized cash of $597,689, as compared to utilizing cash of $702,868
for the year ended December 31, 2007, primarily as a result of a decrease in
advances on research and development contract services in 2008, as compared to
amounts spent on research and development contract services in 2007 related to
an installment payment made under the CRADA in 2007.




The
Company had a working capital deficiency of $323,676 at December 31, 2008. At
December 31, 2007, the Company had working capital of $376,184, primarily as a
result of the sale of the Company’s common stock pursuant to a second private
placement in December 2007 that generated net proceeds of $531,320.




Investing
Activities.  There were no investing activities during the year
ended December 31, 2008. For the year ended December 31, 2007, investing
activities utilized cash of $272 for the purchase of office
equipment.




Financing
Activities.  For the year ended December 31, 2008, financing
activities consisted of proceeds from a note payable to a consultant in the
amount of $100,000. For the year ended December 31, 2007, financing activities
provided net cash of $531,570, consisting of the gross proceeds from the sale of
common stock of $650,000, reduced by the payment of private placement offering
costs of $118,680.




Principal
Commitments




At
December 31, 2008, the Company did not have any material commitments for capital
expenditures. The Company’s principal commitments at December 31, 2008 consisted
of $100,000 due on a note payable to a consultant, the liquidated damages
payable under the registration rights agreement of $74,000, and the contractual
obligations as summarized below.




Effective
March 22, 2006, Lixte entered into a CRADA, as amended, with the NINDS of the
NIH. The CRADA is for a term of 42 months from the effective date and may be
unilaterally terminated by either party by providing written notice within sixty
days. The CRADA provides for the collaboration between the parties in the
identification and evaluation of agents that target the Nuclear Receptor
CoRepressor (N-CoR) pathway for glioma cell differentiation. The CRADA also
provided that NINDS and Lixte will conduct research to determine if expression
of N-CoR correlates with prognosis in glioma patients. Pursuant to the CRADA,
Lixte agreed to provide funds under the CRADA in the amount of $200,000 per year
to fund two technical assistants for the technical, statistical and
administrative support for the research activities, as well as to pay for
supplies and travel expenses. The first $200,000 was due within 180 days of the
effective date and was paid in full on July 6, 2006. The second $200,000 was
paid in full on June 29, 2007. In June 2008, the CRADA was extended to September
30, 2009, with no additional funding required for the period between July 1,
2008 and September 30, 2008. However, for the period from October 1, 2008
through September 30, 2009, the Company has agreed to provide additional funding
under the CRADA of $200,000, to be paid in four quarterly installments of
$50,000 each commencing on October 1, 2008. The first and second installments of
$50,000 were paid on September 29, 2008 and March 5, 2009,
respectively.




On
February 5, 2007, Lixte entered into a two-year agreement (the “Chem-Master
Agreement”) with Chem-Master International, Inc. (“Chem-Master”), a company
co-owned by Francis Johnson, a consultant to the Company, pursuant to which
Lixte engaged Chem-Master to synthesize a compound designated as “LB-1”, and any
other compound synthesized by Chem-Master pursuant to Lixte’s request, which
have potential use in treating a disease, including, without limitation, cancers
such as glioblastomas. Pursuant to the Chem-Master Agreement, Lixte agreed to
reimburse Chem-Master for the cost of materials, labor, and expenses for other
items used in the synthesis process, and also agreed to grant Chem-Master a
five-year option to purchase 100,000 shares of the Company’s common stock at an
exercise price of $0.333 per share. Lixte has the right to terminate the
Chem-Master Agreement at any time during its term upon sixty days prior written
notice.  On February 5, 2009, provided that the Chem-Master Agreement
had not been terminated, the Company has agreed to grant Chem-Master a second
five-year option to purchase an additional 100,000 shares of the Company’s
common stock at an exercise price of $0.333 per share.  The Company
granted the second five-year option on February 5, 2009.


38


On
January 29, 2008, the Chem-Master Agreement was amended to extend its term to
February 15, 2014, and to expressly provide for the design and synthesis of a
new series of compounds designated as “LB-3”. Pursuant to the amendment, the
Company issued 100,000 shares of its restricted common stock and granted an
option to purchase 200,000 shares of common stock. The option is exercisable for
a period of two years from vesting date at $1.65 per share, with one-half
(100,000 shares) vesting on August 1, 2009, and one-half (100,000 shares)
vesting on February 1, 2011.




Pursuant
to the Chem-Master Agreement, the Company reimbursed Chem-Master for the costs
of materials, labor, and expenses aggregating $45,750 and $30,150 during the
years ended December 31, 2008 and 2007, respectively.




During
September 2008, the Company engaged an internet-based investor information
service, to enhance awareness of the Company’s progress in developing a
portfolio of pharmacological agents at an initial cost of $2,500, plus $500 per
month for a period of twelve months.




Effective
as of September 19, 2008, the Company entered into an agreement with the NIH
providing the Company with an exclusive license for all patents submitted
jointly with the NIH under the CRADA. The agreement provided for an initial
payment of $25,000 to NIH within 60 days of September 19, 2008, and for a
minimum annual royalty of $30,000 on January 1 of each calendar year following
the year in which the CRADA is terminated. The agreement also provides for the
Company to pay specified royalties based on (i) net sales by the Company and its
sub-licensees, (ii) the achievement of certain clinical benchmarks, and (iii)
the granting of sublicenses. The Company paid the initial $25,000 obligation on
November 10, 2008.




During
October 2008, the Company engaged Southern Research Institute, Birmingham,
Alabama, to assess one lead compound from each of two classes of its proprietary
pharmacological agents for effects on normal neuronal cells and to determine if
the compounds protect normal brain cells from injury in several different models
of chemical and traumatic brain injury. The goal is to determine if these agents
have promise as potentially useful for the prevention, amelioration or delay of
progression of neurodegenerative diseases such as Alzheimer’s disease and other
neurological diseases or impairments resulting from trauma and/or other diverse
or unknown origins.  The Company agreed to pay a fee not to exceed
$50,000 over a four-month period for such services, of which an advance for
$12,500 was paid during 2008.




On
October 7, 2008, the Company appointed Dr. Mel Sorensen to its Board of
Directors. Dr. Sorensen is a medical oncologist with extensive experience in
cancer drug development, first at the National Cancer Institute, then at Bayer
and GlaxoSmithKline, before becoming President and CEO of a new cancer
therapeutics company, Ascenta Therapeutics, in 2004. Dr. Sorensen is being paid
an annual consulting fee of $40,000, payable in quarterly installments over a
one-year period commencing October 7, 2008, to assist the Company in identifying
a strategic partner. Dr. Sorensen was also granted a stock option to purchase
200,000 shares of the Company’s common stock, exercisable at $0.50 per share for
a period of five years from each tranche’s vesting date. The option vests as to
25,000 shares on January 1, 2009, and a further 25,000 shares on the first day
of each subsequent calendar quarter until all of the shares are
vested.




Off-Balance
Sheet Arrangements




At
December 31, 2008, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet
arrangements.




ITEM
7A.             QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK




Not Applicable.


39


ITEM
8.                FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA




Our
financial statements and notes thereto and the related reports of our
independent registered public accounting firms are attached to this Report
beginning on page F-1.




ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




On
December 17, 2008, AJ. Robbins, P.C. (“Robbins”) was dismissed as the
independent accountant of the Company.  The Board of Directors acting
in the capacity of an audit committee approved the dismissal of
Robbins.





Robbins’
reports on the Company’s financial statements for the years ended December 31,
2007 and 2006 did not contain any adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting
principles except that the report for both years indicated that the Company is
in the development stage and has not commenced operations and its ability to
continue as a going concern is dependent upon its ability to develop additional
sources of capital and ultimately achieve profitable
operations.  Accordingly, such report indicated that there was
substantial doubt as to the Company’s ability to continue as a going concern and
that the financial statements did not include any adjustments that might result
from the outcome of this uncertainty.





During
the years ended December 31, 2007 and 2006 and through December 17, 2008, there
were no disagreements with Robbins on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Robbins, would have caused
it to make reference thereto in connection with its reports on the financial
statements for such years.  During the years ended December 31, 2007
and 2006 and through December 17, 2008, there were no matters that were either
the subject of a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-K
or a reportable event as described in Item 304(a)(1)(v) of Regulation
S-K.




On
December 17, 2008, the Company’s Board of Directors acting in the capacity of an
audit committee engaged Weinberg & Company, P. A. (“Weinberg”) as the
Company’s new independent accountant to act as the principal accountant to audit
the Company’s financial statements. During the Company’s fiscal years ended
December 31, 2007 and 2006 and through December 17, 2008, neither the Company,
nor anyone acting on its behalf, consulted with Weinberg regarding the
application of accounting principles to a specific completed or proposed
transaction or the type of audit opinion that might be rendered on the Company’s
financial statements, and no written report or oral advice was provided that
Weinberg concluded was an important factor considered by the Company in reaching
a decision as to any such accounting, auditing or financial reporting
issue.




ITEM
9A(T).       CONTROLS AND
PROCEDURES




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file with the SEC
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to our management, including our
principal executive and financial officers, as appropriate, to allow for timely
decisions regarding required disclosure. As required by SEC Rule 15d-15(b), we
carried out an evaluation, under the supervision and with the participation of
the our management, including our principal executive and financial officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the most recent fiscal year covered by this
report.  Based on the foregoing, our principal executive and financial
officer concluded that our disclosure controls and procedures are effective to
ensure the information required to be disclosed in our reports filed or
submitted under the Exchange Act is timely recorded, processed and reported
within the time periods specified in the SEC’s rules and forms.


40


Management’s
Annual Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) under the
Exchange Act.  Our internal control over financial reporting is
designed to ensure that material information regarding our operations is made
available to management and the board of directors to provide them reasonable
assurance that the published financial statements are fairly
presented.  There are limitations inherent in any internal control,
such as the possibility of human error and the circumvention or overriding of
controls.  As a result, even effective internal controls can provide
only reasonable assurance with respect to financial statement
preparation.  As conditions change over time so too may the
effectiveness of internal controls.




Our
management, with the participation of our chief executive officer and chief
financial officer, has evaluated our internal control over financial reporting
as of December 31, 2007 based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission.  Based on this assessment, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2008.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.




Changes
In Internal Control Over Financial Reporting




There were no changes in our internal
controls over financial reporting during the fourth quarter of 2008 that
materially affected or are reasonably likely to affect our internal controls
over financial reports.




ITEM
9B.             OTHER
INFORMATION




None.




PART
III




ITEM
10.             DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




The
following table and text set forth the names of all directors and executive
officer of our Company as of December 31, 2008.  The Board of
Directors is comprised of only one class.  All of the directors will
serve until the next annual meeting of stockholders and until their successors
are elected and qualified, or until their earlier death, retirement, resignation
or removal.  There are no family relationships between or among the
directors, executive officers or persons nominated or charged by our Company to
become directors or executive officers.  The executive officer serves
at the discretion of the Board of Directors, and is appointed to serve until the
first Board of Directors meeting following the annual meeting of
stockholders.  The brief descriptions of the business experience of
each director and executive officer and an indication of directorships held by
each director in other companies subject to the reporting requirements under the
Federal securities laws are provided herein below.  Also provided are
the biographies of the members of the Scientific Advisory
Committee.


41


Our
directors and executive officer are as follows:




Name
              
              Age
              
              Positions
      Held with the RegistrantDr.
      John S. Kovach
              
              72
              
              Chief
      Executive Officer, Chief Financial Officer and DirectorDr.
      Philip F. Palmedo
              
              74
              
              DirectorDr.
      Stephen K. Carter
              
              71
              
              DirectorDr.
      Mel Sorensen
              
              51
              
              Director





Biographies
of Directors and Executive Officer:




Dr.
John S. Kovach




Dr. John
S. Kovach founded Lixte in August 2005 and was its President and a member of the
Board of Directors.  He received a BA (cum laude) from Princeton
University and an MD (AOA) from the College of Physicians & Surgeons,
Columbia University.  Dr. Kovach trained in Internal Medicine and
Hematology at Presbyterian Hospital, Columbia University and spent six years in
the laboratory of Chemical Biology, National Institute of Arthritis and
Metabolic diseases studying control of gene expression in bacterial
systems.




Dr.
Kovach was recruited to Stony Brook University in 2000 to found the Long Island
Cancer Center (now named the Stony Brook University Cancer
Center).  He is presently Chair of the Department of Preventive
Medicine at Stony Brook University in Stony Brook, New York.  From
1994 to 2000, Dr. Kovach was Executive Vice President for Medical and Scientific
Affairs, City of Hope National Medical Center in Los Angeles,
California.  His responsibilities included oversight of all basic and
clinical research initiatives at the City of Hope.  During that time
he was also Director of the Beckman Research Center at City of Hope and a member
of the Arnold and Mabel Beckman Scientific Advisory Board in Newport Beach,
California.




From 1976
to 1994, Dr. Kovach was a consultant in oncology and director of the Cancer
Pharmacology Division at the Mayo Clinic in Rochester,
Minnesota.  During this time, he directed the early clinical trials
program for evaluation of new anti-cancer drugs as principal investigator of
contracts from the National Cancer Institute.  From 1986 to 1994, he
was also Chair of the Department of Oncology and Director of the NCI-designated
Mayo Comprehensive Cancer Center.  During that time, Dr. Kovach,
working with a molecular geneticist, Steve Sommer MD, PhD, published extensively
on patterns of acquired mutations in human cancer cells as markers of
environmental mutagens and as potential indicators of breast cancer patient
prognosis.  Dr. Kovach has published over 100 articles on the
pharmacology, toxicity, and effectiveness of anti-cancer treatments and on the
molecular epidemiology of breast cancer.  Dr. Kovach directs Lixte
with the approval of the State University of New York at Stony Brook and the New
York State Ethics Commission.




Dr.
Philip F. Palmedo




Dr.
Palmedo joined our board of directors on June 30, 2006.  Dr. Palmedo
has had a diversified career as a physicist, entrepreneur, corporate manager and
writer.  Dr. Palmedo received his undergraduate degree from Williams
College and M.S. and Ph.D. degrees from MIT.  He carried out
experimental nuclear reactor physics research at MIT, Oak Ridge National
Laboratory, the French Atomic Energy Commission Laboratory at Saclay and
Brookhaven National Laboratory (BNL).  At BNL in 1972 he initiated and
was the first head of the Energy Policy Analysis Group.  In 1974 he
served with the Energy Policy Office of the White House and in the following
year initiated the BNL Developing Country Energy Program.




In 1979,
Dr. Palmedo founded the International Resources Group, an international
professional services firm in energy, environment and natural
resources.  He served as Chairman and CEO until 1988 and then as
Chairman until the company was sold in 2008.  In 1985 the company was
recognized by Inc. Magazine as one of the 500 fastest growing private companies
in the U.S.




In 1988,
Dr. Palmedo joined in the formation of Kepler Financial Management, Ltd., a
quantitative financial research and trading company.  Dr. Palmedo held
the position of President and Managing Director until the end of 1991 when
Renaissance Technologies Corporation acquired the company.  In 2005 he
started a new hedge fund, Kepler Asset Management, and is a Managing Director of
the firm.


42


Dr.
Palmedo was the designer and, in 1992, became the first president of the Long
Island Research Institute.  LIRI was formed by Brookhaven National
Laboratory, Cold Spring Harbor Laboratory, and Stony Brook University to
facilitate the commercialization of technologies developed in their research and
development programs.  LIRI guided fledgling companies and started
several new high tech entities.  In order to provide “zero-stage”
financing, LIRI created the Long Island Venture Fund, which evolved into the
$250 million Topspin Fund.




Dr.
Palmedo served on the boards of Asset Management Advisors and the Teton Trust
Company and is currently a member of the Board of Directors of EHR Investments
and the Gyrodyne Corporation of America.  Dr. Palmedo also served on
the Board of Trustees of Williams College and of the Stony Brook (University)
Foundation and chaired the Foundation’s Investment Committee.  He is
the founding Chairman of the non-profit Cultural Preservation Fund.




Dr.
Palmedo has served as a consultant and advisor to numerous corporations and
national and international agencies in science, technology and environmental
policy including the MacArthur Foundation, the U.S. National Academy of
Sciences, International Atomic Energy Agency, UNIDO, Organization of American
States, the Governments of Sweden, Denmark, Dominican Republic, Indonesia,
Somalia, Sudan, Egypt and Peru.  He is the author of many publications
in nuclear reactor physics, energy and environment, and technology and economic
development.




Dr.
Stephen K. Carter




Dr.
Carter joined our Board on September 12, 2007. Dr. Carter is a highly
experienced leader and administrator in cancer therapeutics and cancer drug
development.  For 13 years, he was associated with Bristol-Meyers Co.
and Bristol-Meyers Squibb, Co. holding successively the positions of Senior Vice
President, Anti-Cancer Research; President, Division of Pharmaceutical Research
and Development, and ultimately Senior Vice President, Worldwide Clinical
Research and Development, Pharmaceutical Research Institute.  Most
recently Dr. Carter was Senior Vice President of Clinical and Regulatory Affairs
at Sugen, Inc., after serving as Senior Vice President for Research and
Development at Boehringer Ingelheim Pharmaceuticals, Inc.  Dr. Carter
held leadership roles in academia and government including Deputy Director,
Division of Cancer Treatment, National Cancer Institute and Director, Northern
California Cancer Program.




Dr.
Carter is currently a director on the boards of:  Cytogen Corporation
(NASDAQ:CYTO), Alfacell Corporation (NASDAQ:ACEL), Tapestry Pharmaceuticals,
Inc. (NASDAQ:TPPH), Callisto Pharmaceuticals, Inc. (AMEX:KAL), Vion
Pharmaceuticals, Inc. (NASDAQ:VION) and Celator.




Dr.
Mel Sorensen




Dr.
Sorensen joined our Board on October 7, 2008. Dr. Sorensen is a medical
oncologist who has dedicated his career to clinical cancer research since
completing his oncology fellowship at the Mayo Clinic in 1988.  Dr.
Sorensen joined Ascenta Therapeutics in August 2004 as Board Director, President
and Chief Executive Officer.  In less than three years, Ascenta was
transformed from a 5-person start-up with a single preclinical program into a
clinical-stage company with over 65 FTFs and facilities in the US and China and
development programs against three distinct targets.  Prior to joining
Ascenta Therapeutics, he spent approximately seven years each in patient care
(St. Louis & Mayo Clinic), the National Cancer Institute and in leadership
positions of clinical cancer research in the pharmaceutical industry (Bayer
& GSK).




Throughout
his career, Dr. Sorensen has been active in fostering public-private
collaborations for clinical cancer research, with the National Cancer Institute
(NCI) with C-Change, with Friends of Cancer
Research (FOCR) and other organizations.  He is a frequent
speaker and panel participant on optimizing cancer R&D, including
presentations at the Woodrow Wilson Center in Washington, DC in 2003 (“Confronting Cancer
Now”), the 2004 Bioethical Symposium in Tampa, FL (“Ethial Issues in
Large Clinical Trials”), the 2005 Tokyo Pharma Partnering Conference &
Shanghai’s 2005 Bio-Forum conference, the 2005 Milken Institute’s Global Conference
(“Biopharmaceuticals:
The Innovation Pipeline Race”), BIO 2006 (“Early-Stage Business Models in
Cancer”), the March 2007 R&D Readers’ Forum (“Biotech R&D Across
Borders: The Ascenta Experience”) in Philadelphia and the China 2007
R&D Summit (“Making Innovative Medicines
Faster and Cost-Efficiently”) in Shanghai.


43


SCIENTIFIC
ADVISORY COMMITTEE




The
Committee which is not part of management advises us in three areas: human
molecular pathology; the clinical management of human brain tumors; and
medicinal chemistry.  It is planned that the committee will meet as a
group annually with some members participating via telephone
conference.  Thus far the Committee has been apprised of our general
objectives  and several of the specific challenges and leads for
developing improved therapies for human brain tumors.  The Committee
members have not provided specific advice thus far that has modified strategy
nor do they serve in any management capacity.  The scientific advisory
committee was formalized on June 30, 2006.  The members of our
Advisory Committee are:




Arndt
Hartmann, MD




Dr.
Hartmann is Professor of Pathology, Institute of Pathology, University of
Regensburg, Germany.  He was trained in Internal Medicine at the
University of Jena, Germany, and in molecular genetics of cancer at Mayo Clinic,
Rochester, MN.  He was subsequently trained in pathology at the
University of Regensburg and the University of Basel,
Switzerland.  His research is focused on methods development in
molecular pathology.  He has specific expertise in genetic alterations
in cancers of the bladder, prostate, kidney and breast.




Ferdinand
Hofstadter, MD




Dr.
Hofstadter is Professor and Director of the Institute of Pathology, University
of Regensburg Medical School, Germany.  He is Research Dean of the
University of Regensburg-Medical Faculty, Chairman of the Managing Board of the
Association of German Tumor Centers, Chairman of the German Society for
Pathology, a member of the editorial boards of Virchow’s Archives and the
Journal of Pathology, and a referee for Deutsche Forschungsgesellschaft, the Dr.
Mildred Scheel-Stiftung, EU, and the European Research Framework
Program.




Iwao
Ojima, BS, MS, PhD




Professor
Ojima is Distinguished Professor of Chemistry and Director, Institute of
Chemical Biology and Drug Discovery, SUNY-Stony Brook.  He is an
internationally recognized expert in medicinal chemistry, including anticancer
agents and enzyme inhibitors, development of efficient synthetic methods for
organic synthesis by means of organometallic reagents, homogeneous catalysis and
organometallic chemistry, peptide and peptide mimetics, beta-lactam chemistry,
and organoflourine chemistry at the biomedical interface.




Dr. Ojima
is a recipient of the Arthur C. Cope Scholar Award (1994) and the
E.  B. Hershberg Award (for important discovery of medicinally active
substances) (2001) from the American Chemical Society; The Chemical Society of
Japan Award (for distinguished achievements) (1999); Outstanding Inventor Award
from the Research Foundation of the State University of New York
(2002.  He is a Fellow of the J.S. Guggenheim Memorial Foundation
(1995-), the American Association for the Advancement of Science (1997-), and
The New York Academy of Sciences (2000-).




Dr. Ojima
is a member of the American Chemical Society, American Association for the
Advancement of Science, American Association for Cancer Research, American
Peptide Society, the Chemical Society of Japan, the Society of Synthetic Organic
Chemistry, Japan, New York Academy of Sciences, and Signa Xi.  He has
served as a consultant for E. I. du Pont, Eli Lilly, Air Products &
Chemicals, Mitsubishi Chem. Inc., Nippon Steel Corp., Life Science Division,
Rhone-Poulenc Rorer, ImmunoGen, Inc., Taiho Pharmaceutical Co., Milliken &
Co., Aventis Pharma, OSI Pharmaceuticals, Inc., Mitsubishi Chem. Corp.
(current).


44


Audit
Committee




We do not
presently have an audit committee.  The board of directors acts in
that capacity and has determined that we do not currently have an individual
serving on our Board equivalent to an audit committee financial
expert.




Code
of Ethics




Our Board
of Directors adopted a code of ethics covering all of our executive officers and
key employees.  A copy of our code of ethics will be furnished without
charge to any person upon written request.  Requests should be sent
to:  Secretary, Lixte Biotechnology Holdings, Inc., 248 Route 25A, No.
2, East Setauket, New York 11733.




Compliance
with Section 16(a) of the Securities Exchange Act of 1934, as
Amended




Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors and executive officers and persons who own more than 10% of a
registered class of the Company’s equity securities to file various reports with
the Securities and Exchange Commission concerning their holdings of, and
transactions in, securities of the Company.  Copies of these filings
must be furnished to the Company.




To the
Company’s knowledge based solely on its review of the copies of the Section
16(a) reports furnished to the Company and written representations to the
Company that no other reports were required, the Company believes that all
individual filing requirements applicable to the Company’s directors and
executive officers were complied with under Section 16(a) during 2007 and
2008.




ITEM
11.             EXECUTIVE
COMPENSATION




For the
fiscal years ended December 31, 2008 and 2007, no individual, including Dr. John
Kovach, our current Chief Executive Officer, received any
compensation.  Dr. Kovach will be reimbursed for any out-of-pocket
expenses.  Any future compensation arrangements will be subject to the
approval of the board of directors.




Option
Grants in 2007 and 2008




The
Company has never issued any options to Management.




Aggregated
Option Exercises in 2007 and 2008 Option Values at December 31, 2007 and at
2008




Not
Applicable.




Employment
Agreements; Management Compensation




We have
not entered into any employment agreements.  As of December 31, 2008,
we had no full-time employees.  For the current fiscal year, Dr.
Kovach does not anticipate receiving any compensation from us in view of our
early stage status.  He is reimbursed for any out-of-pocket
expenses.  Any future compensation arrangements will be subject to the
approval of the board of directors.




45




Director
Compensation




Members
of the Board of Directors




On June
30, 2006, Dr. Palmedo was granted options to purchase 200,000 shares of common
stock at the initial private placement price of $0.333 per share with one third
of the options (66,666 shares) vesting on such date and one third vesting
annually for two years on the anniversary of that date.  On June 30,
2006, Dr. Palmedo also was granted options to purchase 190,000 shares of common
stock exercisable for a period of five years at $0.333 per share for services
rendered in developing our business plan, all of which were fully vested upon
issuance. The fair
value of these options, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $62,000 ($0.31 per
share).




On
September 12, 2007, in conjunction with his appointment as a director of the
Company, the Company granted to Dr. Stephen Carter stock options to purchase an
aggregate of 200,000 shares of common stock under the 2007 Plan, exercisable for
a period of five years from the vesting date at $0.333 per share, with one-half
(100,000 shares) vesting annually on each of September 12, 2008 and 2009. The fair
value of these options, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $204,000 ($1.02 per
share).




On
October 7, 2008, in conjunction with his appointment as director of the
Company, the Company granted to Dr. Mel Sorensen stock options to purchase
an aggregate of 200,000 shares of Common Stock under the 2007 Plan exercisable
for a period of five years from the date of exercisable at $0.50 per share
vesting 12.5% on January 1, 2009 and 12.5% on the first date of each
subsequent quarter. The fair
value of these options, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $100,000 ($0.50 per share).In
addition, in connection with Dr. Sorensen acting in an advisory role for a
period of one year in connection with the strategic development of the Company’s
intellectual properties, the Company has agreed to pay Dr. Sorensen $40,000
payable in quarterly installments of $10,000 commencing on October 7,
2008.  Dr. Sorensen is also eligible to receive a bonus at the
sole discretion of the board of directors.




46


DIRECTOR
COMPENSATION TABLE




Name
                  Year
                  
                  Fees
      Earned
                    or
      Paid
                    In
      Cash
                    ($)
                  
                  
                  Stock
                    Awards
                    ($)
                  
                  
                  Option
                    Awards
                    ($)(1)
                  
                  
                  Non-Equity
                    Incentive Plan
                    Compensation
                    ($)
                  
                  
                  Non-Qualified
                    Deferred
                    Compensation
                    Earnings ($)
                  
                  
                  All Other
                    Compensation
                    ($)
                  
                  
                  Total
                    ($)Philip
      F.  Palmedo
                  2008
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  10,332
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  10,332Director
                  2007
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  20,668
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  20,6682006
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  89,900
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  89,900Stephen
      K. Carter
                  2008
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  102,085
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  102,085Director
                  2007
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  30,655
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  30,655Mel
      Sorensen
                    Director
                  2008
                  
                  
                  10,000
                  
                  
                  
                  0
                  
                  
                  
                  12,568
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  22,568
  (1)
              Represents
      the portion of the fair market value of options issued to each director
      for his services as a board member, calculated at the time of issuance
      pursuant to the Black-Scholes option-pricing model, and charged to
      operations in each respective fiscal
year.
 Options
to purchase a total of 790,000 shares have been issued to directors at exercise
prices ranging from $0.33 to $0.50 per share.


Members
of the Scientific Advisory Committee




On June
30, 2006, each member of the Scientific Advisory Committee (SAC), other than
Drs. Hartmann and Hofstadter, received options to purchase 50,000 shares of
common stock at the initial private placement price of $0.333 per share with
one-half of the options (25,000 shares) vesting on the first anniversary of
joining the SAC and one-half vesting on the second anniversary.




ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND
      MANAGEMENT AND RELATED STOCKHOLDER
MATTERS




The
following table sets forth, as of March 25, 2009, certain information regarding
beneficial ownership of our common stock by (i) each person or entity who is
known by us to own beneficially more than 5% of the outstanding shares of common
stock, (ii) each of our directors, and (iii) all directors and executive
officers as a group.  As of March 25, 2009, there were 28,852,178
shares of our common stock issued and outstanding.  In computing the
number and percentage of shares beneficially owned by a person, shares of common
stock that a person has a right to acquire within sixty (60) days of March 15,
2009, pursuant to options, warrants or other rights are counted as outstanding,
while these shares are not counted as outstanding for computing the percentage
ownership of any other person.  Unless otherwise indicated, the
address for each stockholder listed in the following table is c/o Lixte
Biotechnology Holdings, Inc., 248 Route 25A, No. 2, East Setauket, New York
11733.  This table is based upon information supplied by directors,
officers and principal stockholders and reports filed with the Securities and
Exchange Commission.




47





Name and Address of Beneficial Owner
                  
                  Amount and Nature
                    of Beneficial
                    Ownership
                  
                  
                  Percent of ClassOfficers,
      Directors and 5% stockholdersDr.
      John S. Kovach
                    248
      Route 25A, No.  2
                    East
      Setauket, New York 11733
                  
                  
                  17,021,786
                  
                  
                  
                  59.0
                  %Dr.
      Philip F. Palmedo
                    248
      Route 25A, No.  2
                    East
      Setauket, New York 11733
                  
                  
                  790,000
                  (1)
                  
                  
                  2.7
                  %Dr.
      Stephen K. Carter
                    248
      Route 25A, No. 2
                    East
      Setauket, New York 11733
                  
                  
                  200,000
                  (2)
                  
                  
                  0.7
                  %Dr.
      Mel Sorensen
                    248
      Route 25A, No. 2
                    East
      Setauket, New York 11733
                  
                  
                  100,000
                  (3)
                  
                  
                  0.3
                  %All
      officers and directors as a group (four persons)
                  
                  
                  18,111,786
                  (1)
    (2)(3)
                  
                  
                  60.9
                  %








(1)
            Includes
      options to purchase an aggregate of 390,000 shares of common stock and
      warrants to purchase 200,000 shares of common stock, all of which are
      immediately exercisable or within six
months.




(2)
            Consists
      of options to purchase 200,000 shares of common stock which vest within
      six months.




(3)
            Consists
      of options to purchase 100,000 shares of common stock which vest within
      six months.




Information with respect to securities
authorized for issuance under equity compensation plans is provided in “ITEM
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.”





ITEM
13.             CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR
INDEPENDENCE




(a)           Related Party
Transactions




This
section describes the transactions we have engaged in with persons who were
directors, officers or affiliates before and at the time of the transaction, and
persons known by us to be the beneficial owners of 5% or more of our common
stock as of December 31, 2008.




Most
office services are provided without charge by Dr. Kovach, our
president.  Such costs are immaterial to the financial statements and
accordingly, have not been reflected therein.  Our officer and
director are involved in other business activities and may, in the future,
become involved in other business opportunities that become available, such
person may face a conflict in selecting between us and his other business
interests.  We have not formulated a policy for the resolution of such
conflicts.




Also, Dr.
Kovach, our President, has advanced to us an aggregate of $92,717 through
December 31, 2008 to meet operating expenses.  Such advances are
non-interest bearing and are due on demand.




See “ITEM
11. EXECUTIVE COMPENSATION—Directors Compensation” for disclosure with respect
to payments to certain of our directors for services rendered.




48


(b)           Director
Independence




The
Company considers Drs. Palmedo, Sorensen and Carter to be “independent
directors” as such term is defined by the NASDAQ Rules or Rule 10A-3 of the
Exchange Act.




ITEM
14.              PRINCIPAL
ACCOUNTANT FEES AND SERVICES




AJ.
Robbins, P.C. acted as our independent registered public accounting firm for the
fiscal year ended December 31, 2007 and through the interim period ended
September 30, 2008.  Weinberg & Company, P.C. acted as our
independent registered public accounting firm for the fiscal year ended December
31, 2008.  The following table shows the fees that were paid or
accrued by us for audit and other services provided by AJ. Robbins, P.C. for the
2007 and 2008 fiscal years.  As Weinberg & Company, P.A. was
retained as the Company’s independent registered public accounting firm
effective December 17, 2008, such firm did not have any charges for
2008.




2007
                  
                  
                  2008Audit
      Fees (1)
                  
                  $
                  60,853
                  
                  
                  $
                  38,760Audit-Related
      Fees (2)
                  
                  
                  -
                  
                  
                  
                  -Tax
      Fees (3)
                  
                  
                  7,500
                  
                  
                  
                  6,000All
      Other Fees
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  68,353
                  
                  
                  $
                  44,760




(1)
            Audit
      fees represent fees for professional services provided in connection with
      the audit of our annual financial statements and the review of our
      financial statements included in our Form 10-QSB quarterly reports and
      services that are normally provided in connection with statutory or
      regulatory filings for the 2007 and 2008 fiscal
  years.




(2)
            Audit-related
      fees represent fees for assurance and related services that are reasonably
      related to the performance of the audit or review of our financial
      statements and not reported above under “Audit
  Fees.”




(3)
            Tax
      fees represent fees for professional services related to tax compliance,
      tax advice and tax planning.




All audit
related services, tax services and other services rendered by AJ. Robbins, P.C.
were pre-approved by our Board of Directors.  The Board has adopted a
pre-approval policy that provides for the pre-approval of all services performed
for us by our independent registered public accounting firm.




ITEM
15.              EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES




Exhibit
                No.
              
              Description2.1
              
              Share
      Exchange Agreement dated as of June 8, 2006 among the Company, John S.
      Kovach and Lixte Biotechnology, Inc.12.2
              
              Securities
      Purchase Agreement32.3
              
              Registration
      Rights Agreement33.1
              
              Certificate
      of Incorporation, as filed with the Delaware Secretary of State on May 24,
      2005.23.2
              
              Certificate
      of Amendment of Certificate of Incorporation3.2
              
              Bylaws2


49





Exhibit
                          No.
                        
                        Description10.1
                        
                        Cooperative
      Research and Development Agreement (CRADA) between the U.S. Department of
      Health and Human Services, as represented by National Institute of
      Neurological Disorders and Stroke of the National Institutes of Health and
      Lixte Inc., as amended.410.2
                        
                        Agreement
      between Lixte Biotechnology Holdings, Inc. and Chem-Master International,
      Inc. dated as of February 5, 2007.610.3
                        
                        Stock
      Option Agreement between Lixte Biotechnology Holdings, Inc. and Stephen K.
      Carter dated September 12, 2007.710.4
                        
                        Stock
      Option Agreement between Lixte Biotechnology Holdings, Inc. and Francis
      Johnson dated September 12, 2007.710.5
                        
                        Stock
      Option Agreement between Lixte Biotechnology Holdings, Inc. and Gil
      Schwartzberg dated September 12, 2007.710.6
                        
                        Consulting
      Agreement between Lixte Biotechnology Holdings, Inc. and Gil Schwartzberg
      dated September 12, 2007.710.7
                        
                        Consulting
      Agreement between Lixte Biotechnology Holdings, Inc. and Mirador
      Consulting, Inc. dated September 20, 2007.710.8
                        
                        Consulting
      Agreement between Lixte Biotechnology Holdings, Inc. and Francis Johnson
      dated September 12, 2007.710.9
                        
                        Amendment
      dated as of January 28, 2008 to Agreement with Chem-Master
      International.10.10
                        
                        Amendment
      5 to CRADA dated June 2008.810.11
                        
                        License
      Agreement dated as of September 19, 2008 between the Company and the
      United States Public Health Services.10.12
                        
                        Stock
      Option Agreement between the Company and Mel Sorensen dated October 7,
      2008.910.13
                        
                        Consulting
      Agreement between the Company and Mel Sorensen dated October 7, 2008.1031
                        
                        Officer’s
      Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232
                        
                        Officer’s
      Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002





1
            Filed
      as an Exhibit to the Company’s Current Report on Form 8-K as filed with
      the Securities and Exchange Commission on July 7, 2006, and incorporated
      herein by reference.


2
            Filed
      as an Exhibit to the Company’s Registration Statement on Form 10-SB, as
      filed with the Securities and Exchange Commission on August 3, 2005 and
      incorporated herein by reference.


3
            Filed
      as an Exhibit to the Company’s Registration Statement on Form SB-2 as
      filed with the Securities and Exchange Commission on September 8, 2006 and
      incorporated herein by reference.


4
            Filed
      as an Exhibit to the Company’s Registration on Form SB-2 as filed with the
      Securities and Exchange Commission on March 13, 2007 and incorporated
      herein by reference.


5
            Filed
      as an Exhibit to the Company’s Registration Statement on Form SB-2 as
      filed with the Securities and Exchange Commission on January 11, 2007 and
      incorporated herein by reference.


6
            Filed
      as an Exhibit to the Company’s Current Report on Form 8-K as filed with
      the Securities and Exchange Commission on February 9, 2007 and
      incorporated herein by reference.


7
            Filed
      as an Exhibit to the Company’s Quarterly Report as filed with the
      Securities and Exchange Commission on November 11,
    2007.


8.
            Filed
      as Exhibit to the Company’s Quarterly Report as filed with the Securities
      and Exchange Commission on May 14,
2008


9.
            Filed
      as an Exhibit to the Company’s Quarterly Report on Form 10-Q as filed with
      the Securities and Exchange Commission on August 12,
  2008


10.
            Filed
      as an Exhibit to the Company’s Quarterly Report on Form 10-Q as filed with
      the Securities and Exchange Commission on November 12,
    2008.


50


SIGNATURES




In
accordance with Section 13 and 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.




Date:       March
      30, 2009
                LIXTE
      BIOTECHNOLOGY HOLDINGS, INC.
                  (Registrant)By:
                /s/ John
    S.  KovachName:
                John
      S.  KovachTitle:
                Chief
      Executive Officer





In
accordance with the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the Registrant in the capacity and
on the dates indicated.




Signature
                  
                  Title
                  
                  Date/s/
      John S. Kovach
                  
                  Chief
      Executive Officer, Principal Financial Officer,
                  
                  March
      30, 2009John
      S. Kovach
                  
                  Principal
      Accounting Officer and Director/s/
      Philip F. Palmedo
                  
                  Director
                  
                  March
      30, 2009Philip
      F. Palmedo/s/
      Stephen K. Carter
                  
                  Director
                  
                  March
      30, 2009Stephen
      K. Carter/s/
      Mel Sorensen
                  
                  Director
                  
                  March
      30, 2009Mel
      Sorensen




51


LIXTE
BIOTECHNOLOGY HOLDINGS, INC.


AND
SUBSIDIARY


(a
development stage company)




CONSOLIDATED
FINANCIAL STATEMENTS





and





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS




Years
Ended December 31, 2008 and 2007, and


Period
from August 9, 2005 (Inception) to December 31, 2008 (Cumulative)





INDEX




Report
      of Independent Registered Public Accounting Firms –
                      —Weinberg
      & Company, P.A.
                    
                    F-2—AJ.
      Robbins, P.C.
                    
                    F-3Consolidated
      Balance Sheets - December 31, 2008 and 2007
                    
                    F-4Consolidated
      Statements of Operations - Years Ended December 31, 2008 and 2007,
      and  Period from August 9, 2005 (Inception) to December 31,
      2008 (Cumulative)
                    
                    F-5Consolidated
      Statement of Stockholders’ Equity (Deficiency) - Period from
      August 9, 2005 (Inception) to December 31, 2008
                    
                    F-6Consolidated
      Statements of Cash Flows - Years Ended December 31, 2008 and 2007,
      and  Period from August 9, 2005 (Inception) to December 31,
      2008 (Cumulative)
                    
                    F-7Notes
      to Consolidated Financial Statements – Years Ended December 31, 2008 and
      2007, and Period from August 9, 2005 (Inception) to December 31, 2008
      (Cumulative)
                    
                    F-8





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors


Lixte
Biotechnology Holdings, Inc.


East
Setauket, New York





We have
audited the accompanying consolidated balance sheet of Lixte Biotechnology
Holdings, Inc. and subsidiary (a development stage company) as of December 31,
2008, and the related consolidated statements of operations, stockholders’
equity (deficiency) and cash flows for the year then ended and for the period
from August 9, 2005 (Inception) to December 31, 2008 (Cumulative). 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 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 we considered
appropriate under the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. An audit includes examining on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Accordingly, we express no
such opinion. 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 financial position of Lixte Biotechnology
Holdings, Inc. and subsidiary as of December 31, 2008, and the results of their
operations and their cash flows for the year then ended and for the period from
August 9, 2005 (Inception) to December 31, 2008 (Cumulative), in conformity with
accounting principles generally accepted in the United States of
America.




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has experienced
recurring losses and has a stockholders’ deficiency at December 31, 2008. These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans in regard to these matters are described in
Note 1 to the consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.




WEINBERG
& COMPANY, P.A.


CERTIFIED
PUBLIC ACCOUNTANTS





Los
Angeles, California


March 6,
2009


F-2


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors


Lixte
Biotechnology Holdings, Inc.


East
Setauket, New York





We have
audited the accompanying consolidated balance sheet of Lixte Biotechnology
Holdings, Inc. and subsidiary (a development stage company) as of December 31,
2007, and the related consolidated statements of operations 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 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 we considered
appropriate under the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. An audit includes examining on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Accordingly, we express no
such opinion. 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 financial position of Lixte Biotechnology
Holdings, Inc. and subsidiary as of December 31, 2007, 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 that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company is in the development stage and
has not commenced operations. Its ability to continue as a going concern is
dependent upon its ability to develop additional sources of capital and
ultimately achieve profitable operations. These conditions raise substantial
doubt about its ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




AJ.
ROBBINS, P.C.


CERTIFIED
PUBLIC ACCOUNTANTS





Denver,
Colorado


March 15,
2008


F-3


LIXTE
BIOTECHNOLOGY HOLDINGS, INC.


AND
SUBSIDIARY


(a
development stage company)




CONSOLIDATED
BALANCE SHEETS




December 31,2008
                  
                  
                  2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  10,381
                  
                  
                  $
                  508,070Advances
      on research and development contract services
                  
                  
                  12,500
                  
                  
                  
                  88,180Prepaid
      expenses and other current assets
                  
                  
                  28,644
                  
                  
                  
                  32,117Total
      current assets
                  
                  
                  51,525
                  
                  
                  
                  628,367Office
      equipment , net of
      accumulated depreciation of $1,782 and $1,167 at
                    December
      31, 2008 and 2007, respectively
                  
                  
                  128
                  
                  
                  
                  742Total
      assets
                  
                  $
                  51,653
                  
                  
                  $
                  629,109LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIENCY)Current
      liabilities:Accounts
      payable and accrued expenses
                  
                  $
                  108,484
                  
                  
                  $
                  73,741Note
      payable to consultant
                  
                  
                  100,000
                  
                  
                  
                  —Liquidated
      damages payable under registration rights agreement
                  
                  
                  74,000
                  
                  
                  
                  74,000Research
      and development contract liabilities
                  
                  
                  —
                  
                  
                  
                  11,725Due
      to stockholder
                  
                  
                  92,717
                  
                  
                  
                  92,717Total
      current liabilities
                  
                  
                  375,201
                  
                  
                  
                  252,183Commitments
      and contingenciesStockholders’
      equity (deficiency):Preferred
      stock, $0.0001 par value;
                    authorized
      - 10,000,000 shares; issued - none
                  
                  
                  —
                  
                  
                  
                  —Common
      stock, $0.0001 par value;
                    authorized
      - 100,000,000 shares;
                    issued
      and outstanding - 27,932,178 shares and 27,832,178 shares at
                    December
      31, 2008 and 2007, respectively
                  
                  
                  2,793
                  
                  
                  
                  2,783Additional
      paid-in capital
                  
                  
                  3,171,877
                  
                  
                  
                  2,600,839Deficit
      accumulated during the development stage
                  
                  
                  (3,498,218
                  )
                  
                  
                  (2,226,696
                  )Total
      stockholders’ equity (deficiency)
                  
                  
                  (323,548
                  )
                  
                  
                  376,926Total
      liabilities and stockholders’ equity (deficiency)
                  
                  $
                  51,653
                  
                  
                  $
                  629,109





See
accompanying notes to consolidated financial statements.


F-4


LIXTE
BIOTECHNOLOGY HOLDINGS, INC.


AND
SUBSIDIARY


(a
development stage company)




CONSOLIDATED
STATEMENTS OF OPERATIONS




Period from
                                        August 9,
                                        2005
                                        (Inception) to
                                        December 31,
                                        2008
                                        (Cumulative)Years Ended
                                        December 31,2008
                                      
                                      
                                      2007Revenues
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —Costs
      and expenses:General
      and administrative costs, including $357,987,
                                        $890,444
      and $1,345,831 of stock-based compensation
                                        during
      the years ended December 31, 2008 and 2007, and
                                        the
      period from August 9, 2005 (inception) to December
                                        31,
      2008 (cumulative), respectively
                                      
                                      
                                      664,202
                                      
                                      
                                      
                                      1,203,722
                                      
                                      
                                      
                                      2,116,123Depreciation
                                      
                                      
                                      615
                                      
                                      
                                      
                                      592
                                      
                                      
                                      
                                      1,782Research
      and development costs, including $213,061,
                                        $50,836
      and $263,897 of stock-based compensation during
                                        the
      years ended December 31, 2008 and 2007, and the
                                        period
      from August 9, 2005 (inception) to December 31,
                                        2008
      (cumulative), respectively
                                      
                                      
                                      608,733
                                      
                                      
                                      
                                      454,723
                                      
                                      
                                      
                                      1,280,788Reverse
      merger costs
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      50,000Total
      costs and expenses
                                      
                                      
                                      1,273,550
                                      
                                      
                                      
                                      1,659,037
                                      
                                      
                                      
                                      3,448,693(1,273,550
                                      )
                                      
                                      
                                      (1,659,037
                                      )
                                      
                                      
                                      (3,448,693
                                      )Interest
      income
                                      
                                      
                                      3,261
                                      
                                      
                                      
                                      10,549
                                      
                                      
                                      
                                      25,712Interest
      expense
                                      
                                      
                                      (1,233
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (1,237
                                      )Liquidated
      damages under registration rights agreement
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (74,000
                                      )Net
      loss
                                      
                                      $
                                      (1,271,522
                                      )
                                      
                                      $
                                      (1,648,488
                                      )
                                      
                                      $
                                      (3,498,218
                                      )Net
      loss per common share –Basic
      and diluted
                                      
                                      $
                                      (0.05
                                      )
                                      
                                      $
                                      (0.06
                                      )Weighted
      average common shares outstanding -Basic
      and diluted
                                      
                                      
                                      27,924,528
                                      
                                      
                                      
                                      26,707,525





See
accompanying notes to consolidated financial statements.


F-5


LIXTE
BIOTECHNOLOGY HOLDINGS, INC.


AND
SUBSIDIARY


(a
development stage company)




CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIENCY)





Period
from August 9, 2005 (Inception) to December 31, 2008





Common Stock
                  
                  
                  Additional
                    Paid-in
                  
                  
                  Deficit
                    Accumulated
                    During the
                    Development
                  
                  
                  Total
                    Stockholders’
                    EquityShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Stage
                  
                  
                  (Deficiency)Balance,
      August 9, 2005 (inception)
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Shares
      issued to founding stockholder
                  
                  
                  19,021,786
                  
                  
                  
                  1,902
                  
                  
                  
                  (402
                  )
                  
                  
                  —
                  
                  
                  
                  1,500Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (16,124
                  )
                  
                  
                  (16,124
                  )Balance,
      December 31, 2005
                  
                  
                  19,021,786
                  
                  
                  
                  1,902
                  
                  
                  
                  (402
                  )
                  
                  
                  (16,124
                  )
                  
                  
                  (14,624
                  )Shares
      issued in connection with reverse
                    merger
      transaction
                  
                  
                  4,005,177
                  
                  
                  
                  401
                  
                  
                  
                  62,099
                  
                  
                  
                  —
                  
                  
                  
                  62,500Shares
      issued in private placement, net ofoffering
      costs of $214,517
                  
                  
                  3,555,220
                  
                  
                  
                  355
                  
                  
                  
                  969,017
                  
                  
                  
                  —
                  
                  
                  
                  969,372Stock-based
      compensation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  97,400
                  
                  
                  
                  —
                  
                  
                  
                  97,400Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (562,084
                  )
                  
                  
                  (562,084
                  )Balance,
      December 31, 2006
                  
                  
                  26,582,183
                  
                  
                  
                  2,658
                  
                  
                  
                  1,128,114
                  
                  
                  
                  (578,208
                  )
                  
                  
                  552,564Shares
      issued in private placement, net ofoffering
      costs of $118,680
                  
                  
                  999,995
                  
                  
                  
                  100
                  
                  
                  
                  531,220
                  
                  
                  
                  —
                  
                  
                  
                  531,320Stock-based
      compensation
                  
                  
                  250,000
                  
                  
                  
                  25
                  
                  
                  
                  890,669
                  
                  
                  
                  —
                  
                  
                  
                  890,694Stock-based
      research and developmentcosts
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  50,836
                  
                  
                  
                  —
                  
                  
                  
                  50,836Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,648,488
                  )
                  
                  
                  (1,648,488
                  )Balance,
      December 31, 2007
                  
                  
                  27,832,178
                  
                  
                  
                  2,783
                  
                  
                  
                  2,600,839
                  
                  
                  
                  (2,226,696
                  )
                  
                  
                  376,926Stock-based
      compensation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  357,987
                  
                  
                  
                  —
                  
                  
                  
                  357,987Stock-based
      research and developmentcosts
                  
                  
                  100,000
                  
                  
                  
                  10
                  
                  
                  
                  213,051
                  
                  
                  
                  —
                  
                  
                  
                  213,061Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,271,522
                  )
                  
                  
                  (1,271,522
                  )Balance,
      December 31, 2008
                  
                  
                  27,932,178
                  
                  
                  $
                  2,793
                  
                  
                  $
                  3,171,877
                  
                  
                  $
                  (3,498,218
                  )
                  
                  $
                  (323,548
                  )




See
accompanying notes to consolidated financial statements.


F-6


LIXTE
BIOTECHNOLOGY HOLDINGS, INC.


AND
SUBSIDIARY


(a
development stage company)




CONSOLIDATED
STATEMENTS OF CASH FLOWS




Years Ended
                          December 31,
                        
                        
                        Period from
                          August 9,
                          2005
                          (Inception) to
                          December 31,
                          2008
                          (Cumulative)2008
                        
                        
                        2007Cash
      flows from operating activities:Net
      loss
                        
                        $
                        (1,271,522
                        )
                        
                        $
                        (1,648,488
                        )
                        
                        $
                        (3,498,218
                        )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
                        
                        
                        615
                        
                        
                        
                        592
                        
                        
                        
                        1,782Stock-based
      compensation
                        
                        
                        357,987
                        
                        
                        
                        890,444
                        
                        
                        
                        1,345,831Stock-based
      research and development
                        
                        
                        213,061
                        
                        
                        
                        50,836
                        
                        
                        
                        263,897Changes
      in operating assets and liabilities:(Increase)
      decrease in -Advances
      on research and development contract services
                        
                        
                        75,680
                        
                        
                        
                        (38,180
                        )
                        
                        
                        (12,500
                        )Prepaid
      expenses and other current assets
                        
                        
                        3,473
                        
                        
                        
                        (11,752
                        )
                        
                        
                        (28,644
                        )Increase
      (decrease) in -Accounts
      payable and accrued expenses
                        
                        
                        34,742
                        
                        
                        
                        41,955
                        
                        
                        
                        108,483Liquidated
      damages payable under registration rightsAgreement
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        74,000Research
      and development contract liabilities
                        
                        
                        (11,725
                        )
                        
                        
                        11,725
                        
                        
                        
                        —Net
      cash used in operating activities
                        
                        
                        (597,689
                        )
                        
                        
                        (702,868
                        )
                        
                        
                        (1,745,369
                        )Cash
      flows from investing activities:Purchase
      of office equipment
                        
                        
                        —
                        
                        
                        
                        (272
                        )
                        
                        
                        (1,909
                        )Net
      cash used in investing activities
                        
                        
                        —
                        
                        
                        
                        (272
                        )
                        
                        
                        (1,909
                        )Cash
      flows from financing activities:Proceeds
      from sale of common stock to consulting firm
                        
                        
                        —
                        
                        
                        
                        250
                        
                        
                        
                        250Proceeds
      from sale of common stock to founder
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,500Proceeds
      from note payable to consultant
                        
                        
                        100,000
                        
                        
                        
                        —
                        
                        
                        
                        100,000Cash
      acquired in reverse merger transaction
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        62,500Gross
      proceeds from sale of common stock
                        
                        
                        —
                        
                        
                        
                        650,000
                        
                        
                        
                        1,833,889Payment
      of private placement offering costs
                        
                        
                        —
                        
                        
                        
                        (118,680
                        )
                        
                        
                        (333,197
                        )Advances
      from stockholder
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        92,717Net
      cash provided by financing activities
                        
                        
                        100,000
                        
                        
                        
                        531,570
                        
                        
                        
                        1,757,659Net
      increase (decrease) in cash
                        
                        
                        (497,689
                        )
                        
                        
                        (171,570
                        )
                        
                        
                        10,381Cash
      at beginning of period
                        
                        
                        508,070
                        
                        
                        
                        679,640
                        
                        
                        
                        —Cash
      at end of period
                        
                        $
                        10,381
                        
                        
                        $
                        508,070
                        
                        
                        $
                        10,381Supplemental
      disclosures of cash flow information:Cash
      paid for
-Interest
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —Income
      taxes
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —





See
accompanying notes to consolidated financial statements.


F-7


LIXTE
BIOTECHNOLOGY HOLDINGS, INC.


AND
SUBSIDIARY


(a
development stage company)




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Years
Ended December 31, 2008 and 2007, and


Period
from August 9, 2005 (Inception) to December 31, 2008 (Cumulative)




1.
Organization and Business Operations




Organization





On June
30, 2006, Lixte Biotechnology, Inc., a privately-held Delaware corporation
(“Lixte”), completed a reverse merger transaction with SRKP 7, Inc. (“SRKP”), a
non-trading public shell company, whereby Lixte became a wholly-owned subsidiary
of SRKP. On December 7, 2006, SRKP amended its Certificate of Incorporation to
change its name to Lixte Biotechnology Holdings, Inc.
(“Holdings”).  Unless the context indicates otherwise, Lixte and
Holdings are hereinafter referred to as the “Company”.





For
financial reporting purposes, Lixte was considered the accounting acquirer in
the merger and the merger was accounted for as a reverse merger. Accordingly,
the historical financial statements presented herein are those of Lixte and do
not include the historical financial results of SRKP. The stockholders’ equity
section of SRKP has been retroactively restated for all periods presented to
reflect the accounting effect of the reverse merger transaction. All costs
associated with the reverse merger transaction were expensed as
incurred.





Lixte was
incorporated in Delaware on August 9, 2005 to capitalize on opportunities to
develop low cost, specific and sensitive tests for the early detection of
cancers to better estimate prognosis, to monitor treatment response, and to
reveal targets for development of more effective treatments.





The
Company is considered a “development stage company” as defined in Statement of
Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by
Development Stage Enterprises”, as it has not yet commenced any
revenue-generating operations, does not have any cash flows from operations, and
is dependent on debt and equity funding to finance its operations. The Company
has selected December 31 as its fiscal year end.





The
Company’s common stock was listed for trading on the OTC Bulletin Board
commencing September 24, 2007.





Operating
Plans





The
Company is concentrating on developing new treatments for the most common and
most aggressive type of brain cancer of adults, glioblastoma multiforme (“GBM”)
and the most common cancer of children, neuroblastoma. The Company has expanded
the scope of its anti-cancer investigational activities to include the most
common brain tumor of children, medulloblastoma, and also to several other types
of more common cancers. This expansion of activity is based on documentation
that each of two distinct types of drugs being developed by the Company inhibits
the growth of cell lines of breast, colon, lung, prostate, pancreas, ovary,
stomach and liver cancer, as well as the major types of leukemias. Activity of
lead compounds of both types of drugs was recently demonstrated against human
pancreatic cancer cells in a mouse model. Because there is a great need for any
kind of effective treatment for pancreatic cancer, this cancer will be studied
concomitantly with the primary target of the Company’s research program focused
on brain cancers.


F-8


The
research on brain tumors is proceeding in collaboration with the National
Institute of Neurological Disorders and Stroke (“NINDS”) of the National
Institutes of Health (“NIH”) under a Cooperative Research and Development
Agreement (“CRADA”) entered into on March 22, 2006, as amended. The research at
NINDS continues to be led by Dr. Zhengping Zhuang, an internationally recognized
investigator in the molecular pathology of cancer. Dr. Zhuang is aided by two
senior research technicians supported by the Company as part of the CRADA. The
goal of the CRADA is to develop more effective drugs for the treatment of GBM
through the processes required to gain Food and Drug Administration (“FDA”)
approval for clinical trials. The CRADA was extended and is presently scheduled
to end on September 30, 2009.




The
Company filed five patent applications on August 1, 2008. Two of these patent
filings deal with applications filed earlier jointly with NIH for work done
under the CRADA as follows: (1) a filing entering the regional stage of a PCT
application involving the use of certain compounds to treat human tumors
expressing a biomarker for brain and other human cancers; and (2) an application
for the treatment of the pediatric tumors, medulloblastoma (the most common
brain tumor in children) and neuroblastoma (a tumor arising from neural cells
outside the brain that is the most common cancer of children). The three new
patent applications include: (1) a joint application with NIH identifying a new
biomarker for many common human cancers that when targeted by compounds
developed by the Company result in inhibition of growth and death of cancer
cells; (2) an application by the Company regarding the structure, synthesis and
use of a group of new homologs of its LB-1 compounds; and (3) an application by
the Company for the use of certain homologs of its drugs as neuroprotective
agents with potential application to common neurodegenerative conditions such as
Alzheimer’s and Parkinson’s diseases.




The
Company continues to evaluate compounds for activity against several types of
fungi that cause serious infections, particularly in immuno-compromised
individuals, such as those with HIV-AIDS, and those having bone marrow
transplantations. The Company is also exploring indications that its compounds
have against strains of fungi that cause the most common fungal infections of
the skin and nails. Discussions are in progress with experts in fungal
infections regarding the most reliable methods of assessing the potential of new
agents for the management of common fungal diseases.




The
Company expects that its products will derive directly from the intellectual
property from its research activities. The development of lead compounds with
different mechanisms of action that have activity against brain tumors and other
common human cancers, as well as against serious fungal infections, originated
from the discovery of a biomarker in GBM. The Company will continue to use
discovery and/or recognition of molecular variants characteristic of specific
human cancers as a guide to drug discovery and potentially new diagnostic tests.
Examples of the productivity of this approach to discovery of new therapeutics
are: (1) the recent patent application filing for a new biomarker of several
common cancers that when targeted by certain of the Company’s drugs results in
inhibition of growth and death of cancer cells displaying the marker; and (2)
the filing of a patent on certain homologs of one group of compounds as
potentially useful for the treatment of neurodegenerative diseases.




Going
Concern




The
Company’s consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company is in
the development stage and has not generated any revenues from operations to
date.  Furthermore, the Company has experienced recurring losses and
has a stockholders’ deficiency at December 31, 2008.  As a result, the
Company’s independent registered public accounting firm, in their report on the
Company’s 2008 consolidated financial statements, have raised substantial doubt
about the Company’s ability to continue as a going concern.




The
Company’s ability to continue as a going concern is dependent upon its ability
to develop additional sources of capital and to ultimately achieve profitable
operations. The Company’s consolidated financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.





At
December 31, 2008, the Company had not yet commenced any revenue-generating
operations. All activity through December 31, 2008 has been related to the
Company’s formation, capital raising efforts and research and development
activities. As such, the Company has yet to generate any cash flows from
operations, and is dependent on debt and equity funding from both related and
unrelated parties to finance its operations. Prior to June 30, 2006, the
Company’s cash requirements were funded by advances from the Company’s
founder.


F-9





Because
the Company is currently engaged in research at an early stage, it will likely
take a significant amount of time to develop any product or intellectual
property capable of generating revenues. As such, the Company’s business is
unlikely to generate any revenue in the next several years and may never do so.
Even if the Company is able to generate revenues in the future through licensing
its technologies or through product sales, there can be no assurance that the
Company will be able to generate a profit.





The
Company does not have sufficient resources to fund its operations, including the
Company’s research activities with respect to its intellectual property, for the
next twelve months. In addition, the Company does not have sufficient resources
to fully develop and commercialize any products that may arise from its
research. Accordingly, the Company needs to raise additional funds in order to
satisfy its future working capital requirements.




The
Company estimates that it will require minimum funding in calendar 2009 of
approximately $750,000 in order to fund operations and continuing drug discovery
and to attempt to bring two drugs through the pre-clinical evaluation process
needed for submission of an Investigational New Drug (“IND”) application.
Towards that objective, the Company recently initiated a private placement,
which generated net proceeds from two closings in February and March 2009
aggregating approximately $382,000. The Company utilized a portion of such net
proceeds to repay a $100,000 short-term note in February 2009, as described at
Note 10. The Company is continuing its efforts in 2009 to raise approximately
$500,000 of additional funds under the private placement.  There can
be no assurances that the Company will have further success in this regard. The
amount and timing of future cash requirements will depend on the market’s
evaluation of the Company’s technology and products, if any, and the resources
that it devotes to developing and supporting its activities. The Company will
need to fund these cash requirements from a combination of additional debt or
equity financings, or the sale, licensing or joint venturing of its intellectual
properties.





Current
market conditions present uncertainty as to the Company’s ability to secure
additional funds, as well as its ability to reach profitability. There can be no
assurances that the Company will be able to secure additional financing, or
obtain favorable terms on such financing if it is available, or as to the
Company’s ability to achieve positive earnings and cash flows from operations.
Continued negative cash flows and lack of liquidity create significant
uncertainty about the Company’s ability to fully implement its operating plan,
as a result of which the Company may have to reduce the scope of its planned
operations. If cash resources are insufficient to satisfy the Company’s
liquidity requirements, the Company would be required to scale back or
discontinue its technology and product development programs, or obtain funds, if
available, through strategic alliances that may require the Company to
relinquish rights to certain of its technologies products, or to discontinue its
operations entirely.





2.
Summary of Significant Accounting Policies




Principles
of Consolidation




The
accompanying consolidated financial statements include the financial statements
of Holdings and its wholly-owned subsidiary, Lixte. All intercompany balances
and transactions have been eliminated in consolidation.





Cash
and Cash Equivalents and Concentrations




The
Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents. At times, such cash
and cash equivalents may exceed federally insured limits. The Company has not
experienced a loss in such accounts to date. The Company maintains its accounts
with financial institutions with high credit ratings.


F-10


Research
and Development





Research
and development costs are expensed as incurred.  Research and development
expenses consist primarily of fees paid to consultants and outside service
providers, patent fees and costs, and other expenses relating to the
acquisition, design, development and testing of the Company's treatments
and product candidates.




Amounts
due, pursuant to contractual commitments, on research and development contracts
with third parties are recorded as a liability, with the related amount of such
contracts recorded as advances on research and development contract services on
the Company’s balance sheet. Such advances on research and development contract
services are expensed over their life on the straight-line basis, unless the
achievement of milestones, the completion of contracted work, or other
information indicates that a different expensing schedule is more appropriate.
The Company accounts for its research and development contracts in accordance
with EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities”.




The funds
paid to NINDS of the NIH, pursuant to the CRADA effective March 22, 2006,
as amended, represented an advance on research and development costs and
therefore had future economic benefit. As such, such costs were being charged to
expense when they were actually expended by the provider, which is, effectively,
as they performed the research activities that they were contractually committed
to provide. Absent information that would indicate that a different expensing
schedule was more appropriate (such as, for example, from the achievement of
performance milestones or the completion of contract work), such advances were
expensed over the contractual service term on a straight-line basis, which
reflected a reasonable estimate of when the underlying research and development
costs were being incurred.





Patent
Costs




Due to
the significant uncertainty associated with the successful development of
one or more commercially viable products based on the Company's research efforts
and any related patent applications, all patent costs, including patent-related
legal fees, are expensed as incurred. Patent costs were $164,782 and $94,232 for
the years ended December 31, 2008 and 2007, respectively, and $325,691 for the
period from August 9, 2005 (inception) to December 31, 2008 (cumulative). Patent
costs are included in research and development costs in the Company's
consolidated statement of operations.





Income
Taxes




The
Company accounts for income taxes pursuant to SFAS No. 109, “Accounting for
Income Taxes” (“SFAS No. 109”), which establishes financial accounting and
reporting standards for the effects of income taxes that result from an
enterprise’s activities during the current and preceding years. SFAS No. 109
requires an asset and liability approach for financial accounting and reporting
for income taxes. Accordingly, the Company recognizes deferred tax assets and
liabilities for the expected impact of differences between the financial
statements and the tax basis of assets and liabilities.





For
federal income tax purposes, substantially all expenses, except for interest,
taxes and research and development, are deemed start-up and organization costs
and must be deferred until the Company commences business operations, at which
time they may be written off over a 180-month period. The Company has elected to
deduct research and development costs on a current basis.




The
Company records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. In the event the Company was
to determine that it would be able to realize its deferred tax assets in the
future in excess of its recorded amount, an adjustment to the deferred tax
assets would be credited to operations in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its deferred tax assets in the future, an adjustment to
the deferred tax assets would be charged to operations in the period such
determination was made.


F-11


For
federal income tax purposes, net operating losses can be carried forward for a
period of 20 years until they are either utilized or until they
expire.





On
January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes” (“FIN 48”). FIN 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, the Company may recognize
the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures.  The
adoption of the provisions of FIN 48 did not have a material effect on the
Company’s financial statements. As of December 31, 2008, no liability for
unrecognized tax benefits was required to be recorded.





The
Company files income tax returns in the U.S. federal jurisdiction and is subject
to income tax examinations by federal tax authorities for the year
2005 and thereafter.  The Company’s policy is to record interest and
penalties on uncertain tax provisions as income tax expense. As of December 31,
2008, the Company has no accrued interest or penalties related to uncertain tax
positions.




Stock-Based
Compensation





The
Company accounts for share-based payments pursuant to SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 123R"), a revision to SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123R requires that the
Company measure the cost of employee services received in exchange for equity
awards based on the grant date fair value of the awards, with the cost to be
recognized as compensation expense in the Company’s financial statements over
the vesting period of the awards.




In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 110 (“SAB 110”), which expresses the views of the staff regarding
the use of a “simplified” method, as discussed in Staff Accounting Bulletin No.
107, in developing an estimate of expected term of “plain vanilla” share options
in accordance with SFAS No. 123R. The staff indicated that it will accept a
company’s election to use the simplified method, regardless of whether the
company has sufficient information to make more refined estimates of expected
term. SAB 110 was effective January 1, 2008, and did not have a significant
impact on the Company’s consolidated financial statements.




The
Company accounts for stock option and warrant grants issued and vesting to
non-employees in accordance with EITF No. 96-18, “Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services”, and EITF 00-18, “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees”, whereas the value of the stock compensation is based upon
the measurement date as determined at either (a) the date at which a performance
commitment is reached or (b) at the date at which the necessary performance to
earn the equity instruments is complete. In accordance with EITF 96-18, options
granted to Scientific Advisory Board committee members and outside consultants
are revalued each reporting period to determine the amount to be recorded as an
expense in the respective period. As the options vest, they are valued on each
vesting date and an adjustment is recorded for the difference between the value
already recorded and the then current value on the date of vesting.





Earnings
Per Share




The
Company computes earnings per share (“EPS”) in accordance with SFAS
No. 128, “Earnings per Share” and SEC Staff Accounting Bulletin
No. 98.  SFAS No. 128 requires companies with complex capital
structures to present basic and diluted EPS.  Basic EPS is measured as the
income (loss) available to common shareholders divided by the weighted average
common shares outstanding for the period.  Diluted EPS is similar to basic
EPS but presents the dilutive effect on a per share basis of potential common
shares (e.g., warrants and options) as if they had been converted at the
beginning of the periods presented, or issuance date, if later.  Potential
common shares that have an anti-dilutive effect (i.e., those that increase
income per share or decrease loss per share) are excluded from the calculation
of diluted EPS.


F-12





Loss per
common share is computed by dividing net loss by the weighted average number of
shares of common stock outstanding during the respective periods. Basic and
diluted loss per common share are the same for all periods presented because all
warrants and stock options outstanding are anti-dilutive. The 19,021,786 shares
of common stock issued to the founder of Lixte in conjunction with the closing
of the reverse merger transaction on June 30, 2006 have been presented as
outstanding for all periods presented.




At
December 31, 2008 and 2007, the Company excluded the outstanding securities
summarized below, which entitle the holders thereof to acquire shares of common
stock, from its calculation of earnings per share as their effect would have
been anti-dilutive.




December 31,2008
                                
                                
                                2007Warrants
                                
                                
                                546,626
                                
                                
                                
                                546,626Stock
      options
                                
                                
                                2,540,000
                                
                                
                                
                                2,090,000Total
                                
                                
                                3,086,626
                                
                                
                                
                                2,636,626





Equipment




Equipment
is recorded at cost. Depreciation expense is provided on a straight-line basis
using estimated useful lives of 3 years. Maintenance and repairs are charged to
expense as incurred. When assets are retired or otherwise disposed of, the
property accounts are relieved of costs and accumulated depreciation and any
resulting gain or loss is credited or charged to operations.




Fair
Value of Financial Instruments





The
carrying amounts of cash and cash equivalents, prepaid expenses, accounts
payable, accrued expenses and due to stockholder approximate their respective
fair values due to the short-term nature of these items.




Use of
Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ from those
estimates.




Reclassification




During
the year ended December 31, 2007, laboratory supplies of $30,894 were
reclassified from general and administrative costs to research and development
costs. Such reclassification did not have any effect on results of
operations.




Adoption
of New Accounting Policies in 2008





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”), which establishes a formal framework for measuring fair value
under Generally Accepted Accounting Principles (“GAAP”). SFAS No. 157
defines and codifies the many definitions of fair value included among various
other authoritative literature, clarifies and, in some instances, expands on the
guidance for implementing fair value measurements, and increases the level of
disclosure required for fair value measurements. Although SFAS No. 157
applies to and amends the provisions of existing FASB and American Institute of
Certified Public Accountants (“AICPA”) pronouncements, it does not, of itself,
require any new fair value measurements, nor does it establish valuation
standards. SFAS No. 157 applies to all other accounting pronouncements
requiring or permitting fair value measurements, except for:
SFAS No. 123R, “Share-Based Payment”, and related pronouncements, the
practicability exceptions to fair value determinations allowed by various other
authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9
that deal with software revenue recognition. The Company adopted
SFAS No. 157 on January 1, 2008.


F-13





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”), which
provides companies with an option to report selected financial assets and
liabilities at fair value. The objective of SFAS No. 159 is to reduce
both complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently.
Generally accepted accounting principles have required different measurement
attributes for different assets and liabilities that can create artificial
volatility in earnings. SFAS No. 159 helps to mitigate this type of
accounting-induced volatility by enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 requires
companies to provide additional information that will help investors and other
users of financial statements to more easily understand the effect of the
company’s choice to use fair value on its earnings. SFAS No. 159 also
requires companies to display the fair value of those assets and liabilities for
which the company has chosen to use fair value on the face of the balance sheet.
SFAS No. 159 does not eliminate disclosure requirements included in
other accounting standards, including requirements for disclosures about fair
value measurements included in SFAS No. 157 and
SFAS No. 107. The Company adopted SFAS No. 159 on January 1,
2008.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162,
“The Hierarchy of Generally Accepted Accounting Principles” (“SFAS
No. 162”). SFAS No. 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP. SFAS No. 162 became effective on November 15,
2008.





On
October 10, 2008, the FASB issued FASB Staff Position No. 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active” (“FSP FAS No. 157-3”). FSP FAS No. 157-3 clarifies the application
of SFAS No. 157, “Fair Value Measurements”, in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP FAS No. 157-3 became effective immediately, and includes prior
period financial statements that have not yet been issued, and therefore the
Company became subject to the provisions of FSP FAS No. 157-3 on October 10,
2008.




The
adoption and/or implementation of the aforementioned accounting pronouncements
did not have any effect on the Company’s consolidated financial statement
presentation or disclosures.




Recently Issued
Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS No. 141(R)”), which requires an acquirer to recognize in
its financial statements as of the acquisition date (i) the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, measured at their fair values on the acquisition date, and
(ii) goodwill as the excess of the consideration transferred plus the fair
value of any noncontrolling interest in the acquiree at the acquisition date
over the fair values of the identifiable net assets acquired.
Acquisition-related costs, which are the costs an acquirer incurs to effect a
business combination, will be accounted for as expenses in the periods in which
the costs are incurred and the services are received, except that costs to issue
debt or equity securities will be recognized in accordance with other applicable
GAAP. SFAS No. 141(R) makes significant amendments to other Statements
and other authoritative guidance to provide additional guidance or to conform
the guidance in that literature to that provided in SFAS No. 141(R).
SFAS No. 141(R) also provides guidance as to what information is to be
disclosed to enable users of financial statements to evaluate the nature and
financial effects of a business combination. SFAS No. 141(R) is
effective for financial statements issued for fiscal years beginning on or after
December 15, 2008. Early adoption is prohibited. The adoption of
SFAS No. 141(R) on January 1, 2009 will affect how the Company
accounts for a business combination concluded after December 31,
2008.


F-14





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51”
(“SFAS No. 160”), which revises the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards that require (i) the ownership interests in subsidiaries held by
parties other than the parent be clearly identified, labeled, and presented in
the consolidated statement of financial position within equity, but separate
from the parent’s equity, (ii) the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income,
(iii) changes in a parent’s ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently
as equity transactions, (iv) when a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be initially
measured at fair value, with the gain or loss on the deconsolidation of the
subsidiary being measured using the fair value of any noncontrolling equity
investment rather than the carrying amount of that retained investment, and
(v) entities provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 amends FASB No. 128 to
provide that the calculation of earnings per share amounts in the consolidated
financial statements will continue to be based on the amounts attributable to
the parent. SFAS No. 160 is effective for financial statements issued
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Early adoption is prohibited.
SFAS No. 160 shall be applied prospectively as of the beginning of the
fiscal year in which it is initially applied, except for the presentation and
disclosure requirements, which shall be applied retrospectively for all periods
presented. The Company does not currently anticipate that the adoption of SFAS
No. 160 on January 1, 2009 will have any impact on its consolidated financial
statement presentation or disclosures.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS No.
161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No.
133”). The objective of SFAS No. 161 is to provide users of financial statements
with an enhanced understanding of how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under SFAS No. 133 and its related interpretations, and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS No. 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS No. 161 applies to all derivative financial
instruments, including bifurcated derivative instruments (and nonderivative
instruments that are designed and qualify as hedging instruments pursuant to
paragraphs 37 and 42 of SFAS No. 133) and related hedged items accounted for
under SFAS No. 133 and its related interpretations. SFAS No. 161 also amends
certain provisions of SFAS No. 131. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. SFAS No. 161 encourages, but does
not require, comparative disclosures for earlier periods at initial adoption.
The Company does not currently anticipate that the adoption of SFAS No. 161 on
January 1, 2009 will have any impact on its consolidated financial statement
presentation or disclosures.




In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-05,
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity's Own Stock" (“EITF 07-05”). EITF 07-05 mandates a two-step process for
evaluating whether an equity-linked financial instrument or embedded feature is
indexed to the entity's own stock. Warrants that a company issues that contain a
strike price adjustment feature, upon the adoption of EITF 07-05, results in the
instruments no longer being considered indexed to the company's own stock.
Accordingly, adoption of EITF 07-05 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-05 is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The Company does not
currently anticipate that the adoption of EITF 07-05 on January 1, 2009 will
have any impact on its consolidated financial statement presentation or
disclosures.


F-15





Management
does not believe that any other recently issued, but not yet adopted, accounting
pronouncements issued by the FASB (including its Emerging Issues Task Force),
the AICPA, and/or the Securities and Exchange Commission will have a material
impact on the Company's consolidated financial statement presentation or
disclosures in future periods.




3.
Share Exchange Agreement and Private Placement




Share
Exchange Agreement




On June
30, 2006, pursuant to a Share Exchange Agreement dated as of June 8, 2006 (the
“Share Exchange Agreement”) by and among Holdings, Dr. John S. Kovach (“Seller”)
and Lixte, Holdings issued 19,021,786 shares of its common stock in exchange for
all of the issued and outstanding shares of Lixte (the “Exchange”). Previously,
on October 3, 2005, Lixte had issued 1,500 shares of its no par value common
stock to its founder for $1,500, which constituted all of the issued and
outstanding shares of Lixte prior to the Exchange. As a result of the Exchange,
Lixte became a wholly-owned subsidiary of Holdings.




Pursuant
to the Exchange, Holdings issued to the Seller 19,021,786 shares of its common
stock. Holdings had a total of 25,000,832 shares of common stock issued and
outstanding after giving effect to the Exchange and the 1,973,869 shares of
common stock issued in the initial closing of the private
placement.




As a
result of the Exchange and the shares of common stock issued in the initial
closing of the private placement, on June 30, 2006, the stockholders of the
Company immediately prior to the Exchange owned 4,005,177 shares of common
stock, equivalent to approximately 16% of the issued and outstanding shares of
the Company’s common stock, and the former stockholder of Lixte acquired control
of the Company.




The Share
Exchange Agreement was determined through arms-length negotiations between
Holdings, the Seller and Lixte. In connection with the Exchange, the Company
paid WestPark Capital, Inc. an aggregate cash fee of $50,000.




Private
Placements





On June
30, 2006, concurrently with the closing of the Exchange, the Company sold an
aggregate of 1,973,869 shares of its common stock to accredited investors in an
initial closing of a private placement at a per share price of $0.333, resulting
in aggregate gross proceeds to the Company of $657,299. The Company paid to
WestPark Capital, Inc., as placement agent, a commission of 10% and a
non-accountable fee of 4% of the gross proceeds of the private placement and
issued five-year warrants to purchase common stock equal to (a) 10% of the
number of shares sold in the private placement exercisable at $0.333 per share
and (b) an additional 2% of the number of shares sold in the private placement
also exercisable at $0.333 per share. A total of 236,864 warrants were issued.
Net cash proceeds to the Company, after the deduction of all private placement
offering costs and expenses, were $522,939.





On July
27, 2006, the Company sold an aggregate of 1,581,351 shares of its common stock
to accredited investors in a second closing of the private placement at a per
share price of $0.333 resulting in aggregate gross proceeds to the Company of
$526,590. The Company paid to WestPark Capital, Inc., as placement agent, a
commission of 10% and a non-accountable fee of 4% of the gross proceeds of the
private placement and issued five-year warrants to purchase common stock equal
to (a) 10% of the number of shares sold in the private placement exercisable at
$0.333 per share and (b) an additional 2% of the number of shares sold in the
private placement also exercisable at $0.333 per share. A total of 189,762
warrants were issued. Net cash proceeds to the Company were
$446,433.


F-16





In
conjunction with the private placement of common stock, the Company issued a
total of 426,626 five-year warrants to WestPark Capital, Inc. exercisable at the
per share price of the common stock sold in the private placement ($0.333 per
share). The warrants issued to WestPark Capital, Inc. do not contain any price
anti-dilution provisions. However, such warrants contain cashless exercise
provisions and demand registration rights, but the warrant holder has agreed to
waive any claims to monetary damages or financial penalties for any failure by
the Company to comply with such registration requirements. Based on the
foregoing, the warrants were accounted for as equity and were not accounted for
separately from the common stock and additional paid-in capital
accounts.  The warrants had no accounting impact on the Company’s
consolidated financial statements.




The fair
value of the warrants, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $132,254 ($0.31 per warrant) using
the following Black-Scholes input variables: stock price on date of grant -
$0.333; exercise price - $0.333; expected life - 5 years; expected volatility -
150%; expected dividend yield - 0%; risk-free interest rate - 5%.





As part
of the Company’s private placement of its securities completed on July 27, 2006,
the Company entered into a registration rights agreement with the purchasers,
whereby the Company agreed to register the shares of common stock sold in the
private placement, and to maintain the effectiveness of such registration
statement, subject to certain conditions. The agreement required the Company to
file a registration statement within 45 days of the closing of the private
placement and to have the registration statement declared effective within 120
days of the closing of the private placement. On September 8, 2006, the Company
filed a registration statement on Form SB-2 to register 3,555,220 shares of the
common stock sold in the private placement. Since the registration statement was
not declared effective by the Securities and Exchange Commission within 120 days
of the closing of the private placement, the Company was required to pay each
investor prorated liquidated damages equal to 1.0% of the amount raised per
month, payable monthly in cash.





In
accordance with EITF 00-19-2, “Accounting for Registration Payment
Arrangements”, on the date of the closing of the private placement, the Company
believed it would meet the deadlines under the registration rights agreement
with respect to filing a registration statement and having it declared effective
by the Securities and Exchange Commission. As a result, the Company did not
record any liabilities associated with the registration rights agreement at June
30, 2006. At December 31, 2006, the Company determined that the registration
statement covering the shares sold in the private placement would not be
declared effective within the requisite time frame and therefore accrued six
months liquidated damages under the registration rights agreement aggregating
approximately $74,000, which has been presented as a current liability at
December 31, 2008 and 2007. The Company’s registration statement on Form SB-2
was declared effective by the Securities and Exchange Commission on May 14,
2007. At December 31, 2008, the registration penalty to the investors had not
been paid.





On
December 12, 2007, the Company sold an aggregate of 999,995 shares of its common
stock to accredited investors in a second private placement at a per share price
of $0.65, resulting in aggregate gross proceeds to the Company of $650,000. The
Company paid to WestPark Capital, Inc., as placement agent, a commission of 10%
and a non-accountable fee of 4% of the gross proceeds of the private placement
and issued five-year warrants to purchase common stock equal to (a) 10% of the
number of shares sold in the private placement exercisable at $0.65 per share
and (b) an additional 2% of the number of shares sold in the private placement
also exercisable at $0.65 per share. Net cash proceeds to the Company were
$531,320.





In
conjunction with the second private placement of common stock, the Company
issued a total of 120,000 five-year warrants to WestPark Capital, Inc.
exercisable at the per share price of the common stock sold in the private
placement ($0.65 per share). The warrants issued to WestPark Capital, Inc. do
not contain any price anti-dilution provisions. However, such warrants contain
cashless exercise provisions and demand registration rights, but the warrant
holder has agreed to waive any claims to monetary damages or financial penalties
for any failure by the Company to comply with such registration requirements.
Based on the foregoing, the warrants were accounted for as equity and were not
accounted for separately from the common stock and additional paid-in capital
accounts.  The warrants had no accounting impact on the Company’s
consolidated financial statements.


F-17





The fair
value of the warrants, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $115,200 ($0.96 per warrant) using
the following Black-Scholes input variables: stock price on date of grant -
$1.10; exercise price - $0.65; expected life - 5 years; expected volatility -
118.6%; expected dividend yield - 0%; risk-free interest rate - 4%.




As part
of the Company’s second private placement of its securities completed on
December 12, 2007, the Company entered into a registration rights agreement with
the purchasers, whereby the Company agreed to register the shares of common
stock sold in the second private placement at its sole cost and expense. The
registration rights agreement terminates at such time as the common shares may
be sold in market transactions without regard to any volume limitations. The
registration rights agreement requires the Company to file a registration
statement within 75 days of receipt of written demand from holders who represent
at least 50% of the common shares issued pursuant to the second private
placement, provided that no demand shall be made for less than 500,000 shares,
and to use its best efforts to cause such registration statement to become and
remain effective for the requisite period. The registration rights agreement
also provides for unlimited piggyback registration rights. The registration
rights agreement does not provide for any penalties in the event that the
Company is unable to comply with its terms.





4.
Related Party Transactions




Prior to
June 30, 2006, the Company’s founding stockholder and Chief Executive Officer,
Dr. John Kovach, had periodically made advances to the Company to meet operating
expenses. Such advances are non-interest-bearing and are due on demand. At
December 31, 2008 and 2007, stockholder advances totaled $92,717.




The
Company’s office facilities have been provided without charge by Dr. Kovach.
Such costs were not material to the financial statements and, accordingly, have
not been reflected therein.




Dr.
Kovach did not receive any compensation from the Company during the years ended
December 31, 2008 and 2007, and for the period from August 9, 2005 (inception)
through December 31, 2008 (cumulative), in view of the Company’s development
stage status and limited resources. Any future compensation arrangements will be
subject to the approval of the Board of Directors.





Dr.
Kovach is involved in other business activities and may, in the future, become
involved in other business opportunities that become available. Accordingly, he
may face a conflict in selecting between the Company and his other business
interests. The Company has not yet formulated a policy for the resolution of
such potential conflicts.





5.
Note Payable to Consultant





On
October 3, 2008, the Company borrowed $100,000 from Gil Schwartzberg, a
consultant to the Company (see Note 7), pursuant to an unsecured demand
promissory note with interest at 5% per annum, to fund the Company’s short-term
working capital requirements. The note was repaid in full, including accrued
interest, on February 7, 2009.





6.
Common Stock and Preferred Stock




The
Company’s Certificate of Incorporation provides for authorized capital of
110,000,000 shares, of which 100,000,000 shares consist of common stock with a
par value of $0.0001 per share and 10,000,000 shares consist of preferred stock
with a par value of $0.0001 per share.




The
Company is authorized to issue 10,000,000 shares of preferred stock with such
designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors.


F-18


7.
Stock Options and Warrants




On June
30, 2006, effective with the closing of the Exchange, the Company granted to
Dr. Philip Palmedo, an outside director of the Company, stock options to
purchase an aggregate of 200,000 shares of common stock, exercisable for a
period of five years at $0.333 per share, with one-third of the options (66,666
shares) vesting immediately upon joining the Board and one-third vesting
annually on each of June 30, 2007 and 2008. The fair value of these options, as
calculated pursuant to the Black-Scholes option-pricing model, was determined to
be $62,000 ($0.31 per share), of which $20,666 was charged to operations on June
30, 2006, and the remaining $41,334 was charged to operations ratably from July
1, 2006 through June 30, 2008. During the years ended December 31, 2008 and
2007, the Company recorded a charge to operations of $10,332 and $20,668,
respectively, with respect to these options.




On June
30, 2006, effective with the closing of the Exchange, the Company also granted
to Dr. Palmedo additional stock options to purchase 190,000 shares of
common stock exercisable for a period of five years at $0.333 per share for
services rendered in developing the business plan for Lixte, all of which were
fully vested upon issuance. The fair value of these options, as calculated
pursuant to the Black-Scholes option-pricing model, was determined to be $58,900
($0.31 per share), and was charged to operations at June 30, 2006.




On June
30, 2006, effective with the closing of the Exchange, the Company granted to
certain members of its Scientific Advisory Committee stock options to purchase
an aggregate of 100,000 shares of common stock exercisable for a period of five
years at $0.333 per share, with one-half of the options vesting annually on each
of June 30, 2007 and June 30, 2008. The fair value of these options, as
calculated pursuant to the Black-Scholes option-pricing model, was charged to
operations ratably from July 1, 2006 through June 30, 2008. During the years
ended December 31, 2008 and 2007, the Company recorded a charge (credit) to
operations of $(3,336) and $23,212, respectively, with respect to these
options.





On June
30, 2006, the fair value of the aforementioned stock options was initially
calculated using the following Black-Scholes input variables:  stock
price - $0.333; exercise price - $0.333; expected life - 5 to 7 years; expected
volatility - 150%; expected dividend yield - 0%; risk-free interest rate - 5%.
On June 30, 2007, the Black-Scholes input variables utilized to determine the
fair value of the aforementioned stock options were stock price - $0.333;
exercise price - $0.333; expected life - 4 to 6 years; expected volatility -
150%; expected dividend yield - 0%; risk-free interest rate - 4.5%. On June 30,
2008, the fair value of the aforementioned stock options was calculated using
the following Black-Scholes input variables: stock price - $0.30; exercise price
- $0.333; expected life - 3 to 5 years; expected volatility - 154.5%; expected
dividend yield - 0%; risk-free interest rate - 3.28%.





On June
20, 2007, the Board of Directors of the Company approved the 2007 Stock
Compensation Plan (the “2007 Plan”), which provides for the granting of awards,
consisting of common stock options, stock appreciation rights, performance
shares, or restricted shares of common stock, to employees and independent
contractors, for up to 2,500,000 shares of the Company’s common stock, under
terms and condition, as determined by the Company’s Board of
Directors.





On
September 12, 2007, in conjunction with his appointment as a director of the
Company, the Company granted to Dr. Stephen Carter stock options to purchase an
aggregate of 200,000 shares of common stock under the 2007 Plan, exercisable for
a period of five years from vesting date at $0.333 per share, with one-half
(100,000 shares) vesting annually on each of September 12, 2008 and 2009. The
fair value of these options, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $204,000 ($1.02 per share), and is
being charged to operations ratably from September 12, 2007 through September
12, 2009. During the years ended December 31, 2008 and 2007, the Company
recorded a charge to operations of $102,085 and $30,655, respectively, with
respect to these options.





On
September 12, 2007, the Company entered into a consulting agreement with Gil
Schwartzberg, pursuant to which the Company granted to Mr. Schwartzberg stock
options to purchase an aggregate of 1,000,000 shares of common stock,
exercisable for a period of four years from the vesting date at $1.00 per share,
with one-half of the options (500,000 shares) vesting immediately and one-half
(500,000 shares) vesting on September 12, 2008. The fair value of these options,
as calculated pursuant to the Black-Scholes option-pricing model, was initially
determined to be $945,000 ($0.945 per share), of which $465,000 was attributed
to the fully-vested options and was thus charged to operations on September 12,
2007. The remaining portion of the fair value of the options was charged to
operations ratably from September 12, 2007 through September 12, 2008. On
September 12, 2008, the fair value of these options, as calculated pursuant to
the Black-Scholes option-pricing model, was determined to be $325,000 ($0.65 per
share).  During the years ended December 31, 2008 and 2007, the
Company recorded a charge to operations of $236,338 and $553,662, respectively,
with respect to these options (see Note 5).


F-19


On
September 12, 2007, the Company entered into a consulting agreement with Francis
Johnson, a co-owner of Chem-Master International, Inc., and granted to Professor
Johnson stock options to purchase an aggregate of 300,000 shares of common
stock, exercisable for a period of four years from the vesting date at $0.333
per share, with one-third (100,000 shares) vesting annually on each of September
12, 2008, 2009 and 2010. The fair value of these options, as calculated pursuant
to the Black-Scholes option-pricing model, was initially determined to be
$300,000 ($1.00 per share), and is being charged to operations ratably from
September 12, 2007 through September 12, 2010. On September 12, 2008 and
December 31, 2008, the fair value of these options, as calculated pursuant to
the Black-Scholes option-pricing model, was determined to be $195,000 ($0.65 per
share) and $171,000 ($0.57 per share), respectively, which resulted in a charge
to operations of $62,342 and $19,836 during the years ended December 31, 2008
and 2007, respectively.




On
September 12, 2007, the fair value of the aforementioned stock options was
initially calculated using the following Black-Scholes input variables: stock
price - $1.05; exercise price - $0.333 to $1.00; expected life - 4 to 6 years;
expected volatility - 150%; expected dividend yield - 0%; risk-free interest
rate - 5%. On September 12, 2008, the fair value of the aforementioned stock
options was calculated (for stock options revalued pursuant to EITF 98-16) using
the following Black-Scholes input variables:  stock price - $0.65;
exercise price - $0.333 to $1.00; expected life - 4 years; expected volatility -
275.7%; expected dividend yield - 0%; risk-free interest rate - 2.48%. On
December 31, 2008, the fair value of the aforementioned stock options was
calculated (for stock options revalued pursuant to EITF 98-16) using the
following Black-Scholes input variables:  stock price - $0.57;
exercise price - $0.333; expected life - 4.72 years; expected volatility - 335%;
expected dividend yield - 0%; risk-free interest rate – 1.9%. As the Company’s
common stock commenced trading on September 24, 2007, the Company was able to
utilize such trading date to generate revised volatility factors at September
12, 2008 and December 31, 2008.





On
October 7, 2008, the Company appointed Dr. Mel Sorensen to its Board of
Directors. Dr. Sorensen is a medical oncologist with extensive experience in
cancer drug development, first at the National Cancer Institute, then at Bayer
and GlaxoSmithKline, before becoming President and CEO of a new cancer
therapeutics company, Ascenta Therapeutics, in 2004. Dr. Sorensen is being paid
an annual consulting fee of $40,000, payable in quarterly installments over a
one year period commencing October 7, 2008, to assist the Company in identifying
a strategic partner. Dr. Sorensen was also granted a stock option to purchase
200,000 shares of the Company’s common stock, exercisable at $0.50 per share for
a period of five years from each tranche’s vesting date. The option vests as to
25,000 shares on January 1, 2009, and a further 25,000 shares on the first day
of each subsequent calendar quarter until all of the shares are vested. The fair
value of these options, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $100,000 ($0.50 per share), and is
being charged to operations ratably from October 7, 2008 through October 7,
2010. During the year ended December 31, 2008, the Company recorded a charge to
operations of $12,568 with respect to these options.





On
October 7, 2008, the fair value of the aforementioned stock options was
calculated using the following Black-Scholes input variables:  stock
price - $0.50; exercise price - $0.50; expected life - 5 years; expected
volatility – 275.7%; expected dividend yield - 0%; risk-free interest rate –
2.48%.





In August
2008, a member of the Scientific Advisory Committee resigned from his position
and waived his right to his vested stock option to purchase 50,000 shares of
common stock.





Additional
information with respect to common stock warrants and stock options issued is
provided at Notes 3, 9 and 10.  Warrants to purchase common stock that
were issued in conjunction with the Company’s private placements in 2006, 2007
and 2009 are included in the tables presented below





If and
when the aforementioned stock options and warrants are exercised, the Company
expects to satisfy such stock obligations through the issuance of authorized but
unissued shares of common stock.


F-20





A summary
of stock option and warrant activity for the years ended December 31, 2007 and
2008 is presented below.




Number
                  of
                  Shares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Life
                  (in Years)Options
      and warrants outstanding at December 31, 2006
                
                
                916,626
                
                
                $
                0.333
                
                
                
                4.51Granted
                
                
                1,720,000
                
                
                
                0.743
                
                
                
                4.35Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Cancelled
                
                
                —
                
                
                
                —
                
                
                
                —Options
      and warrants outstanding at December 31, 2007
                
                
                2,636,626
                
                
                
                0.600
                
                
                
                4.32Granted
                
                
                500,000
                
                
                
                0.927
                
                
                
                4.71Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Cancelled
                
                
                (50,000
                )
                
                
                0.333
                
                
                
                2.75Options
      and warrants outstanding at December 31, 2008
                
                
                3,086,626
                
                
                $
                0.658
                
                
                
                3.55Options
      and warrants exercisable at December 31, 2008
                
                
                2,286,626
                
                
                $
                0.641
                
                
                
                3.06




The
intrinsic value of exercisable but unexercised in-the-money stock options and
warrants at December 31, 2008 was $276,490, based on a fair market value of
$0.57 per share on December 31, 2008.





Total
deferred compensation expense for the outstanding value of unvested stock
options was approximately $351,000 at December 31, 2008, which will be
recognized subsequent to December 31, 2008 over a weighted-average period of
18.3 months.





Information
regarding stock options and warrants outstanding and exercisable at
December 31, 2008 is summarized below.




Warrants
                  and
                
                
                Warrants
                  andOptions
                  Outstanding
                
                
                Options
                  ExercisableExercise Prices
                
                (Shares)
                
                
                (Shares)$0.333
                
                
                1,566,626
                
                
                
                1,166,626$0.500
                
                
                200,000
                
                
                
                —$0.650
                
                
                120,000
                
                
                
                120,000$1.000
                
                
                1,000,000
                
                
                
                1,000,000$1.650
                
                
                200,000
                
                
                
                —3,086,626
                
                
                
                2,286,626




Outstanding
options and warrants to acquire 800,000 shares of the Company’s common stock had
not vested at December 31, 2008.





8. Income Taxes




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets as of December 31, 2008 and 2007 are
summarized below.


F-21





December 31,2008
                
                
                2007Start-up
      and organization costs
                
                $
                411,000
                
                
                $
                310,000Contingent
      liability
                
                
                31,000
                
                
                
                31,000Net
      operating loss carryforwards
                
                
                333,000
                
                
                
                170,000Total
      deferred tax assets
                
                
                775,000
                
                
                
                511,000Valuation
      allowance
                
                
                (775,000
                )
                
                
                (
      511,000
                )Net
      deferred tax assets
                
                $
                —
                
                
                $
                —




In
assessing the potential realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the Company attaining future taxable income during the periods in
which those temporary differences become deductible. As of December 31, 2008 and
2007, management was unable to determine if it is more likely than not that the
Company’s deferred tax assets will be realized, and has therefore recorded an
appropriate valuation allowance against deferred tax assets at such
dates.




No
federal tax provision has been provided for the years ended December 31,
2008 and 2007 due to the losses incurred during such periods. A reconciliation
between the income tax rate computed by applying the U.S. federal statutory rate
and the effective tax rate for the years ended December 31, 2008 and 2007 is
summarized below.





Years Ended
                      December 31,2008
                    
                    
                    2007U.
      S. federal statutory tax rate
                    
                    
                    (34.0
                    )%
                    
                    
                    (34.0
                    )%Non-deductible
      stock-based compensation
                    
                    
                    15.3
                    %
                    
                    
                    19.4
                    )%Adjustment
      to deferred tax asset
                    
                    
                    1.7
                    %
                    
                    
                    —
                    %Change
      in valuation allowance
                    
                    
                    17.0
                    %
                    
                    
                    14.6
                    %Effective
      tax rate
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %




At
December 31, 2008, the Company has available net operating loss carryforwards
for federal income tax purposes of approximately $801,000 which, if not utilized
earlier, expire in 2027.





9. Commitments and
Contingencies





Effective
March 22, 2006, the Company entered into a CRADA, as amended, with the NINDS of
the NIH. The CRADA was for a term of 42 months from the effective date and could
be unilaterally terminated by either party by providing written notice within
sixty days. The CRADA provided for the collaboration between the parties in the
identification and evaluation of agents that target the Nuclear Receptor
CoRepressor (N-CoR) pathway for glioma cell differentiation. The CRADA also
provided that NINDS and the Company would conduct research to determine if
expression of N-CoR correlates with prognosis in glioma patients. Pursuant to
the CRADA, the Company agreed to provide funds under the CRADA in the amount of
$200,000 per year to fund two technical assistants for the technical,
statistical and administrative support for the research activities, as well as
to pay for supplies and travel expenses. The first $200,000 was due within 180
days of the effective date and was paid in full on July 6, 2006. The second
$200,000 was paid in full on June 29, 2007. In June 2008, the CRADA was extended
to September 30, 2009, with no additional funding required for the period
between July 1, 2008 and September 30, 2008. However, for the period from
October 1, 2008 through September 30, 2009, the Company has agreed to provide
additional funding under the CRADA of $200,000, to be paid in four quarterly
installments of $50,000 each commencing on October 1, 2008. The first and second
quarterly installments of $50,000 were paid on September 29, 2008 and March 5,
2009, respectively.


F-22





On
January 5, 2007, the Company entered into a Services Agreement with The Free
State of Bavaria (Germany) represented by the University of Regensburg (the
“University”) pursuant to which the Company retained the University to provide
to it certain samples of primary cancer tissue and related biological fluids to
be obtained from patients afflicted with specified types of cancer. The
University also agreed to provide certain information relating to such patients.
The Company agreed to pay the University 72,000 Euros in two equal installments.
The first installment of 36,000 Euros ($48,902) was paid on March 7, 2007. On
January 12, 2008, the Company terminated the Services Agreement in accordance
with its terms, as a result of which payment of the second installment of 36,000
Euros was cancelled. The University agreed to deliver 50% of the aforementioned
samples under the terminated Services Agreement.




On
February 5, 2007, the Company entered into a two-year agreement (the
“Chem-Master Agreement”) with Chem-Master International, Inc. (“Chem-Master”), a
company co-owned by Francis Johnson, a consultant to the Company, pursuant to
which the Company engaged Chem-Master to synthesize a compound designated as
“LB-1”, and any other compound synthesized by Chem-Master pursuant to the
Company’s request, which have potential use in treating a disease, including,
without limitation, cancers such as glioblastomas. Pursuant to the Chem-Master
Agreement, the Company agreed to reimburse Chem-Master for the cost of
materials, labor, and expenses for other items used in the synthesis process,
and also agreed to grant Chem-Master a five-year option to purchase 100,000
shares of the Company’s common stock at an exercise price of $0.333 per share.
The fair value of this option, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $31,000 ($0.31 per share) using the
following Black-Scholes input variables:  stock price on date of grant
- $0.333; exercise price - $0.333; expected life - 5 years; expected volatility
- 150%; expected dividend yield - 0%; risk-free interest rate - 4.5%. The
$31,000 fair value was charged to operations as research and development
costs during the year ended December 31, 2007, since the option was fully vested
and non-forfeitable on the date of issuance.  The Company has the right to
terminate the Chem-Master Agreement at any time during its term upon sixty days
prior written notice.  On February 5, 2009, provided that the Chem-Master
Agreement has not been terminated prior to such date, the Company has
agreed to grant Chem-Master a second five-year option to purchase an
additional 100,000 shares of the Company’s common stock at an exercise price of
$0.333 per share. As of September 30, 2008, the Company determined that it was
likely that this option would be issued. Accordingly, the fair value of the
option is being reflected as a charge to operations for the period from October
1, 2008 through February 5, 2009. On September 30, 2008 and December 31, 2008,
the fair value of this option, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $50,000 ($0.50 per share) and $57,000
($0.57 per share), respectively, which resulted in a charge to operations of
$40,857 during the year ended December 31, 2008.  The Company granted
the second five-year option on February 5, 2009.




On
September 30, 2008, the fair value of the aforementioned stock option was
initially calculated using the following Black-Scholes input
variables:  stock price - $0.50; exercise price - $0.333; expected
life – 5.35 years; expected volatility – 275.7%; expected dividend yield - 0%;
risk-free interest rate – 2.48%. On December 31, 2008, the fair value of the
aforementioned stock option was calculated (for the stock option revalued
pursuant to EITF 98-16) using the following Black-Scholes input
variables:  stock price - $0.57; exercise price - $0.333; expected
life – 5.1 years; expected volatility - 335%; expected dividend yield - 0%;
risk-free interest rate – 1.9%.





On
January 29, 2008, the Chem-Master Agreement was amended to extend its term to
February 15, 2014, and to expressly provide for the design and synthesis of a
new series of compounds designated as “LB-3”. Pursuant to the amendment, the
Company issued 100,000 shares of its restricted common stock, valued at $75,000,
and granted an option to purchase 200,000 shares of common stock. The option is
exercisable for a period of two years from the vesting date at $1.65 per share,
with one-half (100,000 shares) vesting on August 1, 2009, and one-half (100,000
shares) vesting on February 1, 2011. The fair value of this option, as
calculated pursuant to the Black-Scholes option-pricing model, was initially
determined to be $96,000 ($0.48 per share) using the following Black-Scholes
input variables:  stock price on date of grant - $0.75; exercise price
- $1.65; expected life - 5 years; expected volatility - 120.1%; expected
dividend yield - 0%; risk-free interest rate - 3.09%.





The fair
value of the restricted common stock issued was charged to operations as
research and development costs on January 29, 2008. On December 31, 2008, the
fair value of the aforementioned stock options was determined to be $114,000
($0.57 per share) calculated using the following Black-Scholes input
variables:  stock price - $0.57; exercise price - $1.65; expected life
- 4.09 years; expected volatility - 335%; expected dividend yield - 0%;
risk-free interest rate - 1.90%, which resulted in a charge to operations of
$34,862 during the year ended December 31, 2008.


F-23





Pursuant to the Chem-Master Agreement,
the Company reimbursed Chem-Master for the costs of materials, labor, and
expenses aggregating $45,750 and $30,150 during the years ended December 31,
2008 and 2007, respectively.





On
September 12, 2007, the Company entered into two consulting agreements for
financial and scientific services. Compensation related to these agreements was
primarily in the form of stock options (see Note 7).





On
September 20, 2007, the Company entered into a one-year consulting agreement
(the “Mirador Agreement”) with Mirador Consulting, Inc. (“Mirador”), pursuant to
which Mirador was to provide the Company with various financial services.
Pursuant to the Mirador Agreement, the Company agreed to pay Mirador $5,000 per
month and also agreed to sell Mirador 250,000 shares of the Company’s restricted
common stock for $250 ($0.001 per share). The fair value of this transaction was
determined to be in excess of the purchase price by $262,250 ($1.049 per share),
reflecting the difference between the $0.001 purchase price and the $1.05 price
per share as quoted on the OTC Bulletin Board on the transaction date, and was
charged to operations as stock-based compensation during the year ended December
31, 2007, since the shares were fully vested and non-forfeitable on the date of
issuance. The Company made payments under the Mirador Agreement aggregating
$10,000 during 2007. The Mirador Agreement was amended in February 2008,
pursuant to which Mirador agreed to forgive all accrued but unpaid monthly fees
through February 29, 2008, and the Company agreed to pay Mirador a fee of $2,000
per month for the remaining six months of the Mirador Agreement.




In
September 2008, the Company engaged an internet-based investor information
service to enhance awareness of the Company’s progress in developing a portfolio
of pharmacological agents at an initial cost of $2,500, plus $500 per month
for a period of twelve months.




Effective
as of September 19, 2008, the Company entered into an agreement with the NIH
providing the Company with an exclusive license for all patents submitted
jointly with the NIH under the CRADA. The agreement provided for an initial
payment of $25,000 to NIH within 60 days of September 19, 2008, and for a
minimum annual royalty of $30,000 on January 1 of each calendar year following
the year in which the CRADA is terminated. The agreement also provides for the
Company to pay specified royalties based on (i) net sales by the Company and its
sub-licensees, (ii) the achievement of certain clinical benchmarks, and (iii)
the granting of sublicenses. The Company paid the initial $25,000 obligation on
November 10, 2008 and charged the amount to general and administrative costs
during the year ended December 31, 2008.





During
October 2008, the Company engaged Southern Research Institute, Birmingham,
Alabama, to assess one lead compound from each of two classes of its proprietary
pharmacological agents for effects on normal neuronal cells and to
determine if the compounds protect normal brain cells from injury in several
different models of chemical and traumatic brain injury. The goal is to
determine if these agents have promise as potentially useful for the
prevention, amelioration or delay of progression of neurodegenerative diseases
such as Alzheimer’s disease and other neurological diseases or impairments
resulting from trauma and/or other diverse or unknown origins.  The Company
agreed to pay a fee not to exceed $50,000 over a four-month period for such
services, of which an advance of $12,500 was paid during 2008.





10. Subsequent
Events





On
February 10, 2009, the Company sold an aggregate of 658,000 common stock units
to accredited investors in a first closing of a third private placement at a per
unit price of $0.50, resulting in aggregate gross proceeds to the Company of
$329,000.


F-24





Each unit
consists of one share of the Company’s common stock and a five-year warrant to
purchase an additional share of the Company’s common stock on a cashless
exercise basis at an exercise price of $0.50 per common share. The Company paid
to WestPark Capital, Inc., as placement agent, a commission of 10% and a
non-accountable fee of 4% of the gross proceeds of the third private placement
and issued five-year warrants to purchase common stock equal to (a) 10% of the
number of shares sold in the third private placement exercisable at $0.50 per
share and 10% of the number of shares issuable upon exercise of warrants issued
in the third private placement exercisable at $0.50 per share; and (b) an
additional 2% of the number of shares sold in the third private placement also
exercisable at $0.50 per share and 2% of the number of shares issuable upon
exercise of the warrants issued in the third private placement exercisable at
$0.50 per share. Net cash proceeds to the Company were $269,790.





In
conjunction with the first closing of the third private placement of common
stock units, the Company issued a total of 157,920 five-year warrants to
WestPark Capital, Inc. exercisable at the per unit price of the common stock
units sold in the third private placement ($0.50 per unit). The warrants issued
to WestPark Capital, Inc. do not contain any price anti-dilution provisions.
However, such warrants contain cashless exercise provisions and demand
registration rights, but the warrant holder has agreed to waive any claims to
monetary damages or financial penalties for any failure by the Company to comply
with such registration requirements. Based on the foregoing, the warrants will
be accounted for as equity and will not be accounted for separately from the
common stock and additional paid-in capital accounts.  The warrants
will not have any accounting impact on the Company’s consolidated financial
statements.





On
February 7, 2009, the Company repaid a $100,000 unsecured demand promissory
note, including interest at the rate of 5% per annum, to Gil Schwartzberg, a
consultant to the Company.





On March
2, 2009, the Company sold an aggregate of 262,000 common stock units to
accredited investors in a second closing of the third private placement at a per
unit price of $0.50, resulting in aggregate gross proceeds to the Company of
$131,000. Net cash proceeds to the Company were $112,460.





In
conjunction with the second closing of the third private placement of common
stock units, the Company issued a total of 31,440 five-year warrants to WestPark
Capital, Inc. exercisable at the per unit price of the common stock units sold
in the third private placement ($0.50 per unit). The warrants issued to WestPark
Capital, Inc. do not contain any price anti-dilution provisions. However, such
warrants contain cashless exercise provisions and demand registration rights,
but the warrant holder has agreed to waive any claims to monetary damages or
financial penalties for any failure by the Company to comply with such
registration requirements. Based on the foregoing, the warrants will be
accounted for as equity and will not be accounted for separately from the common
stock and additional paid-in capital accounts.  The warrants will not
have any accounting impact on the Company’s consolidated financial
statements.





At the
request of the holders, the Company has agreed to include any shares sold in the
third private placement and any shares issuable upon exercise of the related
warrants to be included in any registration statement filed with the Securities
and Exchange Commission permitting the resale of such shares, subject to
customary cutbacks, at the Company’s sole cost and expense.


F-25